MAXIM INTEGRATED PRODUCTS, INC. 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 theSEC from time to time, such as its Annual Reports on Form 10-K, its Quarterly Reports on Form 10-Q, and any Current Reports on Form 8-K.
Overview of Business
Maxim Integrated Products, Inc. ("Maxim Integrated" or the "Company" and also referred to as "we," "our" or "us") 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 customers in diverse geographical locations. The analog market is fragmented and characterized by many diverse applications, a great number of product variations and, with respect to many circuit types, relatively long product life cycles. We are a global company with a wafer manufacturing facility in theU.S. , test facilities inthe Philippines andThailand , and sales and circuit design offices around the world. We also utilize third parties for manufacturing and assembly of our products.
The Linear and Mixed-Signal Analog Integrated Circuit Market
All electronic signals generally fall into one of two categories, linear or digital. Linear (or analog) signals represent real world phenomena, such as temperature, pressure, sound or speed, and are continuously variable over a wide range of values. Digital signals represent the "ones" and "zeros" of binary arithmetic and are either on or off.
Three general classes of semiconductor products arise from this distinction between linear and digital signals: • digital devices, such as memories and microprocessors that operate
primarily in the digital domain;
• linear devices, such as amplifiers, references, analog multiplexers and
switches that operate primarily in the analog domain; and
• mixed-signal devices such as data converter devices that combine linear
and digital functions on the same integrated circuit and interface between
the analog and digital domains.
Our strategy has been to target both the linear and mixed-signal markets, often
collectively referred to as the analog market. However, some of our products are
exclusively or principally digital. While our focus continues to be on the
linear and mixed-signal market, our capabilities in the digital domain enable
development of new mixed-signal and other products with highly sophisticated
digital characteristics.
At the beginning of fiscal year 2020, we combined our Computing Major End-Market
category with our Communications and Data Center Major End-Market category. Our
former Computing Major End-Market category focused on Desktop Computers,
Notebook Computers, and Peripherals and Other Computer markets.
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Our linear and mixed-signal products now serve four major end-markets: (i)
Automotive, (ii) Communications and Data Center , (iii) Consumer and (iv)
Industrial. These major end-markets and their corresponding markets are noted in
the table below:
MAJOR END-MARKET MARKET
AUTOMOTIVE Infotainment
Powertrain
Body Electronics
Safety and Security
COMMUNICATIONS & DATA CENTER Base Stations
Data Center
Data Storage
Desktop Computers
Network & Datacom
Notebook Computers
Peripherals & Other Computer
Server
Telecom
Other Communications
CONSUMER Smartphones
Digital Cameras
Handheld Computers
Home Entertainment & Appliances
Wearables
Other Consumer
INDUSTRIAL Automatic Test Equipment
Control & Automation
Electrical Instrumentation
Financial Terminals
Medical
Security
USB Extension
Other Industrial
CRITICAL ACCOUNTING POLICIES
The methods, estimates, and judgments we use in applying our most critical
accounting policies have a significant impact on the results we report in our
financial statements. The Securities and Exchange Commission ("SEC") has defined
the most critical accounting policies as the ones that are most important to the
presentation of our financial condition and results of operations, and that
require us to make our most difficult and subjective accounting judgments, often
as a result of the need to make estimates of matters that are inherently
uncertain. Based on this definition, our most critical accounting policies
include revenue recognition, which impacts the recording of net revenues;
valuation of inventories, which impacts costs of goods sold and gross margins;
the assessment of recoverability of long-lived assets, which impacts impairment
of long-lived assets; assessment of recoverability of intangible assets and
goodwill, which impacts impairment of goodwill and intangible assets; accounting
for income taxes, which impacts the income tax provision; and assessment of
litigation and contingencies, which impacts charges recorded in cost of goods
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sold, selling, general and administrative expenses and income taxes. These
policies and the estimates and judgments involved are discussed further in the
Management's Discussion and Analysis of Financial Condition in our Annual Report
on Form 10-K for the fiscal year ended June 29, 2019 . 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.
Except for the accounting policies and estimates outlined under Part I, Item 1.
Financial Statements - Note 2, there have been no material changes during the
six months ended December 28, 2019 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 29, 2019 .
