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| ADI > SEC Filings for ADI > Form 10-Q on 21-Aug-2012 | All Recent SEC Filings |
21-Aug-2012
Quarterly Report
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," and "may," and 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
August 4, 2012 July 30, 2011 $ Change % Change
Revenue $ 683,026 $ 757,902 $ (74,876 ) (10 )%
Gross margin % 65.6 % 67.2 %
Net income $ 169,768 $ 219,935 $ (50,167 ) (23 )%
Net income as a % of revenue 24.9 % 29.0 %
Diluted EPS $ 0.56 $ 0.71 $ (0.15 ) (21 )%
Nine Months Ended
August 4, 2012 July 30, 2011 $ Change % Change
Revenue $ 2,006,178 $ 2,277,186 $ (271,008 ) (12 )%
Gross margin % 64.7 % 67.0 %
Income from continuing operations,
net of tax $ 472,049 $ 677,367 $ (205,318 ) (30 )%
Income from continuing operations,
net of tax, as a % of revenue 23.5 % 29.7 %
Diluted EPS from continuing
operations $ 1.54 $ 2.19 $ (0.65 ) (30 )%
Diluted EPS $ 1.54 $ 2.21 $ (0.67 ) (30 )%
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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 nine months of fiscal 2012 included an additional week of operations as compared to the first nine 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 nine months of fiscal 2012, our revenue decreased 12%, compared
to the first nine months of fiscal 2011. Our diluted earnings per share from
continuing operations decreased to $1.54 in the first nine months of fiscal 2012
compared to $2.19 in the first nine months of fiscal 2011. Cash flow from
operations in the first nine months of fiscal 2012 was $578.5 million, or 29% of
revenue. During the first nine months of fiscal 2012, we received $110.7 million
in net proceeds from employee stock option exercises, repurchased a total of
approximately 3.7 million shares of our common stock for an aggregate of $139.7
million, distributed $253.3 million to our shareholders in dividend payments,
paid $22.9 million in principal payments related to our $145.0 million term loan
facility, paid $94.7 million for property, plant and equipment additions and
paid $24.2 million, net of cash acquired, for the acquisition of Multigig. In
addition, we paid $1,115.0 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 $943.0 million in the first nine months of fiscal 2012.
The year-to-year decrease in revenue and profitability for the three and nine
months ended August 4, 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 nine months 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
August 4, 2012 July 30, 2011
% of % of
Revenue Revenue Y/Y% Revenue Revenue*
Industrial $ 322,295 47 % (12 )% $ 367,511 48 %
Automotive 114,655 17 % 12 % 102,160 13 %
Consumer 108,905 16 % (19 )% 134,771 18 %
Communications 137,171 20 % (11 )% 153,460 20 %
Total revenue $ 683,026 100 % (10 )% $ 757,902 100 %
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* The sum of the individual percentages does not equal the total due to rounding.
Nine Months Ended Nine Months Ended
August 4, 2012 July 30, 2011
% of % of
Revenue Revenue* Y/Y% Revenue Revenue*
Industrial $ 935,054 47 % (15 )% $ 1,094,316 48 %
Automotive 353,232 18 % 16 % 304,620 13 %
Consumer 333,049 17 % (20 )% 415,056 18 %
Communications 384,843 19 % (17 )% 463,194 20 %
Total revenue $ 2,006,178 100 % (12 )% $ 2,277,186 100 %
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* 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 nine-month periods ended August 4, 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 nine-month
periods ended August 4, 2012 in automotive end market revenue was primarily the
result of an increase in the electronic content in automobiles, used in
infotainment, and to a lesser extent in safety and power train applications and
a general increase in demand by our customers.
Consumer - The year-to-year decrease in revenue in the three- and nine-month
periods ended August 4, 2012 in consumer end market revenue was primarily the
result of a broad-based decrease in demand for products sold in this end market.
Communications - The year-to-year decrease in revenue in the three- and
nine-month periods ended August 4, 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
August 4, 2012 July 30, 2011
% of % of
Revenue Revenue* Y/Y% Revenue Revenue*
Converters $ 299,594 44 % (11 )% $ 337,239 44 %
Amplifiers / Radio frequency 180,939 26 % (8 )% 197,447 26 %
Other analog 98,269 14 % (8 )% 106,702 14 %
Subtotal analog signal processing 578,802 85 % (10 )% 641,388 85 %
Power management & reference 45,401 7 % (17 )% 54,957 7 %
Total analog products $ 624,203 91 % (10 )% $ 696,345 92 %
Digital signal processing 58,823 9 % (4 )% 61,557 8 %
Total revenue $ 683,026 100 % (10 )% $ 757,902 100 %
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* The sum of the individual percentages does not equal the total due to rounding.
Nine Months Ended Nine Months Ended
August 4, 2012 July 30, 2011
% of % of
Revenue Revenue Y/Y% Revenue Revenue*
Converters $ 884,771 44 % (13 )% $ 1,020,194 45 %
Amplifiers / Radio frequency 523,208 26 % (14 )% 605,593 27 %
Other analog 285,293 14 % (8 )% 309,146 14 %
Subtotal analog signal processing 1,693,272 84 % (12 )% 1,934,933 85 %
Power management & reference 136,326 7 % (17 )% 164,442 7 %
Total analog products $ 1,829,598 91 % (13 )% $ 2,099,375 92 %
Digital signal processing 176,580 9 % (1 )% 177,811 8 %
Total revenue $ 2,006,178 100 % (12 )% $ 2,277,186 100 %
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* The sum of the individual percentages does not equal the total due to rounding.
