From time to time, the Company receives notices that its products or manufacturing processes may be infringing the patent or intellectual property rights of others. The Company periodically assesses each matter in order to determine if a contingent liability in accordance with Statement of Financial Accounting Standards No. 5 (SFAS 5), “Accounting for Contingencies,” should be recorded. In making this determination, management may, depending on the nature of the matter, consult with internal and external legal counsel and technical experts. Based on the information obtained, combined with management’s judgment regarding all the facts and circumstances of each matter, the Company determines whether it is probable that a contingent loss may be incurred and whether the amount of such loss can be estimated. Should a loss be probable and estimable, the Company records a contingent loss in accordance with SFAS 5. In determining the amount of a contingent loss, the Company takes into consideration advice received from experts in the specific matter, current status of legal proceedings, settlement negotiations which may be ongoing, prior case history and other factors. Should the judgments and estimates made by management be incorrect, the Company may need to record additional contingent losses that could materially adversely impact the Company’s results of operations. Alternatively, if the judgments and estimates made by management are incorrect and a particular contingent loss does not occur, the contingent loss recorded would be reversed thus favorably impacting the Company’s results of operations. See Note 10 of Notes to Condensed Consolidated Financial Statements.
Net revenues were $338.1 million and $286.1 million for the three months ended December 27, 2003 and December 28, 2002, respectively, an increase of 18.2%. Net revenues were $648.3 million and $572.0 million for the six months ended December 27, 2003 and December 28, 2002, respectively, an increase of 13.3%. The increase in net revenues for both the three and six months ended December 27, 2003 as compared to the three and six months ended December 28, 2002 is primarily due to higher unit shipments resulting from the introduction of new proprietary products and increased order rates on the Company’s already existing proprietary and second-source products.
During the three months ended December 27, 2003 and December 28, 2002, approximately 71% and 67%, respectively, of net revenues were derived from customers outside of the United States. During the six months ended December 27, 2003 and December 28, 2002, approximately 70% and 66%, respectively, of net revenues were derived from customers outside of the United States. While the majority of these sales are denominated in U.S. dollars, the Company enters into foreign currency forward contracts to mitigate its risks on firm commitments and net monetary assets denominated in foreign currencies. The impact of changes in foreign exchange rates on revenue and the Company’s results of operations for the three and six months ended December 27, 2003 and December 28, 2002 was immaterial.
Gross margin as a percentage of net revenues was 69.5% and 69.7% for the three months ended December 27, 2003 and December 28, 2002, respectively. The gross margin percentage for the three months ended December 27, 2003 as compared to the three months ended December 28, 2002 decreased primarily due to start up costs at the Company’s newly acquired wafer fabrication facility in San Antonio, Texas. Gross margins for the three months ended December 28, 2002 was negatively impacted due to $3.0 million of inventory write downs.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT’D)
Gross margin as a percentage of net revenues was 69.8% and 69.6% for the six months ended December 27, 2003 and December 28, 2002, respectively. The gross margin percentage for the six months ended December 27, 2003 as compared to the six months ended December 28, 2002 increased primarily due to cost saving measures implemented by the Company. These cost saving measures included, but were not limited to, salary and wage reductions, reduced headcount and reductions in certain salary related expenses. These reductions were slightly offset by start up costs at the Company’s newly acquired wafer fabrication facility in San Antonio, Texas. Gross margins for the six months ended December 27, 2003 and December 28, 2002 were negatively impacted due to $2.2 million and $6.0 million of inventory write downs, respectively.
Research and Development
Research and development expenses were $71.2 million and $67.2 million for the three months ended December 27, 2003, and December 28, 2002, respectively, which represented 21.1% and 23.5% of net revenues, respectively. The increase in research and development expenses in absolute dollars is due to the result of hiring additional engineers and increased salary related expenses.
