Document



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

FORM 10-Q
(Mark One)

[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended December 30, 2017
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
logo10qq117a02.jpg
MAXIM INTEGRATED PRODUCTS, INC.
(Exact name of Registrant as Specified in its Charter)
Delaware
 (State or Other Jurisdiction of Incorporation or Organization)
 
94-2896096 
(I.R.S. Employer I. D. No.)

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller” reporting company in Rule 12b-2 of the Exchange Act. (Check one):




Large accelerated filer [x]
Accelerated filer [ ]
Non-accelerated filer [ ]
(Do not check if a smaller reporting company)
Smaller reporting company [ ]
Emerging growth company [ ]
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revisited financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

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

As of January 19, 2018, there were 218,214,018 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 December 30, 2017 and June 24, 2017
 
 
 
 
Condensed Consolidated Statements of Income for the Three and Six Months Ended December 30, 2017 and December 24, 2016
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended December 30, 2017 and December 24, 2016
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 30, 2017 and December 24, 2016
 
 
 
 
Notes to Condensed Consolidated Financial Statements
 
 
 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
 
 
 
Item 4. Controls and Procedures
 
 
 
 
PART II - OTHER INFORMATION
 
 
 
 
Item 1. Legal Proceedings
 
 
 
 
Item 1A. Risk Factors
 
 
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 
Item 3. Defaults Upon Senior Securities
 
 
 
 
Item 4. Mine Safety Disclosures
 
 
 
 
Item 5. Other Information
 
 
 
 
Item 6. Exhibits
 
 
 
 
SIGNATURES
 




PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

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

 
December 30,
2017
 
June 24,
2017
 
(in thousands)
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
1,631,510

 
$
2,246,121

Short-term investments
1,191,765

 
498,718

Total cash, cash equivalents and short-term investments
2,823,275

 
2,744,839

Accounts receivable, net of allowances of $117,039 at December 30, 2017 and $46,575 at June 24, 2017
235,695

 
256,454

Inventories
259,597

 
247,242

Other current assets
24,153

 
57,059

Total current assets
3,342,720

 
3,305,594

Property, plant and equipment, net
597,818

 
606,581

Intangible assets, net
67,716

 
90,867

Goodwill
491,015

 
491,015

Other assets
65,243

 
76,176

TOTAL ASSETS
$
4,564,512

 
$
4,570,233

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable
$
84,770

 
$
77,373

Income taxes payable
10,523

 
3,688

Accrued salary and related expenses
113,716

 
145,299

Accrued expenses
37,687

 
37,663

Deferred revenue on shipments to distributors

 
14,974

Current portion of debt
498,694

 

Total current liabilities
745,390

 
278,997

Long-term debt
990,428

 
1,487,678

Income taxes payable
801,260

 
557,498

Other liabilities
41,736

 
43,366

Total liabilities
2,578,814

 
2,367,539

 
 
 
 
Commitments and contingencies (Note 11)


 


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

 
283

Retained earnings
1,997,207

 
2,212,301

Accumulated other comprehensive loss
(11,792
)
 
(9,890
)
Total stockholders’ equity
1,985,698

 
2,202,694

TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY
$
4,564,512

 
$
4,570,233


See accompanying Notes to Condensed Consolidated Financial Statements.

3



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


 
Three Months Ended
 
Six Months Ended
 
December 30,
2017
 
December 24,
2016
 
December 30,
2017
 
December 24,
2016
 
(in thousands, except per share data)
 
 
 
 
 
 
 
 
Net revenues
$
622,637

 
$
550,998

 
$
1,198,313

 
$
1,112,394

Cost of goods sold
212,961

 
210,820

 
414,806

 
426,484

Gross margin
409,676

 
340,178

 
783,507

 
685,910

Operating expenses:
 
 
 
 
 
 
 
Research and development
115,896

 
114,057

 
224,497

 
226,803

Selling, general and administrative
85,323

 
71,543

 
159,005

 
142,395

Intangible asset amortization
995

 
2,348

 
2,747

 
4,791

Impairment of long-lived assets
850

 
383

 
892

 
6,517

Severance and restructuring expenses
6,523

 
864

 
11,956

 
10,829

Other operating expenses (income), net
(959
)
 
1,909

 
(1,804
)
 
(26,572
)
Total operating expenses
208,628

 
191,104

 
397,293

 
364,763

Operating income (loss)
201,048

 
149,074

 
386,214

 
321,147

Interest and other income (expense), net
(3,121
)
 
(636
)
 
(7,334
)
 
(7,506
)
Income (loss) before provision for income taxes
197,927

 
148,438

 
378,880

 
313,641

Income tax provision (benefit)
272,942

 
17,961

 
299,361

 
45,550

Net income (loss)
$
(75,015
)
 
$
130,477

 
$
79,519

 
$
268,091

 
 
 
 
 
 
 
 
Earnings (loss) per share:
 
 
 
 
 
 
 
Basic
$
(0.27
)
 
$
0.46

 
$
0.28

 
$
0.95

Diluted
$
(0.27
)
 
$
0.45

 
$
0.28

 
$
0.93

 
 
 
 
 
 
 
 
Shares used in the calculation of earnings (loss) per share:
 
 
 
 
 
 
 
Basic
281,560

 
283,294

 
281,852

 
283,464

Diluted
281,560

 
288,106

 
286,355

 
288,364

 
 
 
 
 
 
 
 
Dividends declared and paid per share
$
0.36

 
$
0.33

 
$
0.72

 
$
0.66


See accompanying Notes to Condensed Consolidated Financial Statements.



4



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

 
 
Three Months Ended
 
Six Months Ended
 
 
December 30,
2017
 
December 24,
2016
 
December 30,
2017
 
December 24,
2016
 
 
(in thousands)
Net income (loss)
 
$
(75,015
)
 
$
130,477

 
$
79,519

 
$
268,091

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Change in net unrealized gains and losses on available-for-sale securities, net of tax benefit (expense) of $0, $1,633, $0 and $0, respectively
 
(2,122
)
 
(4,369
)
 
(2,220
)
 
(1,757
)
Change in net unrealized gains and losses on cash flow hedges, net of tax benefit (expense) of $69, $439, $(51) and $317, respectively
 
(3
)
 
(1,107
)
 
350

 
(721
)
Change in net unrealized gains and losses on post-retirement benefits, net of tax benefit (expense) of $(142), $(28), $(164), and $(2,833), respectively
 
(76
)
 
59

 
(32
)
 
4,906

Other comprehensive income (loss), net
 
(2,201
)
 
(5,417
)
 
(1,902
)
 
2,428

Total comprehensive income (loss)
 
$
(77,216
)
 
$
125,060

 
$
77,617

 
$
270,519


See accompanying Notes to Condensed Consolidated Financial Statements.


5



MAXIM INTEGRATED PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six Months Ended
 
December 30,
2017
 
December 24,
2016
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income (loss)
$
79,519

 
$
268,091

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Stock-based compensation
38,327

 
35,193

Depreciation and amortization
72,567

 
85,625

Deferred taxes
8,927

 
7,375

Loss (gain) from sale of property, plant and equipment
(588
)
 
4,550

Loss (gain) on sale of business

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

 
797

Impairment of investments in privately-held companies
850

 
5,720

Changes in assets and liabilities:
 
 
 
Accounts receivable
20,759

 
32,189

Inventories
(12,290
)
 
(9,995
)
Other current assets
32,947

 
(19,682
)
Accounts payable
3,664

 
(12,857
)
Income taxes payable
250,597

 
17,248

Deferred margin on shipments to distributors
(14,974
)
 
(2,642
)
Accrued salary and related expenses
(31,582
)
 
(57,223
)
All other accrued liabilities
815

 
(11,737
)
Net cash provided by (used in) operating activities
449,580

 
316,032

Cash flows from investing activities:
 
 
 
Purchase of property, plant and equipment
(36,734
)
 
(30,085
)
Proceeds from sale of property, plant and equipment
2,917

 
2,429

Proceeds from sale of available-for-sale securities
39,996

 
50,994

Proceeds from maturity of available-for-sale securities
118,211

 
25,000

Proceeds from sale of business

 
42,199

Purchases of available-for-sale securities
(853,470
)
 
(300,846
)
Purchases of privately-held companies' securities
(2,106
)
 
(2,663
)
Net cash provided by (used in) investing activities
(731,186
)
 
(212,972
)
Cash flows from financing activities:
 
 
 
Repayment of notes payable

 
(250,000
)
Net issuance of restricted stock units
(11,520
)
 
(9,445
)
Proceeds from stock options exercised
18,667

 
27,066

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

 
17,658

Repurchase of common stock
(152,244
)
 
(118,944
)
Dividends paid
(202,883
)
 
(187,189
)
Net cash provided by (used in) financing activities
(333,005
)
 
(520,854
)
Net increase (decrease) in cash and cash equivalents
(614,611
)
 
(417,794
)
Cash and cash equivalents:
 
 
 
Beginning of period
$
2,246,121

 
$
2,105,229

End of period
$
1,631,510

 
$
1,687,435

Supplemental disclosures of cash flow information:
 
 
 
Cash paid, net, during the period for income taxes
$
14,857

 
$
48,753


6



Cash paid for interest
$
23,313

 
$
14,688

 
 
 
 
Noncash financing and investing activities:
 
 
 
Accounts payable related to property, plant and equipment purchases
$
10,961

 
$
8,359


See accompanying Notes to Condensed Consolidated Financial Statements.


