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ADI > SEC Filings for ADI > Form 10-K on 22-Nov-2011All Recent SEC Filings

Show all filings for ANALOG DEVICES INC

Form 10-K for ANALOG DEVICES INC


22-Nov-2011

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (all tabular amounts in thousands except per share amounts)

During the first quarter of fiscal 2008, we sold our baseband chipset business and related support operations, or Baseband Chipset Business, to MediaTek Inc. and sold our CPU voltage regulation and PC thermal monitoring business to certain subsidiaries of ON Semiconductor Corporation. The financial results of these businesses are presented as discontinued operations in the consolidated statements of income for all periods presented. Unless otherwise noted, this Management's Discussion and Analysis relates only to financial results from continuing operations.

Results of Operations

Overview


                                                                           Fiscal Year
                                                             2011             2010             2009

Revenue                                                   $ 2,993,320      $ 2,761,503      $ 2,014,908
Gross Margin %                                                   66.4 %           65.2 %           55.5 %
Net income from Continuing Operations                     $   860,894      $   711,225      $   247,408
Net income from Continuing Operations as a % of Revenue          28.8 %           25.8 %           12.3 %
Diluted EPS from Continuing Operations                    $      2.79      $      2.33      $      0.85
Diluted EPS                                               $      2.81      $      2.33      $      0.85

The year-to-year revenue changes by end market and product category are more fully outlined below under Revenue Trends by End Market and Revenue Trends by Product.

During fiscal 2011, our revenue increased 8%, as compared to fiscal 2010. Our diluted earnings per share from continuing operations increased to $2.79 in fiscal 2011 from $2.33 in fiscal 2010. Cash flow from operations in fiscal 2011 was $900.5 million or 30% of revenue. We received proceeds of $515.5 million during fiscal 2011 from the issuance of $375 million aggregate principal amount of 3.0% senior unsecured notes and from a $145 million term loan facility entered into by a wholly owned subsidiary of ours. In addition, we received $217.2 million in net proceeds from employee stock option exercises. During fiscal 2011, we repurchased a total of approximately 9.0 million shares of our common stock for an aggregate of $330.3 million, distributed $281.6 million to our shareholders in dividend payments and paid $123.0 million for property, plant and equipment additions. These factors contributed to the net increase in cash and cash equivalents of $335.1 million in fiscal 2011.

The year-to-year increase in revenue and profitability for fiscal 2011 was primarily the result of improved global macro-economic conditions during the first half of the fiscal year. The strong growth we experienced in the first six months of fiscal 2011, including a 9% sequential revenue increase in our second fiscal quarter, was followed by sequential revenue declines in both the third and fourth fiscal quarters. The 9% sequential revenue increase in the second fiscal quarter included increased inventory stocking by our customers as a result of the Japanese earthquake and tsunami in March 2011. During the third and fourth quarters, of fiscal 2011, we began to see revenue declines attributable to inventory corrections following the inventory buildup in the prior quarters and declining demand as the deficit and credit related crisis in Europe and the U.S. caused customers to become more cautious in the second half of fiscal 2011.

Revenue Trends by End Market

The following table summarizes revenue by end market. The categorization of revenue by end market is determined using a variety of data points including the technical characteristics of the product, the "sold to" customer information, the "ship to" customer information and the end customer product or application into which our product will be incorporated. As data systems for capturing and tracking this data evolve and improve, the categorization of products by end market can vary over time. When this occurs, we reclassify revenue by end market for prior periods. Such reclassifications typically do not materially change the sizing of, or the underlying trends of results within, each end market. During fiscal year 2011, we consolidated the computer end market, which represented approximately 1% of fiscal 2011 revenue, into the consumer end market, and reclassified handset


revenue, which represented approximately 3% of fiscal 2011 revenue, from the communications end market to the consumer end market for all periods presented.

