Maxim Integrated Products, Inc. (MXIM) had its annual shareholder meeting today in Sunnyvale, CA. A spread of donuts, pastries, water, coffee, tea, and bottled orange juice was offered. (The donuts were an interesting option--most shareholder meetings don't offer donuts.) The meeting started at around 10:05AM and lasted until around 11:00AM. Around 35 people attended.
CEO Tunc Doluca, who replaced Jack Gifford, started the meeting by introducing the Board of Directors. Once the formal part of the presentation was over, the rest of the meeting consisted primarily of questions from shareholders. There was no video presentation.
Before I move to the Q&A session, readers may appreciate some background on Maxim. Due to financial irregularities caused by previous officers, Maxim's shares were temporarily pink-listed; however, Maxim is currently off the pink sheets and back on the NASDAQ. In fact, Maxim was just incorporated into the NASDAQ 100 index. This turnaround--from the pink list to the Nasdaq 100--is stunning, because most companies that are pink-listed never return to stock prices above the single digits or soon declare bankruptcy. Thus, Maxim appears to have put most of their regulatory woes--SEC investigations, stock option backdating, and lawsuits--behind.
Maxim's 10K, starting on page 20, summarizes the status of Maxim's litigation. It appears that if the Delaware Court of Chancery--known for being company-friendly--approves a stipulated settlement agreement, the derivative state and federal lawsuits against Maxim will also be dismissed. In addition, Page 7 of the 10K shows that the federal government's involvement in Maxim's option practices is over:
The informal SEC investigation has subsequently been settled without any admission of wrongdoing on the part of the Company and without any assessment of penalties and the U.S. Attorney subsequently informed us that its office does not intend to pursue any further investigation or action against the Company concerning our stock option grant practices.
I went online to review some of the filings in Maxim's federal litigation. Here are the open case numbers:
06-cv-03344-JW Derivative Litigation (Maxim Integrated Products)
06-cv-03754-JW City of Pontiac Policemen's and Firemen's Retirement System v. Gifford et al, filed 06/14/06
06-cv-03755-JW Corey v. Gifford et al, filed 06/14/06
06-cv-03395-JW Horkay v. Beck et al
08-cv-00832-JW In re Maxim Integrated Products, Inc., Securities Litigation, filed 02/06/08
The latest event in the 2008-filed case is Maxim’s substitution of attorney from Quinn Emanuel to Weil, Gotshal and Manges. I didn't see any filings that appeared out of the ordinary, but one of the plaintiffs' briefs caught my eye. It included charts of when Maxim's former directors granted stock options. These charts appeared to show that certain options were granted at the lowest possible price during the relevant time period. In any case, these directors are no longer with the company.
All the above circumstances have caused Maxim's stock price to reach prices last seen in 1998--over ten years ago. Yet, from a value investor's standpoint, Maxim's balance sheet is pristine--it has no debt, and around a billion dollars in cash.
I asked the first few questions at the shareholder meeting. I inquired about the status of the current lawsuits. A person who appeared to be Maxim's in-house counsel provided a basic overview of the litigation, but after realizing I was looking for more substantive details, he provided more information and a short chronology of legal events. I was pleased with his responsiveness and ability to clearly explain the litigation.
I then asked about the company's experience being pink-listed (I erroneously said, "de-listed"--for the record, Maxim has never been de-listed). CEO Doluca said that being pink-listed did not reduce the company's workload at all, because the company still had to comply with various regulations and internal controls. In fact, he said being pink-listed was a hindrance mainly because Maxim couldn't tell the public how well the company was doing. (During the period of time when Maxim had to restate its financial results, it was barred from publicly reporting various numbers.) CEO Doluca said that it was "frustrating, frankly," not to be able to tell the public more details.
Another person asked about buybacks. The CEO said the company was "buying cautiously."
Another person said that the cost of the backdating of options had cost the company 30 cents a share in earnings, and asked what the company was doing to prevent this [stock option irregularity] from happening again. CEO Doluca said that none of the directors involved in the backdating of options were still with the company. He also said that the company had revamped its stock option plan to grant options only on the first Tuesday of the month after an employee is hired.
Another person asked why the company was buying back shares "cautiously" (instead of more aggressively). The CEO said that the company wanted to maintain its strong balance sheet and in hindsight, not buying shares had been a good decision because Maxim stock had declined (along with the overall market).