7



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

NOTE 1: BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Maxim Integrated Products, Inc. and all of its majority-owned subsidiaries (collectively, the “Company” or “Maxim Integrated”) included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles of the United States of America (“GAAP”) have been condensed or omitted pursuant to applicable rules and regulations. In the opinion of management, all adjustments of a normal recurring nature which were considered necessary for fair presentation have been included. The year-end condensed consolidated balance sheet data were derived from audited consolidated financial statements but do not include all disclosures required by GAAP. The results of operations for the six months ended December 30, 2017 are not necessarily indicative of the results to be expected for the entire year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended June 24, 2017.

The Company has a 52-to-53-week fiscal year that ends on the last Saturday in June. Accordingly, every fifth or sixth fiscal year will be a 53-week fiscal year. Fiscal year 2017 was a 52-week fiscal year and fiscal year 2018 is a 53-week fiscal year. The second quarter of fiscal year 2017 was a 13-week quarter and the second quarter of fiscal year 2018 was a 14-week quarter.

NOTE 2: RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

(i) New Accounting Updates Recently Adopted

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

(ii) Recent Accounting Updates Not Yet Effective

In May 2014, the FASB issued ASU No. 2014-09Revenue from Contracts with Customers (Topic 606)This standard provides a single set of guidelines for revenue recognition to be used across all industries and requires additional disclosures. ASU No. 2014-09 is effective for the Company in the first quarter of fiscal year 2019 using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU No. 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU No. 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU No. 2014-09. The Company presently expects to select the modified retrospective transition method. As the new standard will supersede substantially all existing revenue guidance affecting the Company under GAAP, it could impact the Company's financial statements and disclosures, operational processes including internal controls, and business systems. As of the second quarter of fiscal year 2018, the Company recognizes all revenue from distributors on a sell-in basis of accounting. The Company does not expect the new guidance to materially impact the timing of recognition of future revenue, but continues to evaluate potential impacts of the new standard.

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which provides guidance for the recognition, measurement, presentation, and disclosure of financial assets and liabilities. This ASU will be effective for the Company beginning in the first quarter of fiscal year 2019. The application of this ASU will be by means of a cumulative-effect adjustment to the balance sheet. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) will be applied prospectively to equity investments that exist as of the date of adoption. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the lease accounting requirements in Topic 840. ASU 2016-02 requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of use asset and a corresponding lease liability. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use

8



asset, and for operating leases, the lessee would recognize a straight-line total lease expense. The guidance also requires qualitative and specific quantitative disclosures to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities, including significant judgments and changes in judgments. This guidance is effective beginning in the first quarter of fiscal year 2020 on a modified retrospective approach. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. ASU No. 2016-16 requires that entities recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs instead of when the asset is sold. ASU No. 2016-16 is effective beginning in the first quarter of fiscal 2019, with early adoption permitted. The Company does not believe the implementation of this standard will result in a material impact to its consolidated financial statements.

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

In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires employers that offer or maintain defined benefit plans to disaggregate the service component from the other components of net benefit cost and provides guidance on presentation of the service component and the other components of net benefit cost in the statement of operations. The new standard is effective beginning in the third quarter of fiscal year 2018. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements.

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

NOTE 3: BALANCE SHEET COMPONENTS

Inventories consist of:

 
December 30,
2017
 
June 24,
2017
Inventories:
(in thousands)
Raw materials
$
15,012

 
$
11,779

Work-in-process
163,649

 
151,614

Finished goods
80,936

 
83,849

 
$
259,597

 
$
247,242


Property, plant and equipment, net consists of:

 
December 30,
2017
 
June 24,
2017
Property, plant and equipment, net:
(in thousands) 
Land
$
17,731

 
$
18,952

Buildings and building improvements
253,242

 
254,513

Machinery and equipment
1,319,875

 
1,286,031

 
1,590,848

 
1,559,496

Less: accumulated depreciation
(993,030
)
 
(952,915
)
 
$
597,818

 
$
606,581


9





Accrued salary and related expenses consist of:

 
December 30,
2017
 
June 24,
2017
Accrued salary and related expenses:
(in thousands)
Accrued vacation
$
30,311

 
$
29,621

Accrued bonus
48,677

 
85,600

Accrued salaries
8,676

 
14,528

Other
26,052

 
15,550

 
$
113,716

 
$
145,299


NOTE 4: FAIR VALUE MEASUREMENTS

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

The Company’s Level 2 assets and liabilities consist of U.S. Treasury securities, agency securities, corporate debt securities, certificates of deposit, commercial paper, foreign currency forward contracts and long-term debt that are valued using quoted market prices or are determined using a yield curve model based on current market rates.

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

The Company did not hold any Level 3 assets or liabilities as of December 30, 2017 and June 24, 2017.


10



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

 
As of December 30, 2017
 
As of June 24, 2017
 
Fair Value
 Measurements Using
 
Total
Balance
 
Fair Value
 Measurements Using
 
Total
Balance
 
Level 1
 
Level 2
 
Level 3
 
 
Level 1
 
Level 2
 
Level 3
 
 
(in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
103,678

 
$

 
$

 
$
103,678

 
$
952,462

 
$

 
$

 
$
952,462

Commercial paper

 
19,540

 

 
19,540

 

 

 

 

U.S Treasury securities

 
31,977

 

 
31,977

 

 

 

 

Short Term Investments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency securities

 
6,994

 

 
6,994

 

 

 

 

Certificates of deposit

 
50,545

 

 
50,545

 

 

 

 

Commercial paper

 
82,249

 

 
82,249

 

 

 

 

Corporate debt securities

 
422,659

 

 
422,659

 

 

 

 

U.S. Treasury securities

 
629,318

 

 
629,318

 

 
498,718

 

 
498,718

Other Current Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts

 
606

 

 
606

 

 
848

 

 
848

Total Assets
$
103,678

 
$
1,243,888

 
$

 
$
1,347,566

 
$
952,462

 
$
499,566

 
$

 
$
1,452,028

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Current Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts
$

 
$
230

 
$

 
$
230

 
$

 
$
386

 
$

 
$
386

Total Liabilities
$

 
$
230

 
$

 
$
230

 
$

 
$
386

 
$

 
$
386


During the six months ended December 30, 2017 and the year ended June 24, 2017, there were no transfers in or out of Level 3 from other levels in the fair value hierarchy.

There were no assets or liabilities measured at fair value on a non-recurring basis as of December 30, 2017 and June 24, 2017 other than impairments of Long-Lived assets. For details, please refer to Note 14: “Impairment of long-lived assets”.

NOTE 5: FINANCIAL INSTRUMENTS

Short-term investments
Fair values were as follows:

11



 
December 30,
2017
 
June 24,
2017
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Estimated Fair Value
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Estimated Fair Value
 
(in thousands)
Available-for-sale investments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency Securities
$
6,994

 
$

 
$

 
$
6,994

 
$

 
$

 
$

 
$

Certificates of deposit
50,545

 

 

 
50,545

 

 

 

 

Commercial paper
82,249

 

 

 
82,249

 

 

 

 

Corporate debt securities
423,774

 
38

 
(1,153
)
 
422,659

 

 

 

 

U.S. Treasury securities
631,657

 

 
(2,339
)
 
629,318

 
499,952

 

 
(1,234
)
 
498,718

Total available-for-sale investments
$
1,195,219

 
$
38

 
$
(3,492
)
 
$
1,191,765

 
$
499,952

 
$

 
$
(1,234
)
 
$
498,718


In the three and six months ended December 30, 2017 and the year ended June 24, 2017, the Company did not recognize any impairment charges on short-term investments. All available-for-sale investments have maturity dates between December 31, 2017 and December 1, 2020.

