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ADI > SEC Filings for ADI > Form 10-Q on 19-Feb-2013All Recent SEC Filings

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Form 10-Q for ANALOG DEVICES INC


19-Feb-2013

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 November 3, 2012.
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 and other safe harbors under the Securities Act of 1933 and the Securities Exchange Act of 1934. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. 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," "may" and "will," 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.

Results of Operations
(all tabular amounts in thousands except per share amounts and percentages)
Overview
                                               Three Months Ended
                                      February 2, 2013     February 4, 2012      $ Change        % Change
Revenue                                      $622,134             $648,058     $  (25,924 )          (4 )%
Gross margin %                                   62.7 %               63.2 %
Net income                                   $131,222             $139,382     $   (8,160 )          (6 )%
Net income as a % of revenue                     21.1 %               21.5 %
Diluted EPS                                     $0.42                $0.46     $    (0.04 )          (9 )%

Fiscal 2013 is a 52-week year and fiscal 2012 was a 53-week year. The additional week in fiscal 2012 was included in the first quarter ended February 4, 2012. Therefore, the first three months of fiscal 2012 included an additional week of operations as compared to the first three months of fiscal 2013. 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 quarter of fiscal 2013, our revenue decreased 4% compared to the first quarter of fiscal 2012. Our diluted earnings per share was $0.42 compared to $0.46 in the first quarter of fiscal 2012. Cash flow from operations was $158.0 million, or 25% of revenue. We received $113.8 million in net proceeds from employee stock option exercises and $180.7 million from the net maturities of available-for-sale short term investments. We distributed $90.7 million to our shareholders in dividend payments, repaid the remaining outstanding principal balance on our $145.0 million term loan facility of $60.1 million and paid $18.3 million for property, plant and equipment additions. These factors contributed to the net increase in cash and cash equivalents of $267.0 million in the first quarter of fiscal 2013.
The year-to-year decrease in revenue was primarily attributable to one less week of operations in the first quarter of fiscal 2013 as compared to the first quarter of fiscal 2012. We continue to operate in a weak demand environment as a result of ongoing economic uncertainty. Our customers continued to reduce the inventory levels of our products during the first two months of the first quarter of fiscal 2013. 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
                      February 2, 2013                  February 4, 2012
                              % of                                       % of
                Revenue     Revenue*     Y/Y%          Revenue         Revenue*
Industrial     $ 282,654        45 %     (3 )%   $     290,660             45 %
Automotive       107,581        17 %    (11 )%         120,588             19 %
Consumer         106,929        17 %     (6 )%         114,261             18 %
Communications   124,970        20 %      2  %         122,549             19 %
Total revenue  $ 622,134       100 %     (4 )%   $     648,058            100 %

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

The year-to-year decrease in end market revenue in the industrial, automotive and consumer end markets in the three-month period ended February 2, 2013 was primarily due to one less week of operations in the first quarter of fiscal 2013 as compared to the first quarter of fiscal 2012. Additionally, weak market conditions contributed to the decline in the automotive end market. The year-to-year increase in communications end market revenue in the three-month period ended February 2, 2013 was primarily the result of an increase in demand 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
                                             February 2, 2013                       February 4, 2012
                                                   % of                                              % of
                                    Revenue      Revenue*        Y/Y%             Revenue          Revenue
Converters                        $ 277,637           45 %          (3 )%   $     285,135               44 %
Amplifiers / Radio frequency        157,853           25 %          (4 )%         164,454               25 %
Other analog                         95,693           15 %          (1 )%          96,238               15 %
Subtotal analog signal processing   531,183           85 %          (3 )%         545,827               84 %
Power management & reference         39,460            6 %         (12 )%          44,865                7 %
Total analog products             $ 570,643           92 %          (3 )%   $     590,692               91 %
Digital signal processing            51,491            8 %         (10 )%          57,366                9 %
Total revenue                     $ 622,134          100 %          (4 )%   $     648,058              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-month period ended February 2, 2013 was primarily the result of one less week of operations in the first quarter of fiscal 2013 as compared to the first quarter of fiscal 2012. Revenue Trends by Geographic Region
Revenue by geographic region, based upon the primary location of our customers' design activity for our products for the three-month periods ended February 2, 2013 and February 4, 2012 were as follows:


