ITEM 1.
BUSINESS
Maxim Integrated Products, Inc. (“Maxim” or the “Company”) designs, develops, manufactures, and markets a broad range of linear and mixed-signal integrated circuits, commonly referred to as analog circuits. The Company also provides a range of high-frequency design processes and capabilities that can be used in custom designs. The analog market is fragmented and characterized by many diverse applications, a great number of product variations, and, as to many circuit types, relatively long product life cycles. Maxim’s objective is to develop and market both proprietary and industry-standard analog integrated circuits that meet the increasingly stringent quality standards demanded by customers. Based on product announcements by its competitors, Maxim believes that in the past 21 years it has developed more products for the analog market, including proprietary and second-source products, than any of its competitors over the same period.
In fiscal year 2001, the Company acquired Dallas Semiconductor Corporation in a transaction accounted for as a pooling-of-interests. At the time of the acquisition, Dallas Semiconductor’s product line consisted of 390 proprietary base products sold to over 15,000 customers worldwide. Applications for those products include battery management, broadband telecommunications, wireless handsets, cellular base stations, networking, servers, data storage, and a wide variety of industrial equipment.
The Company is a Delaware corporation that was originally incorporated in California in 1983. It is headquartered in Sunnyvale, California. The mailing address for the Company’s headquarters is 120 San Gabriel Drive, Sunnyvale, California 94086, and the Company’s telephone number is (408) 737-7600. Additional information about the Company is available on the Company’s website at www.maxim-ic.com.
The Company makes available through its website free of charge its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission. The Company assumes no obligation to update or revise any forward-looking statements in this annual report on Form 10-K, whether as a result of new information, future events or otherwise, unless it is required to do so by law. A copy of this annual report on Form 10-K is available without charge upon written request to: Investor Relations, Maxim Integrated Products, Inc., 120 San Gabriel Drive, Sunnyvale, California 94086.
The Analog Integrated Circuit Market
All electronic signals 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 partitioning of signals into linear or digital. There are those, such as memories and microprocessors, that operate only in the digital domain. There are linear devices such as amplifiers, references, analog multiplexers, and switches that operate primarily in the analog domain. Finally, there are mixed-signal devices that combine linear and digital functions on the same integrated circuit and interface between the analog and digital worlds. Maxim’s strategy has been to target both the linear and mixed-signal markets, often collectively referred to as the analog market. In addition, Maxim has added some Dallas Semiconductor products that are exclusively or principally digital as well as a significant number of engineers skilled in digital design and software development. Although the acquisition did not substantially affect Maxim’s strong focus on the linear and mixed signal market, it has supplemented Maxim’s capabilities in the digital area in ways that enable development of new products, mixed signal and other, with very sophisticated digital characteristics. Risks associated with fulfilling this expectation are discussed in “Item 1., Business - Trends, Risks and Uncertainties.”
The Company believes that, compared to the digital integrated circuit market, the analog market has generally been characterized by a wider range of standard products used in smaller quantities by a larger number of customers, and in many cases, by longer product life cycles and lower capital requirements as a result of generally using less dense manufacturing technologies. The Company believes that the widespread application of low-cost microprocessor-based systems and of digital communication technologies has affected the market for analog integrated circuits by increasing the need for signal conditioning interfaces between the digital and analog world.
The analog market is a fragmented group of markets, serving numerous and widely differing applications for instrumentation, industrial control, data processing, communications, automotive, consumer, medical imaging, military and video. For each application, different users may have unique requirements for circuits with specific resolution, accuracy, linearity, speed, power, and signal amplitude capability, which results in a high degree of market complexity. Maxim’s products can be used in a variety of applications, but serve only certain portions of the total analog market.
Products and Applications
The Company believes that it addresses the requirements of the market by providing competitively priced products that add value to electronic equipment with superior quality and reliability.
The Company’s research and development programs emphasize development of technically innovative processes and products. In addition, the Company also develops second-source products. The Company’s products are available with numerous packaging alternatives, including packages for surface mount technology.
The following table illustrates the major industries served by the Company and typical applications for which the Company’s products can be used:
While Maxim’s proprietary products have received substantial market acceptance, some of Maxim’s competitors have developed second source products for some of Maxim’s successful innovative proprietary products. Typically in the semiconductor industry, when a proprietary product becomes second sourced, the credibility of the original design is enhanced, and there is an opportunity to increase total revenues as the potential customers’ reluctance to design in a sole-source product is removed, but gross margins may be adversely affected due to increased price competition.
Product Quality
The Company emphasizes quality and reliability from initial product design through manufacturing, assembly and testing. In the product design phase, the Company applies a set of circuit design rules derived from modeling and characterization of the process and individual circuit elements. The completeness of this characterization and the limits of these models can affect the final quality of the product. There is a higher risk that model characterization of the internally developed processes contains incomplete data; however, such models are refined as the processes mature. The performance of product designs is dependent on the process operating within the limits specified for critical parameters. Deviations from these limits can affect the quality of the end product. Critical process parameters have to maintain a level of stability for subsequent long-term reliability tests to validate the integrity of the process and material produced using the process. The Company measures the stability of these process parameters using test routines and structures that simulate the actual devices used in product design. Simulations generally approximate actual device limits but are not always able to match all usage environments or conditions. The Company believes a comprehensive and thorough engineering approach is applied to the development and deployment of these test routines and structures. The data compiled from the measurement of these critical parameters is statistically analyzed and determines the acceptance of the wafers to be used in the manufacture of the Company’s product. The test routines and structures used by the Company do not provide complete assurance that all quality problems or issues will be detected.
Product quality is determined by conformance to predetermined parameters to the extent they are measured. Parameters are either tested during manufacturing or guaranteed by design. Predetermined parameters guaranteed by design are reliant on the stability of the semiconductor manufacturing processes, the amount of process margin and the completeness of product characterization. Reliability testing is done during wafer process development, process release, product release stages and limited ongoing reliability monitors and serves as a control of process consistency. Parameters tested during manufacturing are dependent on the integrity of the manufacturing test operation, which includes factors such as test software, stability and repeatability of test systems, test set up issues, and other factors and variables. The Company believes a significant amount of resources and diligence is applied to monitor and control the manufacturing test operation.
Quality problems experienced by suppliers could be impossible to reproduce or detect in a controlled environment, or could not be detected by the Company’s quality control procedures. Should this occur, such defects may become part of the Company’s finished product, which would ultimately be sold to customers. If such defects cause quality control problems in the manufacture of customers’ end products or cause direct or indirect damages to either the Company’s customers or the ultimate end user, the Company may be liable for increased production costs at its customers and both direct and indirect damages caused by the defective product. Such liability could have a material adverse impact on the Company’s results of operation and financial condition.
Long term thermal and mechanical testing is performed in an effort to detect the presence of defects, which may arise over the life of a product’s use; however, an emphasis is placed by the Company on infant mortality failure rates. Semiconductor manufacturing consists of complex and diverse processes. Although Maxim believes that the above testing regime is comprehensive and that it meets industry standards, a possibility exists that failure mechanisms could elude detection. This could expose the Company to liability, unforeseen customer returns, and loss of reputation.
Manufacturing
Maxim uses its own wafer fabrication and, to a small extent, silicon foundries to produce wafers. The majority of processed wafers are subjected to parametric and functional testing at the Company’s facilities. The broad range of products demanded by the analog integrated circuit market requires multiple manufacturing process technologies. Many different process technologies are currently used for wafer fabrication of the Company’s products. Historically, wafer fabrication of analog integrated circuits has not required the state-of-the-art processing equipment necessary for the fabrication of advanced digital integrated circuits, although newer processes do utilize and require some of these facilities and equipment. In addition, hybrid products are manufactured using a complex multichip technology featuring thin-film, thick-film, laser-trimmed resistors and other active or passive components. For the majority of these technologies, the Company relies on its fabrication facilities and, to a small extent, manufacturing subcontractors. The Company currently uses five subcontract silicon foundries that represent approximately 5% of wafer production. None of the subcontractors currently used by Maxim is affiliated with the Company.
Most of the wafers produced in fiscal year 2004 were manufactured at one of the Company’s four wafer fabrication facilities noted in the table below:
Facility Location
Fiscal Year Acquired
Wafer Sizes Manufactured
Beaverton, Oregon
6-inch
San Jose, California
6-inch and 8-inch
Dallas, Texas
6-inch and 8-inch
San Antonio, Texas
8-inch
During fiscal year 2004, the Company continued its conversion to 8-inch wafers at its manufacturing facilities located at Dallas, Texas and San Jose, California. It is anticipated that 6-inch wafer production at these facilities will continue through fiscal year 2005. At the end of fiscal 2004, three facilities located at Beaverton, Oregon, San Jose, California and Dallas, Texas combined had a capacity to ship $500 million per quarter, and we project that their capacity will increase to $580 million per quarter in shipments by the end of fiscal year 2005. The Company’s wafer manufacturing facility located at Beaverton, Oregon is converting from six-inch to eight-inch wafer manufacturing and will continue this conversion during fiscal year 2005.
In fiscal year 2004, the Company purchased from Philips Semiconductors a facility in San Antonio, Texas for $40 million in cash. The acquisition includes a 178.5-acre campus site with a submicron eight-inch wafer fabrication facility. When augmented with additional equipment, we believe that this facility will be capable of producing $800 million per year in product for shipment. The Company believes that this acquisition is consistent with its commitment to its customers to supply state-of-the-art mixed-signal analog technology, in volume, at the lowest price of its industry. The Company began wafer manufacturing operations at this facility during the fourth quarter of fiscal year 2004.
As is customary in the industry, the Company ships most of its processed wafers to foreign assembly subcontractors, located in the Philippines, Malaysia, Thailand, Hong Kong, Taiwan, Singapore, and South Korea, where wafers are separated into individual integrated circuits and assembled into a variety of packages. After assembly has been completed, the majority of the assembled product is shipped to the Company’s test facilities located in Cavite, the Philippines, and Chonburi Province, Thailand. In fiscal year 2004, the Company performed less than half of its wafer sort operations at its U.S. facilities and more than half of its wafer sort operations at its facility located in Cavite, the Philippines, with the capacity to electronically test and laser trim the majority of the Company’s wafers. The Company plans to begin wafer sort operations in Thailand in fiscal year 2005 and expects this operation to test and laser trim approximately 10% of the Company’s wafers.
In fiscal year 2004, the Company constructed a 144,000 sq. ft. test facility in Chonburi Province, Thailand. In the first quarter of fiscal year 2005, the Company relocated test operations from its leased site in Samutprakarn Province, Thailand to the new facility located in Chonburi Province, Thailand. The Company expects to start wafer sort operations at this facility in fiscal year 2005. The test operation can be doubled in size when the Company needs further test capacity as demand dictates. Currently, the Company expects that the Company’s facilities located in Cavite, the Philippines and Chonburi Province, Thailand combined will have enough test manufacturing and shipping space to meet the Company’s fiscal year 2005 financial plan, subject to normal and to unforeseen challenges in meeting product demand.
Once testing has been completed, finished product is currently shipped to the Company’s finished goods location at its test facility in Cavite, the Philippines. Finished product is either shipped directly from Cavite, the Philippines to customers worldwide or to other Company locations for sale to end customers or distributors. In fiscal year 2005, the Company plans to establish a shipping operation at its test facility in Chonburi Province, Thailand. Once established, finished product will also be shipped directly from Chonburi Province, Thailand to customers worldwide or to other Company locations for sale to end customers or distributors.
In the past and as sometimes happens in the semiconductor industry, the Company has experienced disruptions in the supply of processed wafers due to quality problems or failure to achieve satisfactory electrical yields. If the foundries used by the Company were unwilling or the Company’s own internal wafer fabrication facilities were unable to produce adequate supplies of processed wafers conforming to the Company’s quality standards, the Company’s business and relationships with its customers could be adversely affected.
Due to the relatively lengthy manufacturing cycle, the Company builds some of its inventory in advance of receiving orders from its customers. As a consequence of inaccuracies inherent in forecasting, inventory imbalances periodically occur that result in surplus amounts of some Company products and shortages of others. Such shortages can adversely affect customer relations and surpluses can result in larger-than-desired inventory levels, which can adversely affect the Company’s financial position. Excess inventory issues can also arise when customers cancel orders. Finished products and work in process for those orders may be unsaleable.
Sales and Marketing
In the United States and Canada, the Company sells its products through a direct sales and applications organization in nine regional sales offices, one sales representative organization and through its own and other unaffiliated distribution channels. As is customary in the industry, most domestic distributors are entitled to certain price rebates and product return privileges.
International sales are conducted by 25 Maxim sales offices, one sales representative organization and 29 distributors. The Company sells in both United States dollars and various foreign currencies. A majority of the Company’s international sales are billed and payable in United States dollars and are therefore not directly subject to currency exchange fluctuations. A portion of the Company’s sales from its United Kingdom, French, and German affiliates is denominated in the local currencies, primarily the Euro and British Pound. The majority of the sales to customers and distributors located in Japan are denominated in Yen. The Company enters into foreign currency forward contracts to protect the United States dollar value of its firm sales commitments and net monetary assets. Changes in the relative value of the dollar, however, may create pricing pressures for Maxim’s products. In addition, various forms of protectionist trade legislation have been proposed in the United States and certain foreign countries. A change in current tariff structures or other trade policies could adversely affect the Company’s foreign marketing strategies. In general, payment terms for foreign customers, distributors and others, which represent a majority of the Company’s accounts receivable at June 26, 2004, are longer than for U.S. customers. Certain major Japanese customers have payment terms that are generally well beyond payment terms extended to customers in other geographic locations. As is customary in the semiconductor industry, the Company’s domestic distributors may market products competitive with Maxim’s.
International sales accounted for approximately 70%, 67%, and 66% of net revenues in fiscal years 2004, 2003 and 2002, respectively. See Note 12 “Segment Information” of the Notes to Consolidated Financial Statements.
As of June 26, 2004, the Company’s backlog was approximately $529 million, as compared to approximately $227 million at June 28, 2003. The Company includes in its backlog customer-released orders with firm schedules for shipment within the next 12 months. As is customary in the semiconductor industry, these orders may be canceled in most cases without penalty to the customers. In addition, the Company’s backlog includes orders from domestic distributors as to which revenues are not recognized until the products are sold by the distributors. Accordingly, the Company believes that its backlog at any time should not be used as a measure of future revenues. All of the backlog numbers have been adjusted for estimated future U.S. distribution ship and debit pricing adjustments.
The Company warrants its products to its customers generally for one year from the date of shipment, but in certain cases for longer periods. Warranty expense to date has been minimal. In certain other cases, the Company warrants products to include significant liability beyond the cost of replacing the product.
Research and Development
The Company believes that research and development is critical to its future success. Objectives for the research and development function include definition, design, and layout of innovative proprietary products that meet customer needs, development of second-source products, design of parts for high yield and reliability, test development, and development of manufacturing processes and advanced packaging to support an expanding product line.
Due to the research and development plans of the Company and the shortage of qualified process development, test development and design engineering talent, the Company does not always have the number of engineers required to meet its research and development goals.
Research and development expenses were approximately $306.3 million, $272.3 million, and $275.5 million in fiscal years 2004, 2003, and 2002 respectively.
Competition
The analog integrated circuit industry is intensely competitive, and virtually all major semiconductor companies presently compete with, or conceivably could compete with, some segment of the Company’s business. Maxim’s competitors include, without limitation, Altera Corporation, Anadigics Inc., Analog Devices, Inc., Advanced Analogic Technologies, Inc., Applied Micro Circuits Corporation, Conexant Systems Inc., Exar Corp., Fairchild Semiconductor Corp., Freescale Semiconductor, Inc., Infineon Technologies AG, Intel Corporation’s Level One Communications, Inc. Subsidiary, Intersil Corporation, Linear Technology Corporation, Lucent Technologies, Micrel Inc., Microchip Technology Inc., Mitsubishi Corporation, Mitsui & Co. Ltd., Monolithic Power Systems, Inc., Motorola Inc., National Semiconductor Corporation, ON Semiconductor Corporation, Philips Electronics N.V., PMC-Sierra Inc., RF Micro Devices Inc., Ricoh Company Ltd., Seiko Corporation, Semtech Corporation, STMicroelectronics N.V., Silicon Laboratories Inc., Siliconix Inc., Sipex Corporation, Skyworks Solutions, Inc., Texas Instruments Inc., Vitesse Semiconductor Corporation, Volterra Semiconductor Corporation, and others, including start-up companies. Some of Maxim’s competitors have substantially greater financial, manufacturing, and marketing resources than the Company, and some of Maxim’s competitors have greater technical resources. The Company believes it competes favorably with these corporations primarily on the basis of technical innovation, product definition, quality, price, and service. There can be no assurance that competitive factors will not adversely affect the Company’s future business.
Patents, Licenses, and Other Intellectual Property Rights
The Company relies upon both know-how and patents to develop and maintain its competitive position. There can be no assurance that others will not develop or patent similar technology or reverse engineer the Company’s products or that the confidentiality agreements with employees, consultants, silicon foundries and other suppliers and vendors will be adequate to protect the Company’s interests.
The Company currently holds 417 U.S. patents and 59 foreign patents with expiration dates ranging from fiscal years 2005 to 2023. In addition, the Company has applied for 87 U.S. patents, a large number of which have corresponding patent applications in multiple foreign jurisdictions. It is the Company’s policy to seek patent protection for significant inventions that may be patented, though the Company may elect, in appropriate cases, not to seek patent protection even for significant inventions if other protection, such as maintaining the invention as a trade secret, is considered more advantageous. In addition, the Company has registered certain of its mask sets under the Semiconductor Chip Protection Act of 1984.