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

Derivative instruments and hedging activities

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

The Company incurs expenditures denominated in non-U.S. currencies, primarily the Philippine Peso and the Thai Baht associated with the Company's manufacturing activities in the Philippines and Thailand, respectively, and the European Euro, Indian Rupee, Japanese Yen, Taiwan New Dollar, South Korean Won, and Chinese Yuan, expenditures for sales offices and research and development activities undertaken outside of the U.S.

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

Derivatives designated as cash flow hedging instruments

The Company designates certain forward contracts as hedging instruments pursuant to Accounting Standards Codification (“ASC”) No. 815-Derivatives and Hedging (“ASC 815”). As of December 30, 2017 and June 24, 2017, the notional amounts of the forward contracts the Company held to purchase international currencies were $37.9 million and $36.2 million, respectively, and the notional amounts of forward contracts the Company held to sell international currencies were $0.8 million and $0.2 million, respectively.

Derivatives not designated as hedging instruments

As of December 30, 2017 and June 24, 2017, the notional amounts of the forward contracts the Company held to purchase international currencies were $16.9 million and $44.5 million, respectively, and the notional amounts of forward contracts the Company held to sell international currencies were $27.5 million and $21.6 million, respectively. The fair values of our outstanding foreign currency forward contracts and gain (loss) included in the Condensed Consolidated Statements of Income were not material for the three and six months ended December 30, 2017 and the year ended June 24, 2017.

Effect of hedge accounting on the Condensed Consolidated Statements of Income

12




The following table summarizes the gains and (losses) from hedging activities recognized in the Company's Condensed Consolidated Statements of Income:
 
Three Months Ended
 
Six Months Ended
 
December 30,
2017
 
December 30,
2017
 
Net Revenue
 
Cost of Goods Sold
 
Operating Expenses
 
Net Revenue
 
Cost of Goods Sold
 
Operating Expenses
 
(in thousands)
Income and expenses line items in which the effects of cash flow hedges are recorded
$
622,637

 
$
212,961

 
$
208,628

 
$
1,198,313

 
$
414,806

 
$
397,293

 
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) on cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts:
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) reclassified from accumulated other comprehensive income into income
$
(12
)
 
$
(52
)
 
$
278

 
$
(53
)
 
$
(49
)
 
$
1,425


Outstanding debt obligations

The following table summarizes the Company’s outstanding debt obligations:
 
December 30,
2017
 
June 24,
2017
 
(in thousands)
3.45% fixed rate notes due June 2027
$
500,000

 
$
500,000

2.5% fixed rate notes due November 2018

500,000

 
500,000

3.375% fixed rate notes due March 2023
500,000

 
500,000

Total outstanding debt
1,500,000

 
1,500,000

Less: Current portion (included in "Current portion of debt")
(498,694
)
 

Less: Reduction for unamortized discount and debt issuance costs
(10,878
)
 
(12,322
)
Total long-term debt
$
990,428

 
$
1,487,678


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

On November 21, 2013, the Company completed a public offering of $500 million aggregate principal amount of the Company’s 2.5% coupon senior unsecured and unsubordinated notes due in November 2018 (“2018 Notes”), with an effective interest rate of 2.6%. Interest on the 2018 Notes is payable semi-annually in arrears on May 15 and November 15 of each year, commencing on May 15, 2014. The net proceeds of this offering were approximately $494.5 million, after issuing at a discount and deducting paid expenses.

On March 18, 2013, the Company completed a public offering of $500 million aggregate principal amount of the Company’s 3.375% senior unsecured and unsubordinated notes due in March 2023 (“2023 Notes”), with an effective interest rate of 3.5%. Interest on the 2023 Notes is payable semi-annually in arrears on March 15 and September 15 of each year, commencing on September 15, 2013. The net proceeds of this offering were approximately $490 million, after issuing at a discount and deducting paid expenses.

The debt indentures that govern the 2027 Notes, the 2023 Notes and the 2018 Notes, respectively, include covenants that limit the Company's ability to grant liens on its facilities and to enter into sale and leaseback transactions, which could limit the Company's ability to secure additional debt funding in the future. In circumstances involving a change of control of the Company followed

13



by a downgrade of the rating of the 2027 Notes, the 2023 Notes or the 2018 Notes, the Company would be required to make an offer to repurchase the affected notes at a purchase price equal to 101% of the aggregate principal amount of such notes, plus accrued and unpaid interest.

The Company accounts for all the notes above based on their amortized cost. The discount and expenses are being amortized to Interest and other income (expense), net in the Condensed Consolidated Statements of Income over the life of the notes. The interest expense is recorded in Interest and other income (expense), net in the Condensed Consolidated Statements of Income. Amortized discount and expenses, as well as interest expense associated with the notes, were $12.4 million and $9.3 million during the three months ended December 30, 2017 and December 24, 2016, respectively. Amortized discount and expenses, as well as interest expense associated with the notes, were $24.7 million and $18.4 million during the six months ended December 30, 2017 and December 24, 2016, respectively.

The estimated fair value of the Company’s outstanding debt obligations was approximately $1,509 million as of December 30, 2017. The estimated fair value of the debt is based primarily on observable market inputs and is a Level 2 measurement.

The Company recorded interest expense of $12.5 million and $9.5 million during the three months ended December 30, 2017, and December 24, 2016, respectively. The Company recorded interest expense of $25.1 million and $18.8 million during the six months ended December 30, 2017 and December 24, 2016, respectively.

Credit Facility
Revolving credit facility

The Company has access to a $350 million senior unsecured revolving credit facility with certain institutional lenders that expires on June 27, 2019. The facility fee is at a rate per annum that varies based on the Company’s index debt rating and any advances under the credit agreement will accrue interest at a base rate plus a margin based on the Company’s index debt rating. The credit agreement requires the Company to comply with certain covenants, including a requirement that the Company maintain a ratio of debt to EBITDA (earnings before interest, taxes, depreciation, and amortization) of not more than 3 to 1 and a minimum interest coverage ratio (EBITDA divided by interest expense) greater than 3.5 to 1. As of December 30, 2017, the Company had not borrowed any amounts from this credit facility and was in compliance with all debt covenants.

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

NOTE 6: STOCK-BASED COMPENSATION

At December 30, 2017, the Company had one stock incentive plan, the Company's 1996 Stock Incentive Plan (the “1996 Plan”) and one employee stock purchase plan, the 2008 Employee Stock Purchase Plan (the “2008 ESPP”). The 1996 Plan was adopted by the board of directors to provide the grant of incentive stock options, non-statutory stock options, restricted stock units (“RSUs”), and market stock units (“MSUs”) to employees, directors, and consultants.

Pursuant to the 1996 Plan, the exercise price for incentive stock options and non-statutory stock options is determined to be the fair market value of the underlying shares on the date of grant. Options typically vest ratably over a four-year period measured from the date of grant. Options generally expire no later than seven years after the date of grant, subject to earlier termination upon an optionee's cessation of employment or service.

RSUs granted to employees typically vest over a four-year period and are converted into shares of the Company's common stock upon vesting, subject to the employee's continued service to the Company over that period. RSUs granted after August 2017 will continue to vest post-employment at the Company for certain individuals satisfying specific eligibility requirements.

MSUs granted to employees typically vest over a four-year cliff period and are converted into shares of the Company's common stock upon vesting, subject to the employee's continued service to the Company over that period. The number of shares that are released at the end of the performance period can range from zero to a maximum cap depending on the Company's performance. For MSUs granted prior to September 2017, the performance metrics of this program are based on relative performance of the Company’s stock price as compared to the Semiconductor Exchange Traded Fund index SPDR S&P (the “XSD”). For MSUs granted in September 2017, the performance metrics for this program are based on the total shareholder return ("TSR") of the Company relative to the TSR of the other companies included in the XSD; these MSUs vest based upon annual performance

14



subject to continued service through the end of the four-year cliff period. MSUs granted after August 2017 will continue to vest post-employment at the Company for certain individuals satisfying specific eligibility requirements.

