MXIM

Maxim Integrated Products, Inc. (MXIM)

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Maxim Integrated Products, Inc. (MXIM)

F2Q13 (Qtr End 12/29/2012) Earnings Call

January 24, 2013 5:00 PM ET

Executives

Venk Nathamuni - Managing Director, Investor Relations

Tunç Doluca - President and Chief Executive Officer

Bruce Kiddoo - Senior Vice President and Chief Financial Officer

Analysts

Romit Shah - Nomura Securities

John Pitzer - Credit Suisse

Gabriela Borges - Goldman Sachs

Aashish Rao - Bank of America

Ambrish Srivastava - BMO

Atif Malik - Citigroup

Craig Ellis - Riley Caris

Ross Seymore - Deutsche Bank

Shawn Webster - Macquarie

Mark Lipacis - Jefferies

Craig Berger - FBR Capital Markets

Joanne Feeney - Longbow Research

Christopher Danely - JPMorgan

David Wong - Wells Fargo Securities

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Maxim Integrated Products' reports and results for second quarter of fiscal year 2013 earnings conference call. (Operator Instructions) I would now like to introduce your host for today's program, Mr. Venk Nathamuni, Managing Director, Investor Relations.

Venk Nathamuni

Thank you, and welcome everyone to Maxim Integrated's fiscal second quarter 2013 earnings conference call. With me on the call today are Chief Executive Officer, Tunç Doluca; and Chief Financial Officer, Bruce Kiddoo.

During today's call, we will be making some forward-looking statements. In light of the Private Securities Litigation Reform Act, I would like to remind you that these statements must be considered in conjunction with the cautionary warnings that appear in our SEC filings. Investors are cautioned that all forward-looking statements in this call involve risks and uncertainty and that, future events may differ materially from the statements made. For additional information, please refer to the company's Securities and Exchange Commission filings, which are posted on our website or available from the company without charge.

Now, I'll turn the call over to Bruce.

Bruce Kiddoo

Thanks, Venk. I will review our second quarter financial results. Revenue for the second quarter was $605.3 million, down 3% from the first quarter. Our revenue mix by major market in Q2 was approximately 46% for consumer, 25% industrial, 15% communications and 14% computing.

Our consumer business was down in all markets. Industrial was up slightly as weakness in general purpose products was offset by strengths in medical and smart meter vertical markets. Our communication business was down due to our telecom business and computing was down due to our notebook business.

Gross margin, excluding special items, was 61.5%, down as expected from 63.4% in the prior quarter due to lower factory utilization. Special items in Q2 gross margin were intangible asset amortization from acquisitions.

Operating expenses, excluding special items were $216 million, up slightly from the prior quarter due to the full quarter impact of our annual compensation adjustment. Special items in Q2 operating expenses included the normal acquisition-related charges, plus charges for impairment of manufacturing equipment, restructuring and contingent consideration.

Q2 GAAP operating income, excluding special items was $157 million or 26% of revenue. The Q2 GAAP tax rate, excluding special items was 19% compared to 21% in the prior quarter due to higher international mix of business. Special items in our Q2 tax provision were a result of this change in business mix.

The Q2 tax rate does not include any benefit from the R&D tax credit, which became law in our fiscal Q3. GAAP earnings per share, excluding special items was $0.42, down from $0.47 in Q1 due to lower revenue and gross margin.

Turning to the balance sheet and cash flow. During the quarter cash flow from operations was $255 million or 42% of revenue. This increased significantly over the prior quarter due to our annual employee bonus paid in September and a reduction in accounts receivable.

Inventory was 101 days, down from 103 days in the prior quarter. Inventory in the channel, excluding catalogue distributors increased slightly from 51 days to 53 days due to lower resales. In dollar terms, channel inventory declined by 1%.

Net capital additions totaled $51 million in Q2, down for the second consecutive quarter after significant investments in the prior fiscal year for long-term manufacturing capacity and new facilities. Share repurchases totaled $50 million in Q2 as we bought back 1.8 million shares.

Finally, in Q2 we paid $70 million in dividends to our shareholders. Overall, total cash, cash equivalents and short-term investments increased by $105 million in the second quarter to just over $1 billion.

Moving on to guidance. Our beginning Q3 backlog declined to $353 million. Based on this beginning backlog and expected turns, we forecast Q3 revenue of $580 million to $610 million or up 1% to down 4% from Q2.

Q3 gross margin, excluding special items is estimated at 60% to 63%. Q2 fab utilization declined slightly due to lower demand and inventory management, impacting Q3 gross margin. Other variables that may influence Q3 gross margin include product mix and inventory reserves.

Special items in Q3 gross margin are estimated at $8.5 million, primarily for amortization of intangible assets. Q3 operating expenses, excluding special items are expected to be down 1% to 2%, consistent with revenue due to tight spending controls.

Special items in Q3 operating expenses are estimated at $4 million for amortization of intangible assets. This excludes potential items that may occur during the quarter. Our Q3 and future tax rate, excluding special items is estimated at 15% to 20%. This is lower than our previously estimated long-term tax rate due to higher international mix of business.

Special items in our Q3 tax provision will include the benefit of the R&D tax credit for prior periods. For Q3 GAAP earnings per share, excluding special items, we expect a range of $0.39 to $0.43. Net capital expenditures in Q3 are expected to be flat with Q2. Finally, our Board of Directors havie approved payment of a cash dividend of $0.24 per share, approximately a 3% yield at yesterday's closing stock price.

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