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.
Net revenues were $435.1 million and $310.2 million for the three months ended September 25, 2004 and September 27, 2003, respectively, an increase of 40.3%. The increase in net revenues for the first quarter of fiscal year 2005 as compared to the first quarter of fiscal year 2004 is primarily due to higher unit shipments resulting from increased order rates on the Company’s already existing proprietary and second-source products and the introduction of new proprietary products.
During the three months ended September 25, 2004 and September 27, 2003, approximately 74% and 73%, 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 months ended September 25, 2004 and September 27, 2003 was immaterial.
Gross margin as a percentage of net revenues was 72.4% and 70.0% for the three months ended September 25, 2004 and September 27, 2003, respectively. The gross margin percentage for the three months ended September 25, 2004 as compared to the three months ended September 27, 2003 increased primarily due to continued improvement in manufacturing efficiencies. Gross margins for the three months ended September 25, 2004 and September 27, 2003 were negatively impacted due to $4.2 million and $2.2 million of inventory write downs in such periods, respectively.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT’D)
Research and Development
Research and development expenses were $79.1 million and $70.1 million for the three months ended September 25, 2004 and September 27, 2003 respectively, which represented 18.2% and 22.6% of net revenues, respectively. The increase in research and development expenses in absolute dollars is primarily due to hiring additional engineers to support the Company’s new product development efforts 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 $25.1 million and $21.4 million for the three months ended September 25, 2004, and September 27, 2003, respectively, which represented 5.8% and 6.9% of net revenues, respectively. The increase in selling, general, and administrative expenses in absolute dollars for the three months ended September 25, 2004 as compared to the three months ended September 27, 2003 is primarily due to increased headcount related expenses.
Interest Income and Other, Net
Interest income and other, net was $5.7 million and $4.8 million for the three months ended September 25, 2004, and September 27, 2003, respectively. This increase was due to higher average interest rates offset slightly by lower average invested cash, cash equivalents, and short-term investments balances.
Income Taxes
The effective income tax rate for the three months ended September 25, 2004 and September 27, 2003 was 33.2% and 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 $33.3 million at September 25, 2004 is dependent primarily upon achieving future U.S. taxable income of $90 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 26, 2004. An increase in the valuation allowance against net deferred tax assets may be necessary if it becomes 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.
OUTLOOK
First quarter bookings were approximately $377 million, a 30% decrease from the fourth quarter’s level of $535 million. Turns orders received in the quarter were $117 million, a 31% decrease from the $170 million received in the fourth quarter of fiscal year 2004 (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 decreased in all geographic locations and for all business units. The Company believes that bookings exceeded consumption in the third and fourth quarters of fiscal year 2004.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT’D)
First quarter ending backlog shippable within the next 12 months was approximately $458 million, including approximately $377 million requested for shipment in the second quarter of fiscal year 2005. The Company’s fourth quarter ending backlog shippable within the next 12 months was approximately $529 million, including approximately $428 million that was requested for shipment in the first quarter of fiscal year 2005.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company’s primary sources of funds for the three months ended September 25, 2004 were from net cash generated from operating activities of $208.3 million and proceeds from the exercises of stock options and purchases of common stock under the Employee Stock Participation Plan of 1.7 million shares in the amount of $25.9 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 $23.8 million in the three months ended September 25, 2004.
The principal uses of funds were the repurchase of 1.3 million shares of the Company’s common stock for $58.5 million, the payment of $25.9 million for dividends and the purchase of $66.3 million in property, plant and equipment. 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 2005. 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 13 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. See Note 9 of the 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. However, were LTC or Qualcomm to prevail in their claims against the Company, the Company’s operating results could be materially adversely affected.
