Company Quick10K Filing
Quick10K
Maxim Integrated Products
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$55.92 273 $15,290
10-Q 2018-12-29 Quarter: 2018-12-29
10-Q 2018-09-29 Quarter: 2018-09-29
10-K 2018-06-30 Annual: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-Q 2017-12-30 Quarter: 2017-12-30
10-Q 2017-09-23 Quarter: 2017-09-23
10-K 2017-06-24 Annual: 2017-06-24
10-Q 2017-03-25 Quarter: 2017-03-25
10-Q 2016-12-24 Quarter: 2016-12-24
10-Q 2016-09-24 Quarter: 2016-09-24
10-K 2016-06-25 Annual: 2016-06-25
10-Q 2016-03-26 Quarter: 2016-03-26
10-Q 2015-12-26 Quarter: 2015-12-26
8-K 2019-01-29 Earnings, Exhibits
8-K 2019-01-10 Officers
8-K 2018-11-08 Shareholder Vote
8-K 2018-10-30 Earnings, Exhibits
8-K 2018-09-04 Officers
8-K 2018-07-26 Earnings, Exhibits
8-K 2018-04-26 Earnings, Exhibits
8-K 2018-01-25 Earnings, Exhibits
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ACIA Acacia Communications
MXL Maxlinear
ENPH Enphase Energy
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IOTS Adesto Technologies
RBCN Rubicon Technology
MXIM 2018-12-29
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Note 1: Basis of Presentation
Note 2: Summary of Significant Accounting Policies
Note 3: Balance Sheet Components
Note 4: Fair Value Measurements
Note 5: Financial Instruments
Note 6: Stock-Based Compensation
Note 7: Earnings (Loss) per Share
Note 8: Segment Information
Note 9: Comprehensive Income (Loss)
Note 10: Income Taxes
Note 11: Commitments and Contingencies
Note 12: Common Stock Repurchases
Note 13: Acquisition
Note 14: Goodwill and Intangible Assets
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Item 4: Controls and Procedures
Part II. Other Information
Item 1: Legal Proceedings
Item 1A: Risk Factors
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
Item 3: Defaults Upon Senior Securities
Item 4: Mine Safety Disclosures
Item 5: Other Information
Item 6: Exhibits
EX-31.1 ex-311q219.htm
EX-31.2 ex-312q219.htm
EX-32.1 ex-321q219.htm
EX-32.2 ex-322q219.htm

Maxim Integrated Products Earnings 2018-12-29

MXIM 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 maximq21910-q.htm 10-Q Document



 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended December 29, 2018
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________ to ________.

Commission file number 1-34192
maximlogoa05.jpg
MAXIM INTEGRATED PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
Delaware
 (State or Other Jurisdiction of Incorporation or Organization)
 
94-2896096 
(I.R.S. Employer I. D. No.)

160 Rio Robles
San Jose, California 95134
(Address of Principal Executive Offices including Zip Code)

(408) 601-1000
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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 reports), and (2) has been subject to such filing requirements for the past 90 days. YES [x] NO [ ]

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 [x] NO [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller” reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [x]
Accelerated filer [ ]
Non-accelerated filer [ ]
(Do not check if a smaller reporting company)
Smaller reporting company [ ]
Emerging growth company [ ]

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. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). (Check one):
YES [ ] NO [x]

As of January 24, 2019 there were 273,398,340 shares of Common Stock, par value $.001 per share, of the registrant outstanding.

 
 
 
 
 





MAXIM INTEGRATED PRODUCTS, INC.
INDEX

 
PART I - FINANCIAL INFORMATION
 
Page
 
 
 
Item 1. Financial Statements (Unaudited)
 
 
 
 
Condensed Consolidated Balance Sheets as of December 29, 2018 and June 30, 2018
 
 
 
 
Condensed Consolidated Statements of Income for the Three and Six Months Ended December 29, 2018 and December 30, 2017
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended December 29, 2018 and December 30, 2017
 
 
 
 
Condensed Consolidated Statements of Shareholders' Equity for the Three and Six Months Ended December 29, 2018 and December 30, 2017
 

 
 
 
Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 29, 2018 and December 30, 2017
 
 
 
 
Notes to Condensed Consolidated Financial Statements
 
 
 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
 
 
 
Item 4. Controls and Procedures
 
 
 
 
PART II - OTHER INFORMATION
 
 
 
 
Item 1. Legal Proceedings
 
 
 
 
Item 1A. Risk Factors
 
 
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 
Item 3. Defaults Upon Senior Securities
 
 
 
 
Item 4. Mine Safety Disclosures
 
 
 
 
Item 5. Other Information
 
 
 
 
Item 6. Exhibits
 
 
 
 
SIGNATURE
 

2



PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

MAXIM INTEGRATED PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

 
December 29,
2018
 
June 30,
2018
 
(in thousands)
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
1,406,740

 
$
1,543,484

Short-term investments
553,901

 
1,082,915

Total cash, cash equivalents and short-term investments
1,960,641

 
2,626,399

Accounts receivable, net of allowances of $136 at December 29, 2018 and $140,296 at June 30, 2018
391,419

 
280,072

Inventories
278,925

 
282,390

Other current assets
26,933

 
21,548

Total current assets
2,657,918

 
3,210,409

Property, plant and equipment, net
571,983

 
579,364

Intangible assets, net
67,161

 
78,246

Goodwill
532,251

 
532,251

Other assets
59,614

 
51,291

TOTAL ASSETS
$
3,888,927

 
$
4,451,561

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable
$
99,577

 
$
92,572

Price adjustment and other revenue reserves
130,601

 

Income taxes payable
39,507

 
17,961

Accrued salary and related expenses
102,427

 
151,682

Accrued expenses
34,368

 
35,774

Current portion of debt

 
499,406

Total current liabilities
406,480

 
797,395

Long-term debt
991,866

 
991,147

Income taxes payable
673,051

 
661,336

Other liabilities
62,116

 
70,743

Total liabilities
2,133,513

 
2,520,621

 
 
 
 
Commitments and contingencies (Note 11)


 


 
 
 
 
Stockholders’ equity:
 
 
 
Common stock and capital in excess of par value
279

 
279

Retained earnings
1,766,471

 
1,945,646

Accumulated other comprehensive loss
(11,336
)
 
(14,985
)
Total stockholders’ equity
1,755,414

 
1,930,940

TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY
$
3,888,927

 
$
4,451,561


See accompanying Notes to Condensed Consolidated Financial Statements.

