10-K 1 maxim10-kfy2019.htm 10-K Document



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 29, 2019
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-34192
logo10k2016a04.jpg
MAXIM INTEGRATED PRODUCTS, INC.
(Exact name of Registrant as specified in its charter)
Delaware
 
94-2896096
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)

160 Rio Robles
San Jose, California 95134
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (408) 601-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class 
Common stock, $0.001 par value
Trading Symbol
MXIM
Name of each exchange on which registered 
The NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
  Yes ý    No  o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes o   No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ý    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes ý    No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:
Large Accelerated Filer ý
 
Accelerated Filer  o
 
Non-accelerated Filer  o

 
Smaller Reporting Company o
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revisited financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o   No ý
The aggregate market value of the voting stock held by non-affiliates of the Registrant based upon the closing price of the common stock on December 29, 2018 as reported by The NASDAQ Global Select Market was $8,902,453,605. Shares of voting stock held by executive officers, directors and holders of more than 5% of the outstanding voting stock have been excluded from this calculation because such persons may be deemed to be affiliates. Exclusion of such shares should not be construed to indicate that any of such persons possesses the power, direct or indirect, to control the Registrant, or that any such person is controlled by or under common control with the Registrant.
Number of shares outstanding of the Registrant's Common Stock, $0.001 par value, as of August 8, 2019: 271,272,841.
Documents Incorporated By Reference:
(1)
Portions of the Registrant's Proxy Statement for its 2019 Annual Meeting of Stockholders, to be filed subsequently, are incorporated by reference into Part III of this report.




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MAXIM INTEGRATED PRODUCTS, INC.

INDEX

 
Forward-Looking Statements
 
 
Part I
 
Business
 
Risk Factors
 
Unresolved Staff Comments
 
Properties
 
Legal Proceedings
 
Mine Safety Disclosures
 
 
Part II
 
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Selected Financial Data
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Quantitative and Qualitative Disclosures about Market Risk
 
Financial Statements and Supplementary Data
 
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
Controls and Procedures
 
Other Information
 
 
Part III
 
Directors, Executive Officers, and Corporate Governance
 
Executive Compensation
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
Certain Relationships and Related Transactions, and Director Independence
 
Principal Accountant Fees and Services
 
 
Part IV
 
Exhibits and Financial Statement Schedules
 
Form 10-K Summary
 
 
 
 

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FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K (this “Annual Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing and particularly in Part I, Item I - Business, Part I, Item 1A - Risk Factors and Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations. These statements relate to, among other things, sales, gross margins, operating expenses, capital expenditures and requirements, liquidity, asset dispositions, product development and R&D efforts, potential growth opportunities, manufacturing plans, pending litigation, effective tax rates and tax reserves for uncertain tax positions, and are indicated by words or phrases such as “anticipate,” “expect,” “outlook,” “foresee,” “forecast,” “estimate,” “believe,” “should,” “could,” “intend,” “potential,” “will,” “may,” “might,” “plan,” “seek,” “predict,” “project” and variations of such words and similar words or expressions and the negatives of those terms. These statements involve known and unknown risks, uncertainties and other factors that could cause actual results, performance or achievements to differ materially from expectations. These forward-looking statements should not be relied upon as predictions of future events as we cannot assure you that the events or circumstances reflected in these statements will be achieved or will occur. For a discussion of some of the factors that could cause actual results to differ materially from our forward-looking statements, see the discussion on “Risk Factors” that appears in Part I, Item 1A of this Annual Report and other risks and uncertainties detailed in this and our other reports and filings with the Securities and Exchange Commission (“SEC”). Given these uncertainties, you should not place undue reliance on these forward-looking statements. These forward-looking statements represent our beliefs and assumptions only as of the date of this Annual Report. We undertake no obligation to update forward-looking statements to reflect developments or information obtained after the date hereof and disclaim any obligation to do so except as required by applicable laws.


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PART I


ITEM 1. BUSINESS

Overview

Maxim Integrated Products, Inc. (“Maxim Integrated” or the “Company” and also referred to as “we,” “our” or “us”) designs, develops, manufactures and markets a broad range of linear and mixed-signal integrated circuits, commonly referred to as analog circuits, for a large number of customers in diverse geographical locations. The analog market is fragmented and characterized by many diverse applications, a great number of product variations and, with respect to many circuit types, relatively long product life cycles. We are a global company with a wafer manufacturing facility in the U.S., test facilities in the Philippines and Thailand, and sales and circuit design offices around the world. We also utilize third parties for manufacturing and assembly of our products. The major end-markets in which our products are sold are the Automotive, Communications and Data Center, Computing, Consumer, and Industrial markets.

We are a Delaware corporation originally incorporated in California in 1983. The mailing address for our headquarters is 160 Rio Robles, San Jose, California 95134, and our telephone number is (408) 601-1000. Additional information about us is available on our website at www.maximintegrated.com. The contents of our website are not incorporated into this Annual Report.

We have a 52-to-53-week fiscal year that ends on the last Saturday in June. Accordingly, every fifth or sixth fiscal year will be a 53-week fiscal year. Fiscal year 2019 was a 52-week fiscal year. Fiscal year 2018 was a 53-week fiscal year. Fiscal year 2017 was a 52-week fiscal year. Fiscal year 2020 will be a 52-week fiscal year.

We make available through our website, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and any amendments to those reports or statements filed or furnished pursuant to the Exchange Act, as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. The SEC also maintains an internet site at www.sec.gov that contains such reports and statements filed electronically with the SEC by the Company. We also use our Investor Relations website at investor.maximintegrated.com as a routine channel for distribution of other important information, such as news releases, analyst presentations and financial information. We assume no obligation to update or revise any forward-looking statements in this Annual Report, whether as a result of new information, future events or otherwise, unless we are required to do so by applicable laws. A copy of this Annual Report is available without charge and can be accessed at our website at investor.maximintegrated.com.

The Linear and Mixed-Signal Analog Integrated Circuit Market

All electronic signals generally fall into one of two categories, linear or digital. Linear (or analog) signals represent real world phenomena, such as temperature, pressure, sound or speed, and are continuously variable over a wide range of values. Digital signals represent the “ones” and “zeros” of binary arithmetic and are either on or off.

Three general classes of semiconductor products arise from this distinction between linear and digital signals:

digital devices, such as memories and microprocessors that operate primarily in the digital domain;
linear devices, such as amplifiers, references, analog multiplexers and switches that operate primarily in the analog domain; and
mixed-signal devices such as data converter devices that combine linear and digital functions on the same integrated circuit and interface between the analog and digital domains.

Our strategy has been to target both the linear and mixed-signal markets, often collectively referred to as the analog market. However, some of our products are exclusively or principally digital. While our focus continues to be on the linear and mixed-signal market, our capabilities in the digital domain enable development of new mixed-signal and other products with highly sophisticated digital characteristics.

Our linear and mixed-signal products serve five major end-markets: (i) Automotive, (ii) Communications and Data Center, (iii) Computing, (iv) Consumer and (v) Industrial. These major end-markets and their corresponding markets are noted in the table below:


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MAJOR END-MARKET
MARKET
 
 
AUTOMOTIVE
Infotainment
 
Powertrain
 
Body Electronics
 
Safety & Security
 
 
COMMUNICATIONS & DATA CENTER
Base Stations
 
Data Center
 
Data Storage
 
Network & Datacom
 
Servers
 
Telecom
 
Other Communications
 
 
COMPUTING
Desktop Computers
 
Notebook Computers
 
Peripherals & Other Computer
 
 
CONSUMER
Smartphones
 
Digital Cameras
 
Handheld Computers
 
Home Entertainment & Appliances
 
Wearables
 
Other Consumer
 
 
INDUSTRIAL
Automatic Test Equipment
 
Control & Automation
 
Electrical Instrumentation
 
Financial Terminals
 
Medical
 
Security
 
USB Extension
 
Other Industrial

Product Quality

We employ a system addressing quality and reliability of our products from initial design through wafer fabrication, assembly, testing and final shipment. We have received ISO 9001, IATF16949 and ISO 14001 certifications for all wafer fabrication, assembly, final test and shipping facilities. Based on industry standard requirements, we conduct reliability stress testing on the products we manufacture and sell. Through this testing, we can detect and accelerate the presence of defects that may arise over the life of a product.

Manufacturing

We primarily utilize third party foundries as well as our own wafer fabrication facility for the production of our wafers. The broad range of products demanded by the analog integrated circuit market requires multiple manufacturing process technologies. As a result, many different process technologies are currently used for wafer fabrication of our products. The majority of processed wafers are also subject to parametric and functional testing at either our facilities or third-party vendors.
 
In fiscal year 2007, we entered into a supply agreement with Seiko Epson Corporation (“Epson”). In fiscal year 2010, we entered into a supply agreement with Powerchip Semiconductor Manufacturing Corp. (“Powerchip”) to provide 300mm wafer capacity. In fiscal year 2014, we entered into a supply agreement with UMC Corporation (“UMC”). In fiscal year 2016, we entered into a supply agreement with TowerJazz Texas, Inc. (formerly known as TJ Texas, Inc.) ("TowerJazz"), an indirect wholly-owned subsidiary of Tower Semiconductor Ltd. In fiscal year 2018, we ramped production at our most recently added partner foundry, Fujitsu Ltd. ("Fujitsu"). Epson and Fujitsu in Japan and UMC and Powerchip in Taiwan manufacture products for us under rights and licenses using our proprietary technology. In fiscal years 2019, 2018 and 2017, wafers manufactured by our partner foundries

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and merchant foundries (e.g., Taiwan Semiconductor Manufacturing Company Limited) represented 65%, 73% and 75% respectively, of our total wafer manufacturing.

Once wafer manufacturing has been completed, wafers are sorted in order to determine which integrated circuits on each wafer are functional and which are defective. We currently perform the majority of wafer sorting, final testing and shipping activities at two company-owned facilities, located in Cavite, the Philippines and Chonburi Province, Thailand, although we also utilize independent subcontractors for some wafer sorting.

We process wafers for products that utilize chip scale packaging (“CSP”), also known as wafer level packaging (“WLP”). CSP, or WLP, enables integrated circuits to be attached directly to a printed circuit board without the use of a traditional plastic package. Historically, we utilized internal manufacturing resources as well as independent subcontractors to perform WLP manufacturing. In fiscal year 2016, we announced our intent to shut down our WLP manufacturing facility located in Dallas, Texas and completed this shutdown in fiscal year 2017. The manufacturing operations of the Dallas manufacturing facility were transferred to our Beaverton, Oregon factory and assembly subcontractors, which is also part of our manufacturing transformation. Currently, all WLP processes are done externally.
 
Integrated circuit assembly is performed by foreign assembly subcontractors, located in China, Japan, Malaysia, the Philippines, Taiwan, Thailand, Singapore and South Korea, where wafers are separated into individual integrated circuits and assembled into a variety of packages.

After assembly has been completed, a majority of the assembled products are shipped to our facilities located in Cavite, the Philippines or Chonburi Province, Thailand, where the packaged integrated circuits undergo final testing and preparation for customer shipment. In addition, we also utilize independent subcontractors to perform final testing.

The majority of our finished products ship 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.

Customers, Sales and Marketing

We market our products worldwide through a direct-sales and applications organization and through our own and other unaffiliated distribution channels to a broad range of customers in diverse industries. Our products typically require a sophisticated technical sales and marketing effort. Our sales organization is divided into domestic and international regions. Distributors and direct customers generally buy on an individual purchase order basis, rather than pursuant to long-term agreements.

Certain distributors have agreements with us which allow for certain sales price rebates or price adjustments on certain inventory if we change the price of those products. Certain distributor agreements also permit distributors to exchange a portion of certain purchases on a periodic basis. As is customary in the semiconductor industry, our distributors may also market other products that compete with our products.

We derived approximately 46% of our fiscal year 2019 revenue from sales made through distributors which includes distribution sales to Samsung and catalog distributors. Our primary distributor is Avnet Electronics ("Avnet") which accounted for 22%, 25% and 22% of our revenues in fiscal years 2019, 2018 and 2017, respectively. Avnet, like our other distributors, is not an end customer, but rather serves as a channel of sale to many end users of our products. Sales to Samsung, our largest single end customer (through direct sales and distributors), accounted for approximately 10% of net revenues in fiscal years 2019, 2018 and 2017. No single customer (other than Avnet and Samsung) nor single product accounted for 10% or more of net revenues in fiscal years 2019, 2018 and 2017. Based on customers’ ship-to locations, international sales accounted for approximately 89%, 88% and 88% of our net revenues in fiscal years 2019, 2018 and 2017, respectively. See Note 10: “Segment Information” in the Notes to Consolidated Financial Statements in Part IV, Item 15(a) of this Annual Report.

Seasonality
 

Our revenue is generally influenced on a quarterly basis by customer demand patterns and new product introductions. A large number of our products have been incorporated into consumer electronic products, which are subject to seasonality and fluctuations in demand.

Foreign Operations
 


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We conduct business in numerous countries outside of the United States (“U.S.”). Our international business is subject to numerous risks, including fluctuations in foreign currency exchange rates and controls, import and export controls, and other laws, policies and regulations of foreign governments. Refer to our discussion of risks related to our foreign operations as included in Item 1A, Risk Factors and our discussion of foreign income included in Item 7 under “Results of Operations” included in this Annual Report. Refer to net revenues from unaffiliated customers by geographic region included in Note 10: “Segment Information” in the Notes to Consolidated Financial Statements in Part IV, Item 15(a) of this Annual Report.
 
Backlog

At June 29, 2019 and June 30, 2018, our current quarter backlog was approximately $391.3 million and $441.1 million, respectively. Our current quarter backlog includes customer request dates to be filled within the next three months. As is customary in the semiconductor industry, these orders may be canceled in most cases without penalty to customers. Accordingly, we believe that our backlog is not a reliable measure for predicting future revenues. All backlog amounts have been adjusted for estimated future distribution ship and debit pricing adjustments.

Research and Development

We believe that research and development is critical to our future competitiveness. Objectives for the research and development function include:

new product definition and development of differentiated products;
design of products with performance differentiation that achieve high manufacturing yield and reliability;
development of, and access to, manufacturing processes and advanced packaging;
development of hardware, software, and algorithms to support the acceptance and design-in of our products in the end customer's system; and
development of high-integration products across multiple end markets.

Our research and development plans require engineering talent and tools for product definition, electronic design automation (“EDA”), circuit design, process technologies, test development, test technology, packaging development, software development and applications support. Research and development expenses were $435.2 million, $450.9 million and $454.0 million in fiscal years 2019, 2018 and 2017, respectively. See “Research and Development” under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, for more information.

