MAXIM INTEGRATED PRODUCTS, INC. 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, the uncertainties as to the timing of the completion of our pending merger with Analog Devices, Inc. and the ability of each party to complete the merger, and the effects of the ongoing novel coronavirus ("COVID-19") pandemic, or to release publicly the results of any future revisions it may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, including the impact of the COVID-19 pandemic and the responses to it, except as required by federal securities laws. Readers are cautioned not to place undue reliance on such statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Readers should carefully review future reports and documents that the Company files with or furnishes to theSEC from time to time, such as its Annual Reports on Form 10-K, its Quarterly Reports on Form 10-Q, and any Current Reports on Form 8-K.
Overview of Business
Maxim Integrated Products, Inc. ("Maxim Integrated" or the "Company" and also referred to as "we," "our" or "us") designs, develops, manufactures and markets a broad range of linear and mixed-signal integrated circuits, commonly referred to as analog circuits, for a large number of customers in diverse geographical locations. The analog market is fragmented and characterized by many diverse applications, a great number of product variations and, with respect to many circuit types, relatively long product life cycles. We are a global company with a wafer manufacturing facility in theU.S. , test facilities inthe Philippines andThailand , and sales and circuit design offices around the world. We also utilize third parties for manufacturing and assembly of our products.
Recent Developments
OnJuly 13, 2020 , the Company announced that it had entered into an Agreement and Plan of Merger, datedJuly 12, 2020 (as it may be amended from time to time, the "ADI Merger Agreement") with Analog Devices, Inc., aMassachusetts corporation ("Analog Devices" or "ADI"), andMagneto Corp. , a wholly-owned subsidiary of Analog Devices ("Acquisition Sub"), under which, subject to the satisfaction or (to the extent permissible) waiver of the conditions set forth therein, Acquisition Sub will merge with and into the Company, and the Company will survive the merger as a wholly-owned subsidiary of Analog Devices (the "ADI Merger"). Under the terms of the ADI Merger Agreement, at the effective time of the ADI Merger (the "Effective Time"), each share of common stock, par value$0.001 per share, of the Company (the "Company Common Stock"), issued and outstanding immediately prior to the Effective Time (other than treasury shares and any shares of Company Common Stock held by Analog Devices or Acquisition Sub) will be converted into the right to receive 0.6300 of a fully paid and non-assessable share of common stock, par value$0.16 2/3 per share, of Analog Devices (with cash being paid (without interest and less applicable withholding taxes) in lieu of any fraction of a share of Analog Devices common stock). Analog Devices shareholders will continue to own their existing Analog Devices shares, and the combined company will be named Analog Devices. The ADI Merger has been approved by both the Company's Board of Directors and the Board of Directors of Analog Devices. The completion of the ADI Merger is subject to customary closing conditions, including, among others, the required approvals of Maxim Integrated's stockholders, the approval of ADI's shareholders and the receipt of various regulatory approvals. Subject to the satisfaction or (to the extent permissible) waiver of such conditions, the transaction is expected to close in the summer of 2021. The Company cannot guarantee that the ADI Merger will be completed on a timely basis or at all or that, if completed, it will be completed on the terms set forth in the ADI Merger Agreement. As ofOctober 8, 2020 , stockholder approval for the ADI Merger has been obtained from Maxim Integrated's stockholders and ADI's shareholders. In addition, the proposed transaction has received antitrust clearance from theUnited States Federal Trade Commission .
The Linear and Mixed-Signal Analog Integrated Circuit Market
All electronic signals generally fall into one of two categories, linear or digital. Linear (or analog) signals represent real world phenomena, such as temperature, pressure, sound or speed, and are continuously variable over a wide range of values. Digital signals represent the "ones" and "zeros" of binary arithmetic and are either on or off.
Three general classes of semiconductor products arise from this distinction
between linear and digital signals:
•digital devices, such as memories and microprocessors that operate primarily in
the digital domain;
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--------------------------------------------------------------------------------•linear devices, such as amplifiers, references, analog multiplexers and switches that operate primarily in the analog domain; and •mixed-signal devices such as data converter devices that combine linear and digital functions on the same integrated circuit and interface between the analog and digital domains.