                                2011                                2010                          2009
                                   % of                                     % of                          % of
                                   Total                                    Total                         Total
                                  Product                                  Product                       Product
                   Revenue       Revenue*      Y/Y%         Revenue        Revenue        Revenue        Revenue

Industrial       $ 1,397,634            47 %      10 %    $ 1,267,736            46 %   $   860,696            43 %
Automotive           415,444            14 %      25 %        333,644            12 %       200,329            10 %
Consumer             586,945            20 %      (6 )%       626,565            23 %       508,848            25 %
Communications       593,297            20 %      11 %        533,558            19 %       445,035            22 %

Total Revenue    $ 2,993,320           100 %       8 %    $ 2,761,503           100 %   $ 2,014,908           100 %

* The sum of the individual percentages do not equal the total due to rounding.

Industrial - The year-to-year increase in revenue from fiscal 2010 to fiscal 2011 in industrial end market revenue was primarily the result of a broad-based increase in demand in this end market, which was most significant for products sold into the automation and instrumentation sectors and, to a lesser extent, products sold into the energy and healthcare sectors. The year-to-year increase in revenue from fiscal 2009 to fiscal 2010 in industrial end market revenue was primarily the result of a broad-based increase in demand in this end market, which was most significant for products sold into the instrumentation and automation sectors.

Automotive - The year-to-year increase in revenue from fiscal 2010 to fiscal 2011 in automotive end market revenue was primarily the result of a general increase in the electronic content found in vehicles and, to a lesser extent, a general increase in demand by our customers. The year-to-year increase in revenue from fiscal 2009 to fiscal 2010 in automotive end market revenue was primarily the result of increased demand due to various government-initiated incentive programs, inventory replenishment and a general increase in the electronic content found in vehicles.

Consumer - The year-to-year decrease in revenue from fiscal 2010 to fiscal 2011 in consumer end market revenue was primarily the result of a decrease in demand for products in the digital camera and home entertainment sector primarily as a result of the impact of the earthquake and tsunami that occurred in Japan in March 2011, partially offset by an increase in demand for products used in portable devices in this end market. The year-to-year increase in revenue from fiscal 2009 to fiscal 2010 in consumer end market revenue was primarily the result of a broad-based increase in demand for products used in digital cameras and other consumer applications.

Communications - The year-to-year increase in revenue from fiscal 2010 to fiscal 2011 in communications end market revenue was primarily the result of a broad-based increase in demand in this end market, which was most significant for the basestation end market sector. The year-to-year increase in revenue from fiscal 2009 to fiscal 2010 in communications end market revenue was primarily the result of a broad-based increase in demand in this end market, which was most significant for the infrastructure sector.


Revenue Trends by Product

The following table summarizes revenue by product categories. The categorization of our products into broad categories is based on the characteristics of the individual products, the specification of the products and in some cases the specific uses that certain products have within applications. The categorization of products into categories is therefore subject to judgment in some cases and can vary over time. In instances where products move between product categories we reclassify the amounts in the product categories for all prior periods. Such reclassifications typically do not materially change the sizing of, or the underlying trends of results within, each product category.

                                                    2011                                 2010                          2009
                                                       % of                                      % of                          % of
                                                       Total                                     Total                         Total
                                                      Product                                   Product                       Product
                                       Revenue        Revenue      Y/Y%          Revenue        Revenue        Revenue       Revenue*

Converters                           $ 1,343,492            45 %       4 %     $ 1,295,678            47 %   $ 1,005,004            50 %
Amplifiers/Radio frequency               788,498            26 %      12 %         701,634            25 %       501,942            25 %
Other analog                             410,233            14 %      23 %         334,649            12 %       216,473            11 %

Subtotal analog signal processing      2,542,223            85 %       9 %       2,331,961            84 %     1,723,419            86 %

Power management & reference             217,501             7 %      12 %         194,699             7 %       118,148             6 %

Total analog products                $ 2,759,724            92 %       9 %     $ 2,526,660            91 %   $ 1,841,567            91 %

Digital signal processing                233,596             8 %      (1 )%        234,843             9 %       173,341             9 %

Total Revenue                        $ 2,993,320           100 %       8 %     $ 2,761,503           100 %   $ 2,014,908           100 %

* The sum of the individual percentages do not equal the total due to rounding.

The increase in total revenue from fiscal 2010 to fiscal 2011 and from fiscal 2009 to fiscal 2010 was the result of a broad-based increase in sales across all of our product categories.