Competition

The linear and mixed-signal analog integrated circuit industry is intensely competitive, and virtually all major semiconductor companies presently compete with, or conceivably could compete with, some portion of our business.

We believe the principal elements of competition include:

technical innovation;
service and support;
time to market;
business, operational, marketing and financial strategy;
differentiated product performance and features;
quality and reliability;
product pricing and delivery capabilities;
customized design and applications;
business relationship with customers;
experience, skill and productivity of employees and management; and
manufacturing competence and inventory management.

Our principal competitors include, but are not limited to, ams AG, Analog Devices, Inc., Cirrus Logic, Inc., Monolithic Power Systems, Inc., NXP Semiconductors N.V., Semtech Corporation, Silicon Laboratories, and Texas Instruments Inc. We expect increased competition in the future from other emerging and established companies as well as through consolidation of our competitors within the semiconductor industry.

Patents, Licenses and Other Intellectual Property Rights


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We rely upon both know-how and patents to develop and maintain our competitive position.

It is our policy to seek patent protection for significant inventions that may be patented, though we may elect, in certain cases, not to seek patent protection even for significant inventions if other protection, such as maintaining the invention as a trade secret, is considered by us to be more advantageous. In addition, we have registered certain of our mask sets under the Semiconductor Chip Protection Act of 1984, as amended. We hold a number of patents worldwide with expiration dates ranging from calendar year 2019 to 2038. We have also registered several of our trademarks and copyrights in the United States and other countries.

Employees

As of June 29, 2019, we employed 7,131 persons.

Environmental Regulations

Our compliance with foreign, federal, state and local laws and regulations that have been enacted to regulate the environment has not had a material adverse effect on our capital expenditures, earnings, or competitive or financial position.

Executive Officers

For information regarding our current executive officers, see Part III, Item 10 of this Annual Report.


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ITEM 1A. RISK FACTORS

The following risk factors and other information included in this Annual Report should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also adversely affect our business.

The sale of our products and our results of operations are dependent upon demand from the end markets of our customers, which is cyclical.

Our products are sold in the following major end-markets: (i) Automotive, (ii) Communications and Data Center, (iii) Computing, (iv) Consumer, and (v) Industrial. The demand for our products is subject to the strength of these five major end-markets that we serve and to some extent the overall economic climate. We often experience decreases and increases in demand for our products primarily due to the end-market demand of our customers. Our business and results of operations may be adversely affected if demand for our products decreases or if we are unable to meet an increase in demand without significantly increasing the lead-time for the delivery of our products. The semiconductor market historically has been cyclical with periods of increased demand and rapid growth followed by periods of oversupply and subsequent contraction and subject to significant and often rapid increases and decreases in product demand. As a result, changes could have adverse effects on our results of operation.

The loss of, or substantial reduction in sales to, any of our large customers could have a material adverse effect on our business, financial condition, and results of operations.

A reduction in demand or loss of one or more of our large customers may adversely affect our business. For example, sales to Samsung, our largest single end customer (through direct sales and distributors), accounted for approximately 10% of net revenues in fiscal years 2019, 2018 and 2017. The delay, significant reduction in, or loss of, orders from any one or more of our large customers (including curtailments of purchases due to a change in the design, manufacturing or sourcing policies or practices of these customers or the timing of customer inventory adjustments) or demands of price concessions from any one or more of our large customers could have a material adverse effect on our net revenues and results of operations.

Our global operations subject us to risks associated with changes in trade policies, including international trade disputes, and domestic or international political, social, economic or other conditions.

We are subject to the political and legal risks inherent in international operations. Exposure to political instabilities, different business policies and varying legal or regulatory standards, including, but not limited to, international trade disputes, could result in the imposition of tariffs, sanctions, restrictions on the U.S. import and export controls and other trade restrictions or barriers, which could negatively impact economic activity and lead to a contraction of customer demand. For example, in 2018, the U.S. and China began to impose partial tariffs on each other's products, and the trade tension between the two countries has escalated in 2019. In addition, the U.S. has and may continue to focus on the business practices of specific foreign companies, including large technology companies based in China, which may result in future U.S. government actions impacting our ability to do business with such companies. The possibility of a deteriorating trade relationship may put us at a disadvantage in competition with non-U.S. companies and lead to a decreased customer demand for our products in the long-term due to the growing economic risks and geopolitical uncertainty between the U.S. and China. International trade disputes could also result in various forms of protectionist trade legislation and other protectionist measures that could limit the Company’s ability to operate its business and have a negative effect on end-market demand, which could have a material adverse impact on our results of operations and financial condition. Additionally, political and economic changes or volatility, political unrest, civil strife, public corruption and other economic or political uncertainties in certain countries, such as the Philippines, could interrupt and negatively affect our business operations. We have been impacted by these problems in the past, but none have materially affected our results of operations. Problems in the future or not-yet-materialized consequences of past problems could affect deliveries of our products to our customers, possibly resulting in business interruptions, substantially delayed or lost sales and/or increased expenses that cannot be passed on to our customers, any of which could ultimately have a material adverse effect on our business.

Incorrect forecasts, reductions, cancellations or delays in orders for our products and volatility in customer demand could adversely affect our results of operations.

As is customary in the semiconductor industry, customer orders may be canceled in most cases without penalty to the customers. Some customers place orders that require us to manufacture products and have them available for shipment, even though the customer may be unwilling to make a binding commitment to purchase all, or even any, of the products. In other cases, we manufacture products based on forecasts of customer demands. As a result, we may incur inventory and manufacturing costs in

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advance of anticipated sales and are subject to the risk of cancellations of orders, potentially leading to an initial inflation of backlog followed by a sharp reduction. Because of the possibility of order cancellation, backlog should not be used as a measure of future revenues. Furthermore, canceled or unrealized orders, especially for products meeting unique customer requirements, may also result in an inventory of unsaleable products, causing potential inventory write-downs, some of which could be substantial and could have a material adverse effect on our gross margins and results of operations.

We may experience difficulties implementing our new global execution system, which may adversely affect our ability to effectively supply products to our customers.

We have been implementing a new global execution system (“GES”) as part of our efforts to integrate inventory movement with our financial reporting system. This implementation is a major undertaking and requires significant employee time and financial resources. While we have invested significant resources in planning and project management, implementation issues may arise. For example, we may experience staff turnover, which may delay the implementation of GES. Additionally, unforeseen issues may arise, which could disrupt the implementation of GES. Any disruptions, delays or deficiencies in the design and the implementation or operation of GES could disrupt or reduce our supply chain execution and operational efficiency which may lead to our inability to effectively supply products to our customers and may impact the accuracy of our financial reporting. Our inability to successfully manage the implementation of GES could materially adversely affect our business, results of operations and financial condition.

Our operating results may be adversely affected by our inability to timely develop new products through our research and development efforts. We may be unsuccessful in developing and selling new products necessary to maintain or expand our business.

The marketplace for our products is constantly changing and we are required to make substantial ongoing investments in our research and development. The semiconductor industry is characterized by rapid technological change, variations in manufacturing efficiencies of new products, and significant expenditures for capital equipment and product development. New product introductions are a critical factor for maintaining or increasing future revenue growth and sustained or increased profitability. However, they can present significant business challenges because product development commitments and expenditures must be made well in advance of the related revenues. The success of a new product depends on a variety of factors including accurate forecasts of long-term market demand and future technological developments, accurate anticipation of competitors' actions and offerings, timely and efficient completion of process design and development, timely and efficient implementation of manufacturing and assembly processes, product performance, quality and reliability of the product, and effective marketing, revenue and service.

Our manufacturing operations may be interrupted or suffer yield problems.

The manufacture and design of integrated circuits is highly complex. We may experience a disruption in factory operations, manufacturing problems in achieving acceptable yields, or product delivery delays in the future as a result of, among other things, outdated infrastructure, upgrading or expanding existing facilities, equipment malfunctioning, construction delays, changing our process technologies, capacity constraints, or new technology qualification delays, particularly in our internal fabrication facilities. For example, our internal fabrication facility at Beaverton, Oregon requires additional investment to, among other things, upgrade its infrastructure and manufacturing equipment. In connection with the upgrading of our facilities, we may experience a disruption in factory operations, which could result in damages to the facilities and stoppages to the operations of the facilities. Additionally, our internal fabrication facilities may be harmed or rendered inoperable due to damages resulting from fire, natural disaster, unavailability of electric power or other causes, which may render it difficult or impossible for us to manufacture our products for some period of time.

If our internal fabrication facilities become unavailable to us, it would be time consuming, difficult, and costly to arrange for new manufacturing facilities to supply our products given the nature of our products. In addition, our third party's manufacturing facilities may not be available to us due to natural or man-made disasters, labor unrest, political conditions or other causes. To the extent we experience disruptions at our wafer fabrication facilities or we do not achieve acceptable manufacturing yields, our results of operations could be adversely affected.

Our dependence on subcontractors for assembly, test, freight, wafer fabrication and logistic services and certain manufacturing services may cause delays beyond our control in delivering products to our customers.

We rely on subcontractors located in various parts of the world for assembly and CSP packaging services, freight and logistic services, wafer fabrication, and sorting and testing services. For example, in connection with the sale of our semiconductor wafer fabrication facility in San Antonio, Texas to TowerJazz Texas, Inc. (formerly known as TJ Texas, Inc.) ("TowerJazz"), an indirect

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wholly-owned subsidiary of Tower Semiconductor Ltd. (“Tower”), in the third quarter of fiscal year 2016, we entered into a long-term supply agreement with TowerJazz, pursuant to which we procure from TowerJazz certain quantities of silicon wafers upon which integrated circuits are made that are designed by us. None of the subcontractors we currently use are affiliated with us. Reliability problems experienced by our subcontractors or the inability to promptly replace any subcontractor could cause serious problems in delivery and quality resulting in potential product liability to us. Such problems could impair our ability to meet our revenue plan in the fiscal year period impacted by the disruption. Failure to meet the revenue plan may materially adversely impact our results of operations.

Any disruptions in our sort, assembly, test, freight, and logistic operations or in the operations of our subcontractors, including, but not limited to, the inability or unwillingness of any of our subcontractors to produce or timely deliver adequate supplies of processed wafers, integrated circuit packages, or tested products conforming to our quality standards, or other required products or services could damage our reputation, relationships, and goodwill with customers. Furthermore, finding alternate sources of supply or initiating internal wafer processing for these products may not be economically feasible.

Our critical information systems are subject to cyber-attacks, data breaches, interruptions, and failures.

We rely on several information technology systems to provide products and services, process orders, manage inventory, process shipments to customers, keep financial, employee, and other records, and operate other critical functions. Maintaining the security of our information technology systems is important to our business and reputation. These information technology systems are subject to damage or interruption from a number of potential sources. Security breaches, including cyber-attacks, phishing attacks, denial-of-service attacks, or attempts to misappropriate or compromise confidential or proprietary information or sabotage enterprise information technology systems, are becoming increasingly frequent and more sophisticated. We currently have developed, and are in the process of developing more systems and procedures that include, among other things, ongoing internal risk assessments to identify vulnerabilities, an internal group dedicated to reviewing cybersecurity threats, and the adoption of an information security policy. Although we take steps to detect and investigate security incidents and implement protections to prevent their recurrence, in some cases, we might be unable to anticipate or prevent all attacks because the techniques used to obtain unauthorized access to or sabotage networks and systems are constantly evolving. Despite our efforts to mitigate risks associated with cybersecurity events, our information technology systems may still be susceptible to adaptive persistent threats, catastrophic cybersecurity attacks, damage, disruptions, or shutdowns due to power outages, hardware failures, computer malware and viruses, telecommunication failures, user errors, or other events. Risks associated with these threats include, but are not limited to, loss of intellectual property, impairment of our ability to conduct our operations, disruption of our customers’ operations, loss or damage to our customer data delivery systems, and increased costs to prevent, respond to or mitigate catastrophic cybersecurity events. A prolonged systemic disruption in the information technology systems could result in the loss of sales and customers and significant consequential costs, which could adversely affect our business. In addition, cybersecurity breaches of our information technology systems could result in the misappropriation or unauthorized disclosure of sensitive or confidential information belonging to us or to our customers, partners, suppliers, or employees. Our business and reputation could be harmed, and we could be subject to legal and regulatory claims which could result in significant financial or reputational damage.

Our results of operations could be adversely affected by warranty claims and product liability.

We face an inherent risk of exposure to product liability suits in connection with reliability problems or other product defects that may affect our customers. Our products are used by a variety of industries, including the automotive and medical industries. Failure of our products to perform to specifications, or other product defects, could lead to substantial damage to both the end product in which our device has been placed and to the user of such end product. Although we take measures to protect against product defects, if a product liability claim is brought against us, the cost of defending the claim could be significant and any adverse determination could have a material adverse effect on our results of operations.

If we fail to attract and retain qualified personnel, our business may be harmed.

Our success depends to a significant extent upon the continued service of our chief executive officer, our other executive officers, and key management and technical personnel, particularly our experienced engineers and business unit managers, and on our ability to continue to attract, retain, and motivate qualified personnel. The loss of the services of one or several of our executive officers could have a material adverse effect on our Company. In addition, we could be materially adversely affected if the turnover rates for engineers and other key personnel increases significantly or we are unsuccessful in attracting, motivating and retaining qualified personnel. Should we lose one or more engineers who are key to a project's completion during the course of a particular project, the completion of such project may be delayed which could negatively affect customer relationships and goodwill and have a material adverse effect on our results of operations.


11



Our independent distributors and sales representatives may underperform relative to our expectations, terminate their relationship with us or fail to make payments on outstanding accounts receivable to us, which would adversely affect our financial results.

A portion of our sales is realized through independent electronics distributors that are not under our direct control. These independent sales organizations generally represent product lines offered by several companies and thus could underperform for various reasons, including as a result of reducing their sales efforts applied to our products, or terminate their distribution relationship with us. In fiscal 2019, 46% of our revenues were generated from distributors, the largest of which was Avnet, our primary world-wide distributor, which accounted for 22% of our revenues. We require certain foreign distributors to provide a letter of credit to us in an amount up 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 us. Where credit limits have been established above the amount of the letter of credit, we are exposed for the difference. We do not require letters of credit from any of our domestic distributors and are not contractually protected against accounts receivable default or bankruptcy by these distributors. The inability to collect open accounts receivable could adversely affect our results of operations and financial condition. Termination of a significant distributor, whether at our or the distributor's initiative, or the general underperformance of a significant distributor could be disruptive and harmful to our current business. Additional factors that could adversely affect us include the difficulties of managing independent sales organizations due to any matter involving fraud or dishonesty on the part of the independent distributors and sales representatives. It is often difficult to anticipate or immediately detect such misconduct of an independent third party.  

