MAXIM INTEGRATED PRODUCTS, INC. The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and notes thereto included in Part IV, Item 15(a), the risk factors included in Part I, Item 1A, and the "forward-looking statements" and other risks described herein and elsewhere in this Annual Report. The ADI Merger The completion of the ADI Merger under the ADI Merger Agreement is subject to customary closing conditions, including, among others, the approval of Maxim Integrated's stockholders, and the approval of Analog Devices' shareholders, which were obtained onOctober 8, 2020 , and the receipt of various regulatory approvals. Subject to the satisfaction or (to the extent permissible) waiver of such conditions, the ADI Merger is expected to close in the summer of 2021. OnJuly 12, 2021 , the outside date following which the ADI Merger Agreement may be terminated (subject to certain limitations) was automatically extended fromJuly 12, 2021 toOctober 12, 2021 due to pendency of certain required regulatory approvals. For additional information on the ADI Merger Agreement and the ADI Merger, please refer to the Company's Current Report on Form 8-K, filed with theSEC onJuly 13, 2020 . The Company cannot guarantee that the ADI Merger will be completed on a timely basis or at all or that, if completed, it will be completed on the terms set forth in the ADI Merger Agreement.
Overview
We are a global company with manufacturing facilities inthe United States ,the Philippines andThailand , and sales offices and design centers throughout the world. We design, develop, manufacture and market linear and mixed-signal integrated circuits, commonly referred to as analog circuits, for a large number of customers in diverse geographical locations. The analog market is fragmented and characterized by diverse applications, a great number of product variations and, with respect to many circuit types, relatively long product life cycles. The major end-markets in which we sell our products are the automotive, communications and data center, consumer, and industrial markets. We are incorporated in theState of Delaware .
Critical Accounting Policies
The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our financial statements.The Securities and Exchange Commission ("SEC") has defined the most critical accounting policies as the ones that are most important to the presentation of our financial condition and results of operations, and that require us to make our most difficult and subjective accounting judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, our most critical accounting policies include valuation of inventories, accounting for income taxes, and assessment of litigation and contingencies. These policies and the estimates and judgments involved are discussed further below. 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. Our significant accounting policies are described in Note 2 to the Consolidated Financial Statements included in this Annual Report.
Inventories
Inventories are stated at the lower of (i) standard cost, which approximates actual cost on a first-in-first-out basis, or (ii) net realizable value. Our standard cost revision policy is to monitor manufacturing variances and revise standard costs on a periodic basis. At each reporting period, we assess our ending inventories for excess quantities and obsolescence based on our projected sales outlook. This assessment includes analysis of projections of future demand. Because of the cyclical nature of the market, inventory levels, obsolescence of technology, and product life cycles, we generally write-down inventories to net realizable value based on this forecasted product demand analysis. Actual demand and market conditions may be lower than those projected by us. This difference could have a material adverse effect on our gross margin should inventory write-downs beyond those initially recorded become necessary. Alternatively, should actual demand and market conditions be more favorable than those estimated by us, gross margin could be favorably impacted as we release these reserves upon the ultimate product shipment. During fiscal years 2021 and 2020, we had net inventory write-downs of$14.3 million and$16.5 million , respectively.
Accounting for Income Taxes
We must make certain estimates and judgments in the calculation of income tax
expense, determination of uncertain tax positions, and in the determination of
whether deferred tax assets are more likely than not to be realized. The
calculation of our
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--------------------------------------------------------------------------------income tax expense and income tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations.
ASC No. 740-10, Income Taxes ("ASC 740-10"), prescribes a recognition threshold
and measurement framework for financial statement reporting and disclosure of
tax positions taken or expected to be taken on a tax return. Under ASC 740-10, a
tax position is recognized in the financial statements when it is more likely
than not, based on the technical merits, that the position will be sustained
upon examination, including resolution of any related appeals or litigation
processes. A tax position that meets the recognition threshold is then measured
to determine the largest amount of the benefit that has a greater than 50%
likelihood of being realized upon settlement. Although we believe that our
computation of tax benefits to be recognized and realized are reasonable, no
assurance can be given that the final outcome will not be different from what
was reflected in our income tax provisions and accruals. Such differences could
have a material impact on our net income and operating results in the period in
which such determination is made. See Note 17: "Income Taxes" in the Notes to
Consolidated Financial Statements included in Part IV, Item 15(a) of this Annual
Report for further information related to ASC 740-10.