Revenue Trends by Geographic Region

Revenue by geographic region, based upon customer location, for the last three
fiscal years is as follows:


                                           2011            2010            2009

      United States                     $   532,011     $   508,187     $   401,608

      Rest of North and South America       164,079         153,962          92,954
      Europe                                838,719         703,717         502,602
      Japan                                 400,456         441,826         349,907
      China                                 596,433         508,489         376,080
      Rest of Asia                          461,622         445,322         291,757

      Total revenue                     $ 2,993,320     $ 2,761,503     $ 2,014,908

In fiscal years 2011, 2010 and 2009, the predominant countries comprising "Rest of North and South America" are Canada and Mexico; the predominant countries comprising "Europe" are Germany, Sweden, France and the United Kingdom; and the predominant countries comprising "Rest of Asia" are Taiwan and South Korea.

Sales increased in all geographic regions, except Japan, in fiscal 2011 as compared to fiscal 2010, primarily as a result of increases in sales activity in the industrial, automotive and communications end market sectors. The year-to-year decrease in sales in Japan was primarily the result of lower sales activity in the consumer end market sector in this region due to the earthquake and tsunami that occurred in Japan in March 2011.


Sales increased in all geographic regions in fiscal 2010 as compared to fiscal 2009, with sales in Europe and the Rest of Asia experiencing the largest increases. The increase in sales was the result of an increase in demand for our products primarily as a result of improving economic conditions worldwide.

Gross Margin


                                                 Fiscal Year
                                    2011            2010            2009

               Gross Margin     $ 1,986,541     $ 1,799,422     $ 1,118,637
               Gross Margin %          66.4 %          65.2 %          55.5 %

Gross margin percentage was higher in fiscal 2011 by 120 basis points, as compared to fiscal 2010 primarily as a result of an increase in sales of $231.8 million, increased operating levels in our manufacturing facilities and the impact of efforts to reduce overall manufacturing costs, including the savings realized as a result of our wafer fabrication consolidation actions. Additionally, a higher proportion of our revenues were from products sold into the instrumentation and automation sectors of the industrial end market, which earn higher margins as compared to products sold into our other end markets.

Gross margin percentage was higher in fiscal 2010 by 970 basis points as compared to fiscal 2009 primarily as a result of an increase in sales of $746.6 million, increased operating levels in our manufacturing facilities and the impact of ongoing efforts to reduce overall manufacturing costs, including the savings realized as a result of our wafer fabrication facility consolidations. Additionally, a higher proportion of our revenues were from products sold into the instrumentation and automation sectors of the industrial end market, which earn higher margins as compared to products sold into our other end markets.

Research and Development (R&D)


                                                         Fiscal Year
                                              2011          2010          2009

          R&D Expenses                     $ 505,570     $ 492,305     $ 446,980
          R&D Expenses as a % of Revenue        16.9 %        17.8 %        22.2 %

R&D expenses increased $13.3 million, or 3%, in fiscal 2011 as compared to fiscal 2010. The increase was primarily the result of higher employee salary and benefit expense due to salary increases that were effective at the beginning of the second quarter of fiscal 2011, increased headcount, and a general increase in spending. These increases were partially offset by lower variable compensation expense, which is a variable expense linked to our overall profitability and revenue growth.

Research and development, or R&D, expenses in fiscal 2010 increased $45.3 million, or 10%, from fiscal 2009. The increase was primarily the result of an increase in variable compensation expense, which was a variable expense linked to our overall profitability, partially offset by the impact of actions we took over the prior two years to control discretionary spending and permanently reduce operating expenses.

R&D expenses as a percentage of revenue will fluctuate from year-to-year depending on the amount of revenue and the success of new product development efforts, which we view as critical to our future growth. At any point in time we have hundreds of R&D projects underway, and we believe that none of these projects is material on an individual basis. We expect to continue the development of innovative technologies and processes for new products, and we believe that a continued commitment to R&D is essential in order to maintain product leadership with our existing products and to provide innovative new product offerings, and therefore, we expect to continue to make significant R&D investments in the future.


