SEC Company Response from MAXIM INTEGRATED PRODUCTS INC (CIK 0000743316) — Dec 23, 2004
MAXIM INTEGRATED PRODUCTS INC (CIK 0000743316)
Date: Dec. 23, 2004 · CIK: 0000743316 · Accession: 0001206774-04-001776
AI Filing Summary & Sentiment
Referenced dates: November 30, 2004
Letter
VIA EDGAR Securities and Exchange Commission Attention: Form 10-K for the fiscal year ended June 26, 2004 Form 10-Q for the first fiscal quarter ended September 25, 2004 Form 8-K dated November 1, 2004 File No. 0-16538
Dear Sirs:
Maxim Integrated Products, Inc. (the “Company”) is responding via EDGAR to the comments of the Staff of the Securities and Exchange Commission set forth in the letter from the Staff dated November 30, 2004 in connection with its Form 10-K for the fiscal year ended June 26, 2004, its Form 10-Q for the first fiscal quarter ended September 25, 2004 and its Form 8-K dated November 1, 2004. In addition, the Company is filing herewith via EDGAR a supplement to its disclosures in the Form 10-K, Form 10-Q and Form 8-K, as well as proposed disclosures for future filings as requested by the Staff.
For ease of reference by the Staff in reviewing the Company’s responses to each of the comments and as requested by the Staff, each comment is referred to separately by the number set forth in the letter from the Staff dated November 30, 2004.
Form 10-K for the fiscal year ended June 26, 2004
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting
Revenue Recognition and Accounts Receivable Allowances – Page 19
COMMENT 1:
In a supplemental response tell us what “non-warranty product return privileges” these distributors have. In addition, tell us how you have accounted for these product return privileges. Revise future filings as appropriate based on our comment.
Securities and Exchange Commission December 22, 2004 Page 2
RESPONSE:
The Company’s agreements with its United States (“US”) distributors provide for non-warranty product return privileges of their standard product purchases which allow these distributors to rotate a small portion based on their previous 90 days of purchases. This stock rotation is separate from and not a part of the Company’s product warranty program. Revenue and the related cost of goods sold on all shipments to US distributors are deferred until the product is sold by the distributor. Accordingly, non-warranty product returns by US distributors do not impact the Company’s income statement as revenue has not been recognized on the returned products.
As of and for the year ended June 26, 2004 and as of and for the first quarter ended September 25, 2004, none of the Company’s existing international distributors had non-warranty product return privileges. Revenue on all shipments to international distributors is recognized upon shipment to the distributor, with appropriate provision of reserves for returns and allowances. Returns and allowances are estimated based on historical returns rates applied against current period gross revenues. Specific customer returns and allowances are considered in this estimate.
The Company’s proposed disclosure for its future filings is as follows:
Revenue Recognition and Accounts Receivable Allowances:
The Company recognizes revenue for sales to direct customers and sales to international distributors upon shipment, provided that persuasive evidence of a sales arrangement exists, the price is fixed and determinable, title has transferred to the customer, collectibility of the resulting receivable is reasonably assured, there are no customer acceptance requirements and the Company does not have any significant post-shipment obligations. The Company estimates returns for sales to direct customers and international distributors based on historical returns rates applied against current period gross revenues. Specific customer returns and allowances are considered in this estimate.
Sales to US distributors are made pursuant to agreements allowing the possibility of certain sales price rebates and for non-warranty product return privileges. The non-warranty product return privileges include allowing US distributors to rotate a small portion based on their previous 90 days of purchases. Given the uncertainties associated with the levels of non-warranty product returns and sales price rebates that could be issued to US distributors, the Company defers recognition of such revenue and related cost of goods sold until the product is sold by the US distributors to their end customers. Accounts receivable from direct customers, domestic distributors and international distributors are recognized and inventory is relieved upon shipment as title to inventories generally transfers upon shipment at which point the Company has a legally enforceable right to collection under normal terms. In addition, the Company estimates returns for sales to domestic distributors based on historical return rates applied against current period gross revenues.
Securities and Exchange Commission December 22, 2004 Page 3
The Company makes estimates of 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 by the Company may differ from actual returns and sales allowances. These differences may materially impact reported revenue and amounts ultimately collected on accounts receivable. In addition, the Company monitors collectibility of accounts receivable primarily through review of the accounts receivable aging. When facts and circumstances indicate the collection of specific amounts or from specific customers is at risk, the Company assesses the impact on amounts recorded for bad debts and, if necessary, will record a charge in the period such determination is made. To date, the Company has not experienced material write-offs of accounts receivable due to uncollectibility.
