On a periodic basis the Company evaluates its deferred tax asset balance for realizability. To the extent the Company believes it is more likely than not that some portion of its deferred tax assets will not be realized, the Company will increase the valuation allowance against the deferred tax assets. Realization of the Company’s deferred tax assets is dependent primarily upon future U.S. taxable income. The Company’s judgments regarding future profitability may change due to future market conditions, changes in U.S. or international tax laws and other factors. These changes, if any, may require possible material adjustments to these deferred tax assets, resulting in a reduction in net income or an increase in net loss in the period when such determinations are made.
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 $400.2 million and $370.0 million for the three months ended March 26, 2005 and March 27, 2004, respectively, an increase of 8.2%. Net revenues were $1,271.3 million and $1,018.3 million for the nine months ended March 26, 2005 and March 27, 2004, respectively, an increase of 24.8%. The increase in net revenues for both the three and nine months ended March 26, 2005 as compared to the three and nine months ended March 27, 2004 is primarily due to higher unit shipments of the Company’s products.
During the three months ended March 26, 2005 and March 27, 2004, approximately 72% and 73%, respectively, of net revenues were derived from customers outside of the United States. During the nine months ended March 26, 2005 and March 27, 2004, approximately 73% 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 nine months ended March 26, 2005 and March 27, 2004 was immaterial.
Gross margin as a percentage of net revenues was 72.0% and 69.8% for the three months ended March 26, 2005 and March 27, 2004, respectively. The gross margin percentage for the three months ended March 26, 2005 as compared to the three months ended March 27, 2004 increased primarily due to continued improvement in manufacturing efficiencies. Gross margin for the three months ended March 26, 2005 was negatively impacted due to $3.2 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 72.3% and 69.8% for the nine months ended March 26, 2005 and March 27, 2004, respectively. The gross margin percentage for the nine months ended March 26, 2005 as compared to the nine months ended March 27, 2004 increased primarily due to continued improvement in manufacturing efficiencies. Gross margin for the nine months ended March 27, 2004 was negatively impacted due to $2.8 million start up costs at the Company’s wafer fabrication facility in San Antonio, Texas. Gross margins for the nine months ended March 26, 2005 and March 27, 2004 were negatively impacted due to $11.9 million and $2.2 million of inventory write downs, respectively.
Research and Development
Research and development expenses were $83.1 million and $77.3 million for the three months ended March 26, 2005 and March 27, 2004, respectively, which represented 20.8% and 20.9% of net revenues, respectively. The increase in research and development expenses in absolute dollars is primarily due to $4.3 million increase in salary related expenses and $0.6 million increase in mask expenses.
Research and development expenses were $243.3 million and $218.6 million for the nine months ended March 26, 2005 and March 27, 2004, respectively, which represented 19.1% and 21.5% of net revenues, respectively. The increase in research and development expenses in absolute dollars is primarily due to $19.9 million resulting from hiring additional engineers to support the Company’s research and development efforts and increase in salary related expenses, $1.4 million increase in mask expenses and $1.0 million increase in travel and entertainment 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 $24.7 million and $23.5 million for the three months ended March 26, 2005 and March 27, 2004, respectively, which represented 6.2% and 6.4% of net revenues, respectively. The increase in selling, general, and administrative expenses in absolute dollars for the three months ended March 26, 2005 as compared to the three months ended March 27, 2004 is primarily due to $2.2 million increase in legal expense offset by a $1.2 million decrease in advertising and marketing costs.
Selling, general and administrative expenses were $75.1 million and $67.1 million for the nine months ended March 26, 2005 and March 27, 2004, respectively, which represented 5.9% and 6.6% of net revenues, respectively. The increase in selling, general, and administrative expenses in absolute dollars for the nine months ended March 26, 2005 as compared to the nine months ended March 27, 2004 is primarily due to a $3.7 million increase in legal expense and $3.3 million increase in salary related expenses.
Interest Income and Other, Net
Interest income and other, net was $7.5 million and $19.4 million for the three and nine months ended March 26, 2005, respectively, compared to $5.5 million and $15.6 million for the three and nine months ended March 27, 2004, respectively. The increase in interest income and other, net for the three and nine months ended March 26, 2005 as compared to the three and nine months ended March 27, 2004 is primarily due to higher average interest rates.
18
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 nine months ended March 26, 2005 and March 27, 2004 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 $6.3 million at March 26, 2005 is dependent primarily upon achieving future U.S. taxable income of $17.0 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.
Recently Issued Accounting Pronouncement
In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 151 (SFAS 151), “Inventory Costs, an amendment of Accounting Research Bulletin (ARB) No. 43, Chapter 4.” SFAS 151 amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing” to clarify the accounting for abnormal amounts of idle facility expense, freight handling costs, and wasted material (spoilage). SFAS 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, SFAS 151 requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. The provisions of SFAS 151 will be effective for fiscal years beginning after June 15, 2005. The Company is currently evaluating the provisions of SFAS 151 and does not believe that its adoption will have a material impact on the Company’s financial condition, results of operations or liquidity.
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004) (SFAS 123(R)), “Share-Based Payment.” SFAS 123(R) replaces Statement of Financial Accounting Standards No. 123, “Accounting for Stock Issued to Employees,” and supersedes Accounting Principal Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123(R) requires that compensation costs relating to share-based payment transactions be recognized in the consolidated financial statements. Compensation costs will be measured based on the fair value of the equity or liability instruments issued. SFAS 123(R) is effective as of the first annual reporting period that begins after June 15, 2005. The Company is currently evaluating the provisions of SFAS 123(R) and has not yet determined whether to use the modified prospective or the modified retrospective methods allowed by SFAS 123(R), nor has it determined its impact on the Company’s financial condition, results of operations or liquidity beyond the disclosure on Note 2 of the Notes to Condensed Consolidated Financial Statements.