We evaluate our deferred tax asset balance and record a valuation allowance to
reduce the net deferred tax assets to the amount that is more likely than not to
be realized. In the event it is determined that the deferred tax assets to be
realized in the future would be in excess of the net recorded amount, an
adjustment to the deferred tax asset valuation allowance would be recorded. This
adjustment would increase income in the period such determination was made.
Likewise, should it be determined that all or part of the net deferred tax asset
would not be realized in the future, an adjustment to increase the deferred tax
asset valuation allowance would be charged to income in the period such
determination is made. In assessing the need for a valuation allowance,
historical levels of income, expectations and risks associated with estimates of
future taxable income and ongoing prudent and practicable tax planning
strategies are considered. Realization of our deferred tax asset is dependent
primarily upon future taxable income in the U.S. and certain foreign
jurisdictions. Our judgments regarding future profitability may change due to
future market conditions, changes in U.S. or international tax laws and other
factors. These changes, if any, may require material adjustments to the net
deferred tax asset and an accompanying reduction or increase in net income in
the period in which such determinations are made.
Litigation and Contingencies
From time to time, we receive notices that our products or manufacturing
processes may be infringing the patent or other intellectual property rights of
others, notices of stockholder litigation or other lawsuits or claims against
us. We periodically assess each matter in order to determine if a contingent
liability in accordance with ASC No. 450, Contingencies ("ASC 450"), should be
recorded. In making this determination, management may, depending on the nature
of the matter, consult with internal and external legal counsel and technical
experts. We expense legal fees associated with consultations and defense of
lawsuits as incurred. Based on the information obtained, combined with
management's judgment regarding all of the facts and circumstances of each
matter, we determine whether a contingent loss is probable and whether the
amount of such loss can be estimated. Should a loss be probable and estimable,
we record a contingent loss. In determining the amount of a contingent loss, we
take into consideration advice received from experts in the specific matter, the
current status of legal proceedings, settlement negotiations which may be
ongoing, prior case history and other factors. Should the judgments and
estimates made by management be incorrect, we may need to record additional
contingent losses that could materially adversely impact our results of
operations. Alternatively, if the judgments and estimates made by management are
incorrect and a particular contingent loss does not occur, the contingent loss
recorded would be reversed, thereby favorably impacting our results of
operations.
Impact of COVID-19 on Our Business
The ongoing COVID-19 pandemic has impacted and will continue to impact the
Company's operations, employees, customers, and suppliers, due to
shelter-in-place orders, mandated quarantines, reduced facility operations, and
travel bans and restrictions. While the operating results for the first quarter
of fiscal year 2022 and thereafter may be impacted by COVID-19, the extent and
form of such impact to our business is uncertain and cannot be estimated with
any degree of certainty.
Employee Health and Safety
During the second half of fiscal year 2020 and the full fiscal year 2021, the
Company's facilities and offices were either operating at reduced capacity or
temporarily closed for non-essential operations. In an effort to protect the
health and safety of our employees, we implemented safety measures such as
work-from-home practices, travel restrictions, extensive cleaning protocols, and
social distancing when engaging in essential activities.
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Focus on Customers
We continue to work with our sales, supplier, and customer design and
engineering teams to meet current demand. Teams meet remotely, through
telephonic or video conferences and by leveraging available technology, to
continue the design and engineering process that would normally take place at
physical customer locations.
Manufacturing and Operations
We will continue to actively monitor this evolving situation and implement
changes to protect employee health. In addition to our actions, we will continue
to implement government-placed orders in all our locations. While COVID-19
related disruptions have impacted our manufacturing operations, we continue to
leverage our manufacturing flexibility to reduce the negative effects of such
disruptions.
For a further discussion of the uncertainties and business risks associated with
the COVID-19 pandemic, see Part I, Item 1A - Risk Factors of this Annual Report.