The following tables show total stock-based compensation expense by type of award, and the resulting tax effect, included in the Condensed Consolidated Statements of Income for the three and six months ended December 30, 2017 and December 24, 2016, respectively:

Three Months Ended

December 30, 2017

December 24, 2016

Stock Options

Restricted Stock Units

Employee Stock Purchase Plan

Total

Stock Options

Restricted Stock Units

Employee Stock Purchase Plan

Total

(in thousands)
Cost of goods sold
$
75


$
1,944


$
467


$
2,486


$
155


$
1,756


$
512


$
2,423

Research and development
185


8,898


1,033


10,116


620


7,995


1,068


9,683

Selling, general and administrative
222


7,656


558


8,436


177


5,261


529


5,967

Pre-tax stock-based compensation expense
$
482


$
18,498


$
2,058


$
21,038


$
952


$
15,012


$
2,109


$
18,073

Less: income tax effect






1,887








2,825

Net stock-based compensation expense








$
19,151








$
15,248



 
Six Months Ended
 
December 30, 2017
 
December 24, 2016
 
Stock Options
 
Restricted Stock Units
 
Employee Stock Purchase Plan
 
Total
 
Stock Options
 
Restricted Stock Units
 
Employee Stock Purchase Plan
 
Total
 
(in thousands)
Cost of goods sold
$
161

 
$
3,780

 
$
946

 
$
4,887

 
$
335

 
$
3,339

 
$
996

 
$
4,670

Research and development
493

 
15,487

 
2,003

 
17,983

 
843

 
14,692

 
2,285

 
17,820

Selling, general and administrative
585

 
13,786

 
1,086

 
15,457

 
819

 
10,737

 
1,147

 
12,703

Pre-tax stock-based compensation expense
$
1,239

 
$
33,053

 
$
4,035

 
$
38,327

 
$
1,997

 
$
28,768

 
$
4,428

 
$
35,193

Less: income tax effect
 
 
 
 
 
 
4,777

 
 
 
 
 
 
 
5,892

Net stock-based compensation expense
 
 
 
 
 
 
$
33,550

 
 
 
 
 
 
 
$
29,301


The expenses included in the Condensed Consolidated Statements of Income related to RSUs include expenses related to MSUs of $2.2 million and $0.9 million for the three months ended December 30, 2017 and December 24, 2016, respectively and $3.6 million and $1.5 million for the six months ended December 30, 2017 and December 24, 2016, respectively.

Stock Options

The fair value of options granted to employees under the 1996 Plan is estimated on the date of grant using the Black-Scholes option valuation model.

There were no stock options granted in the three and six months ended December 30, 2017 and December 24, 2016.

The following table summarizes outstanding, exercisable and vested and expected to vest stock options as of December 30, 2017 and their activity for the six months ended December 30, 2017:

15



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

 
$
26.92

 
 
 
 
Options Granted

 
$

 
 
 
 
Options Exercised
(736,768
)
 
$
25.35

 
 
 
 
Options Cancelled
(21,591
)
 
$
25.65

 
 
 
 
Balance at December 30, 2017
2,041,648

 
$
27.50

 
2.3
 
$
50,968,262

Exercisable, December 30, 2017
2,026,132

 
$
27.46

 
2.2
 
$
50,643,099

Vested and expected to vest, December 30, 2017
2,041,136

 
$
27.49

 
2.2
 
$
50,957,420

(1)
Aggregate intrinsic value represents the difference between the exercise price and the closing price per share of the Company’s common stock on December 29, 2017, 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 December 30, 2017.

As of December 30, 2017, there was less than $0.1 million of total unrecognized stock compensation cost related to less than 0.1 million unvested stock options, which is expected to be recognized over a weighted average period of approximately 0.4 years.

Restricted Stock Units and Other Awards

The fair value of RSUs and other awards under the Company’s 1996 Plan is estimated using the value of the Company’s common stock on the date of grant, reduced by the present value of dividends expected to be paid on the Company’s common stock prior to vesting. The Company also estimates forfeitures at the time of grant and makes revisions to forfeitures on a quarterly basis.

The weighted-average fair value of RSUs and other awards granted was $50.36 and $37.27 per share for the three months ended December 30, 2017 and December 24, 2016, respectively and $42.41 and $36.09 per share for the six months ended December 30, 2017 and December 24, 2016, respectively.

The following table summarizes the outstanding and expected to vest RSUs and other awards as of December 30, 2017 and their activity during the six months ended December 30, 2017:
 
Number of
Shares 
 
Weighted Average
Remaining
Contractual Term
(in Years)
 
 
Aggregate Intrinsic
Value (1) 
Balance at June 24, 2017
5,942,123

 
 
 
 
Restricted stock units and other awards granted
1,607,542

 
 
 
 
Restricted stock units and other awards released
(752,212
)
 
 
 
 
Restricted stock units and other awards cancelled
(356,167
)
 
 
 
 
Balance at December 30, 2017
6,441,286

 
2.9
 
$
339,132,496

Outstanding and expected to vest, December 30, 2017
5,305,015

 
2.8
 
$
278,301,106

(1)
Aggregate intrinsic value for RSUs and other awards represents the closing price per share of the Company’s common stock on December 29, 2017, the last business day preceding the fiscal quarter-end, multiplied by the number of RSUs outstanding or expected to vest as of December 30, 2017.
The Company withheld shares totaling $6.1 million and $11.5 million in value as a result of employee withholding taxes based on the value of the RSUs on their vesting date for the three and six months ended December 30, 2017. 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 December 30, 2017, there was $160.2 million of unrecognized compensation expense related to 6.5 million unvested RSUs and other awards, which is expected to be recognized over a weighted average period of approximately 2.9 years.

Market Stock Units (MSUs)

16




The Company grants MSUs to senior members of management in lieu of granting stock options. For MSUs granted prior to September 2017, the performance metrics of this program are based on relative performance of the Company’s stock price as compared to the Semiconductor Exchange Traded Fund index SPDR S&P (the “XSD”). For MSUs granted in September 2017, the performance metrics for this program are based on the total shareholder return ("TSR") of the Company relative to the TSR of the other companies included in the XSD. The fair value of MSUs is estimated using a Monte Carlo simulation model on the date of grant. The Company also estimates forfeitures at the time of grant and makes revisions to forfeitures on a quarterly basis. Compensation expense is recognized based on the initial valuation and is not subsequently adjusted as a result of the Company’s performance relative to that of the XSD or the TSR of the companies included in the XSD index, as applicable. Vesting for MSUs is contingent upon both service and market conditions and has a four-year vesting cliff period. MSUs granted in September 2017 vest based upon annual performance and are subject to continued service through the end of the four-year period, but will continue to vest post-employment at the Company for certain individuals satisfying specific eligibility requirements.

The weighted-average fair value of MSUs granted was $51.03 and $37.29 per share for the six months ended December 30, 2017 and December 24, 2016, respectively.

The following table summarizes the number of MSUs outstanding and expected to vest as of December 30, 2017 and their activity during the six months ended December 30, 2017:
 
Number of
Shares 
 
Weighted Average
Remaining
Contractual Term
(in Years)
 
 
Aggregate Intrinsic
Value (1) 
Balance at June 24, 2017
818,028

 
 
 
 
Market stock units granted
292,336

 
 
 
 
Market stock units released

 
 
 
 
Market stock units cancelled
(5,140
)
 
 
 
 
Balance at December 30, 2017
1,105,224

 
3.0
 
$
57,980,051

Outstanding and expected to vest, December 30, 2017
433,872

 
2.9
 
$
22,760,921

(1)
Aggregate intrinsic value for MSUs represents the closing price per share of the Company’s common stock on December 29, 2017, the last business day preceding the fiscal quarter-end, multiplied by the number of MSUs outstanding or expected to vest as of December 30, 2017.

As of December 30, 2017, there was $26.9 million of unrecognized compensation expense related to 1.1 million unvested MSUs, which is expected to be recognized over a weighted average period of approximately 3.0 years.

Employee Stock Purchase Plan

Employees are granted rights to acquire common stock under the 2008 ESPP.

The fair value of ESPP rights granted to employees has been estimated at the date of grant using the Black-Scholes option valuation model using the following assumptions for the offering periods outstanding:
 
ESPP
 
ESPP
 
Three Months Ended
 
Six Months Ended
 
December 30,
2017
 
December 24,
2016
 
December 30,
2017
 
December 24, 2016
Expected holding period (in years)
0.5 years
 
0.5 years
 
0.5 years
 
0.5 years
Risk-free interest rate
0.8% - 1.5%
 
0.5% - 0.7%
 
0.8% - 1.5%
 
0.5% - 0.7%
Expected stock price volatility
19.1% - 24.7%
 
22.1% - 30.4%
 
19.1% - 24.7%
 
22.1% - 30.4%
Dividend yield
3.0% - 3.4%
 
3.4% - 3.6%
 
3.0% - 3.4%
 
3.4% - 3.6%

As of December 30, 2017 and December 24, 2016, there was $6.5 million and $6.1 million, respectively, of unrecognized compensation expense related to the 2008 ESPP.

