Maxim_Q1 '13 10-Q



 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)

[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 29, 2012
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________ to ________.

Commission file number 1-34192
MAXIM INTEGRATED PRODUCTS, INC.
(Exact name of Registrant as Specified in its Charter)
Delaware
 (State or Other Jurisdiction of Incorporation or Organization)
 
94-2896096 
(I.R.S. Employer I. D. No.)

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

(408) 601-1000
(Registrant's Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. YES [x] NO [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES [x] NO [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [x]
Accelerated filer [ ]
Non-accelerated filer [ ]
(Do not check if a smaller reporting company)
Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). (Check one):
YES [ ] NO [x]

As of October 19, 2012 there were 291,584,856 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 September 29, 2012 and June 30, 2012
 
 
 
 
Condensed Consolidated Statements of Income for the Three Months Ended September 29, 2012 and September 24, 2011
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended September 29, 2012 and September 24, 2011
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 29, 2012 and September 24, 2011
 
 
 
 
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)

 
September 29,
2012
 
June 30,
2012
 
(in thousands)
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
849,850

 
$
881,060

Short-term investments
75,283

 
75,326

Total cash, cash equivalents and short-term investments
925,133

 
956,386

Accounts receivable, net
316,538

 
317,461

Inventories
258,689

 
242,162

Deferred tax assets
71,561

 
98,180

Other current assets
94,875

 
85,177

Total current assets
1,666,796

 
1,699,366

Property, plant and equipment, net
1,359,882

 
1,353,606

Intangible assets, net
195,410

 
208,913

Goodwill
422,083

 
423,073

Other assets
60,403

 
52,988

TOTAL ASSETS
$
3,704,574

 
$
3,737,946

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 
 
 
Accounts payable
$
127,306

 
$
147,086

Income taxes payable
19,437

 
22,589

Accrued salary and related expenses
132,847

 
191,846

Accrued expenses
72,510

 
64,092

Current portion of long-term debt
303,272

 
303,496

Deferred income on shipments to distributors
27,025

 
26,280

Total current liabilities
682,397

 
755,389

Long-term debt
5,592

 
5,592

Income taxes payable
226,001

 
212,389

Deferred tax liabilities
195,893

 
198,502

Other liabilities
26,254

 
27,797

Total liabilities
1,136,137

 
1,199,669

Commitments and contingencies (Note 11)


 


 
 
 
 
Stockholders' equity:
 
 
 
Common stock and capital in excess of par value
292

 
293

Retained earnings
2,583,060

 
2,553,418

Accumulated other comprehensive loss
(14,915
)
 
(15,434
)
Total stockholders' equity
2,568,437

 
2,538,277

TOTAL LIABILITIES & STOCKHOLDERS' EQUITY
$
3,704,574

 
$
3,737,946


See accompanying Notes to Condensed Consolidated Financial Statements.

3



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


 
Three Months Ended
 
September 29,
2012
 
September 24,
2011
 
(in thousands, except per share data)
 
 
 
 
Net revenues
$
623,075

 
$
636,002

Cost of goods sold
237,384

 
240,529

Gross margin
385,691

 
395,473

Operating expenses:
 
 
 
Research and development
132,930

 
140,213

Selling, general and administrative
80,187

 
82,456

Intangible asset amortization
4,049

 
4,321

Impairment of long-lived assets
2,707

 

Severance and restructuring expenses

 
492

Other operating expenses (income), net
415

 
(4,389
)
Total operating expenses
220,288

 
223,093

Operating income
165,403

 
172,380

Interest and other income (expense), net
(5,742
)
 
(4,100
)
Income before provision for income taxes
159,661

 
168,280

Provision for income taxes
31,773

 
34,834

Net income
$
127,888

 
$
133,446

 
 
 
 
Earnings per share:
 
 
 
Basic
$
0.44

 
$
0.45

Diluted
$
0.43

 
$
0.44

 
 
 
 
Shares used in the calculation of earnings per share:
 
 
 
Basic
292,213

 
294,475

Diluted
298,782

 
301,076

 
 
 
 
Dividends paid per share
$
0.24

 
$
0.22


See accompanying Notes to Condensed Consolidated Financial Statements.




4



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

 
Three Months Ended
 
September 29,
2012
 
September 24,
2011
 
(in thousands)
Net income
$
127,888

 
$
133,446

Other comprehensive income, net of tax:
 
 
 
Unrealized gains (losses) on available-for-sale securities, net of tax benefit (expense) of $20 and $26, respectively
(35
)
 
(47
)
Unrealized gains (losses) on cash flow hedges, net of tax benefit (expense) of $(335) and $186, respectively
585

 
(325
)
Tax effect of the unrealized exchange gain (loss) on long-term intercompany receivables
(1,082
)
 
243

Unrealized gains (losses) on post-retirement benefits, net of tax benefit (expense) of $(99) and $(35), respectively
1,051

 
62

Other comprehensive income (loss)
519

 
(67
)
Total comprehensive income
$
128,407

 
$
133,379


See accompanying Notes to Condensed Consolidated Financial Statements.


5



MAXIM INTEGRATED PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three Months Ended
 
September 29,
2012
 
September 24,
2011
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income
$
127,888

 
$
133,446

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
     Stock-based compensation
22,497

 
23,465

Depreciation and amortization
53,674

 
52,071

Deferred taxes
22,772

 
39,845

     Tax benefit (shortfall) related to stock-based compensation
1,335

 
1,428

     Impairment of long lived assets
2,707

 

     Excess tax benefit from stock-based compensation
(5,219
)
 
(2,821
)
     Loss (gain) from sale of property, plant and equipment
(51
)
 
127

Changes in assets and liabilities:
 
 
 
Accounts receivable
923

 
(30,790
)
Inventories
(16,015
)
 
(9,799
)
Other current assets
(7,839
)
 
(11,840
)
Accounts payable
(26,466
)
 
4,882

Income taxes payable
10,461

 
3,698

Deferred income on shipments to distributors
745

 
(2,301
)
All other accrued liabilities
(50,667
)
 
(80,602
)
Net cash provided by operating activities
136,745

 
120,809

 
 
 
 
Cash flows from investing activities:
 
 
 
Purchase of property, plant and equipment
(50,703
)
 
(49,324
)
Proceeds from sale of property, plant and equipment
344

 

Acquisitions

 
(154,269
)
Net cash used in investing activities
(50,359
)
 
(203,593
)
 
 
 
 
Cash flows from financing activities:
 
 
 
           Excess tax benefit from stock-based compensation
5,219

 
2,821

Repayment of notes payable
(224
)
 
(16,217
)
Net issuance of restricted stock units
(7,107
)
 
(7,016
)
Proceeds from stock options exercised
19,864

 
4,151

Repurchase of common stock
(65,149
)
 
(88,674
)
Dividends paid
(70,199
)
 
(64,781
)
Net cash used in financing activities
(117,596
)
 
(169,716
)
Net increase (decrease) in cash and cash equivalents
(31,210
)
 
(252,500
)
Cash and cash equivalents:
 
 
 
Beginning of period
881,060

 
962,541

End of period
$
849,850

 
$
710,041

Supplemental disclosures of cash flow information:
 
 
 
Cash paid (refunded), net during the period for income taxes
$
5,602

 
$
1,033

Cash paid for interest
$
98

 
$
239

Noncash financing and investing activities:
 
 
 
Accounts payable related to property, plant and equipment purchases
$
32,765


$
26,422


See accompanying Notes to Condensed Consolidated Financial Statements.