Our strategy has been to target both the linear and mixed-signal markets, often collectively referred to as the analog market. However, some of our products are exclusively or principally digital. While our focus continues to be on the linear and mixed-signal market, our capabilities in the digital domain enable development of new mixed-signal and other products with highly sophisticated digital characteristics. Our linear and mixed-signal products now serve four major end-markets: (i) Automotive, (ii)Communications and Data Center , (iii) Consumer and (iv) Industrial. These major end-markets and their corresponding markets are noted in the table below: MAJOR END-MARKET MARKET AUTOMOTIVE Infotainment PowertrainBody Electronics Safety & Security COMMUNICATIONS & DATA CENTER Base Stations Data Center Data Storage Desktop Computers Network & Datacom Notebook Computers Peripherals & Other Computer Server TelecomOther Communications CONSUMER Smartphones Digital Cameras Handheld ComputersHome Entertainment & Appliances Wearables Other Consumer INDUSTRIAL Automatic Test Equipment Control & Automation Electrical Instrumentation Financial Terminals Medical Security USB ExtensionOther Industrial 27
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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 valuation of inventories; accounting for income taxes; and assessment of litigation and contingencies. 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 endedJune 27, 2020 . We have other significant accounting policies that either do not generally require estimates and judgments that are as difficult or subjective, or it is less likely that such accounting policies would have a material impact on our reported results of operations for a given period. Except for the accounting policies and estimates outlined under Part I, Item 1. Financial Statements - Note 2, there have been no material changes during the six months endedDecember 26, 2020 to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year endedJune 27, 2020 . Impact of COVID-19 on Our Business The ongoing COVID-19 pandemic has impacted and will continue to impact the Company's operations, employees, customers, and suppliers, due to shelter-in-place orders, mandated quarantines, reduced facility operations, and travel bans and restrictions. While the operating results for the second quarter of fiscal year 2021 and thereafter may be impacted by COVID-19, the extent and form of such impact to our business is uncertain and cannot be estimated with any degree of certainty.Employee Health and Safety During the third and fourth quarters of fiscal year 2020 and the first and second quarters of fiscal year 2021, the Company's facilities and offices were either operating at reduced capacity or temporarily closed for non-essential operations. In an effort to protect the health and safety of our employees, we implemented safety measures such as work-from-home practices, travel restrictions, extensive cleaning protocols, and social distancing when engaging in essential activities. Focus on Customers We continue to work with our sales, supplier, and customer design and engineering teams to meet current demand. Teams meet remotely, through telephonic or video conferences and by leveraging available technology, to continue the design and engineering process that would normally take place at physical customer locations. Manufacturing and Operations We will continue to actively monitor this evolving situation and implement changes to protect employee health. In addition to our actions, we will continue to implement government-placed orders in all our locations. While COVID-19 related disruptions have impacted our manufacturing operations, we continue to leverage our manufacturing flexibility to reduce the negative effects of such disruptions. Please refer to certain risk factors included in Item 1A in our Annual Report on Form 10-K for the fiscal year endedJune 27, 2020 for discussions of the risks to our business from COVID-19. 28
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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 26, December 28, December 26, December 28,
2020 2019 2020 2019
Net revenues 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 33.7 % 34.6 % 33.2 % 35.1 %
Gross margin 66.3 % 65.4 % 66.8 % 64.9 %
Operating expenses:
Research and development 18.3 % 20.3 % 18.5 % 20.4 %
Selling, general and administrative 12.8 % 13.8 % 13.1 % 14.0 %
Intangible asset amortization 0.2 % 0.1 % 0.1 % 0.1 %
Severance and restructuring expenses 0.5 % 0.5 % 1.0 % 0.4 %
Other operating expenses (income), net 0.6 % - % 0.9 % - %
Total operating expenses 32.3 % 34.7 % 33.5 % 34.9 %
Operating income 34.0 % 30.7 % 33.3 % 30.0 %
Interest and other income (expense), net (0.5) % - % (0.8) % 0.2 %
Income before provision for income taxes 33.5 % 30.7 % 32.4 % 30.2 %
Income tax provision (benefit) 4.2 % 4.2 % 4.1 % 3.8 %
Net income 29.3 % 26.5 % 28.3 % 26.4 %
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 26, December 28, December 26, December 28,
2020 2019 2020 2019
Cost of goods sold 0.7 % 0.5 % 0.7 % 0.5 %
Research and development 1.9 % 2.1 % 2.1 % 2.1 %
Selling, general and administrative 2.4 % 1.8 % 2.6 % 1.9 %
5.0 % 4.4 % 5.4 % 4.5 %
Net Revenues
Net revenues were $628.3 million and $551.1 million for the three months ended
December 26, 2020 and December 28, 2019 , respectively. Revenue from automotive
products was up 30% driven by an increased demand for infotainment, safety and
security, and powertrain products. Revenue from industrial products was up 19%
driven by an increased demand for medical, and control and automation products.