NOTE 7: EARNINGS (LOSS) PER SHARE

17




Basic earnings (loss) per share are computed using the weighted average number of shares of common stock outstanding during the period. For purposes of computing basic earnings (loss) per share, the weighted average number of outstanding shares of common stock excludes unvested RSUs and other awards as well as MSUs. Diluted earnings (loss) per share incorporates the incremental shares issuable upon the assumed exercise of stock options, assumed release of unvested RSUs and other awards as well as MSUs, and assumed issuance of common stock under the 2008 ESPP using the treasury stock method.

The following table sets forth the computation of basic and diluted earnings (loss) per share:
 
Three Months Ended
 
Six Months Ended
 
December 30,
2017
 
December 24,
2016
 
December 30,
2017
 
December 24,
2016
 
(in thousands, except per share data)
Numerator for basic earnings (loss) per share and diluted earnings (loss) per share
 
 
 
 
 
 
 
Net income (loss)
$
(75,015
)
 
$
130,477

 
$
79,519

 
$
268,091

 
 
 
 
 
 
 
 
Denominator for basic earnings (loss) per share
281,560

 
283,294

 
281,852

 
283,464

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

 
4,812

 
4,503

 
4,900

Denominator for diluted earnings (loss) per share
281,560

 
288,106

 
286,355

 
288,364

 
 
 
 
 
 
 
 
Earnings (loss) per share
 
 
 
 
 
 
 
Basic
$
(0.27
)
 
$
0.46

 
$
0.28

 
$
0.95

Diluted
$
(0.27
)
 
$
0.45

 
$
0.28

 
$
0.93


For the three months ended December 30, 2017 and December 24, 2016, there were approximately 4.8 million and zero incremental shares, respectively, determined to be anti-dilutive and therefore excluded from the calculation of diluted earnings per share. For the six months ended December 30, 2017 and December 24, 2016, no stock awards were determined to be anti-dilutive and therefore none were excluded from the calculation of diluted earnings per share.

NOTE 8: SEGMENT INFORMATION

The Company designs, develops, manufactures and markets a broad range of linear and mixed signal integrated circuits. All of the Company's products are designed through a centralized R&D function, manufactured using centralized manufacturing (internal and external), and sold through a centralized sales force and shared wholesale distributors.

The Company currently has
one operating segment and reportable segment. In accordance with ASC No. 280, Segment Reporting (“ASC 280”), the Company considers operating segments to be components of the Company’s business for which separate financial information is available that is evaluated regularly by the Company’s Chief Operating Decision Maker, assessed and determined to be the CEO, in deciding how to allocate resources and in assessing performance. The CEO reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance.

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

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

18



 
 
Three Months Ended
 
Six Months Ended
 
 
December 30,
2017
 
December 24,
2016
 
December 30,
2017
 
December 24,
2016
 
 
(in thousands)
United States
 
$
82,620

 
$
63,385

 
$
147,261

 
$
133,536

China
 
230,188

 
212,816

 
442,953

 
426,326

Rest of Asia
 
182,953

 
174,060

 
363,903

 
348,429

Europe
 
111,550

 
87,284

 
215,684

 
176,922

Rest of World
 
15,326

 
13,453

 
28,512

 
27,181

 
 
$
622,637

 
$
550,998

 
$
1,198,313

 
$
1,112,394


Net long-lived assets by geographic region were as follows:
 
December 30,
2017
 
June 24,
2017
 
(in thousands)
United States
$
369,342

 
$
374,775

Philippines
126,328

 
128,241

Rest of World
102,148

 
103,565

 
$
597,818

 
$
606,581


NOTE 9: COMPREHENSIVE INCOME (LOSS)
 
The changes in accumulated other comprehensive income (loss) by component and related tax effects in the six months ended December 30, 2017 and December 24, 2016 were as follows:

(in thousands)
Unrealized Gains and Losses on Intercompany Receivables
 
Unrealized Gains and Losses on Post-Retirement Benefits
 
Cumulative Translation Adjustment
 
Unrealized Gains and Losses on Cash Flow Hedges
 
Unrealized Gains and Losses on Available-For-Sale Securities
 
Total
June 24, 2017
$
(6,280
)
 
$
(1,258
)
 
$
(1,136
)
 
$
18

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

 

 

 
1,725

 
(2,220
)
 
(495
)
Amounts reclassified out of accumulated other comprehensive loss (income)

 
132

 

 
(1,324
)
 

 
(1,192
)
Tax effects

 
(164
)
 

 
(51
)
 

 
(215
)
Other comprehensive income (loss)

 
(32
)
 

 
350

 
(2,220
)
 
(1,902
)
December 30, 2017
$
(6,280
)
 
$
(1,290
)
 
$
(1,136
)
 
$
368

 
$
(3,454
)
 
$
(11,792
)


19



(in thousands)
Unrealized Gains and Losses on Intercompany Receivables
 
Unrealized Gains and Losses on Post-Retirement Benefits
 
Cumulative Translation Adjustment
 
Unrealized Gains and Losses on Cash Flow Hedges
 
Unrealized Gains and Losses on Available-For-Sale Securities
 
Total
June 25, 2016
$
(6,280
)
 
$
(6,800
)
 
$
(1,136
)
 
$
(492
)
 
$
489

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

 
7,563

 

 
(2,115
)
 
2,694

 
8,142

Amounts reclassified out of accumulated other comprehensive loss (income)

 
176

 

 
1,077

 
(4,451
)
 
(3,198
)
Tax effects

 
(2,833
)
 

 
317

 

 
(2,516
)
Other comprehensive income (loss)

 
4,906

 

 
(721
)
 
(1,757
)
 
2,428

December 24, 2016
$
(6,280
)
 
$
(1,894
)
 
$
(1,136
)
 
$
(1,213
)
 
$
(1,268
)
 
$
(11,791
)


20



NOTE 10: INCOME TAXES

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

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

In the second quarter of fiscal year 2018 the Company recorded a $236.9 million discrete provisional charge for the Repatriation Tax and a $13.7 million discrete charge to remeasure deferred tax assets and liabilities as of the enactment date of the Act to reflect federal statutory tax rate reductions. To determine the amount of the Repatriation Tax, we must determine the accumulated unremitted earnings of the Company’s foreign subsidiaries and the amount of foreign income tax paid on such earnings.  The U.S. Department of Treasury has issued guidance regarding the Repatriation Tax and we expect that they will issue additional guidance.  Based on the information currently available, we can make a reasonable estimate of the Repatriation Tax and therefore recorded a provisional Repatriation Tax of $236.9 million, however, we are continuing to gather additional information and analyze the available authorities to more precisely compute the amount of the Repatriation Tax.

In the three and six months ended December 30, 2017, the Company recorded an income tax provision of $272.9 million and $299.4 million, respectively, compared to $18.0 million and $45.6 million for the three and six months ended December 24, 2016, respectively. The Company’s effective tax rate for the three and six months ended December 30, 2017 was 137.9% and 79.0%, respectively, compared to 12.1% and 14.5% for the three and six months ended December 24, 2016, respectively.

The Company’s federal statutory tax rate for fiscal year 2018 is 28.1%. The Company’s effective tax rate for the three and six months ended December 30, 2017 was higher than the statutory rate primarily due to a $236.9 million discrete provisional charge for the Repatriation Tax, a $13.7 million discrete charge to remeasure deferred taxes as of the enactment date of the Act, $4.2 million and $8.0 million of discrete interest accruals for unrecognized tax benefits in the three and six months ended December 30, 2017, respectively, partially offset by earnings of foreign subsidiaries, generated primarily by the Company's international operations managed in Ireland, that were taxed at lower rates.

The Company’s federal statutory tax rate for the fiscal year 2017 was 35%. The Company’s effective tax rate for the three and six months ended December 24, 2016 was lower than the statutory rate primarily due to earnings of foreign subsidiaries, generated primarily by the Company's international operations managed in Ireland, that were taxed at lower rates, and a $5.1 million discrete benefit for differences between our fiscal year 2016 tax returns and the tax provision originally recorded, partially offset by stock-based compensation for which no tax benefit is expected and $3.7 million and $6.7 million of discrete interest accruals for unrecognized tax benefits in the three and six months ended December 24, 2016, respectively.

