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ADI > SEC Filings for ADI > Form 10-Q on 21-May-2013All Recent SEC Filings

Show all filings for ANALOG DEVICES INC

Form 10-Q for ANALOG DEVICES INC


21-May-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 this 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
                              May 4, 2013      May 5, 2012      $ Change     % Change
Revenue                      $    659,250     $    675,094     $ (15,844 )     (2 )%
Gross margin %                       64.0 %           65.2 %
Net income                   $    164,472     $    162,899     $   1,573        1  %
Net income as a % of revenue         24.9 %           24.1 %
Diluted EPS                  $       0.52     $       0.53     $   (0.01 )     (2 )%


                                                Six Months Ended
                              May 4, 2013     May 5, 2012     $ Change     % Change
Revenue                      $ 1,281,384     $ 1,323,152     $ (41,768 )     (3 )%
Gross margin %                      63.4 %          64.2 %
Net income                   $   295,694     $   302,281     $  (6,587 )     (2 )%
Net income as a % of revenue        23.1 %          22.8 %
Diluted EPS                  $      0.95     $      0.99     $   (0.04 )     (4 )%

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 six months of fiscal 2012 included an additional week of operations as compared to the first six months of fiscal 2013.


The year-to-year revenue changes by end market and product type are more fully outlined below under Revenue Trends by End Market and Revenue Trends by Product Type.
During the first six months of fiscal 2013, our revenue decreased 3% compared to the first six months of fiscal 2012. Our diluted earnings per share in the first six months of fiscal 2013 was $0.95 compared to $0.99 in the first six months of fiscal 2012. Cash flow from operations in the first six months of fiscal 2013 was $410.2 million, or 32% of revenue. During the first six months of fiscal 2013, we received $176.0 million in net proceeds from employee stock options, paid $204.8 million for the net purchases of available-for-sale short term investments, distributed $195.1 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 $44.4 million for property, plant and equipment additions. These factors contributed to the net increase in cash and cash equivalents of $66.8 million in the first six months of fiscal 2013.
The year-to-year decrease in revenue was attributable to one less week of operations in the first six months of fiscal 2013 as compared to the first six months of fiscal 2012 and a weak demand environment as a result of ongoing economic uncertainty. 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
                        May 4, 2013                 May 5, 2012
                              % of                            % of
                Revenue     Revenue    Y/Y%     Revenue     Revenue*
Industrial     $ 312,071        47 %   (4 )%   $ 324,728        48 %
Automotive       122,229        19 %    3  %     118,210        18 %
Consumer         101,049        15 %   (5 )%     106,086        16 %
Communications   123,901        19 %   (2 )%     126,070        19 %
Total revenue  $ 659,250       100 %   (2 )%   $ 675,094       100 %

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

                                    Six Months Ended
                         May 4, 2013                   May 5, 2012
                                % of                              % of
                 Revenue      Revenue    Y/Y%      Revenue      Revenue*
Industrial     $   593,588        46 %   (4 )%   $   615,439        47 %
Automotive         229,875        18 %   (4 )%       238,820        18 %
Consumer           207,998        16 %   (6 )%       220,300        17 %
Communications     249,923        20 %    1  %       248,593        19 %
Total revenue  $ 1,281,384       100 %   (3 )%   $ 1,323,152       100 %

* The sum of the individual percentages does not equal the total due to rounding. The year-to-year decrease in revenue in the industrial, consumer and communications end markets in the three-month period ended May 4, 2013 was primarily the result of a weak demand environment. Automotive end market revenue increased in the three-month period ended May 4, 2013 primarily as a result of an increase in the demand for products used in powertrain electronics. The year-to-year decrease in revenue in the industrial, consumer and automotive end markets in the six-month period ended May 4, 2013 was primarily the result of a weak demand environment and one less week of operations in the first six months of fiscal 2013 as compared to the first six months of fiscal 2012. 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
                                           May 4, 2013                  May 5, 2012
                                                 % of                             % of
                                   Revenue     Revenue*    Y/Y%     Revenue     Revenue*
Converters                        $ 301,887        46 %     1  %   $ 300,338        44 %
Amplifiers / Radio frequency        164,793        25 %    (7 )%     177,872        26 %
Other analog                         91,906        14 %     2  %      90,442        13 %
Subtotal analog signal processing   558,586        85 %    (2 )%     568,652        84 %
Power management & reference         43,623         7 %    (5 )%      46,051         7 %
Total analog products             $ 602,209        91 %    (2 )%   $ 614,703        91 %
Digital signal processing            57,041         9 %    (6 )%      60,391         9 %
Total revenue                     $ 659,250       100 %    (2 )%   $ 675,094       100 %

