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ADI > SEC Filings for ADI > Form 10-K on 26-Nov-2013All Recent SEC Filings

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Form 10-K for ANALOG DEVICES INC


26-Nov-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (all tabular amounts in thousands except per share amounts)

During the first quarter of fiscal 2008, we sold our baseband chipset business and related support operations, which we refer to as the Baseband Chipset Business, to MediaTek Inc. The financial results of this business is presented as discontinued operations in the 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
Overview
                                      Fiscal Year                        2013 over 2012             2012 over 2011
                         2013            2012            2011          $ Change    % Change      $ Change      % Change
Revenue              $ 2,633,689     $ 2,701,142     $ 2,993,320     $ (67,453 )     (2 )%     $ (292,178 )     (10 )%
Gross Margin %              64.3 %          64.5 %          66.4 %
Net income from
Continuing
Operations           $   673,487     $   651,236     $   860,894     $  22,251        3  %     $ (209,658 )     (24 )%
Net income from
Continuing
Operations as a % of
Revenue                     25.6 %          24.1 %          28.8 %
Diluted EPS from
Continuing
Operations           $      2.14     $      2.13     $      2.79     $    0.01        -  %     $    (0.66 )     (24 )%
Diluted EPS          $      2.14     $      2.13     $      2.81     $    0.01        -  %     $    (0.68 )     (24 )%

Fiscal 2013 and fiscal 2011 were 52-week years. Fiscal 2012 was a 53-week year. The additional week in fiscal 2012 was included in the first quarter ended February 4, 2012.
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 fiscal 2013, our revenue decreased 2% compared to fiscal 2012. Our diluted earnings per share from continuing operations increased to $2.14 in fiscal 2013 from $2.13 in fiscal 2012. Cash flow from operations in fiscal 2013 was $912.3 million, or 34.6% of revenue. The year-to-year decrease in revenue was primarily attributable to one less week of operations in fiscal 2013 as compared to 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 of the lower sales level 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.
                             2013                           2012                      2011
                                % of                                % of                      % of
                                Total                              Total                     Total
                               Product                            Product                   Product
                 Revenue      Revenue*     Y/Y%      Revenue      Revenue      Revenue      Revenue
Industrial     $ 1,219,798        46 %     (2 )%   $ 1,246,380        46 %   $ 1,416,686        47 %
Automotive         481,803        18 %      4  %       463,927        17 %       418,419        14 %
Consumer           403,649        15 %    (13 )%       464,103        17 %       556,056        19 %
Communications     528,439        20 %      -  %       526,732        20 %       602,159        20 %
Total Revenue  $ 2,633,689       100 %     (2 )%   $ 2,701,142       100 %   $ 2,993,320       100 %

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

The year-to-year decrease in revenue in the industrial and consumer end markets in fiscal 2013 was primarily the result of a weak global economic environment and one less week of operations in fiscal 2013 as compared to fiscal 2012. Automotive end market revenue increased in fiscal 2013 primarily as a result of increasing electronic content in vehicles.
The year-to-year decrease in revenue in the industrial, consumer and communications end markets in fiscal 2012 was primarily the result of a broad-based decrease in demand in these end markets. Automotive end market revenue increased in fiscal 2012 primarily as a result of increasing electronic content in vehicles.


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.

                                        2013                             2012                        2011
                                           % of                                  % of                        % of
                                           Total                                 Total                      Total
                                          Product                               Product                    Product
                            Revenue      Revenue*     Y/Y%        Revenue      Revenue*       Revenue      Revenue
Converters               $ 1,180,072         45 %      (1 )%   $ 1,192,064         44 %    $ 1,343,487         45 %
Amplifiers/Radio
frequency                    682,759         26 %      (2 )%       697,687         26 %        788,299         26 %
Other analog                 372,281         14 %      (6 )%       397,376         15 %        410,323         14 %
Subtotal analog signal
processing                 2,235,112         85 %      (2 )%     2,287,127         85 %      2,542,109         85 %
Power management &
reference                    172,920          7 %      (5 )%       182,134          7 %        217,615          7 %
Total analog products    $ 2,408,032         91 %      (2 )%   $ 2,469,261         91 %    $ 2,759,724         92 %
Digital signal
processing                   225,657          9 %      (3 )%       231,881          9 %        233,596          8 %
Total Revenue            $ 2,633,689        100 %      (2 )%   $ 2,701,142        100 %    $ 2,993,320        100 %


_____________________________________


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

The year-to-year decrease in total revenue in fiscal 2013 as compared to fiscal 2012 was the result of one less week of operations in fiscal 2013 as compared to fiscal 2012 and a broad-based decrease in demand across most product type categories.
The year-to-year decrease in total revenue in fiscal 2012 as compared to fiscal 2011 was the result of a broad-based demand shift across all product categories. Revenue Trends by Geographic Region
Revenue by geographic region, based upon the primary location of our customers' design activity for its products, for fiscal 2013, 2012 and 2011 was as follows.