6



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


NOTE 1: BASIS OF PRESENTATION

The accompanying unaudited condensed interim 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 considered necessary for fair presentation have been included. The year-end condensed 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 three months ended September 29, 2012 are not necessarily indicative of the results to be expected for the entire year. These condensed interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Annual Report on Form 10-K for the fiscal year ended June 30, 2012.

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 2013 is a 52-week fiscal year, fiscal year 2012 was a 53-week fiscal year.

NOTE 2: RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In the first quarter of fiscal year 2013, the Company adopted Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220)-Presentation of Comprehensive Income and Accounting Standards Update No. 2011-12, Comprehensive Income (Topic 220)-Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The adoption of these amended standards impacted the presentation of other comprehensive income, as the Company elected to present two separate but consecutive statements, but did not impact our financial position or results of operations.
NOTE 3: BALANCE SHEET COMPONENTS

Accounts receivables, net consist of:

 
September 29,
2012
 
June 30,
2012
Accounts Receivables:
(in thousands)
Accounts receivable
$
329,713

 
$
329,990

Returns and allowances
(13,175
)
 
(12,529
)
 
$
316,538

 
$
317,461


Inventories consist of:

 
September 29,
2012
 
June 30,
2012
Inventories:
(in thousands)
Raw materials
$
14,108

 
$
11,922

Work-in-process
160,442

 
149,603

Finished goods
84,139

 
80,637

 
$
258,689

 
$
242,162







7



Property, plant and equipment, net consist of:

 
September 29,
2012
 
June 30,
2012
Property, plant and equipment:
(in thousands) 
Land
$
62,093

 
$
65,007

Buildings and building improvements
351,847

 
348,727

Machinery and equipment
2,142,734

 
2,105,905

 
2,556,674

 
2,519,639

Less: accumulated depreciation and amortization                       
(1,196,792
)
 
(1,166,033
)
 
$
1,359,882

 
$
1,353,606


NOTE 4: FAIR VALUE MEASUREMENTS

The FASB established a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Three levels of inputs that may be used to measure fair value are as follows:
 
Level 1 - Quoted (unadjusted) prices in active markets for identical assets or liabilities.
 
The Company's Level 1 assets consist of money market funds.
 
Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

The Company's Level 2 assets and liabilities consist of certificates of deposit, government agency securities and foreign currency forward contracts.
 
Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

The Company's Level 3 liabilities consist of contingent consideration related to certain acquisitions and assets classified as held for sale.

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

 
As of September 29, 2012
 
As of June 30, 2012
 
Fair Value
 
 
 
Fair Value
 
 
 
Measurements Using
 
Total
 
Measurements Using
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Balance
 
Level 1
 
Level 2
 
Level 3
 
Balance
 
(in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds (1)
$
417,569

 
$

 
$

 
$
417,569

 
$
602,462

 
$

 
$

 
$
602,462

Certificates of deposit (1)

 
6,185

 

 
6,185

 

 
6,182

 

 
6,182

Government agency securities (2)

 
75,283

 

 
75,283

 

 
75,326

 

 
75,326

Foreign currency forward contracts (3)

 
1,007

 

 
1,007

 

 
642

 

 
642

Total Assets
$
417,569

 
$
82,475

 
$

 
$
500,044

 
$
602,462

 
$
82,150

 
$

 
$
684,612

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts (4)
$

 
$
273

 
$

 
$
273

 
$

 
$
507

 
$

 
$
507

Contingent Consideration (4)

 

 
18,409

 
18,409

 

 

 
17,737

 
17,737

Total Liabilities
$

 
$
273

 
$
18,409

 
$
18,682

 
$

 
$
507

 
$
17,737

 
$
18,244


8




(1) Included in Cash and cash equivalents in the accompanying Condensed Consolidated Balance Sheets.
(2) Included in Short-term investments in the accompanying Condensed Consolidated Balance Sheets.
(3) Included in Other current assets in the accompanying Condensed Consolidated Balance Sheets.
(4) Included in Accrued expenses in the accompanying Condensed Consolidated Balance Sheets.

The tables below present reconciliations for liabilities measured and recorded at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended September 29, 2012 and for the year ended June 30, 2012:

Fair Value Measured and Recorded Using Significant Unobservable Inputs (Level 3)
 
 
 
 
 
 
 
September 29,
2012
 
June 30,
2012
Contingent Consideration
 
(in thousands)
Beginning balance
  
$
17,737

 
$
8,800

Total gains or losses (realized and unrealized):
 
 
 
 
Included in earnings
 
672

 
1,670

Additions
 

 
11,354

Payments
 

 
(4,087
)
Ending balance
  
$
18,409

 
$
17,737

 
 
 
 
 
Changes in unrealized gains or losses included in earnings related to liabilities still held as of period end
 
$
672

 
$
1,670


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

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

During the three months ended September 29, 2012 and the year ended June 30, 2012, there were no transfers in or out of Level 3 from other levels in the fair value hierarchy.

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

As of September 29, 2012, long-lived assets held for sale were written down to their fair value, less cost to sell of $3.9 million, resulting in an impairment loss of $2.7 million, which was included in earnings for the period. The impairment charge was measured using Level 3 inputs. The Company reached its conclusion regarding the asset impairment after conducting an evaluation of assets fair values. The fair value of the land and buildings was determined mainly after consideration of evidence such as comparable property listings, recent sales, and offers received. Please refer to Note 15: "Impairment of long-lived assets" of these Notes to Condensed Consolidated Financial Statements.

As of June 30, 2012, long-lived assets held for sale were written down to their fair value, less cost to sell of $19.7 million, resulting in an impairment loss of $22.4 million, which was included in earnings for the period. The impairment charge was measured using Level 3 inputs. The Company reached its conclusion regarding the asset impairment after conducting an evaluation of assets fair values. The fair value of the land and buildings was determined mainly after consideration of evidence such as appraisals and offers received. Please refer to Note 15: "Impairment of long-lived assets" of these Notes to Condensed Consolidated Financial Statements.