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--------------------------------------------------------------------------------RESULTS OF OPERATIONS
The following table sets forth certain Condensed Consolidated Statements of
Income data expressed as a percentage of net revenues for the periods indicated:
Three Months Ended Six Months Ended
December 28, December 29, December 28, December 29,
2019 2018 2019 2018
Net revenues 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 34.6 % 35.3 % 35.1 % 33.9 %
Gross margin 65.4 % 64.7 % 64.9 % 66.1 %
Operating expenses:
Research and development 20.3 % 19.1 % 20.4 % 18.3 %
Selling, general and administrative 13.8 % 13.5 % 14.0 % 13.1 %
Intangible asset amortization 0.1 % 0.1 % 0.1 % 0.1 %
Impairment of long-lived assets - % 0.1 % - % 0.1 %
Severance and restructuring expenses 0.5 % 0.2 % 0.4 % 0.2 %
Other operating expenses (income), net - % - % - % - %
Total operating expenses 34.7 % 33.1 % 34.9 % 31.8 %
Operating income 30.7 % 31.6 % 30.0 % 34.3 %
Interest and other income (expense), net - % 0.1 % 0.2 % - %
Income before provision for income taxes 30.7 % 31.7 % 30.2 % 34.3 %
Income tax provision (benefit) 4.2 % 8.8 % 3.8 % 7.2 %
Net income 26.5 % 22.9 % 26.4 % 27.1 %
The following table shows stock-based compensation included in the components of
the Condensed Consolidated Statements of Income reported above as a percentage
of net revenues for the periods indicated:
Three Months Ended Six Months Ended
December 28 ,December 29 ,
2019 2018 2019 2018
Cost of goods sold 0.5 % 0.4 % 0.5 % 0.4 %
Research and development 2.1 % 1.7 % 2.1 % 1.6 %
Selling, general and administrative 1.8 % 1.6 % 1.9 % 1.5 %
4.4 % 3.7 % 4.5 % 3.5 %
Net Revenues
Net revenues were $551.1 million and $576.9 million for the three months ended
December 28, 2019 and December 29, 2018 , respectively. Revenue from consumer
products was down by 22% primarily due to lower demand in smartphone products.
Revenue from communications and data center products was up by 12% driven by an
increased demand for base station, data center, and data storage products. These
results include net revenues for the three months ended December 29, 2018 that
align with our revised end-market categories.
Net revenues were $1.1 billion and $1.2 billion for the six months ended
December 28, 2019 and December 29, 2018 , respectively. Revenue from consumer
products was down by 21% primarily due to lower demand in smartphone products.
Revenue from industrial products was down by 11% primarily due to lower demand
in control and automation products. These results include net revenues for the
six months ended December 29, 2018 that align with our revised end-market
categories.
During each of the three months ended December 28, 2019 and December 29, 2018 ,
approximately 89% of net revenues, were derived from customers outside of the
United States . While less than 1.0% of our sales are denominated in currencies
other than U.S. dollars, we enter into foreign currency forward contracts to
mitigate our risks on firm commitments and net monetary assets
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denominated in foreign currencies. The impact of changes in foreign exchange
rates on our revenue and results of operations for the three and six months
ended
Gross Margin
Our gross margin percentages were 65.4% and 64.7% for the three months endedDecember 28, 2019 andDecember 29, 2018 , respectively. Our gross margin increased by 0.7 percentage points, primarily due to lower inventory reserve requirements.
Our gross margin percentages were 64.9% and 66.1% for the six months ended
Research and Development
Research and development expenses were$111.9 million and$110.3 million for the three months endedDecember 28, 2019 andDecember 29, 2018 , respectively, which represented 20.3% and 19.1% of net revenues for each respective period. The$1.6 million increase was due to higher salaries and related personnel costs. Research and development expenses were$220.9 million and$223.0 million for the six months endedDecember 28, 2019 andDecember 29, 2018 , respectively, which represented 20.4% and 18.3% of net revenues for each respective period. The$2.1 million decrease was due to lower salaries and travel expenses.