3



MAXIM INTEGRATED PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)


 
Three Months Ended
 
Six Months Ended
 
December 29,
2018
 
December 30,
2017
 
December 29,
2018
 
December 30,
2017
 
(in thousands, except per share data)
 
 
 
 
 
 
 
 
Net revenues
$
576,906

 
$
622,637

 
$
1,215,401

 
$
1,198,313

Cost of goods sold
203,858

 
212,961

 
412,117

 
414,806

Gross margin
373,048

 
409,676

 
803,284

 
783,507

Operating expenses:
 
 
 
 
 
 
 
Research and development
110,303

 
115,896

 
223,011

 
224,497

Selling, general and administrative
77,853

 
85,323

 
159,372

 
159,005

Intangible asset amortization
756

 
995

 
1,529

 
2,747

Impairment of long-lived assets
753

 
850

 
753

 
892

Severance and restructuring expenses
1,179

 
6,523

 
2,173

 
11,956

Other operating expenses (income), net

 
(959
)
 
60

 
(1,804
)
Total operating expenses
190,844

 
208,628

 
386,898

 
397,293

Operating income (loss)
182,204

 
201,048

 
416,386

 
386,214

Interest and other income (expense), net
472

 
(3,121
)
 
(74
)
 
(7,334
)
Income (loss) before provision for income taxes
182,676

 
197,927

 
416,312

 
378,880

Income tax provision (benefit)
50,784

 
272,942

 
86,997

 
299,361

Net income (loss)
$
131,892

 
$
(75,015
)
 
$
329,315

 
$
79,519

 
 
 
 
 
 
 
 
Earnings (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.48

 
$
(0.27
)
 
$
1.19

 
$
0.28

Diluted
$
0.47

 
$
(0.27
)
 
$
1.17

 
$
0.28

 
 
 
 
 
 
 
 
Shares used in the calculation of earnings (loss) per share:
 
 
 
 
 
 
 
Basic
276,252

 
281,560

 
277,144

 
281,852

Diluted
280,008

 
281,560

 
281,414

 
286,355


See accompanying Notes to Condensed Consolidated Financial Statements.



4



MAXIM INTEGRATED PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)

 
Three Months Ended
 
Six Months Ended
 
December 29,
2018
 
December 30,
2017
 
December 29,
2018
 
December 30,
2017
 
(in thousands)
Net income (loss)
$
131,892

 
$
(75,015
)
 
$
329,315

 
$
79,519

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 $(201), $0, ($228), and $0, respectively
885

 
(2,122
)
 
1,977

 
(2,220
)
Change in net unrealized gains and losses on cash flow hedges, net of tax benefit (expense) of $(96), $69, $(310), and $(51), respectively
423

 
(3
)
 
1,518

 
350

Change in net unrealized gains and losses on post-retirement benefits, net of tax benefit (expense) of $(18), $(142), $(37), and $(164), respectively
76

 
(76
)
 
154

 
(32
)
Other comprehensive income (loss), net
1,384

 
(2,201
)
 
3,649

 
(1,902
)
Total comprehensive income (loss)
$
133,276

 
$
(77,216
)
 
$
332,964

 
$
77,617


See accompanying Notes to Condensed Consolidated Financial Statements.


5



MAXIM INTEGRATED PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)

 
Three Months Ended December 29, 2018
 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Total
Stockholders' Equity
 
Shares
 
Par Value
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 29, 2018
277,430

 
$
279

 
$

 
$
1,924,764

 
$
(12,720
)
 
$
1,912,323

Net income

 

 

 
131,892

 

 
131,892

Other comprehensive income (loss), net

 

 

 

 
1,384

 
1,384

Repurchase of common stock 
(3,960
)
 

 
(44,181
)
 
(163,377
)
 

 
(207,558
)
Net issuance of restricted stock units
281

 

 
(5,916
)
 

 

 
(5,916
)
Stock options exercised
191

 

 
7,235

 

 

 
7,235

Stock-based compensation 

 

 
21,702

 

 

 
21,702

Modification of liability to equity instruments (1)

 

 
3,471

 

 

 
3,471

Common stock issued under Employee Stock Purchase Plan

 

 
17,689

 

 

 
17,689

Dividends paid, $0.46 per common share

 

 

 
(126,808
)
 

 
(126,808
)
Balance, December 29, 2018
273,942

 
$
279

 
$

 
$
1,766,471

 
$
(11,336
)
 
$
1,755,414

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended December 29, 2018
 
Common Stock
 
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Total
Stockholders' Equity
 
Shares
 
Par Value
 
 
 
 
 
(in thousands)
Balance, June 30, 2018
278,664

 
$
279

 
$

 
$
1,945,646

 
$
(14,985
)
 
$
1,930,940

Net income

 

 

 
329,315

 

 
329,315

Other comprehensive income (loss), net

 

 

 

 
3,649

 
3,649

Repurchase of common stock 
(5,822
)
 

 
(63,744
)
 
(256,312
)
 

 
(320,056
)
Cumulative effect adjustment for adoption of ASU 2016-01

 

 

 
2,487

 

 
2,487

Net issuance of restricted stock units
578

 

 
(13,444
)
 

 

 
(13,444
)
Stock options exercised
522

 

 
13,843

 

 

 
13,843

Stock-based compensation 

 

 
42,185

 

 

 
42,185

Modification of liability to equity instruments (1)

 

 
3,471

 

 

 
3,471

Common stock issued under Employee Stock Purchase Plan

 

 
17,689

 

 

 
17,689

Dividends paid, $0.92 per common share

 

 

 
(254,665
)
 

 
(254,665
)
Balance, December 29, 2018
273,942

 
$
279

 
$

 
$
1,766,471

 
$
(11,336
)
 
$
1,755,414

_____________________________

(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 Condensed Consolidated Financial Statements.