If we fail to enter into future vendor managed inventory arrangements or fail to supply the specific product or quantity under such arrangements, the results of our operations and financial condition may be materially adversely impacted.

We enter into arrangements with certain original equipment manufacturers (“OEMs”) and electronic manufacturing services (“EMS”) partners to consign quantities of certain products within proximity of the OEMs and EMS partners' manufacturing location. The inventory is physically segregated at these locations and we retain title and risk of loss related to this inventory until such time as the OEM or EMS partner pulls the inventory for use in its manufacturing process. Once the inventory is pulled by the OEM or EMS partner, title and risk of loss pass to the customer, at which point we relieve inventory and recognize revenue and the related cost of goods sold. The specific quantities to be consigned are based on a forecast provided by the OEM or EMS partner. Generally, the arrangements with the OEMs and EMS partners provide for transfer of title and risk of loss once product has been consigned for a certain length of time.

We believe these arrangements will continue to grow in terms of number of customers and products and will increase in proportion to consolidated net revenues. Should we be unable or unwilling to enter into such agreements as requested by OEMs or EMS partners, our results of operations may be materially adversely impacted. In addition, should we be unable to supply the specific product in the quantity needed by the OEM or EMS partner as reflected in their forecast, we may be liable for damages, including, but not limited to, lost revenues and increased production costs which could have a material adverse impact on our results of operations and financial condition. Should we supply product in excess of the OEM or EMS partners' actual usage, any inventory not consumed may become excess or obsolete, which would result in an inventory write-down that could materially adversely affect our results of operations.

We may be unable to adequately protect our proprietary rights, which may impact our ability to compete effectively.

We rely upon know-how, trade secrets, and patents to develop and maintain our competitive position. There can be no assurance that others will not develop or patent similar technology or reverse engineer our products or that the confidentiality agreements upon which we rely will be adequate to protect our interests. Moreover, the laws of some foreign countries generally do not protect proprietary rights to the same extent as the United States, and we may encounter problems in protecting our proprietary rights in those foreign countries. Periodically, we have been asked by certain prospective customers to provide them with broad licenses to our intellectual property rights in connection with the sale of our products to them. Such licenses, if granted, may have a negative impact on the value of our intellectual property portfolio. Other companies have obtained patents covering a variety of semiconductor designs and processes, and we could be required to obtain licenses under some of these patents or be precluded from making and selling products that are alleged to be infringing, if such patents are valid and other design and manufacturing solutions are not available. There can be no assurance that we would be able to obtain licenses, if required, upon commercially reasonable terms or at all.


12



We may suffer losses and business interruption if our products infringe the intellectual property rights of others.

In the past, it has been common in the semiconductor industry for patent holders to offer licenses on reasonable terms and rates. Although the practice of offering licenses appears to be generally continuing, in some situations, typically where the patent directly relates to a specific product or family of products, patent holders have refused to grant licenses. In any of those cases, there can be no assurance that we would be able to obtain any necessary license on terms acceptable to us, if at all, or that we would be able to re-engineer our products or processes in a cost-effective manner to avoid claims of infringement. Any litigation in such a situation could involve an injunction to prevent the sales of a material portion of our products, the reduction or elimination of the value of related inventories and the assessment of a substantial monetary award for damages related to past sales, all of which could have a material adverse effect on our results of operations and financial condition.

We may experience losses related to intellectual property indemnity claims.

We provide intellectual property indemnification for 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 and copyrights. 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 been required to pay significant amounts for intellectual property indemnification claims. However, there can be no assurance that we will not have significant financial exposure under those intellectual property indemnification obligations in the future.

Our financial results may be adversely affected by increased tax rates and exposure to additional tax liabilities.

On June 18, 2019, the U.S. Treasury and the Internal Revenue Service released temporary regulations under Internal Revenue Code (“IRC”) Section 245A (“Section 245A”), as enacted by the Tax Cuts and Jobs Act, and IRC Section 954(c)(6) (the “Temporary Regulations”), which apply retroactively to intercompany dividends occurring after December 31, 2017. The Temporary Regulations limit the applicability of the foreign personal holding company income (“FPHCI”) look-through exception for certain intercompany dividends received by a controlled foreign corporation. Before application of the retroactive Temporary Regulations, the Company benefited in fiscal years 2018 and 2019 from the FPHCI look-through exception. The Company has analyzed the relevant Temporary Regulations and concluded that they were not validly issued. Therefore, the Company has not accounted for the effects of the retroactive Temporary Regulations in its results of operations for fiscal year 2019. The Company believes it has strong arguments in favor of its position and that it has met the more likely than not recognition threshold that its position will be sustained. The Company intends to vigorously defend its position, however, due to the uncertainty involved in challenging the validity of regulations as well as a potential litigation process, there can be no assurances that the relevant Temporary Regulations will be invalidated, modified or that a court of law will rule in favor of the Company. An unfavorable resolution of this issue could have a material adverse impact on our results of operations and financial condition.


We are subject to taxation in various countries and jurisdictions. Significant judgment is required to determine tax liabilities on a worldwide basis. Any significant increase in our future effective tax rates could reduce net income for future periods and may have a material adverse impact on our results of operations. A number of factors may increase our future effective tax rates, including, but not limited to:

the jurisdictions in which profits are determined to be earned and taxed;

changes in our global structure that involve changes to investment in technology outside of the United States;

the resolution of issues arising from tax audits with various tax authorities,


13



changes in the valuation of our deferred tax assets and liabilities;

adjustments to estimated taxes upon finalization of various tax returns;

increases in expenses not deductible for tax purposes, including impairments of goodwill in connection with acquisitions;

changes in available tax credits;

changes in share-based compensation;

changes in tax laws or the interpretation of such tax laws, including laws or rules enacted by countries in response to the Base Erosion and Profit Shifting (“BEPS”) project conducted by the Organization for Economic Co-operation and Development (“OECD”); and

changes in generally accepted accounting principles.


Our operating results may be adversely affected by unfavorable economic and market conditions.

The global economic environment could subject us to increased credit risk should customers be unable to pay us, or delay paying us, for previously purchased products. Accordingly, reserves for doubtful accounts and write-offs of accounts receivable may increase. In addition, weakness in the market for end users of our products could harm the cash flow of certain of our distributors and resellers who could then delay paying their obligations to us or experience other financial difficulties. This would further increase our credit risk exposure and potentially cause delays in our recognition of revenue on sales to these customers.

If economic or market conditions deteriorate globally, in the United States or in other key markets, our business, operating results, and financial condition may be materially and adversely affected.

Shortage of raw materials or supply disruption of such raw materials could harm our business.

The semiconductor industry has experienced a large expansion of fabrication capacity and production worldwide over time. As a result of increasing demand from semiconductor, solar and other manufacturers, availability of certain basic materials and supplies, and of subcontract services, has been limited from time to time over the past several years, and could come into short supply again if overall industry demand exceeds the supply of these materials and services in the future.

We purchase materials and supplies from many suppliers, some of which are sole-sourced. If the availability of these materials and supplies is interrupted, we may not be able to find suitable replacements. In addition, from time to time natural disasters can lead to a shortage of some materials due to disruption of the manufacturer's production. We continually strive to maintain availability of all required materials, supplies and subcontract services. However, we do 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 material adverse effect on our ability to achieve our production requirements.

We may be liable for additional production costs and lost revenues to certain customers with whom we have entered into customer supply agreements if we are unable to meet certain product quantity and quality requirements.

We enter into contracts with certain customers whereby we commit to supply quantities of specified parts at a predetermined scheduled delivery date. The number of such arrangements continues to increase as this practice becomes more commonplace. Should we be unable to supply the customer with the specific part at the quantity and product quality desired and on the scheduled delivery date, the customer may incur additional production costs. In addition, the customer may lose 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. Under certain customer supply agreements, we may be liable for direct additional production costs or lost revenues. If products are not shipped on time or are quality deficient, we may be liable for penalties and resulting damages. Such liability, should it arise, and/or our inability to meet these commitments to our customers may have a material adverse impact on our results of operations and financial condition and could damage our relationships with the affected customers, reputation and goodwill.

Our products may fail to meet new industry standards or requirements and the efforts to meet such industry standards or requirements could be costly.


14



Many of our products are based on industry standards that are continually evolving. Our ability to compete in the future will depend on our ability to identify and ensure compliance with these evolving industry standards. The emergence of new industry standards could render our products incompatible with products developed by major systems manufacturers. As a result, we could be required to invest significant time and effort and to incur significant expense to redesign our products to ensure compliance with relevant standards. If our products are not in compliance with prevailing industry standards or requirements, we could miss opportunities to achieve crucial design wins which in turn could have a material adverse effect on our business, operations and financial results.

Our operating results may be adversely affected by increased competition and consolidation of competitors in our market.

The semiconductor industry has experienced significant consolidation in recent years. As a result, we experience intense competition from a number of companies, some of which have significantly greater financial, manufacturing and marketing resources than us, as well as greater technical resources and proprietary intellectual property rights than us. The principal elements of competition include product performance, functional value, quality and reliability, technical service and support, price, diversity of product line, and sale of integrated system solutions which combine the functionality of multiple chips on one chip for a price as part of a complete system solution and delivery capabilities. We believe we compete favorably with respect to these factors, although we may be at a disadvantage in comparison to companies with broader product lines, greater technical service and support capabilities and larger research and development budgets. We may be unable to compete successfully in the future against existing or new competitors and our operating results may be adversely affected by increased competition or our inability to timely develop new products to meet the needs of our customers. In addition, our competitors may become more aggressive in their pricing practices which may adversely impact our gross margins and market share. For example, our competitors may offer lower prices than us, or they may price multiple products or services in a bundle to provide additional incentives that we may not be able to match. We may be unable to mitigate the negative effects of such price competition, which may adversely affect our operating results.

Extensions in lead-time for delivery of products could adversely affect our future growth opportunities and results of operations.

Supply constraints, which may include limitations in manufacturing capacity, could impede our ability to grow revenues and meet increased customer demands for our products. Our results of operations may be adversely affected if we fail to meet such increase in demand for our products without significantly increasing the lead-time required for our delivery of such products. Any significant increase in the lead-time for delivery of products may negatively affect our customer relationships, reputation as a dependable supplier of products and ability to obtain future design wins, while potentially increasing order cancellations, aged, unsaleable or otherwise unrealized backlog, and the likelihood of our breach of supply agreement terms. Any of the foregoing factors could negatively affect our future revenue growth and results of operations.

We are subject to a variety of domestic and international laws and regulations that could impose substantial costs on us and may adversely affect our business.

We are subject to numerous U.S. and international laws, rules and regulations covering a wide variety of subject matters, including, but not limited to, data privacy and protection, environment, safety and health, exports and imports, bribery and corruption, tax, labor and employment, competition, market access, and intellectual property ownership and infringement. Compliance with these laws, rules and regulations may be onerous and expensive and could restrict our ability to operate our business. If we fail to comply or if we become subject to enforcement activity, we could be subject to fines, penalties or other legal liability. Furthermore, should these laws, rules and regulations be amended or expanded, or new ones enacted, we could incur materially greater compliance costs or restrictions on our ability to operate our business.

Among other laws and regulations, we are subject to the General Data Protection Regulation (“GDPR”) effective in the European Union (“EU”), which created a data protection compliance regime that imposed substantial obligations on companies collecting, processing and transferring personal data and may impose significant penalties for non-compliance. Similarly, certain jurisdictions in the United States and some countries in which we operate may consider or have passed legislation implementing data protection requirements that could require us to change our business practices and increase the cost and complexity of compliance. In addition to GDPR, we are subject to the 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 companies and various other aspects of the operation of our business, and the Foreign Corrupt Practices Act and similar anti-bribery laws, which prohibit companies from making improper payments to government officials for the purposes of obtaining or retaining business.

While our Company’s policies and procedures mandate compliance with such laws and regulations, there can be no assurance that our employees and agents will always act in strict compliance. If we fail to comply or if we become subject to enforcement activity, we could be subject to fines, penalties or other legal liability. Furthermore, should these laws, rules and regulations be amended

15



or expanded, or new ones enacted, we could incur materially greater compliance costs or restrictions on our ability to operate our business, which could have a material adverse impact on our results of operations and financial condition. Our failure or inability to comply with existing or future laws, rules or regulations, or changes to existing laws, rules or regulations could subject us to fines, penalties or other legal liability.

Our quarterly operating results may fluctuate, which could adversely impact our common stock price.

We believe that period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as indicators of future performance. Our operating results have in the past been, and will continue to be, subject to quarterly fluctuations as a result of numerous factors, some of which may contribute to more pronounced fluctuations in an uncertain global economic environment. These factors include, but are not limited to, the following:

Fluctuations in demand for our products and services;

Loss of a significant customer or significant customers electing to purchase from another supplier;

Reduced visibility into our customers' spending plans and associated revenue;

The level of price and competition in our product markets;

Our pricing practices, including our use of available information to maximize pricing potential;

The impact of the uncertain economic and credit environment on our customers, channel partners, and suppliers, including their ability to obtain financing or to fund capital expenditures;

The overall movement toward industry consolidations among our customers and competitors;

Below industry-average growth of the non-consumer segments of our business;

Announcements and introductions of new products by our competitors;

Our ability to generate sufficient earnings and cash flow to pay dividends to our stockholders;

Deferrals of customer orders in anticipation of new products or product enhancements (introduced by us or our competitors);

Our ability to meet increases in customer orders in a timely manner;

Striking an appropriate balance between short-term execution and long-term innovation;

Our ability to develop, introduce, and market new products and enhancements and market acceptance of such new products and enhancements; and

Our levels of operating expenses.

Environmental, safety and health laws and regulations could force us to expend significant capital and incur substantial costs.

Various foreign and domestic federal, state, and local government agencies impose a variety of environmental, safety and health laws and regulations on the storage, handling, use, discharge and disposal of certain chemicals, gases and other substances used or produced in the semiconductor manufacturing process as well as the health and safety regulations related to our employees. Historically, compliance with these regulations has not had a material adverse effect on our capital expenditures, earnings, or competitive or financial position. There can be no assurance, however, that interpretation and enforcement of current or future environmental, safety and health laws and regulations will not impose costly requirements upon us. Any failure by us to adequately control the storage, handling, use, discharge or disposal of regulated substances could result in fines, sales limitations, suspension of production, alteration of wafer fabrication processes and legal liability, which may materially adversely impact our financial condition, results of operations or liquidity.