There can be no assurance that any patent will issue on pending applications or that any patent issued will provide substantive protection for the technology or product covered by it. The Company believes that patent and mask work protection is of less significance in its business than experience, innovation, and management skill.
Maxim has registered several of its trademarks with the U.S. Patent and Trademark Office and in foreign jurisdictions.
Due to the many technological developments and the technical complexity of the semiconductor industry, it is possible that certain of the Company’s designs or processes may involve infringement of patents or other intellectual property rights held by others. From time to time, the Company has received, and in the future may receive, notice of claims of infringement by its products on intellectual property rights of third parties. If any such infringements were to exist, the Company might be obligated to seek a license from the holder of the rights and might have liability for past infringement. In the past, it has been common in the semiconductor industry for patent holders to offer licenses on reasonable terms and rates. Although in some situations, typically where the patent directly relates to a specific product or family of products, patent holders have refused to grant licenses, though the practice of offering licenses appears to be generally continuing. However, no assurance can be given that the Company will be able to obtain licenses as needed in all cases or that the terms of any license that may be offered will be acceptable to Maxim. In those circumstances where an acceptable license is not available, the Company would need either to change the process or product so that it no longer infringes or else stop manufacturing the product or products involved in the infringement.
Environmental Regulation
Various foreign and United States federal, state, and local government agencies impose a variety of environmental regulations on the storage, handling, use, discharge and disposal of certain chemicals, gases and other substances used or produced in the semiconductor manufacturing process. The Company’s facilities have been designed to comply with these regulations, and it believes that its activities are conducted in material compliance with such regulations. There can be no assurance, however, that interpretation and enforcement of current or future environmental regulations will not impose costly requirements upon the Company. Any failure of the Company to control adequately the storage, handling, use, discharge or disposal of regulated substances could result in fines, suspension of production, alteration of fabrication processes and legal liability, which may materially adversely impact the Company’s financial condition, results of operations or liquidity.
Increasing public attention has been focused on the environmental impact of electronic manufacturing operations and waste electronic equipment. While the Company to date has not experienced any materially adverse effects on its business from environmental regulations, there can be no assurance that changes in such regulations will not have a materially adverse effect on the Company’s financial condition or results of operations. Possible effects include, but are not limited to, making costly changes to manufacturing, waste discharge or disposal processes and purchasing higher cost equipment or materials.
Employees
The supply of skilled engineers required for Maxim’s business is limited, and competition for such personnel is intense. The Company’s growth also requires the hiring or training of additional middle-level managers. If the Company is unable to hire, retain, and motivate qualified technical and management personnel, its operations and financial results will be adversely affected.
None of the Company’s employees is subject to a collective bargaining agreement.
As of June 26, 2004, the Company had 7,599 employees.
Trends, Risks and Uncertainties
An investment in the securities of Maxim involves certain risks. In evaluating the Company and its business, prospective investors should give careful consideration to the factors listed below, in addition to the information provided elsewhere in this Annual Report on Form 10-K, in the documents incorporated herein by reference and in other documents filed with the Securities and Exchange Commission.
Factors Affecting Future Operating Results
The Company’s future operating results are difficult to predict and may be affected by a number of factors.
The semiconductor market has historically been cyclical and subject to significant economic downturns at various times. After a period of increasing demand that extended through fiscal year 2000, the semiconductor industry, including the portions in which the Company participates, experienced dramatically decreased demand. Although some of the causes of that decrease are known, including significant excess inventories in the hands of equipment manufacturers and other potential customers, it remains unclear what all the causes may have been. In fiscal year 2004, Maxim achieved increases in net revenues and net income over fiscal year 2003 levels of 24.8% and 35.6%, respectively. However, Maxim’s ability to achieve future revenue growth depends on whether, and the extent to which, demand for its products increases and reflects real end user demand and whether customer cancellations and delays of outstanding orders remain small.
Other key factors affecting the Company’s revenues and operating results that could cause actual results to differ materially from past or predicted results include the timing of new product announcements or introductions by the Company and its competitors, competitive pricing pressures, fluctuations in manufacturing yields and manufacturing efficiency, adequate availability of wafers and other materials and manufacturing capacity, changes in product mix, and economic conditions in the United States and international markets. As a result of these and other factors, there can be no assurance that the Company will not experience material fluctuations in its future operating results on a quarterly or annual basis.
The Company’s ability to realize its quarterly revenue goals and projections is affected to a significant extent by its ability to match inventory and current production mix with the product mix required to fulfill orders on hand and orders received within a quarter for delivery in that quarter (referred to as “turns business”). This issue, which has been one of the distinguishing characteristics of the analog integrated circuit industry, results from the very large number of individual parts offered for sale and the very large number of customers, combined with limitations on Maxim’s and its customers’ ability to forecast orders accurately, and relatively lengthy manufacturing cycles. Because of this extreme complexity in the Company’s business, no assurance can be given that the Company will achieve a match of inventory on hand, production units, and shippable orders sufficient to realize quarterly or annual revenue goals.
In addition, in certain markets where end-user demand may be particularly volatile and difficult to predict, such as notebook computers and cellular handsets, some Maxim customers place orders that require Maxim to manufacture product and have it available for shipment, even though the customer is unwilling to make a binding commitment to purchase all, or even any, of the product. At any given time, this situation could affect a portion of the Company’s backlog. As a result, in any quarterly fiscal period, the Company is subject to the risk of cancellation of orders leading to a sharp fall-off of sales and backlog. Further, those orders may be for products that meet the customer’s unique requirements so that those cancelled orders would, in addition, result in an inventory of unsaleable products, resulting in potential inventory write-offs. Because of lengthy manufacturing cycles for certain of the products subject to these uncertainties, the amount of unsaleable product could be substantial. The Company routinely estimates inventory reserves required for such product. Actual results may differ from these reserve estimates, and such differences may be material to Maxim’s financial condition, gross margins, and results of operations.
Dependence on New Products, Process Technologies and Market Penetration
The Company’s future success will continue to depend on its continued ability to introduce new products and to develop new process technologies. Semiconductor design and process technology are subject to rapid technological change, requiring a high level of expenditures for research and development. Design and process development for the portions of the semiconductor market in which the Company participates are particularly challenging. The success of new product introductions is dependent on several factors, including proper new product selection, timely product introduction, achievement of acceptable production test times and yields, and market acceptance. From time to time, Maxim has not fully achieved its new product introduction and process development goals. There can be no assurance that the Company will successfully develop or implement new process technologies or that new products will be introduced on a timely basis or receive substantial market acceptance.
In addition, the Company’s growth is dependent on its continued ability to penetrate new markets where the Company has limited experience and competition is intense. There can be no assurance that the markets being served by the Company will grow (for example, older markets do saturate and decline); that the Company’s existing and new products will meet the requirements of such markets; that the Company’s products will achieve customer acceptance in such markets; that competitors will not force prices to an unacceptably low level or take market share from the Company; or that the Company can achieve or maintain profitability in these markets.
Manufacturing Risks
The fabrication of integrated circuits is a highly complex and precise process. Minute impurities, contaminants in the manufacturing environment, difficulties in the fabrication process, defects in the masks used in the wafer manufacturing process, manufacturing equipment failures, wafer breakage, or other factors can cause a substantial percentage of wafers to be rejected or numerous dice on each wafer to be nonfunctional. The Company has from time to time experienced lower-than-expected production yields and reliability problems, which have delayed product shipments and adversely affected gross margins. There can be no assurance that the Company will not experience a decrease in manufacturing yields or reliability or quality problems that could expose the Company to liability, product returns and product warranty claims.
The number of shippable dice per wafer for a given product is critical to the Company’s results of operations. To the extent the Company does not achieve acceptable manufacturing yields or experiences delays in its wafer fabrication, wafer sort, assembly or final test operations, its results of operations could be adversely affected. During periods of decreased demand, fixed wafer fabrication costs could have an adverse effect on the Company’s financial condition, gross margins, and results of operations.
The Company is currently in the process of ramping wafer manufacturing production at its wafer manufacturing facility located in San Antonio, Texas, and is converting to eight-inch wafer manufacturing at the wafer manufacturing facility located at Beaverton, Oregon, and developing new processes, which are necessary for the successful entry into significantly large markets, in anticipation of increased customer demand for its products. Should the Company be unsuccessful in completing the production ramp up at the San Antonio, Texas, wafer manufacturing facility, or conversion to eight-inch wafer manufacturing at its wafer manufacturing facility located at Beaverton, Oregon, or should customer demand fail to increase and the Company no longer needs the additional capacity, the Company’s financial position and results of operations could be adversely impacted.
The Company manufactures approximately 95% of its wafer production requirements internally. Given the nature of the Company’s products, it would be very difficult and costly to arrange for independent manufacturing facilities to supply such products. Any prolonged inability to utilize one of the Company’s manufacturing facilities as a result of fire, natural disaster, unavailability of electric power or otherwise, would have a material adverse effect on the Company’s results of operations and financial condition.
Competition
The Company experiences intense competition from a number of companies, some of which have significantly greater financial, manufacturing, and marketing resources than the Company and some of which have greater technical resources than the Company and have intellectual property rights to which the Company is not privy. To the extent that the Company’s proprietary products become more successful, competitors will offer second source products for some of those products, possibly causing some erosion of profit margins.
Dependence on Independent Distributors and Sales Representatives
A portion of the Company’s sales is realized through independent electronics distributors and a limited portion of the Company’s sales is realized through independent sales representatives that are not under the control of the Company. Dallas Semiconductor continues to have a larger percentage of their sales through the distribution channel than the Maxim only business. These independent sales organizations generally represent product lines offered by several companies and thus could reduce their sales efforts applied to the Company’s products or terminate their representation of the Company. Payment terms for foreign distributors are substantially longer, either according to contract or by practice, than for U.S. customers. The Company generally requires foreign distributors to provide a letter of credit to the Company in an amount equal to the credit limit set for accounts receivable from such foreign distributors. The letter of credit provides for collection on accounts receivable from the foreign distributor should the foreign distributor default on their accounts receivable to the Company. The Company does not require letters of credit from any of its domestic distributors and is not protected against accounts receivable default or bankruptcy by these distributors. The inability to collect open accounts receivable could adversely affect the Company’s results of operations. Termination of a significant distributor, whether at the Company’s or the distributor’s initiative, could be disruptive to the Company’s current business. If the Company were unable to find suitable replacements, terminations by significant distributors or representatives could have a material adverse impact on the Company.
Dependence on Independent Foundries, Subcontractors, Thailand Test Facility and Philippines Test and Shipping Facility
Although the Company has an internal capability to fabricate most of its wafers, Maxim remains dependent on outside silicon foundries for a small portion of its wafer fabrication. None of the foundries currently used by Maxim is affiliated with the Company. As is typical in the semiconductor industry, from time to time, the Company has experienced disruptions in the supply of processed wafers from these foundries due to quality problems, failure to achieve satisfactory electrical yields, and capacity limitations. Procurement from foundries is done by purchase order and contracts. If these foundries are unable or unwilling to produce adequate supplies of processed wafers conforming to the Company’s quality standards, the Company’s business and relationships with its customers for the limited quantities of products produced by these foundries would be adversely affected. Finding alternate sources of supply or initiating internal wafer processing for these products may not be economically feasible.
Maxim relies on assembly subcontractors located in the Philippines, Malaysia, Thailand, Hong Kong, Singapore, Taiwan and South Korea to separate wafers into individual integrated circuits and package them. None of the assembly subcontractors currently used by Maxim is affiliated with the Company. Reliability problems experienced by the Company’s assemblers could cause serious problems in delivery and quality resulting in potential product liability to the Company. In fiscal year 2004, the Company performed wafer sort operations for more than half of its wafers and final testing for about two-thirds of its products at a Philippines facility owned by the Company. In the past, South Korea and the Philippines have experienced political disorders, labor disruptions, and natural disasters. Although the Company has been affected by these problems, none has materially affected the Company’s revenues or costs to date. However, similar problems in the future or more aggravated consequences of current problems, could affect deliveries to Maxim of assembled, tested product, possibly resulting in substantial delayed or lost sales and/or increased expense. The Thailand test facility will perform about 10% of the Company’s wafer sort and one-third of the Company’s final testing for its products in fiscal year 2005, but would not provide sufficient capacity to make up for a significant disruption in the Philippines test facility.
The Company performs substantially all of its final testing at its facilities in the Philippines and Thailand. Given the nature of the Company’s test operations, it would be very difficult and costly to arrange for independent testing facilities to supply such test services. Any prolonged inability to utilize one of the Company’s testing facilities as a result of fire, natural disaster, unavailability of electric power or otherwise, would have a material adverse effect on the Company’s results of operations and financial condition.
As previously noted, once testing has been completed, finished product is currently shipped to the Company’s finished goods location at its test facility in Cavite, the Philippines. In fiscal year 2005, the Company plans to establish a shipping operation at its test facility in Chonburi Province, Thailand. Once established, finished product will be shipped directly from either Cavite, the Philippines or Chonburi Province, Thailand to customers worldwide or to other Company locations for sale to end customers or distributors. Should there be disruption for any reason to the shipping operations in Cavite, the Philippines or should the Company be unable to establish a shipping operation at its Thailand test facility, the Company might not be able to meet its revenue plan in the fiscal period. Failure to meet the revenue plan may materially adversely impact the Company’s results of operations.
Availability and Quality of Materials, Supplies, and Subcontract Services
The semiconductor industry has experienced a very large expansion of fabrication capacity and production worldwide over time. As a result of increasing demand from semiconductor manufacturers, availability of certain basic materials and supplies, such as polysilicon, silicon wafers, ultra-pure metals, lead frames and molding compounds, and of subcontract services, like epitaxial growth, ion implantation and assembly of integrated circuits into packages, have from time to time, over the past few years, been in short supply and may be expected to come into short supply again if overall industry demand continues to increase in the future. Maxim devotes continuous efforts to maintain availability of all required materials, supplies, and subcontract services. However, Maxim does not have long-term agreements providing for all of these materials, supplies, and services, and shortages could occur as a result of capacity limitations or production constraints on suppliers that could have a materially adverse effect on Maxim’s ability to achieve its planned production.
A number of Dallas Semiconductor products, including nonvolatile Static Random Access Memory products (SRAMs), real time clocks, and iButton TM products use components such as static memory circuits, batteries, PC boards, and crystals that are purchased from third parties. The Company anticipates that from time to time supplies of these components may not be sufficient to meet all customer requested delivery dates for products containing the components. As a result of any such shortages, future sales and earnings from products using these components could be adversely affected. Additionally, significant fluctuations in the purchase price for these components could affect gross margins for the products involved. Suppliers could also discontinue the manufacture of such purchased products or could have quality problems that could affect the Company’s ability to meet customer commitments. Quality problems experienced by suppliers could be impossible to reproduce or detect in a controlled environment, or could not be detected by the Company’s quality control procedures. Should this occur, such defects may become part of the Company’s finished product which would ultimately be sold to customers. If such defects cause quality control problems in the manufacture of customers’ end products or cause direct or indirect damages to either the Company’s customers or the ultimate end user, the Company may be liable for increased production costs at its customers and both direct and indirect damages caused by the defective product. Such liability could have a material adverse impact on the Company’s results of operation and financial condition.
In addition, suppliers of semiconductor manufacturing equipment are sometimes unable to deliver test and/or fabrication equipment to a schedule or equipment performance specification that meets the Company’s requirements. Delays in delivery of equipment needed for planned growth could adversely affect the Company’s ability to achieve its manufacturing and revenue plans in the future.
Protection of Proprietary Information
The Company relies upon both know-how and patents to develop and maintain its competitive position. There can be no assurance that others will not develop or patent similar technology or reverse engineer the Company’s products or that the confidentiality agreements upon which the Company relies will be adequate to protect its interests. Moreover, the laws of foreign countries do not protect proprietary rights to the same extent as the United States, and we may encounter problems in protecting our proprietary rights in these foreign countries. Other companies have obtained patents covering a variety of semiconductor designs and processes, and the Company might be required to obtain licenses under some of these patents or be precluded from making and selling the infringing products, if such patents are found to be valid. There can be no assurance that Maxim would be able to obtain licenses, if required, upon commercially reasonable terms.
Intellectual Property Litigation and Claims
The Company is subject to various legal proceedings and other similar claims that involve possible infringement of patent or other intellectual property rights of third parties. Maxim is currently a defendant in lawsuits brought by Linear Technology Corporation (LTC) and Qualcomm, Inc. (Qualcomm) in which LTC and Qualcomm allege that Maxim has willfully infringed LTC and Qualcomm patents. LTC and Qualcomm seek unspecified actual and treble monetary damages and permanent injunctions against Maxim. In addition to the above, from time to time, the Company receives notices that its products or processes may be infringing the intellectual property rights of others.
If one or more of the Company’s products or processes were determined to infringe any such intellectual property rights, a court might enjoin the Company from further manufacture and/or sale of the affected products. The Company would then need to obtain a license from the holders of the rights and/or to reengineer the Company’s products or processes in such a way as to avoid the alleged infringement. In any of those cases, there can be no assurance that the Company would be able to obtain any necessary license on commercially reasonable terms acceptable to the Company or that the Company would be able to reengineer its products or processes to avoid infringement. An adverse result in litigation arising from such a claim could involve an injunction to prevent the sales of a material portion of the Company’s products, a reduction or the elimination of the value of related inventories, and the assessment of a substantial monetary award for damages related to past sales which could have a material adverse effect on the Company’s result of operations and financial condition.
