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ADI > SEC Filings for ADI > Form 10-Q on 22-May-2012All Recent SEC Filings

Show all filings for ANALOG DEVICES INC

Form 10-Q for ANALOG DEVICES INC


22-May-2012

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This information should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in Item 1 of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended October 29, 2011.

This Management's Discussion and Analysis of Financial Condition and Results of Operations, including in particular the section entitled "Outlook," contains forward-looking statements regarding future events and our future results that are subject to the safe harbor created under the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as "expects," "anticipates," "targets," "goals," "projects," "intends," "plans," "believes," "seeks," "estimates," "continues," "may," variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections regarding our future financial performance; our anticipated growth and trends in our businesses; our future capital needs and capital expenditures; our future market position and expected competitive changes in the marketplace for our products; our ability to pay dividends or repurchase stock; our ability to service our outstanding debt; our expected tax rate; the effect of new accounting pronouncements; and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified in Part II, Item 1A. Risk Factors and elsewhere in our Quarterly Report on Form 10-Q. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements except to the extent required by law.

During the first quarter of fiscal 2008, we sold our baseband chipset business and related support operations, or Baseband Chipset Business, to MediaTek Inc. The financial results of this business are presented as discontinued operations in the condensed 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

(all tabular amounts in thousands except per share amounts and percentages)

Overview



                                                 Three Months Ended
                                         May 5, 2012         April 30, 2011         $ Change        % Change
Revenue                                 $     675,094       $        790,780       $ (115,686 )           (15 )%
Gross margin %                                   65.2 %                 67.6 %
Income from continuing operations,
net of tax                              $     162,899       $        241,826       $  (78,927 )           (33 )%
Income from continuing operations,
net of tax, as a % of revenue                    24.1 %                 30.6 %
Diluted EPS from continuing
operations                              $        0.53       $           0.78       $    (0.25 )           (32 )%
Diluted EPS                             $        0.53       $           0.78       $    (0.25 )           (32 )%

--------------------------------------------------------------------------------
                                                 Six Months Ended
                                        May 5, 2012         April 30, 2011         $ Change        % Change
Revenue                                 $  1,323,152       $      1,519,284       $ (196,132 )           (13 )%
Gross margin %                                  64.2 %                 66.9 %
Income from continuing operations,
net of tax                              $    302,281       $        457,432       $ (155,151 )           (34 )%
Income from continuing operations,
net of tax, as a % of revenue                   22.8 %                 30.1 %
Diluted EPS from continuing
operations                              $       0.99       $           1.48       $    (0.49 )           (33 )%
Diluted EPS                             $       0.99       $           1.50       $    (0.51 )           (34 )%

Fiscal 2012 is a 53-week year and fiscal 2011 was a 52-week year. The additional week in fiscal 2012 was included in the first quarter ended February 4, 2012. Therefore, the first six months of fiscal 2012 included an additional week of operations as compared to the first six months of fiscal 2011.

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 Type.

During the first six months of fiscal 2012, our revenue decreased 13%, compared to the first six months of fiscal 2011. Our diluted earnings per share from continuing operations decreased to $0.99 in the first six months of fiscal 2012 compared to $1.48 in the first six months of fiscal 2011. Cash flow from operations in the first six months of fiscal 2012 was $440.8 million or 33% of revenue. During the first six months of fiscal 2012, we received $87.4 million in net proceeds from employee stock option exercises, repurchased a total of approximately 3.2 million shares of our common stock for an aggregate of $122.4 million, distributed $163.8 million to our shareholders in dividend payments, paid $19.3 million in principal payments related to our $145 million term loan facility, paid $55.4 million for property, plant and equipment additions and paid $24.2 million for the acquisition of Multigig. In addition, we paid $871.3 million for the net purchase of available-for-sale short term investments. These factors contributed to the net decrease in cash and cash equivalents of $710.0 million in the first six months of fiscal 2012.