Results of Operations – Page 21
COMMENT 2:
Please revise your discussion of revenue changes in future filings to discuss and quantify the effects of changes in prices and volume as well as the introduction of new products on your revenues for the period, in accordance with Item 303(3)(iii) of Regulation S-K. You should discuss why these changes occurred and whether these matters are expected to have an impact on future operations, including any material trends that may exist.
RESPONSE:
The Company will expand its disclosure in future filings, including but not limited to the disclosure in its Form 10-Q for the second fiscal quarter ended December 25, 2004, to address and quantify the effects of changes in prices and volume as well as to provide more details, to the extent known to the Company, of the reasons for the changes and the anticipated impact on future operations, if any, and any trends. It would be extremely difficult for the Company to quantify the impact of new product sales on changes to current revenue and difficult to define the meaning of a new product sale given the nature of the Company’s business. The Company estimates that new products typically take 3 years to generate significant revenues after introduction. Furthermore, the Company believes the impact of new product sales has not resulted in any significant changes to revenue in recent, prior periods. Therefore, in future filings the Company will not refer to new product sales in its discussion regarding the change in revenue quarter over quarter unless such sales are material in the period.
Securities and Exchange Commission December 22, 2004 Page 4
COMMENT 3:
When more than one factor is cited in explaining a change in a financial statement item, the amounts of the individual factors cited should be quantified unless not practical. We noted instances where it appears that the amounts of multiple factors should be reasonably quantifiable. For example, under Research and Development, please quantify the increases in costs from hiring additional engineers and from supporting new product development efforts. Please apply this general guidance throughout Management’s Discussion and analysis in your future filings.
RESPONSE:
The Company will expand its disclosure in future filings, including but not limited to the disclosure in its Form 10-Q for the second fiscal quarter ended December 25, 2004, to quantify the amount individual factors identified have on financial statement line items to the extent practicable.
Notes to Consolidated Financial Statements
Note 2 – Summary of Significant Accounting Policies
Revenue Recognition and Accounts Receivable Allowances – Page 37
COMMENT 4:
In a supplemental response respond to the following, and revise future filings to address our comments as appropriate:
a)
Provide more details to distinguish more clearly your revenue recognition policy. It appears that you defer revenue on your domestic distributor sales due to the inherent difficulties in estimating returns. What sales do you make estimates on returns for? Are these for direct sales to customers?
b)
What is your policy for the international distributors that do have price rebate or product return privileges? Do you defer revenue on those sales until the distributors sell the product to the end customer? If not, why is your policy for these different than your policy for domestic distributors?
RESPONSE:
a) The Company recognizes revenue for sales to direct customers and sales to international distributors when the following criteria have been met:
•
shipment has occurred,
•
persuasive evidence of a sales arrangement exists,
•
the price is fixed and determinable,
•
title has transferred to the customer,
Securities and Exchange Commission December 22, 2004 Page 5
•
collectibility of the resulting receivable is reasonably assured,
•
there are no customer acceptance requirements, and
•
the Company does not have any significant post-shipment obligations.
The foregoing criteria are in compliance with SAB 101 and SAB 104.
Sales to US distributors are made pursuant to agreements allowing the possibility of certain sales price rebates and for limited non-warranty product return privileges that allow these distributors to rotate a small portion based on their previous 90 days of purchases. Given the uncertainties associated with the levels of such non-warranty returns and sales price rebates that could be issued to US distributors, the Company defers recognition of such revenue and related cost of goods sold until the product is sold by the US distributors to their end customers. Deferral of such revenue until sell through of the product by the US distributor is a common and standard accounting practice used in the semiconductor industry.
The Company estimates returns for sales to direct customers and international distributors, as well as for sales to domestic distributors, based on historical return rates applied against current period gross revenues. Specific customer returns and allowances are considered in this estimate.
The Company’s proposed disclosure for its future filings is presented in the response to Comment #1 above.
b) None of the Company’s international distributors have contractual sales price rebates or non-warranty product return privileges. Accordingly, the Company recognizes revenue upon shipment to international distributors because all criteria contained in SAB 101 and SAB 104 are met as further discussed in Response 4.a) above. As further discussed in the Company’s Response 1.) above, returns and allowances are estimated for international distributors based on historical return rates applied against current period gross revenues. Specific customer returns and allowances are considered in this estimate.
Securities and Exchange Commission December 22, 2004 Page 6
Stock-Based Compensation – Page 38
COMMENT 5:
In a supplemental response tell us why the stock price volatilities for the stock option plans and the employee stock participation plan are the same given the fact that the expected option holding periods are significantly different. For reference see paragraphs 284 and 285 of Appendix B in SFAS 123.