Insurance
The Company has insurance contracts with independent insurance companies that provide certain of its employees with health (medical and dental) benefits, worker’s compensation coverage, long term disability income coverage, life insurance coverage, and fiduciary insurance coverage for employee and Company funds invested under the Employee Retirement Income and Security Act. The Company is self-insured with respect to medical benefits for most of its domestic (United States) employees. The Company has insurance contracts with independent insurance companies that provide coverage related to certain property insurance, employee, third party liability, worker’s compensation insurance, and automobile insurance. In addition, the Company has insurance contracts that provide officer and director liability coverage for the Company’s officers and directors. Other than the specific areas mentioned above, the Company is self-insured as it relates to most other risks and exposures. Based on management’s assessment and judgment, the Company has determined that it is more cost effective to self-insure these risks than to incur the insurance premium costs. The risks and exposures the Company self insures include, but are not limited to, fire, property and casualty, natural disaster, product defects, political risk, general liability, patent infringement, and some employment practice matters. Should there be catastrophic loss from events such as fires, explosions, or earthquakes, among many other risks, or adverse court or similar decisions in any area in which the Company is self-insured, the Company’s financial condition, results of operations, and liquidity may be materially adversely affected.
Customer Supply Agreements
The Company enters into contracts with certain customers whereby the Company commits to supply quantities of specified parts at a predetermined scheduled delivery date. Should the Company be unable to supply the customer with the specific part at the quantity and product quality desired at the scheduled delivery date, the customer may incur additional production costs. In addition, the customer may incur lost revenues due to a delay in receiving the parts necessary to have the end product ready for sale to its customers or due to product quality issues which may arise. Under the customer supply agreements, the Company may be liable for direct additional production costs or lost revenues. The Company tries to limit such liabilities. However, if products were not shipped on time or were quality deficient, the Company may be liable for damages. Such liability, should it arise, may have a material adverse impact on the Company’s results of operation and financial condition.
Foreign Trade and Currency Exchange
Many of the materials and manufacturing steps in the Company’s products are supplied by foreign companies or by the Company’s operations abroad, such as its test operations in the Philippines and Thailand. Approximately 70% of the Company’s net revenues in fiscal year 2004 were from foreign customers. Accordingly, both manufacturing and sales of the Company’s products may be adversely affected by political or economic conditions abroad. In addition, various forms of protectionist trade legislation are routinely proposed in the United States and certain foreign countries. A change in current tariff structures or other trade policies could adversely affect the Company’s foreign manufacturing or marketing strategies. Currency exchange fluctuations could also increase the cost of components manufactured abroad and the cost of the Company’s products to foreign customers or decrease the costs of products from the Company’s foreign competitors.
The Company is subject to U.S. Customs and Export Regulations, including U.S. International Traffic and Arms Regulations and similar laws, which collectively control import, export, and sale of technologies by U.S. companies. Failure to comply with such regulations may result in civil and criminal enforcement, including monetary fines and possible injunctions against shipment of product, which could have a material impact on the Company’s results of operations and financial condition.
Dependence on Key Personnel
The Company’s success depends to a significant extent upon the continued service of its president, John F. Gifford, its other executive officers, and key management and technical personnel, particularly its experienced engineers and business unit managers, and on its ability to continue to attract, retain, and motivate qualified personnel. The competition for such employees is intense. The loss of the services of Mr. Gifford or several of the Company’s executive officers could have a material adverse effect on the Company. In addition, there could be a material adverse effect on the Company should the turnover rates for engineers and other key personnel increase significantly or should the Company be unable to continue to attract qualified personnel.
The Company does not maintain any key person life insurance policies on any of its officers or employees.
Reliance on Stock Options
The Company’s success depends to a significant extent upon the continued use of stock options as a compensation tool. The Financial Accounting Standards Board (“FASB”) is encouraging all companies to treat the value of stock options granted to employees as an expense. The U.S. Congress and other governmental and regulatory authorities have also considered requiring companies to expense stock options. On March 31, 2004, FASB issued a proposed statement which would eliminate the ability to account for stock-based compensation transactions using Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees” and generally would require instead that such transactions be accounted for using the fair value based method. If this change were to become mandatory, the Company and other companies would be required to record a compensation expense equal to the value of each stock option granted. This expense would likely be recognized over the vesting period of the stock option. Currently, the Company is not required to record compensation expenses in connection with stock option grants to employees. If the Company were to elect, or were required to record, an expense for our stock-based compensation plans using the fair value method, the Company could have significant compensation charges.
If the FASB proposal is adopted, the Company may not be able to grant stock options to employees at the same levels as in the past, which could have a material adverse effect on the Company’s ability to attract, retain and motivate qualified personnel and as a result, on the Company’s results of operation and financial condition.
In addition, the Company plans to seek stockholder approval, at a special meeting to be held in September, as well as in the future, for increases in the number of shares available for grant under its option plan. If such proposals do not receive stockholder approval, the Company may not be able to grant stock options to employees at the same levels as in the past, which could have a material adverse effect on the Company’s ability to attract, retain and motivate qualified personnel and as a result, on the Company’s results of operation and financial condition.
ITEM 2.
ITEM 2.
PROPERTIES
Maxim’s headquarters is located in Sunnyvale, California. Manufacturing and other operations are conducted in several locations worldwide. The following table provides certain information regarding the Company’s principal general offices and manufacturing facilities:
Owned Property Location
Use(s)
Approximate
Floor Space
Sunnyvale, California
Corporate headquarters, office space, engineering, manufacturing, administration, customer services, shipping, and other
319,000 sq. ft.
San Jose, California
Wafer fabrication, office space, and administration
80,000 sq. ft.
N. Chelmsford, Massachusetts
Engineering, office space, and administration
30,000 sq. ft.
Beaverton, Oregon
Wafer fabrication, engineering, office space, shipping, and administration
226,000 sq. ft.
Hillsboro, Oregon
Engineering, manufacturing, office space and administration
325,000 sq. ft.
Dallas, Texas
Dallas Semiconductor headquarters, office space, engineering, manufacturing, administration, wafer fabrication, customer service, warehousing, shipping and other
705,000 sq. ft.
San Antonio, Texas
Wafer fabrication, office space, and administration
381,000 sq. ft.
Cavite, the Philippines
Manufacturing, engineering, office space, shipping, and administration
234,000 sq. ft.
Chonburi Province, Thailand
Manufacturing, engineering, office space and administration
144,000 sq. ft.
Leased Property Location
Use(s)
Approximate
Floor Space
Samutprakarn Province, Thailand
Manufacturing, engineering, office space and administration
25,000 sq. ft.
In fiscal year 2004, the Company purchased from Philips Semiconductors a facility in San Antonio, Texas for $40 million in cash. The Company began wafer manufacturing operations at this facility in the fourth quarter of fiscal year 2004. In the first quarter of fiscal year 2005, the Company relocated test operation from its leased site in Samutprakarn Province, Thailand to the new facility located in Chonburi Province, Thailand.
In addition to the leased property listed in the table, the Company also leases sales, engineering, and manufacturing offices and other premises at various locations in the United States and overseas under operating leases. These leases expire at various dates through the year 2014. The Company anticipates no difficulty in retaining occupancy of any of its manufacturing, office or sales facilities through lease renewals prior to expiration or through month-to-month occupancy or in replacing them with equivalent facilities.
The Company expects these buildings and the contiguous land to be adequate for its business purposes through fiscal year 2005.
ITEM 3.
ITEM 3.
LEGAL PROCEEDINGS
Linear Technology Corporation vs. Maxim Integrated Products, Inc. et al., in the Federal District Court for the Northern District of California.
On June 26, 1997, a complaint was filed by Linear Technology Corporation (“LTC”) naming the Company and certain other unrelated parties as defendants. The complaint alleges that each of the defendants, including the Company, has willfully infringed, induced infringement and contributorily infringed LTC’s United States Patent 5,481,178 relating to control circuits and methods for maintaining high efficiencies over broad current ranges in a switching regulator circuit, all of which has allegedly damaged LTC in an unspecified amount. The complaint further alleges that the Company’s actions have been, and continue to be, willful and deliberate and seeks a permanent injunction against the Company as well as unspecified actual and treble damages including costs, expenses, and attorneys fees. The Company answered the complaint on October 20, 1997, denying all of LTC’s substantive allegations and counterclaiming for a declaration that LTC’s patent is invalid and not infringed.
On September 21, 2001, the Federal District Court for the Northern District of California issued an order dismissing the patent litigation action by LTC. The Company had moved for summary judgment on a number of subjects, including noninfringement, invalidity and unenforceability of the patent. LTC appealed the decision. In June 2004, the appellate court remanded the matter to the trial court for trial. The Company then filed a request for rehearing on two issues. After making certain amendments to its opinion, the appellate court again remanded the matter for trial. The Company does not believe that the ultimate outcome of these matters will have a material adverse effect on the financial position or liquidity of the Company. However, were LTC to prevail in its claims against the Company, the Company’s operating results could be materially adversely affected.
Qualcomm Inc. vs. Maxim Integrated Products, Inc., in the Federal District Court for the Southern District of California.
On December 12, 2002, Qualcomm Inc. filed and on February 4, 2003, Qualcomm Inc. served the Company with a complaint for patent infringement claiming that certain of the Company’s products infringe one or all of three Qualcomm Inc. patents. Qualcomm seeks a preliminary and permanent injunction as well as unspecified actual and treble damages including costs, expenses and attorneys fees. Qualcomm withdrew one of its patents from the claim in June 2003 and another in May 2004, and has added three more related patents. The Company is presently reviewing these claims and does not believe that the products in question infringe upon Qualcomm Inc. patents noted above. In May 2004, the Company won a motion for summary judgment on the issue of the inducement of infringement by its customers. While no assurance can be given in this regard, the Company does not believe that the ultimate outcome of the action will have a material adverse effect on the Company’s financial condition, liquidity, or results of operation. However, were Qualcomm to prevail in its claims against the Company, the Company’s operating results could be materially adversely affected.
ITEM 4.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5.
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES
The Company’s common stock is traded on the Nasdaq National Market under the symbol “MXIM”. At June 26, 2004, there were 1,538 stockholders of record of the Company’s common stock as reported by EquiServe Trust Company, N.A.
The following table sets forth the range of the high and low closing prices by quarter for fiscal years 2004 and 2003:
The Company paid $104.6 million ($0.32 per share) in cash dividends in fiscal year 2004, which was paid on a quarterly basis. The Company paid $25.9 million ($0.08 per share) in cash dividends in fiscal year 2003, which was paid on quarterly basis. The Company paid no cash dividend in fiscal year 2002.
The information required by Item 201(d) of Regulation S-K is incorporated by reference from the Company’s Proxy Statement for 2004 Annual Meeting of Stockholders under the heading “Equity Compensation Plan Information”.
(c) Information Required by Item 703 of Regulation S-K
The following table summarizes the activity related to stock repurchases for the fourth quarter of fiscal year 2004:
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. No shares were repurchased during the period from April 25, 2004 through June 26, 2004. During the fourth quarter of fiscal year 2004, the Company purchased 2.1 million shares for $100.1 million. As of June 26, 2004, approximately 4.0 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 6.
ITEM 6.
SELECTED FINANCIAL DATA
Set forth below is a summary of certain consolidated financial information with respect to Maxim as of the dates and for the periods indicated. The consolidated statements of income data set forth below for the five years ended June 26, 2004 and the consolidated balance sheet data at each year end for the five years ended June 26, 2004 have been derived from the Company’s consolidated financial statements, which have been audited. The selected financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Financial Statements and notes thereto included elsewhere in this Report.
Net income for fiscal year 2001 included merger and special charges of $163.4 million ($0.30 diluted earnings per share). See Note 13 to the Notes to Consolidated Financial Statements for additional information on the “Merger and Special Charges.”
ITEM 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements as noted in Item 15 (a)(1).
Nature of Operations
Maxim Integrated Products, Inc. (the “Company”) designs, develops, manufactures, and markets linear and mixed-signal integrated circuits and is incorporated in the state of Delaware. The Company’s products include data converters, interface circuits, microprocessor supervisors, operational amplifiers, power supplies, multiplexers, delay lines, real-time clocks, microcontrollers, switches, battery chargers, battery management circuits, RF circuits, fiber optic transceivers, sensors, voltage references and T/E transmission products. The Company is a global company with manufacturing facilities in the United States, testing facilities in the Philippines and Thailand, and sales offices throughout the world. The Company’s products are sold to customers in numerous markets, including automotive, communications, consumer, data processing, industrial control, instrumentation and medical imaging.
Critical Accounting Policies
The methods, estimates and judgments the Company uses in applying its most critical accounting policies have a significant impact on the results the Company reports in its financial statements. The Securities and Exchange Commission has defined the most critical accounting policies as the ones that are most important to the portrayal of the Company’s financial condition and results of operations, and require the Company to make its 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, the Company’s most critical accounting policies include revenue recognition and accounts receivable allowances, which impact the recording of revenues; valuation of inventories, which impacts costs of goods sold and gross margins; the assessment of recoverability of long-lived assets, which impacts write-offs of fixed assets; accounting for income taxes, which impacts the income tax provision; and assessment of contingencies, which impacts charges recorded in cost of goods sold and selling, general and administrative expenses. These policies and the estimates and judgments involved are discussed further below. The Company has other key 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 the Company’s reported results of operations for a given period.
Revenue Recognition and Accounts Receivable Allowances
Revenue from product sales to the Company’s direct customers is recognized upon shipment, provided that persuasive evidence of a sales arrangement exists, the price is fixed and determinable, title has transferred, collection of resulting receivables is reasonably assured, there are no customer acceptance requirements, and there are no remaining significant obligations.
A portion of the Company’s sales is made to domestic distributors under agreements that provide the possibility of certain sales price rebates and limited product return privileges. Given the uncertainties associated with the levels of returns and other credits that will be issued to these distributors, the Company defers recognition of such sales and related cost of goods sold until the product is sold by the domestic distributors to their end customers. Revenue on all shipments to international distributors is recognized upon shipment to the distributor, with appropriate provision of reserves for returns and allowances, as these distributors generally do not have price rebate or product return privileges other than non-warranty product return privileges. Accounts receivable from both domestic and international distributors are recognized and inventory is relieved upon shipment as title to inventories generally transfers upon shipment at which point the Company has a legally enforceable right to collection under normal terms.
The Company must make estimates of potential future product returns and sales allowances related to current period product revenue. Management analyzes historical returns, changes in customer demand, and acceptance of products when evaluating the adequacy of sales returns and allowances. Estimates made by the Company may differ from actual product returns and sales allowances. These differences may materially impact reported revenue and amounts ultimately collected on accounts receivable. In addition, the Company monitors collectibility of accounts receivable primarily through review of the accounts receivable aging. When facts and circumstances indicate the collection of specific amounts or from specific customers is at risk, the Company assesses the impact on amounts recorded for bad debts and, if necessary, will record a charge in the period such determination is made. To date, the Company has not experienced material write-offs of accounts receivable due to uncollectibility.
Inventories
Inventories are stated at the lower of cost, which approximates actual cost on a first-in-first-out basis, or market value. The Company’s standard cost revision policy is to continuously monitor manufacturing variances and revise standard costs when necessary. Because of the cyclicality of the market, inventory levels, obsolescence of technology, and product life cycles, the Company writes down inventories to net realizable value based on 12 months forecasted product demand. Actual demand and market conditions may be lower than those projected by the Company. This difference could have a material adverse effect on the Company’s gross margin should inventory write downs beyond those initially recorded become necessary. Alternatively, should actual demand and market conditions be more favorable than those estimated by the Company, gross margin could be favorably impacted. During fiscal years 2004, 2003 and 2002, the Company had inventory write downs of $5.0 million, $11.9 million and $12.5 million, respectively, due primarily to work in process and finished goods inventory manufactured in excess of forecasted demand.
Long-Lived Assets
The Company evaluates the recoverability of property, plant and equipment in accordance with Statement of Financial Accounting Standards No. 144 (SFAS 144), “Accounting for the Impairment or Disposal of Long-Lived Assets.” The Company performs periodic reviews to determine whether facts and circumstances exist that would indicate that the carrying amounts of property, plant and equipment might not be fully recoverable. If facts and circumstances indicate that the carrying amount of property, plant and equipment might not be fully recoverable, the Company compares projected undiscounted net cash flows associated with the related asset or group of assets over their estimated remaining useful life against their respective carrying amounts. In the event that the projected undiscounted cash flows are not sufficient to recover the carrying value of the assets, the assets are written down to their estimated fair values based on the expected discounted future cash flows attributable to the assets. Evaluation of impairment of property, plant and equipment requires estimates in the forecast of future operating results that are used in the preparation of the expected future undiscounted cash flows. Actual future operating results and the remaining economic lives of the Company’s property, plant and equipment could differ from the Company’s estimates used in assessing the recoverability of these assets. These differences could result in additional impairment charges, which could have a material adverse impact on the Company’s results of operations.