The year-to-year decrease in revenue and profitability for the three and six months ended May 5, 2012 was primarily attributable to a slowdown in orders as our customers reduced their inventory levels from the levels recorded at the end of the second quarter of fiscal 2011. In the second quarter of fiscal 2011 customers had built inventory in order to reduce the risk of supply disruptions as a result of the March 2011 earthquake and tsunami in Japan. In addition, the ongoing European debt crisis and the global credit and financial crisis caused customers to become more cautious in the first half of fiscal 2012. We believe that our variable cost structure and continued efforts to manage production, inventory levels and expenses helped to mitigate the effect that these lower sales levels had on our earnings.

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.

                               Three Months Ended                   Three Months Ended
                                  May 5, 2012                         April 30, 2011
                                       % of                                         % of
                        Revenue       Revenue       Y/Y%          Revenue          Revenue
      Industrial       $ 323,441            48 %      (16 )%    $    386,697             49 %
      Automotive         118,009            17 %       10 %          107,171             14 %
      Consumer           107,994            16 %      (20 )%         135,256             17 %
      Communications     125,650            19 %      (22 )%         161,656             20 %

      Total revenue    $ 675,094           100 %      (15 )%    $    790,780            100 %

--------------------------------------------------------------------------------
                                 Six Months Ended                     Six Months Ended
                                   May 5, 2012                         April 30, 2011
                                         % of                                       % of
                         Revenue        Revenue       Y/Y%          Revenue       Revenue*
      Industrial       $   612,113            46 %      (16 )%    $   726,013            48 %
      Automotive           238,506            18 %       18 %         202,399            13 %
      Consumer             224,880            17 %      (20 )%        280,562            18 %
      Communications       247,653            19 %      (20 )%        310,310            20 %

      Total revenue    $ 1,323,152           100 %      (13 )%    $ 1,519,284           100 %

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

Industrial - The year-to-year decrease in revenue in the three- and six-month periods ended May 5, 2012 in industrial end market revenue was primarily the result of a broad-based decrease in demand in this end market. The year-to-year decrease was most significant for products sold into the industrial automation and instrumentation sectors.

Automotive - The year-to-year increase in revenue in the three- and six-month periods ended May 5, 2012 in automotive end market revenue was primarily the result of an increase in the electronic content in automobiles, used primarily in infotainment and safety, and a general increase in demand by our customers.

Consumer - The year-to-year decrease in revenue in the three- and six-month periods ended May 5, 2012 in consumer end market revenue was primarily the result of a broad-based decrease in demand for products sold in this end market and to a lesser extent customer production limitations in the first quarter of fiscal 2012 caused by the 2011 floods in Thailand.

Communications - The year-to-year decrease in revenue in the three- and six-month periods ended May 5, 2012 in communications end market revenue was primarily the result of a broad-based decrease in demand in this end market, which was most significant for products sold into the wireless base station end market sector.

Revenue Trends by Product Type

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.

                                                   Three Months Ended                   Three Months Ended
                                                      May 5, 2012                         April 30, 2011
                                                           % of                                         % of
                                            Revenue      Revenue*       Y/Y%          Revenue          Revenue
Converters                                 $ 300,040            44 %      (14 )%    $    350,187             44 %
Amplifiers / Radio frequency                 177,813            26 %      (17 )%         213,140             27 %
Other analog                                  90,790            13 %      (18 )%         111,037             14 %

Subtotal analog signal processing            568,643            84 %      (16 )%         674,364             85 %
Power management & reference                  46,060             7 %      (18 )%          56,125              7 %

Total analog products                      $ 614,703            91 %      (16 )%    $    730,489             92 %

Digital signal processing                     60,391             9 %        0 %           60,291              8 %

Total revenue                              $ 675,094           100 %      (15 )%    $    790,780            100 %

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

--------------------------------------------------------------------------------
                                                   Six Months Ended                     Six Months Ended
                                                     May 5, 2012                         April 30, 2011
                                                           % of                                       % of
                                           Revenue        Revenue       Y/Y%          Revenue        Revenue
Converters                               $   585,173            44 %      (14 )%    $   682,954            45 %
Amplifiers / Radio frequency                 342,269            26 %      (16 )%        408,147            27 %
Other analog                                 187,028            14 %       (8 )%        202,444            13 %