                                                 Three months ended
               Region                  February 2, 2013      February 4, 2012       $ Change        % Change
United States                        $          204,271     $         196,527     $    7,744             4  %
Rest of North and South America                  23,512                31,873         (8,361 )         (26 )%
Europe                                          189,298               206,098        (16,800 )          (8 )%
Japan                                            64,688                80,339        (15,651 )         (19 )%
China                                            84,769                75,576          9,193            12  %
Rest of Asia                                     55,596                57,645         (2,049 )          (4 )%
Total revenue                        $          622,134     $         648,058     $  (25,924 )          (4 )%

In the three-month periods ended February 2, 2013 and February 4, 2012, the predominant country comprising "Rest of North and South America" is Canada; 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.
On a regional basis Europe and Japan experienced the largest year-over-year sales decline. The decline in sales in Europe was primarily the result of lower demand in the automotive end market. The sales decline in Japan and sales increase in the United States were primarily the result of changes in demand for products used in consumer applications. Sales in China increased primarily as a result of an increase in demand for products sold into the communications end market.

Gross Margin
                         Three months ended
                                                                          %
                February 2, 2013     February 4, 2012     $ Change     Change
Gross margin           $390,284             $409,390     $ (19,106 )    (5 )%
Gross margin %             62.7 %               63.2 %

Gross margin percentage was lower by 50 basis points in the three months ended February 2, 2013, as compared to the three months ended February 4, 2012, primarily as a result of a higher concentration of our revenues from lower margin products,


Research and Development (R&D)
                                                    Three months ended
                                          February 2, 2013      February 4, 2012      $ Change       % Change
R&D expenses                                      $125,164              $124,378          $786           1 %
R&D expenses as a % of revenue                        20.1 %                19.2 %

R&D expenses remained flat compared to the prior year as general increases in operational spending and benefit expenses were partially offset by lower variable compensation expense, which is linked to our overall profitability and revenue growth.
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
                                          February 2, 2013       February 4, 2012      $ Change      % Change
SMG&A expenses                                     $97,560                $99,045     $ (1,485 )         (1 )%
SMG&A expenses as a % of revenue                      15.7 %                 15.3 %

SMG&A expenses were down slightly as compared to the prior year primarily as a result of lower variable compensation expense, which is linked to our overall profitability and revenue growth.
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 as well as a 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 2010 through fiscal 2012, we recorded special charges of approximately $22.1 million. These special charges included: $21.1 million for severance and fringe benefit costs in accordance with our ongoing benefit plan or statutory requirements at foreign locations for 269 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; $0.1 million for contract termination costs; $0.2 million for the write-off of property, plant and equipment; and $0.5 million related to the impairment of intellectual property. These actions resulted in annual cost savings of approximately $32.0 million. We have terminated the employment of all employees associated with these actions.
During the first quarter of fiscal 2013, we recorded a special charge of approximately $14.1 million for severance and fringe benefit costs in accordance with our ongoing benefit plan or statutory requirements at foreign locations for 137 manufacturing, engineering and SMG&A employees. As of February 2, 2013, we employed 19 of the 137 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 cost savings of approximately $17.0 million once fully implemented.


Operating Income
                                                   Three months ended
                                         February 2, 2013      February 4, 2012      $ Change       % Change
Operating income                                 $153,489              $183,372     $ (29,883 )        (16 )%
Operating income as a % of revenue                   24.7 %                28.3 %

The year-over-year decrease in operating income was primarily the result of a decrease in revenue of $25.9 million, a 50 basis point decrease in gross margin percentage and a $14.1 million special charge recorded in the first quarter of fiscal 2013 as more fully described above under the heading Special Charges-Reduction of Operating Costs.