Accounting for Income Taxes
The Company records a valuation allowance to reduce the net deferred tax assets to the amount that is more likely than not to be realized. In assessing the need for a valuation allowance, historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and practicable tax planning strategies are considered. In the event it is determined that the deferred tax assets to be realized in the future would be in excess of the net recorded amount, an adjustment to the deferred tax asset valuation allowance would be recorded. This adjustment would increase income in the period such determination was made. Likewise, should it be determined that all or part of the net deferred tax asset would not be realized in the future, an adjustment to increase the deferred tax asset valuation allowance would be charged to income in the period such determination would be made. As of June 26, 2004, the Company had recorded a valuation allowance against the net deferred tax asset of $109.0 million attributable to the expected tax benefits on gains realized from the exercise of stock options, which if and when realized, will be recorded as a credit to additional paid-in-capital.
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.
Contingencies
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.
Results of Operations
Net Revenues
The Company reported net revenues of $1,439.3 million in fiscal year 2004, a 24.8% increase from net revenues of $1,153.2 million in fiscal year 2003. Net revenues increased by 5.1% from the fourth quarter of fiscal year 2003 to the first quarter of fiscal year 2004, and increased by 9.0% and 9.4% sequentially during the second and the third quarters of fiscal year 2004, respectively. Net revenues increased by 13.8% from the third to fourth quarter of fiscal year 2004. The increase in quarterly net revenues for fiscal year 2004 is primarily related to higher unit shipments resulting from increased order rates in the Company’s already existing proprietary and second-source products and the introduction of new proprietary products.
The Company reported net revenues of $1,153.2 million in fiscal year 2003, a 12.5% increase from net revenues of $1,025.1 million in fiscal year 2002. Net revenues increased by 2.1% from the fourth quarter of fiscal year 2002 to the first quarter of fiscal year 2003 and remained flat during the second and third quarters of fiscal year 2003. Net revenues increased by 3.1% from the third to fourth quarter of fiscal year 2003. The increase in quarterly net revenues for fiscal year 2003 was primarily related to higher unit shipments resulting from the introduction of new proprietary products and increased order rates in the Company’s already existing proprietary and second-source products.
Approximately 70%, 67% and 66% of the Company’s net revenues in fiscal years 2004, 2003, and 2002, respectively, were derived from customers located outside the United States, primarily in the Pacific Rim, Europe, and Japan. 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 net revenues and the Company’s results of operations for fiscal years 2004, 2003, and 2002 was immaterial.
Gross Margin
The Company’s gross margin as a percentage of net revenues was 69.9% in fiscal year 2004 compared to 69.8% in fiscal year 2003. The gross margin percentage increased slightly from fiscal year 2003 to fiscal year 2004 due to lower manufacturing costs driven by increased manufacturing volumes and eight-inch wafer manufacturing which began in volume in fiscal year 2004. These improvements were offset by $5.9 million of discretionary employee bonuses awarded in the fourth quarter of fiscal year 2004 and $2.7 million of start up costs at the Company’s newly acquired wafer fabrication facility in San Antonio, Texas. Gross margins for both fiscal 2004 and fiscal 2003 were negatively impacted due to $5.0 million and $11.9 million of inventory write downs, respectively.
The Company’s gross margin as a percentage of net revenues was 69.8% in fiscal year 2003 compared to 69.5% in fiscal year 2002. The improvement in gross margin as a percentage of net revenues from fiscal year 2002 to fiscal year 2003 was attributable 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 revenue growth in lower margin products. Gross margins for both fiscal 2003 and fiscal 2002 were negatively impacted due to $11.9 million and $12.5 million of inventory write downs, respectively.
Research and Development
Research and development expenses were $306.3 million and $272.3 million for fiscal years 2004 and 2003, respectively, which represented 21.3% and 23.6% of net revenues, respectively. The increase in research and development expenses in absolute dollars is due to the $9.2 million of discretionary employee bonuses awarded in the fourth quarter of fiscal year 2004, the result of hiring additional engineers and increased mask expenses to support the Company’s new product development efforts.
Research and development expenses were $272.3 million and $275.5 million for fiscal years 2003 and 2002, respectively, which represented 23.6% and 26.9% of net revenues, respectively. The decrease in research and development expenses in absolute dollars was 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.
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 $93.6 million and $85.6 million in fiscal years 2004 and 2003, respectively, which represented 6.5% and 7.4% of net revenues, respectively. The increase in selling, general, and administrative expenses in absolute dollars in fiscal year 2004 is primarily related to $2.4 million of discretionary employee bonuses awarded in the fourth quarter of fiscal year 2004 and increased salary related expense which were mainly due to increases in headcount.
Selling, general and administrative expenses were $85.6 million and $92.0 million in fiscal years 2003 and 2002, respectively, which represented 7.4% and 9.0% of net revenues, respectively. The decrease in selling, general and administrative expenses both in terms of absolute dollars and as a percentage of net revenues in fiscal year 2003 was primarily due to the cost saving measures implemented by the Company during fiscal year 2003. These cost saving measures included, but were not limited to, salary and wage reductions, reduced headcount and reductions in certain salary related expenses.
Interest Income and Other, Net
Interest income and other, net increased to $20.5 million in fiscal year 2004 from $15.1 million in fiscal year 2003. The increase in interest income is due to higher average interest rates combined with higher average levels of invested cash, cash equivalents, and short-term investments.
Interest income and other, net decreased to $15.1 million in fiscal year 2003 from $41.5 million in fiscal year 2002. This decrease was due to significantly lower average interest rates combined with lower average levels of invested cash, cash equivalents, and short-term investments.
Provision for Income Taxes
The effective tax rate was 33.0% for fiscal years 2004, 2003 and 2002. The fiscal years 2004, 2003 and 2002 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 $39.3 million at June 26, 2004 is dependent primarily upon achieving future U.S. taxable income of $112.3 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 discussed in “Item 1., Business - Trends, Risks and Uncertainties.” 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.
Recently Issued Accounting Pronouncements
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 adoption of SFAS 132 didn’t have a material impact on the Company’s financial condition, results of operations or liquidity.
Outlook
At the end of the fourth quarter of fiscal year 2004, backlog shippable within the next 12 months was approximately $529 million (compared to $227 million at the end of fiscal year 2003), including approximately $428 million (compared to $199 million at the end of fiscal year 2003) requested for shipment in the first quarter of fiscal year 2005. Because the Company’s backlog of orders at any point is not necessarily based on firm, noncancelable orders and because the Company’s customers do in fact routinely cancel orders for their own convenience with little notice, backlog has limited value as a predictor of future revenues.
During the fourth quarter of fiscal year 2004, bookings were approximately $535 million, a 9% increase over the previous quarter’s level of $488 million. Turns orders received during the fourth quarter of fiscal year 2004 were approximately $170 million (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). Compared with the third quarter of fiscal year 2004, bookings increased in all geographic regions except Europe, with the strongest bookings growth coming from Pacific Rim and Japan.
The fourth quarter of fiscal year 2004 results were generally consistent with the Company’s expectations. Net revenues increased approximately 13.8% over the third quarter of fiscal year 2004. The Company believes that its net revenues will be higher in the first quarter of fiscal year 2005 than in the fourth quarter of fiscal year 2004.
With fiscal year 2005 expected to be another strong growth year, the Company has put in place the capacity, personnel, and infrastructure to support its fiscal year 2005 revenues. Continued successful execution will depend on its ability to recruit and retain the engineering talent that will forge new products in fiscal year 2005. It is the Company’s goal to hire over 1,000 employees during fiscal year 2005, and its employee stock option program will be a key tool in recruiting and retaining premier technical talent.
Financial Condition, Liquidity and Capital Resources
Overview
Total assets increased to $2,549.5 million at the end of fiscal year 2004, up from $2,368.0 million at the end of fiscal year 2003. Cash, cash equivalent and short-term investments decreased to $1096.6 million in fiscal year 2004 from $1,164.0 million in fiscal year 2003. This decrease was primarily due to the repurchase of 12.4 million shares of the Company’s common stock for $601.2 million; the purchase of $231.6 million of property, plant and equipment; and the payment of $104.6 million of dividends. The above decreases were offset by cash generated from operations of $695.5 million in fiscal 2004 and $183.9 million from employee stock option exercises and stock purchase plan purchases. Net accounts receivable increased to $197.2 million in fiscal year 2004 from $126.8 million in fiscal year 2003 due to the increase in net revenues from $1,153.2 million in fiscal year 2003 to $1,439.3 million in fiscal year 2004. Current deferred tax assets increased to $153.7 million in fiscal year 2004 from $136.2 million in fiscal year 2003 primarily due to timing differences between tax and financial reporting. Accounts payable increased to $93.9 million in fiscal year 2004 from $42.0 million in fiscal year 2003 primarily due to capital additions and additional expenses required to support the increased level of net revenues noted above. Accrued salary and related expense increased to $103.3 million in fiscal year 2004 from $70.5 million in fiscal year 2003 primarily due to increased headcount, increased salaries and salary related expenses required to support revenue growth. Noncurrent deferred tax liabilities increased to $114.4 million at the end of fiscal year 2004 from $77.6 million at the end of fiscal year 2003 primarily due to timing differences between tax and financial reporting related to plant and equipment depreciation.
Liquidity and Capital Resources
The Company’s primary sources of funds for fiscal years 2004, 2003, and 2002 has been from net cash generated from operating activities of approximately $695.5 million, $582.5 million and $403.8 million, respectively. In addition, the Company received approximately $183.9 million, $83.7 million and $109.3 million of proceeds from the exercises of stock options and purchases of common stock under the Employee Stock Participation Plan during fiscal years 2004, 2003, and 2002, respectively.
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 $152.5 million, $113.5 million and $140.0 million in fiscal years 2004, 2003, and 2002, respectively.
The principal uses of funds for fiscal years 2004, 2003, and 2002 were repurchases of $601.2 million, $153.9 million and $864.0 million of the Company’s common stock, purchases of property, plant and equipment of $231.6 million, $84.1 million and $90.4 million and dividends paid of $104.6 million, $25.9 million and $0, respectively. The Company will 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 14 “Common Stock Repurchases” of the Notes to Consolidated Financial Statements regarding repurchases of common stock.
The Company is subject to pending legal proceedings. See Note 8 “Commitments and Contingencies” of the Notes to 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.
As of June 26, 2004, the Company’s available funds consisted of $1,096.6 million in cash, cash equivalents, and highly liquid investment securities. The Company anticipates that the available funds and cash generated from operations will be sufficient to meet cash and working capital requirements, including its anticipated level of capital expenditures, common stock repurchases, and dividend payments for the next twelve months.
During the first quarter of fiscal year 2005, the Board of Directors declared a cash dividend of $0.08 per share on the Company’s common stock payable on August 31, 2004 to stockholders of record on August 16, 2004.
Contractual Obligation
The following table provides a summary of the effect on liquidity and cash flows from the Company’s contractual obligation as of June 26, 2004:
Off-Balance-Sheet Arrangements
As of June 26, 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.
ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company’s exposure to market risk for changes in interest rates relates primarily to the Company’s investment portfolio, which includes U.S. Treasury, Federal Agency debt securities and repurchase agreements relating to such securities. Investments mature at frequent intervals during the year, at which time the funds are available for use in the business, or for reinvestment, as cash demands dictate. The Company places its investments only in high-quality financial instruments, limits the amount invested in any one institution or instrument, and limits portfolio duration. This policy is intended to reduce default risk, market risk, and reinvestment risk. The Company does not use derivative financial instruments in its investment portfolio. The fair value of the Company’s investment portfolio would vary by approximately $17 million by a change in market interest rates of 100 basis points. Exposure to interest rate fluctuations is mitigated by maintaining a laddered portfolio of investment instruments that mature at regular intervals over a three-year investment horizon. By creating a steady stream of cash from maturing investments, the Company intends to generate cash to meet business needs without liquidating investments. At June 26, 2004, the Company’s investment portfolio had an expected weighted average return of 2.2% (1.5% at June 28, 2003) and a weighted maturity of 627 days (440 days at June 28, 2003).
Foreign Currency Risk
The Company transacts business in various non-U.S. currencies, primarily the Japanese Yen, British Pound, and the Euro. The Company is exposed to fluctuations in foreign currency exchange rates on accounts receivable from sales in these foreign currencies and the net monetary assets and liabilities of the related foreign subsidiary. The Company has established risk management strategies designed to protect against reductions in value and volatility of future cash flows caused by changes in exchange rates. These strategies reduce, but do not always entirely eliminate, the impact of currency exchange movements.
Currency forward contracts are used to offset the currency risk of non-U.S. dollar-denominated assets and liabilities. Changes in fair value of the underlying assets and liabilities are generally offset by the changes in fair value of the related currency forward contract. The net realized and unrealized gains or losses from hedging non-U.S. dollar denominated assets and liabilities were immaterial in fiscal years 2004 and 2003. The Company had forward contracts to sell foreign currencies for $82.1 million and $60.5 million at June 26, 2004 and June 28, 2003, respectively. The fair market value of these forward contracts was $(1.5) million and $0.4 million at June 26, 2004 and June 28, 2003, respectively. A hypothetical 10% favorable or unfavorable change in foreign currency exchange rates compared to rates at June 26, 2004 and June 28, 2003 would have an insignificant impact on our financial position or results of operations.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements and supplemental data required by this item and set forth at the pages indicated in item 15 (a) of this Report.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
As of the end of the period covered by this Annual Report on Form 10-K, the Company carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer, and Vice Presidents, of the effectiveness 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 have concluded that our 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 was no change in our internal control over financial reporting that occurred during the period covered by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B.
OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Other than as follows, the information required by this item is incorporated by reference from the Company’s Proxy Statement for the 2004 Annual Meeting of Stockholders under the headings “Proposal 1 - Election of Directors” and “Compliance with Section 16(a) of the Securities Exchange Act of 1934. ”
The officers of the Company, including executive officers and other Vice Presidents, are as follows:
Name
Age
Position
John F. Gifford
President, Chief Executive Officer and Chairman of the Board
Frederick G. Beck
Vice President
Tunc Doluca
Senior Vice President
Rob B. Georges
Vice President
Parviz Ghaffaripour
Vice President
Jennifer E. Gilbert
Vice President
Alan P. Hale
Vice President
Richard C. Hood
Vice President
Kenneth J. Huening
Vice President
Carl W. Jasper
Vice President
Chief Financial Officer and
Principal Accounting Officer
Nasrollah Navid, Ph. D.
Vice President
Pirooz Parvarandeh
Senior Vice President
Charles G. Rigg
Vice President
Vijay Ullal
Senior Vice President
Mr. Gifford, a founder of the Company, has served as President, Chief Executive Officer and Chairman of the Board since the Company’s incorporation in April 1983.
Mr. Beck, a founder of the Company, has served as Vice President since May 1983, except for a medical leave between December 1991 and January 1994.
Mr. Doluca joined Maxim in October 1984 and was promoted to Vice President in July 1994. Prior to July 1994, he served in a number of integrated circuit development positions.
Mr. Georges joined Maxim in June 1983 and was promoted to Vice President in June 2000.
Mr. Ghaffaripour joined Maxim in March 1999 and was promoted to Vice President in January 2001. Prior to joining Maxim, he was with National Semiconductor Corporation from 1990 to 1999 where he held various technical and management positions, most recently including that of Product Line Director for the Audio Business Unit.
Ms. Gilbert joined Maxim in November 1986 and was promoted to Vice President in July 2001.
Mr. Hale joined Dallas Semiconductor Corporation in June 1987 and served as Vice President and Chief Financial Officer of Dallas Semiconductor Corporation since 1992. He became an officer of Maxim upon the consummation of the merger between the Company and Dallas Semiconductor Corporation in April 2001.
Mr. Hood, a founder of the Company, joined the Company in May 1983 and was promoted to Vice President in February 1997. Prior to February 1997, he served in a number of engineering and manufacturing positions.
Mr. Huening joined Maxim in December 1983 and was promoted to Vice President in December 1993. Prior to December 1993, he served in a number of quality assurance positions.
Mr. Jasper joined Maxim in May 1998 as the Principal Accounting Officer and was promoted in April 1999 to Vice President and Chief Financial Officer. Prior to joining Maxim, he was with Read-Rite Corporation from November 1995 to April 1998, where he held the position of Vice President, Corporate Controller, and prior to that was with Ernst & Young LLP from September 1983 to November 1995.
Dr. Navid joined Maxim in May 1997 as Vice President. Prior to joining Maxim and since 1980, he was with Philips Semiconductors, where he served in a number of technical and management positions for the wireless communications product line.
Mr. Parvarandeh joined Maxim in July 1987 and was promoted to Vice President in July 1997. Prior to July 1997, he served in a number of integrated circuit development positions.
Mr. Rigg joined Maxim in August 1996 as Managing Director and General Counsel and was promoted to Vice President in April 1999. Prior to joining Maxim, he was with Ropers, Majeski, Kohn and Bentley from 1970 to 1996 where he held various positions, including director.
Mr. Ullal joined Maxim in December 1989 and was promoted to Vice President in March 1996. Prior to March 1996, he served in a number of wafer fabrication operation positions.
Code of Business Conduct and Ethics
Maxim has built its reputation of integrity and ethical business practices and gained its credibility and trust from the Company’s stockholders, customers, suppliers and employees over time. The Company has adopted a code of ethics that is designed to qualify as a “code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder and is applicable to the Company’s employees, officers and non-employee directors, including the Company’s principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. The Company has posted its code of ethics on its website at www.maxim-ic.com/company/ and will provide it free of charge to general public upon request. To the extent required by law, amendments to, and waivers from, the code of ethics will be disclosed to the public. To the extent permitted by such legal requirements, the Company intends to make such public disclosure by posting such information on the Company’s website in accordance with SEC rules.
