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ADI > SEC Filings for ADI > Form 10-Q on 20-Aug-2013All Recent SEC Filings

Show all filings for ANALOG DEVICES INC

Form 10-Q for ANALOG DEVICES INC


20-Aug-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
                              August 3, 2013     August 4, 2012     $ Change    % Change
Revenue                      $      674,172     $      683,026     $ (8,854 )     (1 )%
Gross margin %                         64.5 %             65.6 %
Net income                   $      176,239     $      169,768     $  6,471        4  %
Net income as a % of revenue           26.1 %             24.9 %
Diluted EPS                  $         0.56     $         0.56     $      -        -  %


                                                    Nine Months Ended
                              August 3, 2013      August 4, 2012      $ Change     % Change
Revenue                      $     1,955,556     $     2,006,178     $ (50,622 )     (3 )%
Gross margin %                          63.8 %              64.7 %
Net income                   $       471,933     $       472,049     $    (116 )      -  %
Net income as a % of revenue            24.1 %              23.5 %
Diluted EPS                  $          1.51     $          1.54     $   (0.03 )     (2 )%

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 nine months of fiscal 2012 included an additional week of operations as compared to the first nine 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 nine months of fiscal 2013, our revenue decreased 3% compared to the first nine months of fiscal 2012. Our diluted earnings per share in the first nine months of fiscal 2013 was $1.51 compared to $1.54 in the first nine months of fiscal 2012. Cash flow from operations in the first nine months of fiscal 2013 was $630.2 million, or 32% of revenue. The year-to-year decrease in revenue was attributable to one less week of operations in the first nine months of fiscal 2013 as compared


to the first nine months of fiscal 2012 and continued weakness in the global economic environment. 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
                       August 3, 2013               August 4, 2012
                              % of                              % of
                Revenue     Revenue*    Y/Y%      Revenue     Revenue
Industrial     $ 314,196        47 %    (3 )%   $  323,621        47 %
Automotive       120,386        18 %     5  %      114,876        17 %
Consumer         100,163        15 %    (6 )%      106,940        16 %
Communications   139,427        21 %     1  %      137,589        20 %
Total revenue  $ 674,172       100 %    (1 )%   $  683,026       100 %

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

                                   Nine Months Ended
                       August 3, 2013                August 4, 2012
                                % of                              % of
                 Revenue      Revenue    Y/Y%      Revenue      Revenue
Industrial     $   907,109        46 %   (3 )%   $   939,329        47 %
Automotive         350,471        18 %   (1 )%       353,579        18 %
Consumer           308,493        16 %   (6 )%       327,145        16 %
Communications     389,483        20 %    1  %       386,125        19 %
Total revenue  $ 1,955,556       100 %   (3 )%   $ 2,006,178       100 %

The year-to-year decrease in revenue in the industrial and consumer end markets in the three-month period ended August 3, 2013 was primarily the result of a weak global economic environment. Automotive end market revenue increased in the three-month period ended August 3, 2013 primarily as a result of an increase in the demand for products used in powertrain electronics and infotainment applications.
The year-to-year decrease in revenue in the industrial and consumer end markets in the nine-month period ended August 3, 2013 was primarily the result of a weak global economic environment and one less week of operations in the first nine months of fiscal 2013 as compared to the first nine 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
                                          August 3, 2013               August 4, 2012
                                                 % of                              % of
                                   Revenue     Revenue*    Y/Y%      Revenue     Revenue*
Converters                        $ 306,347        45 %     2  %   $  299,736        44 %
Amplifiers / Radio frequency        171,588        25 %    (5 )%      180,989        26 %
Other analog                         92,278        14 %    (6 )%       98,075        14 %
Subtotal analog signal processing   570,213        85 %    (1 )%      578,800        85 %
Power management & reference         45,611         7 %     -  %       45,403         7 %
Total analog products             $ 615,824        91 %    (1 )%   $  624,203        91 %
Digital signal processing            58,348         9 %    (1 )%       58,823         9 %
Total revenue                     $ 674,172       100 %    (1 )%   $  683,026       100 %