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

                                                       Six Months Ended
                                            May 4, 2013                    May 5, 2012
                                                   % of                               % of
                                    Revenue      Revenue*    Y/Y%      Revenue      Revenue
Converters                        $   579,524        45 %    (1 )%   $   585,527        44 %
Amplifiers / Radio frequency          322,646        25 %    (6 )%       342,339        26 %
Other analog                          187,599        15 %     1  %       186,604        14 %
Subtotal analog signal processing   1,089,769        85 %    (2 )%     1,114,470        84 %
Power management & reference           83,083         6 %    (9 )%        90,925         7 %
Total analog products             $ 1,172,852        92 %    (3 )%   $ 1,205,395        91 %
Digital signal processing             108,532         8 %    (8 )%       117,757         9 %
Total revenue                     $ 1,281,384       100 %    (3 )%   $ 1,323,152       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 May 4, 2013 was primarily the result of a broad-based decrease in demand across most product type categories. The year-to-year decrease in total revenue in the six-month period ended May 4, 2013 was the result of one less week of operations in the first six months of fiscal 2013 as compared to the first six months of fiscal 2012 and a broad-based decrease in demand across most product type categories. 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- and six-month periods ended May 4, 2013 and May 5, 2012 were as follows:


                                                    Three Months Ended
            Region               May 4, 2013      May 5, 2012      $ Change      % Change
United States                   $     206,181    $     191,548    $  14,633         8  %
Rest of North and South America        28,194           30,392       (2,198 )      (7 )%
Europe                                216,071          217,195       (1,124 )      (1 )%
Japan                                  71,874           86,687      (14,813 )     (17 )%
China                                  83,970           89,405       (5,435 )      (6 )%
Rest of Asia                           52,960           59,867       (6,907 )     (12 )%
Total revenue                   $     659,250    $     675,094    $ (15,844 )      (2 )%



                                                    Six Months Ended
            Region               May 4, 2013     May 5, 2012     $ Change      % Change
United States                   $    396,607    $    388,075    $   8,532         2  %
Rest of North and South America       65,551          62,265        3,286         5  %
Europe                               405,369         423,293      (17,924 )      (4 )%
Japan                                136,562         167,026      (30,464 )     (18 )%
China                                168,739         164,981        3,758         2  %
Rest of Asia                         108,556         117,512       (8,956 )      (8 )%
Total revenue                   $  1,281,384    $  1,323,152    $ (41,768 )      (3 )%

In the three- and six-month periods ended May 4, 2013 and May 5, 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, the year-over-year sales decline in Japan and sales increase in the United States for the three- and six-month periods ended May 4, 2013 were primarily the result of product transitions within consumer applications. In addition, the sales increase in the United States in the three-month period ended May 4, 2013 was partially attributable to an increase in demand in the automotive end market. The year-over-year sales decline in Europe in the six-month period ended May 4, 2013 was primarily a result of lower demand in the industrial and automotive end markets.

Gross Margin
                                   Three Months Ended                                             Six Months Ended
                May 4, 2013      May 5, 2012      $ Change      % Change      May 4, 2013      May 5, 2012      $ Change      % Change
Gross margin   $    422,195     $    440,455     $ (18,260 )       (4 )%     $    812,479     $    849,845     $ (37,366 )       (4 %)
Gross margin %         64.0 %           65.2 %                                       63.4 %           64.2 %

Gross margin percentage was lower by 120 and 80 basis points in the three and six months ended May 4, 2013, respectively, as compared to the three and six months ended May 5, 2012, respectively, primarily as a result of decreased operating levels in our manufacturing facilities driven by our efforts to balance manufacturing production, demand and inventory levels. Research and Development (R&D)

                                 Three Months Ended                                              Six Months Ended
              May 4, 2013      May 5, 2012      $ Change      % Change      May 4, 2013      May 5, 2012       $ Change      % Change
R&D expenses $    128,110     $    127,537     $     573          - %      $    253,274     $    251,915     $    1,359          1 %
R&D expenses
as a % of
revenue              19.4 %           18.9 %                                       19.8 %           19.0 %