This same person asked about Maxim's inventory and what the company was doing to clear inventory (making way for new products and new sales). The CEO indicated that Maxim's customers had become very cautious in their own outlook and were keeping less inventory on hand, making it more difficult for Maxim to predict future sales with clarity. In addition, because of the X-Mas season, a lot of finished products were on the market, making it difficult to ascertain when inventories would be reduced and when customer demand would pick up.
I didn't hear the next question clearly. The CEO responded that Maxim had scored various design wins and was looking forward to growth in handsets (3G), medical products, and management products.
Someone asked about additional product lines. The CEO responded that the auto market represented a growth market for Maxim. He said that even though demand was down, "for us, it's a growth market." He also indicated that security video and storage/networking sectors would experience growth.
The CEO indicated that Maxim had acquired a security video company and that various acquisitions had already broken even or would be at the break-even point by next year.
Another person asked an interesting question. I am paraphrasing, but I believe he asked how Maxim was evaluating future demand when the credit markets were so volatile and currently inefficient. The CEO talked about using a cash burn rate and other metrics. (It's refreshing to hear a CEO who can convey both financial and technological concepts effectively. Not once during the presentation did the CEO deflect a question to the CFO.)
After the praising the CEO for being responsive during the meeting, I asked him to tell me whether Maxim had a "wide moat." Warren Buffett uses the term "wide moat" to see whether a stock is worth buying. Basically, a wide moat is how secure a company's product is from competition/attack. Imagine being in a castle and having no moat. You will be invaded and possibly vanquished. But with a wide moat, attackers need to spend more time, energy, and resources to attack you and might avoid your territory. Coke's brand name and the goodwill attached to it represent one form of a wide moat. Adobe's PDF DRM support, which allows only Adobe's software to be capable of reading and creating every PDF feature with 100% accuracy, represents another example of a wide moat. What, I wondered, was Maxim's wide moat?
CEO Doluca responded that Maxim's "wide moat" was its well-diversified product lines, the numerous features of its products, and its highly innovative staff. He said Maxim's products were part of a broad IP portfolio that was highly integrated and "very differentiated" from other companies' products. Also, because Maxim's chips were "feature-rich" and multi-functional, their high level of specialization eliminated most competitors and start-ups from Maxim's target markets.
CEO Doluca also talked about how, relatively speaking, Maxim enjoyed high margins. (In general, analog products have longer lives, which allows companies involved in analog-based products to enjoy higher margins. The downside is that the longer life of analog products comes with lower growth because products don't have to be replaced as often.)
So many CEOs have a hard time with the "wide moat" question, but CEO Doluca answered it very well. I would also add that many of Maxim's employees have specialized knowledge in analog design and products. Engineers who specialize in analog design are less available on the market and tend to have Ph.Ds, making them harder to find and hire. While Microsoft won't have a hard time finding software engineers, analog technology companies have to work harder to find competent employees who can handle the high level of specialization in their products. As a result, Maxim's engineers represent a unique strength. I believe this is what CEO Doluca was saying when he mentioned his innovative employees as part of Maxim's "wide moat."
The CEO agreed with another shareholder who said that Maxim had previously been in a position where it "couldn't tell our story very well."
I was very pleased with CEO Doluca's grasp of his company's products and his ability to answer questions. I view him as an honest, knowledgeable CEO who will give Maxim more credibility on Wall Street.
Most semiconductor companies have seen their shares decline in value, and Maxim is no exception. But the semiconductor industry is cyclical, and right now, most major semiconductor companies have strong balance sheets. When the economy improves, companies like Maxim, Texas Instruments, and Intel--all of which have solid balance sheets--will be well-positioned to benefit from the economic recovery. I see a bright future for Maxim.
Disclosure: I own over 200 shares of Maxim, most of which I bought after attending the shareholder meeting; members of my family own shares of Maxim and/or have access to shares; and a relative works at Maxim. I may buy more shares of Maxim in the future. I also own shares of Texas Instruments (TXN) and Intel (INTC).
Note: The law firm of Weil, Gotshal and Manges was mentioned in this article. I was in an intern in Weil, Gotshal and Manges' Singapore office for a brief period of time. At the time, non-Singaporean law firms had to set up joint ventures with Singaporean law firms to do business in Singapore, and the law firm I worked at happened to be connected with Weil, Gotshal and Manges. As far as I know, I do not currently have any financial interests with or in Weil, Gotshal and Manges.
Correction: Maxim was in fact de-listed from the NASDAQ exchange, but Maxim shares never stopped being publicly traded.