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

                                                      Nine Months Ended
                                           August 3, 2013                August 4, 2012
                                                   % of                               % of
                                    Revenue      Revenue*    Y/Y%      Revenue      Revenue
Converters                        $   885,871        45 %     -  %   $   885,528        44 %
Amplifiers / Radio frequency          494,234        25 %    (6 )%       523,156        26 %
Other analog                          279,877        14 %    (2 )%       284,586        14 %
Subtotal analog signal processing   1,659,982        85 %    (2 )%     1,693,270        84 %
Power management & reference          128,694         7 %    (6 )%       136,328         7 %
Total analog products             $ 1,788,676        91 %    (2 )%   $ 1,829,598        91 %
Digital signal processing             166,880         9 %    (5 )%       176,580         9 %
Total revenue                     $ 1,955,556       100 %    (3 )%   $ 2,006,178       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 August 3, 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 nine-month period ended August 3, 2013 was the result of one less week of operations in the first nine months of fiscal 2013 as compared to the first nine 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 nine-month periods ended August 3, 2013 and August 4, 2012 were as follows:

                                                               Three Months Ended
               Region                  August 3, 2013       August 4, 2012       $ Change        % Change
United States                        $        202,687     $        202,080     $      607             -  %
Rest of North and South America                25,063               25,268           (205 )          (1 )%
Europe                                        217,608              216,809            799             -  %
Japan                                          77,790               87,169         (9,379 )         (11 )%
China                                          93,305               89,616          3,689             4  %
Rest of Asia                                   57,719               62,084         (4,365 )          (7 )%
Total revenue                        $        674,172     $        683,026     $   (8,854 )          (1 )%


                                                                Nine Months Ended
               Region                  August 3, 2013       August 4, 2012       $ Change        % Change
United States                        $        613,139     $        590,155     $   22,984             4  %
Rest of North and South America                76,769               87,533        (10,764 )         (12 )%
Europe                                        622,977              640,102        (17,125 )          (3 )%
Japan                                         214,352              254,195        (39,843 )         (16 )%
China                                         262,044              254,597          7,447             3  %
Rest of Asia                                  166,275              179,596        (13,321 )          (7 )%
Total revenue                        $      1,955,556     $      2,006,178     $  (50,622 )          (3 )%

In the three- and nine-month periods ended August 3, 2013 and August 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, the year-over-year sales declines in Japan and Rest of Asia for the three-month period ended August 3, 2013 were primarily the result of lower demand for products used in consumer applications. The year-over-year sales increase in China for the three-month period ended August 3, 2013 was primarily the result of an increase in demand in the industrial end market. On a regional basis, the year-over-year sales declines in Japan and Rest of Asia and sales increase in the United States for the nine-month period ended August 3, 2013 were primarily the result of product transitions within consumer applications. In addition, the year-over-year sales decline in Europe in the nine-month period ended August 3, 2013 was primarily a result of lower demand in the industrial and automotive end market partially offset by an increase in demand in the communication end market.

Gross Margin
                                     Three Months Ended                                                Nine Months Ended
                August 3, 2013     August 4, 2012     $ Change      % Change     August 3, 2013      August 4, 2012      $ Change      % Change
Gross margin   $      435,062     $      447,874     $ (12,812 )      (3 )%     $     1,247,541     $     1,297,719     $ (50,178 )      (4 )%
Gross margin %           64.5 %             65.6 %                                         63.8 %              64.7 %

Gross margin percentage was lower by 110 and 90 basis points in the three and nine months ended August 3, 2013, respectively, as compared to the same periods of fiscal 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                                                 Nine Months Ended
              August 3, 2013     August 4, 2012     $ Change      % Change      August 3, 2013     August 4, 2012      $ Change      % Change
R&D expenses $      128,947     $      129,694     $    (747 )       (1 )%     $      382,221     $      381,609     $      612          - %
R&D expenses
as a % of
revenue                19.1 %             19.0 %                                         19.5 %             19.0 %

R&D expenses decreased 1% in the three-month period ended August 3, 2013 as compared to the same period of fiscal 2012 as decreases in variable compensation expense linked to our overall profitability and revenue growth, and other operational spending were partially offset by increases in R&D employee salary and benefit expenses.
R&D expenses remained flat in the nine-month period ended August 3, 2013 as compared to the same period of fiscal 2012 as increases in R&D employee salary and benefit expenses and other operational spending were partially offset by lower variable compensation 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 Nine Months Ended August 3, 2013 August 4, 2012 $ Change % Change August 3, 2013 August 4, 2012 $ Change % Change

SMG&A
expenses     $       97,773     $       99,873     $ (2,100 )       (2 )%     $      298,036     $      298,910     $     (874 )        - %
SMG&A
expenses as
a % of
revenue                14.5 %             14.6 %                                        15.2 %             14.9 %

The decreases in SMG&A expenses in the three- and nine-month periods ended August 3, 2013 as compared to the same periods of fiscal 2012 were primarily the result of decreases in SMG&A employee salary and benefit expenses and variable compensation expense linked to our overall profitability and revenue growth, partially offset by increases in other operational spending. In addition, the nine-month period ended August 3, 2013 also included $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. 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. We estimate this action will result in annual cost savings of approximately $17.0 million. We have terminated the employment of all employees associated with this action.