NOTE 5: FINANCIAL INSTRUMENTS

Short-term investments

9



Fair values were as follows:
 
September 29, 2012
 
June 30, 2012
 
Amortized Cost
 
Gross
Unrealized
Gain
 
Gross
Unrealized
Loss
 
Estimated
Fair Value
 
Amortized Cost
 
Gross
Unrealized
Gain
 
Gross
Unrealized
Loss
 
Estimated
Fair Value
 
(in thousands)
Available-for-sale investments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government agency securities
$
75,021

 
$
262

 
$

 
$
75,283

 
$
75,007

 
$
319

 
$

 
$
75,326

Total available-for-sale investments
$
75,021

 
$
262

 
$

 
$
75,283

 
$
75,007

 
$
319

 
$

 
$
75,326


In the three months ended September 29, 2012 and the year ended June 30, 2012, Maxim Integrated did not recognize any impairment charges on short-term investments.
The government agency securities have maturity dates between February 26, 2013 and December 18, 2013.
Derivative instruments and hedging activities

Foreign Currency Risk

The Company generates revenues in various global markets based on orders obtained in non-U.S. currencies, primarily the Japanese Yen, the Euro and the British Pound. Maxim Integrated incurs expenditures denominated in non-U.S. currencies, principally the Philippine Peso and Thai Baht associated with the Company's manufacturing activities in the Philippines and Thailand, respectively, and expenditures for sales offices and research and development activities undertaken outside of the U.S. Maxim Integrated is exposed to fluctuations in foreign currency exchange rates primarily on orders and accounts receivable from sales in these foreign currencies and cash flows for expenditures in these foreign currencies. Maxim Integrated has established risk management strategies designed to reduce the impact of volatility of future cash flows caused by changes in the exchange rate for these currencies. These strategies reduce, but do not entirely eliminate, the impact of currency exchange rates movements. Maxim Integrated does not use derivative financial instruments for speculative or trading purposes. The Company routinely hedges its exposures to certain foreign currencies with various financial institutions in an effort to minimize the impact of certain currency exchange rate fluctuations. If a financial counterparty to any of the Company's hedging arrangements experiences financial difficulties or is otherwise unable to honor the terms of the foreign currency hedge, the Company may experience financial losses.
 
For derivative instruments that are designated and qualify as cash flow hedges under Accounting Standards Codification ("ASC") No. 815-Derivatives and Hedging, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive loss and reclassified into earnings into the same financial statement line as the item being hedged, and in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in interest and other income (expense), net.
 
For derivative instruments that are not designated as hedging instruments under ASC No. 815, gains and losses are recognized in interest and other income (expense), net. All derivatives are foreign currency forward contracts to hedge certain foreign currency denominated assets or liabilities. The gains and losses on these derivatives largely offset the changes in the fair value of the assets or liabilities being hedged.

Fair Value of Derivative Instruments in the Condensed Consolidated Balance Sheets
Maxim Integrated estimates the fair value of derivatives primarily based on pricing models using current market rates and records all derivatives on the balance sheet at fair value. The gross notional and the recorded fair value of derivative financial instruments in the Condensed Consolidated Balance Sheets were as follows:


10



 
As of September 29, 2012
 
As of June 30, 2012
 
Gross Notional(1)
 
Other Current Assets
 
Accrued Expenses
 
Gross Notional (1)
 
Other Current Assets
 
Accrued Expenses
 
(in thousands)
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$
59,107

 
$
751

 
$
140

 
$
37,955

 
$
150

 
$
459

 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
56,069

 
256

 
133

 
35,105

 
492

 
48

Total derivatives
$
115,176

 
$
1,007

 
$
273

 
$
73,060

 
$
642

 
$
507

(1) Represents the face amounts of contracts that were outstanding as of September 29, 2012 and June 30, 2012, as applicable.
Derivatives designated as hedging instruments

The following table provides the balances and changes in the accumulated other comprehensive loss (income) related to derivative instruments during the three months ended September 29, 2012 and the year ended June 30, 2012.

 
 
September 29,
2012
 
June 30,
2012
 
 
(in thousands)
Beginning balance
  
$
309

 
$
(234
)
Gain (loss) reclassified to income
 
6

 
653

Loss (gain) recorded in other comprehensive loss
  
(926
)
 
(110
)
Ending balance
  
$
(611
)
 
$
309


Maxim Integrated expects to reclassify an estimated net accumulated other comprehensive gain of $0.4 million, net of taxes, to earnings in the next twelve months along with the earnings effects of the related forecasted transactions in association with cash flow hedges.
The before-tax effect of cash flow derivative instruments for the three months ended September 29, 2012 and September 24, 2011 was as follows:
 
 
Loss (Gain) Reclassified from Accumulated OCI into Income (Effective portion)
 
 
 
 
Three Months Ended
 
 
Location
 
September 29,
2012
 
September 24,
2011
 
 
 
 
(in thousands)
Cash Flow hedges:
 
 
 
 
 
 
Foreign exchange contracts
 
Net revenues
 
$
25

 
$
(243
)
Foreign exchange contracts
 
Cost of goods sold
 
252

 
195

Foreign exchange contracts
 
Operating expenses
 
(283
)
 

Total cash flow hedges
 
 
 
$
(6
)
 
$
(48
)
The before-tax effect of derivative instruments not designated as hedging instruments on the Condensed Consolidated Statements of Income for the three months ended September 29, 2012 and September 24, 2011 was as follows:

11



 
Gain (Loss) Recognized in Income on Derivative Instrument
 
 
Three Months Ended
 
Location
September 29,
2012
 
September 24,
2011
 
 
(in thousands)
Foreign exchange contracts
Interest and other expense, net
$
(1,696
)
 
$
529

Total
 
$
(1,696
)
 
$
529


Volume of Derivative Activity

Total net U.S. Dollar notional amounts for foreign currency forward contracts, presented by net currency purchase (sell), are as follows:

In United States Dollars
 
September 29,
2012
 
June 30,
2012
 
 
(in thousands)
Euro
 
$
(19,550
)
 
$
(10,686
)
Japanese Yen
 
(4,917
)
 
(2,254
)
British Pound
 
(2,497
)
 
(575
)
Philippine Peso
 
22,472

 
15,443

Thai Baht
 
5,091

 
4,264

Total                                                
 
$
599

 
$
6,192


Long-term debt
The following table summarizes the Company's long-term debt:
 