Research and development expenses were $141.3 million and $138.3 million for the six months ended December 27, 2003, and December 28, 2002, respectively, which represented 21.8% and 24.2% of net revenues, respectively. The increase in research and development expenses in absolute dollars is due to the result of hiring additional engineers and increased salary related expenses.
The level of research and development expenditures as a percentage of net revenues will vary from period to period, depending, in part, on the level of net revenues and, in part, on the Company’s success in recruiting the technical personnel needed for its new product introductions and process development. The Company continuously attempts to control and, if possible, reduce expense levels in all areas including research and development. However, the Company views research and development expenditures as critical to maintaining a high level of new product introductions, which in turn are critical to the Company’s plan for future growth.
Selling, General and Administrative
Selling, general and administrative expenses were $22.2 million and $21.2 million for the three months ended December 27, 2003, and December 28, 2002, respectively, which represented 6.6% and 7.4% of net revenues, respectively. The increase in selling, general, and administrative expenses in absolute dollars for the three months ended December 27, 2003 as compared to the three months ended December 28, 2002 is primarily due to increased headcount related expenses. This increase is slightly offset by lower advertising and marketing costs.
Selling, general and administrative expenses were $43.6 million and $43.5 million for the six months ended December 27, 2003, and December 28, 2002, respectively, which represented 6.7% and 7.6% of net revenues, respectively. The selling, general, and administrative expenses in absolute dollars remain relatively unchanged for the six months ended December 27, 2003 as compared to the six months ended December 28, 2002.
Interest Income, Net
Interest income, net was $5.4 million and $10.1 million for the three and six months ended December 27, 2003, respectively, compared to $3.9 million and $7.8 million for the three and six months ended December 28, 2002, respectively. The increase in interest income, net for three and six months ended December 27, 2003 as compared to the three and six months ended December 28, 2002 is due to higher average interest rates combined with higher average levels of invested cash, cash equivalents, and short-term investments.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT’D)
Income Taxes
The effective income tax rate for the three and six months ended December 27, 2003 and December 28, 2002 was 33.0%, respectively. The effective rates were lower than the U.S. federal and state combined statutory rate primarily due to tax benefits on export sales.
Realization of the net deferred tax asset of $51.4 million at December 27, 2003 is dependent primarily upon achieving future U.S. taxable income of $147 million. The Company believes it is more likely than not that the net deferred tax assets will be realized based on historical earnings and expected levels of future taxable income. Levels of future taxable income are subject to the various risks and uncertainties as described in the Company’s Annual Report on Form 10-K for the fiscal year ended June 28, 2003. An increase in the valuation allowance against net deferred tax assets may be necessary if it is more likely than not that all or a portion of the net deferred tax assets will not be realized. The Company periodically assesses the need for increases to the deferred tax asset valuation allowance.
Inventory
In prior fiscal periods, the Company has experienced the theft of inventory at its test facility in Cavite, the Philippines. The Company has implemented control procedures to prevent and detect such theft. There can be no assurance, however, that these control procedures will be effective in preventing or detecting, in a timely manner, future theft and that such theft, when detected, will not have a material adverse impact on the Company’s results of operations. The Company’s control procedures did not detect any material theft of inventory during the six months ended December 27, 2003.
