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ADI > SEC Filings for ADI > Form 10-Q on 21-Aug-2012All Recent SEC Filings

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Form 10-Q for ANALOG DEVICES INC


21-Aug-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," 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 )%

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 %

* 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 %

* 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 %

* 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 %

* 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 )%

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 %

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 %

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 %

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 %

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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