16



In addition, some of our customers and potential customers may require that we implement operating practices that are more stringent than applicable legal requirements with respect to health regulations, environmental matters or other items. As a result, these requirements may increase our own costs regarding developing, administering, monitoring and auditing these customer-requested practices at our own sites and those in our supply chain.

We may pursue acquisitions and investments that could harm our operating results and may disrupt our business.

We have made and will continue to consider making strategic business investments, alliances, and acquisitions we consider necessary or desirable to gain access to key technologies that we believe will complement our existing technical capability and support our business model objectives. Investments, alliances, and acquisitions involve risks and uncertainties that may negatively impact our future financial performance and result in an impairment of goodwill. If integration of our acquired businesses is not successful, we may not realize the potential benefits of an acquisition or suffer other adverse effects that we currently do not foresee. We may also need to enter new markets in which we have no or limited experience and where competitors in such markets have stronger market positions.

We also invest in early-to-late stage private companies to further our strategic objectives and support key business initiatives. These strategic investments may not perform as expected. We cannot provide assurance that these companies will operate in a manner that will increase or maintain the value of our investment. If these private companies fail, we may not realize a return on our investments. Thus, all of our investments are subject to a risk of a partial or total loss of investment capital.

Any of the foregoing, and other factors, could harm our ability to achieve anticipated levels of profitability from acquired businesses or to realize other anticipated benefits of acquisitions. In addition, because acquisitions of high technology companies are inherently risky, no assurance can be given that our previous or future acquisitions will be successful and will not adversely affect our business, operating results, or financial condition.

Material impairments of our goodwill or intangible assets could adversely affect our results of operations.

Goodwill is reviewed for impairment annually or more frequently if certain impairment indicators arise or upon the disposition of a significant portion of a reporting unit. The review compares the fair value for each reporting unit to its associated book value including goodwill. A decrease in the fair value associated with a reporting unit resulting from, among other things, unfavorable changes in the estimated future discounted cash flow of the reporting unit, may require us to recognize impairments of goodwill. Our intangible assets are amortized over their estimated useful lives, but they are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the sum of the future undiscounted cash flows expected to result from the use of the intangible asset and its eventual disposition is less than the carrying amount of the asset, we would recognize an impairment loss to the extent the carrying amount of the asset exceeds its fair value.

Our debt covenants may limit us from engaging in certain transactions or other activities.

We have entered into debt arrangements that contain certain covenants which may limit the manner in which we conduct our business. For example, the debt indentures that govern our outstanding notes include covenants that, under certain circumstances, limit our ability to grant liens on our facilities and to enter into sale and leaseback transactions, which could limit our ability to secure additional debt funding in the future. In circumstances involving a change of control of the Company followed by a downgrade of the rating of the notes, we would be required to make an offer to repurchase the affected notes at a purchase price greater than the aggregate principal amount of such notes, plus accrued and unpaid interest. Our ability to repurchase the notes in such events may be limited by our then-available financial resources or by the terms of other agreements to which we are a party. Although we currently have the funds necessary to retire this debt, funds might not be available to repay the notes when they become due in the future.

We are required to comply with the covenants set forth in our debt indentures. If we breach any of the covenants and do not obtain a waiver from the note holders or lenders, then, subject to cure periods, any outstanding indebtedness may be declared immediately due and payable.

Business interruptions from natural disasters could harm our ability to produce products.

We operate our business in worldwide locations. Some of our facilities and those of our subcontractors are located in areas of the world that are susceptible to damage from natural disasters and other significant disruptions, including earthquakes, typhoons, hurricanes, tsunamis, floods, fires, water shortages and other natural catastrophic events. In the event of a natural disaster, we may suffer a disruption in our operations that could adversely affect our results of operations.

17




Our financial condition, operations and liquidity may be materially adversely affected in the event of a catastrophic loss for which we are self-insured.

We are primarily self-insured with respect to many of our commercial risks and exposures. Based on management's assessment and judgment, we have determined that it is generally more cost effective to self-insure these risks. The risks and exposures we self-insure include, but are not limited to, fire, property and casualty, natural disasters, product defects, political risk, general liability, theft, counterfeits, patent infringement, certain employment practice matters and medical benefits for many of our U.S. employees. Should there be catastrophic loss from events such as fires, explosions, earthquakes, or other natural disasters, among many other risks, or adverse court or similar decisions in any area in which we are self-insured, our financial condition, results of operations, and liquidity may be materially adversely affected.

We may be materially adversely affected by currency fluctuations.

We conduct our manufacturing and other operations in various worldwide locations. A portion of our operating costs and expenses at foreign locations are paid in local currencies. Many of the materials used in our products and much of the manufacturing process for our products are supplied by foreign companies or by our foreign operations, such as our test operations in the Philippines and Thailand. Approximately 89%, 88% and 88% of our net revenues in fiscal years 2019, 2018 and 2017, respectively, were from international sales. Currency exchange fluctuations could decrease revenue and increase our operating costs, the cost of components manufactured abroad, and the cost of our products to foreign customers, or decrease the costs of products produced by our foreign competitors.

Exiting certain product lines or businesses, or restructuring our operations, may adversely affect certain customer relationships and produce results that differ from our intended outcomes.

The nature of our business requires strategic changes from time to time, including restructuring our operations and divesting and consolidating certain product lines and businesses. The sale of facilities, or the exiting of certain product lines or businesses, may adversely affect certain customer relationships, which may have a material adverse effect on our business, financial condition, and results of operations. Additionally, our ability to timely shut down our facilities or otherwise exit product lines and businesses, or to close or consolidate operations, depends on a number of factors, many of which are outside of our control. If we are unable to shut down a facility or exit a product line or business in a timely manner, or to restructure our operations in a manner we deem to be advantageous, this could have a material adverse effect on our business, financial condition, and results of operations. Even if the sale of a facility or divestment is successful, we may face indemnity and other liability claims by the acquirer or other parties.

Our stock price may be volatile.

The market price of our common stock may be volatile and subject to wide fluctuations. Fluctuations have occurred and may continue to occur in response to various factors, many of which are beyond our control.

In addition, the market prices of securities of technology companies, including those in the semiconductor industry, generally have been and remain volatile. This volatility has significantly affected the market prices of securities of many technology companies for reasons frequently unrelated to the operating performance of the specific companies. If our actual operating results or future forecasted results do not meet the expectations of securities analysts or investors, who may derive their expectations by extrapolating data from recent historical operating results, the market price of our common stock may decline. Accordingly, you may not be able to resell shares of our common stock at a price equal to or higher than the price you paid for them.

Due to the nature of our compensation programs, some of our executive officers sell shares of our common stock each quarter or otherwise periodically, including pursuant to trading plans established under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. Regardless of the reasons for such sales, analysts and investors could view such actions in a negative light and the market price of our stock could be adversely affected as a result of such periodic sales.

Our certificate of incorporation contains certain anti-takeover provisions that may discourage, delay or prevent a hostile change in control of our Company.

Our certificate of incorporation permits our Board of Directors to authorize the issuance of up to 2,000,000 shares of preferred stock and to determine the rights, preferences and privileges and restrictions applicable to such shares without any further vote or action by our stockholders. Any such issuance might discourage, delay or prevent a hostile change in control of our Company, which may be considered beneficial to our stockholders.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our worldwide headquarters is in San Jose, California. Manufacturing and other operations are conducted in several locations worldwide. The following table provides certain information regarding our principal offices and manufacturing facilities at June 29, 2019:
Principal Properties
Use(s)
Approximate
Floor Space
(sq. ft.)
Cavite, the Philippines
Manufacturing, engineering, and administrative
489,000

 
 
 
San Jose, California
Corporate headquarters, engineering, sales, and administrative
435,000

 
 
 
Beaverton, Oregon
Wafer fabrication, engineering, and administrative
312,000

 
 
 
Chonburi Province, Thailand
Manufacturing, engineering, and administrative
144,000

 
 
 
Dallas, Texas†
Engineering, sales, and administrative
82,000

 
 
 
Chandler, Arizona
Engineering, sales, and administrative
65,000

 
 
 
Bangalore, India†
Engineering and administrative
49,000

 
 
 
Colorado Springs, Colorado†
Engineering and administrative
28,000

 
 
 
Dublin, Ireland†
Administrative and sales
20,000


† Leased.

In addition to the property listed in the above table, we also lease sales, engineering, administration and manufacturing offices and other premises at various locations in the United States and internationally under operating leases, none of which are material to our future cash flows. These leases expire at various dates through 2030. We anticipate no difficulty in retaining occupancy of any of our other manufacturing, office or sales facilities through lease renewals prior to expiration or through month-to-month occupancy or in replacing them with equivalent facilities.

We expect these facilities to be adequate for our business purposes through at least the next 12 months.

ITEM 3. LEGAL PROCEEDINGS

Legal Proceedings

We are party or subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business, including proceedings and claims that relate to intellectual property matters. While the outcome of these matters cannot be predicted with certainty, we do not believe that the outcome of any of these matters, individually or in the aggregate, will result in losses that are materially in excess of amounts already recognized or reserved, if any.

Indemnifications

We indemnify certain customers, distributors, suppliers, and subcontractors for attorney fees, damages, and costs awarded against such 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.

Pursuant to our charter documents and separate written indemnification agreements, we have certain indemnification obligations to our current officers, employees, and directors, as well as certain former officers and directors.


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ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on the NASDAQ Global Select Market (“NASDAQ”) under the symbol MXIM. As of August 8, 2019, there were approximately 650 stockholders of record of our common stock.

Issuer Purchases of Equity Securities

The following table summarizes the activity related to stock repurchases for the three months ended June 29, 2019:
 
Issuer Purchases of Equity Securities
 
(in thousands, except per share amounts)
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Amount That May Yet Be Purchased Under the Plans or Programs
Mar 31, 2019 - Apr. 27, 2019
436

 
$
57.46

 
436

 
$
1,192,002

Apr. 28, 2019 - May 25, 2019
574

 
$
56.42

 
574

 
$
1,159,633

May 26, 2019 - Jun. 29, 2019
797

 
$
56.02

 
797

 
$
1,114,982

Total
1,807

 
$
56.50

 
1,807

 
$
1,114,982


On July 20, 2017, the Board of Directors of the Company authorized the repurchase of up to $1.0 billion of the Company's common stock.

On October 30, 2018, the Board of Directors of the Company authorized the repurchase of up to $1.5 billion of the Company’s common stock. The stock repurchase authorization does not have an expiration date and the pace of repurchase activity will depend on factors such as current stock price, levels of cash generation from operations, cash requirements, and other factors. The prior repurchase authorization by the Company’s Board of Directors for the repurchase of common stock was cancelled and superseded by this repurchase authorization.

During fiscal year 2019, we repurchased approximately 9.8 million shares of our common stock for $539.2 million. As of June 29, 2019, we had a remaining authorization of $1.1 billion for future share repurchases. 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 and liquidity and general market and business conditions.

Stock Performance Graph

The line graph below compares the cumulative total stockholder return on our common stock with the cumulative total return of the NASDAQ Composite Index, the Standard & Poor's (S&P) 500 Index, and the Philadelphia Semiconductor Index for the five years ended June 29, 2019. The graph and table assume that $100 was invested on June 27, 2014 (the last day of trading for the fiscal year ended June 28, 2014) in each of our common stock, the NASDAQ Composite Index, the S&P 500 Index, and the Philadelphia Semiconductor Index, and that all dividends were reinvested. Cumulative returns shown on the graph are based on our fiscal year.

This performance graph shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or incorporated by reference into any of our filings under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing. The returns shown are based on historical results and are not intended to suggest or predict future performance.


20



chart-9a38d3554d7b50ff853.jpg
 
Base Year
 
Fiscal Year Ended
 
June 28,
2014
 
June 27,
2015
 
June 25,
2016
 
June 24,
2017
 
June 30,
2018
 
June 29,
2019
Maxim Integrated Products, Inc.
$
100.00

 
$
106.10

 
$
110.89

 
$
149.60

 
$
196.71

 
$
207.26

NASDAQ Composite
$
100.00

 
$
116.85

 
$
109.63

 
$
147.61

 
$
178.85

 
$
192.77

S&P 500
$
100.00

 
$
109.37

 
$
108.37

 
$
132.43

 
$
150.59

 
$
166.27

Philadelphia Semiconductor
$
100.00

 
$
112.86

 
$
111.38

 
$
182.66

 
$
224.57

 
$
254.46


ITEM 6. SELECTED FINANCIAL DATA

Set forth below is a summary of certain consolidated financial information with respect to the Company as of the dates and for the periods indicated. The following selected financial data as of June 29, 2019 and June 30, 2018 and for the years ended June 29, 2019, June 30, 2018 and June 24, 2017 are derived from and should be read in conjunction with, and are qualified by reference to, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 8 - Financial Statements and Supplementary Data, and notes thereto included elsewhere in Part IV, Item 15(a) of this Annual Report. The following selected financial data as of June 24, 2017, June 25, 2016, and June 27, 2015 and for the years ended June 25, 2016 and June 27, 2015 have been derived from our consolidated financial statements not included herein. The historical results are not necessarily indicative of the results to be expected in any future period. We adopted Accounting Standards Codification Topic 606 (Topic 606), effective July 1, 2018, using the modified retrospective method. The reported results for fiscal year 2019 reflect the application of Topic 606, while the reported results for prior fiscal years are not adjusted and continue to be reported under Topic 605.