Recently Issued Accounting Pronouncement
In December 2003, the Financial Accounting Standard Board (FASB) issued Statement of Financial Accounting Standard No. 132 (SFAS 132) (Revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits — an amendment of FASB Statements No. 87, 88, and 106”. SFAS 132 revises employers’ disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by FASB Statements No. 87, “Employers’ Accounting for Pensions,” No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” and No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” SFAS 132 retains the disclosure requirements contained in the original FASB Statement No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” which it replaces. It requires additional disclosures to those in the original Statement 132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The required information needs to be provided separately for pension plans and for other postretirement benefit plans. SFAS 132 is effective for financial statements with fiscal years ending after December 15, 2003. The interim-period disclosures are effective for interim periods beginning after December 15, 2003. Disclosure of information about foreign plans is effective for fiscal years ending after June 15, 2004. Disclosure of estimated future benefit payments is effective for fiscal years ending after June 15, 2004. Disclosure of information for nonpublic entities is effective for fiscal years ending after June 15, 2004. The Company believes the adoption of SFAS 132 will not have a material impact on the Company’s financial condition, results of operations or liquidity.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT’D)
OUTLOOK
Second quarter net bookings were approximately $417 million, a 19% increase over the previous quarter’s level of $349 million. Turns orders received in the quarter were $192 million, a 7% increase over the $180 million received in the prior quarter (turns orders are customer orders that are for delivery within the same quarter and may result in revenue within the same quarter if the Company has available inventory that matches those orders). Bookings increased by more than 10% in all geographic regions, and eleven of the Company’s fourteen business units had a significant increase in bookings over the first quarter’s level. Bookings exceeded the Company’s expectation for the second quarter of fiscal 2004, with both Maxim and Dallas Semiconductor bookings up approximately 19% over the first quarter of fiscal 2004’s level. Bookings growth was particularly strong for the Company’s integrated circuits that have industrial applications and for the Company’s traditional analog and mixed signal products that serve a very broad market. Bookings from Automatic Test Equipment (ATE) customers picked up significantly after so many quarters of sluggish performance. The Company believes that the ATE market will continue to improve during calendar 2004, as semiconductor companies increase their capacity and add equipment.
Second quarter ending backlog shippable within the next 12 months was approximately $327 million, including approximately $293 million requested for shipment in the third quarter of fiscal year 2004. The Company’s first quarter ending backlog shippable within the next 12 months was approximately $252 million, including approximately $233 million that was requested for shipment in the second quarter of fiscal year 2004.
The Company believes that there could be a shortage of foundry capacity for high-frequency chip production in the next six months. With the Company’s installed in-house capacity plus the newly acquired capacity in San Antonio, Texas, Maxim has the capacity to meet its customers’ revised and increased product and schedule requirements in most areas. Based on the current estimates for demand over the next two quarters, the Company has accelerated its schedule for production in San Antonio to the first quarter of fiscal 2005, which is approximately nine months earlier than the Company had originally planned.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s primary sources of funds for the six months ended December 27, 2003 were from net cash generated from operating activities of $327.9 million and proceeds from the exercises of stock options and purchases of common stock under the Employee Stock Participation Plan in the amount of $101.7 million. Another source of cash from the Company’s stock option programs is the tax deductions that arise from exercise of options. These tax benefits amounted to $76.3 million in the six months ended December 27, 2003.
The principal uses of funds were the repurchase of 2.4 million shares of the Company’s common stock for $116.0 million, the payment of $52.5 million for dividends and the purchase of $93.0 million in property, plant and equipment. Included in the purchase of property, plant and equipment, $40.5 million was for the payment of the Company’s newly acquired fabrication facility in San Antonio, Texas. The Company believes that it possesses sufficient liquidity and capital resources to fund its property, plant and equipment purchases, common stock repurchases, dividend payments, and operations for at least the next twelve months. The Company plans to continue to repurchase its common stock in fiscal year 2004. 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, general market conditions, and other factors. See Note 12 of Notes to Condensed Consolidated Financial Statements regarding the status of the Company’s common stock repurchases.