6



MAXIM INTEGRATED PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)

 
Three Months Ended December 30, 2017
 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Total
Stockholders' Equity
 
Shares
 
Par Value
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 23, 2017
281,731

 
$
283

 
$

 
$
2,207,053

 
$
(9,591
)
 
$
2,197,745

Net income

 

 

 
(75,015
)
 

 
(75,015
)
Other comprehensive income (loss), net

 

 

 

 
(2,201
)
 
(2,201
)
Repurchase of common stock 
(1,488
)
 
(1
)
 
(43,543
)
 
(33,410
)
 

 
(76,954
)
Net issuance of restricted stock units
258

 

 
(6,104
)
 

 

 
(6,104
)
Stock options exercised
521

 
1

 
13,507

 

 

 
13,508

Stock-based compensation 

 

 
21,165

 

 

 
21,165

Common stock issued under Employee Stock Purchase Plan

416

 

 
14,975

 

 

 
14,975

Dividends paid, $0.36 per common share

 

 

 
(101,421
)
 

 
(101,421
)
Balance, December 30, 2017
281,438

 
$
283

 
$

 
$
1,997,207

 
$
(11,792
)
 
$
1,985,698

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended December 30, 2017
 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Total
Stockholders' Equity
 
Shares
 
Par Value
 
 
 
 
 
(in thousands)
Balance, June 24, 2017
282,912

 
$
283

 
$

 
$
2,212,301

 
$
(9,890
)
 
$
2,202,694

Net income

 

 

 
79,519

 

 
79,519

Other comprehensive income (loss), net

 

 

 

 
(1,902
)
 
(1,902
)
Repurchase of common stock 
(3,146
)
 
(1
)
 
(60,515
)
 
(91,730
)
 

 
(152,246
)
Net issuance of restricted stock units
519

 

 
(11,520
)
 

 

 
(11,520
)
Stock options exercised
737

 
1

 
18,668

 

 

 
18,669

Stock-based compensation 

 

 
38,392

 

 

 
38,392

Common stock issued under Employee Stock Purchase Plan
416

 

 
14,975

 

 

 
14,975

Dividends paid, $0.72 per common share

 

 

 
(202,883
)
 

 
(202,883
)
Balance, December 30, 2017
281,438


$
283


$


$
1,997,207


$
(11,792
)

$
1,985,698



See accompanying Notes to Consolidated Financial Statements.


7



MAXIM INTEGRATED PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six Months Ended
 
December 29,
2018
 
December 30,
2017
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income (loss)
$
329,315

 
$
79,519

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Stock-based compensation
42,153

 
38,327

Depreciation and amortization
57,994

 
72,567

Deferred taxes
(8,206
)
 
8,927

Loss (gain) on disposal of property, plant and equipment
2,896

 
(588
)
Impairment of investments in privately-held companies
636

 
850

Other adjustments

 
42

Changes in assets and liabilities:
 
 
 
Accounts receivable
19,798

 
20,759

Inventories
3,497

 
(12,290
)
Other current assets
(6,587
)
 
32,947

Accounts payable
2,401

 
3,664

Income taxes payable
33,261

 
250,597

Deferred margin on shipments to distributors

 
(14,974
)
Accrued salary and related expenses
(45,783
)
 
(31,582
)
All other accrued liabilities
60

 
815

Net cash provided by (used in) operating activities
431,435

 
449,580

Cash flows from investing activities:
 
 
 
Purchases of property, plant and equipment
(30,913
)
 
(36,734
)
Proceeds from sale of property, plant and equipment
2

 
2,917

Proceeds from sale of available-for-sale securities
27,253

 
39,996

Proceeds from maturity of available-for-sale securities
718,554

 
118,211

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

Purchases of available-for-sale securities
(214,587
)
 
(853,470
)
Purchases of privately-held companies' securities
(906
)
 
(2,106
)
Net cash provided by (used in) investing activities
496,454

 
(731,186
)
Cash flows from financing activities:
 
 
 
Repayment of debt
(500,000
)
 

Contingent consideration paid
(8,000
)
 

Net issuance of restricted stock units
(13,444
)
 
(11,520
)
Proceeds from stock options exercised
13,843

 
18,667

Issuance of common stock under employee stock purchase program
17,689

 
14,975

Repurchase of common stock
(320,056
)
 
(152,244
)
Dividends paid
(254,665
)
 
(202,883
)
Net cash provided by (used in) financing activities
(1,064,633
)
 
(333,005
)
Net increase (decrease) in cash and cash equivalents
(136,744
)
 
(614,611
)
Cash and cash equivalents:
 
 
 
Beginning of period
$
1,543,484

 
$
2,246,121

End of period
$
1,406,740

 
$
1,631,510

Supplemental disclosures of cash flow information:
 
 
 
Cash paid, net, during the period for income taxes
$
60,946

 
$
14,857

Cash paid for interest
$
23,313

 
$
23,313

Noncash financing and investing activities:
 
 
 
Accounts payable related to property, plant and equipment purchases
$
14,660

 
$
10,961

See accompanying Notes to Condensed Consolidated Financial Statements.

8



MAXIM INTEGRATED PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1: BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Maxim Integrated Products, Inc. and all of its majority-owned subsidiaries (collectively, the “Company” or “Maxim Integrated”) included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles of the United States of America (“GAAP”) have been condensed or omitted pursuant to applicable rules and regulations. In the opinion of management, all adjustments of a normal recurring nature which were considered necessary for fair statement have been included. The year-end condensed consolidated balance sheet data were derived from audited consolidated financial statements but do not include all disclosures required by GAAP. The results of operations for the six months ended December 29, 2018 are not necessarily indicative of the results to be expected for the entire year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2018.

The Company has 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 2018 was a 53-week fiscal year and fiscal year 2019 is a 52-week fiscal year. The second quarter of fiscal year 2019 was a 13-week quarter and the second quarter of fiscal year 2018 was a 14-week quarter.

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Recently Issued Accounting Pronouncements

(i) New Accounting Updates Recently Adopted

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606). This standard provides a single set of guidelines for revenue recognition to be used across all industries. Under the new standard, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires reporting companies to disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

On July 1, 2018, the Company adopted Topic 606 and related amendments (ASU 2015-14, Deferral of the Effective Date; ASU 2016-08, Principal versus Agent Considerations; ASU 2016-10, Identifying Performance Obligations and Licensing, ASU 2016-12, Narrow-Scope Improvements and Practical Expedients and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers) using the modified retrospective method applied to all contracts that are not completed at the date of initial application (i.e., July 1, 2018). Results for reporting periods beginning after July 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with historic accounting standards under Topic 605.