September 29,
2012
 
June 30,
2012
 
(in thousands)
3.45% fixed rate notes due June 2013
$
300,000

 
$
300,000

SensorDynamics Debt (Denominated in Euro)
 
 
 
Term fixed rate notes (2.0%-2.5%) due March 2013 to September 2015
6,285

 
6,285

Amortizing fixed rate notes (1.5%-2.75%) due up to June 2014
903

 
1,127

Amortizing floating rate notes (EURIBOR plus 1.5%) due up to June 2014
1,676

 
1,676

Total
308,864

 
309,088

Less: Current portion
(303,272
)
 
(303,496
)
Total long-term debt
$
5,592

 
$
5,592


On June 17, 2010, the Company completed a public offering of $300 million aggregate principal amount of the Company's 3.45% senior unsecured notes due on June 14, 2013 ("$300 million notes"), with an effective interest rate of 3.49%. Interest is payable semi-annually in arrears on June 14 and December 14 of each year. The $300 million notes are governed by base and supplemental indentures dated June 10, 2010 and June 17, 2010, respectively, between the Company and Wells Fargo Bank, National Association, as trustee.

In conjunction with the SensorDynamics acquisition as discussed in Note 13: "Acquisitions" of these Notes to Condensed Consolidated Financial Statements, Maxim Integrated acquired certain fixed and floating rate notes as detailed in the table above.

The Company accounts for all the notes above based on their amortized cost. The discount and expenses are being amortized to Interest and other income (expense), net over the life of the notes. Interest expense associated with the notes was $2.9 million and $2.8 million during the three months ended September 29, 2012 and September 24, 2011, respectively. The interest expense is recorded in Interest and other income (expense), net in the Condensed Consolidated Statements of Income.


12



The estimated fair value of Maxim Integrated's debt was approximately $315 million at September 29, 2012. The estimated fair value of the debt is based primarily on quoted market prices.

As of September 29, 2012, the Company had the capacity to issue an unspecified amount of additional debt securities, common stock, preferred stock, warrants, rights and units under its 2010 Shelf Registration Statement.

Credit Facility

On October 13, 2011, the Company entered into a $250 million senior unsecured revolving credit facility with certain institutional lenders that expires on October 13, 2016. The Company agreed to pay the lenders a facility fee at a rate per annum that varies based on the Company's debt rating. Any advances under the credit agreement will accrue interest at a base rate plus a margin based on the Company's 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 September 29, 2012, the Company had not borrowed any amounts under this credit facility.

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

NOTE 6: STOCK-BASED COMPENSATION

The following table shows total stock-based compensation expense by type of award, and the resulting tax effect, included in the Condensed Consolidated Statements of Income for the three months ended September 29, 2012 and September 24, 2011:

Stock-based compensation expense by type of award
 
 
 
Three Months Ended
 
September 29,
2012
 
September 24,
2011
 
(in thousands)
Stock options
$
3,782

 
$
4,000

Restricted stock units
16,500

 
17,390

Employee stock purchase plan
2,215

 
2,075

Pre-tax stock-based compensation expense
22,497

 
23,465

Less: income tax effect
4,832

 
5,459

Net stock-based compensation expense
$
17,665

 
$
18,006



The following table shows pre-tax stock-based compensation expense by income statement classification:

 
Three Months Ended
 
September 29,
2012
 
September 24,
2011
 
(in thousands)
Cost of goods sold
$
2,988

 
$
3,257

Research and development
12,323

 
13,261

Selling, general and administrative
7,186

 
6,947

 
$
22,497

 
$
23,465


Fair Value

The fair value of options granted to employees under the Company's 1996 Stock Incentive Plan and rights to acquire common

13



stock under the Company's 2008 Employee Stock Purchase Plan (the "ESPP") is estimated on the date of grant using the Black-Scholes option valuation model. The fair value of Restricted Stock Units ("RSUs") 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.

Expected volatilities are based on the historical volatilities from the Company's traded common stock over a period equal to the expected term. The Company is utilizing the simplified method to estimate expected holding periods. The risk-free interest rate is based on the U.S. Treasury yield. The Company determines the dividend yield by dividing the annualized dividends per share by the prior quarter's average stock price. The result is analyzed by the Company to decide whether it represents expected future dividend yield. The Company also estimates forfeitures at the time of grant and makes revisions to forfeitures on a quarterly basis.

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

 
1996 Stock Incentive Plan
 
Three Months Ended
 
September 29,
2012
 
September 24,
2011
Expected holding period (in years)
5.4

 
5.3

Risk-free interest rate
0.7
%
 
1.4
%
Expected stock price volatility
37.8
%
 
38.0
%
Dividend yield
3.3
%
 
3.2
%

The weighted-average fair value of stock options granted was $6.24 and $5.79 per share for the three months ended September 29, 2012 and September 24, 2011, respectively. The weighted-average fair value of RSUs granted was $24.31 and $19.69 per share for the three months ended September 29, 2012 and September 24, 2011, respectively.

Stock Options

The following table summarizes outstanding, exercisable and vested and expected to vest stock options as of September 29, 2012 and their activity for the three months ended September 29, 2012:
 
Number of
Shares 
 
Weighted Average
Exercise Price
 
Weighted
Average
Remaining
Contractual
Term (in Years)
 
 
Aggregate
Intrinsic
Value (1) 
Balance at June 30, 2012
24,234,994

 
$
25.20

 
 
 
 
Options Granted
2,530,804

 
27.26

 
 
 
 
Options Exercised
(1,098,144
)
 
17.47

 
 
 
 
Options Cancelled
(928,478
)
 
34.90

 
 
 
 
Balance at September 29, 2012
24,739,176

 
$
25.39

 
3.7

 
$
130,703,636

Exercisable, September 29, 2012
12,813,102

 
$
29.72

 
2.2

 
$
49,479,720

Vested and expected to vest, September 29, 2012
23,149,811

 
$
25.56

 
3.6

 
$
123,286,805

 
(1)
Aggregate intrinsic value represents the difference between the exercise price and the closing price per share of the Company's common stock on September 28, 2012, 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 September 29, 2012.
As of September 29, 2012, there was $42.8 million of total unrecognized stock compensation cost related to 11.9 million unvested stock options, which is expected to be recognized over a weighted average period of approximately 3.1 years.