Provision for Income Taxes
                                     Three months ended
                            February 2, 2013     February 4, 2012     $ Change
Provision for income taxes          $18,887              $40,704     $ (21,817 )
Effective income tax rate              12.6 %               22.6 %

Our effective tax rate reflects the applicable tax rate in effect in the various tax jurisdictions around the world where our income is earned.
The decrease in our effective tax rate for the first quarter of fiscal 2013 compared to the first quarter of fiscal 2012 was primarily due to income earned in lower tax rate jurisdictions as a result of an international tax restructuring effective January 1, 2013. In addition our effective tax rate was lower due to a tax benefit from the reinstatement of the U.S. federal research and development tax credit in January 2013 retroactive to January 1, 2012 which resulted in lowering our effective tax rate by approximately 4%.
We expect our effective tax rate to be approximately 17% for the remainder of fiscal 2013.

Net Income
                                       Three months ended
                              February 2, 2013     February 4, 2012     $ Change    % Change
Net Income                           $131,222             $139,382     $ (8,160 )     (6 )%
Net Income as a % of revenue             21.1 %               21.5 %
Diluted EPS                             $0.42                $0.46

Net income declined year-over-year as the $29.9 million decrease in operating income was partially offset by a lower provision for income taxes in the first quarter of 2013.
Outlook
The following statements are based on current expectations. These statements are forward-looking and our actual results may differ materially as a result of, among other things, the important factors contained in Item 1A. Risk Factors in this Quarterly Report on Form 10-Q. Unless specifically mentioned, these statements do not give effect to the potential impact of any mergers, acquisitions, divestitures, or business combinations that may be announced or closed after the date of filing this report. These statements supersede all prior statements regarding our business outlook made by us and we disclaim any obligation to update these forward-looking statements.
We are planning for revenue in the second quarter of fiscal 2013 to increase from the first quarter of fiscal 2013 by approximately 4% to 8%. Our plan is for gross margin for the second quarter of fiscal 2013 to be approximately 64% and for operating expenses to be approximately $224 million. We expect our effective tax rate to be approximately 17%. As a result, we are planning for diluted earnings per share to be in the range of $0.49 to $0.55 in the second quarter of fiscal 2013.


Liquidity and Capital Resources
At February 2, 2013, our principal source of liquidity was $3,987.0 million of cash and cash equivalents and short-term investments, of which approximately $1,137.0 million was held in the United States. The balance of our cash and cash equivalents and short-term investments was held outside the United States in various foreign subsidiaries. As we intend to reinvest our foreign earnings indefinitely, this cash held outside the United States is not available to meet our cash requirements in the United States, including cash dividends and common stock repurchases. Our cash and cash equivalents consist of highly liquid investments with maturities of three months or less at the time of acquisition and our short-term investments consist primarily of corporate obligations, such as commercial paper and floating rate notes, bonds and bank time deposits. We maintain these balances with high credit quality counterparties, continually monitor the amount of credit exposure to any one issuer and diversify our investments in order to minimize our credit risk. We believe that our existing sources of liquidity and cash expected to be generated from future operations, together with existing and anticipated available long-term financing, will be sufficient to fund operations, capital expenditures, research and development efforts, dividend payments (if any) and repurchases of our stock (if any) under our stock repurchase program in the immediate future and for at least the next twelve months.

                                             Three Months Ended
                                   February 2, 2013      February 4, 2012      $ Change         % Change
Net cash provided by operating
activities                                 $157,969             $214,820     $   (56,851 )          (26 )%
Net cash provided by operations
as a % of
revenue                                        25.4 %               33.1 %

At February 2, 2013, cash and cash equivalents totaled $795.8 million. The primary sources of funds for the first three months of fiscal 2013 were net cash generated from operating activities of $158.0 million. In addition, we received $113.8 million in net proceeds from employee stock option exercises and $180.7 million from the net maturities of available-for-sale short term investments. The principal uses of funds for the first three months of fiscal 2013 were dividend payments of $90.7 million, principal payments of $60.1 million related to our $145 million term loan facility and additions to property, plant and equipment of $18.3 million. These factors contributed to the net increase in cash and cash equivalents of $267.0 million in the first three months of fiscal 2013.