21



 
Fiscal Year Ended
 
June 29,
2019
 
June 30,
2018
 
June 24,
2017
 
June 25,
2016
 
June 27,
2015
 
(in thousands, except percentages and per share data)
Consolidated Statement of Income Data:
 

 
 

 
 

 
 

 
 

Net revenues 
$
2,314,329

 
$
2,480,066

 
$
2,295,615

 
$
2,194,719

 
$
2,306,864

Cost of goods sold 
813,823

 
853,945

 
849,135

 
950,331

 
1,034,997

Gross margin 
$
1,500,506

 
$
1,626,121

 
$
1,446,480

 
$
1,244,388

 
$
1,271,867

Gross margin %
64.8
%
 
65.6
%
 
63.0
%
 
56.7
%
 
55.1
%
 
 
 
 
 
 
 
 
 
 
Operating income 
$
747,098

 
$
833,448

 
$
694,777

 
$
313,849

 
$
237,280

% of net revenues 
32.3
%
 
33.6
%
 
30.3
%
 
14.3
%
 
10.3
%
 
 
 
 
 
 
 
 
 
 
Net income
$
827,486

 
$
467,318

 
$
571,613

 
$
227,475

 
$
206,038

 
 
 
 
 
 
 
 
 
 
Earnings per share
 

 
 

 
 

 
 

 
 

Basic net income per share
$
3.01

 
$
1.66

 
$
2.02

 
$
0.80

 
$
0.73

Diluted net income per share
$
2.97

 
$
1.64

 
$
1.98

 
$
0.79

 
$
0.71

 
 
 
 
 
 
 
 
 
 
Weighted-average shares used in the calculation of earnings per share:
 

 
 

 
 

 
 

 
 

Basic 
274,966

 
280,979

 
283,147

 
285,081

 
283,675

Diluted 
278,777

 
285,674

 
287,974

 
289,479

 
288,949

 
 

 
 

 
 

 
 

 
 

Dividends declared and paid per share 
$
1.84

 
$
1.56

 
$
1.32

 
$
1.20

 
$
1.12

 
 
 
 
 
 
 
 
 
 
 
As of
 
June 29,
2019
 
June 30,
2018
 
June 24,
2017
 
June 25,
2016
 
June 27,
2015
 
(in thousands)
Consolidated Balance Sheet Data:
 

 
 

 
 

 
 

 
 

Cash, cash equivalents and short-term investments
$
1,898,332

 
$
2,626,399

 
$
2,744,839

 
$
2,230,668

 
$
1,626,119

Working capital 
$
2,168,333

 
$
2,413,014

 
$
3,026,597

 
$
2,197,645

 
$
1,936,226

Total assets 
$
3,743,982

 
$
4,451,561

 
$
4,570,233

 
$
4,234,616

 
$
4,216,071

Long-term debt, excluding current portion
$
992,584

 
$
991,147

 
$
1,487,678

 
$
990,090

 
$
987,687

Total stockholders' equity
$
1,845,276

 
$
1,930,940

 
$
2,202,694

 
$
2,107,814

 
$
2,290,020



22



ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and notes thereto included in Part IV, Item 15(a), the risk factors included in Part I, Item 1A, and the “forward-looking statements” and other risks described herein and elsewhere in this Annual Report.

Overview

We are a global company with manufacturing facilities in the United States, the Philippines and Thailand, and sales offices and design centers throughout the world. We design, develop, manufacture and market linear and mixed-signal integrated circuits, commonly referred to as analog circuits, for a large number of customers in diverse geographical locations. The analog market is fragmented and characterized by diverse applications, a great number of product variations and, with respect to many circuit types, relatively long product life cycles. The major end-markets in which we sell our products are the automotive, communications and data center, computing, consumer and industrial markets. We are incorporated in the State of Delaware.

Critical Accounting Policies

The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our financial statements. The Securities and Exchange Commission (“SEC”) has defined the most critical accounting policies as the ones that are most important to the presentation of our financial condition and results of operations, and that require us to make our most difficult and subjective accounting judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, our most critical accounting policies include revenue recognition, which impacts the recording of net revenues; valuation of inventories, which impacts costs of goods sold and gross margins; the assessment of recoverability of long-lived assets, which impacts impairment of long-lived assets; assessment of recoverability of intangible assets and goodwill, which impacts impairment of goodwill and intangible assets; accounting for income taxes, which impacts the income tax provision; and assessment of litigation and contingencies, which impacts charges recorded in cost of goods sold, selling, general and administrative expenses and income taxes. These policies and the estimates and judgments involved are discussed further below. We have other significant accounting policies that either do not generally require estimates and judgments that are as difficult or subjective, or it is less likely that such accounting policies would have a material impact on our reported results of operations for a given period. Our significant accounting policies are described in Note 2 to the Consolidated Financial Statements included in this Annual Report.

Revenue Recognition

We recognize revenue for sales to direct customers and sales to distributors when a customer obtains control of promised goods or services in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. The transaction price is calculated as selling price net of variable considerations, such as distributor price adjustments. In determining the transaction price, we evaluate whether the price is subject to refund or adjustment to determine the net consideration that is expected to be realized. The transaction price does not include amounts collected on behalf of another party, such as sales taxes or value added tax. We elected the practical expedient to not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed. We estimate returns for sales to direct customers and distributors based on historical return rates applied against current period gross revenue. Specific customer returns and allowances are considered within this estimate.

Accounts receivable from direct customers and distributors are recognized and inventory is relieved upon shipment as title to inventories generally transfers upon shipment, at which point we have a legally enforceable right to collection under normal terms. Accounts receivable related to consigned inventory is recognized when the customer takes title to such inventory from its consigned location, at which point inventory is relieved, title transfers, and we have a legally enforceable right to collection under the terms of the agreement with the related customers. Customers are generally required to pay for products and services within our standard terms, which is net 30 days from the date of invoice.

We estimate potential future 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 returns and sales allowances. Estimates made may differ from actual returns and sales allowances. These differences may materially impact reported revenue and amounts ultimately collected on accounts receivable. Historically, such differences have not been material.


23



Distributor price adjustments are estimated based on our historical experience rates and also considering economic conditions and contractual terms. To date, actual distributor claims activity has been materially consistent with the estimates we have made based on our historical rates.

Our revenue arrangements do not contain significant financing components. Revenue is recognized over a period of time when it is assessed that performance obligations are satisfied over a period rather than at a point in time. When any of the following criteria is fulfilled, revenue is recognized over a period of time:

(a) The customer simultaneously receives and consumes the benefits provided by the performance completed.
(b) Performance creates or enhances an asset (for example, work in process) that the customer controls as the asset is created or enhanced.
(c) Performance does not create an asset with an alternative use, and has an enforceable right to payment for performance completed to date.

Inventories

Inventories are stated at the lower of (i) standard cost, which approximates actual cost on a first-in-first-out basis, or (ii) net realizable value. Our standard cost revision policy is to monitor manufacturing variances and revise standard costs on a quarterly basis. Because of the cyclical nature of the market, inventory levels, obsolescence of technology, and product life cycles, we generally write-down inventories to net realizable value based on forecasted product demand. Actual demand and market conditions may be lower than those projected by us. This difference could have a material adverse effect on our 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 us, gross margin could be favorably impacted as we release these reserves upon the ultimate product shipment. During fiscal years 2019 and 2018, we had net inventory write-downs of $36.1 million and $21.4 million, respectively. When the Company records a write-down on inventory, it establishes a new, lower cost basis for that inventory, and subsequent changes in facts and circumstances will not result in the restoration or increase in that newly established cost basis.

Long-Lived Assets

We evaluate the recoverability of property, plant and equipment in accordance with Accounting Standards Codification (“ASC”) No. 360, Property, Plant, and Equipment (“ASC 360”). We perform 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, we compare projected undiscounted net cash flows associated with the related asset or group of assets over their estimated remaining useful lives 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 our property, plant and equipment could differ from our estimates used in assessing the recoverability of these assets. These differences could result in impairment charges, which could have a material adverse impact on our results of operations.

Intangible Assets and Goodwill

We account for intangible assets in accordance with ASC No. 350, Intangibles-Goodwill and Other (“ASC 350”). We review goodwill and purchased intangible assets for impairment annually and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable, such as when reductions in demand or significant economic slowdowns in the semiconductor industry are present.

Intangible asset reviews are performed when indicators exist that could indicate the carrying value may not be recoverable based on comparisons to undiscounted expected future cash flows. If this comparison indicates that there is impairment, the impaired asset is written down to fair value, which is typically calculated using: (i) quoted market prices or (ii) discounted expected future cash flows utilizing a discount rate consistent with the guidance provided in FASB Concepts Statement No. 7, Using Cash Flow Information and Present Value in Accounting Measurements. Impairment is based on the excess of the carrying amount over the fair value of those assets.


24



Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired. In accordance with ASC 350, the Company tests goodwill for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis or more frequently if the Company believes indicators of impairment exist. As part of its analysis, the Company first performs a qualitative assessment to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, as a result of the qualitative assessment, the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the Company performs the quantitative goodwill impairment test. This test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. The Company generally determines the fair value of the Company's reporting units using the income approach methodology of valuation that includes the discounted cash flow method as well as the market approach which includes the guideline company method. If the carrying amount of a reporting unit exceeds the reporting unit's fair value, the Company recognizes an impairment of goodwill measured as the amount by which a reporting unit’s carrying value exceeds its fair value with the loss recognized not to exceed the total amount of goodwill allocated to the reporting unit.

Accounting for Income Taxes

We must make certain estimates and judgments in the calculation of income tax expense, determination of uncertain tax positions, and in the determination of whether deferred tax assets are more likely than not to be realized. The calculation of our income tax expense and income tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations.

ASC No. 740-10, Income Taxes (“ASC 740-10”), prescribes a recognition threshold and measurement framework for financial statement reporting and disclosure of tax positions taken or expected to be taken on a tax return. Under ASC 740-10, a tax position is recognized in the financial statements when it is more likely than not, based on the technical merits, that the position will be sustained upon examination, including resolution of any related appeals or litigation processes. A tax position that meets the recognition threshold is then measured to determine the largest amount of the benefit that has a greater than 50% likelihood of being realized upon settlement. Although we believe that our computation of tax benefits to be recognized and realized are reasonable, no assurance can be given that the final outcome will not be different from what was reflected in our income tax provisions and accruals. Such differences could have a material impact on our net income and operating results in the period in which such determination is made. See Note 15: “Income Taxes” in the Notes to Consolidated Financial Statements included in Part IV, Item 15(a) of this Annual Report for further information related to ASC 740-10.

We evaluate our deferred tax asset balance and record a valuation allowance to reduce the net deferred tax assets to the amount that is more likely than not to be realized. 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 is made. 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. Realization of our deferred tax asset is dependent primarily upon future taxable income in the U.S. and certain foreign jurisdictions. Our 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 material adjustments to the net deferred tax asset and an accompanying reduction or increase in net income in the period in which such determinations are made.

Litigation and Contingencies

From time to time, we receive notices that our products or manufacturing processes may be infringing the patent or other intellectual property rights of others, notices of stockholder litigation or other lawsuits or claims against us. We periodically assess each matter in order to determine if a contingent liability in accordance with ASC No. 450, Contingencies (“ASC 450”), 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. We expense legal fees associated with consultations and defense of lawsuits as incurred. Based on the information obtained, combined with management's judgment regarding all of the facts and circumstances of each matter, we determine whether a contingent loss is probable and whether the amount of such loss can be estimated. Should a loss be probable and estimable, we record a contingent loss in accordance with ASC 450. In determining the amount of a contingent loss, we take into consideration advice received from experts in the specific matter, the 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, we may need to record additional contingent losses that could materially adversely impact our 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 thereby favorably impacting our results of operations.



25



Results of Operations
The following table sets forth certain Consolidated Statements of Income data expressed as a percentage of net revenues for the periods indicated:
 
For the Year Ended
 
June 29,
2019
 
June 30,
2018
 
June 24,
2017
Net revenues
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of goods sold 
35.2
 %
 
34.4
 %
 
37.0
 %
Gross margin 
64.8
 %
 
65.6
 %
 
63.0
 %
Operating expenses:
 

 
 

 
 

Research and development 
18.8
 %
 
18.2
 %
 
19.8
 %
Selling, general and administrative 
13.3
 %
 
13.0
 %
 
12.7
 %
Intangible asset amortization
0.1
 %
 
0.2
 %
 
0.4
 %
Impairment of long-lived assets
 %
 
 %
 
0.3
 %
Severance and restructuring expenses 
0.2
 %
 
0.6
 %
 
0.5
 %
Other operating expenses (income), net
 %
 
(0.1
)%
 
(1.0
)%
Total operating expenses 
32.6
 %
 
32.0
 %
 
32.7
 %
Operating income (loss)
32.3
 %
 
33.6
 %
 
30.3
 %
Interest and other income (expense), net
0.3
 %
 
(0.3
)%
 
(0.7
)%
Income before taxes
32.6
 %
 
33.3
 %
 
29.6
 %
Provision (benefit) for income taxes
(3.2
)%
 
14.4
 %
 
4.7
 %
Net income 
35.8
 %
 
18.8
 %
 
24.9
 %

The following table shows pre-tax stock-based compensation included in the components of the Consolidated Statements of Income reported above as a percentage of net revenues for the periods indicated:
 
For the Year Ended
 
June 29,
2019
 
June 30,
2018
 
June 24,
2017
 
 

 
 

 
 

Cost of goods sold
0.4
%
 
0.4
%
 
0.4
%
Research and development
1.8
%
 
1.5
%
 
1.6
%
Selling, general and administrative
1.5
%
 
1.3
%
 
1.1
%
 
3.7
%
 
3.2
%
 
3.1
%

A review of our fiscal year 2019 performance compared to fiscal year 2018 performance appears below. A review of our fiscal year 2018 performance compared to fiscal year 2017 performance is set forth in Part II, Item 7 of the Form 10-K for the fiscal year ended June 30, 2018 under the caption "Results of Operations".

Net Revenues

We reported net revenues of $2.3 billion and $2.5 billion in fiscal years 2019 and 2018, respectively. Our net revenues in fiscal year 2019 decreased by 7% compared to our net revenues in fiscal year 2018.

Revenue from industrial products was down 11% due to lower demand for control and automation, automatic test equipment and security products, partially offset by higher demand for USB extension products. Revenue from communications and data center products was down 15% due to lower demand for network and datacom and server products. Revenue from consumer products was down 6% due to lower demand in smartphones and home entertainment products, partially offset by higher demand in handheld computers and wearable products. Revenue from automotive products was up 6%, driven by increased demand for powertrain and safety and security products.

The decrease in revenue was also partially driven by the 52-week fiscal year 2019 compared to the 53-week fiscal year 2018.

26




Approximately 89% and 88% of our net revenues in fiscal years 2019 and 2018, respectively, were derived from customers located outside the United States, primarily in Asia and Europe. Less than 1.0% of our sales are denominated in currencies other than U.S. dollars. The impact of changes in foreign exchange rates on net revenues and our results of operations for fiscal years 2019 and 2018 were immaterial.

Gross Margin

Our gross margin as a percentage of net revenue was 64.8% in fiscal year 2019 compared to 65.6% in fiscal year 2018. Our gross margin decreased by approximately 1 percentage point, primarily due to lower revenue.