The Company’s federal corporate income tax returns are audited on a recurring basis by the Internal Revenue Service (“IRS”). The IRS has concluded its field examination of the Company’s federal corporate income tax returns for fiscal years 2009 through 2011 and issued an IRS Revenue Agent’s Report in July 2016 that includes proposed adjustments for transfer pricing issues related to cost sharing and buy-in license payments for the use of intangible property by one of the Company’s international subsidiaries. The Company disagrees with the proposed transfer pricing adjustments and related penalties, and in September 2016, the Company filed a protest to challenge the proposed adjustments and requested a conference with the Appeals Office of the IRS. The Company believes that its reserves for unrecognized tax benefits are sufficient to cover any potential assessments that may result from the final resolution of these transfer pricing issues. In fiscal year 2017, the IRS commenced an audit of the Company’s federal corporate income tax returns for fiscal years 2012 through 2014, which is ongoing.


21



NOTE 11: COMMITMENTS AND CONTINGENCIES

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

Indemnification

The Company indemnifies certain customers, distributors, suppliers and subcontractors for attorney fees, damages and costs awarded against such parties in certain circumstances in which the Company's products are alleged to infringe third party intellectual property rights, including patents, registered trademarks or copyrights. The terms of the Company's indemnification obligations are generally perpetual from the effective date of the agreement. In certain cases, there are limits on and exceptions to the Company's potential liability for indemnification relating to intellectual property infringement claims.

Pursuant to the Company's charter documents and separate written indemnification agreements, the Company has certain indemnification obligations to its current officers, employees and directors, as well as certain former officers and directors.

Product Warranty

The Company accrues for specific and estimated products claims resulting from defects in materials, workmanship and material non-conformance to the Company’s specifications. The Company's aggregate product warranty liabilities as of December 30, 2017 and December 24, 2016 were $5.4 million and $5.4 million, respectively.

NOTE 12: COMMON STOCK REPURCHASES

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

During the six months ended December 30, 2017, the Company repurchased approximately 3.1 million shares of its common stock for $152.2 million. As of December 30, 2017, the Company had remaining authorization of $874.1 million for future share repurchases. The number of shares to be repurchased and the timing of such repurchases will be based on several factors, including the price of the Company’s common stock and general market and business conditions.

NOTE 13: 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.

No indicators or instances of impairment were identified in the six months and fiscal year ended December 30, 2017 and June 24, 2017, respectively.

Intangible Assets

The useful lives of amortizable intangible assets are as follows:


22



Asset
 
Life
Intellectual property
 
1-10 years
Customer relationships
 
3-10 years
Trade name
 
1-4 years
Patents
 
5 years

Intangible assets consisted of the following:

 
December 30,
2017
 
June 24,
2017
 
Original
Cost
 
Accumulated
Amortization
 
Net
 
Original
Cost
 
Accumulated
Amortization
 
Net
 
(in thousands)
Intellectual property
$
453,685

 
$
400,009

 
$
53,676

 
$
451,885

 
$
377,806

 
$
74,079

Customer relationships
115,634

 
101,885

 
13,749

 
115,634

 
99,812

 
15,822

Trade name
8,500

 
8,500

 

 
8,500

 
8,086

 
414

Patents
2,500

 
2,209

 
291

 
2,500

 
1,948

 
552

Total amortizable purchased intangible assets
580,319

 
512,603

 
67,716

 
578,519

 
487,652

 
90,867

IPR&D

 

 

 

 

 

Total purchased intangible assets
$
580,319

 
$
512,603

 
$
67,716

 
$
578,519

 
$
487,652

 
$
90,867



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

 
Three Months Ended
 
Six Months Ended
 
December 30,
2017
 
December 24,
2016
 
December 30,
2017
 
December 24,
2016
 
(in thousands)
Cost of goods sold
$
11,140

 
$
11,755

 
$
22,204

 
$
24,356

Intangible asset amortization
995

 
2,348

 
2,747

 
4,791

Total intangible asset amortization expenses
$
12,135

 
$
14,103

 
$
24,951

 
$
29,147


The following table represents the estimated future amortization expense of intangible assets as of December 30, 2017:

Fiscal Year
 
Amount
 
 
(in thousands)
Remaining six months of 2018
 
$
23,420

2019
 
20,161

2020
 
10,242

2021
 
8,454

2022
 
2,863

Thereafter
 
2,576

Total intangible assets
 
$
67,716


NOTE 14: IMPAIRMENT OF LONG-LIVED ASSETS

Fiscal year 2018:

23




During the three and six months ended December 30, 2017, the Company recorded $0.9 million and $0.9 million, respectively, in impairment of long-lived assets in the Company's Condensed Consolidated Statements of Income. The impairment was primarily associated with certain investments in privately held companies. The Company uses various inputs to evaluate investments in privately held companies, including valuations of recent financing events as well as other information regarding the privately held companies' historical and forecasted performance. The Company reached its conclusion regarding the asset impairment due to changes, during the six months ended December 30, 2017, in the financial condition of certain investments in privately held companies which indicated an other than temporary impairment.

Fiscal year 2017:

During the fiscal year ended June 24, 2017, the Company recorded $7.5 million in impairment of long-lived assets in the Company's Consolidated Statements of Income. The impairment was primarily associated with certain investments in privately held companies. The Company uses various inputs to evaluate investments in privately held companies, including valuations of recent financing events as well as other information regarding the privately held companies' historical and forecasted performance. The Company reached its conclusion regarding the asset impairment due to changes, during fiscal year 2017, in the financial condition of certain investments in privately held companies which indicated an other than temporary impairment.

During the second quarter of fiscal year 2016, the Company classified the micro-electromechanical systems (MEMS) business line, including associated tangible assets and goodwill, as held for sale but no impairment charge was recorded as the carrying value of the product lines' associated assets approximated or was less than the fair value, less cost to sell. The fair values of the assets were determined after consideration of quoted market prices of similar equipment and offers received. During the first quarter of fiscal year 2017, the Company completed the sale of this business line for approximately $42.2 million, resulting in a gain of $26.6 million, included in Other operating income (expenses), net in the Condensed Consolidated Statements of Income.

NOTE 15: RESTRUCTURING ACTIVITIES

Fiscal year 2018:

During the three and six months ended December 30, 2017, the Company recorded $6.5 million and $12.0 million, respectively, in “Severance and restructuring expenses” in the Condensed Consolidated Statements of Income related to various restructuring plans designed to reduce costs. These charges were primarily associated with continued reorganization of certain business units and functions. Multiple job classifications and locations were impacted by these activities.

Fiscal year 2017:

During the fiscal year ended June 24, 2017, the Company recorded $12.5 million in “Severance and restructuring expenses” in the Consolidated Statements of Income related to various restructuring plans designed to reduce costs. These charges were primarily associated with continued reorganization of certain business units and functions and the closure of the Dallas wafer level packaging (“WLP”) manufacturing facilities. Multiple job classifications and locations were impacted by these activities.
 
During the fiscal year ended June 24, 2017, the Company completed the closure of its Dallas, Texas campus, including ceasing operations of its WLP manufacturing facility. The Company recorded accelerated depreciation charges of $3.5 million in "Cost of goods sold" and $0.8 million in "Operating expenses" in the Consolidated Statements of Income during the fiscal year ended June 24, 2017 in connection with this closure.

Restructuring Accruals

The Company has accruals for severance and restructuring payments within Accrued salary and related expenses in the accompanying Condensed Consolidated Balance Sheets. The following table summarizes changes in the accruals associated with these restructuring activities during the six months ended December 30, 2017:


24



 
Balance, June 24, 2017
 
Six Months Ended
December 30, 2017
 
Balance, December 30, 2017
 
Charges
 
Cash Payments
 
Change in Estimates
 
 
(in thousands)
Severance - All plans (1)
$
526

 
$
12,414

 
$
(5,744
)
 
$
(459
)
 
$
6,737


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

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Maxim Integrated Products, Inc. (“Maxim Integrated” or the “Company” and also referred to as “we,” “our” or “us”) disclaims any duty to and undertakes no obligation to update any forward-looking statement, whether as a result of new information relating to existing conditions, future events or otherwise or to release publicly the results of any future revisions it may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, except as required by federal securities laws. Readers are cautioned not to place undue reliance on such statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Readers should carefully review future reports and documents that the Company files with or furnishes to the SEC from time to time, such as its Annual Reports on Form 10-K, its Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.

Overview of Business

Maxim Integrated is incorporated in the state of Delaware. Maxim Integrated designs, develops, manufactures and markets a broad range of linear and mixed-signal integrated circuits, commonly referred to as analog circuits, for a large number of geographically diverse customers. We also provide a range of high-frequency process technologies and capabilities that can be used in custom designs. The analog market is fragmented and characterized by many diverse applications, a great number of product variations and, with respect to many circuit types, relatively long product life cycles. We are a global company with a wafer manufacturing facility in the U.S., testing facilities in the Philippines and Thailand and sales and circuit design offices around the world. The major end-markets in which our products are sold are the Automotive, Communications and Data Center, Computing, Consumer and Industrial markets.