There was no impact on the opening retained earnings as of July 1, 2018 due to the adoption of Topic 606. However, in conjunction with the adoption of the new standard, the Company recorded a reclassification of accrued revenue reserves for price adjustments and other revenue reserves from accounts receivable, net to price adjustment and other revenue reserves within current liabilities.

The cumulative effect of the changes to the condensed consolidated balance sheet from the adoption of Topic 606 was as follows (in thousands):
 
As of June 30, 2018
 
Effect of Adoption of Topic 606
 
As of July 1, 2018
 
 
 
 
 
 
Accounts receivable, net
$
280,072

 
$
141,652

 
$
421,724

Price adjustment and other revenue reserves

 
141,652

 
141,652



9



Balance Sheet Reclassification

Under Topic 605, the gross amount of accrued revenue reserves for price adjustments and other revenue reserves of $141.7 million was included within accounts receivable, net as of June 30, 2018. Subsequent to the adoption of Topic 606, such balances are presented on a gross basis as accrued price adjustments and other revenue reserves of $141.7 million, which is presented in the price adjustment and other revenue reserves balance sheet caption.

The adoption of Topic 606 has no impact on the total cash flows from operating, investing, or financing activities on the Condensed Consolidated Statement of Cash Flows.

The following table summarizes the impacts of adopting Topic 606 on the Company’s Condensed Consolidated Balance Sheet as of December 29, 2018 (in thousands):

 
As Reported
 
If Reported Under Topic 605
 
Effect of Adoption of Topic 606
 
 
 
 
 
 
Accounts receivable, net
$
391,419

 
$
260,818

 
$
130,601

Price adjustment and other revenue reserves
130,601

 

 
130,601


Practical Expedients and Elections

The Company does 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 the Company recognizes revenue at the amount to which it has the right to invoice for services performed.
The Company has elected to account for shipping and handling costs as fulfillment costs after the customer obtains control of the goods.
The Company has elected to exclude sales, use, value added, and some excise taxes, if applicable, from the measurement of the transaction price. The transaction price excludes sales and other similar taxes.

Updated Revenue Recognition Policy

The Company recognizes revenue for sales to direct customers and distribution customers ("distributors") when a customer obtains control of promised goods or services in an amount that reflects the consideration which the Company expects 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, the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which it is expected to be entitled. The transaction price does not include amounts collected on behalf of another party, such as sales taxes or value added tax. The Company 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 it recognizes revenue at the amount to which it has the right to invoice for services performed. The Company estimates 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 the Company has 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 the Company has 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 the Company’s standard terms, which is net 30 days from the date of invoice. The Company does not have any significant financing components greater than one year.

The Company estimates 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.


10



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

The Company's 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.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, with further classifications made recently with the issuance of ASU 2018-03 and ASU 2018-04, which provides guidance for the recognition, measurement, presentation, and disclosure of financial assets and liabilities. The application of this ASU was made by the means of a cumulative-effect adjustment to the balance sheet for the equity securities that qualify for the practical expedient to estimate fair value using the net asset value per share. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) is being applied prospectively to equity investments that exist as of the date of adoption. The Company adopted ASU 2016-01 in the first quarter of fiscal year 2019. As a result of this adoption, the Company recognized an increase of $2.5 million, net of tax, in retained earnings at the beginning of fiscal year 2019.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16 requires that entities recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs instead of when the asset is sold. The Company adopted ASU 2016-16 in the first quarter of fiscal year 2019. The adoption of this guidance did not have an impact on the Company's consolidated financial statements.

In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires employers that offer or maintain defined benefit plans to disaggregate the service component from the other components of net benefit cost and provides guidance on presentation of the service component and the other components of net benefit cost in the statement of operations. The application of ASU 2017-07 requires retrospective basis for all periods presented. The Company adopted ASU 2017-07 in the first quarter of fiscal year 2019. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. The amendments in this standard provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. Unless the changes in terms or conditions meet all three criteria outlined in the guidance, modification accounting should be applied. The three criteria relate to changes in the terms and conditions that affect the fair value, vesting conditions, or classification of a share-based payment award. The guidance is required to be applied prospectively to an award modified on or after the adoption date. The Company adopted ASU 2017-09 in the first quarter of fiscal year 2019. The adoption of this guidance did not have an impact on the Company's consolidated financial statements.

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This standard provides guidance about the reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The Company adopted ASU 2018-02 in the first quarter of fiscal year 2019. There was no material change to the Company's consolidated financial statements as a result of this adoption.

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting. This ASU largely aligns the accounting for share-based payment awards to employees and non-employees. Under the new guidance, both sets of awards, for employees and non-employees, will essentially follow the same model, with small discrepancies related to the term assumption when valuing non-employee awards. The Company adopted ASU 2018-07 in the first quarter of fiscal year 2019. The adoption of this guidance did not have an impact on the Company's consolidated financial statements.


11



SEC Disclosure Update and Simplification. In August 2018, the SEC adopted a final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, which amends certain disclosure requirements that were redundant and outdated. The rule also requires registrants to include in their interim financial statements a reconciliation of changes in stockholders' equity in the notes or as a separate statement. The final rule was effective on November 5, 2018. The Company has adopted the final rule as of December 29, 2018, and has included a reconciliation of the changes in stockholders' equity in this Form 10-Q.

(ii) Recent Accounting Updates Not Yet Effective

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the lease accounting requirements in Topic 840. ASU 2016-02 requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and a corresponding lease liability. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset, and for operating leases, the lessee would recognize a straight-line total lease expense. The guidance also requires qualitative and specific quantitative disclosures to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities, including significant judgments and changes in judgments. This guidance is effective beginning in the first quarter of fiscal year 2020 on a modified retrospective approach. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements and expects that there will be an increase in assets and liabilities on the Consolidated Balance Sheets at adoption due to the recognition of right-of-use assets and related lease liabilities.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which improves disclosures by removing, modifying and adding disclosure requirements related to fair value measurements. The update highlights adjustments in disclosures for changes in the fair value of Level 1, Level 2, and Level 3 instruments. This guidance is effective beginning in the first quarter of fiscal year 2021, with early adoption permitted. The Company does not believe that this update will have a material impact on its consolidated financial statements.