The information required by this item is incorporated by reference from the Company’s Proxy Statement for the 2004 Annual Meeting of Stockholders under the headings “Executive Compensation” and “Performance Graph. “
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference from the Company’s Proxy Statement for the 2004 Annual Meeting of Stockholders under the heading “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. “
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the Company’s Proxy Statement for the 2004 Annual Meeting of Stockholders under the heading “Certain Relationships and Related Transactions.”
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference from the Company’s Proxy Statement for the 2004 Annual Meeting of Stockholders under the heading “Principal Accountant Fees and Services.”
PART IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
On April 27, 2004, Maxim Integrated Products, Inc. furnished a report on Form 8-K announcing the Company’s earnings for the third quarter ended March 27, 2004, as presented in a press release dated April 27, 2004.
(c)
Exhibits.
See attached Index to Exhibits.
(d)
Financial Statement Schedules.
The financial statement schedule required by this Item is listed under Item 15(a), above.
CONSOLIDATED BALANCE SHEETS
See accompanying Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying Notes to Consolidated Financial Statements.
MAXIM INTEGRATED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF OPERATIONS
Maxim Integrated Products, Inc. (the Company) designs, develops, manufactures, and markets linear and mixed-signal integrated circuits and is incorporated in the state of Delaware. The Company’s products include data converters, interface circuits, microprocessor supervisors, operational amplifiers, power supplies, multiplexers, delay lines, real-time clocks, microcontrollers, switches, battery chargers, battery management circuits, RF circuits, fiber optic transceivers, sensors, voltage references and T/E transmission products. The Company is a global company with manufacturing facilities in the United States, testing facilities in the Philippines and Thailand, and sales offices throughout the world. The Company’s products are sold to customers in numerous markets, including automotive, communications, consumer, data processing, industrial control, instrumentation, and medical imaging.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries. Intercompany balances and transactions have been eliminated. The Company has a 52-to-53-week fiscal year that ends on the last Saturday of June. Accordingly, every sixth or seventh year will be a 53-week fiscal year. Fiscal years 2004 2003 and 2002 were 52-week years.
Certain prior-year amounts in the Consolidated Statement of Cash Flows and Notes to Consolidated Financial Statements have been reclassified to conform to the current year’s presentation.
Cash Equivalents and Short-term Investments
The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents consist of demand accounts, government securities, and money market funds. Short-term investments consist primarily of U.S. Treasury and Federal Agency debt securities with original maturities beyond three months.
The Company’s cash equivalents and short-term investments are considered available-for-sale. Such securities are carried at fair market value based on market quotes. Unrealized gains and losses, net of tax, on securities in this category are reported as a separate component of stockholders’ equity. The cost of securities sold is based on the specific identification method. Interest earned on securities is included in “Interest income and other, net” in the Consolidated Statements of Income. Included in cash and cash equivalents at June 26, 2004 is $20.8 million of restricted cash.
Derivative Instruments
The Company transacts business in various non-U.S. currencies, primarily the Japanese Yen, British Pound, and the Euro. The Company is exposed to fluctuations in foreign currency exchange rates on accounts receivable from sales in these foreign currencies and the net monetary assets and liabilities of the related foreign subsidiary. The Company has established risk management strategies designed to protect against reductions in value and volatility of future cash flows caused by changes in exchange rates. These strategies reduce, but do not always entirely eliminate, the impact of currency exchange movements.
MAXIM INTEGRATED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company uses currency forward contracts to hedge exposure to variability in anticipated non-U.S.-dollar-denominated cash flows are designated as cash flow hedges. These contracts are designed as cash flow hedges and recorded on the Consolidated Balance Sheets at their fair market value. The maturities of these instruments are generally less than 6 months. The Company had forward contracts to sell foreign currencies with a U.S. dollar equivalent of $82.1 million and $60.5 million at June 26, 2004 and June 28, 2003, respectively. For these derivatives, the effective portion of the gain or loss is reported as a component of other comprehensive (loss) income in stockholders’ equity and is reclassified into earnings in the same period or periods in which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in earnings, net during the period of change. The ineffective portion of the gains and losses on the derivatives has been immaterial in all periods presented. The net value of all contracts which hedge transactions that have affected earnings is classified within current assets. For contracts which hedge transactions that have not affected earnings (primarily backlog), a net gain is classified within current assets and a net loss is classified within current liabilities.
For currency forward contracts, effectiveness of the hedge is measured using forward rates to value the forward contract and the underlying hedged transaction. Any ineffective portions of the hedge, as well as amounts not included in the assessment of effectiveness, are recognized currently in interest and other income, net. If a cash flow hedge were to be discontinued because it is probable that the original hedged transaction will not occur as anticipated, the unrealized gains or losses would be reclassified into earnings. Subsequent gains or losses on the related derivative instrument would be recognized in income in each period until the instrument matures, is terminated or is sold. In fiscal years 2004 and 2003, no cash flow hedges were discontinued as a result of forecasted transactions that did not occur. Fair value of the contracts is determined by reference to liquidation value.
Inventories
Inventories are stated at the lower of cost, which approximates actual cost on a first-in-first-out basis, or market value. Because of the cyclicality of the market, inventory levels, obsolescence of technology, and product life cycles, the Company writes down inventories to net realizable value based on 12 months forecasted product demand.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is primarily computed on the straight-line method over the estimated useful lives of the assets, which range from 2 to 15 years for machinery and equipment and up to 40 years for buildings and building improvements. Leasehold improvements are amortized over the lesser of their useful lives or the remaining term of the related lease.
The Company evaluates the recoverability of property, plant and equipment in accordance with Statement of Financial Accounting Standards No. 144 (SFAS 144), “Accounting for the Impairment or Disposal of Long-Lived Assets.” The Company performs periodic reviews to determine whether facts and circumstances exist that would indicate that the carrying amounts of property, plant and equipment exceeds their fair values. If facts and circumstances indicate that the carrying amount of property, plant and equipment might not be fully recoverable, projected undiscounted net cash flows associated with the related asset or group of assets over their estimated remaining useful life is compared against their respective carrying amounts. In the event that the projected undiscounted cash flows are not sufficient to recover the carrying value of the assets, the assets are written down to their estimated fair values.
MAXIM INTEGRATED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition and Accounts Receivables Allowances
Revenue from product sales to the Company’s direct customers is recognized upon shipment provided that persuasive evidence of a sales arrangement exists, the price is fixed and determinable, title has transferred, collection of resulting receivables is reasonably assured, there are no customer acceptance requirements and there are no remaining significant obligations.
A portion of the Company’s sales is made to domestic distributors under agreements that provide the possibility of certain sales price rebates and limited product return privileges. Given the uncertainties associated with the levels of returns and other credits that will be issued to these distributors, the Company defers recognition of such sales and related cost of goods sold until the product is sold by the domestic distributors to their end customers. The Company estimates the provision for returns and price rebates based on historical experience and known future returns and price rebates. Revenue on all shipments to international distributors is recognized upon shipment to the distributor, when the above criteria are met, with appropriate provision of reserves for returns and allowances, as these distributors generally do not have price rebate or product return privileges. Accounts receivable from both domestic and international distributors are recognized and inventory is relieved upon shipment as title to inventories generally transfers upon shipment at which point the Company has a legally enforceable right to collection under normal terms.
The Company must make estimates of potential future product returns and sales allowances related to current period product revenue. Management analyzes historical returns, changes in customer demand, and acceptance of products when evaluating the adequacy of sales returns and allowances. Estimates made by the Company may differ from actual product returns and sales allowances. These differences may materially impact reported revenue and amounts ultimately collected on accounts receivable. In addition, the Company monitors collectibility of accounts receivable primarily through review of the accounts receivable aging. When facts and circumstances indicate the collection of specific amounts or from specific customers is at risk, the Company assesses the impact on amounts recorded for bad debts and, if necessary, will record a charge in the period such determination is made. To date, the Company has not experienced material write-offs of accounts receivable due to uncollectibility.
Advertising
Advertising costs are expensed as incurred and included in selling, general and administrative expenses in the Consolidated Statements of Income. Advertising expenses were $11.1 million, $13.2 million, and $16.7 million in fiscal years 2004, 2003, and 2002, respectively.
Shipping Costs
Shipping costs are charged to cost of goods sold as incurred.
Foreign Currency Translation and Remeasurement
The U.S. dollar is the functional currency for the Company’s foreign operations. Using the U.S. dollar as the functional currency, monetary assets and liabilities are remeasured at the year-end exchange rates. Certain non-monetary assets and liabilities are remeasured using historical rates. Statements of operations are remeasured at the average exchange rates during the year. Net gains and losses from foreign currency remeasurements have been minimal and are included in selling, general and administrative expenses.
MAXIM INTEGRATED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based Compensation
The Company accounts for its stock option and employee stock purchase plans using the intrinsic value method prescribed in Accounting Principles Board’s Opinion No. 25 (APB 25), “Accounting for Stock Issued to Employees.” Accordingly, employee and director compensation expense is recognized only for those options whose price is less than fair market value at the measurement date. In addition, the Company discloses pro forma information related to its stock plans according to Financial Accounting Standards Board Statement No. 123 (SFAS 123) “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock Based Compensation - Transition and Disclosure.”
Under SFAS 148, the Company may elect to continue to account for the grant of stock options under APB Opinion 25, in which options granted with an exercise price equal to the fair market value on the date of grant do not require recognition of expense in the Company’s financial statements. Under SFAS 148, the Company is, however, required to provide pro forma disclosure regarding net income and earnings per share as if the Company had accounted for its employee stock options and employee stock purchase rights (including shares issued under 1996 Stock Incentive Plan, 1993 Officer and Director Stock Option Plan, 1987 Stock Option Plan, 1987 Supplemental Stock Option Plan, 1987 Employee Stock Participation Plan (ESP Plan), and Supplemental Nonemployee Stock Option Plan) granted subsequent to June 30, 1995, under the methodology prescribed by that statement. Since the Company has elected to account for the grant of options under APB Opinion No. 25, the following information is for disclosure purposes only.
The valuation of options granted in fiscal years 2004, 2003, and 2002 reported below has been estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
The Black-Scholes option pricing model was developed for use in estimating the value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the estimate of value, in the opinion of management, the existing models do not provide a reliable single measure of the value of the options. The following is a summary of weighted average grant values generated by application of the Black-Scholes model:
As required under SFAS 148, the reported net income and earnings per share have been presented to reflect the impact had the Company been required to include the amortization of the Black-Scholes option value as an expense. The adjusted amounts are as follows:
MAXIM INTEGRATED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings Per Share
Basic earnings per share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share incorporates the incremental shares issuable upon the assumed exercise of stock options. The number of incremental shares from the assumed issuance of stock options is calculated applying the treasury stock method. See Note 3 “Earnings Per Share” of these Notes to Consolidated Financial Statements.
Indemnifications
We indemnify certain customers, distributors, suppliers, and subcontractors for attorney fees and damages and costs awarded against these parties in certain circumstances in which our products are alleged to infringe third party intellectual property rights, including patents, registered trademarks, or copyrights. The terms of our indemnification obligations are generally perpetual from the effective date of the agreement. In certain cases, there are limits on and exceptions to our potential liability for indemnification relating to intellectual property infringement claims. We cannot estimate the amount of potential future payments, if any, that we might be required to make as a result of these agreements. To date, we have not paid or been required to defend any indemnification claims, and accordingly, we have not accrued any amounts for our indemnification obligations. However, there can be no assurances that we will not have any future financial exposure under those indemnification obligations.
Product Warranty
The Company warrants its products to its customers generally for one year from the date of shipment, but in certain cases for longer periods. In certain other cases, the Company warrants products to include significant liability beyond the cost of replacing the product. If there is a material increase in the rate of customer claims or our estimates of probable losses relating to specifically identified warranty exposures are inaccurate, we may record a charge against future cost of sales. Warranty expense has historically been immaterial to our financial statements.
Self-Insurance Accruals
The Company is self-insured with respect to defective product claims, employment practice claims, worker’s compensation claims, and general liability. Accruals are primarily based on the actuarially estimated, undiscounted cost of claims, which includes incurred-but-not-reported claims. Amounts accrued for defective product claims, employment practice claims, worker’s compensation claims and general liability are included in accrued expenses.
In addition to the above, the Company is primarily self-insured with respect to healthcare benefits for most of its domestic (United States) employees. Accruals are primarily based on estimated incurred-but-not-reported claims. Amounts accrued for employee healthcare claims are included in salary and salary related expenses.
MAXIM INTEGRATED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
New Accounting Pronouncements
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 adoption of SFAS 132 did not have a material impact on the Company’s financial condition, results of operations or liquidity.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates relate to the useful lives and fair value of fixed assets, allowances for doubtful accounts and customer returns, inventory reserves, reserves relating to litigation matters, accrued liabilities, and other reserves. The Company bases its estimates and judgments on its historical experience, knowledge of current conditions and its beliefs of what could occur in the future given available information. Actual results may differ from those estimates, and such differences may be material to the financial statements.
Concentration of Credit Risk
Due to the Company’s credit evaluation and collection process, bad debt expenses have not been significant. Credit risk with respect to trade receivables is limited, because a large number of geographically diverse customers make up the Company’s customer base, thus spreading the credit risk. While a significant portion of the Company’s revenues is made through domestic and international distributors, no single customer has accounted for greater than 10% of net revenues in the last three fiscal years.
The Company maintains cash, cash equivalents, and short-term investments with various high credit quality financial institutions, limits the amount of credit exposure to any one financial institution or instrument, and is exposed to credit risk in the event of default by these institutions to the extent of amounts recorded at the balance sheet date. To date, the Company has not incurred losses related to these investments.
Concentration of Other Risks
The semiconductor industry is characterized by rapid technological change, competitive pricing pressures, and cyclical market patterns. The Company’s results of operations are affected by a wide variety of factors, including general economic conditions, both in the United States and abroad; economic conditions specific to the semiconductor industry and to the analog portion of that industry; demand for the Company’s products; the timely introduction of new products; implementation of new manufacturing technologies; manufacturing capacity; the ability to manufacture efficiently; the availability of materials, supplies, machinery and equipment; competition; the ability to safeguard patents and intellectual property in a rapidly evolving market; and reliance on assembly and, to a small extent, wafer fabrication subcontractors and on independent distributors and sales representatives. As a result, the Company may experience substantial period-to-period fluctuations in future operating results due to the factors mentioned above or other factors.
MAXIM INTEGRATED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3: EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
Approximately 12.4 million, 38.8 million, and 11.8 million of the Company’s stock options were excluded from the calculation of diluted earnings per share for fiscal years 2004, 2003, and 2002, respectively. These options were excluded, as they were antidilutive; however, such options could be dilutive in the future.
NOTE 4: FINANCIAL INSTRUMENTS
Investments
In accordance with Statement of Financial Accounting Standard No 115 (SFAS 115), “Accounting for Certain Investments in Debt and Equity Securities,” the Company recorded a net unrealized loss of $7.5 million on short-term investments at June 26, 2004. The unrealized loss resulted from a increase in interest rates that occurred during fiscal year 2004. The Company believes the unrealized loss is temporary as the related available-for-sale investments will be held to maturity resulting in cash flow equal to face value. The Company recorded a net unrealized gain of $4.6 million on available-for-sale investments at June 28, 2003, which resulted from a decline in interest rates that occurred during fiscal year 2003. Fair market values are calculated based upon prevailing market quotes at the end of each fiscal year.
Available-for-sale investments at June 26, 2004 were as follows:
Available-for-sale investments at June 28, 2003 were as follows:
MAXIM INTEGRATED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company realized net gains of $0.1 million, $0.1 million, and $4.9 million for fiscal years 2004, 2003 and 2002, respectively. The Company’s portfolio of marketable securities by contractual maturity is as follows:
Foreign exchange contracts
At June 26, 2004, and June 28, 2003, the Company held forward exchange contracts, all having maturities of less than one year, to exchange various foreign currencies for U.S. dollars in the amount of $82.1 million and $60.5 million, respectively. The table below summarizes, by currency, the notional amounts of the Company’s forward exchange contracts and net unrealized gain or loss at the end of fiscal years 2004 and 2003. The net unrealized gain or loss approximates the fair market value of these contracts.
The net unrealized gain or loss, if any, is potentially subject to market and credit risk as it represents appreciation of the hedge position over the spot exchange rates at year-end. The Company attempts to control credit risk through credit approvals and monitoring procedures. The net realized and unrealized gains or losses from hedging foreign currency denominated assets and liabilities were immaterial in fiscal years 2004 and 2003.
NOTE 5: INVENTORIES
The components of inventories consist of :
NOTE 6: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
MAXIM INTEGRATED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7: OTHER ASSETS
Included in Other Assets at June 28, 2003 is $13.4 million of 4% senior secured convertible notes resulting from amounts loaned to a privately held semiconductor company. The notes were secured by a first priority lien on, or security interest in, substantially all the assets, including intellectual property, of this company. This privately held semiconductor company ceased operations due to insolvency during fiscal year 2003. Per the terms of the 4% senior secured convertible notes, the Company accelerated the maturity of said notes and foreclosed on its first priority lien and security interest. During the first quarter of fiscal 2004, the Company acquired substantially all the assets, including intellectual property of this privately held semiconductor company. The 4% senior secured convertible notes were converted to a long-term intangible asset which is being amortized over ten years, the estimated useful life of the associated intellectual property. At June 26, 2004, the balance of intellectual property included in Other Assets was $10.5 million.