RESPONSE:
The Company estimates expected stock price volatility based on actual volatility observed in the historical record, and also on reported volatility data for the Company stock and traded options for which Company stock is the underlying asset.
The Company maintains a historical price database of daily closing price observations dating from the Feb. 29, 1988 initial public offering to present. As required by SFAS 123 paragraph 284, the Company has analyzed this historical record to compute annualized volatility. Based on these computations, the Company has determined that historical volatility varies widely depending upon which range of price observations is used to make the computation. Accordingly, as required by SFAS 123 paragraph 251, the Company has used publicly available information in the form of implied volatility reported for traded options to settle the question of which of the myriad calculations of historical volatility is best representative of expected future volatility. The Company believes this is consistent with the meaning and intent of the accounting standard, as the direction of SFAS 123 paragraph 274 states “In estimating the expected volatility of…the underlying stock, the objective is to approximate the expectations that likely would be reflected in a current market or negotiated exchange price for the option.” There is a well-developed and liquid market for trading options on the Company’s stock for which calculations of volatility are readily available. Although there are differences between employee stock options and traded options, the volatility of the underlying stock should be the same because volatility is a characteristic of the underlying stock rather than the option.
Analysis of the implied volatilities reflected in the market prices for traded options indicates that the market is using a volatility of 42% to value options based on Company stock. Turning to the historical record of price observations, the Company validated 42% as a reasonable volatility metric by computing a weighted average of historical volatilities for recent years with the most recent data receiving higher relative weight in the calculation of the average.
Securities and Exchange Commission December 22, 2004 Page 7
After determining that 42% is the appropriate measure of volatility to use in general, the Company applied this data to estimate future volatility. 42% is used as the expected volatility for the input to the Black-Scholes option pricing model for shares under option in both the stock option plan and the employee stock participation plan even though the expected holding periods are different because the estimates of future volatility are based on management’s expectation that the trading characteristics of Company stock will be substantially unchanged going forward and are not expected to vary significantly with the passage of time. To support using a different volatility measure based on different expected holding periods, the Company would need to support an expectation that the volatility of the Company’s stock will change in the future from volatility that is now measured and reported.
The Company examined the historical record of volatility referenced above and determined that no meaningful trend could be
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December 22, 2004
VIA EDGAR
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0306
Attention:
Kevin L. Vaughn, Staff Accountant, Division of Corporation Finance
Martin James, Senior Assistant Chief Accountant
Daniel Gordon, Branch Chief
Re:
Maxim Integrated Products, Inc.
Form 10-K for the fiscal year ended June 26, 2004
Form 10-Q for the first fiscal quarter ended September 25, 2004
Form 8-K dated November 1, 2004
File No. 0-16538
Dear Sirs:
Maxim Integrated Products, Inc. (the “Company”) is responding via EDGAR to the comments of the Staff of the Securities and Exchange Commission set forth in the letter from the Staff dated November 30, 2004 in connection with its Form 10-K for the fiscal year ended June 26, 2004, its Form 10-Q for the first fiscal quarter ended September 25, 2004 and its Form 8-K dated November 1, 2004. In addition, the Company is filing herewith via EDGAR a supplement to its disclosures in the Form 10-K, Form 10-Q and Form 8-K, as well as proposed disclosures for future filings as requested by the Staff.
For ease of reference by the Staff in reviewing the Company’s responses to each of the comments and as requested by the Staff, each comment is referred to separately by the number set forth in the letter from the Staff dated November 30, 2004.
Form 10-K for the fiscal year ended June 26, 2004
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting
Revenue Recognition and Accounts Receivable Allowances – Page 19
COMMENT 1:
In a supplemental response tell us what “non-warranty product return privileges” these distributors have. In addition, tell us how you have accounted for these product return privileges. Revise future filings as appropriate based on our comment.
Securities and Exchange Commission
December 22, 2004
Page 2
RESPONSE:
The Company’s agreements with its United States (“US”) distributors provide for non-warranty product return privileges of their standard product purchases which allow these distributors to rotate a small portion based on their previous 90 days of purchases. This stock rotation is separate from and not a part of the Company’s product warranty program. Revenue and the related cost of goods sold on all shipments to US distributors are deferred until the product is sold by the distributor. Accordingly, non-warranty product returns by US distributors do not impact the Company’s income statement as revenue has not been recognized on the returned products.