Revenue from consumer products was up 13% driven by an increased demand for
handheld and other consumer products, partially offset by a decrease in wearable
products.
Net revenues were $1.2 billion and $1.1 billion for the six months ended
December 26, 2020 and December 28, 2019 , respectively. Revenue from automotive
products was up 22% driven by increased demand for powertrain, safety and
security, and infotainment products. Revenue from industrial products was up 19%
driven by increased demand for control and automation, automatic test equipment
and medical products. Revenue from communications and data products was up 10%
due to increased demand for notebook computers and data center products.
During each of the six months ended December 26, 2020 and December 28, 2019 ,
approximately 90% of net revenues were derived from customers outside of the
United States . While less than 2% 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
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assets denominated in foreign currencies. The impact of changes in foreign
exchange rates on our revenue and results of operations for the six months ended
Gross Margin
Our gross margin percentages were 66.3% and 65.4% for the three months endedDecember 26, 2020 andDecember 28, 2019 , respectively. Our gross margin increased by 0.9 percentage points, due to higher revenues, increased factory utilization and lower inventory reserves.
Our gross margin percentages were 66.8% and 64.9% for the six months ended
Research and Development
Research and development expenses were$114.8 million and$111.9 million for the three months endedDecember 26, 2020 andDecember 28, 2019 , respectively, which represented 18.3% and 20.3% of net revenues for each respective period. The$2.9 million increase was primarily due to higher salaries and related personnel costs. Research and development expenses were$230.3 million and$220.9 million for the six months endedDecember 26, 2020 andDecember 28, 2019 , respectively, which represented 18.5% and 20.4% of net revenues for each respective period. The$9.4 million increase was primarily due to higher salaries and related personnel costs.
Selling, General and Administrative
Selling, general and administrative expenses were$80.2 million and$76.1 million for the three months endedDecember 26, 2020 andDecember 28, 2019 , respectively, which represented 12.8% and 13.8% of net revenues for each respective period. The$4.1 million increase was mainly due to higher salaries and related personnel costs, including increased stock-based compensation for accelerated vesting of certain RSAs and RSUs. Selling, general and administrative expenses were$163.1 million and$152.2 million for the six months endedDecember 26, 2020 andDecember 28, 2019 , respectively, which represented 13.1% and 14.0% of net revenues for each respective period. The$10.9 million increase was mainly due to higher salaries and related personnel costs, including increased stock-based compensation for accelerated vesting of certain RSAs and RSUs. This was partially offset by lower depreciation expense. Severance and restructuring Severance and restructuring expenses were$3.3 million and$2.7 million for the three months endedDecember 26, 2020 andDecember 28, 2019 , respectively, which represented 0.5% of net revenues for each respective period. The$0.6 million increase was due to increased restructuring activities which, as a result of the pending ADI merger, now include change in control related benefits. Severance and restructuring expenses were$12.1 million and$4.2 million for the six months endedDecember 26, 2020 andDecember 28, 2019 , respectively, which represented 1.0% and 0.4% of net revenues for each respective period. The$8.0 million increase was due to increased restructuring activities which, as a result of the pending ADI merger, now include change in control related benefits.