The intellectual property acquired by the Company is being used to design and develop new products as well as in some product currently in production. As required by SFAS 144, the Company assessed the recoverability of the intellectual property. Based on this assessment, as of June 26, 2004, the intellectual property is fully recoverable based on the projected discounted cash flows attributable to products designed and developed with this intellectual property. Should it be determined in a future period that the projected remaining discounted cash flows attributable to products designed and developed with the acquired intellectual property are less than the net book value represented by the intellectual property, the Company’s results of operations could be materially adversely impacted in the period such determination is made.
Also included in Other Assets in the Consolidated Balance Sheets at June 26, 2004, and at June 28, 2003 are loans to employees of approximately $7.2 million and $7.9 million, respectively. These loans are collateralized. To the extent such collateral is not sufficient to cover the amounts owed, there is risk of loss to the Company. To date, the Company has not experienced any material losses related to these employee loans.
NOTE 8: COMMITMENTS AND CONTINGENCIES
Litigation
On June 26, 1997, a complaint was filed by Linear Technology Corporation (“LTC”) naming the Company and certain other unrelated parties as defendants. The complaint alleges that each of the defendants, including the Company, has willfully infringed, induced infringement and contributorily infringed LTC’s United States Patent 5,481,178 relating to control circuits and methods for maintaining high efficiencies over broad current ranges in a switching regulator circuit, all of which has allegedly damaged LTC in an unspecified amount. The complaint further alleges that the Company’s actions have been, and continue to be, willful and deliberate and seeks a permanent injunction against the Company as well as unspecified actual and treble damages including costs, expenses, and attorneys fees. The Company answered the complaint on October 20, 1997, denying all of LTC’s substantive allegations and counterclaiming for a declaration that LTC’s patent is invalid and not infringed.
On September 21, 2001, the Federal District Court for the Northern District of California issued an order dismissing the patent litigation action by LTC. The Company had moved for summary judgment on a number of subjects, including noninfringement, invalidity and unenforceability of the patent. LTC appealed the decision. In June 2004, the appellate court remanded the matter to the trial court for trial. The Company then filed a request for rehearing on two issues. After making certain amendments to its opinion, the appellate court again remanded the matter for trial. The Company does not believe that the ultimate outcome of these matters will have a material adverse effect on the financial position or liquidity of the Company. However, were LTC to prevail in its claims against the Company, the Company’s operating results could be materially adversely affected.
MAXIM INTEGRATED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On December 12, 2002, Qualcomm Inc. filed and on February 4, 2003, Qualcomm Inc. served the Company with a complaint for patent infringement claiming that certain of the Company’s products infringe one or all of three Qualcomm Inc. patents. Qualcomm seeks a preliminary and permanent injunction as well as unspecified actual and treble damages including costs, expenses and attorneys fees. Qualcomm withdrew one of its patents from the claim in June 2003 and another in May 2004, and has added three more related patents. The Company is presently reviewing these claims and does not believe that the products in question infringe upon Qualcomm Inc. patents noted above. In May 2004, the Company won a motion for summary judgment on the issue of the inducement of infringement by its customers. While no assurance can be given in this regard, the Company does not believe that the ultimate outcome of the action will have a material adverse effect on the Company’s financial condition, liquidity, or results of operation. However, were Qualcomm to prevail in its claims against the Company, the Company’s operating results could be materially adversely affected.
In addition to the above, the Company is subject to other legal proceedings and claims that arise in the normal course of its business. The Company does not believe that the ultimate outcome of these matters will have a material adverse effect on the financial position of the Company.
Contractual Obligation
The Company leases certain of its facilities under various operating leases that expire at various dates through 2014. The lease agreements generally include renewal provisions and require the Company to pay property taxes, insurance, and maintenance costs.
Future annual minimum lease payments for all leased facilities are as follows:
Rent expense was approximately $3.6 million, $3.2 million, and $3.0 million in fiscal years 2004, 2003, and 2002, respectively.
NOTE 9: COMPREHENSIVE INCOME
Comprehensive income consists of net income and net unrealized gains (losses) on available-for-sale investments and forward exchange contracts. The components of other comprehensive income (loss) and related tax effects were as follows:
Accumulated other comprehensive (loss) income presented in the Consolidated Balance Sheets at June 26, 2004 and June 28, 2003 consists of net unrealized (loss) gains on available-for-sale investments of $(5.0) million and $3.0 million, respectively, net unrealized losses on forward exchange contracts of $(0.5) million and $(0.1) million, respectively, and net foreign currency translation adjustments of $(1.5) million and $(1.5) million, respectively.
MAXIM INTEGRATED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10: EMPLOYEE STOCK AND BENEFIT PLANS
Stock option and purchase plans
At June 26, 2004, the Company has reserved a total of 98,511,342 of its common shares for issuance to employees and certain others under its 1996 Stock Incentive Plan, 1993 Officer and Director Stock Option Plan, 1987 Stock Option Plan, 1987 Supplemental Stock Option Plan, 1987 Employee Stock Participation Plan (ESP Plan), and Supplemental Nonemployee Stock Option Plan. Under the plans, options are granted at a price not less than fair market value as determined by the Board of Directors or Plan administrator at the date of grant. Options granted under the stock option plans described above generally vest within five years and expire from five to ten years from the date of the grant or such shorter term as may be provided in the agreement. Under the 1987 Employee Stock Participation Plan, employees of the Company could purchase shares of common stock at a price not less than the lesser of 85% of the fair market value of the stock on the date the purchase right is granted or the date the right is exercised. During fiscal year 2004, the Company recorded $152,500,000 of tax payable benefit on the exercise of nonqualified stock options and on disqualifying dispositions under stock plans ($113,473,000 in fiscal year 2003 and $139,987,000 in fiscal year 2002).
Information with respect to activity under the stock option plans and ESP Plan is set forth below:
At June 26, 2004, 40,982,928 options to purchase shares of common stock were exercisable. Options exercisable at June 28, 2003 and June 29, 2002 were 40,797,090 and 36,116,676, respectively.
The following table summarizes information about options outstanding at June 26, 2004:
MAXIM INTEGRATED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
401(k) retirement plan
The Company sponsors a 401(k) retirement plan (401(k) Plan) through Fidelity Investments, under which full-time U.S. employees may contribute, on a pretax basis, between 1% and 20% of their total annual income from the Company, subject to a maximum aggregate annual contribution imposed by the Internal Revenue Code. The administration charge of the service provider, which the Company pays, was immaterial for fiscal year 2004. Company contributions to the 401(k) Plan were $0.9 million, $0.7 million, and $2.6 million in fiscal years 2004, 2003 and 2002, respectively.
NOTE 11: INCOME TAXES
The provision for income taxes consists of the following:
Pretax income from foreign operations was approximately $13.3 million, $9.2 million, and $17.0 million for the years ended June 26, 2004, June 28, 2003, and June 29, 2002, respectively.
The Company has enjoyed tax holidays with respect to its operations in Thailand and the Philippines. All of the Company’s tax holidays expired by the end of fiscal year 2004, although a new tax holiday will start when the Company begins manufacturing operations in its new Thailand test facility in fiscal year 2005. The impact of these tax holidays was to increase net income by approximately $0 million, $0.2 million and $1.6 million during fiscal years 2004, 2003, and 2002, respectively. At June 26, 2004, accumulated undistributed earnings of approximately $17.0 million are intended to be permanently reinvested outside the United States, and no federal tax has been provided on these earnings.
The provision for income taxes differs from the amount computed by applying the statutory rate as follows:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of the Company’s deferred tax assets and liabilities are as follows:
MAXIM INTEGRATED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The valuation allowance of $109.0 million is attributable to the tax benefits on gains realized from the exercise of stock options, and when realized, will be recorded as a credit to additional paid-in-capital. Realization of the net deferred tax assets is dependent upon the Company’s ability to generate future taxable income.
As of June 26, 2004, the Company has $6.9 million of foreign net operating loss carryforwards expiring at various dates between fiscal year 2005 and fiscal year 2007, $1.1 million of foreign net operating loss carryforwards with no expiration date and $108.4 million of state net operating loss carryforwards expiring at various dates between fiscal year 2006 and 2022.
As of June 26, 2004, the Company has $46.6 million of federal general business credit carryforwards expiring at various dates between fiscal year 2020 and fiscal year 2024, $55.8 million of state credit carryforwards with no expiration date and various other federal and state credit carryforwards with varying expiration dates.
NOTE 12: SEGMENT INFORMATION
The Company operates and tracks its results in one reportable segment. The Company designs, develops, manufactures and markets a broad range of linear and mixed-signal integrated circuits. The Chief Executive Officer has been identified as the Chief Operating Decision Maker as defined by Statement of Financial Accounting Standard No. 131 (SFAS 131), “Disclosures about Segments of an Enterprise and Related Information.”
Enterprise-wide information is provided in accordance with SFAS 131. Geographical revenue information is based on the customer’s bill-to location. Long-lived assets consist of property, plant and equipment. Property, plant and equipment information is based on the physical location of the assets at the end of each fiscal year.
Net revenues from unaffiliated customers by geographic region were as follows:
MAXIM INTEGRATED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net long-lived assets by geographic region were as follows:
NOTE 13: MERGER AND SPECIAL CHARGES
In fiscal year 2001, the Company acquired Dallas Semiconductor, a leading supplier of specialty semiconductors. As a result of the merger, the Company recorded a charge that included merger costs and costs related to the reorganization of the Company’s sales organization, purchase order cancellation fees, and the reduction in the Company’s manufacturing workforce.
At June 28, 2003, the Company had a reserve balance of $1.6 million related to merger costs, $3.0 million related to purchase order cancellations fees, and $1.7 million related primarily to unresolved claims that resulted from the termination of certain sales representatives leaving a total remaining reserve balance of $6.0 million. During fiscal year 2004, the Company has cash payments against the reserve of approximately $0.4 million. During fiscal year 2004, the Company reclassified the remaining $1.5 million related to merger cost to salary and salary related accruals as these amounts are related to change in control payments under previously existing employment contracts and other non-employee director arrangements that will be paid out in future periods according to the terms of the related agreements. The remaining $4.5 million of merger reserves related to purchase order cancellation fees and sales representative termination claims was reclassified to legal related reserves.
The following table summarizes the activity related to the merger for fiscal years ended June 26, 2004 and June 28, 2003:
NOTE 14: COMMON STOCK REPURCHASES
In fiscal year 2002, the Board of Directors authorized the Company to repurchase up to 20 million shares of the Company’s common stock from time to time at the discretion of the Company’s management between the dates of such authorizations and the end of the Company’s fiscal year 2003. In May 2003, the Board of Directors extended the share repurchase authorizations noted above to the end of the Company’s fiscal year 2004. During fiscal year 2003, the Company repurchased approximately 4.5 million shares of common stock for $153.9 million. As of June 28, 2003, approximately 6.4 million shares remained available under the repurchase authorization.
On March, 2004, the Board of Directors authorized the Company to repurchase an additional 10 million shares of the Company’s common stock. This share repurchase authorization has no expiration date. During fiscal year 2004, the Company repurchased approximately 12.4 million shares of its common stock for $601.2 million. As of June 26, 2004, approximately 4.0 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. Common stock repurchased is retired and is not held as treasury stock.
MAXIM INTEGRATED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15: SUBSEQUENT EVENT (UNAUDITED)
During the first quarter of fiscal year 2005, the Board of Directors declared a cash dividend of $0.08 per share on the Company’s common stock payable on August 31, 2004 to stockholders of record on August 16, 2004.
NOTE 16: QUARTERLY FINANCIAL DATA (UNAUDITED)
Net income for the three months ended June 26, 2004 includes $17.5 million of discretionary bonuses awarded to employees.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Maxim Integrated Products, Inc.
We have audited the accompanying consolidated balance sheets of Maxim Integrated Products, Inc., as of June 26, 2004 and June 28, 2003, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three fiscal years in the period ended June 26, 2004. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Maxim Integrated Products, Inc., at June 26, 2004 and June 28, 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 26, 2004, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
San Jose, California
August 2, 2004
MAXIMINTEGRATED PRODUCTS, INC.
SCHEDULE II-VALUATION AND QUALIFYING
ACCOUNTS
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of John F. Gifford and Carl W. Jasper as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, the report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ JOHN F. GIFFORD
President, Chief
September 9, 2004
John F. Gifford
Executive Officer and
Chairman of the Board
(Principal Executive Officer)
/s/ JAMES R. BERGMAN
Director
September 9, 2004
James R. Bergman
/s/ B. KIPLING HAGOPIAN
Director
September 9, 2004
B. Kipling Hagopian
/s/ M.D. SAMPELS
Director
September 9, 2004
M.D. Sampels
/s/ A.R. WAZZAN
Director
September 9, 2004
A.R. Wazzan
CORPORATE DATA AND STOCKHOLDER INFORMATION
Independent Registered Public Accounting Firm
Ernst & Young LLP
San Jose, California
Registrar/Transfer Agent
EquiServe Trust Company, N.A.
Boston, Massachusetts
Corporate Headquarters
120 San Gabriel Drive
Sunnyvale, California 94086
(408) 737-7600
Stock Listing
At June 26, 2004, there were 1,538 stockholders of record of the Company's common stock as reported by EquiServe Trust Company, N.A. Maxim common stock is traded on the Nasdaq National Market under the symbol “MXIM”.
Special Stockholder Meeting
The Board of Directors has called a special meeting of stockholders to be held on Friday, September 17, 2004 at 11:00 a.m. at the Company’s Event Center, 433 N. Mathilda Avenue, Sunnyvale, California 94086 to consider a proposal to add 13 million shares to the Company’s 1996 Stock Incentive Plan.
Annual Meeting
The annual meeting of stockholders will be held on Thursday, November 18, 2004 at 11:00 a.m. at the Company's Event Center, 433 N. Mathilda Avenue, Sunnyvale, California 94086.
EXHIBIT INDEX
Exhibit
Number
Description
3.1 (1)
Restated Certificate of Incorporation of the Company
3.3 (2)
Amendments to Restated Certificate of Incorporation of the Company
3.4 (3)
Amended and Restated Bylaws of the Company, as amended
4.1
Reference is made to Exhibits 3.1, 3.3 and 3.4
10.5 (4)
Agreement between John F. Gifford and the Company, dated as of July 14, 1987, as amended and restated(A)
10.8 (5)
The Company’s Form of Indemnity Agreement(A)
10.11 (6)
The Company’s Incentive Stock Option Plan, as amended(A)
10.12 (7)
The Company’s 1987 Supplemental Stock Option Plan, as amended(A)
10.13 (7)
The Company’s Supplemental Nonemployee Stock Option Plan, as amended(A)
10.14 (8)
The Company’s 1987 Employee Stock Participation Plan, as amended(A)
10.16 (8)
The Company’s 1996 Stock Incentive Plan, as amended(A)
10.17 (8)
Dallas Semiconductor Corporation - 1993 Officer and Director Stock Option Plan, as amended, together with forms of stock option agreements thereunder(A)
10.18 (8)
Dallas Semiconductor Corporation Amended 1987 Stock Option Plan, together with forms of stock option agreements thereunder(A)
10.19 (8)
Assumption Agreement relating to the Split Dollar Insurance Agreement between Dallas Semiconductor Corporation and Alan P. Hale, dated July 20, 2000, as amended (A)
10.20 (8)
Assumption Agreement relating to the Split Dollar Insurance Agreement between Dallas Semiconductor Corporation and M.D. Sampels, dated July 20, 2000, as amended (A)
10.21 (8)
Form of Shareholder Agreements between Dallas Semiconductor Corporation and employee stockholders, as amended(A)
10.22 (8)
Agreement between Dallas Semiconductor Corporation and Alan P. Hale, dated May 20, 1999, as amended(A)
10.23 (8)
Employment Agreement between Dallas Semiconductor Corporation and Alan P. Hale, dated April 11, 2001 (A)
10.24 (8)
Split Dollar Insurance Agreement between Dallas Semiconductor Corporation and Alan P. Hale, dated July 20, 2000, as amended
10.25 (8)
Split Dollar Insurance Agreement between Dallas Semiconductor Corporation and M.D. Sampels, dated July 20, 2000, as amended(A)
10.26 (8)
Assumption Agreement, dated April 11, 2001, relating to Dallas Semiconductor Corporation Executives Retiree Medical Plan, as amended(A)
10.27 (8)
Assumption Agreement, dated April 11, 2001, relating to Dallas Semiconductor Corporation stock options(A)
10.28 (8)
Dallas Semiconductor Corporation Executives Retiree Medical Plan, as amended(A)
10.29 (8)
Form of Indemnification Agreement between Dallas Semiconductor Corporation and its directors and officers(A)
21.1
Subsidiaries of the Company
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm
24.1
Power of Attorney (see page 53)
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 1350, Chapter 63 of Title 18 United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer Pursuant to Section 1350, Chapter 63 of Title 18 United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(5)
Incorporated by reference to exhibit 10.34 in the Company’s Registration Statement on Form S-1 (File No. 33-19561).
(6)
Incorporated by reference to the exhibit with the corresponding exhibit number in the Company’s Annual Report on Form 10-K for the year ended June 30, 1995.
(7)
Incorporated by reference to the exhibit with the corresponding exhibit number in the Company’s Annual Report on Form 10-K for the year ended June 27, 1998.