During fiscal year 2015, we commenced activities to close down the operations in our Hillsboro, Oregon testing site and consolidate such operations with our facility in Beaverton, Oregon, which were completed in fiscal year 2017.

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

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

CRITICAL ACCOUNTING POLICIES

The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our financial statements. The Securities and Exchange Commission (“SEC”) has defined the most critical accounting policies as the ones that are most important to the presentation of our financial condition and results of operations, and that require us to make our most difficult and subjective accounting judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, our most critical accounting policies include revenue recognition, which impacts the recording of net revenues; valuation of inventories, which impacts costs of goods sold and gross margins; the assessment of recoverability of long-lived assets, which impacts impairment of long-lived assets; assessment of recoverability of intangible assets and goodwill, which impacts impairment of goodwill and intangible assets; accounting for income taxes, which impacts the income tax provision; and assessment of litigation and contingencies, which impacts charges recorded in cost of goods sold, selling, general and administrative expenses and income taxes. These policies and the estimates and judgments involved are discussed further in the Management’s Discussion and Analysis of Financial Condition in our Annual Report on Form 10-K for the fiscal year ended June 24, 2017. We have other significant accounting policies that either do not generally require estimates

25



and judgments that are as difficult or subjective, or it is less likely that such accounting policies would have a material impact on our reported results of operations for a given period.

There have been no material changes during the six months ended December 30, 2017 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended June 24, 2017.

We have a 52-to-53-week fiscal year that ends on the last Saturday in June. Accordingly, every fifth or sixth fiscal year will be a 53-week fiscal year. Fiscal year 2017 was a 52-week fiscal year and fiscal year 2018 is a 53-week fiscal year. The second quarter of fiscal year 2017 was a 13-week quarter and the second quarter of fiscal year 2018 was a 14-week quarter.

26



RESULTS OF OPERATIONS

The following table sets forth certain Condensed Consolidated Statements of Income data expressed as a percentage of net revenues for the periods indicated:

 
Three Months Ended
 
Six Months Ended
 
December 30,
2017
 
December 24,
2016
 
December 30,
2017
 
December 24,
2016
 
 
 
 
 
 
 
 
Net revenues
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of goods sold
34.2
 %
 
38.3
 %
 
34.6
 %
 
38.3
 %
Gross margin
65.8
 %
 
61.7
 %
 
65.4
 %
 
61.7
 %
Operating expenses:
 
 
 
 
 
 
 
Research and development
18.6
 %
 
20.7
 %
 
18.7
 %
 
20.4
 %
Selling, general and administrative
13.7
 %
 
13.0
 %
 
13.3
 %
 
12.8
 %
Intangible asset amortization
0.2
 %
 
0.4
 %
 
0.2
 %
 
0.4
 %
Impairment of long-lived assets
0.1
 %
 
0.1
 %
 
0.1
 %
 
0.6
 %
Severance and restructuring expenses
1.0
 %
 
0.2
 %
 
1.0
 %
 
1.0
 %
Other operating expenses (income), net
(0.2
)%
 
0.3
 %
 
(0.2
)%
 
(2.4
)%
Total operating expenses
33.5
 %
 
34.7
 %
 
33.1
 %
 
32.8
 %
Operating income
32.3
 %
 
27.0
 %
 
32.3
 %
 
28.9
 %
Interest and other income (expense), net
(0.5
)%
 
(0.1
)%
 
(0.6
)%
 
(0.7
)%
Income before provision for income taxes
31.8
 %
 
26.9
 %
 
31.7
 %
 
28.2
 %
Income tax provision (benefit)
43.8
 %
 
3.3
 %
 
25.0
 %
 
4.1
 %
Net income (loss)
(12.0
)%
 
23.6
 %
 
6.7
 %
 
24.1
 %

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 30,
2017
 
December 24,
2016
 
December 30,
2017
 
December 24,
2016
Cost of goods sold
0.4
%
 
0.4
%
 
0.4
%
 
0.4
%
Research and development
1.6
%
 
1.8
%
 
1.5
%
 
1.6
%
Selling, general and administrative
1.4
%
 
1.1
%
 
1.3
%
 
1.1
%
 
3.4
%
 
3.3
%
 
3.2
%
 
3.1
%

Net Revenues

Net revenues were $622.6 million and $551.0 million for the three months ended December 30, 2017 and December 24, 2016, respectively. Revenue from industrial products was up 29%, driven by higher sales of core industrial products. Revenue from automotive products was up 25%, primarily driven by growth in infotainment. These increases were partially offset by a decrease in revenue from consumer products of 5%, primarily due to lower shipments of smartphone products. Also, in the second quarter of fiscal 2018, the Company began recognizing revenue with a certain distributor (less its estimate of future price adjustments and returns) upon shipment to the distributor (also referred to as the sell-in basis of revenue recognition). As a result of this change, the Company recognized an incremental $22.0 million of revenue during the second quarter of fiscal 2018. The increase in revenue was also partially driven by the 14-week second quarter of fiscal year 2018 compared to the 13-week second quarter of fiscal year 2017.

Net revenues were $1,198.3 million and $1,112.4 million for the six months ended December 30, 2017 and December 24, 2016, respectively. Revenue from industrial products was up 20%, driven by higher sales of core industrial products. Revenue from automotive products was up 19%, primarily driven by growth in infotainment. These increases were partially offset by a decrease

27



in revenue from consumer products of 7%, primarily due to lower shipments of smartphone products. Also, in the second quarter of fiscal 2018, the Company began recognizing revenue with a certain distributor (less its estimate of future price adjustments and returns) upon shipment to the distributor (also referred to as the sell-in basis of revenue recognition). As a result of this change, the Company recognized an incremental $22.0 million of revenue during the second quarter of fiscal 2018. The increase in revenue was also partially driven by the 14-week second quarter of fiscal year 2018 compared to the 13-week second quarter of fiscal year 2017.

During the three months ended December 30, 2017 and December 24, 2016, approximately 87% and 88% of net revenues, respectively, 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 six months ended December 30, 2017 and December 24, 2016 was immaterial.

Gross Margin

Our gross margin percentages were 65.8% and 61.7% for the three months ended December 30, 2017 and December 24, 2016, respectively. Our gross margin increased by 4.1 percentage points, primarily due to implementation of cost reduction initiatives and improved factory utilization.

Our gross margin percentages were 65.4% and 61.7% for the six months ended December 30, 2017 and December 24, 2016, respectively. Our gross margin increased by 3.7 percentage points, primarily due to implementation of cost reduction initiatives and improved factory utilization.

Research and Development

Research and development expenses were $115.9 million and $114.1 million for the three months ended December 30, 2017 and December 24, 2016, respectively, which represented 18.6% and 20.7% of net revenues for each respective period. The $1.8 million increase was primarily attributable to an increase in employee related expenses partially driven by the 14-week second quarter of fiscal year 2018 compared to the 13-week second quarter of fiscal year 2017.

Research and development expenses were $224.5 million and $226.8 million for the six months ended December 30, 2017 and December 24, 2016, respectively, which represented 18.7% and 20.4% of net revenues for each respective period. The $2.3 million decrease was primarily due to continued management of research and development programs partially offset by an increase in employee related expenses partially driven by the 14-week second quarter of fiscal year 2018 compared to the 13-week second quarter of fiscal year 2017.

Selling, General and Administrative

Selling, general and administrative expenses were $85.3 million and $71.5 million for the three months ended December 30, 2017 and December 24, 2016, respectively, which represented 13.7% and 13.0% of net revenues for each respective period. The $13.8 million increase was primarily attributable to an increase in employee related expenses partially driven by the 14-week second quarter of fiscal year 2018 compared to the 13-week second quarter of fiscal year 2017.

Selling, general and administrative expenses were $159.0 million and $142.4 million for the six months ended December 30, 2017 and December 24, 2016, respectively, which represented 13.3% and 12.8% of net revenues for each respective period. The $16.6 million increase was primarily attributable to an increase in employee related expenses partially driven by the 14-week second quarter of fiscal year 2018 compared to the 13-week second quarter of fiscal year 2017.

Severance and Restructuring Expenses

Severance and restructuring expenses were $6.5 million and $0.9 million for the three months ended December 30, 2017 and December 24, 2016, respectively, which represented 1.0% and 0.2% of net revenues for each respective period. The $5.7 million increase was primarily due to employee enrollments in voluntary separation programs during the second quarter of fiscal year 2018.