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153 (SFAS 153), “Exchange of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.” SFAS 153 is based on the principle that exchange of nonmonetary assets should be measured based on the fair market value of the assets exchanged. SFAS 153 eliminates the exception of nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS 153 is effective for nonmonetary asset exchanges in fiscal periods beginning after June 15, 2005. The Company is currently evaluating the provisions of SFAS 153 and does not believe that its adoption will have a material impact on the Company’s financial condition, results of operations or liquidity.
19
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT’D)
In March 2005, the FASB issued FASB Interpretation No. 47 (FIN 47), “Accounting for Conditional Asset Retirement Obligations.” FIN 47 clarifies that the term conditional asset retirement obligation as used in FASB Statement No. 143, “Accounting for Asset Retirement Obligations,” refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Company will adopt FIN 47 in its fiscal year 2006. The Company is currently analyzing FIN 47 and believes the adoption of FIN 47 will not have material impact on the Company’s financial condition, results of operations or liquidity.
BOOKINGS AND BACKLOG
Bookings during the third quarter of fiscal year 2005 were approximately $373 million, a 6% increase from the second quarter of fiscal year 2005’s level of $353 million. Turns orders received during the third quarter of fiscal year 2005 were $156 million, a 28% increase from the $122 million received during the second quarter of fiscal year 2005 (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 in all geographic locations except Europe during the third quarter of fiscal year 2005.
Third quarter of fiscal year 2005 ending backlog shippable within the next 12 months was approximately $328 million, including approximately $284 million requested for shipment in the fourth quarter of fiscal year 2005. The Company’s second quarter of fiscal year 2005 ending backlog shippable within the next 12 months was approximately $370 million, including approximately $300 million that was requested for shipment in the third quarter of fiscal year 2005.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company’s primary sources of funds for the nine months ended March 26, 2005 were from net cash generated from operating activities of $531.5 million and proceeds from the exercises of stock options and purchases of common stock under the Employee Stock Participation Plan of 5.4 million shares in the amount of $82.1 million.
Included in cash provided by operating activities are the tax benefits that arise from exercise of options. These tax benefits amounted to $87.3 million in the nine months ended March 26, 2005.
The principal uses of funds for the nine months ended March 26, 2005 were the repurchase of 2.2 million shares of the Company’s common stock for $96.7 million, the payment of $91.2 million for dividends and the purchase of $111.6 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, level of option exercise activity by the employee base and other factors. See Note 14 of Notes to Condensed Consolidated Financial Statements regarding the status of the Company’s common stock repurchases.
During the fourth 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 June 1, 2005 to stockholders of record on May 16, 2005. In the fourth quarter of fiscal year 2005, the Company will pay LTC a $40 million royalty payment related to a settlement agreement entered into during the three months ended March 26, 2005 (see Note 10 of Condensed Consolidated Financial Statements).
20
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT’D)
The Company is subject to pending legal proceedings. See Note 10 of the Notes to Condensed Consolidated Financial Statements for information regarding pending 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 Qualcomm to prevail in their claims against the Company, the Company’s operating results could be materially adversely affected.
Off-Balance-Sheet Arrangements
As of March 26, 2005, 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 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 and Chief Financial Officer, 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 properly 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, the Company’s internal control over financial reporting.
21
PART II. OTHER INFORMATION
ITEMS 3, 4 AND 5 OF PART II HAVE BEEN OMITTED AS THEY ARE NOT APPLICABLE PROCEEDINGS
ITEM 1: LEGAL PROCEEDINGS
The information set forth above under Note 10 contained in the “Notes to Condensed Consolidated Financial Statements” is incorporated herein by reference.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table summarizes the activity related to stock repurchases for the third quarter of fiscal year 2005.
| | Issuer Repurchases of Equity Securities | |
| |
| |
| | Total Number
of Shares
Purchased | | Average
Price Paid
per Share | | Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs | | Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs | |
| |
| |
| |
| |
| |
Dec. 26, 2004 – Jan. 22, 2005 | | | 49,878 | | $ | 40.05 | | | 49,878 | | | 2,340,846 | |
Jan. 23, 2005 – Feb. 19, 2005 | | | 393,846 | | $ | 40.05 | | | 393,846 | | | 1,947,000 | |
Feb. 20, 2005 – Mar. 26, 2005 | | | 154,448 | | $ | 43.26 | | | 154,448 | | | 1,792,552 | |
| |
|
| | | | |
|
| | | | |
Total for the Quarter | | | 598,172 | | $ | 40.88 | | | 598,172 | | | 1,792,552 | |
| |
|
| | | | |
|
| | | | |
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 third quarter of fiscal year 2005, the Company purchased approximately 0.6 million shares for approximately $24.5 million. As of March 26, 2005, approximately 1.8 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, the level of the Company’s unrestricted cash, level of option exercise activity by the employee base and other factors.
22
ITEM 6: EXHIBITS
Exhibits are incorporated herein by reference or are filed with this report as indicated below (numbered in accordance with Item 601 of Regulation S-K):
Exhibit Number | | Description |
| |
|
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). |
23
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.
May 5, 2005 | 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) |
24
Exhibit Index
Exhibit Number | | Description |
| |
|
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). |
25