(8)
Incorporated by reference to the exhibit with the corresponding exhibit number in the Company’s Annual Report on Form 10-K for the year ended June 30, 2001.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference from the Company’s Proxy Statement for the 2004 Annual Meeting of Stockholders under the heading “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. “
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the Company’s Proxy Statement for the 2004 Annual Meeting of Stockholders under the heading “Certain Relationships and Related Transactions.”
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference from the Company’s Proxy Statement for the 2004 Annual Meeting of Stockholders under the heading “Principal Accountant Fees and Services.”
PART IV
ITEM 15.
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
On April 27, 2004, Maxim Integrated Products, Inc. furnished a report on Form 8-K announcing the Company’s earnings for the third quarter ended March 27, 2004, as presented in a press release dated April 27, 2004.
(c)
Exhibits.
See attached Index to Exhibits.
(d)
Financial Statement Schedules.
The financial statement schedule required by this Item is listed under Item 15(a), above.
CONSOLIDATED BALANCE SHEETS
See accompanying Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying Notes to Consolidated Financial Statements.
MAXIM INTEGRATED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF OPERATIONS
Maxim Integrated Products, Inc. (the Company) designs, develops, manufactures, and markets linear and mixed-signal integrated circuits and is incorporated in the state of Delaware. The Company’s products include data converters, interface circuits, microprocessor supervisors, operational amplifiers, power supplies, multiplexers, delay lines, real-time clocks, microcontrollers, switches, battery chargers, battery management circuits, RF circuits, fiber optic transceivers, sensors, voltage references and T/E transmission products. The Company is a global company with manufacturing facilities in the United States, testing facilities in the Philippines and Thailand, and sales offices throughout the world. The Company’s products are sold to customers in numerous markets, including automotive, communications, consumer, data processing, industrial control, instrumentation, and medical imaging.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries. Intercompany balances and transactions have been eliminated. The Company has a 52-to-53-week fiscal year that ends on the last Saturday of June. Accordingly, every sixth or seventh year will be a 53-week fiscal year. Fiscal years 2004 2003 and 2002 were 52-week years.
Certain prior-year amounts in the Consolidated Statement of Cash Flows and Notes to Consolidated Financial Statements have been reclassified to conform to the current year’s presentation.
Cash Equivalents and Short-term Investments
The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents consist of demand accounts, government securities, and money market funds. Short-term investments consist primarily of U.S. Treasury and Federal Agency debt securities with original maturities beyond three months.
The Company’s cash equivalents and short-term investments are considered available-for-sale. Such securities are carried at fair market value based on market quotes. Unrealized gains and losses, net of tax, on securities in this category are reported as a separate component of stockholders’ equity. The cost of securities sold is based on the specific identification method. Interest earned on securities is included in “Interest income and other, net” in the Consolidated Statements of Income. Included in cash and cash equivalents at June 26, 2004 is $20.8 million of restricted cash.
Derivative Instruments
The Company transacts business in various non-U.S. currencies, primarily the Japanese Yen, British Pound, and the Euro. The Company is exposed to fluctuations in foreign currency exchange rates on accounts receivable from sales in these foreign currencies and the net monetary assets and liabilities of the related foreign subsidiary. The Company has established risk management strategies designed to protect against reductions in value and volatility of future cash flows caused by changes in exchange rates. These strategies reduce, but do not always entirely eliminate, the impact of currency exchange movements.
MAXIM INTEGRATED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company uses currency forward contracts to hedge exposure to variability in anticipated non-U.S.-dollar-denominated cash flows are designated as cash flow hedges. These contracts are designed as cash flow hedges and recorded on the Consolidated Balance Sheets at their fair market value. The maturities of these instruments are generally less than 6 months. The Company had forward contracts to sell foreign currencies with a U.S. dollar equivalent of $82.1 million and $60.5 million at June 26, 2004 and June 28, 2003, respectively. For these derivatives, the effective portion of the gain or loss is reported as a component of other comprehensive (loss) income in stockholders’ equity and is reclassified into earnings in the same period or periods in which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in earnings, net during the period of change. The ineffective portion of the gains and losses on the derivatives has been immaterial in all periods presented. The net value of all contracts which hedge transactions that have affected earnings is classified within current assets. For contracts which hedge transactions that have not affected earnings (primarily backlog), a net gain is classified within current assets and a net loss is classified within current liabilities.
For currency forward contracts, effectiveness of the hedge is measured using forward rates to value the forward contract and the underlying hedged transaction. Any ineffective portions of the hedge, as well as amounts not included in the assessment of effectiveness, are recognized currently in interest and other income, net. If a cash flow hedge were to be discontinued because it is probable that the original hedged transaction will not occur as anticipated, the unrealized gains or losses would be reclassified into earnings. Subsequent gains or losses on the related derivative instrument would be recognized in income in each period until the instrument matures, is terminated or is sold. In fiscal years 2004 and 2003, no cash flow hedges were discontinued as a result of forecasted transactions that did not occur. Fair value of the contracts is determined by reference to liquidation value.
Inventories
Inventories are stated at the lower of cost, which approximates actual cost on a first-in-first-out basis, or market value. Because of the cyclicality of the market, inventory levels, obsolescence of technology, and product life cycles, the Company writes down inventories to net realizable value based on 12 months forecasted product demand.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is primarily computed on the straight-line method over the estimated useful lives of the assets, which range from 2 to 15 years for machinery and equipment and up to 40 years for buildings and building improvements. Leasehold improvements are amortized over the lesser of their useful lives or the remaining term of the related lease.
The Company evaluates the recoverability of property, plant and equipment in accordance with Statement of Financial Accounting Standards No. 144 (SFAS 144), “Accounting for the Impairment or Disposal of Long-Lived Assets.” The Company performs periodic reviews to determine whether facts and circumstances exist that would indicate that the carrying amounts of property, plant and equipment exceeds their fair values. If facts and circumstances indicate that the carrying amount of property, plant and equipment might not be fully recoverable, projected undiscounted net cash flows associated with the related asset or group of assets over their estimated remaining useful life is compared against their respective carrying amounts. In the event that the projected undiscounted cash flows are not sufficient to recover the carrying value of the assets, the assets are written down to their estimated fair values.
MAXIM INTEGRATED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition and Accounts Receivables Allowances
Revenue from product sales to the Company’s direct customers is recognized upon shipment provided that persuasive evidence of a sales arrangement exists, the price is fixed and determinable, title has transferred, collection of resulting receivables is reasonably assured, there are no customer acceptance requirements and there are no remaining significant obligations.
A portion of the Company’s sales is made to domestic distributors under agreements that provide the possibility of certain sales price rebates and limited product return privileges. Given the uncertainties associated with the levels of returns and other credits that will be issued to these distributors, the Company defers recognition of such sales and related cost of goods sold until the product is sold by the domestic distributors to their end customers. The Company estimates the provision for returns and price rebates based on historical experience and known future returns and price rebates. Revenue on all shipments to international distributors is recognized upon shipment to the distributor, when the above criteria are met, with appropriate provision of reserves for returns and allowances, as these distributors generally do not have price rebate or product return privileges. Accounts receivable from both domestic and international distributors are recognized and inventory is relieved upon shipment as title to inventories generally transfers upon shipment at which point the Company has a legally enforceable right to collection under normal terms.
The Company must make estimates of potential future product returns and sales allowances related to current period product revenue. Management analyzes historical returns, changes in customer demand, and acceptance of products when evaluating the adequacy of sales returns and allowances. Estimates made by the Company may differ from actual product returns and sales allowances. These differences may materially impact reported revenue and amounts ultimately collected on accounts receivable. In addition, the Company monitors collectibility of accounts receivable primarily through review of the accounts receivable aging. When facts and circumstances indicate the collection of specific amounts or from specific customers is at risk, the Company assesses the impact on amounts recorded for bad debts and, if necessary, will record a charge in the period such determination is made. To date, the Company has not experienced material write-offs of accounts receivable due to uncollectibility.
Advertising
Advertising costs are expensed as incurred and included in selling, general and administrative expenses in the Consolidated Statements of Income. Advertising expenses were $11.1 million, $13.2 million, and $16.7 million in fiscal years 2004, 2003, and 2002, respectively.
Shipping Costs
Shipping costs are charged to cost of goods sold as incurred.
Foreign Currency Translation and Remeasurement
The U.S. dollar is the functional currency for the Company’s foreign operations. Using the U.S. dollar as the functional currency, monetary assets and liabilities are remeasured at the year-end exchange rates. Certain non-monetary assets and liabilities are remeasured using historical rates. Statements of operations are remeasured at the average exchange rates during the year. Net gains and losses from foreign currency remeasurements have been minimal and are included in selling, general and administrative expenses.
MAXIM INTEGRATED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based Compensation
The Company accounts for its stock option and employee stock purchase plans using the intrinsic value method prescribed in Accounting Principles Board’s Opinion No. 25 (APB 25), “Accounting for Stock Issued to Employees.” Accordingly, employee and director compensation expense is recognized only for those options whose price is less than fair market value at the measurement date. In addition, the Company discloses pro forma information related to its stock plans according to Financial Accounting Standards Board Statement No. 123 (SFAS 123) “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock Based Compensation - Transition and Disclosure.”
Under SFAS 148, the Company may elect to continue to account for the grant of stock options under APB Opinion 25, in which options granted with an exercise price equal to the fair market value on the date of grant do not require recognition of expense in the Company’s financial statements. Under SFAS 148, the Company is, however, required to provide pro forma disclosure regarding net income and earnings per share as if the Company had accounted for its employee stock options and employee stock purchase rights (including shares issued under 1996 Stock Incentive Plan, 1993 Officer and Director Stock Option Plan, 1987 Stock Option Plan, 1987 Supplemental Stock Option Plan, 1987 Employee Stock Participation Plan (ESP Plan), and Supplemental Nonemployee Stock Option Plan) granted subsequent to June 30, 1995, under the methodology prescribed by that statement. Since the Company has elected to account for the grant of options under APB Opinion No. 25, the following information is for disclosure purposes only.
The valuation of options granted in fiscal years 2004, 2003, and 2002 reported below has been estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
The Black-Scholes option pricing model was developed for use in estimating the value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the estimate of value, in the opinion of management, the existing models do not provide a reliable single measure of the value of the options. The following is a summary of weighted average grant values generated by application of the Black-Scholes model:
As required under SFAS 148, the reported net income and earnings per share have been presented to reflect the impact had the Company been required to include the amortization of the Black-Scholes option value as an expense. The adjusted amounts are as follows:
MAXIM INTEGRATED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings Per Share
Basic earnings per share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share incorporates the incremental shares issuable upon the assumed exercise of stock options. The number of incremental shares from the assumed issuance of stock options is calculated applying the treasury stock method. See Note 3 “Earnings Per Share” of these Notes to Consolidated Financial Statements.
Indemnifications
We indemnify certain customers, distributors, suppliers, and subcontractors for attorney fees and damages and costs awarded against these parties in certain circumstances in which our products are alleged to infringe third party intellectual property rights, including patents, registered trademarks, or copyrights. The terms of our indemnification obligations are generally perpetual from the effective date of the agreement. In certain cases, there are limits on and exceptions to our potential liability for indemnification relating to intellectual property infringement claims. We cannot estimate the amount of potential future payments, if any, that we might be required to make as a result of these agreements. To date, we have not paid or been required to defend any indemnification claims, and accordingly, we have not accrued any amounts for our indemnification obligations. However, there can be no assurances that we will not have any future financial exposure under those indemnification obligations.
Product Warranty
The Company warrants its products to its customers generally for one year from the date of shipment, but in certain cases for longer periods. In certain other cases, the Company warrants products to include significant liability beyond the cost of replacing the product. If there is a material increase in the rate of customer claims or our estimates of probable losses relating to specifically identified warranty exposures are inaccurate, we may record a charge against future cost of sales. Warranty expense has historically been immaterial to our financial statements.
Self-Insurance Accruals
The Company is self-insured with respect to defective product claims, employment practice claims, worker’s compensation claims, and general liability. Accruals are primarily based on the actuarially estimated, undiscounted cost of claims, which includes incurred-but-not-reported claims. Amounts accrued for defective product claims, employment practice claims, worker’s compensation claims and general liability are included in accrued expenses.
In addition to the above, the Company is primarily self-insured with respect to healthcare benefits for most of its domestic (United States) employees. Accruals are primarily based on estimated incurred-but-not-reported claims. Amounts accrued for employee healthcare claims are included in salary and salary related expenses.
MAXIM INTEGRATED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
New Accounting Pronouncements
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 adoption of SFAS 132 did not have a material impact on the Company’s financial condition, results of operations or liquidity.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates relate to the useful lives and fair value of fixed assets, allowances for doubtful accounts and customer returns, inventory reserves, reserves relating to litigation matters, accrued liabilities, and other reserves. The Company bases its estimates and judgments on its historical experience, knowledge of current conditions and its beliefs of what could occur in the future given available information. Actual results may differ from those estimates, and such differences may be material to the financial statements.
Concentration of Credit Risk
Due to the Company’s credit evaluation and collection process, bad debt expenses have not been significant. Credit risk with respect to trade receivables is limited, because a large number of geographically diverse customers make up the Company’s customer base, thus spreading the credit risk. While a significant portion of the Company’s revenues is made through domestic and international distributors, no single customer has accounted for greater than 10% of net revenues in the last three fiscal years.
The Company maintains cash, cash equivalents, and short-term investments with various high credit quality financial institutions, limits the amount of credit exposure to any one financial institution or instrument, and is exposed to credit risk in the event of default by these institutions to the extent of amounts recorded at the balance sheet date. To date, the Company has not incurred losses related to these investments.
Concentration of Other Risks
The semiconductor industry is characterized by rapid technological change, competitive pricing pressures, and cyclical market patterns. The Company’s results of operations are affected by a wide variety of factors, including general economic conditions, both in the United States and abroad; economic conditions specific to the semiconductor industry and to the analog portion of that industry; demand for the Company’s products; the timely introduction of new products; implementation of new manufacturing technologies; manufacturing capacity; the ability to manufacture efficiently; the availability of materials, supplies, machinery and equipment; competition; the ability to safeguard patents and intellectual property in a rapidly evolving market; and reliance on assembly and, to a small extent, wafer fabrication subcontractors and on independent distributors and sales representatives. As a result, the Company may experience substantial period-to-period fluctuations in future operating results due to the factors mentioned above or other factors.
MAXIM INTEGRATED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3: EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
Approximately 12.4 million, 38.8 million, and 11.8 million of the Company’s stock options were excluded from the calculation of diluted earnings per share for fiscal years 2004, 2003, and 2002, respectively. These options were excluded, as they were antidilutive; however, such options could be dilutive in the future.
NOTE 4: FINANCIAL INSTRUMENTS
Investments
In accordance with Statement of Financial Accounting Standard No 115 (SFAS 115), “Accounting for Certain Investments in Debt and Equity Securities,” the Company recorded a net unrealized loss of $7.5 million on short-term investments at June 26, 2004. The unrealized loss resulted from a increase in interest rates that occurred during fiscal year 2004. The Company believes the unrealized loss is temporary as the related available-for-sale investments will be held to maturity resulting in cash flow equal to face value. The Company recorded a net unrealized gain of $4.6 million on available-for-sale investments at June 28, 2003, which resulted from a decline in interest rates that occurred during fiscal year 2003. Fair market values are calculated based upon prevailing market quotes at the end of each fiscal year.
Available-for-sale investments at June 26, 2004 were as follows:
Available-for-sale investments at June 28, 2003 were as follows:
MAXIM INTEGRATED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company realized net gains of $0.1 million, $0.1 million, and $4.9 million for fiscal years 2004, 2003 and 2002, respectively. The Company’s portfolio of marketable securities by contractual maturity is as follows:
Foreign exchange contracts
At June 26, 2004, and June 28, 2003, the Company held forward exchange contracts, all having maturities of less than one year, to exchange various foreign currencies for U.S. dollars in the amount of $82.1 million and $60.5 million, respectively. The table below summarizes, by currency, the notional amounts of the Company’s forward exchange contracts and net unrealized gain or loss at the end of fiscal years 2004 and 2003. The net unrealized gain or loss approximates the fair market value of these contracts.
The net unrealized gain or loss, if any, is potentially subject to market and credit risk as it represents appreciation of the hedge position over the spot exchange rates at year-end. The Company attempts to control credit risk through credit approvals and monitoring procedures. The net realized and unrealized gains or losses from hedging foreign currency denominated assets and liabilities were immaterial in fiscal years 2004 and 2003.
NOTE 5: INVENTORIES
The components of inventories consist of :
NOTE 6: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
MAXIM INTEGRATED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7: OTHER ASSETS
Included in Other Assets at June 28, 2003 is $13.4 million of 4% senior secured convertible notes resulting from amounts loaned to a privately held semiconductor company. The notes were secured by a first priority lien on, or security interest in, substantially all the assets, including intellectual property, of this company. This privately held semiconductor company ceased operations due to insolvency during fiscal year 2003. Per the terms of the 4% senior secured convertible notes, the Company accelerated the maturity of said notes and foreclosed on its first priority lien and security interest. During the first quarter of fiscal 2004, the Company acquired substantially all the assets, including intellectual property of this privately held semiconductor company. The 4% senior secured convertible notes were converted to a long-term intangible asset which is being amortized over ten years, the estimated useful life of the associated intellectual property. At June 26, 2004, the balance of intellectual property included in Other Assets was $10.5 million.