Severance and restructuring expenses were $12.0 million and $10.8 million for the six months ended December 30, 2017 and December 24, 2016, respectively, which represented 1.0% and 1.0% of net revenues for each respective period. The $1.1 million increase was primarily due to employee enrollments in voluntary separation programs during the second quarter of fiscal year 2018.

28




Other Operating Expenses (Income), net

Other operating expenses (income), net were $(1.0) million and $1.9 million during the three months ended December 30, 2017 and December 24, 2016, respectively, which represented 0.2% and 0.3% of net revenues for each respective period. This net increase in other operating income of $2.9 million was primarily driven by gains on the sale of fixed assets during the three months ended December 30, 2017.

Other operating expenses (income), net were $(1.8) million and $(26.6) million during the six months ended December 30, 2017 and December 24, 2016, respectively, which represented 0.2% and 2.4% of net revenues for each respective period. This net decrease in other operating income of $24.8 million was primarily driven by the $26.6 million gain on the sale of micro-electromechanical systems (MEMS) business line in the first quarter of fiscal year 2017.

Provision for Income Taxes

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

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

In the second quarter of fiscal year 2018 the Company recorded a $236.9 million discrete provisional charge for the Repatriation Tax and a $13.7 million discrete charge to remeasure deferred tax assets and liabilities as of the enactment date of the Act to reflect federal statutory tax rate reductions. To determine the amount of the Repatriation Tax, we must determine the accumulated unremitted earnings of the Company’s foreign subsidiaries and the amount of foreign income tax paid on such earnings. The U.S. Department of Treasury has issued guidance regarding the Repatriation Tax and we expect that they will issue additional guidance. Based on the information currently available, we can make a reasonable estimate of the Repatriation Tax and therefore recorded a provisional Repatriation Tax of $236.9 million, however, we are continuing to gather additional information and analyze the available authorities to more precisely compute the amount of the Repatriation Tax.

In the three and six months ended December 30, 2017, the Company recorded an income tax provision of $272.9 million and $299.4 million, respectively, compared to $18.0 million and $45.6 million for the three and six months ended December 24, 2016, respectively. The Company’s effective tax rate for the three and six months ended December 30, 2017 was 137.9% and 79.0%, respectively, compared to 12.1% and 14.5% for the three and six months ended December 24, 2016, respectively.

The Company’s federal statutory tax rate for fiscal year 2018 is 28.1%. The Company’s effective tax rate for the three and six months ended December 30, 2017 was higher than the statutory rate primarily due to a $236.9 million discrete provisional charge for the Repatriation Tax, a $13.7 million discrete charge to remeasure deferred taxes as of the enactment date of the Act, $4.2 million and $8.0 million of discrete interest accruals for unrecognized tax benefits in the three and six months ended December 30, 2017, respectively, partially offset by earnings of foreign subsidiaries, generated primarily by the Company's international operations managed in Ireland, that were taxed at lower rates.

The Company’s federal statutory tax rate for the fiscal year 2017 was 35%. The Company’s effective tax rate for the three and six months ended December 24, 2016 was lower than the statutory rate primarily due to earnings of foreign subsidiaries, generated primarily by the Company's international operations managed in Ireland, that were taxed at lower rates, and a $5.1 million discrete benefit for differences between our fiscal year 2016 tax returns and the tax provision originally recorded, partially offset by stock-

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based compensation for which no tax benefit is expected and $3.7 million and $6.7 million of discrete interest accruals for unrecognized tax benefits in the three and six months ended December 24, 2016, respectively.

BACKLOG

At December 30, 2017 and June 24, 2017, our current quarter backlog was approximately $445.7 million and $389.1 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 30,
2017
 
December 24,
2016
 
(in thousands)
Net cash provided by (used in) operating activities
$
449,580

 
$
316,032

Net cash provided by (used in) investing activities
(731,186
)
 
(212,972
)
Net cash provided by (used in) financing activities
(333,005
)
 
(520,854
)
Net increase (decrease) in cash and cash equivalents
$
(614,611
)
 
$
(417,794
)
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 $449.6 million in the six months ended December 30, 2017, an increase of $133.5 million compared with the six months ended December 24, 2016. This increase was primarily caused by an increase in income before provision for income taxes which resulted from improved gross margin.

Investing activities

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

Cash used in investing activities increased by $518.2 million for the six months ended December 30, 2017 compared with the six months ended December 24, 2016. The increase was due primarily to a $552.6 million increase in purchases of available-for-sale-securities during the six months ended December 30, 2017.

Financing activities

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

Net cash used in financing activities decreased by approximately $187.8 million for the six months ended December 30, 2017 compared to the six months ended December 24, 2016. The decrease was primarily due to a $250.0 million repayment of notes payable during the six months ended December 24, 2016 with no repayment for the six months ended December 30, 2017. Additionally, this was offset by $33.3 million in higher repurchases of our common stock and a $15.7 million increase in dividends paid to stockholders in the six months ended December 30, 2017.

Liquidity and Capital Resources

As of December 30, 2017, our available funds consisted of $2.8 billion 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.

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Outstanding Debt Levels
On June 15, 2017, the Company completed a public offering of $500 million aggregate principal amount of the Company's 3.45% senior unsecured and unsubordinated notes due on June 15, 2027 (“2027 Notes”).

On November 21, 2013, the Company completed a public offering of $500 million aggregate principal amount of the Company’s 2.5% senior unsecured and unsubordinated notes due on November 15, 2018 (“2018 Notes”).

On March 18, 2013, the Company completed a public offering of $500 million aggregate principal amount of the Company’s 3.375% senior unsecured and unsubordinated notes due on March 15, 2023 (“2023 Notes”).

The estimated fair value of outstanding debt is $1,509 million and $1,516 million as of December 30, 2017 and June 24, 2017, respectively.

Off-Balance-Sheet Arrangements

As of December 30, 2017, 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 24, 2017.

The impact of inflation and changing prices on the Company’s net revenues and on operating income during the three months ended December 30, 2017 and December 24, 2016 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 Securities Exchange Act of 1934 (the “Exchange Act”) as of December 30, 2017. Our management, including the CEO and the CFO, has concluded that the Company’s disclosure controls and procedures were effective as of December 30, 2017. 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 during the quarter ended December 30, 2017 that have 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.


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PART II. OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

The information set forth above under Part I, Item 1, Note 11 “Commitments and Contingencies” 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 24, 2017, which is incorporated herein by reference.

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

On July 20, 2017, the board of directors of the Company authorized the repurchase of up to $1.0 billion of the Company's common stock. The stock repurchase authorization does not have an expiration date and the pace of repurchase activity will depend on factors such as current stock price, levels of cash generation from operations, cash requirements, and other factors. The Company's prior repurchase authorization has been cancelled and superseded by this new repurchase authorization.

The following table summarizes the activity related to stock repurchases for the three months ended December 30, 2017:

 
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
Sep 24, 2017 - Oct 21, 2017
352

 
$
48.23

 
352

 
$
934,044

Oct 22, 2017 - Nov 18, 2017
463

 
52.89

 
463

 
909,559

Nov 19, 2017 - Dec 30, 2017
673

 
52.7

 
673

 
874,081

Total for the quarter
1,488

 
$
51.7

 
1,488

 
$
874,081


In the fiscal quarter ended December 30, 2017, the Company repurchased approximately 1.5 million shares of its common stock for approximately $77.0 million. As of December 30, 2017, the Company had remaining authorization of $874.1 million for future share repurchases. The number of shares to be repurchased and the timing of such repurchases will be based on several factors, including the price of the Company’s common stock and general market and business conditions.

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4: MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5: OTHER INFORMATION

None.


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ITEM 6: EXHIBITS

(a) Exhibits
(1) This exhibit is being furnished rather than filed and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K.

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 and six months ended December 30, 2017, (ii) Condensed Consolidated Balance Sheets at December 30, 2017 and June 24, 2017, (iii) Condensed Consolidated Statement of Comprehensive Income for the three and six months ended December 30, 2017, (iv) Condensed Consolidated Statements of Cash Flows for the six months ended December 30, 2017 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.









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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the report has been signed below by the following person on behalf of the registrant and in the capacity indicated.
January 26, 2018
 
MAXIM INTEGRATED PRODUCTS, INC.
 
 
 
 
 
By:/s/ Sumeet Gagneja
 
 
 
 
 
Sumeet Gagneja
 
 
Vice President, Chief Accounting Officer
 
 
(Chief Accounting Officer and Duly Authorized Officer)

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