Results of Operations
The following table sets forth certain Consolidated Statements of Income data
expressed as a percentage of net revenues for the periods indicated:
For the Year Ended
June 26, June 27, June 29,
2021 2020 2019
Net revenues 100.0 % 100.0 % 100.0 %
Cost of goods sold 33.1 % 34.6 % 35.2 %
Gross margin 66.9 % 65.4 % 64.8 %
Operating expenses:
Research and development 17.3 % 20.1 % 18.8 %
Selling, general and administrative 12.2 % 13.5 % 13.3 %
Intangible asset amortization 0.1 % 0.1 % 0.1 %
Impairment of long-lived assets - % - % -%
Severance and restructuring expenses 0.5 % 0.2 % 0.2 %
Other operating expenses (income), net 0.9 % - % -%
Total operating expenses 30.9 % 34.1 % 32.6 %
Operating income 35.9 % 31.3 % 32.3 %
Interest and other income (expense), net (0.6) % (0.4) % 0.3 %
Income before taxes 35.3 % 30.9 % 32.6 %
Provision (benefit) for income taxes 3.9 % 1.1 % (3.2) %
Net income 31.4 % 29.9 % 35.8 %
The following table shows pre-tax stock-based compensation included in the components of the Consolidated Statements of Income reported above as a percentage of net revenues for the periods indicated:
For the Year Ended
June 26, June 27, June 29,
2021 2020 2019
Cost of goods sold 0.5 % 0.6 % 0.4 %
Research and development 1.7 % 2.0 % 1.8 %
Selling, general and administrative 1.8 % 1.8 % 1.5 %
4.0 % 4.4 % 3.7 %
A review of our fiscal year 2021 performance compared to fiscal year 2020
performance appears below. A review of our fiscal year 2020 performance compared
to fiscal year 2019 performance is set forth in Part II, Item 7 of the Form 10-K
for the fiscal year ended June 27, 2020 under the caption "Results of
Operations".
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--------------------------------------------------------------------------------Net Revenues
We reported net revenues of$2.6 billion and$2.2 billion in fiscal years 2021 and 2020, respectively. Our net revenues in fiscal year 2021 increased by 20% compared to our net revenues in fiscal year 2020. Revenue from consumer products was up 21% due to higher demand in cell phone and handheld computer products. Revenue from industrial products was up 22% due to higher demand in control and automation, automatic test equipment, and medical products. Revenue from automotive products was up 38% due to higher demand in auto infotainment, safety and security, and powertrain products. The Company has updated the year endedJune 27, 2020 market revenue to conform to the current period presentation of Major End-Market estimates, due to a change in product classification. Approximately 90% and 89% of our net revenues in fiscal years 2021 and 2020, respectively, were derived from shipments to customers located outsidethe United States , primarily inAsia andEurope . Less than 1% of our sales are denominated in currencies other thanU.S. dollars. The impact of changes in foreign exchange rates on net revenues and our results of operations for fiscal years 2021 and 2020 were immaterial.
Gross Margin
Our gross margin as a percentage of net revenue was 66.9% in fiscal year 2021 compared to 65.4% in fiscal year 2020. Gross margins as a percentage of net revenue in fiscal year 2021 compared to fiscal year 2020 was higher primarily due to higher revenues, increased factory utilization and lower inventory reserves.
Research and Development
Research and development expenses were$454.3 million and$440.2 million for fiscal years 2021 and 2020, respectively, which represented 17.3% and 20.1% of net revenues, respectively. The$14.1 million increase in research and development expenses was primarily due to higher salaries and other personnel related costs, partially offset by lower travel expenses. The level of research and development expenditures as a percentage of net revenues will vary from period to period depending, in part, on the level of net revenues and on our success in recruiting the technical personnel needed for our new product introductions and process development. We view research and development expenditures as critical to maintaining a high level of new product introductions, which in turn are critical to our plans for future growth.
Selling, General and Administrative
Selling, general and administrative expenses were$320.7 million and$296.7 million in fiscal years 2021 and 2020, respectively, which represented 12.2% and 13.5% of net revenues, respectively. The$24.0 million increase in selling, general and administrative expenses was primarily due to higher salaries and other personnel costs, including stock-based compensation for accelerated vesting of certain restricted stock awards and restricted stock units. The level of selling, general and administrative expenditures as a percentage of net revenues will vary from period to period, depending on the level of net revenues and our success in recruiting sales and administrative personnel needed to support our operations. Severance and restructuring Severance and restructuring expenses were$13.4 million and$5.4 million in fiscal years 2021 and 2020, respectively, which represented 0.5% and 0.2% of net revenues for each respective period. The$8.0 million increase was due to increased restructuring activities which, as a result of the pending ADI Merger, now include change in control related benefits.