NOTE 3: BALANCE SHEET COMPONENTS

Inventories consist of:
 
December 29,
2018
 
June 30,
2018
Inventories:
(in thousands)
Raw materials
$
16,832

 
$
16,251

Work-in-process
171,287

 
173,859

Finished goods
90,806

 
92,280

 
$
278,925

 
$
282,390


Property, plant and equipment, net consists of:
 
December 29,
2018
 
June 30,
2018
Property, plant and equipment, net:
(in thousands) 
Land
$
17,731

 
$
17,731

Buildings and building improvements
258,679

 
254,733

Machinery, equipment and software
1,339,552

 
1,309,487

 
1,615,962

 
1,581,951

Less: accumulated depreciation
(1,043,979
)
 
(1,002,587
)
 
$
571,983

 
$
579,364


12




Accrued salary and related expenses consist of:
 
December 29,
2018
 
June 30,
2018
Accrued salary and related expenses:
(in thousands)
Accrued vacation
$
31,914

 
$
30,695

Accrued bonus
43,511

 
92,288

Accrued salaries
8,616

 
8,210

ESPP withholding
4,267

 
5,158

Accrued fringe benefits
8,279

 
4,752

Other
5,840

 
10,579

 
$
102,427

 
$
151,682


NOTE 4: FAIR VALUE MEASUREMENTS

The FASB established a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Three levels of inputs that may be used to measure fair value are as follows:
 
Level 1 - Quoted (unadjusted) prices in active markets for identical assets or liabilities.
 
The Company’s Level 1 assets consist of money market funds.
 
Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

The Company’s Level 2 assets and liabilities consist of U.S. Treasury securities, agency securities, corporate debt securities, certificates of deposit, commercial paper and foreign currency forward contracts that are valued using quoted market prices or are determined using a yield curve model based on current market rates.

Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

The Company's Level 3 assets and liabilities consist of acquisition related contingent consideration liabilities.


13



Assets and liabilities measured at fair value on a recurring basis were as follows:
 
As of December 29, 2018
 
As of June 30, 2018
 
Fair Value
 Measurements Using
 
Total
Balance
 
Fair Value
 Measurements Using
 
Total
Balance
 
Level 1
 
Level 2
 
Level 3
 
 
Level 1
 
Level 2
 
Level 3
 
 
(in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    Agency securities
$

 
$

 
$

 
$

 
$

 
$
13,946

 
$

 
$
13,946

    Certificates of deposit

 
1,000

 

 
1,000

 

 
6,000

 

 
6,000

    Commercial paper

 

 

 

 

 
45,063

 

 
45,063

    Corporate debt securities

 

 

 

 

 
3,819

 

 
3,819

    Money market funds
167,698

 

 

 
167,698

 
98,467

 

 

 
98,467

    U.S. Treasury securities

 

 

 

 

 
30,988

 

 
30,988

Short term investments
 
 
 
 
 
 


 
 
 
 
 
 
 


    Certificates of deposit

 
34,997

 

 
34,997

 

 
52,428

 

 
52,428

    Commercial paper

 
38,437

 

 
38,437

 

 
64,354

 

 
64,354

    Corporate debt securities

 
263,562

 

 
263,562

 

 
367,765

 

 
367,765

    U.S. Treasury securities

 
216,905

 

 
216,905

 

 
598,368

 

 
598,368

Other current assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts

 
418

 

 
418

 

 
235

 

 
235

Total assets
$
167,698

 
$
555,319

 
$

 
$
723,017

 
$
98,467

 
$
1,182,966

 
$

 
$
1,281,433

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accrued expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts
$

 
$
270

 
$

 
$
270

 
$

 
$
1,845

 
$

 
$
1,845

Contingent consideration

 

 
9,052

 
9,052

 

 

 
8,000

 
8,000

Other liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration

 

 
1,052

 
1,052

 

 

 
8,000

 
8,000

Total Liabilities
$

 
$
270

 
$
10,104

 
$
10,374

 
$

 
$
1,845

 
$
16,000

 
$
17,845


During the six months ended December 29, 2018 and the year ended June 30, 2018, there were no transfers in or out of Level 3 from other levels in the fair value hierarchy.

There were no assets or liabilities measured at fair value on a non-recurring basis as of December 29, 2018 and June 30, 2018 other than impairments of long-lived assets. The Company uses various inputs to evaluate investments in privately held companies, including valuations of recent financing events as well as other relevant information regarding the performance of the issuer. During the three and six months ended December 29, 2018, the Company recorded $0.8 million, in impairment of long-lived assets in the Company's Condensed Consolidated Statements of Income. For the fiscal year ended June 30, 2018, the Company recorded $0.9 million in impairment of long-lived assets in the Company's Consolidated Statements of Income.

NOTE 5: FINANCIAL INSTRUMENTS


14



Short-term investments
Fair values were as follows:
 
December 29,
2018
 
June 30,
2018
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Estimated Fair Value
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Estimated Fair Value
 
(in thousands)
Available-for-sale investments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
$
34,997

 
$

 
$

 
$
34,997

 
$
52,429

 
$

 
$
(1
)
 
$
52,428

Commercial paper
38,437

 

 

 
38,437

 
64,354

 

 

 
64,354

Corporate debt securities
264,880

 

 
(1,318
)
 
263,562

 
369,734

 
39

 
(2,008
)
 
367,765

U.S. Treasury securities
217,280

 
1

 
(376
)
 
216,905

 
600,068

 
10

 
(1,710
)
 
598,368

Total available-for-sale investments
$
555,594

 
$
1

 
$
(1,694
)
 
$
553,901

 
$
1,086,585

 
$
49

 
$
(3,719
)
 
$
1,082,915


In the three and six months ended December 29, 2018 and June 30, 2018, the Company did not recognize any impairment charges on short-term investments. All available-for-sale investments have maturity dates between December 29, 2018 and March 12, 2021.

The Company invests in various financial instruments including U.S. Treasury securities, corporate debt securities, commercial paper, and certificates of deposit which include instruments issued or managed by industrial, financial, and utility institutions and U.S. Treasury securities which include U.S. government Treasury bills and Treasury notes.