Subtotal analog signal processing          1,114,470            84 %      (14 )%      1,293,545            85 %
Power management & reference                  90,925             7 %      (17 )%        109,485             7 %

Total analog products                    $ 1,205,395            91 %      (14 )%    $ 1,403,030            92 %

Digital signal processing                    117,757             9 %        1 %         116,254             8 %

Total revenue                            $ 1,323,152           100 %      (13 )%    $ 1,519,284           100 %

The year-to-year decrease in total revenue in the three- and six-month periods ended May 5, 2012 was primarily the result of a broad-based decrease in demand across most product categories.

Revenue Trends by Geographic Region

During the second quarter of fiscal 2012 the Company revised its method for classifying revenue by geographic region to more accurately reflect the primary location of our customers' design activity for our products. Prior periods have been reclassified to align with this definition. In general, the prior classification method reflected the customers' manufacturing location or the distributors' stocking territory. No changes have been made to the Company's revenue recognition policy. Revenue by geographic region for the three- and six-month periods ended May 5, 2012 and April 30, 2011 was as follows:

                                               Three Months Ended
              Region                   May 5, 2012        April 30, 2011        $ Change        % Change
United States                          $    191,548      $        233,181      $  (41,633 )           (18 )%
Rest of North and South America              30,392                40,927         (10,535 )           (26 )%
Europe                                      217,195               267,228         (50,033 )           (19 )%
Japan                                        86,687                91,423          (4,736 )            (5 )%
China                                        89,405                94,339          (4,934 )            (5 )%
Rest of Asia                                 59,867                63,682          (3,815 )            (6 )%

Total revenue                          $    675,094      $        790,780      $ (115,686 )           (15 )%


                                                Six Months Ended
              Region                   May 5, 2012        April 30, 2011        $ Change        % Change
United States                          $    388,075      $        440,647      $  (52,572 )           (12 )%
Rest of North and South America              62,265                78,216         (15,951 )           (20 )%
Europe                                      423,293               492,801         (69,508 )           (14 )%
Japan                                       167,026               195,280         (28,254 )           (14 )%
China                                       164,981               184,128         (19,147 )           (10 )%
Rest of Asia                                117,512               128,212         (10,700 )            (8 )%

Total revenue                          $  1,323,152      $      1,519,284      $ (196,132 )           (13 )%

In the three- and six-month periods ended May 5, 2012 and April 30, 2011, 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 decreased in all regions in the three and six months ended May 5, 2012 as compared to the same periods of fiscal 2011. The most significant year-to-year decrease in sales by region occurred in Europe and the United States. These decreases were primarily in the communication, consumer and industrial end market sectors in these regions.


Gross Margin



                                             Three Months Ended                                                      Six Months Ended
                                                                                                %                                                                       %
                                      May 5, 2012        April 30, 2011       $ Change        Change         May 5, 2012        April 30, 2011        $ Change        Change
Gross margin                         $     440,455      $        534,214      $ (93,759 )         (18 )%    $     849,845      $      1,016,387      $ (166,542 )         (16 )%
Gross margin %                                65.2 %                67.6 %                                           64.2 %                66.9 %

Gross margin percentage was lower by 240 and 270 basis points in the three and six months ended May 5, 2012, respectively, as compared to the three and six months ended April 30, 2011, respectively, primarily as a result of decreased operating levels in our manufacturing facilities as well as a reduced percentage of sales of our products sold into the industrial automation and instrumentation sectors of the industrial end market and the wireless base station sector of the communications end market, which earn higher margins as compared to products sold into our other end market sectors.

Research and Development (R&D)



                                           Three Months Ended                                                         Six Months Ended
                                                                                                %                                                                         %
                                   May 5, 2012         April 30, 2011        $ Change        Change          May 5, 2012         April 30, 2011        $ Change        Change
R&D expenses                      $     127,537       $        130,460       $  (2,923 )          (2 )%     $     251,915       $        253,205       $  (1,290 )          (1 )%
R&D expenses as a % of revenue             18.9 %                 16.5 %                                             19.0 %                 16.7 %

R&D expenses in the three months ended May 5, 2012 decreased slightly as compared to the same period of fiscal 2011 as lower variable compensation expense, which is a variable expense linked to our overall profitability and revenue growth, was partially offset by annual salary increases that became effective during the latter half of the second quarter of fiscal 2012 and a general increase in spending.