Restricted Stock Units

The following table summarizes outstanding and expected to vest RSUs as of September 29, 2012 and their activity during the

14



three months ended September 29, 2012:

 
Number of
Shares 
 
Weighted Average
Remaining
Contractual Term
(in Years)
 
 
Aggregate Intrinsic
Value (1) 
Balance at June 30, 2012
8,923,454

 
 
 
 
Restricted stock units granted
2,392,659

 
 
 
 
Restricted stock units released
(822,458
)
 
 
 
 
Restricted stock units cancelled
(165,545
)
 
 
 
 
Balance at September 29, 2012
10,328,110

 
3.0

 
$
285,375,233

Vested and expected to vest, September 29, 2012
8,966,075

 
2.9

 
$
246,656,725

(1)
Aggregate intrinsic value for RSUs represents the closing price per share of the Company's common stock on September 28, 2012, the last business day preceding the fiscal quarter-end, multiplied by the number of RSUs outstanding or expected to vest as of September 29, 2012.
The Company withheld shares totaling $7.1 million in value as a result of employee withholding taxes based on the value of the RSUs on their vesting date as determined by the Company's closing stock price for the three months ended September 29, 2012. 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 September 29, 2012, there was $153.3 million of unrecognized compensation expense related to 10.3 million unvested RSUs, which is expected to be recognized over a weighted average period of approximately 3.0 years.

Employee Stock Purchase Plan

As of September 29, 2012, there was $3.0 million of unrecognized compensation expense related to the ESPP.

NOTE 7: EARNINGS PER SHARE

Basic earnings per share are computed using the weighted average number of shares of common stock outstanding during the period. For purposes of computing basic earnings per share, the weighted average number of outstanding shares of common stock excludes unvested RSUs. Diluted earnings per share incorporates the incremental shares issuable upon the assumed exercise of stock options, assumed release of unvested RSUs and assumed issuance of common stock under the employee stock purchase plans using the treasury stock method.

The following table sets forth the computation of basic and diluted earnings per share.


15



 
Three Months Ended
 
September 29,
2012
 
September 24,
2011
 
(in thousands, except per share data)
Numerator for basic earnings per share and diluted earnings per share
 
 
 
Net income
$
127,888

 
$
133,446

 
 
 
 
Denominator for basic earnings per share
292,213

 
294,475

Effect of dilutive securities:
 
 
 
Stock options, ESPP and RSUs
6,569

 
6,601

Denominator for diluted earnings per share
298,782

 
301,076

 
 
 
 
Earnings per share
 
 
 
Basic
$
0.44

 
$
0.45

Diluted
$
0.43

 
$
0.44

Approximately 11.0 million and 13.8 million stock options were excluded from the calculation of diluted earnings per share for the three months ended September 29, 2012 and September 24, 2011, respectively. These options were excluded because they were determined to be antidilutive. However, such options could be dilutive in the future and, under those circumstances, would be included in the calculation of diluted earnings per share.

NOTE 8: SEGMENT INFORMATION

The Company operates and tracks its results in one reportable segment. The Company designs, develops, manufactures and markets a broad range of linear and mixed signal integrated circuits. The Chief Executive Officer has been identified as the Chief Operating Decision Maker as defined by ASC No. 280, Disclosures about Segments Reporting ("ASC 280").

The Company has three operating segments which aggregate into one reportable segment. Under ASC 280, two or more operating segments may be aggregated into a single operating segment for financial reporting purposes if aggregation is consistent with the objective and basic principles of ASC 280, if the segments have similar economic characteristics, and if the segments are similar in each of the following areas:

the nature of products and services;
the nature of the production processes;
the type or class of customer for their products and services; and
the methods used to distribute their products or provide their services.

The Company meets each of the aggregation criteria for the following reasons:

the sale of analog and mixed signal integrated circuits is the primary source of revenue for each of the Company's three operating segments;
the integrated circuits sold by each of the Company's operating segments are manufactured using similar semiconductor manufacturing processes;
the integrated circuits marketed by each of the Company's operating segments are sold to the same types of customers; and
all of the Company's integrated circuits are sold through a centralized sales force and common wholesale distributors.

All of the Company's operating segments share similar economic characteristics as they have a similar long term business model. The causes for variation among the Company's operating segments are the same and include factors such as (i) life cycle and price and cost fluctuations, (ii) number of competitors, (iii) product differentiation and (iv) size of market opportunity. Additionally, each operating segment is subject to the overall cyclical nature of the semiconductor industry. The number and composition of employees and the amounts and types of tools and materials required are similar for each operating segment. Finally, even though the Company periodically reorganizes the Company's operating segments based upon changes in customers, end-markets or

16



products, acquisitions, long-term growth strategies, and the experience and bandwidth of the senior executives in charge, the common financial goals for each operating segment remain constant.

Enterprise-wide information is provided in accordance with ASC 280. Geographical revenue information is based on customers' ship-to location. Long-lived assets consist of property, plant and equipment. Property, plant and equipment information is based on the physical location of the assets at the end of each fiscal year.

Net revenues from unaffiliated customers by geographic region were as follows:

 
 
Three Months Ended
 
 
September 29,
2012
 
September 24,
2011
 
 
(in thousands)
United States
 
$
59,121

 
$
76,929

China
 
274,905

 
276,430

Japan
 
35,816

 
36,907

Korea
 
64,379

 
65,761

Rest of Asia
 
101,611

 
80,314

Europe
 
70,907

 
83,638

Rest of World
 
16,336

 
16,023

 
 
$
623,075

 
$
636,002


Net long-lived assets by geographic region were as follows:
 
September 29,
2012
 
June 30,
2012
 
(in thousands)
United States
$
1,008,500

 
$
957,982

Philippines
208,624

 
247,681

Thailand
92,646

 
99,308

Rest of World
50,112

 
48,635

 
$
1,359,882

 
$
1,353,606


NOTE 9: COMPREHENSIVE INCOME
 
The components of Accumulated Other Comprehensive Loss were as follows:
 
 
September 29,
2012
 
June 30,
2012
 
 
(in thousands)
Tax effect of the unrealized exchange loss on long-term intercompany receivables
 
$
(7,551
)
 
$
(6,469
)
Unrealized loss on post-retirement benefits
 
(6,393
)
 
(7,444
)
Cumulative translation adjustment
 
(1,527
)
 
(1,527
)
Unrealized gain (loss) on cash flow hedges
 
389

 
(196
)
Unrealized gain on available-for-sale securities
 
167

 
202

Accumulated Other Comprehensive Loss
 
$
(14,915
)
 
$
(15,434
)

NOTE 10: INCOME TAXES

In the three months ended September 29, 2012, the Company recorded an income tax provision of $31.8 million, compared to an income tax provision of $34.8 million in the three months ended September 24, 2011
 
In fiscal year 2012 the U.S. Internal Revenue Service commenced an audit of the Company's federal corporate income tax returns

17



for fiscal years 2009 through 2011, which is still ongoing.

NOTE 11: COMMITMENTS AND CONTINGENCIES

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

Indemnifications
 
The Company indemnifies certain customers, distributors, suppliers and subcontractors for attorney fees and damages and costs awarded against such parties in certain circumstances in which the Company's products are alleged to infringe third party intellectual property rights, including patents, registered trademarks and 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.
 