Derivative instruments and hedging activities

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 the European Euro, Indian Rupee, Japanese Yen, Taiwan New Dollar, South Korean Won, Chinese Yuan and Canadian Dollar, for sales offices and research and development activities undertaken outside of the U.S.

The Company has established a program that primarily utilizes foreign currency forward contracts to offset the risks associated with the effects of certain foreign currency exposures. The Company does not use these foreign currency forward contracts for trading purposes.

Derivatives designated as cash flow hedging instruments

The Company designates certain forward contracts as hedging instruments pursuant to Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging (“ASC 815”). As of December 29, 2018 and June 30, 2018, the notional amounts of the forward contracts the Company held to purchase international currencies were $42.2 million and $49.7 million, respectively, and the notional amounts of forward contracts the Company held to sell international currencies were $0.3 million and $1.2 million, respectively.

Derivatives not designated as hedging instruments

As of December 29, 2018 and June 30, 2018, the notional amounts of the forward contracts the Company held to purchase international currencies were $19.8 million and $21.1 million, respectively, and the notional amounts of forward contracts the Company held to sell international currencies were $19.0 million and $21.3 million, respectively. The fair values of the Company's outstanding foreign currency forward contracts and gain (loss) included in the Condensed Consolidated Statements of Income were not material for the three and six months ended December 29, 2018 and December 30, 2017.


15



Effect of hedge accounting on the Condensed Consolidated Statements of Income

The following table summarizes the gains (losses) from hedging activities recognized in the Company's Condensed Consolidated Statements of Income:
 
Three Months Ended
Six Months Ended
 
December 29, 2018
December 29, 2018
 
Net Revenue
 
Cost of Goods Sold
 
Operating Expenses
 
Net Revenue
 
Cost of Goods Sold
 
Operating Expenses
 
(in thousands)
Income and expenses line items in which the effects of cash flow hedges are recorded
$
576,906

 
$
203,858

 
$
190,844

 
$
1,215,401

 
$
412,117

 
$
386,898

 
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) on cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts:
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) reclassified from accumulated other comprehensive income into income
$
5

 
$
(82
)
 
$
(602
)
 
$
44

 
(596
)
 
(1,827
)

Outstanding debt obligations

The following table summarizes the Company’s outstanding debt obligations:
 
December 29, 2018
 
June 30, 2018
 
(in thousands)
3.45% fixed rate notes due June 2027
$
500,000

 
$
500,000

2.5% fixed rate notes due November 2018

 
500,000

3.375% fixed rate notes due March 2023
500,000

 
500,000

Total outstanding debt
1,000,000

 
1,500,000

Less: Current portion (included in "Current portion of debt")

 
(499,406
)
Less: Reduction for unamortized discount and debt issuance costs
(8,134
)
 
(9,447
)
Total long-term debt
$
991,866

 
$
991,147


On June 15, 2017, the Company completed a public offering of $500 million aggregate principal amount of the Company's 3.45% senior unsecured and unsubordinated notes due in June 2027 (“2027 Notes”), with an effective interest rate of 3.5%. Interest on the 2027 Notes is payable semi-annually in arrears on June 15 and December 15 of each year, commencing on December 15, 2017. The net proceeds of this offering were approximately $495.2 million, after issuing at a discount and deducting paid expenses.

On November 21, 2013, the Company completed a public offering of $500 million aggregate principal amount of the Company’s 2.5% coupon senior unsecured and unsubordinated notes due in November 2018 (“2018 Notes”), with an effective interest rate of 2.6%. Interest on the 2018 Notes is payable semi-annually in arrears on May 15 and November 15 of each year, commencing on May 15, 2014. The net proceeds of this offering were approximately $494.5 million, after issuing at a discount and deducting paid expenses. In November of 2018, the Company repaid the entire $500 million in principal and any outstanding interest, related to these outstanding notes.

On March 18, 2013, the Company completed a public offering of $500 million aggregate principal amount of the Company’s 3.375% senior unsecured and unsubordinated notes due in March 2023 (“2023 Notes”), with an effective interest rate of 3.5%. Interest on the 2023 Notes is payable semi-annually in arrears on March 15 and September 15 of each year. The net proceeds of this offering were approximately $490.0 million, after issuing at a discount and deducting paid expenses.

The debt indentures that govern the 2027 Notes and the 2023 Notes include covenants that limit the Company's ability to grant liens on its facilities and to enter into sale and leaseback transactions, which could limit the Company's 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 2027 Notes or the 2023 Notes, the Company would be required to make an offer to repurchase the affected notes at a purchase price equal to 101% of the aggregate principal amount of such notes, plus accrued and unpaid interest.

16




The Company accounts for all the notes above based on their amortized cost. The discount and expenses are being amortized to Interest and other income (expense), net in the Condensed Consolidated Statements of Income over the life of the notes. The interest expense is recorded in Interest and other income (expense), net in the Condensed Consolidated Statements of Income. Amortized discount and expenses, as well as interest expense associated with the notes, were $11.2 million and $12.4 million during the three months ended December 29, 2018 and December 30, 2017, respectively. Amortized discount and expenses, as well as interest expense associated with the notes, were $23.6 million and $24.7 million, respectively, during the six months ended December 29, 2018 and December 30, 2017.

The estimated fair value of the Company’s outstanding debt obligations was approximately $955 million as of December 29, 2018. The estimated fair value of the debt is based primarily on observable market inputs and is a Level 2 measurement.

The Company recorded interest expense of $11.7 million and $12.5 million during the three months ended December 29, 2018, and December 30, 2017, respectively. The Company recorded interest expense of $24.6 million and $25.1 million during the six months ended December 29, 2018 and December 30, 2017, respectively.

Credit Facility
Revolving credit facility

As of December 29, 2018, the Company had access to a $350 million senior unsecured revolving credit facility with certain institutional lenders that expires on June 27, 2019. The facility fee is at a rate per annum that varies based on the Company’s index debt rating and any advances under the credit agreement will accrue interest at a base rate plus a margin based on the Company’s index debt rating. The credit agreement required the Company to comply with certain covenants, including a requirement that the Company maintain a ratio of debt to EBITDA (earnings before interest, taxes, depreciation, and amortization) of not more than 3 to 1 and a minimum interest coverage ratio (EBITDA divided by interest expense) greater than 3.5 to 1. As of December 29, 2018, the Company had not borrowed any amounts from this credit facility and was in compliance with all debt covenants. Effective January 22, 2019, the Company terminated this revolving credit facility.