R&D expenses in the six months ended May 5, 2012 remained flat as compared to the same period of fiscal 2011 as lower variable compensation expense, which is a variable expense linked to our overall profitability and revenue growth, was offset by annual salary increases that became effective during the latter half of the second quarter of fiscal 2012 and an additional week of operations in the first quarter of fiscal 2012.

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. We have hundreds of R&D projects underway, none of which we believe are material on an individual basis. We expect to continue the development of innovative technologies and processes for new products. We believe that a continued commitment to R&D is essential to maintain product leadership with our existing products as well as 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)



                                             Three Months Ended                                                         Six Months Ended
                                                                                                  %                                                                         %
                                     May 5, 2012         April 30, 2011        $ Change        Change          May 5, 2012         April 30, 2011        $ Change        Change
SMG&A expenses                      $      99,992       $        105,268       $  (5,276 )          (5 )%     $     199,037       $        205,290       $  (6,253 )          (3 )%
SMG&A expenses as a % of revenue             14.8 %                 13.3 %                                             15.0 %                 13.5 %

SMG&A expenses in the three months ended May 5, 2012 decreased as compared to the same period of fiscal 2011 as lower variable compensation, which is a variable expense linked to our overall profitability and revenue growth, was partially offset by annual salary increases that became effective during the latter half of the second quarter of fiscal 2012.

SMG&A expenses in the six months ended May 5, 2012 decreased slightly as compared to the same period of fiscal 2011 as lower variable compensation, which is a variable expense linked to our overall profitability and revenue growth, was partially offset by annual salary increases that became effective during the latter half of the second quarter of fiscal 2012 and an additional week of operations in the first quarter of fiscal 2012.


Special Charges - Reduction of Operating Costs

We monitor global macroeconomic conditions on an ongoing basis, and continue to assess opportunities for improved operational effectiveness and efficiency and better alignment of expenses with revenues. As a result of these assessments, we have undertaken various restructuring actions over the past several years. These reductions relating to ongoing actions are described below.

During fiscal 2008 through fiscal 2010, 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 have terminated the employment of all employees associated with these actions, and we are paying amounts owed to them as income continuance.

During fiscal 2011, 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 May 5, 2012, we employed 3 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.

During the first quarter of fiscal 2012, we recorded a special charge of approximately $2.6 million. The special charge included $2.5 million for severance and fringe benefit costs in accordance with our ongoing benefit plan or statutory requirements at foreign locations for 34 manufacturing, engineering and SMG&A employees and $0.1 million for contract termination costs. We terminated the employment of all employees associated with these actions, and we are paying amounts owed to them as income continuance. We estimate this action will result in annual savings in SMG&A expenses of approximately $4 million.

Operating Income from Continuing Operations



                                                Three Months Ended                                                      Six Months Ended
                                                                                                   %                                                                       %
                                         May 5, 2012        April 30, 2011       $ Change        Change         May 5, 2012        April 30, 2011        $ Change        Change
Operating income from continuing
operations                              $     212,926      $        298,486      $ (85,560 )         (29 )%    $     396,298      $        557,892      $ (161,594 )         (29 )%
Operating income from continuing
operations as a % of revenue                     31.5 %                37.7 %                                           30.0 %                36.7 %

The year-over-year decrease in operating income from continuing operations in the second quarter of fiscal 2012 was primarily the result of a decrease in revenue of $115.7 million and a 240 basis point decrease in gross margin percentage. This decrease in operating income from continuing operations was partially offset by a decrease in R&D and SMG&A expenses as more fully described above under the headings Research and Development and Selling, Marketing, General and Administrative.

The year-over-year decrease in operating income from continuing operations in the six months ended May 5, 2012 was primarily the result of a decrease in . . .

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