Research and Development

Research and development expenses were $435.2 million and $450.9 million for fiscal years 2019 and 2018, respectively, which represented 18.8% and 18.2% of net revenues, respectively. The $15.7 million decrease in research and development expenses was due to lower salaries and other personnel related costs.

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 on our success in recruiting the technical personnel needed for our new product introductions and process development. We view research and development expenditures as critical to maintaining a high level of new product introductions, which in turn are critical to our plans for future growth.

Selling, General and Administrative

Selling, general and administrative expenses were $308.6 million and $322.9 million in fiscal years 2019 and 2018, respectively, which represented 13.3% and 13.0% of net revenues, respectively. The $14.3 million decrease in selling, general and administrative expenses was due to lower salaries and other personnel related costs, and lower travel expenses.

The level of selling, general and administrative expenditures as a percentage of net revenues will vary from period to period, depending on the level of net revenues and our success in recruiting sales and administrative personnel needed to support our operations.

Severance and Restructuring Expenses 

Severance and restructuring expenses were $5.6 million in fiscal year 2019 and $15.1 million in fiscal year 2018, which represented 0.2% and 0.6% of net revenues, respectively. The $9.4 million decrease was primarily due to fewer restructuring programs and activities during fiscal year 2019.

For further details on our restructuring plans and charges recorded, please refer to Note 16: “Restructuring Activities” in our consolidated financial statements included in Part IV, Item 15(a) to this Annual Report.

Interest and Other Income (Expense), Net

Interest and other income (expense), net was $7.3 million in fiscal year 2019 and $(8.6) million in fiscal year 2018, which represented 0.3% and (0.3)% of net revenues, respectively. The increase in interest and other income (expense) of $15.9 million was attributable to increased interest income from cash equivalents and short-term investments, and gains from long-term investments. In addition, interest expense was lower due to the repayment of $500.0 million of notes in November 2018.

Provision (Benefit) for Income Taxes

Our annual income tax expense (benefit) was ($73.1) million and $357.6 million fiscal years 2019 and 2018, respectively. The effective tax rate was (9.7)% and 43.3% for fiscal years 2019 and 2018, respectively.

On December 22, 2017 legislation, commonly referred to as the Tax Cuts and Jobs Act (the “Act”), was enacted. The Act reduced the federal statutory tax rate from 35% to 21%, effective January 1, 2018, which results in federal statutory tax rates for the Company of 21% and 28.1% (average of a 35% rate for the first half of fiscal year 2018 and a 21% rate for the second half of fiscal year 2018) for fiscal years 2019 and 2018, respectively.


27



The Act included a one-time tax on accumulated unremitted earnings of our foreign subsidiaries (“Transition Tax”). SEC Staff Accounting Bulletin No. 118 allowed the use of provisional amounts (reasonable estimates) if accounting for the income tax effects of the Act was not completed. Provisional amounts must be adjusted within a one-year measurement period from the enactment date of the Act. In the second quarter of fiscal year 2018, the Company recorded a $236.9 million provisional Transition Tax charge. During the measurement period the Company gathered information and analyzed available guidance and in the second quarter of fiscal year 2019 recorded a $22.1 million Transition Tax charge, which increased the Company’s fiscal year 2019 tax rate by 2.9%. As of the end of the second quarter of fiscal year 2019 accounting for the income tax effects of the Act was completed.

The Act included Global Intangible Low-Taxed Income (“GILTI”) provisions, which first impact the Company in fiscal year 2019. The GILTI provisions effectively subject income earned by the Company’s foreign subsidiaries to current U.S. tax at a rate of 10.5%, less foreign tax credits. The Company has elected to treat tax generated by the GILTI provisions as a period expense.

In fiscal year 2019, the Company reversed $221.5 million of uncertain tax position reserves and $30.1 million of related interest reserves, net of federal and state benefits, primarily due to the fiscal fourth quarter settlement of an audit of the Company’s fiscal year 2009 through fiscal year 2011 federal corporate income tax returns, which also settled intercompany buy-in license payment issues for fiscal years 2012 through fiscal year 2019. $140.7 million of fiscal year 2009 through fiscal year 2018 advance tax payments made in June 2018 were applied to additional federal tax liabilities generated by the settlement. The reversal of uncertain tax position reserves for intercompany transfer pricing issues increased accumulated unremitted foreign earnings, which resulted in an additional Transition Tax charge of $47.7 million in the fiscal fourth quarter.

Our fiscal year 2019 effective tax rate was lower than the statutory tax rate primarily due to the $251.6 million reversal of uncertain tax position and related interest reserves, and earnings of foreign subsidiaries, generated primarily by our international operations managed in Ireland, that were taxed at lower rates. These impacts were partially offset by tax generated by GILTI provisions and a $68.7 million Transition Tax charge.

Our fiscal year 2018 effective tax rate was higher than the statutory rate primarily due to a $236.9 million provisional charge for the Transition Tax, a $13.7 million charge to remeasure deferred taxes at the enactment date of the Act to reflect the federal statutory rate reduction, and $17.1 million of interest accruals for unrecognized tax benefits, partially offset by earnings of foreign subsidiaries, generated primarily by our international operations managed in Ireland, that were taxed at lower rates, and $11.1 million of excess tax benefits generated by the settlement of share-based awards.

We have various entities domiciled within and outside the United States. The following is a breakout of our U.S. and foreign income (loss) before income taxes:
 
For the Year Ended
 
June 29,
2019
 
June 30,
2018
 
June 24,
2017
 
(in thousands)
Domestic pre-tax income
$
103,016

 
$
149,056

 
$
154,628

Foreign pre-tax income
651,405

 
675,829

 
524,961

Total
$
754,421

 
$
824,885

 
$
679,589


A relative increase in earnings in lower tax jurisdictions, such as Ireland, may lower our consolidated effective tax rate, while a relative increase in earnings in higher tax jurisdictions, such as the United States, may increase our consolidated effective tax rate.

In fiscal year 2019 the percentage of pre-tax income from our foreign operations increased, which was primarily due to lower foreign amortization and intercompany royalty expenses. The impact of pre-tax income from foreign operations reduced our effective tax rate by 15.8 percentage points in fiscal year 2019 as compared to 16.7 percentage points in fiscal year 2018. The rate reduction for foreign operations is the expected tax on foreign operations at the federal statutory tax rate less actual tax on foreign operations. The lower fiscal year 2019 tax rate benefit from foreign operations was primarily due to a reduction of the Company’s federal statutory tax rate from 28.1% to 21%, partially offset by lower intercompany royalty expenses.

In fiscal year 2018 the percentage of pre-tax income from our foreign operations increased, which was primarily due a fiscal year 2017 gain from the sale of the Company’s micro-electromechanical systems (MEMS) business line that increased domestic pre-tax income. The impact of pre-tax income from foreign operations reduced our effective tax rate by 16.7 percentage points in fiscal year 2018 as compared to 20.2 percentage points in fiscal year 2017. The rate reduction for foreign operations is the expected tax on foreign operations at the federal statutory tax rate less actual tax on foreign operations. The lower fiscal year 2018 tax rate benefit from foreign operations was primarily due to a reduction of the Company’s federal statutory tax rate from 35% to 28.1%.

28




Recently Issued Accounting Pronouncements

Refer to our discussion of recently issued accounting pronouncements as included in Part IV, Item 15. Exhibits and financial statement schedules, Note 2: “Summary of Significant Accounting Policies”.

Financial Condition, Liquidity and Capital Resources

Financial Condition

Cash flows were as follows:

 
For the Year Ended
 
June 29,
2019
 
June 30,
2018
 
June 24,
2017
 
(in thousands)
Net cash provided by operating activities
$
875,840

 
$
819,464

 
$
773,657

Net cash provided by (used in) investing activities
856,911

 
(710,066
)
 
(325,396
)
Net cash provided by (used in) financing activities
(1,518,893
)
 
(812,035
)
 
(307,369
)
Net increase (decrease) in cash and cash equivalents
$
213,858

 
$
(702,637
)
 
$
140,892


Operating Activities

Cash provided by operating activities is net income adjusted for certain non-cash items and changes in certain assets and liabilities.

Cash provided by operating activities was $875.8 million in fiscal year 2019, an increase of $56.4 million compared with fiscal year 2018. This increase was primarily caused by an increase in net income of $360.2 million, and partially offset by changes in income tax liabilities.

Investing Activities

Investing cash flows consist primarily of capital expenditures, net investment purchases and maturities, and acquisitions.

Cash provided by investing activities was $856.9 million in fiscal year 2019, an increase of $1.6 billion compared with fiscal year 2018. The change was due to $377.3 million increase in maturities of available-for-sale securities and a $1.2 billion decrease in purchases of available-for-sale securities.

Financing Activities

Financing cash flows consist primarily of new borrowings, repurchases of common stock, issuance and repayment of notes payables, payment of dividends to stockholders, proceeds from stock option exercises and employee stock purchase plan and withholding tax payments associated with net share settlements of equity awards.

Net cash used in financing activities was $1.5 billion in fiscal year 2019, an increase of $706.9 million compared with fiscal year 2018. Changes in cash used in fiscal year 2019 included a payment of $500.0 million of debt, a $131.2 million increase in repurchases of common stock, and an increase of $67.5 million in dividend payments.

Liquidity and Capital Resources

Our primary source of liquidity is our cash flows from operating activities resulting from net income and management of working capital.

As of June 29, 2019, our available funds consisted of $1.9 billion in cash, cash equivalents and short-term investments.

In November 2018, the Company repaid $500.0 million of principal and related outstanding interest of the Company's 2.5% coupon notes.

29




In January 2019, the Company terminated its $350.0 million revolving credit facility with certain institutional lenders.

On October 30, 2018, we were authorized to repurchase up to $1.5 billion of the Company's common stock. During the years ended June 29, 2019 and June 30, 2018, we repurchased an aggregate of $539.2 million and $408.0 million, respectively, of the Company's common stock.

We anticipate that the available funds and cash generated from operations will be sufficient to meet cash and working capital requirements, including the anticipated level of capital expenditures, common stock repurchases, debt repayments and dividend payments for at least the next twelve months.

Contractual Obligations

The following table summarizes our significant contractual obligations at June 29, 2019, and the effect such obligations are expected to have on our liquidity and cash flows in future periods:
 
Payment due by period
 
Total
 
Less than 1 year
 
1-3 years
 
4-5 years
 
More than 5 years
 
(in thousands)
Operating lease obligations (1) 
$
72,544

 
$
11,162

 
$
21,567

 
$
17,602

 
$
22,213

Outstanding debt obligations (2)
1,000,000

 

 

 
500,000

 
500,000

Interest payments associated with debt obligations (3)
200,562

 
34,125

 
68,250

 
47,156

 
51,031

Inventory related purchase obligations (4)
416,969

 
64,067

 
100,926

 
87,323

 
164,653

Transition Tax (5)
282,681

 
20,512

 
49,937

 
71,784

 
140,448

Total 
$
1,972,756

 
$
129,866

 
$
240,680

 
$
723,865

 
$
878,345


(1) We lease some facilities under non-cancelable operating lease agreements that expire at various dates through 2030.
(2) Outstanding debt represents amounts primarily due for our long-term notes.
(3) Interest payments calculated based on contractual payment requirements under the debt agreements.
(4) We order some materials and supplies in advance or with minimum purchase quantities. We are obligated to pay for the materials and supplies when received. We also entered into a long-term supply agreement with a semiconductor foundry, TowerJazz, to supply finished wafers on our existing processes and products, which contains minimum purchase requirements.
(5) Transition tax on accumulated unremitted earnings of foreign subsidiaries at December 31, 2017, paid in eight interest-free installments beginning in September 2018.

Purchase orders for the purchase of the majority of our raw materials and other goods and services are not included above. Our purchase orders generally allow for cancellation without significant penalties. We do not have significant agreements for the purchase of raw materials or other goods specifying minimum quantities or set prices that exceed our expected short-term requirements.

As of June 29, 2019, our gross unrecognized income tax benefits were $220.4 million which excludes $31.7 million of accrued interest. We are unable to make a reasonably reliable estimate of the timing of payments of these amounts, if any, in individual years due to uncertainties in the timing or outcomes of either actual or anticipated tax audits. As a result, these amounts are not included in the table above.

Off-Balance-Sheet Arrangements

As of June 29, 2019, we did not have any material off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to our cash and cash equivalents, short-term investments and notes payable. See Note 5: “Financial Instruments” in the Notes to Consolidated Financial Statements included in this Annual

30



Report. We do not use derivative financial instruments to hedge the ongoing risk of interest rate volatility. At June 29, 2019, we maintained a significant portfolio of money market fund investments, which are included in cash and cash equivalents. These money market funds are generally invested only in U.S. government or agency securities and are all available on a daily basis. Our short-term investments are in U.S. government, corporate and bank debt securities. Our long-term notes payable are all fixed rate securities and as such, we have no financial statement risk associated with changes in interest rates related to these notes.

To assess the interest rate risk associated with our outstanding long-term debt portfolio, we performed sensitivity analysis for our long-term notes as of June 29, 2019, using a modeling technique that measures the change in the fair values arising from a hypothetical 100 basis points increase in the levels of interest rates across the entire yield curve, with all other variables held constant. The discount rates used were based on the market interest rates in effect at June 29, 2019. The sensitivity analysis indicated that a hypothetical 100 basis points increase in interest rates would result in a reduction in the fair values of our long-term notes of $50.7 million.

Foreign Currency Risk

We generate less than 1.0% of our revenues in various global markets based on orders obtained in currencies other than the U.S. Dollar. We incur expenditures denominated in non-U.S. currencies, primarily the Philippine Peso and the Thai Baht associated with our manufacturing activities in the Philippines and Thailand, respectively, and expenditures for sales offices and research and development activities undertaken outside of the U.S. We are exposed to fluctuations in foreign currency exchange rates primarily on cash flows for expenditures, orders, and accounts receivable from sales in these foreign currencies. We have established risk management strategies designed to reduce the impact of volatility of future cash flows caused by changes in the exchange rate for these currencies. These strategies reduce, but do not entirely eliminate, the impact of currency exchange rate movements. We do not use derivative financial instruments for speculative or trading purposes. We routinely hedge our exposure to certain foreign currencies with various financial institutions in an effort to minimize the impact of certain currency exchange rate fluctuations. If a financial counterparty to any of our hedging arrangements experiences financial difficulties or is otherwise unable to honor the terms of the foreign currency hedge, we may experience financial losses.