Working Capital
                                       February 2, 2013       November 3, 2012       $ Change       % Change
Accounts receivable, net                       $329,578               $339,881     $  (10,303 )         (3 )%
Days sales outstanding                               48                     45
Inventory                                      $307,263               $313,723     $   (6,460 )         (2 )%
Days cost of sales in inventory                     121                    114

The decrease in accounts receivable was primarily the result of lower revenue in the final month of the first quarter of fiscal 2013 compared to the final month of the fourth quarter of fiscal 2012. Days sales outstanding increased as a result of higher product shipments made to our distributors in the final month of the first quarter of fiscal 2013 as compared to the final month of the fourth quarter of fiscal 2012.
Inventory decreased as a result of our continued efforts to balance manufacturing production, demand and inventory levels. Days cost of sales in inventory increased from 114 days at the end of the fourth fiscal quarter of 2012 to 121 days at the end of the first fiscal quarter of 2013 as a result of the decline in cost of sales by 8% while inventory decreased by only 2% for the same period.
Current liabilities decreased to $508.5 million at February 2, 2013, a decrease of $16.5 million, or 3%, from $525.1 million at the end of fiscal 2012. This decrease was primarily due to a decrease in accrued liabilities as a result of lower variable compensation expense accruals and a decrease in the current portion of long term debt that related to the $145 million term loan facility, which we repaid in the first quarter of fiscal 2013. These decreases were partially offset by an increase in income taxes payable.
As of February 2, 2013 and November 3, 2012, we had gross deferred revenue of $302.4 million and $299.0 million, respectively, and gross deferred cost of sales of $59.0 million and $60.5 million, respectively. Deferred income on shipments to


distributors increased in the first three months of fiscal 2013 as a result of a mix shift in favor of higher margin products in the channel. Sales to distributors are made under agreements that allow distributors to receive price-adjustment credits and to return qualifying products for credit, as determined by us, in order to reduce the amounts of slow-moving, discontinued or obsolete product from their inventory. Given the uncertainties associated with the levels of price-adjustment credits to be granted to distributors, the sales price to the distributors is not fixed or determinable until the distributors resell the products to their customers. Therefore, we defer revenue recognition from sales to distributors until the distributors have sold the products to their customers. The amount of price-adjustments is dependent on future overall market conditions, and therefore the levels of these adjustments could fluctuate significantly from period to period. To the extent that we experience a significant increase in the amount of credits we issue to our distributors, there could be a material impact on the ultimate revenue and gross margin recognized relating to these transactions. Debt
As of February 2, 2013, we had $750.0 million in principal outstanding on our long term debt. Our debt obligations consist of the following:
$375.0 million aggregate principal amount of 5.0% senior unsecured notes On June 30, 2009, we issued $375.0 million aggregate principal amount of 5.0% senior unsecured notes due July 1, 2014 (the 5.0% Notes) with semi-annual fixed interest payments due on January 1 and July 1 of each year, commencing January 1, 2010. We swapped the fixed interest portion of these notes for a variable interest rate based on the three-month LIBOR plus 2.05%. The variable interest payments based on the variable annual rate are payable quarterly. The LIBOR based rate is set quarterly three months prior to the date of the interest payment. In the second quarter of fiscal 2012, we terminated the interest rate swap agreement. We received $19.8 million in cash proceeds from the swap termination, which included $1.3 million in accrued interest. The proceeds, net of interest received, are disclosed in cash flows from financing activities in our condensed consolidated statements of cash flows. As a result of the termination, the carrying value of the 5.0% Notes was adjusted for the change in fair value of the interest component of the debt up to the date of the termination of the swap in an amount equal to the fair value of the swap, and . . .

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