Other operating expenses (income), net
Other operating expenses (income), net were$22.6 million and$0.9 million in fiscal years 2021 and 2020, respectively, which represented 0.9% and less than 0.1% of net revenues for each respective period. The$21.7 million increase was primarily due to expenses such as legal and professional services related to the pending ADI Merger and an increase in fair value of contingent consideration related to a prior acquisition. We expect to incur additional merger-related expenses as we approach the expected transaction close date. 31 --------------------------------------------------------------------------------
Interest and Other Income (Expense), Net
Interest and other income (expense), net were$(16.0) million and$(8.3) million in fiscal years 2021 and 2020, respectively, which represented (0.6)% and (0.4)% of net revenues, respectively. Interest income in fiscal year 2021 compared to fiscal year 2020 decreased by$25.4 million due to lower investment yields from cash equivalents and decrease in short-term investments portfolio. Other income in fiscal year 2021 compared to fiscal year 2020 increased by$17.7 million primarily due to fair value adjustments in privately-held companies and receipt of previously impaired notes receivable.
Provision (Benefit) for Income Taxes
Our annual income tax expense was$102.5 million and$23.4 million for fiscal years 2021 and 2020, respectively. The effective tax rate was 11.0% and 3.5% for fiscal years 2021 and 2020, respectively. In fiscal year 2020, we reversed$40.5 million of uncertain tax position reserves and$10.7 million of related interest reserves, net of federal and state benefits, primarily due to the fiscal fourth quarter settlement of an audit of our fiscal year 2012 through fiscal year 2014 federal corporate income tax returns. The reversal of uncertain tax position reserves for intercompany transfer pricing issues increased accumulated unremitted foreign earnings, which resulted in an additional Internal Revenue Code Section 965 transition tax ("Transition Tax") charge of$6.5 million in the fiscal fourth quarter. Our federal statutory tax rate is 21%. Our fiscal year 2021 effective tax rate was lower than the statutory tax rate primarily due to earnings of foreign subsidiaries, generated by our international operations managed inIreland , that were taxed at lower rates and a$13.2 million reversal of uncertain tax position and related interest reserves. These impacts were partially offset by tax generated by Global Intangible Low-Taxed Income ("GILTI") provisions. Our fiscal year 2020 effective tax rate was lower than the statutory tax rate primarily due to the$51.2 million reversal of uncertain tax position and related interest reserves, and earnings of foreign subsidiaries, generated by our international operations managed inIreland , that were taxed at lower rates. These impacts were partially offset by tax generated by GILTI provisions and a$6.5 million Transition Tax charge. We have various entities domiciled within and outsidethe United States . The following is a breakout of ourU.S. and foreign income (loss) before income taxes: For the Year Ended June 26, June 27, June 29, 2021 2020 2019 (in thousands) Domestic pre-tax income$ 69,061 $ 72,854 $ 103,016 Foreign pre-tax income 860,675 605,242 651,405 Total$ 929,736 $ 678,096 $ 754,421 A relative increase in earnings in lower tax jurisdictions, such asIreland , may lower our consolidated effective tax rate, while a relative increase in earnings in higher tax jurisdictions, such asthe United States , may increase our consolidated effective tax rate. However, after fiscal year 2018 the consolidated effective tax rate impact of earnings changes in various tax jurisdictions is not as significant due to the reduction of the federal statutory tax rate from 35% to 21% and GILTI provisions, which effectively subject income earned by our foreign subsidiaries to currentU.S. tax at a rate of 10.5%, less foreign tax credits.
Recently Issued Accounting Pronouncements
Refer to our discussion of recently issued accounting pronouncements as included in Part IV, Item 15. Exhibits and financial statement schedules, Note 2: "Summary of Significant Accounting Policies".
Financial Condition, Liquidity and Capital Resources
Financial Condition
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Cash flows were as follows:
For the Year Ended
June 26, June 27, June 29,
2021 2020 2019
(in thousands)
Net cash provided by operating activities $ 924,260 $ 800,855 $ 875,840
Net cash provided by (used in) investing activities (30,511) (32,049) 856,911
Net cash provided by (used in) financing activities (187,765)
(940,720) (1,518,893) Net increase (decrease) in cash, cash equivalents and restricted cash$ 705,984 $ (171,914) $ 213,858 Operating Activities
Cash provided by operating activities is net income adjusted for certain non-cash items and changes in certain assets and liabilities.
