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,
including the impact of the recent coronavirus (COVID-19) pandemic and the
responses to it, 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, including
the impact of the COVID-19 pandemic and the responses to it, except as required
by federal securities laws. Readers are cautioned not to place undue reliance on
such statements, which speak only as of the date of this Quarterly Report on
Form 10-Q. Readers should carefully review future reports and documents that the
Company files with or furnishes to the SEC from time to time, such as its Annual
Reports on Form 10-K, its Quarterly Reports on Form 10-Q, and any Current
Reports on Form 8-K.
Overview of Business
Maxim Integrated 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 the U.S., test facilities in the Philippines
and Thailand, and sales and circuit design offices around the world. We also
utilize third parties for manufacturing and assembly of our products.
Impact of COVID-19
The recent coronavirus (COVID-19) pandemic and the mitigation efforts by
governments to attempt to control its spread are impacting and will likely
continue to impact our operations, customers, and suppliers for an indefinite
period of time. While we have implemented safeguards and procedures to counter
the impact of the COVID-19 pandemic, the full extent to which the COVID-19
pandemic has and will directly or indirectly impact us, including our business,
financial condition, and results of operations, will depend on future
developments that are highly uncertain and cannot be accurately predicted,
including the further mitigation efforts taken to contain it or treat its impact
and the economic impact on local, regional, national and international markets.
We will continue to actively monitor the situation and may take further actions
that alter our business operations as may be required by federal, state, or
local authorities or that we determine are in the best interests of our
employees, customers, suppliers, and stockholders.
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
nine months ended March 28, 2020 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
Impact of COVID-19 on Our Business
The 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 fourth quarter of fiscal year
2020 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 last month of the fiscal quarter, 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.
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 rapidly-evolving situation and are
working to adopt and implement government-placed orders, in addition to our own
actions, in all our locations. While supply chain disruptions outside of our
operations have impacted the way we conduct business, we continuously implement
alternative procedures to counter the negative effects of such disruptions.
The following table sets forth certain Condensed Consolidated Statements of
Income data expressed as a percentage of net revenues for the periods indicated:
Three Months Ended Nine Months Ended
March 28, March 30, March 28, March 30,
2020 2019 2020 2019
Net revenues 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 34.8 % 37.2 % 35.0 % 34.9 %
Gross margin 65.2 % 62.8 % 65.0 % 65.1 %
Operating expenses:
Research and development 19.4 % 19.7 % 20.0 % 18.8 %
Selling, general and administrative 12.7 % 13.7 % 13.6 % 13.3 %
Intangible asset amortization 0.1 % 0.1 % 0.1 % 0.1 %
Impairment of long-lived assets - % - % - % - %
Severance and restructuring expenses 0.1 % 0.3 % 0.3 % 0.2 %
Other operating expenses (income), net 0.2 % - % 0.1 % - %
Total operating expenses 32.6 % 33.9 % 34.1 % 32.5 %
Operating income 32.6 % 29.0 % 30.9 % 32.6 %
Interest and other income (expense), net (0.3 )% 0.6 % - % 0.2 %
Income before provision for income taxes 32.3 % 29.6 % 30.9 % 32.8 %
Income tax provision (benefit)
3.7 % 5.5 % 3.7 % 6.6 %
Net income 28.7 % 24.1 % 27.2 % 26.2 %
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:
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Three Months Ended Nine Months Ended
March 28, March 30, March 28, March 30,
2020 2019 2020 2019
Cost of goods sold 0.6 % 0.5 % 0.5 % 0.4 %
Research and development 2.0 % 2.0 % 2.0 % 1.7 %
Selling, general and administrative 1.6 % 1.7 % 1.8 % 1.5 %
4.2 % 4.2 % 4.3 % 3.6 %
Net Revenues
Net revenues were $561.9 million and $542.4 million for the three months ended
March 28, 2020 and March 30, 2019, respectively.
Revenue from communications and data center products was up by 26% driven by an
increased demand for base station and data center products. Revenue from
consumer products was down by 18% primarily due to lower demand in smartphone
products. These results include net revenues for the three months ended March
30, 2019 that align with our revised end-market categories.
Net revenues were $1.6 billion and $1.8 billion for the nine months ended
March 28, 2020 and March 30, 2019, respectively. Revenue from consumer products
was down by 20% primarily due to lower demand in smartphone products. Revenue
from industrial products was down by 7% primarily due to lower demand in control
and automation, and medical products. These results include net revenues for the
nine months ended March 30, 2019 that align with our revised end-market
categories.
During each of the three months ended March 28, 2020 and March 30, 2019,
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 denominated in
foreign currencies. The impact of changes in foreign exchange rates on our
revenue and results of operations for the three and nine months ended March 28,
2020 and March 30, 2019 was immaterial.
Gross Margin
Our gross margin percentages were 65.2% and 62.8% for the three months ended
March 28, 2020 and March 30, 2019, respectively. Our gross margin increased by
2.4 percentage points, primarily due to lower inventory reserve requirements.
Our gross margin percentages were 65.0% and 65.1% for the nine months ended
March 28, 2020 and March 30, 2019, respectively. Our gross margin decreased by
0.1 percentage point, remaining flat compared to the same period last year.