Other operating expenses (income), net
Other operating expenses (income), net were$3.5 million and$(1) thousand for the three months endedDecember 26, 2020 andDecember 28, 2019 , respectively, which represented 0.6% and less than 0.1% of net revenues for each respective period. The$3.5 million increase was primarily due to expenses such as legal and professional services related to the pending ADI merger. Other operating expenses (income), net were$11.0 million and less than$0.1 million for the six months endedDecember 26, 2020 andDecember 28, 2019 , respectively, which represented 0.9% and less than 0.1% of net revenues for each respective period. The$10.9 million increase was primarily due to expenses such as legal and professional services related to the pending ADI merger. We expect to incur additional merger-related expenses as we approach the expected transaction close date. 30 --------------------------------------------------------------------------------
Provision for Income Taxes
In the three and six months endedDecember 26, 2020 the Company recorded an income tax provision of$26.5 million and$51.4 million , respectively, compared to$23.0 million and$40.7 million for the three and six months endedDecember 28, 2019 , respectively. The Company's effective tax rate for the three and six months endedDecember 26, 2020 was 12.6% and 12.7%, respectively, compared to 13.6% and 12.4% for the three and six months endedDecember 28, 2019 , respectively. The Company's federal statutory tax rate is 21%. The Company's effective tax rate for the three and six months endedDecember 26, 2020 andDecember 28, 2019 was lower than the statutory rate primarily due to earnings of foreign subsidiaries, generated by the Company's international operations managed inIreland , that were taxed at lower rates, partially offset byU.S. tax expense related to Global Intangible Low-Taxed Income.
BACKLOG
As ofDecember 26, 2020 andJune 27, 2020 , our current quarter backlog was approximately$584.3 million and$496.4 million , respectively. Our current quarter backlog includes customer request dates to be filled 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 for predicting future revenues. All backlog amounts 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 26, December 28,
2020 2019
(in thousands)
Net cash provided by (used in) operating activities $ 373,010 $ 378,735
Net cash provided by (used in) investing activities (2,692) 43,869
Net cash provided by (used in) financing activities (152,027) (459,752)
Net increase (decrease) in cash, cash equivalents and
restricted cash $ 218,291 $ (37,148)
Operating activities
Cash provided by operating activities is net income adjusted for certain non-cash items and changes in certain assets and liabilities.
Cash provided by operating activities decreased by$5.7 million for the six months endedDecember 26, 2020 compared with the six months endedDecember 28, 2019 primarily due to changes in working capital. Changes in working capital were driven by increases in accounts receivable and inventories, partially offset by increases in accounts payable.
Investing activities
Investing cash flows consist primarily of net investment purchases and maturities, and capital expenditures.
Cash provided by investing activities decreased by$46.6 million for the six months endedDecember 26, 2020 compared with the six months endedDecember 28, 2019 . The decrease was due to less proceeds from maturity of available-for-sale securities partially offset by less purchases of property, plant and equipment.
Financing activities
Financing cash flows consist primarily of payment of debt, dividends to stockholders, and repurchases of common stock.
Cash used in financing activities decreased by$307.7 million for the six months endedDecember 26, 2020 compared with the six months endedDecember 28, 2019 . The decrease was due to less repurchases of common stock and dividend payments. 31 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Our primary source of liquidity is our cash flows from operating activities resulting from net income and management of working capital.
As of
OnOctober 30, 2018 , we were authorized to repurchase up to$1.5 billion of the Company's common stock. During the six months endedDecember 26, 2020 , we repurchased an aggregate of$9.2 million of the Company's common stock. Pursuant to the terms of the ADI Merger Agreement, the Company suspended the repurchase program onJuly 13, 2020 , the date we announced our planned merger with ADI. During the six months endedDecember 26, 2020 , we paid cash dividends of$0.48 per common share totaling$128.1 million . The Company discontinued its dividend program effective during the first quarter of fiscal year 2021, as provided in the ADI Merger Agreement. We anticipate that the available funds and cash generated from operations will be sufficient to meet cash and working capital requirements, including the anticipated level of capital expenditures, debt repayments and dividend payments for at least the next twelve months.
Off-Balance-Sheet Arrangements
As of
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