Selling, Marketing, General and Administrative (SMG&A)


                                                          Fiscal Year
                                               2011          2010          2009

         SMG&A Expenses                     $ 406,707     $ 390,560     $ 333,184
         SMG&A Expenses as a % of Revenue        13.6 %        14.1 %        16.5 %

Selling, marketing, general and administrative, or SMG&A, expenses increased $16.1 million, or 4%, in fiscal 2011 as compared to fiscal 2010. The increase was primarily the result of higher employee salary and benefit expense due to salary increases that were effective at the beginning of the second quarter of fiscal 2011, increased headcount and a general increase in spending. These increases were partially offset by lower variable compensation expense, which is a variable expense linked to our overall profitability and revenue growth.

SMG&A expenses in fiscal 2010 increased $57.4 million, or 17%, from fiscal 2009. The increase was primarily the result of an increase in variable compensation expense, which was a variable expense linked to our overall profitability, and higher sales commission expenses, which are variable expenses linked to our sales. These increases were offset by the impact of actions we took over the prior two years to control discretionary spending and permanently reduce operating expenses.

Special Charges

Closure of Wafer Fabrication Facility in Sunnyvale

We ceased production at our California wafer fabrication facility in November 2006. We paid the related lease obligation costs on a monthly basis over the remaining lease term, which expired in March 2010. We recorded a one-time settlement charge of $0.4 million in fiscal 2010 related to the termination of the lease. This action was completed during fiscal 2010.

Consolidation of a Wafer Fabrication Facility in Limerick

During fiscal 2007 through fiscal 2010, we recorded special charges of $16.4 million as a result of our decision to only use eight-inch technology at our wafer fabrication facility in Limerick. These special charges included $14.9 million for severance and fringe benefit costs in accordance with our ongoing benefit plan for 150 manufacturing employees and $1.5 million for clean-up and closure costs that we expensed as incurred. The production in the six-inch wafer fabrication facility ceased during the fourth quarter of fiscal 2009. This action was completed during fiscal 2010. This action resulted in annual cost savings of approximately $25 million per year.

Reduction of Operating Costs

During fiscal 2008 through fiscal 2010, in order to further reduce our operating cost structure, we recorded special charges of approximately $43.3 million. These special charges included: $39.1 million for severance and fringe benefit costs in accordance with our ongoing benefit plan or statutory requirements at foreign locations for 245 manufacturing employees and 470 engineering and SMG&A employees; $2.1 million for lease obligation costs for facilities that we ceased using during the first quarter of fiscal 2009; $0.8 million for the write-off of property, plant and equipment; $0.5 million for contract termination costs; $0.3 million for clean-up and closure costs that we expensed as incurred; and $0.5 million related to the impairment of intellectual property. This action resulted in annual cost savings of approximately $52 million per year. We terminated the employment of all employees associated with this action and we are paying amounts owed to them as income continuance.

During fiscal 2011, in order to further reduce our operating cost structure, we recorded a special charge of approximately $2.2 million. This special charge was for severance and fringe benefit costs in accordance with our ongoing benefit plan or statutory requirements at foreign locations for 25 engineering and SMG&A employees. As of October 29, 2011, we still employed 13 of the 25 employees included in this cost reduction action. These employees must continue to be employed by us until their employment is involuntarily terminated in order to receive the severance benefit. We estimate this action will result in annual savings in SMG&A expenses of approximately $4 million once fully implemented.


Closure of a Wafer Fabrication Facility in Cambridge

During fiscal 2009 and fiscal 2010, we recorded special charges of $26.8 million as a result of our decision to consolidate our Cambridge, Massachusetts wafer fabrication facility into our existing Wilmington, Massachusetts facility. These special charges included: $7.4 million for severance and fringe benefit costs recorded in accordance with our ongoing benefit plan for 124 manufacturing employees and 9 SMG&A employees; $14.6 million for the impairment of manufacturing assets; $3.4 million for lease obligation costs for the Cambridge wafer fabrication facility, which we ceased using in the first quarter of fiscal 2010; and $1.4 million for clean-up and closure costs that we expensed as incurred. This action was completed during the third quarter of fiscal 2011. This action resulted in annual cost savings of approximately $43 million per year.