As of and for the year ended June 26, 2004 and as of and for the first quarter ended September 25, 2004, none of the Company’s existing international distributors had non-warranty product return privileges. Revenue on all shipments to international distributors is recognized upon shipment to the distributor, with appropriate provision of reserves for returns and allowances. Returns and allowances are estimated based on historical returns rates applied against current period gross revenues. Specific customer returns and allowances are considered in this estimate.
The Company’s proposed disclosure for its future filings is as follows:
Revenue Recognition and Accounts Receivable Allowances:
The Company recognizes revenue for sales to direct customers and sales to international distributors upon shipment, provided that persuasive evidence of a sales arrangement exists, the price is fixed and determinable, title has transferred to the customer, collectibility of the resulting receivable is reasonably assured, there are no customer acceptance requirements and the Company does not have any significant post-shipment obligations. The Company estimates returns for sales to direct customers and international distributors based on historical returns rates applied against current period gross revenues. Specific customer returns and allowances are considered in this estimate.
Sales to US distributors are made pursuant to agreements allowing the possibility of certain sales price rebates and for non-warranty product return privileges. The non-warranty product return privileges include allowing US distributors to rotate a small portion based on their previous 90 days of purchases. Given the uncertainties associated with the levels of non-warranty product returns and sales price rebates that could be issued to US distributors, the Company defers recognition of such revenue and related cost of goods sold until the product is sold by the US distributors to their end customers. Accounts receivable from direct customers, domestic distributors and international distributors are recognized and inventory is relieved upon shipment as title to inventories generally transfers upon shipment at which point the Company has a legally enforceable right to collection under normal
terms. In addition, the Company estimates returns for sales to domestic distributors based on historical return rates applied against current period gross revenues.
Securities and Exchange Commission
December 22, 2004
Page 3
The Company makes estimates of 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 by the Company may differ from actual returns and sales allowances. These differences may materially impact reported revenue and amounts ultimately collected on accounts receivable. In addition, the Company monitors collectibility of accounts receivable primarily through review of the accounts receivable aging. When facts and circumstances indicate the collection of specific amounts or from specific customers is at risk, the Company assesses the impact on amounts recorded for bad debts and, if necessary, will record a charge in the period such determination is made. To date, the Company has not
experienced material write-offs of accounts receivable due to uncollectibility.
Results of Operations – Page 21
COMMENT 2:
Please revise your discussion of revenue changes in future filings to discuss and quantify the effects of changes in prices and volume as well as the introduction of new products on your revenues for the period, in accordance with Item 303(3)(iii) of Regulation S-K. You should discuss why these changes occurred and whether these matters are expected to have an impact on future operations, including any material trends that may exist.
RESPONSE:
The Company will expand its disclosure in future filings, including but not limited to the disclosure in its Form 10-Q for the second fiscal quarter ended December 25, 2004, to address and quantify the effects of changes in prices and volume as well as to provide more details, to the extent known to the Company, of the reasons for the changes and the anticipated impact on future operations, if any, and any trends. It would be extremely difficult for the Company to quantify the impact of new product sales on changes to current revenue and difficult to define the meaning of a new product sale given the nature of the Company’s business. The Company estimates that new products typically take 3 years to generate significant revenues after introduction. Furthermore, the Company believes the impact of new product sales has not resulted in any significant changes to revenue in recent, prior periods. Therefore, in
future filings the Company will not refer to new product sales in its discussion regarding the change in revenue quarter over quarter unless such sales are material in the period.
Securities and Exchange Commission
December 22, 2004
Page 4
COMMENT 3:
When more than one factor is cited in explaining a change in a financial statement item, the amounts of the individual factors cited should be quantified unless not practical. We noted instances where it appears that the amounts of multiple factors should be reasonably quantifiable. For example, under Research and Development, please quantify the increases in costs from hiring additional engineers and from supporting new product development efforts. Please apply this general guidance throughout Management’s Discussion and analysis in your future filings.
RESPONSE:
The Company will expand its disclosure in future filings, including but not limited to the disclosure in its Form 10-Q for the second fiscal quarter ended December 25, 2004, to quantify the amount individual factors identified have on financial statement line items to the extent practicable.
Notes to Consolidated Financial Statements
Note 2 – Summary of Significant Accounting Policies
Revenue Recognition and Accounts Receivable Allowances – Page 37
COMMENT 4:
In a supplemental response respond to the following, and revise future filings to address our comments as appropriate:
a)
Provide more details to distinguish more clearly your revenue recognition policy. It appears that you defer revenue on your domestic distributor sales due to the inherent difficulties in estimating returns. What sales do you make estimates on returns for? Are these for direct sales to customers?
b)
What is your policy for the international distributors that do have price rebate or product return privileges? Do you defer revenue on those sales until the distributors sell the product to the end customer? If not, why is your policy for these different than your policy for domestic distributors?