Cash provided by operating activities was$924.3 million in fiscal year 2021, an increase of$123.4 million compared with fiscal year 2020. This increase was primarily caused by an increase in net income of$172.6 million and changes in working capital. Changes in working capital were driven by increases in other assets and other liabilities, partially offset by decreases in accounts receivable and price adjustment and other revenue reserves.
Investing Activities
Investing cash flows consist primarily of capital expenditures, net investment purchases and maturities, and acquisitions.
Cash used in investing activities was$30.5 million in fiscal year 2021, a decrease of$1.5 million compared with fiscal year 2020. The change was due to a$70.4 million decrease in maturities of available-for-sale securities. The Company also paid$69.3 million , net of cash acquired, for an acquisition during fiscal year 2020. Financing Activities Financing cash flows consist primarily of new borrowings, repurchases of common stock, issuance and repayment of notes payables, payment of dividends to stockholders, proceeds from stock option exercises and employee stock purchase plan and withholding tax payments associated with net share settlements of equity awards. Net cash used in financing activities was$187.8 million in fiscal year 2021, a decrease of$753.0 million compared with fiscal year 2020. Cash used in financing activities was lower due to a decrease in repurchases of common stock of$431.6 million and dividend payments of$389.0 million , offset by an increase in net issuance of restricted stock units and awards of$26.0 million and proceeds from the Employee Stock Purchase Plan ("ESPP") of$23.8 million .
Liquidity and Capital Resources
Our primary source of liquidity is our cash flows from operating activities resulting from net income and management of working capital.
As of
OnOctober 30, 2018 , we were authorized to repurchase up to$1.5 billion of the Company's common stock. During the fiscal years endedJune 26, 2021 andJune 27, 2020 , we repurchased an aggregate of$9.2 million and$440.8 million , respectively, of the Company's common stock. Pursuant to the terms of the ADI Merger Agreement, the Company suspended its repurchase program onJuly 13, 2020 , the date we announced our planned merger with ADI.
We paid cash dividends of
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 and debt repayments for at least the
next twelve months.
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--------------------------------------------------------------------------------Contractual Obligations
The following table summarizes our significant contractual obligations as of
Payment due by period
Less than 1 More than 5
Total year 1-3 years 4-5 years years
(in thousands)
Outstanding debt obligations (1) $ 1,000,000 $ -
299,552 47,055 87,850 72,980 91,667
Transition tax (3) 237,160 26,927 77,416 132,817 -Interest payments associated with debt obligations (4) 132,312
34,125 47,156 34,500 16,531
Operating lease obligations (5) 56,900 12,444 18,707 13,533 12,216
Contingent liability 10,000 10,000 - - -
Total $ 1,735,924 $ 130,551 $ 731,129 $ 253,830 $ 620,414
(1) Outstanding debt represents amounts due for our long-term notes.
(2) We order materials and supplies in advance or with minimum purchase
quantities. We are obligated to pay for the materials and supplies when
received.
(3) Internal Revenue Code Section 965 transition tax on accumulated unremitted
earnings of foreign subsidiaries at December 31, 2017 , paid in eight
interest-free installments beginning in September 2018 .
(4) Interest payments calculated based on contractual payment requirements under
the debt agreements.
(5) We lease facilities under non-cancelable operating lease agreements that
expire at various dates through fiscal year 2031.
Purchase orders for the purchase of the majority of our raw materials and other
goods and services are not included above. Our purchase orders generally allow
for cancellation without significant penalties. We do not have significant
agreements for the purchase of raw materials or other goods specifying minimum
quantities or set prices that exceed our expected short-term requirements.
As of June 26, 2021 , our gross unrecognized income tax benefits were $171.7
million which excludes $29.5 million of accrued interest. We are unable to make
a reasonably reliable estimate of the timing of payments of these amounts, if
any, in individual years due to uncertainties in the timing or outcomes of
either actual or anticipated tax audits. As a result, these amounts are not
included in the table above.
Off-Balance-Sheet Arrangements
As of
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