Research and Development
Research and development expenses were $109.1 million and $107.1 million for the
three months ended March 28, 2020 and March 30, 2019, respectively, which
represented 19.4% and 19.7% of net revenues for each respective period. The $2.0
million increase was primarily due to higher employee compensation expense.
Research and development expenses were $330.0 million and $330.1 million for the
nine months ended March 28, 2020 and March 30, 2019, respectively, which
represented 20.0% and 18.8% of net revenues for each respective period. Research
and development expenses remained flat compared to the same period last year.
Selling, General and Administrative
Selling, general and administrative expenses were $71.6 million and $74.1
million for the three months ended March 28, 2020 and March 30, 2019,
respectively, which represented 12.7% and 13.7% of net revenues for each
respective period. The $2.5 million decrease was mainly due to lower
depreciation expenses.
Selling, general and administrative expenses were $223.8 million and $233.5
million for the nine months ended March 28, 2020 and March 30, 2019,
respectively, which represented 13.6% and 13.3% of net revenues for each
respective period. The $9.7 million decrease was due to lower depreciation,
professional fees, and travel expenses.
Provision for Income Taxes
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In the three and nine months ended March 28, 2020, the Company recorded an
income tax provision of $20.5 million and $61.2 million, respectively, compared
to $29.8 million and $116.8 million for the three and nine months ended March
30, 2019, respectively. The Company's effective tax rate for the three and nine
months ended March 28, 2020 was 11.3% and 12.0%, respectively, compared to 18.6%
and 20.3% for the three and nine months ended March 30, 2019, respectively.
The Company's federal statutory tax rate is 21%. The Company's effective tax
rate for the three and nine months ended March 28, 2020 was lower than the
statutory rate primarily due to earnings of foreign subsidiaries, generated by
the Company's international operations managed in Ireland, that were taxed at
lower rates, partially offset by U.S. tax expense related to Global Intangible
Low-Taxed Income ("GILTI").
The Company's effective tax rate for the three months ended March 30, 2019 was
lower than the statutory rate primarily due to earnings of foreign subsidiaries,
generated by the Company's international operations managed in Ireland, that
were taxed at lower rates, partially offset by tax generated by the GILTI
provisions, a $4.1 million discrete charge for differences between the Company's
fiscal year 2018 tax returns and the tax provision originally recorded, and $5.7
million of discrete interest accruals for unrecognized tax benefits.
The Company's effective tax rate for the nine months ended March 30, 2019 was
lower than the statutory rate primarily due to earnings of foreign subsidiaries,
generated by the Company's international operations managed in Ireland, that
were taxed at lower rates, partially offset by $21.0 million of discrete charges
for the Transition Tax, tax generated by the GILTI provisions, $15.1 million of
discrete interest accruals for unrecognized tax benefits, and $4.8 million of
discrete charges for differences between the Company's fiscal year 2018 tax
returns and the tax provision originally recorded.
BACKLOG
As of March 28, 2020 and June 29, 2019, our current quarter backlog was
approximately $508.5 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:
Nine Months Ended
March 28, March 30,
2020 2019
(in thousands)
Net cash provided by (used in) operating activities $ 588,526 $ 638,373
Net cash provided by (used in) investing activities 42,386 785,387
Net cash provided by (used in) financing activities (749,587 ) (1,312,681 )
Net increase (decrease) in cash and cash equivalents $ (118,675 ) $ 111,079
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 $49.8 million for the nine
months ended March 28, 2020 compared with the nine months ended March 30, 2019
due mainly to lower net income and changes in working capital. Changes in
working capital were driven by a decrease in income tax payable and an increase
in accounts receivable, partially offset by a decrease in inventory and an
increase in accrued expenses.
Investing activities
Investing cash flows consist primarily of net investment purchases and
maturities, and capital expenditures.
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Cash provided by investing activities decreased by $743.0 million for the nine
months ended March 28, 2020 compared with the nine months ended March 30, 2019.
The decrease was due to lower proceeds from maturity of available-for-sale
securities partially offset by lower purchases of available-for-sale securities.
Financing activities
Financing cash flows consist primarily of payment of debt, dividends to
stockholders, and repurchases of common stock.
Cash used in financing activities decreased by $563.1 million for the nine
months ended March 28, 2020 compared with the nine months ended March 30, 2019.
The decrease was due to a $500.0 million debt repayment we made in November 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 March 28, 2020, our available funds consisted of $1.7 billion in cash,
cash equivalents and short-term investments.
On October 30, 2018, we were authorized to repurchase up to $1.5 billion of the
Company's common stock. During the three and nine months ended March 28, 2020,
we repurchased an aggregate of $157.0 million and $358.5 million of the
Company's common stock, respectively.
During the three and nine months ended March 28, 2020, we paid cash dividends of
$0.48 and $1.44 per common share totaling $129.1 million and $389.1 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, debt repayments and dividend payments
for at least the next twelve months.
Off-Balance-Sheet Arrangements
As of March 28, 2020, we did not have any material off-balance-sheet
arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
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