The Company is subject to pending legal proceedings. For example, see Note 10 of Notes to Condensed Consolidated Financial Statements for information regarding pending patent litigation. Although the results of such legal proceedings are unpredictable, the Company does not believe that any pending legal proceedings will have a material adverse impact on its liquidity or financial position. If, however, the appellate court in the action brought by Linear Technology Corporation were to reverse the trial court’s dismissal of the patent litigation claims brought by Linear Technology Corporation against the Company, and were Linear Technology Corporation to prevail in its claims against the Company, the Company’s operating results could be materially adversely affected.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT’D)
The following table provides a summary of the effect on liquidity and cash flows from the Company’s contractual obligations as of December 27, 2003:
(Amounts in thousands)
(Unaudited) | | Fiscal Year:
2004 | | 2005 | | 2006 | | 2007 | | 2008 | | 2009 and
thereafter | | Total | |
| |
| |
| |
| |
| |
| |
| |
| |
Contractual obligations: | | | | | | | | | | | | | | | | | | | | | | | | |
Noncancellable operating leases | | | $ | 1,270 | | | $ | 2,093 | | $ | 1,430 | | $ | 1,071 | | $ | 685 | | | $ | 286 | | | $ | 6,835 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
On January 26, 2004, the Board of Directors declared a cash dividend of $0.08 per share on the Company’s common stock payable on March 1, 2004 to stockholders of record on February 16, 2004. This will result in a cash payment of approximately $26.5 million. See Note 14 of Notes to Condensed Consolidated Financial Statements.
FORWARD-LOOKING INFORMATION AND RISK FACTORS
This Report on Form 10-Q contains forward-looking statements that fall within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. All statements included or incorporated by reference in this Report, other than statements that are purely historical, are forward-looking statements, including statements regarding or implicating the Company’s expectations, intentions, plans, goals and hopes regarding the future. Words such as “anticipates,” “expects,” “intends,” “plans,” believes,” “seeks,” “estimates,” variations of such words and similar expressions identify forward-looking statements. Forward-looking statements in this Report, including this Management’s Discussion and Analysis section, involve risk and uncertainty.
Forward-looking statements include, without limitation, the Company’s intention to use the intellectual property acquired from a privately-held semiconductor company, the Company’s intention to convert 6-inch to 8-inch wafer production at Dallas Semiconductor’s manufacturing facilities throughout fiscal 2004, the Company’s belief that the ultimate outcome of the LTC litigation and any pending legal proceedings will not have a material adverse effect on the financial position or liquidity of the Company, the Company’s belief that it is more likely than not that net deferred tax assets will be realized, the Company’s belief that it possesses sufficient liquidity and capital resources to fund operations for at least the next twelve months, the Company’s assessment of its customers’ current ordering activities and demand for products, the Company’s expectation that it will continue to purchase its common stock in fiscal year 2004, the Company’s continuous attempts to control and reduce expenses, the Company’s belief that the ATE market will continue to improve during calendar 2004 and that there could be a shortage of foundry capacity for high-frequency chip production and the Company’s plan to have its San Antonio facility in production in the first quarter of fiscal 2005
Actual results could differ materially from those forecasted based upon, among other things, the Company’s inability to use the intellectual property from a privately-held company, delays in conversion from 6-inch to 8-inch wafer production at Dallas Semiconductor’s manufacturing facilities, the inability to supply high frequency wafer requirements if the Company is not able to convert from 6-inch to 8-inch wafer production, unexpected outcomes in the Company’s pending litigation and legal proceedings, unexpected changes in earnings and taxable income that adversely affect the realizability of net deferred tax assets, the Company incorrectly assessing liquidity and capital resources, customer demand, customer willingness to commit to inventories and orders, and higher than expected order cancellation levels, the Company’s ability to repurchase its common stock at favorable prices, the Company’s effectiveness in controlling and reducing expenses, the Company incorrectly assessing that the ATE market will continue to improve during calendar 2004, the Company’s incorrectly assessing that there could be a shortage of foundry capacity for high-frequency chip production, and unexpected delays in preparing its San Antonio facility for production.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT’D)
In addition, future business could be adversely affected by technical difficulties in bringing new products and processes to market in a timely manner; market developments that could adversely affect the growth of the mixed-signal analog market; the Company being unable to sustain its success in recruiting and retaining high-quality personnel; the Company’s success in the markets its products are introduced in; whether, and the extent to which, demand for the Company’s products increases and reflects real end-user demand; customer cancellations and delays of outstanding orders; whether the Company is able to manufacture in a correct mix to respond to orders on hand and new orders received in the future; whether the Company is able to achieve its new product development and introduction goals; whether the Company is able to effectively and successfully manage manufacturing operations; whether the Company is able to successfully commercialize its new technologies; overall worldwide economic conditions; demand for electronic products and semiconductors generally; demand for the end-user products for which the Company’s semiconductors are suited; timely availability of raw materials, equipment, supplies and services; unanticipated manufacturing problems; technological and product development risks; competitors that may outperform the Company; and other risk factors described in the Company’s filings with the Securities and Exchange Commission and in particular its report on Form 10-K for the fiscal year ended June 28, 2003.