For derivative instruments that are designated and qualify as cash flow hedges under ASC No. 815, Derivatives and Hedging (“ASC 815”), the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income or loss and reclassified into earnings into the same financial statement line as the item being hedged, and in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized each period in interest and other income (expense), net.

For derivative instruments that are not designated as hedging instruments under ASC 815, gains and losses are recognized each period in interest and other income (expense), net. All derivatives are foreign currency forward contracts to hedge certain foreign currency denominated assets or liabilities. The gains and losses on these derivatives largely offset the changes in the fair value of the assets or liabilities being hedged.

As of June 29, 2019, we had outstanding foreign currency derivative contracts with a total notional amount of $89.2 million. If overall foreign currency exchange rates appreciated (depreciated) uniformly by 10% against the U.S. dollar, our foreign currency derivative contracts outstanding as of June 29, 2019 would experience an approximately $4.7 million gain (loss).

Foreign Exchange Contracts

The net unrealized gain or loss, if any, is potentially subject to market and credit risk as it represents appreciation (decline) of the hedge position against the spot exchange rates. The net realized and unrealized gains or losses from hedging foreign currency denominated assets and liabilities were immaterial during the fiscal years ended June 29, 2019 and June 30, 2018.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary data required by this Item are set forth at the pages indicated in Part IV, Item 15(a) of this Annual Report and incorporated by reference herein.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.


31



ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer (“CEO”) and our chief financial officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act as of June 29, 2019. These disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our CEO and our CFO, to allow timely decisions regarding required disclosures. Based on the evaluation, our CEO and our CFO have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of June 29, 2019.

Management's Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of, the Company's CEO and CFO and effected by the Company's Board of Directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our management, with the participation of our CEO and our CFO, assessed the effectiveness of our internal control over financial reporting as of June 29, 2019. Management's assessment of internal control over financial reporting was conducted using the criteria in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our management has concluded that, as of June 29, 2019, our internal control over financial reporting was effective, based on these criteria. PricewaterhouseCoopers LLP, an independent registered public accounting firm, audited the effectiveness of the Company's internal control over financial reporting, as of June 29, 2019, as stated within their report which is included herein.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended June 29, 2019 that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on the Effectiveness of Internal Controls over Financial Reporting and Disclosure Controls and Procedures

A system of internal control over financial reporting is intended to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP and no control system, no matter how well designed and operated, can provide absolute assurance. The design of any control system 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. Because of its inherent limitations, internal control over financial reporting may not prevent or detect financial statement errors and misstatements. Also, projection of any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

32



ITEM 9B. OTHER INFORMATION
 
None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Other than as follows, the information required by this Item is incorporated by reference from the Company's Proxy Statement for the 2019 Annual Meeting of Stockholders under the headings “Audit Committee and Audit Committee Financial Expert,” “Proposal No. 1 - Election of Directors” and “Delinquent Section 16(a) Reports”,

Information About Our Executive Officers

The following is information regarding our executive officers, including their positions and ages as of July 29, 2019.

Name
 
Age
 
Position
Tunç Doluca
 
61
 
President and Chief Executive Officer 
Bruce E. Kiddoo
 
58
 
Senior Vice President, Chief Financial Officer and Chief Accounting Officer
Vivek Jain
 
59
 
Senior Vice President, Technology and Manufacturing Group
Edwin B. Medlin
 
62
 
Senior Vice President, Chief Legal, Administrative, and Compliance Officer
Christopher J. Neil
 
53
 
Senior Vice President, New Ventures
Bryan J. Preeshl
 
57
 
Senior Vice President, Quality
David Loftus
 
58
 
Vice President, Worldwide Sales and Marketing

Tunç Doluca has served as a director of Maxim Integrated as well as the President and Chief Executive Officer since January 2007. He joined Maxim Integrated in October 1984 and served as Vice President from 1994 to 2004. He was promoted to Senior Vice President in 2004 and Group President in May 2005. Prior to 1994, he served in a number of integrated circuit development positions. Mr. Doluca holds a BSEE degree from Iowa State University and an MSEE degree from the University of California, Santa Barbara.

Bruce E. Kiddoo joined Maxim Integrated in September 2007 as Vice President of Finance. On October 1, 2008, Mr. Kiddoo was appointed Chief Financial Officer and Principal Accounting Officer of Maxim Integrated and was appointed Senior Vice President in September 2009. Prior to joining Maxim Integrated, Mr. Kiddoo held various positions at Broadcom Corporation, a global semiconductor company, beginning in December 1999. Mr. Kiddoo served as Broadcom’s Corporate Controller and Principal Accounting Officer from July 2002 and served as Vice President from January 2003. He also served as Broadcom’s Acting Chief Financial Officer from September 2006 to March 2007. Mr. Kiddoo holds a BS degree in Applied Science from the United States Naval Academy and an MBA degree from the College of William & Mary. In January 2019, Mr. Kiddoo informed the Company that he was planning to retire in the second half of calendar year 2019, subject to the identification of and transition to a new Chief Financial Officer.

Vivek Jain joined Maxim Integrated in April 2007 as Vice President responsible for our wafer fabrication operations. In June 2009, Mr. Jain was promoted to Senior Vice President with expanded responsibility for managing test and assembly operations in addition to wafer fabrication operations. Prior to joining Maxim Integrated, Mr. Jain was with Intel Corporation as Plant Manager for Technology Development and Manufacturing Facility in Santa Clara, California from 2000. Mr. Jain holds a BS degree in Chemical Engineering from the Indian Institute of Technology at New Delhi, an MS degree in Chemical Engineering from Penn State University, and an MS degree in Electrical Engineering from Stanford University.
 
Edwin B. Medlin joined Maxim Integrated in November 1999 as Director and Associate General Counsel. He was promoted to Vice President and Senior Counsel in April 2006, was appointed General Counsel in September 2010, and he was promoted to Senior Vice President and General Counsel in May 2015. In July 2019, Mr. Medlin was promoted to Chief Legal, Administrative, and Compliance Officer and remains a Senior Vice President of the Company. Prior to joining Maxim Integrated, he was with the law firm of Ropers, Majeski, Kohn and Bentley between 1987 and 1994 where he held various positions, including director. Between 1994 and 1997, he held the positions of General Counsel, and later, General Manager, at Fox Factory, Inc., a privately held manufacturing company. Between 1997 and 1999 he held the positions of General Counsel and later, Vice President of Global Sales and Marketing, at RockShox, Inc., a publicly traded corporation. Mr. Medlin holds a degree in Economics from the University of California, Santa Barbara, and a Juris Doctorate from Santa Clara University.

33




Christopher J. Neil joined Maxim Integrated in September 1990, was promoted to Vice President in April 2006, was named Division Vice President in September 2009 and was promoted to Senior Vice President in September 2011. In May 2015, Mr. Neil was appointed to create and lead Maxim Ventures, the Company’s venture arm. Prior to 2006, he held several engineering and executive management positions. Mr. Neil holds BSEE and MSEE degrees from the Massachusetts Institute of Technology.

Bryan J. Preeshl joined Maxim Integrated in 1990 as a Senior Failure Analysis Engineer and held various senior management roles in the quality organization before being promoted to Vice President of Quality in 2010 and Senior Vice President of Quality in 2016. Prior to joining Maxim Integrated, Mr. Preeshl held numerous quality-related positions at National Semiconductor, ZyMOS, Monolithic Memories, and Advanced Micro Devices. Mr. Preeshl holds a degree in Electronics Engineering Technology from the DeVry Institute of Technology in Phoenix, Arizona.

David Loftus joined Maxim Integrated as its Vice President of Worldwide Sales and Marketing in 2015. Immediately prior to joining Maxim Integrated, Mr. Loftus led Worldwide Insights, a management consulting firm he founded in Atlanta. Earlier, he led the worldwide sales organizations for Cypress Semiconductor and Intersil Corporation. Before his tenure at Intersil, Mr. Loftus spent 17 years with Xilinx, as Vice President and General Manager for its Spartan Products Division and as Vice President and Managing Director for the Company's Asia Pacific operations. Mr. Loftus holds a degree in Electrical Engineering and a Masters in Management from Georgia Institute of Technology.

Code of Business Conduct and Ethics

We have a Code of Business Conduct and Ethics (the “Code of Ethics”), which applies to all directors and employees, including, but not limited to, our principal executive officer and principal financial and accounting officer. The Code of Ethics is designed to promote: (i) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest arising from personal and professional relationships, (ii) full, fair, accurate, timely and understandable disclosure in reports and documents that we are required to file with the SEC and in other public communications, (iii) compliance with applicable governmental laws, rules and regulations, (iv) the prompt internal reporting of violations of the Code of Ethics to an appropriate person or group, and (v) accountability for adherence to the Code of Ethics. A copy of the Code of Ethics is available on our website at http://www.maximintegrated.com/en/aboutus/maxim-corporate-policies.html. The Company intends to satisfy the disclosure requirement regarding any amendment to, or a waiver from, a provision of the Code of Ethics for the Company's principal executive officer, principal financial officer or principal accounting officer by posting such information on its website. The contents of our website are not incorporated into this Annual Report.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference from the Company's Proxy Statement for the 2019 Annual Meeting of Stockholders under the headings “Director Compensation,” “Compensation Discussion and Analysis,” “Compensation Committee Report” and “Executive Compensation.”

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Equity Compensation Plan Information

The information required by this item is incorporated by reference from the Company's Proxy Statement for the 2019 Annual Meeting of Stockholders under the heading “Equity Compensation Plan Information” and “Security Ownership of Certain Beneficial Owners, Directors and Management.”

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item is incorporated by reference from the Company’s Proxy Statement for the 2019 Annual Meeting of Stockholders under the headings “Corporate Governance and Board of Directors Matters” and “Certain Relationships and Related Transactions.”

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES


34



The information required by this item is incorporated by reference from the Company's Proxy Statement for the 2019 Annual Meeting of Stockholders under the headings “Report of the Audit Committee of the Board of Directors” and “Independent Public Accountants.”

35




PART IV


ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) The following are filed as part of this Report:

 
 
 
 
Page
 
(1)
Financial Statements
 
 
 
Consolidated Balance Sheets at June 29, 2019 and June 30, 2018
 
 
 
Consolidated Statements of Income for each of the three years in the period ended June 29, 2019
 
 
 
Consolidated Statements of Comprehensive Income for each of the three years in the period ended June 29, 2019
 
 
 
Consolidated Statements of Stockholders' Equity for each of the three years in the period ended June 29, 2019
 
 
 
Consolidated Statements of Cash Flows for each of the three years in the period ended June 29, 2019
 
 
 
Notes to Consolidated Financial Statements
 
 
 
Report of Independent Registered Public Accounting Firm
 
 
(2)
Financial Statement Schedule
 
 
 
 
The following financial statement schedule is filed as part of this Annual Report on Form 10-K and should be read in conjunction with the financial statements.
 
 
 
 
Schedule II - Valuation and Qualifying Accounts
 
 
 
All other schedules are omitted because they are not applicable, or because the required information is included in the consolidated financial statements or notes thereto.
 
 
 
(3)
The Exhibits filed as a part of this Report are listed in the attached Index to Exhibits.
 
 

(b) Exhibits.
    
See attached Index to Exhibits.


36




MAXIM INTEGRATED PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS

 
June 29,
2019
 
June 30,
2018
 
(in thousands, except par value)
ASSETS
Current assets:
 

 
 

Cash and cash equivalents
$
1,757,342

 
$
1,543,484

Short-term investments
140,990

 
1,082,915

Total cash, cash equivalents and short-term investments
1,898,332

 
2,626,399

Accounts receivable, net of allowances of $148 at June 29, 2019 and $140,296 at June 30, 2018
360,016

 
280,072

Inventories
246,512

 
282,390

Other current assets
34,640

 
21,548

Total current assets
2,539,500

 
3,210,409

Property, plant and equipment, net
577,722

 
579,364

Intangible assets, net
56,242

 
78,246

Goodwill
532,251

 
532,251

Other assets
38,267

 
51,291

TOTAL ASSETS
$
3,743,982

 
$
4,451,561

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 
 
 

Accounts payable 
$
84,335

 
$
92,572

Price adjustment and other revenue reserves
100,490

 

Income taxes payable
33,765

 
17,961

Accrued salary and related expenses
118,704

 
151,682

Accrued expenses 
33,873

 
35,774

Deferred margin on shipments to distributors

 

Current portion of debt

 
499,406

          Total current liabilities
371,167

 
797,395

Long-term debt
992,584

 
991,147

Income taxes payable 
469,418

 
661,336

Other liabilities
65,537

 
70,743

Total liabilities 
1,898,706

 
2,520,621

 
 
 
 
Commitments and contingencies (Note 11)


 


 
 
 
 
Stockholders' equity:
 
 
 
Preferred stock, $0.001 par value
 
 
 
Authorized: 2,000 shares, issued and outstanding: none

 

Common stock, $0.001 par value
 
 
 
Authorized: 960,000 shares 
 
 
 
Issued and outstanding: 271,852 in 2019 and 278,664 in 2018
272

 
279

Additional paid-in capital 

 

Retained earnings 
1,856,358

 
1,945,646

Accumulated other comprehensive loss
(11,354
)
 
(14,985
)
Total stockholders' equity
1,845,276

 
1,930,940

TOTAL LIABILITIES & STOCKHOLDERS' EQUITY 
$
3,743,982

 
$
4,451,561



See accompanying Notes to Consolidated Financial Statements.

37



MAXIM INTEGRATED PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF INCOME

 
For the Years Ended
 
June 29,
2019
 
June 30,
2018
 
June 24,
2017
 
(in thousands, except per share data)
 
 
 
 
 
 
Net revenues
$
2,314,329

 
$
2,480,066

 
$
2,295,615

Cost of goods sold
813,823

 
853,945

 
849,135

          Gross margin 
1,500,506

 
1,626,121

 
1,446,480

Operating expenses:
 

 
 

 
 

     Research and development
435,222


450,943


453,977

     Selling, general and administrative
308,617


322,918


291,511

     Intangible asset amortization
3,041


4,467


9,189

     Impairment of long-lived assets
753


892


7,517

     Severance and restructuring expenses 
5,632


15,060


12,453

     Other operating expenses (income), net
143


(1,607
)

(22,944
)
          Total operating expenses 
753,408

 
792,673

 
751,703

               Operating income (loss)
747,098

 
833,448

 
694,777

Interest and other income (expense), net
7,323

 
(8,563
)
 
(15,188
)
Income (loss) before taxes
754,421

 
824,885

 
679,589

Provision (benefit) for income taxes
(73,065
)
 
357,567


107,976

Net income (loss)
$
827,486

 
$
467,318

 
$
571,613

 
 

 
 

 
 

Earnings (loss) per share:
 

 
 

 
 

     Basic
$
3.01

 
$
1.66

 
$
2.02

Diluted
$
2.97

 
$
1.64

 
$
1.98

 
 
 
 
 
 
Weighted-average shares used in the calculation of earnings (loss) per share: 
 

 
 

 
 

     Basic
274,966


280,979


283,147

     Diluted 
278,777


285,674


287,974

 
 

 
 

 
 

Dividends declared and paid per share 
$
1.84


$
1.56


$
1.32



See accompanying Notes to Consolidated Financial Statements.