Other Financial Instruments
For the balance of the Company’s financial instruments, cash equivalents, accounts receivable, accounts payable and other accrued liabilities, the carrying amounts approximate fair value due to their short maturities.

NOTE 6: STOCK-BASED COMPENSATION

At December 29, 2018, the Company had one stock incentive plan, the Company's 1996 Stock Incentive Plan (the “1996 Plan”) and one employee stock purchase plan, the 2008 Employee Stock Purchase Plan (the “2008 ESPP”). The 1996 Plan was adopted by the board of directors to provide the grant of incentive stock options, non-statutory stock options, restricted stock units (“RSUs”), and market stock units (“MSUs”) to employees, directors, and consultants.

Pursuant to the 1996 Plan, the exercise price for incentive stock options and non-statutory stock options is determined to be the fair market value of the underlying shares on the date of grant. Options typically vest ratably over a four-year period measured from the date of grant. Options generally expire no later than seven years after the date of grant, subject to earlier termination upon an optionee's cessation of employment or service.

RSUs granted to employees typically vest ratably over a four-year period and are converted into shares of the Company's common stock upon vesting, subject to the employee's continued service to the Company over that period. RSUs granted after August 2017 will continue to vest post-employment at the Company for certain individuals satisfying specific eligibility requirements.

MSUs granted to employees typically vest over a four-year cliff period and are converted into shares of the Company's common stock upon vesting, subject to the employee's continued service to the Company over that period. The number of shares that are released at the end of the performance period can range from zero to a maximum cap depending on the Company's performance. MSUs granted after August 2017 will continue to vest post-employment at the Company for certain individuals satisfying specific eligibility requirements.


17



The following tables show total stock-based compensation expense by type of award, and the resulting tax effect, included in the Condensed Consolidated Statements of Income for the three and six months ended December 29, 2018 and December 30, 2017, respectively:

Three Months Ended

December 29, 2018

December 30, 2017

Stock Options

Restricted Stock Units

Employee Stock Purchase Plan

Total

Stock Options

Restricted Stock Units

Employee Stock Purchase Plan

Total

(in thousands)
Cost of goods sold
$
9


$
1,884


$
495


$
2,388


$
75


$
1,944


$
467


$
2,486

Research and development
11


8,693


1,135


9,839


185


8,898


1,033


10,116

Selling, general and administrative
58


8,773


598


9,429


222


7,656


558


8,436

Pre-tax stock-based compensation expense
$
78


$
19,350


$
2,228


$
21,656


$
482


$
18,498


$
2,058


$
21,038

Less: income tax effect






2,304








1,887

Net stock-based compensation expense








$
19,352








$
19,151


 
Six Months Ended
 
December 29, 2018
 
December 30, 2017
 
Stock Options
 
Restricted Stock Units
 
Employee Stock Purchase Plan
 
Total
 
Stock Options
 
Restricted Stock Units
 
Employee Stock Purchase Plan
 
Total
 
(in thousands)
Cost of goods sold
$
19

 
$
3,646

 
$
1,002

 
$
4,667

 
$
161

 
$
3,780

 
$
946

 
$
4,887

Research and development
22

 
17,384

 
2,290

 
19,696

 
493

 
15,487

 
2,003

 
17,983

Selling, general and administrative
114

 
16,417

 
1,259

 
17,790

 
585

 
13,786

 
1,086

 
15,457

Pre-tax stock-based compensation expense
$
155

 
$
37,447

 
$
4,551

 
$
42,153

 
$
1,239

 
$
33,053

 
$
4,035

 
$
38,327

Less: income tax effect
 
 
 
 
 
 
4,268

 
 
 
 
 
 
 
4,777

Net stock-based compensation expense
 
 
 
 
 
 
$
37,885

 
 
 
 
 
 
 
$
33,550


The expenses included in the Condensed Consolidated Statements of Income for RSUs include expenses related to MSUs of $2.9 million and $2.2 million for the three months ended December 29, 2018 and December 30, 2017, respectively and $5.3 million and $3.6 million for the six months ended December 29, 2018 and December 30, 2017, respectively.

Stock Options

The fair value of options granted to employees under the 1996 Plan is estimated on the date of grant using the Black-Scholes option valuation model.

There were no stock options granted in the three and six months ended December 29, 2018 and December 30, 2017.

The following table summarizes outstanding, exercisable and vested and expected to vest stock options as of December 29, 2018 and related activity for the six months ended December 29, 2018:

18



 
Number of
Shares 
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term (in Years)
 
Aggregate Intrinsic Value(1)
Balance at June 30, 2018
1,688,253

 
$
27.72

 
 
 
 
Options Granted

 

 
 
 
 
Options Exercised
(522,499
)
 
26.96

 
 
 
 
Options Cancelled
(3,439
)
 
28.08

 
 
 
 
Balance at December 29, 2018
1,162,315

 
$
28.06

 
1.5
 
$
24,126,273

Exercisable, December 29, 2018
1,162,315

 
$
28.06

 
1.5
 
$
24,126,273

Vested and expected to vest, December 29, 2018
1,162,315

 
$
28.06

 
1.5
 
$
24,126,273


(1)
Aggregate intrinsic value represents the difference between the exercise price and the closing price per share of the Company’s common stock on December 28, 2018, the last business day preceding the fiscal quarter-end, multiplied by the number of options outstanding, exercisable or vested and expected to vest as of December 29, 2018.

As of December 29, 2018, there was no unrecognized stock compensation from unvested stock options.

Restricted Stock Units and Other Awards

The fair value of RSUs and other awards under the Company’s 1996 Plan is estimated using the value of the Company’s common stock on the date of grant, reduced by the present value of dividends expected to be paid on the Company’s common stock prior to vesting. The Company also estimates forfeitures at the time of grant and makes revisions to forfeitures on a quarterly basis.

The weighted-average fair value of RSUs and other awards granted was $50.90 and $50.36 per share for the three months ended December 29, 2018 and December 30, 2017, respectively, and 54.71 and $42.41 per share for the six months ended December 29, 2018 and December 30, 2017, respectively.