All forward-looking statements are based on the Company’s current outlook, expectations, estimates, projections, beliefs and plans or objectives about its business and its industry. These statements are not guarantees of future performance and are subject to risk and uncertainty. Actual results could differ materially from those predicted or implied in any such forward-looking statements.
The Company 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. 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 from time to time with the Securities and Exchange Commission, such as its quarterly reports on Form 10-Q (particularly Management’s Discussion and Analysis of Financial Condition and Results of Operations) and any current reports on Form 8-K.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company’s market risk has not changed significantly 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 28, 2003.
ITEM 4: CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of our disclosure controls and procedures. The Company’s disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in the Company’s reports filed under the Securities Exchange Act of 1934 is properly and timely recorded, processed, summarized and reported. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in this report at the reasonable assurance level.
It should be noted that any control system, no matter how well designed and operated, can provide only reasonable assurance to the tested objectives. The design of any control systems 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, regardless of how remote.
There has been no change in the Company’s internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on November 13, 2003. The following proposals were voted on by the Company’s Stockholders and results obtained thereon:
Proposal 1: Election of Directors
The following directors were elected as directors by the votes indicated:
Nominee | | Votes in Favor | | Votes Withheld | |
| |
| |
| |
| | | | | |
James R. Bergman | | | 276,239,112 | | | 23,776,918 | |
John F. Gifford | | | 216,573,506 | | | 83,442,524 | |
B. Kipling Hagopian | | | 276,278,994 | | | 23,737,036 | |
M.D. Sampels | | | 289,511,815 | | | 10,504,215 | |
A.R. Frank Wazzan | | | 276,261,326 | | | 23,754,704 | |
Proposal 2: Ratification and approval of amendment to the Company’s 1996 Stock Incentive Plan, as amended, increasing the number of shares available for issuance.
The proposal was ratified and approved with 134,817,650 votes in favor, 131,055,387 against, and 1,968,277 abstentions.
Proposal 3: Ratification and approval of amendment to the Company’s 1987 Employee Stock Participation Plan, as amended, increasing the number of shares available for issuance.
The proposal was ratified and approved with 256,812,452 votes in favor, 9,652,503 against, and 1,339,474 abstentions.
Proposal 4: Ratification of Selection of Independent Auditors
The selection of Ernst & Young LLP as the Company’s independent auditors for fiscal year 2004 was ratified with 246,858,265 votes in favor, 51,871,841 votes against, and 1,285,934 abstentions.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
On October 28, 2003, Maxim Integrated Products, Inc. furnished a report on Form 8-K announcing the Company’s earnings for the first quarter ended September 27, 2003, as presented in a press release dated October 28, 2003.
ITEMS 1, 2, 3 AND 5 HAVE BEEN OMITTED AS THEY ARE NOT APPLICABLE.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
February 5, 2004 | MAXIM INTEGRATED PRODUCTS, INC. |
(Date) | | (Registrant) | |
| |
| /s/ Carl W. Jasper |
|
| |
| CARL W. JASPER |
| Vice President,
Chief Financial Officer
(For the Registrant and as
Principal Financial Officer
and as Chief Accounting Officer) |
| | | | |
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