The following table provides a summary of the effect on liquidity and cash flows from the Company’s contractual obligations as of September 25, 2004
(Amounts in thousands)
(Unaudited) | | Fiscal Year:
2005 | | 2006 | | 2007 | | 2008 | | 2009 | | 2010 and
thereafter | | Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Contractual obligations: | | | | | | | | | | | | | | | | | | | | | | |
Noncancellable operating leases | | $ | 2,136 | | $ | 1,995 | | $ | 1,186 | | $ | 838 | | $ | 366 | | $ | 172 | | $ | 6,693 | |
During the second quarter of fiscal year 2005, the Board of Directors declared a cash dividend of $0.10 per share on the Company’s common stock payable on November 30, 2004 to stockholders of record on November 15, 2004.
Off-Balance-Sheet Arrangements
As of September 25, 2004, the Company did not have any material off-balance-sheet arrangements, as defined in Item 303 (a)(4)(ii) of SEC Regulation S-K.
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.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT’D)
Forward-looking statements include, without limitation, the Company’s belief that the ultimate outcome of the LTC litigation, the Qualcomm litigation and any other 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 assessment of its customers’ current ordering activities and demand for products, 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 expectation that it will continue to repurchase its common stock in fiscal year 2005, the Company’s continuous attempts to control and reduce expenses and the Company’s intention to use the intellectual property acquired from a privately-held semiconductor company.
Actual results could differ materially from those forecasted based upon, among other things, 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 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 and the Company’s ability to use the intellectual property from a privately-held company.
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 26, 2004.
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 annual reports on Form 10-K (particularly Management’s Discussion and Analysis of Financial Condition and Results of Operations) and any current reports on Form 8-K.
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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 26, 2004.
ITEM 4: CONTROLS AND PROCEDURES
As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer, and Vice Presidents, of the effectiveness of the Company’s 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, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that information that the Company is required to disclose in reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
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 were no changes in the Company’s internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) Information Required by Item 703 of Regulation S-K
The following table summarizes the activity related to stock repurchases for the first quarter of fiscal year 2005.
| | Issuer Repurchases of Equity Securities | |
| |
| |
| | Total Number
of Shares
Purchased | | Average
Price Paid
per Share | | Total Number of
SharesPurchased as
Part of Publicly
Announced Plans or
Programs | | Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs | |
| |
|
| |
|
| |
|
| |
|
| |
Jun. 27, 2004 – Jul. 24, 2004 | | | 11,542 | | $ | 48.66 | | | 11,542 | | | 4,006,810 | |
Jul. 25, 2004 – Aug. 21, 2004 | | | 1,202,889 | | $ | 44.81 | | | 1,202,889 | | | 2,803,921 | |
Aug. 22, 2004 – Sep. 25, 2004 | | | 95,381 | | $ | 42.19 | | | 95,381 | | | 2,708,540 | |
| |
|
| |
|
| |
|
| | | | |
Total for the Quarter | | | 1,309,812 | | $ | 44.66 | | | 1,309,812 | | | 2,708,540 | |
| |
|
| |
|
| |
|
| | | | |
All shares were repurchased pursuant to the Company’s share repurchase program authorized in March 2004 to repurchase up to 10 million shares, which has no expiration date. During the first quarter of fiscal year 2005, the Company purchased 1.3 million shares for $58.5 million. As of September 25, 2004, approximately 2.7 million shares remained available under the repurchase authorization. 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 and business conditions, and other factors.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a special meeting of stockholders on September 17, 2004. The following proposal was voted on by the Company’s stockholders and the results thereon:
Proposal 1: Ratification and approval of an amendment and restatement of the Company’s 1996 Stock Incentive Plan, as amended, increasing the number of shares available for issuance from 104.6 million to 117.6 million.
The proposal was ratified and approved with 157,062,990 votes in favor, 118,109,144 against, and 1,530,619 abstentions.
ITEM 6: EXHIBITS
(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
ITEMS 1, 3 AND 5 OF PART II 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.
November 4, 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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Exhibit Index
31.1 | Certification Pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer). |
| |
31.2 | Certification Pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer). |
| |
32.1 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer). |
| |
32.2 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer). |
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