R&D expenses remained flat in the three and six months ended May 4, 2013 as compared to the same periods of fiscal 2012 as increases in employee salary and benefit expenses and other operational spending were offset by lower variable compensation expense, which is a variable expense 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 Six Months Ended May 4, 2013 May 5, 2012 $ Change % Change May 4, 2013 May 5, 2012 $ Change % Change

SMG&A
expenses     $    102,703     $     99,992     $    2,711          3 %      $    200,263     $    199,037     $    1,226          1 %
SMG&A
expenses as
a % of
revenue              15.6 %           14.8 %                                        15.6 %           15.0 %

The increases in SMG&A expenses in the three- and six-month periods ended May 4, 2013 as compared to the same periods of fiscal 2012 were primarily the result of recording $6.3 million of stock-based compensation expense following the death of the Company's CEO in the second quarter of fiscal 2013 due to the accelerated vesting of restricted stock units in accordance with the terms of his restricted stock unit agreement. These increases in expense were partially offset by lower variable compensation expense, which is a variable expense 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 May 4, 2013, we employed 6 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                                             Six Months Ended
              May 4, 2013      May 5, 2012      $ Change      % Change      May 4, 2013      May 5, 2012      $ Change      % Change
Operating
income       $    191,382     $    212,926     $ (21,544 )      (10 )%     $    344,871     $    396,298     $ (51,427 )      (13 %)
Operating
income as a
% of revenue         29.0 %           31.5 %                                       26.9 %           30.0 %

The year-over-year decrease in operating income in the three months ended May 4, 2013 was primarily the result of a decrease in revenue of $15.8 million, a 120 basis point decrease in gross margin percentage and an increase of $2.7 million 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 in the six months ended May 4, 2013 was primarily the result of a decrease in revenue of $41.8 million, a 80 basis point decrease in gross margin percentage and $14.1 million in special charges recorded in the first six months of fiscal 2013 as more fully described above under the heading Special Charges-Reduction of Operating Costs.

Provision for Income Taxes
                                          Three Months Ended                               Six Months Ended
                              May 4, 2013      May 5, 2012      $ Change      May 4, 2013      May 5, 2012      $ Change
Provision for income taxes   $     23,189     $     48,555     $ (25,366 )   $     42,076     $     89,259     $ (47,183 )

Effective income tax rate 12.4 % 23.0 % 12.5 % 22.8 %

Our effective tax rate reflects the applicable tax rate in effect in the various tax jurisdictions around the world where our income is earned.
The decrease in our effective tax rate for the second quarter of fiscal 2013 compared to the second 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 by approximately 4% due to a tax benefit of $6.6 million recorded as a result of the reversal of certain prior period tax liabilities. Our effective tax rate for the second quarter of fiscal 2013 also included a benefit related to the application of the U.S. federal research and development tax credit which was not available in the second quarter of fiscal 2012.
The decrease in our effective tax rate for the first six months of fiscal 2013 compared to the first six months 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 by 4% 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 of $6.3 million and a tax benefit of $6.6 million recorded as a result of the reversal of certain prior period tax liabilities.
We expect our effective tax rate to be approximately 16.5% for the remainder of fiscal 2013.

Net Income
                                  Three Months Ended                                             Six Months Ended
              May 4, 2013      May 5, 2012       $ Change      % Change      May 4, 2013      May 5, 2012      $ Change      % Change
Net Income   $    164,472     $    162,899     $    1,573          1 %      $    295,694     $    302,281     $  (6,587 )       (2 %)
Net Income
as a % of
revenue              24.9 %           24.1 %                                        23.1 %           22.8 %
Diluted EPS         $0.52            $0.53                                         $0.95            $0.99

Net income remained flat year-over-year as the $25.4 million decrease in provision for income taxes was offset by the $21.5 million decrease in operating income in the second quarter of fiscal 2013.
The year-over-year decrease in net income in the six months ended May 4, 2013 was primarily a result of the $51.4 million decrease in operating income partially offset by a lower provision for income taxes in the first six months of fiscal 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 Part II, 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 third quarter of fiscal 2013 to be in the range of approximately $655 million to $685 million. Our plan is for gross margin for the third quarter of fiscal 2013 to be approximately 64.5% and for operating expenses to be approximately $226 million. We expect our effective tax rate to be approximately 16.5%. As a result, we are planning for diluted earnings per share to be in the range of $0.51 to $0.56 in the third quarter of fiscal 2013.


Liquidity and Capital Resources
At May 4, 2013, our principal source of liquidity was $4,172.1 million of cash and cash equivalents and short-term investments, of which approximately $1,180.6 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. . . .

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