Selling, General and Administrative
Selling, general and administrative expenses were
Selling, general and administrative expenses were
Provision for Income Taxes
In the three and six months endedDecember 28, 2019 , the Company recorded an income tax provision of$23.0 million and$40.7 million , respectively, compared to$50.8 million and$87.0 million for the three and six months endedDecember 29, 2018 , respectively. The Company's effective tax rate for the three and six months endedDecember 28, 2019 was 13.6% and 12.4%, respectively, compared to 27.8% and 20.9% for the three and six months endedDecember 29, 2018 , respectively. OnDecember 22, 2017 , legislation, commonly referred to as the Tax Cuts and Jobs Act (the "Act"), was enacted. The Act included a one-time tax on accumulated unremitted earnings of the Company's foreign subsidiaries ("Transition Tax").SEC Staff Accounting Bulletin No. 118 allowed the use of provisional amounts (reasonable estimates) if accounting for the income tax effects of the Act was not completed. Provisional amounts must be adjusted within a one-year measurement period from the enactment date of the Act. In the second quarter of fiscal year 2018, the Company recorded a discrete$236.9 million provisional Transition Tax charge. During the measurement period, the Company gathered additional information and analyzed available guidance to more precisely compute the amount of the Transition Tax. In the second quarter of fiscal year 2019 the Company completed this work and recorded a discrete$22.1 million measurement period adjustment for the Transition Tax, which increased the Company's effective tax rate for the three and six months endedDecember 29, 2018 by 12.1% and 5.3%, respectively. As of the end of the second quarter of fiscal year 2019, the accounting for income tax effects of the Act was completed. The Company's federal statutory tax rate is 21%. The Company's effective tax rate for the three and six months endedDecember 28, 2019 was lower than the statutory rate primarily due to earnings of foreign subsidiaries, generated by the Company's international operations managed inIreland , that were taxed at lower rates, partially offset byU.S. tax expense related to Global Intangible Low-Taxed Income ("GILTI"). The Company's effective tax rate for the three months endedDecember 29, 2018 was higher than the statutory rate primarily due to a$22.1 million discrete charge for the Transition Tax,U.S. tax expense related to GILTI, and a$4.9 million discrete charge for interest accruals for unrecognized tax benefits, partially offset by earnings of foreign subsidiaries, generated by the Company's international operations managed inIreland , that were taxed at lower rates. 28 -------------------------------------------------------------------------------- The Company's effective tax rate for the six months endedDecember 29, 2018 was lower than the statutory rate primarily due to earnings of foreign subsidiaries, generated by the Company's international operations managed inIreland , that were taxed at lower rates, partially offset by a$22.1 million discrete charge for the Transition Tax,U.S. tax expense related to GILTI, and a$9.4 million discrete charge for interest accruals for unrecognized tax benefits.
BACKLOG
As ofDecember 28, 2019 andJune 29, 2019 , our current quarter backlog was approximately$455.6 million and$391.3 million respectively. In backlog, we include 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. Accordingly, we believe that our backlog is not a reliable measure of future revenues. All backlog numbers have been adjusted for estimated future distribution ship and debit pricing adjustments.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Financial Condition
Cash flows were as follows:
Six Months Ended
December 28 , December 29,
2019 2018
(in thousands)
Net cash provided by (used in) operating activities
431,435
Net cash provided by (used in) investing activities 43,869
496,454
Net cash provided by (used in) financing activities (459,752 ) (1,064,633 )
Net increase (decrease) in cash and cash equivalents
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 decreased by$52.7 million for the six months endedDecember 28, 2019 compared with the six months endedDecember 29, 2018 due mainly to lower net income and changes in working capital. Changes in working capital were driven by changes in income tax payable, partially offset by changes in accrued expenses and inventories.
Investing activities
Investing cash flows consist primarily of net investment purchases and maturities, and capital expenditures.
Cash provided by investing activities decreased by$452.6 million for the six months endedDecember 28, 2019 compared with the six months endedDecember 29, 2018 . The decrease was due to lower proceeds from maturity of available-for-sale securities offset by lower purchases of available-for-sale securities.
Financing activities
Financing cash flows consist primarily of debt issuance, repurchases of common stock, and payment of dividends to stockholders.
Cash used in financing activities decreased by$604.9 million for the six months endedDecember 28, 2019 compared with the six months endedDecember 29, 2018 . The decrease was due to a$500.0 million debt repayment we made inNovember 2018 and lower repurchases of common stock.
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
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On October 30, 2018 , we were authorized to repurchase up to $1.5 billion of the
Company's common stock. During the three and six months ended December 28, 2019 ,
we repurchased an aggregate of $108.0 million and $201.5 million of the
Company's common stock, respectively.
During the three and six months ended December 28, 2019 , we paid cash dividends
of $0.48 and $0.96 per common share totaling $129.8 million and $260.0 million ,
respectively.
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
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