Legal fees associated with indemnification obligations, defense and other related costs
 
Pursuant to the Company's charter documents and separate written indemnification agreements, the Company has certain indemnification obligations to its current executive officers and directors, as well as certain former officers and directors. Pursuant to such obligations, the Company has incurred expenses related to legal fees and expenses advanced to certain former officers of the Company subject to civil charges by the SEC in connection with Maxim Integrated's historical stock option granting practices.  The Company expenses such amounts as incurred.

NOTE 12: COMMON STOCK REPURCHASES

In August 2011, the Board of Directors authorized the Company to repurchase up to $750 million 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 canceled and superseded by this authorization.

During the three months ended September 29, 2012, the Company repurchased approximately 2.5 million shares of its common stock for $65.1 million. As of September 29, 2012, the Company had remaining authorization to repurchase up to an additional $486.1 million of the Company's common stock. 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: ACQUISITIONS
 
Acquisitions completed during fiscal year 2012

The purchase price allocation for acquisitions completed in fiscal year 2012 is set forth in the table below, including work performed by third-party valuation specialists.

Pro forma results of operations for these acquisitions have not been presented because they are not material to Maxim Integrated's condensed consolidated income, either individually or in the aggregate. Revenue and earnings per share for the acquired businesses since the date of acquisition through September 29, 2012 were not provided as they are not material. Goodwill, which represents the excess of the purchase price over the net tangible and intangible assets acquired, is not expected to be deductible for tax purposes. Acquisition costs for fiscal year 2012 were not material.







18



Aggregate purchase price allocation for acquisitions made by Maxim Integrated during fiscal year 2012:

 
SensorDynamics
 
Other acquisitions
 
Total
 
 
 
(in thousands)
 
 
Tangible assets
$
18,692

 
$
1,159

 
$
19,851

Debt assumed
(29,078
)
 

 
(29,078
)
Other liabilities assumed
(37,559
)
 
(4,729
)
 
(42,288
)
Net liabilities assumed
(47,945
)
 
(3,570
)
 
(51,515
)
Amortizable intangible assets
20,900

 
17,840

 
38,740

In-process research and development ("IPR&D")
19,600

 

 
19,600

Goodwill (1)
130,594

 
38,392

 
168,986

 
 
 
 
 
 
Total purchase price (1)
$
123,149

 
$
52,662

 
$
175,811

(1) Includes $11.4 million of contingent consideration relating to the other acquisitions discussed further below.

The following table presents details of the Company's intangible assets acquired through business combinations completed during fiscal year 2012 (in thousands, except years):

 
Intellectual Property
 
Customer Relationships
 
Trademark
 
Total
 
Weighted Average Useful Life (in Years)
 
Amount
 
Weighted Average Useful Life (in Years)
 
Amount
 
Weighted Average Useful Life (in Years)
 
Amount
 
 
SensorDynamics
7.0

 
$
16,400

 
7.0

 
$
4,100

 
3.0

 
$
400

 
$
20,900

Other acquisitions
9.2

 
15,340

 
3.0

 
2,500

 

 

 
17,840

Total
 
 
$
31,740

 
 
 
$
6,600

 
 
 
$
400

 
$
38,740

Weighted Average (in Years)
8.1

 
 
 
5.5

 
 
 
3.0

 
 
 
 

SENSORDYNAMICS

On July 18, 2011, the Company acquired SensorDynamics, a semiconductor company that develops proprietary sensor and microelectromechanical solutions. SensorDynamics is based in Lebring, near Graz, Austria. The purpose of the acquisition was to allow Maxim Integrated to combine sensors with analog products. The total cash consideration associated with the acquisition was approximately $123.1 million.

OTHER ACQUISITIONS

The Company acquired three other companies during fiscal year 2012, which included a company that develops low power high performance analog circuits. The total cash consideration paid in these three Acquisitions was approximately $41.3 million. Maxim Integrated also recorded $11.4 million, representing the fair value of contingent consideration that would be payable in the future should certain specified project milestones be met. Total contingent consideration that could be paid out under the agreements amounts to $16.0 million. The contingent consideration was calculated based on probabilities that were developed regarding the likelihood that the product development milestones would be met and when the contingent payments would occur. Based on these factors, a probability weighted earnout amount was calculated and discounted (at the cost of debt) to present value.

NOTE 14: GOODWILL AND INTANGIBLE ASSETS

Goodwill

The Company monitors the recoverability of goodwill recorded in connection with acquisitions, by reporting unit, annually, or more often if events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company performed the annual impairment analysis during the first quarter of fiscal year 2013 and concluded that goodwill was not impaired, as the fair value of each reporting unit exceeded its carrying value, including goodwill.

19




Activity and goodwill balances for the three months ended September 29, 2012 were as follows:

 
Goodwill
 
(in thousands)
Balance at June 30, 2012
$
423,073

Adjustments
(990
)
Balance at September 29, 2012
$
422,083


Intangible Assets

The useful lives of amortizable intangible assets are as follows:
 
Asset
 
Life
Intellectual Property
 
5-10 years
Customer Relationships
 
3-10 years
Tradename
 
3 years
Backlog
 
1 year
  
Intangible assets consisted of the following:
 
 
September 29, 2012
 
June 30, 2012
 
Original
Cost 
 
Accumulated
Amortization 
 
Net
 
Original
Cost
 
Accumulated
Amortization
 
Net
 
(in thousands)
Intellectual property
$
231,912

 
$
112,158

 
$
119,754

 
$
227,912

 
$
102,501

 
$
125,411

Customer relationships
95,230

 
43,312

 
51,918

 
95,230

 
39,583

 
55,647

Backlog
6,400

 
6,400

 

 
6,400

 
6,400

 

Tradename
2,100

 
1,642

 
458

 
2,100

 
1,525

 
575

Total amortizable purchased intangible assets
335,642

 
163,512

 
172,130

 
331,642

 
150,009

 
181,633

IPR&D
23,280

 

 
23,280

 
27,280

 

 
27,280

Total purchased intangible assets
$
358,922

 
$
163,512

 
$
195,410

 
$
358,922

 
$
150,009

 
$
208,913


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

 
Three Months Ended
 
September 29,
2012
 
September 24,
2011
 
(in thousands)
Cost of goods sold
$
9,454

 
$
9,434

Intangible asset amortization
4,049

 
4,321

Total intangible asset amortization expenses
$
13,503

 
$
13,755





20



The following table represents the estimated future amortization expense of intangible assets as of September 29, 2012:
 
Fiscal Year
 
Amount
 
 
(in thousands)
Remaining nine months of 2013
 
$
37,487

2014
 
44,738

2015
 
41,535

2016
 
28,244

2017
 
18,233

2018
 
1,455

Thereafter
 
438

Total intangible assets
 
$
172,130


NOTE 15: IMPAIRMENT OF LONG-LIVED ASSETS

Fiscal year 2013:

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

The Company has ceased depreciation and classified these assets as held for sale based on its intentions to sell the assets and has included the lower of fair value less cost to sell and net book value of $8.0 million in other assets in the Condensed Consolidated Balance Sheet as of September 29, 2012.