Operating Income
                                   Three Months Ended                                                Nine Months Ended
              August 3, 2013     August 4, 2012     $ Change     % Change      August 3, 2013     August 4, 2012     $ Change      % Change
Operating
income       $      208,342     $      212,471     $ (4,129 )       (2 )%     $      553,213     $      608,769     $ (55,556 )       (9 %)
Operating
income as a
% of revenue           30.9 %             31.1 %                                        28.3 %             30.3 %

The year-over-year decrease in operating income in the three months ended August 3, 2013 was primarily the result of a decrease in revenue of $8.9 million and a 110 basis point decrease in gross margin percentage which was partially offset by decreases in operating expenses of $8.7 million as more fully described above under the headings Research and Development (R&D), Selling, Marketing, General and Administrative (SMG&A) and Special Charges-Reduction of Operating Costs.
The year-over-year decrease in operating income in the nine months ended August 3, 2013 was primarily the result of a decrease in revenue of $50.6 million, a 90 basis point decrease in gross margin percentage and a $5.6 million increase in special charges recorded in the first nine months of fiscal 2013 as compared to the same period of fiscal 2012 as more fully described above under the heading Special Charges-Reduction of Operating Costs.

Nonoperating (income) expense


                                      Three Months Ended                                   Nine Months Ended
                        August 3, 2013     August 4, 2012     $ Change      August 3, 2013     August 4, 2012     $ Change
Interest expense       $        7,672     $       6,459      $   1,213             20,443            20,031      $     412
Interest income                (3,125 )          (3,506 )          381             (9,402 )         (10,821 )    $   1,419
Other, net                      8,754                49          8,705              9,361            (1,450 )    $  10,811
  Total                $       13,301     $       3,002      $  10,299     $       20,402     $       7,760      $  12,642
Nonoperating (income)
expense
as a % of revenue                 2.0 %             0.4 %                             1.0 %             0.4 %

The year-over-year increase in nonoperating expense in the three and nine months ended August 3, 2013 was primarily the result of a net loss on extinguishment of debt of approximately $10.2 million in conjunction with the redemption of our $375.0 million aggregate principal amount of 5.0% senior unsecured notes during the third quarter of fiscal 2013 as more fully described below under the heading Liquidity and Capital Resources.

Provision for Income Taxes
                                            Three Months Ended                                   Nine Months Ended
                              August 3, 2013     August 4, 2012     $ Change      August 3, 2013     August 4, 2012     $ Change
Provision for income taxes   $       18,802     $       39,701     $ (20,899 )   $       60,878     $      128,960     $ (68,082 )

Effective income tax rate 9.6 % 19.0 % 11.4 % 21.5 %

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 third quarter of fiscal 2013 compared to the third 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 for the third quarter of fiscal 2013 was reduced by approximately 2% due to a tax benefit related to the release of a tax reserve for an expired tax year and a tax benefit from the U.S. federal research and development tax credit which was not available during the third quarter of fiscal 2012.
The decrease in our effective tax rate for the first nine months of fiscal 2013 compared to the first nine 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 for the first nine months of fiscal 2013 was reduced by approximately 3% as a result of a tax benefit of $6.3 million from the reinstatement of the U.S. federal research and development tax credit in January 2013 retroactive to January 1, 2012, a tax benefit of $4.7 million from this credit for the current fiscal year, which was only available for two months of fiscal 2012, 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 between 14% and 15% for the remainder of fiscal 2013.

Net Income
                                    Three Months Ended                                                 Nine Months Ended
              August 3, 2013     August 4, 2012      $ Change      % Change      August 3, 2013     August 4, 2012      $ Change      % Change
Net Income   $      176,239     $      169,768     $    6,471          4 %      $      471,933     $      472,049     $     (116 )        - %
Net Income
as a % of
revenue                26.1 %             24.9 %                                          24.1 %             23.5 %
Diluted EPS           $0.56              $0.56                                           $1.51              $1.54

Net income increased 4% in the three months ended August 3, 2013 as compared to the same period of fiscal 2012 as the $20.9 million decrease in provision for income taxes was partially offset by the $10.3 million increase in nonoperating (income) expense and $4.1 million decrease in operating income.
Net income remained flat in the nine months ended August 3, 2013 as compared to the same period of fiscal 2012 as the $68.1 million decrease in provision for income taxes was offset by the $55.6 million decrease in operating income and the $12.6 million increase in nonoperating (income) expense.


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, . . .

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