The intellectual property acquired by the Company is being used to design and develop new products as well as in some product currently in production. As required by SFAS 144, the Company assessed the recoverability of the intellectual property. Based on this assessment, as of June 26, 2004, the intellectual property is fully recoverable based on the projected discounted cash flows attributable to products designed and developed with this intellectual property. Should it be determined in a future period that the projected remaining discounted cash flows attributable to products designed and developed with the acquired intellectual property are less than the net book value represented by the intellectual property, the Company’s results of operations could be materially adversely impacted in the period such determination is made.
Also included in Other Assets in the Consolidated Balance Sheets at June 26, 2004, and at June 28, 2003 are loans to employees of approximately $7.2 million and $7.9 million, respectively. These loans are collateralized. To the extent such collateral is not sufficient to cover the amounts owed, there is risk of loss to the Company. To date, the Company has not experienced any material losses related to these employee loans.
NOTE 8: COMMITMENTS AND CONTINGENCIES
Litigation
On June 26, 1997, a complaint was filed by Linear Technology Corporation (“LTC”) naming the Company and certain other unrelated parties as defendants. The complaint alleges that each of the defendants, including the Company, has willfully infringed, induced infringement and contributorily infringed LTC’s United States Patent 5,481,178 relating to control circuits and methods for maintaining high efficiencies over broad current ranges in a switching regulator circuit, all of which has allegedly damaged LTC in an unspecified amount. The complaint further alleges that the Company’s actions have been, and continue to be, willful and deliberate and seeks a permanent injunction against the Company as well as unspecified actual and treble damages including costs, expenses, and attorneys fees. The Company answered the complaint on October 20, 1997, denying all of LTC’s substantive allegations and counterclaiming for a declaration that LTC’s patent is invalid and not infringed.
On September 21, 2001, the Federal District Court for the Northern District of California issued an order dismissing the patent litigation action by LTC. The Company had moved for summary judgment on a number of subjects, including noninfringement, invalidity and unenforceability of the patent. LTC appealed the decision. In June 2004, the appellate court remanded the matter to the trial court for trial. The Company then filed a request for rehearing on two issues. After making certain amendments to its opinion, the appellate court again remanded the matter for trial. The Company does not believe that the ultimate outcome of these matters will have a material adverse effect on the financial position or liquidity of the Company. However, were LTC to prevail in its claims against the Company, the Company’s operating results could be materially adversely affected.
MAXIM INTEGRATED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On December 12, 2002, Qualcomm Inc. filed and on February 4, 2003, Qualcomm Inc. served the Company with a complaint for patent infringement claiming that certain of the Company’s products infringe one or all of three Qualcomm Inc. patents. Qualcomm seeks a preliminary and permanent injunction as well as unspecified actual and treble damages including costs, expenses and attorneys fees. Qualcomm withdrew one of its patents from the claim in June 2003 and another in May 2004, and has added three more related patents. The Company is presently reviewing these claims and does not believe that the products in question infringe upon Qualcomm Inc. patents noted above. In May 2004, the Company won a motion for summary judgment on the issue of the inducement of infringement by its customers. While no assurance can be given in this regard, the Company does not believe that the ultimate outcome of the action will have a material adverse effect on the Company’s financial condition, liquidity, or results of operation. However, were Qualcomm to prevail in its claims against the Company, the Company’s operating results could be materially adversely affected.
In addition to the above, the Company is subject to other legal proceedings and claims that arise in the normal course of its business. The Company does not believe that the ultimate outcome of these matters will have a material adverse effect on the financial position of the Company.
Contractual Obligation
The Company leases certain of its facilities under various operating leases that expire at various dates through 2014. The lease agreements generally include renewal provisions and require the Company to pay property taxes, insurance, and maintenance costs.
Future annual minimum lease payments for all leased facilities are as follows:
Rent expense was approximately $3.6 million, $3.2 million, and $3.0 million in fiscal years 2004, 2003, and 2002, respectively.
NOTE 9: COMPREHENSIVE INCOME
Comprehensive income consists of net income and net unrealized gains (losses) on available-for-sale investments and forward exchange contracts. The components of other comprehensive income (loss) and related tax effects were as follows:
Accumulated other comprehensive (loss) income presented in the Consolidated Balance Sheets at June 26, 2004 and June 28, 2003 consists of net unrealized (loss) gains on available-for-sale investments of $(5.0) million and $3.0 million, respectively, net unrealized losses on forward exchange contracts of $(0.5) million and $(0.1) million, respectively, and net foreign currency translation adjustments of $(1.5) million and $(1.5) million, respectively.
MAXIM INTEGRATED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10: EMPLOYEE STOCK AND BENEFIT PLANS
Stock option and purchase plans
At June 26, 2004, the Company has reserved a total of 98,511,342 of its common shares for issuance to employees and certain others under its 1996 Stock Incentive Plan, 1993 Officer and Director Stock Option Plan, 1987 Stock Option Plan, 1987 Supplemental Stock Option Plan, 1987 Employee Stock Participation Plan (ESP Plan), and Supplemental Nonemployee Stock Option Plan. Under the plans, options are granted at a price not less than fair market value as determined by the Board of Directors or Plan administrator at the date of grant. Options granted under the stock option plans described above generally vest within five years and expire from five to ten years from the date of the grant or such shorter term as may be provided in the agreement. Under the 1987 Employee Stock Participation Plan, employees of the Company could purchase shares of common stock at a price not less than the lesser of 85% of the fair market value of the stock on the date the purchase right is granted or the date the right is exercised. During fiscal year 2004, the Company recorded $152,500,000 of tax payable benefit on the exercise of nonqualified stock options and on disqualifying dispositions under stock plans ($113,473,000 in fiscal year 2003 and $139,987,000 in fiscal year 2002).
Information with respect to activity under the stock option plans and ESP Plan is set forth below:
At June 26, 2004, 40,982,928 options to purchase shares of common stock were exercisable. Options exercisable at June 28, 2003 and June 29, 2002 were 40,797,090 and 36,116,676, respectively.
The following table summarizes information about options outstanding at June 26, 2004:
MAXIM INTEGRATED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
401(k) retirement plan
The Company sponsors a 401(k) retirement plan (401(k) Plan) through Fidelity Investments, under which full-time U.S. employees may contribute, on a pretax basis, between 1% and 20% of their total annual income from the Company, subject to a maximum aggregate annual contribution imposed by the Internal Revenue Code. The administration charge of the service provider, which the Company pays, was immaterial for fiscal year 2004. Company contributions to the 401(k) Plan were $0.9 million, $0.7 million, and $2.6 million in fiscal years 2004, 2003 and 2002, respectively.
NOTE 11: INCOME TAXES
The provision for income taxes consists of the following:
Pretax income from foreign operations was approximately $13.3 million, $9.2 million, and $17.0 million for the years ended June 26, 2004, June 28, 2003, and June 29, 2002, respectively.
The Company has enjoyed tax holidays with respect to its operations in Thailand and the Philippines. All of the Company’s tax holidays expired by the end of fiscal year 2004, although a new tax holiday will start when the Company begins manufacturing operations in its new Thailand test facility in fiscal year 2005. The impact of these tax holidays was to increase net income by approximately $0 million, $0.2 million and $1.6 million during fiscal years 2004, 2003, and 2002, respectively. At June 26, 2004, accumulated undistributed earnings of approximately $17.0 million are intended to be permanently reinvested outside the United States, and no federal tax has been provided on these earnings.
The provision for income taxes differs from the amount computed by applying the statutory rate as follows:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of the Company’s deferred tax assets and liabilities are as follows:
MAXIM INTEGRATED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The valuation allowance of $109.0 million is attributable to the tax benefits on gains realized from the exercise of stock options, and when realized, will be recorded as a credit to additional paid-in-capital. Realization of the net deferred tax assets is dependent upon the Company’s ability to generate future taxable income.
As of June 26, 2004, the Company has $6.9 million of foreign net operating loss carryforwards expiring at various dates between fiscal year 2005 and fiscal year 2007, $1.1 million of foreign net operating loss carryforwards with no expiration date and $108.4 million of state net operating loss carryforwards expiring at various dates between fiscal year 2006 and 2022.
As of June 26, 2004, the Company has $46.6 million of federal general business credit carryforwards expiring at various dates between fiscal year 2020 and fiscal year 2024, $55.8 million of state credit carryforwards with no expiration date and various other federal and state credit carryforwards with varying expiration dates.
NOTE 12: SEGMENT INFORMATION
The Company operates and tracks its results in one reportable segment. The Company designs, develops, manufactures and markets a broad range of linear and mixed-signal integrated circuits. The Chief Executive Officer has been identified as the Chief Operating Decision Maker as defined by Statement of Financial Accounting Standard No. 131 (SFAS 131), “Disclosures about Segments of an Enterprise and Related Information.”
Enterprise-wide information is provided in accordance with SFAS 131. Geographical revenue information is based on the customer’s bill-to location. Long-lived assets consist of property, plant and equipment. Property, plant and equipment information is based on the physical location of the assets at the end of each fiscal year.
Net revenues from unaffiliated customers by geographic region were as follows:
MAXIM INTEGRATED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net long-lived assets by geographic region were as follows:
NOTE 13: MERGER AND SPECIAL CHARGES
In fiscal year 2001, the Company acquired Dallas Semiconductor, a leading supplier of specialty semiconductors. As a result of the merger, the Company recorded a charge that included merger costs and costs related to the reorganization of the Company’s sales organization, purchase order cancellation fees, and the reduction in the Company’s manufacturing workforce.
At June 28, 2003, the Company had a reserve balance of $1.6 million related to merger costs, $3.0 million related to purchase order cancellations fees, and $1.7 million related primarily to unresolved claims that resulted from the termination of certain sales representatives leaving a total remaining reserve balance of $6.0 million. During fiscal year 2004, the Company has cash payments against the reserve of approximately $0.4 million. During fiscal year 2004, the Company reclassified the remaining $1.5 million related to merger cost to salary and salary related accruals as these amounts are related to change in control payments under previously existing employment contracts and other non-employee director arrangements that will be paid out in future periods according to the terms of the related agreements. The remaining $4.5 million of merger reserves related to purchase order cancellation fees and sales representative termination claims was reclassified to legal related reserves.
The following table summarizes the activity related to the merger for fiscal years ended June 26, 2004 and June 28, 2003:
NOTE 14: COMMON STOCK REPURCHASES
In fiscal year 2002, the Board of Directors authorized the Company to repurchase up to 20 million shares of the Company’s common stock from time to time at the discretion of the Company’s management between the dates of such authorizations and the end of the Company’s fiscal year 2003. In May 2003, the Board of Directors extended the share repurchase authorizations noted above to the end of the Company’s fiscal year 2004. During fiscal year 2003, the Company repurchased approximately 4.5 million shares of common stock for $153.9 million. As of June 28, 2003, approximately 6.4 million shares remained available under the repurchase authorization.
On March, 2004, the Board of Directors authorized the Company to repurchase an additional 10 million shares of the Company’s common stock. This share repurchase authorization has no expiration date. During fiscal year 2004, the Company repurchased approximately 12.4 million shares of its common stock for $601.2 million. As of June 26, 2004, approximately 4.0 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. Common stock repurchased is retired and is not held as treasury stock.
MAXIM INTEGRATED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15: SUBSEQUENT EVENT (UNAUDITED)
During the first quarter of fiscal year 2005, the Board of Directors declared a cash dividend of $0.08 per share on the Company’s common stock payable on August 31, 2004 to stockholders of record on August 16, 2004.
NOTE 16: QUARTERLY FINANCIAL DATA (UNAUDITED)
Net income for the three months ended June 26, 2004 includes $17.5 million of discretionary bonuses awarded to employees.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Maxim Integrated Products, Inc.
We have audited the accompanying consolidated balance sheets of Maxim Integrated Products, Inc., as of June 26, 2004 and June 28, 2003, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three fiscal years in the period ended June 26, 2004. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Maxim Integrated Products, Inc., at June 26, 2004 and June 28, 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 26, 2004, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
San Jose, California
August 2, 2004
MAXIMINTEGRATED PRODUCTS, INC.
SCHEDULE II-VALUATION AND QUALIFYING
ACCOUNTS
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of John F. Gifford and Carl W. Jasper as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, the report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ JOHN F. GIFFORD
President, Chief
September 9, 2004
John F. Gifford
Executive Officer and
Chairman of the Board
(Principal Executive Officer)
/s/ JAMES R. BERGMAN
Director
September 9, 2004
James R. Bergman
/s/ B. KIPLING HAGOPIAN
Director
September 9, 2004
B. Kipling Hagopian
/s/ M.D. SAMPELS
Director
September 9, 2004
M.D. Sampels
/s/ A.R. WAZZAN
Director
September 9, 2004
A.R. Wazzan
CORPORATE DATA AND STOCKHOLDER INFORMATION
Independent Registered Public Accounting Firm
Ernst & Young LLP
San Jose, California
Registrar/Transfer Agent
EquiServe Trust Company, N.A.
Boston, Massachusetts
Corporate Headquarters
120 San Gabriel Drive
Sunnyvale, California 94086
(408) 737-7600
Stock Listing
At June 26, 2004, there were 1,538 stockholders of record of the Company's common stock as reported by EquiServe Trust Company, N.A. Maxim common stock is traded on the Nasdaq National Market under the symbol “MXIM”.
Special Stockholder Meeting
The Board of Directors has called a special meeting of stockholders to be held on Friday, September 17, 2004 at 11:00 a.m. at the Company’s Event Center, 433 N. Mathilda Avenue, Sunnyvale, California 94086 to consider a proposal to add 13 million shares to the Company’s 1996 Stock Incentive Plan.
Annual Meeting
The annual meeting of stockholders will be held on Thursday, November 18, 2004 at 11:00 a.m. at the Company's Event Center, 433 N. Mathilda Avenue, Sunnyvale, California 94086.
EXHIBIT INDEX
Exhibit
Number
Description
3.1 (1)
Restated Certificate of Incorporation of the Company
3.3 (2)
Amendments to Restated Certificate of Incorporation of the Company
3.4 (3)
Amended and Restated Bylaws of the Company, as amended
4.1
Reference is made to Exhibits 3.1, 3.3 and 3.4
10.5 (4)
Agreement between John F. Gifford and the Company, dated as of July 14, 1987, as amended and restated(A)
10.8 (5)
The Company’s Form of Indemnity Agreement(A)
10.11 (6)
The Company’s Incentive Stock Option Plan, as amended(A)
10.12 (7)
The Company’s 1987 Supplemental Stock Option Plan, as amended(A)
10.13 (7)
The Company’s Supplemental Nonemployee Stock Option Plan, as amended(A)
10.14 (8)
The Company’s 1987 Employee Stock Participation Plan, as amended(A)
10.16 (8)
The Company’s 1996 Stock Incentive Plan, as amended(A)
10.17 (8)
Dallas Semiconductor Corporation - 1993 Officer and Director Stock Option Plan, as amended, together with forms of stock option agreements thereunder(A)
10.18 (8)
Dallas Semiconductor Corporation Amended 1987 Stock Option Plan, together with forms of stock option agreements thereunder(A)
10.19 (8)
Assumption Agreement relating to the Split Dollar Insurance Agreement between Dallas Semiconductor Corporation and Alan P. Hale, dated July 20, 2000, as amended (A)
10.20 (8)
Assumption Agreement relating to the Split Dollar Insurance Agreement between Dallas Semiconductor Corporation and M.D. Sampels, dated July 20, 2000, as amended (A)
10.21 (8)
Form of Shareholder Agreements between Dallas Semiconductor Corporation and employee stockholders, as amended(A)
10.22 (8)
Agreement between Dallas Semiconductor Corporation and Alan P. Hale, dated May 20, 1999, as amended(A)
10.23 (8)
Employment Agreement between Dallas Semiconductor Corporation and Alan P. Hale, dated April 11, 2001 (A)
10.24 (8)
Split Dollar Insurance Agreement between Dallas Semiconductor Corporation and Alan P. Hale, dated July 20, 2000, as amended
10.25 (8)
Split Dollar Insurance Agreement between Dallas Semiconductor Corporation and M.D. Sampels, dated July 20, 2000, as amended(A)
10.26 (8)
Assumption Agreement, dated April 11, 2001, relating to Dallas Semiconductor Corporation Executives Retiree Medical Plan, as amended(A)
10.27 (8)
Assumption Agreement, dated April 11, 2001, relating to Dallas Semiconductor Corporation stock options(A)
10.28 (8)
Dallas Semiconductor Corporation Executives Retiree Medical Plan, as amended(A)
10.29 (8)
Form of Indemnification Agreement between Dallas Semiconductor Corporation and its directors and officers(A)
21.1
Subsidiaries of the Company
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm
24.1
Power of Attorney (see page 53)
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 1350, Chapter 63 of Title 18 United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer Pursuant to Section 1350, Chapter 63 of Title 18 United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(5)
Incorporated by reference to exhibit 10.34 in the Company’s Registration Statement on Form S-1 (File No. 33-19561).
(6)
Incorporated by reference to the exhibit with the corresponding exhibit number in the Company’s Annual Report on Form 10-K for the year ended June 30, 1995.
(7)
Incorporated by reference to the exhibit with the corresponding exhibit number in the Company’s Annual Report on Form 10-K for the year ended June 27, 1998.
(8)
Incorporated by reference to the exhibit with the corresponding exhibit number in the Company’s Annual Report on Form 10-K for the year ended June 30, 2001.