38



MAXIM INTEGRATED PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
For the Years Ended
 
June 29,
2019
 
June 30,
2018
 
June 24,
2017
 
(in thousands)
Net income
$
827,486


$
467,318

 
$
571,613

Other comprehensive income (loss), net of tax:
 
 
 
 
 
Change in net unrealized gains and (losses) on available-for-sale securities, net of tax benefit (expense) of $(175) in 2019, $184 in 2018, and $0 in 2017
3,629


(2,436
)
 
(1,723
)
Change in net unrealized gains and (losses) on cash flow hedges, net of tax benefit (expense) of $(354) in 2019, $291 in 2018, and $(137) in 2017
1,808


(1,401
)
 
510

Change in net unrealized gains and (losses) on postretirement benefits, net of tax benefit (expense) of $42 in 2019, $115 in 2018, and $(2,988) in 2017
(1,806
)

(1,258
)
 
5,542

Other comprehensive income (loss), net
3,631

 
(5,095
)
 
4,329

Total comprehensive income
$
831,117

 
$
462,223

 
$
575,942




See accompanying Notes to Consolidated Financial Statements.


39




MAXIM INTEGRATED PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Total
Stockholders' Equity
 
Shares
 
Par Value
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Balance, June 25, 2016
283,909

 
$
284

 
$

 
$
2,121,749

 
$
(14,219
)
 
$
2,107,814

Net income

 

 

 
571,613

 

 
571,613

Other comprehensive income, net

 

 

 

 
4,329

 
4,329

Repurchase of common stock 
(6,057
)
 
(6
)
 
(143,309
)
 
(108,484
)
 

 
(251,799
)
Net issuance of restricted stock units
1,275

 
1

 
(25,184
)
 

 

 
(25,183
)
Stock options exercised
2,741

 
3

 
63,000

 

 

 
63,003

Stock-based compensation 

 

 
71,225

 

 

 
71,225

Cumulative adjustment for adoption of ASU 2016-09

 

 

 
1,394

 

 
1,394

Common stock issued under Employee Stock Purchase Plan
1,044

 
1

 
34,268

 

 

 
34,269

Dividends paid, $1.32 per common share

 

 

 
(373,971
)
 

 
(373,971
)
Balance, June 24, 2017
282,912

 
$
283

 
$

 
$
2,212,301

 
$
(9,890
)
 
$
2,202,694

Net income

 

 

 
467,318

 

 
467,318

Other comprehensive (loss), net

 

 

 

 
(5,095
)
 
(5,095
)
Repurchase of common stock 
(7,487
)
 
(7
)
 
(112,075
)
 
(295,886
)
 

 
(407,968
)
Net issuance of restricted stock units
1,241

 
1

 
(30,311
)
 

 

 
(30,310
)
Stock options exercised
1,090

 
1

 
28,008

 

 

 
28,009

Stock-based compensation 

 

 
78,058

 

 

 
78,058

Common stock issued under Employee Stock Purchase Plan
908

 
1

 
36,320

 

 

 
36,321

Dividends paid, $1.56 per common share

 

 

 
(438,087
)
 

 
(438,087
)
Balance, June 30, 2018
278,664

 
$
279

 
$

 
$
1,945,646

 
$
(14,985
)
 
$
1,930,940

Net income

 

 

 
827,486

 

 
827,486

Other comprehensive income, net

 

 

 

 
3,631

 
3,631

Repurchase of common stock 
(9,839
)
 
(9
)
 
(125,457
)
 
(413,685
)
 

 
(539,151
)
Cumulative effect-adjustment for adoption of ASU 2016-01

 

 

 
2,487

 

 
2,487

Net issuance of restricted stock units
1,259

 
1

 
(29,690
)
 

 

 
(29,689
)
Stock options exercised
893

 
1

 
24,399

 

 

 
24,400

Stock-based compensation 

 

 
87,102

 

 

 
87,102

Modification of liability to equity instruments(1)

 

 
3,471

 

 

 
3,471

Common stock issued under Employee Stock Purchase Plan
875

 

 
40,175

 

 

 
40,175

Dividends paid, $1.84 per common share

 

 

 
(505,576
)
 

 
(505,576
)
Balance, June 29, 2019
271,852

 
$
272

 
$

 
$
1,856,358

 
$
(11,354
)
 
$
1,845,276


(1) In December 2018, $3.5 million was reclassified from accrued salaries to additional paid-in capital due to a settlement agreement relating to the expiration of stock options.




See accompanying Notes to Consolidated Financial Statements.

40



MAXIM INTEGRATED PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the Years Ended
 
June 29,
2019
 
June 30,
2018
 
June 24,
2017
 
(in thousands)
Cash flows from operating activities:
 
 
 
 
 
Net income
$
827,486


$
467,318

 
$
571,613

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 
 
 

Stock-based compensation 
86,977

 
78,685

 
71,117

Depreciation and amortization 
110,745

 
144,974

 
164,292

Deferred taxes
13,957

 
27,715

 
(7,895
)
Loss on sale of property, plant and equipment
3,967

 
995

 
16,365

Impairment of long-lived assets

 
42

 
1,462

(Gain) loss on investments in privately-held companies, net
(3
)
 
850

 
6,720

(Gain) on sale of business

 

 
(26,620
)
Changes in assets and liabilities: 
 
 
 
 
 

Accounts receivable 
21,090

 
(19,714
)
 
78

Inventories 
36,003

 
(32,776
)
 
(21,215
)
Other current assets 
(14,901
)
 
32,368

 
(3,547
)
Accounts payable 
(10,272
)
 
9,560

 
(6,205
)
Income taxes payable 
(176,114
)
 
117,654

 
60,798

Deferred margin on shipments to distributors 

 
(14,974
)
 
(23,805
)
All other accrued liabilities 
(23,095
)
 
6,767

 
(29,501
)
Net cash provided by operating activities 
875,840


819,464


773,657

 


 
 
 
 
Cash flows from investing activities:
 

 
 

 
 

Purchases of property, plant and equipment
(82,823
)
 
(65,782
)
 
(51,421
)
Proceeds from sale of property, plant, and equipment
340

 
5,823

 
10,792

Proceeds from sale of available-for-sale securities
30,192

 
107,291

 
50,994

Proceeds from maturity of available-for-sale securities
1,130,514

 
753,249

 
75,000

Proceeds from sale of business

 

 
42,199

Payment in connection with business acquisition, net of cash acquired
(2,949
)
 
(57,773
)
 

Purchases of available-for-sale securities
(214,587
)
 
(1,447,354
)
 
(450,135
)
Purchases of privately-held companies' securities
(3,176
)
 
(5,520
)
 
(2,825
)
Other investing activities
(600
)
 

 

Net cash provided by (used in) investing activities 
856,911


(710,066
)

(325,396
)
 
 
 
 
 
 
Cash flows from financing activities
 

 
 

 
 

Contingent consideration paid
(9,052
)
 

 

Repayment of notes payable
(500,000
)
 

 
(250,000
)
Issuance of debt

 

 
500,000

Debt issuance cost

 

 
(3,688
)
Net issuance of restricted stock units
(29,689
)
 
(30,310
)
 
(25,183
)
Proceeds from stock options exercised
24,400

 
28,009

 
63,003

Issuance of common stock under employee stock purchase program
40,175

 
36,321

 
34,269

Repurchase of common stock
(539,151
)
 
(407,968
)
 
(251,799
)
Dividends paid
(505,576
)
 
(438,087
)
 
(373,971
)
Net cash used in financing activities 
(1,518,893
)

(812,035
)

(307,369
)
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents 
213,858

 
(702,637
)
 
140,892

Cash and cash equivalents: 
 

 
 

 
 

Beginning of year
1,543,484

 
2,246,121

 
2,105,229

End of year
$
1,757,342

 
$
1,543,484

 
$
2,246,121

 
 

 
 

 
 

Supplemental disclosures of cash flow information:
 

 
 

 
 

Cash paid, net, for income taxes
$
98,104

 
$
189,100

 
$
76,243

Cash paid for interest
$
40,376

 
$
46,625

 
$
29,375

 
 
 
 

 
 
Noncash financing and investing activities:
 
 
 

 
 
Accounts payable related to property, plant and equipment purchases
$
12,090

 
$
8,833

 
$
3,853



See accompanying Notes to Consolidated Financial Statements.

41



MAXIM INTEGRATED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: NATURE OF OPERATIONS

Maxim Integrated Products, Inc. (“Maxim Integrated”, the “Company,” “we,” “us” or “our”), incorporated in Delaware, designs, develops, manufactures, and markets a broad range of linear and mixed-signal integrated circuits, commonly referred to as analog circuits, for a large number of customers in diverse geographical locations. The Company also provides a range of high-frequency process technologies and capabilities for use in custom designs. The analog market is fragmented and characterized by diverse applications and a great number of product variations with varying product life cycles. Maxim Integrated is a global company with a manufacturing facility in the United States, testing facilities in the Philippines and Thailand, and sales and circuit design offices throughout the world. Integrated circuit assembly is performed by foreign assembly subcontractors, located in countries throughout Asia, where wafers are separated into individual integrated circuits and assembled into a variety of packages. The major end-markets in which the Company's products are sold are the automotive, communications and data center, computing, consumer and industrial markets.

The Company has a 52-to-53-week fiscal year that ends on the last Saturday of June. Accordingly, every fifth or sixth year will be a 53-week fiscal year. Fiscal year 2019 was a 52-week fiscal year (ended on June 29, 2019). Fiscal years 2018 and 2017 were 53-week and 52-week fiscal years, respectively. Fiscal years 2018 and 2017 ended on June 30, 2018, and June 24, 2017, respectively.


NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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, 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, valuation allowance for deferred tax assets, reserves relating to uncertain tax positions, allowances for doubtful accounts, customer returns and allowances, allowance for distributor credits, inventory valuation, reserves relating to litigation matters, assumptions about the fair value of reporting units, accrued liabilities and reserves, assumptions related to the calculation of stock-based compensation and the value of intangibles acquired and goodwill associated with business combinations. 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.

Basis of Presentation

The consolidated financial statements include the accounts of the Company and all of its majority-owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.

Cash Equivalents and Investments

The Company considers all highly liquid financial 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, money market funds, U.S. Treasury securities, agency securities, corporate debt securities, certificates of deposit, and commercial paper. Short-term investments consist primarily of U.S. treasury debt securities with original maturities beyond three months at the date of purchase, agency securities, corporate debt securities, certificates of deposit, and commercial paper.

The Company's short-term investments are considered available-for-sale and classified as short-term as these investments generally consist of highly marketable securities that are available to meet near-term cash requirements. Such securities are carried at fair market value based on market quotes and other observable inputs. Unrealized gains and losses, net of tax, on securities in this category are reported as equity in the Consolidated Statement of Comprehensive Income. Realized gains and losses on sales of investment securities are determined based on the specific identification method and are included in Interest and other income (expense), net in the Consolidated Statements of Income.

The Company's long-term equity investments consist of investments in privately-held companies without readily determinable fair values and are included in Other assets on the Consolidated Balance Sheets. Equity investments are measured using the measurement alternative, which is defined as cost, less impairment, adjusted for observable price changes from orderly transactions

42


MAXIM INTEGRATED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

for identical or similar investments of the same issuer. The Company uses various inputs to evaluate equity investments including valuations of recent financing events as well as other information regarding the issuer’s historical and forecasted performance.

Derivative Instruments

The Company incurs expenditures denominated in non-U.S. currencies, primarily the Philippine Peso and the Thai Baht associated with the Company's manufacturing activities in the Philippines and Thailand, respectively, and European Euro, Indian Rupee, Taiwan New Dollar, South Korean Won, Chinese Yuan, Japanese Yen, Singapore Dollar, and Canadian Dollar expenditures for sales offices and research and development activities undertaken outside of the U.S. The Company is exposed to fluctuations in foreign currency exchange rates for cash flows for expenditures and on orders and accounts receivable from sales in these foreign currencies. The Company has established risk management strategies designed to reduce the impact of volatility of future cash flows caused by changes in the exchange rate for these currencies. These strategies reduce, but do not entirely eliminate, the impact of currency exchange rates movements.

Currency forward contracts are used to offset the currency risk of non-U.S. dollar-denominated assets and liabilities. The Company typically enters into currency forward contracts to hedge exposures associated with its expenditures denominated in European Euro, Philippine Peso and South Korean Won. The Company also hedges smaller expense exposures in several other foreign currencies. The Company enters into currency forward contracts to hedge its accounts receivable and backlog denominated in European Euro, Japanese Yen and British Pound. 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 Company uses currency forward contracts to hedge exposure to variability in anticipated non-U.S. dollar-denominated cash flows. These contracts are designated 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 six months. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (loss) and reported within the Consolidated Statements of Comprehensive Income. These amounts have been reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. For derivative instruments that are not designated as hedging instruments, gains and losses are recognized immediately in “Interest income (expense) and other, net” in the Consolidated Statements of Income.

Fair Value of Financial Instruments

The Company measures certain financial assets and liabilities at fair value based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.

Inventories

Inventories are stated at the lower of (i) standard cost, which approximates actual cost on a first-in-first-out basis, or (ii) net realizable value. The Company's standard cost revision policy is to monitor manufacturing variances and revise standard costs on a quarterly basis. Because of the cyclical nature of the market, inventory levels, obsolescence of technology, and product life cycles, the Company generally writes down inventories to net realizable value based on 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, equipment and software 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. When assets are retired or otherwise disposed of, the cost and accumulated depreciation or amortization is removed from the accounts and any resulting gain or loss is reflected in the Consolidated Statements of Income. The classification is based mainly on whether the asset is operating or not.