The year-to-year decrease in total revenue in the three- and nine-month periods ended August 4, 2012 was primarily the result of a broad-based decrease in demand across all 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
nine-month periods ended August 4, 2012 and July 30, 2011 was as follows:
Three Months Ended
Region August 4, 2012 July 30, 2011 $ Change % Change
United States $ 202,080 $ 218,447 $ (16,367 ) (7 )%
Rest of North and South America 25,268 33,816 (8,548 ) (25 )%
Europe 216,809 245,917 (29,108 ) (12 )%
Japan 87,169 96,730 (9,561 ) (10 )%
China 89,616 98,865 (9,249 ) (9 )%
Rest of Asia 62,084 64,127 (2,043 ) (3 )%
Total revenue $ 683,026 $ 757,902 $ (74,876 ) (10 )%
Nine Months Ended
Region August 4, 2012 July 30, 2011 $ Change % Change
United States $ 590,155 $ 659,094 $ (68,939 ) (10 )%
Rest of North and South America 87,533 112,032 (24,499 ) (22 )%
Europe 640,102 738,718 (98,616 ) (13 )%
Japan 254,195 292,010 (37,815 ) (13 )%
China 254,597 282,993 (28,396 ) (10 )%
Rest of Asia 179,596 192,339 (12,743 ) (7 )%
Total revenue $ 2,006,178 $ 2,277,186 $ (271,008 ) (12 )%
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In the three- and nine-month periods ended August 4, 2012 and July 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 nine months ended August 4, 2012
as compared to the same periods of fiscal 2011 as a result of a broad-based
decrease in demand.
Gross Margin
Three Months Ended Nine Months Ended
% %
August 4, 2012 July 30, 2011 $ Change Change August 4, 2012 July 30, 2011 $ Change Change
Gross margin $ 447,874 $ 509,640 $ (61,766 ) (12 )% $ 1,297,719 $ 1,526,027 $ (228,308 ) (15 )%
Gross margin % 65.6 % 67.2 % 64.7 % 67.0 %
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Gross margin percentage was lower by 160 and 230 basis points in the three and nine months ended August 4, 2012, respectively, as compared to the three and nine months ended July 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 Nine Months Ended
% %
August 4, 2012 July 30, 2011 $ Change Change August 4, 2012 July 30, 2011 $ Change Change
R&D expenses $ 129,694 $ 128,476 $ 1,218 1 % $ 381,609 $ 381,681 $ (72 ) - %
R&D expenses as
a % of revenue 19.0 % 17.0 % 19.0 % 16.8 %
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R&D expenses in the three months ended August 4, 2012 increased slightly as
compared to the same period of fiscal 2011 as a result of annual salary
increases that became effective during the latter half of the second quarter of
fiscal 2012 and a general increase in spending, partially offset by lower
variable compensation expense, which is linked to our overall profitability and
revenue growth.
R&D expenses in the nine months ended August 4, 2012 remained flat as compared
to the same period of fiscal 2011 as lower variable compensation expense, which
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 Nine Months Ended
% %
August 4, 2012 July 30, 2011 $ Change Change August 4, 2012 July 30, 2011 $ Change Change
SMG&A expenses $ 99,873 $ 102,323 $ (2,450 ) (2 )% $ 298,910 $ 307,613 $ (8,703 ) (3 )%
SMG&A expenses
as a % of
revenue 14.6 % 13.5 % 14.9 % 13.5 %
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SMG&A expenses in the three and nine months ended August 4, 2012 decreased as compared to the same periods of fiscal 2011 as lower variable compensation expense, which is 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.
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 $52.0 million per year. We have terminated the employment of all
employees associated with these actions.
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 August 4, 2012, we employed 2 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 $4.0 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 $4.0 million. During the third quarter of fiscal 2012, we recorded a special charge of approximately $5.8 million. The special charge included $5.4 million for severance and fringe benefits costs in accordance with our ongoing benefit plan or statutory requirements at foreign locations for 61 manufacturing, engineering and SMG&A employees; $0.2 million for lease obligation costs for facilities that we ceased using during the third quarter of fiscal 2012 and $0.2 million for the write-off of property, plant and equipment. As of August 4, 2012, we employed 25 of the 61 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 $8.0 million once fully implemented.
Operating Income from Continuing Operations
Three Months Ended Nine Months Ended
% %
August 4, 2012 July 30, 2011 $ Change Change August 4, 2012 July 30, 2011 $ Change Change
Operating
income from
continuing
operations $ 212,471 $ 278,841 $ (66,370 ) (24 )% $ 608,769 $ 836,733 $ (227,964 ) (27 )%
Operating
income from
continuing
operations as a
% of revenue 31.1 % 36.8 % 30.3 % 36.7 %
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The year-over-year decrease in operating income from continuing operations in the third quarter of fiscal 2012 was primarily the result of a decrease in revenue of $74.9 million, a 160 basis point decrease in gross margin percentage, $5.8 million in special charges recorded in the third quarter of fiscal 2012 as more fully described above under the heading Special Charges-Reduction of Operating Costs. These reductions in operating income from continuing operations were partially offset by a decrease in SMG&A expenses as more fully described above under the heading Selling, Marketing, General and Administrative. The year-over-year decrease in operating income from continuing operations in the nine months ended August 4, 2012 was primarily the result of a decrease in revenue of $271.0 million, a 230 basis point decrease in gross margin percentage and $8.4 million in special charges recorded in the first nine months of fiscal 2012 as more fully described above under the heading Special Charges-Reduction of Operating Costs. These reductions in operating income from continuing operations were partially offset by a decrease in SMG&A expenses as more fully described above under the heading Selling, Marketing, General and Administrative.
Nonoperating (Income) Expense
Three Months Ended Nine Months Ended
August 4, 2012 July 30, 2011 $ Change August 4, 2012 July 30, 2011 $ Change
. . .
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