RESPONSE:
a) The Company recognizes revenue for sales to direct customers and sales to international distributors when the following criteria have been met:
•
shipment has occurred,
•
persuasive evidence of a sales arrangement exists,
•
the price is fixed and determinable,
•
title has transferred to the customer,
Securities and Exchange Commission
December 22, 2004
Page 5
•
collectibility of the resulting receivable is reasonably assured,
•
there are no customer acceptance requirements, and
•
the Company does not have any significant post-shipment obligations.
The foregoing criteria are in compliance with SAB 101 and SAB 104.
Sales to US distributors are made pursuant to agreements allowing the possibility of certain sales price rebates and for limited non-warranty product return privileges that allow these distributors to rotate a small portion based on their previous 90 days of purchases. Given the uncertainties associated with the levels of such non-warranty returns and sales price rebates that could be issued to US distributors, the Company defers recognition of such revenue and related cost of goods sold until the product is sold by the US distributors to their end customers. Deferral of such revenue until sell through of the product by the US distributor is a common and standard accounting practice used in the semiconductor industry.
The Company estimates returns for sales to direct customers and international distributors, as well as for sales to domestic distributors, based on historical return rates applied against current period gross revenues. Specific customer returns and allowances are considered in this estimate.
The Company’s proposed disclosure for its future filings is presented in the response to Comment #1 above.
b) None of the Company’s international distributors have contractual sales price rebates or non-warranty product return privileges. Accordingly, the Company recognizes revenue upon shipment to international distributors because all criteria contained in SAB 101 and SAB 104 are met as further discussed in Response 4.a) above. As further discussed in the Company’s Response 1.) above, returns and allowances are estimated for international distributors based on historical return rates applied against current period gross revenues. Specific customer returns and allowances are considered in this estimate.
Securities and Exchange Commission
December 22, 2004
Page 6
Stock-Based Compensation – Page 38
COMMENT 5:
In a supplemental response tell us why the stock price volatilities for the stock option plans and the employee stock participation plan are the same given the fact that the expected option holding periods are significantly different. For reference see paragraphs 284 and 285 of Appendix B in SFAS 123.
RESPONSE:
The Company estimates expected stock price volatility based on actual volatility observed in the historical record, and also on reported volatility data for the Company stock and traded options for which Company stock is the underlying asset.
The Company maintains a historical price database of daily closing price observations dating from the Feb. 29, 1988 initial public offering to present. As required by SFAS 123 paragraph 284, the Company has analyzed this historical record to compute annualized volatility. Based on these computations, the Company has determined that historical volatility varies widely depending upon which range of price observations is used to make the computation. Accordingly, as required by SFAS 123 paragraph 251, the Company has used publicly available information in the form of implied volatility reported for traded options to settle the question of which of the myriad calculations of historical volatility is best representative of expected future volatility. The Company believes this is consistent with the meaning and intent of the accounting standard, as the direction of SFAS 123 paragraph 274 states “In estimating
the expected volatility of…the underlying stock, the objective is to approximate the expectations that likely would be reflected in a current market or negotiated exchange price for the option.” There is a well-developed and liquid market for trading options on the Company’s stock for which calculations of volatility are readily available. Although there are differences between employee stock options and traded options, the volatility of the underlying stock should be the same because volatility is a characteristic of the underlying stock rather than the option.
Analysis of the implied volatilities reflected in the market prices for traded options indicates that the market is using a volatility of 42% to value options based on Company stock. Turning to the historical record of price observations, the Company validated 42% as a reasonable volatility metric by computing a weighted average of historical volatilities for recent years with the most recent data receiving higher relative weight in the calculation of the average.
Securities and Exchange Commission
December 22, 2004
Page 7
After determining that 42% is the appropriate measure of volatility to use in general, the Company applied this data to estimate future volatility. 42% is used as the expected volatility for the input to the Black-Scholes option pricing model for shares under option in both the stock option plan and the employee stock participation plan even though the expected holding periods are different because the estimates of future volatility are based on management’s expectation that the trading characteristics of Company stock will be substantially unchanged going forward and are not expected to vary significantly with the passage of time. To support using a different volatility measure based on different expected holding periods, the Company would need to support an expectation that the volatility of the Company’s stock will change in the future from volatility that is now measured and reported.
The Company examined the historical record of volatility referenced above and determined that no meaningful trend could be