Fiscal year 2012:

During the fourth quarter of fiscal year 2012, the Company identified certain idle facilities as held for sale. In connection with these circumstances, the Company recorded a charge for the write-down of land and buildings to their estimated fair value, less cost to sell. The total charge of $22.4 million was included in impairment of long-lived assets in the Company's Consolidated Statements of Income. The Company reached its conclusion regarding the asset impairment after conducting an evaluation of assets fair values. The fair value of the land and buildings was determined mainly after consideration of evidence such as appraisals and offers received.

The Company has ceased depreciation and classified the above assets as held for sale based on its intentions to sell the assets and has included the lower of fair value less cost to sell and net book value of $24.0 million in other assets in the Condensed Consolidated Balance Sheet as of June 30, 2012.

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 (particularly Management's Discussion and Analysis of Financial Condition and Results of Operations), its Quarterly Reports on Form 10-Q (particularly Management's Discussion and Analysis of Financial Condition and Results of Operations) and any Current Reports on Form 8-K.

Overview of Business

21




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

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

There have been no material changes during the three months ended September 29, 2012 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 30, 2012.



22



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
 
September 29,
2012
 
September 24,
2011
 
 
Net revenues
100.0
 %
 
100.0
 %
Cost of goods sold
38.1
 %
 
37.8
 %
Gross margin
61.9
 %
 
62.2
 %
Operating expenses:
 
 
 
Research and development
21.3
 %
 
22.0
 %
Selling, general and administrative
12.9
 %
 
13.0
 %
Intangible asset amortization
0.6
 %
 
0.7
 %
Impairment of long-lived assets
0.4
 %
 
 %
Severance and restructuring expenses
 %
 
0.1
 %
    Other operating expenses (income), net
0.1
 %
 
(0.7
)%
Total operating expenses
35.3
 %
 
35.1
 %
Operating income
26.6
 %
 
27.1
 %
Interest and other income (expense), net
(0.9
)%
 
(0.6
)%
Income before provision for income taxes
25.7
 %
 
26.5
 %
Provision for income taxes
5.1
 %
 
5.5
 %
Net income
20.6
 %
 
21.0
 %

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
 
September 29,
2012
 
September 24,
2011
 
 
Cost of goods sold
0.5
%
 
0.5
%
Research and development
2.0
%
 
2.1
%
Selling, general and administrative
1.2
%
 
1.1
%
 
3.7
%
 
3.7
%

Net Revenues

Net revenues were $623.1 million and $636.0 million for the three months ended September 29, 2012 and September 24, 2011, respectively, a decrease of 2.0%. We classify our net revenue by four major end market categories: Communications, Computing, Consumer and Industrial. Net shipments decreased during the three months ended September 29, 2012 as compared to the three months ended September 24, 2011 due to reduced demand for our products in the communications, computing and industrial markets.

During the three months ended September 29, 2012 and September 24, 2011, approximately 91% and 88% of net revenues, respectively, were derived from customers outside of the United States. While the majority of these sales are denominated in U.S. dollars, we enter into foreign currency forward contracts to mitigate our risks on firm commitments and net monetary assets and liabilities denominated in foreign currencies. The impact of changes in foreign exchange rates on our revenue and results of operations for the three months ended September 29, 2012 and September 24, 2011 was immaterial.

23




Gross Margin

Our gross margin percentage was 61.9% and 62.2% for the three months ended September 29, 2012 and September 24, 2011, respectively. The gross margin decreased primarily due to underutilization of factory capacity.

Research and Development

Research and development expenses were $132.9 million and $140.2 million for the three months ended September 29, 2012 and September 24, 2011, respectively, which represented 21.3% and 22.0% of net revenues, respectively. The $7.3 million decrease was primarily attributable to a decrease in salaries and related expenses of $3.4 million relating to decreased headcount and a decrease in mask expenses by $3.2 million.

Selling, General and Administrative

Selling, general and administrative expenses were $80.2 million and $82.5 million for the three months ended September 29, 2012 and September 24, 2011, respectively, which represented 12.9% and 13.0% of net revenues, respectively. The $2.3 million decrease was primarily attributable to lower legal expense related to acquisitions.

Impairment of Long-lived Assets

Impairment of long lived assets was $2.7 million in the three months ended September 29, 2012. The impairment was primarily due to write-downs of certain land and buildings classified in the period as held for sale. In connection with this, the Company recorded a charge for the write-down of the land and buildings to its estimated fair value less estimated cost to sell.

Other Operating Expenses (Income), net

Other operating expenses (income), net were $0.4 million and $(4.4) million during the three months ended September 29, 2012 and September 24, 2011, respectively. The net increase in expense was primarily driven by a reversal of payroll related tax reserves totaling approximately $4.6 million due to the lapsing of the statutes of limitations in the three months ended September 24, 2011.

Interest and Other Income (Expense), net

Interest and other expense, net was $5.7 million and $4.1 million for the three months ended September 29, 2012 and September 24, 2011, respectively. This net increase in expense was primarily driven by an increase in foreign exchange losses of $3.0 million. This was partially offset by a decrease in interest expense.

Provision for Income Taxes

In the three months ended September 29, 2012, the Company recorded an income tax provision of $31.8 million, compared to an income tax provision of $34.8 million in the three months ended September 24, 2011
 
The Company's federal statutory tax rate is 35%. The Company's income tax provision for the three months ended September 29, 2012 and three months ended September 24, 2011 was lower than the amount computed by applying the statutory tax rate primarily because of earnings of foreign subsidiaries taxed at lower tax rates, partially offset by stock-based compensation for which no tax benefit is expected.
In fiscal year 2012 the U.S. Internal Revenue Service commenced an audit of the Company's federal corporate income tax returns for fiscal years 2009 through 2011, which is still ongoing.

BACKLOG

At September 29, 2012 and June 30, 2012, our current quarter backlog was approximately $400 million and $393 million, respectively. We include in backlog orders with customer request dates within the next three months. As is customary in the semiconductor industry, these orders may be canceled in most cases without penalty to customers. In addition, backlog includes orders from domestic distributors for which revenues are not recognized until the products are sold by the distributors. Accordingly, we believe that our backlog is not a reliable measure of future revenues. All backlog numbers have been adjusted for estimated future U.S. distribution ship and debit pricing adjustments.