Operating Income from Continuing Operations


                                                                              Fiscal Year
                                                                2011               2010             2009

Operating income from Continuing Operations                 $ 1,072,025         $ 900,074        $ 284,817
Operating income from Continuing Operations as a % of
Revenue                                                            35.8 %            32.6 %           14.1 %

The $172.0 million, or 19%, increase in operating income from continuing operations in fiscal 2011 as compared to fiscal 2010 was primarily the result of an increase in revenue of $231.8 million and a 120 basis point increase in gross margin percentage.

The $615.3 million, or 216%, increase in operating income from continuing operations in fiscal 2010 as compared to fiscal 2009 was primarily the result of an increase in revenue of $746.6 million, a 970 basis point increase in gross margin percentage, and lower special charges recorded in fiscal 2010 as compared to fiscal 2009.

Nonoperating (Income) Expense


                                                          Fiscal Year
                                                2011         2010         2009

        Interest expense                      $ 19,146     $ 10,429     $   4,094
        Interest income                         (9,060 )     (9,837 )     (15,621 )
        Other, net                                 492       (2,183 )      (1,100 )

        Total nonoperating expense (income)   $ 10,578     $ (1,591 )   $ (12,627 )

Nonoperating (income) expense was higher by $12.2 million in fiscal 2011 as compared to fiscal 2010. The increase was primarily due to an increase in interest expense incurred as a result of the issuance of $375 million aggregate principal amount of 3.0% senior unsecured notes on April 4, 2011, and the $145 million term loan facility entered into by a wholly owned subsidiary of ours in December 2010. In addition, we earned lower interest income as a result of lower interest rates in fiscal 2011 as compared to fiscal 2010, which was partially offset by interest earned on higher cash balances in fiscal 2011.

Nonoperating income was lower by $11 million in fiscal 2010 as compared to fiscal 2009. The increase was primarily due to higher interest expense incurred during fiscal 2010 as a result of the issuance of $375 million aggregate principal 5.0% senior unsecured notes on June 30, 2009, resulting in a partial year of interest expense in 2009 compared to a full year in 2010. In addition, we earned lower interest income on investments as a result of lower interest rates in fiscal 2010 as compared to fiscal 2009.

Provision for Income Taxes


                                                      Fiscal Year
                                            2011          2010          2009

            Provision for Income Taxes   $ 200,553     $ 190,440     $ 50,036
            Effective Income Tax Rate         18.9 %        21.1 %       16.8 %


Our effective tax rate reflects the applicable tax rate in effect in the various tax jurisdictions around the world where our income is earned.

Our effective tax rate for fiscal 2011 was lower by 220 basis points compared to our effective tax rate for fiscal 2010. The tax rate for fiscal 2011 included the following items which caused a decrease in our tax rate: the reinstatement of the federal R&D tax credit in December 2010 retroactive to January 1, 2010, resulting in a $6.0 million income tax savings; a $6.7 million reduction in the state tax credit valuation reserve that we believe we can now recover; a $0.5 million tax benefit from the increase in Irish deferred taxes as a result of the increase in the Irish manufacturing tax rate from 10% to 12.5%; and a net $10.8 million tax benefit related to the settlement with the Appeals Office of the Internal Revenue Service of certain tax matters for the fiscal 2004 through fiscal 2007 tax years. Fiscal 2010 also included a higher special charge, a majority of which provided a tax benefit at the higher U.S. tax rate as compared to the special charge recorded in fiscal 2011.

Our effective tax rate for fiscal 2010 was higher compared to our effective tax rate for fiscal 2009 primarily as a result of a change in the mix of our income to jurisdictions where income is taxed at a higher rate. In addition, higher special charges recorded in fiscal 2009, a majority of which provided a tax benefit at the higher U.S. tax rate, contributed to a higher effective tax rate for fiscal 2010 as compared to fiscal 2009.

Income from Continuing Operations, Net of Tax


                                                                             Fiscal Year
                                                               2011             2010             2009

Income from Continuing Operations, net of tax               $ 860,894        $ 711,225        $ 247,408
Income from Continuing Operations, net of tax as a % of
Revenue                                                          28.8 %           25.8 %           12.3 %
Diluted EPS from Continuing Operations                      $    2.79        $    2.33        $    0.85

Net income from continuing operations in fiscal 2011 was higher than in fiscal 2010 by approximately $149.7 million primarily as a result of the $172.0 million . . .

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