The following table summarizes the outstanding and expected to vest RSUs and other awards as of December 29, 2018 and related activity during the six months ended December 29, 2018:
 
Number of
Shares 
 
Weighted Average
Remaining
Contractual Term
(in Years)
 
 
Aggregate Intrinsic
Value(1) 
Balance at June 30, 2018
5,524,432

 
 
 
 
Restricted stock units and other awards granted
1,321,125

 
 
 
 
Restricted stock units and other awards released
(802,916
)
 
 
 
 
Restricted stock units and other awards cancelled
(325,807
)
 
 
 
 
Balance at December 29, 2018
5,716,834

 
2.9
 
$
279,095,836

Outstanding and expected to vest, December 29, 2018
4,743,351

 
2.8
 
$
231,570,395

(1)
Aggregate intrinsic value for RSUs and other awards represents the closing price per share of the Company’s common stock on December 28, 2018, the last business day preceding the fiscal quarter-end, multiplied by the number of RSUs outstanding or expected to vest as of December 29, 2018.
The Company withheld shares totaling $5.9 million and $13.4 million, respectively, in value as a result of employee withholding taxes based on the value of RSUs on vesting date for the three and six months ended December 29, 2018. Total payments for employees’ tax obligations to taxing authorities are reflected as financing activities within the Condensed Consolidated Statements of Cash Flows.

As of December 29, 2018, there was $170.4 million of unrecognized compensation expense related to 5.7 million unvested RSUs and other awards, which is expected to be recognized over a weighted average period of approximately 2.9 years.

Market Stock Units (MSUs)

19




The Company grants MSUs to senior members of management in lieu of granting stock options. For MSUs granted prior to September 2017, the performance metrics of this program are based on relative performance of the Company’s stock price as compared to the Semiconductor Exchange Traded Fund index SPDR S&P (the “XSD”). For MSUs granted in September 2017 and after, the performance metrics for this program are based on the total shareholder return ("TSR") of the Company relative to the TSR of the other companies included in the XSD. The fair value of MSUs is estimated using a Monte Carlo simulation model on the date of grant. The Company also estimates forfeitures at the time of grant and makes revisions to forfeitures on a quarterly basis. Compensation expense is recognized based on the initial valuation and is not subsequently adjusted as a result of the Company’s performance relative to that of the XSD or the TSR of the companies included in the XSD, as applicable. Vesting for MSUs is contingent upon both service and market conditions and has a four-year vesting cliff period. MSUs granted after August 2017 vest based upon annual performance and are subject to continued service through the end of the four-year period, but will continue to vest post-employment at the Company for certain individuals satisfying specific eligibility requirements.

The weighted-average fair value of MSUs granted was $75.48 and $51.03 per share for the six months ended December 29, 2018 and December 30, 2017, respectively.

The following table summarizes the number of MSUs outstanding and expected to vest as of December 29, 2018 and their activity during the six months ended December 29, 2018:
 
Number of
Shares 
 
Weighted Average
Remaining
Contractual Term
(in Years)
 
 
Aggregate Intrinsic
Value
(1) 
Balance at June 30, 2018
1,079,064

 
 
 
 
Market stock units granted
247,804

 
 
 
 
Market stock units released
(13,594
)
 
 
 
 
Market stock units cancelled
(250,190
)
 
 
 
 
Balance at December 29, 2018
1,063,084

 
2.9
 
$
51,889,761

Outstanding and expected to vest, December 29, 2018
960,920

 
2.9
 
$
46,912,120

(1)
Aggregate intrinsic value for MSUs represents the closing price per share of the Company’s common stock on December 28, 2018, the last business day preceding the fiscal quarter-end, multiplied by the number of MSUs outstanding or expected to vest as of December 29, 2018.

As of December 29, 2018, there was $35.0 million of unrecognized compensation expense related to 1.1 million unvested MSUs, which is expected to be recognized over a weighted average period of approximately 2.9 years.

Employee Stock Purchase Plan

Employees are granted rights to acquire common stock under the 2008 ESPP.

The fair value of 2008 ESPP rights granted to employees has been estimated at the date of grant using the Black-Scholes option valuation model using the following assumptions for the offering periods outstanding:
 
Three Months Ended
 
Six Months Ended
 
December 29, 2018
 
December 30, 2017
 
December 29, 2018
 
December 30, 2017
Expected holding period (in years)
0.5 years
 
0.5 years
 
0.5 years
 
0.5 years
Risk-free interest rate
1.6% - 2.6%
 
0.8% - 1.5%
 
1.6% - 2.6%
 
0.8% - 1.5%
Expected stock price volatility
19.6% - 32.7%
 
19.1% - 24.7%
 
19.6% - 32.7%
 
19.1% - 24.7%
Dividend yield
2.1% - 3.1%
 
3.0% - 3.4%
 
2.1% - 3.1%
 
3.0% - 3.4%

As of December 29, 2018 and December 30, 2017, there was $8.6 million and $6.5 million, respectively, of unrecognized compensation expense related to the 2008 ESPP.

NOTE 7: EARNINGS (LOSS) PER SHARE


20



Basic earnings (loss) per share are computed using the weighted average number of shares of common stock outstanding during the period. For purposes of computing basic earnings (loss) per share, the weighted average number of outstanding shares of common stock excludes unvested RSUs and other awards as well as MSUs. Diluted earnings (loss) per share incorporates the incremental shares issuable upon the assumed exercise of stock options, assumed release of unvested RSUs and other awards as well as MSUs, and assumed issuance of common stock under the 2008 ESPP using the treasury stock method.

The following table sets forth the computation of basic and diluted earnings (loss) per share:
 
Three Months Ended
 
Six Months Ended
 
December 29,
2018
 
December 30,
2017
 
December 29,
2018
 
December 30,
2017
 
(in thousands, except per share data)
Numerator for basic earnings (loss) per share and diluted earnings (loss) per share
 
 
 
 
 
 
 
Net income (loss)
$
131,892

 
$
(75,015
)
 
$
329,315

 
$
79,519

 
 
 
 
 
 
 
 
Denominator for basic earnings (loss) per share
276,252

 
281,560

 
277,144

 
281,852

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock options, ESPP, RSUs, and MSUs
3,756

 

 
4,270

 
4,503

Denominator for diluted earnings (loss) per share
280,008

 
281,560

 
281,414

 
286,355

 
 
 
 
 
 
 
 
Earnings (loss) per share