24



FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
 
Financial condition

Cash flows were as follows:
 
Three Months Ended
 
September 29,
2012
 
September 24,
2011
 
(in thousands)
Net cash provided by operating activities
$
136,745

 
$
120,809

Net cash used in investing activities
(50,359
)
 
(203,593
)
Net cash used in financing activities
(117,596
)
 
(169,716
)
Net increase (decrease) in cash and cash equivalents
$
(31,210
)
 
$
(252,500
)
Operating activities

Cash provided by operating activities is net income adjusted for certain non-cash items and changes in certain assets and liabilities.

Cash from operations for the three months ended September 29, 2012 increased by approximately $15.9 million compared with the three months ended September 24, 2011. This was due to net increases in cash provided by other accrued liabilities and accounts receivable of $61.6 million. These increases were offset by decreases in accounts payable and deferred taxes of $48.4 million.

Investing activities

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

Cash used in investing activities decreased by $153.2 million for the three months ended September 29, 2012 compared with the three months ended September 24, 2011. The decrease was primarily due to a decrease of $154.3 million in cash used for acquisitions.

Financing activities

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

Net cash used in financing activities decreased by approximately $52.1 million for the three months ended September 29, 2012 compared with the three months ended September 24, 2011. The decrease was primarily due to lower repurchases of common stock of $23.5 million, lower repayment of notes payables of $16.0 million relating to the assumed SensorDynamics notes, and higher proceeds received on exercise of stock options of $15.7 million.

Liquidity and Capital Resources
Debt Levels
On June 17, 2010, we completed a public offering of $300 million aggregate principal amount of the Company's 3.45% senior unsecured and unsubordinated notes due on June 14, 2013. In addition, on July 18, 2011, we acquired certain fixed and floating rate notes in conjunction with our acquisition of SensorDynamics. (Please refer to Note 5: Financial Instruments to the Condensed Consolidated Financial Statements).

Outstanding debt is at $309 million as of September 29, 2012 and June 30, 2012, bearing weighted average interest rates of 3.43% and 3.45% for the three months ended September 29, 2012 and for the year ended June 30, 2012, respectively.

Available borrowing resources
As of September 29, 2012, the Company had the capacity to issue an unspecified amount of additional debt securities, common stock, preferred stock, warrants, rights and units under the 2010 Shelf Registration Statement.


25



On October 13, 2011, the Company entered into a $250 million senior unsecured revolving credit facility with certain institutional lenders that expires on October 13, 2016. The Company has agreed to pay the lenders a facility fee at a rate per annum that varies based on the Company's debt rating. Any advances under the credit agreement will accrue interest at a base rate plus a margin based on the Company's 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 September 29, 2012, the Company had not borrowed any amounts under this credit facility and was in compliance with all debt covenants.

As of September 29, 2012, our available funds consisted of $925.1 million in cash, cash equivalents and short-term investments. We anticipate that the available funds and cash generated from operations will be sufficient to meet cash and working capital requirements, including the anticipated level of capital expenditures, common stock repurchases, debt repayments and dividend payments for at least the next twelve months.

Off-Balance-Sheet Arrangements

As of September 29, 2012, the Company did not have any material off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's market risk has not changed materially from the interest rate and foreign currency risks disclosed in Item 7A of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2012.

The impact of inflation and changing prices on the Company's net revenues and on operating income during the three months ended September 29, 2012 and September 24, 2011 was not material.

ITEM 4: CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer ("CEO") and our chief financial officer ("CFO"), evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act as of September 29, 2012. Our management, including the CEO and the CFO, has concluded that the Company's disclosure controls and procedures were effective as of September 29, 2012. The purpose of these controls and procedures is to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules, and that such information is accumulated and communicated to our management, including our CEO and our CFO, to allow timely decisions regarding required disclosures.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the three months ended September 29, 2012 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on the Effectiveness of Internal Controls

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

PART II. OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

26




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

ITEM 1A: RISK FACTORS

A description of risks associated with our business, financial condition and results of our operations is set forth in Item 1A - Risk Factors of our Annual Report on Form 10-K for the fiscal year ended June 30, 2012, which is incorporated herein by reference.

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

The following table summarizes the activity related to stock repurchases for the three months ended September 29, 2012:

 
Issuer Repurchases of Equity Securities
 
(in thousands, except per share amounts)
 
Total Number
of Shares
Purchased
 
Average Price
Paid
per Share
 
Total Number of
Shares Purchased
as Part of
Publicly Announced
Plans or Programs
 
Approximate Dollar Value of Shares
That May Yet
Be Purchased
Under the Plans
or Programs
Jul. 1, 2012 - Jul. 28, 2012
1,040

 
$
24.90

 
1,040

 
$
525,319

Jul. 29, 2012 - Aug. 25, 2012
620

 
27.60

 
620

 
508,205

Aug. 26, 2012 - Sep. 29, 2012
810

 
27.35

 
810

 
486,055

Total for the quarter
2,470

 
$
26.38

 
2,470

 
$
486,055


In August 2011, the Company's Board of Directors authorized the Company to repurchase up to $750 million 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 canceled and superseded by this authorization.

In the fiscal quarter ended September 29, 2012, the Company repurchased approximately 2.5 million shares of its common stock for approximately $65.1 million. As of September 29, 2012, the Company had remaining authorization to repurchase up to an additional $486.1 million of the Company's common stock. 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.

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4: MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5: OTHER INFORMATION

Not applicable.

27



ITEM 6: EXHIBITS

(a) Exhibits
10.25
Form of Performance Share Agreement under the Company's 1996 Stock Incentive Plan (A)
31.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
(A) Management contract or compensatory plan or arrangement.
Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Statements of Income for the three months ended September 29, 2012, (ii) Condensed Consolidated Balance Sheets at September 29, 2012 and June 30, 2012, (iii) Condensed Consolidated Statement of Comprehensive Income for the three months ended September 29, 2012, (iv) Condensed Consolidated Statements of Cash Flows for the three months ended September 29, 2012 and (v) Notes to Condensed Consolidated Financial Statements.
 
 
In accordance with Rule 406T of Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act, is deemed not filed for purposes of Section 18 of the Exchange Act, and otherwise is not subject to liability under these sections.





28



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

October 26, 2012
 
MAXIM INTEGRATED PRODUCTS, INC.
 
 
 
 
 
By:/s/ David A. Caron
 
 
 
 
 
David A. Caron
 
 
Vice President and Principal Accounting Officer


29