                                                                                                Change
                                          Fiscal Year                         2013 over 2012             2012 over 2011
                             2013            2012            2011          $ Change     % Change      $ Change      % Change
United States            $   821,269     $   818,653     $   866,142     $   2,616         -  %     $  (47,489 )      (5 )%
Rest of North and South
America                       99,215         114,133         144,585       (14,918 )     (13 )%        (30,452 )     (21 )%
Europe                       840,585         852,668         967,417       (12,083 )      (1 )%       (114,749 )     (12 )%
Japan                        292,804         333,558         398,587       (40,754 )     (12 )%        (65,029 )     (16 )%
China                        349,575         341,196         360,594         8,379         2  %        (19,398 )      (5 )%
Rest of Asia                 230,241         240,934         255,995       (10,693 )      (4 )%        (15,061 )      (6 )%
Total Revenue            $ 2,633,689     $ 2,701,142     $ 2,993,320     $ (67,453 )      (2 )%     $ (292,178 )     (10 )%

In fiscal years 2013, 2012 and 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. On a regional basis, the year-over-year sales declines in Japan and Rest of Asia for fiscal 2013 were primarily the result of lower demand for products used in consumer applications. The year-over-year sales increase in China for fiscal 2013 was primarily the result of an increase in demand in the industrial end market.


Sales decreased in all regions in fiscal 2012 as compared to fiscal 2011 as a result of a broad-based decrease in demand.

Gross Margin
                                                                                          Change
                                    Fiscal Year                         2013 over 2012             2012 over 2011
                       2013            2012            2011         $ Change      % Change      $ Change      % Change
Gross Margin       $ 1,692,411     $ 1,741,001     $ 1,986,541     $ (48,590 )      (3 )%     $ (245,540 )     (12 )%
Gross Margin %            64.3 %          64.5 %          66.4 %

Gross margin percentage in fiscal 2013 decreased 20 basis points compared to fiscal 2012 primarily as a result of a slight mix shift in favor of lower margin products being sold.
Gross margin percentage in fiscal 2012 decreased 190 basis points compared to fiscal 2011 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)

                                                                                         Change
                                 Fiscal Year                         2013 over 2012                   2012 over 2011
                      2013          2012          2011           $ Change         % Change        $ Change         % Change
R&D Expenses       $ 513,255     $ 512,003     $ 505,570     $     1,252             - %      $     6,433             1 %
R&D Expenses as a
% of Revenue            19.5 %        19.0 %        16.9 %

R&D expenses remained flat in fiscal 2013 as compared to fiscal 2012 as increases in R&D employee salary and benefit expenses and other operational spending were offset by lower variable compensation expense linked to our overall profitability and revenue growth.
R&D expenses increased in fiscal 2012 as compared to fiscal 2011 as a result of annual salary increases that became effective during the second quarter of fiscal 2012 and a general increase in spending, 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)

                                                                                     Change
                                 Fiscal Year                        2013 over 2012               2012 over 2011
                      2013          2012          2011         $ Change        % Change      $ Change      % Change
SMG&A Expenses     $ 396,233     $ 396,519     $ 406,707     $     (286 )        -  %       $ (10,188 )      (3 )%
SMG&A Expenses as
a % of Revenue          15.0 %        14.7 %        13.6 %

SMG&A expenses remained flat in fiscal 2013 as compared to fiscal 2012 as decreases in SMG&A employee salary and benefit expenses and variable compensation expense linked to our overall profitability and revenue growth were partially offset by increases in other operational spending. In addition, fiscal 2013 also included $6.3 million of stock-based compensation expense following the death of our 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.


SMG&A expenses decreased in fiscal 2012 as compared to fiscal 2011 as lower variable compensation expense, which is a variable expense linked to our overall profitability and revenue growth, was partially offset by annual salary increases that became effective during the second quarter of fiscal 2012. Special Charges
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. The expense 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 and $0.3 million for clean-up and closure costs that were 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 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. This action was completed in the fourth quarter of fiscal 2012. This action resulted in annual cost savings of approximately $4.0 million. During fiscal 2012, we recorded special charges of approximately $8.4 million. The special charge included $7.9 million for severance and fringe benefit costs in accordance with our ongoing benefit plan or statutory requirements at foreign locations for 95 manufacturing, engineering and SMG&A employees; $0.1 million for contract termination costs; $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. This action resulted in annual savings in SMG&A expenses of approximately $12.0 million per year. We have terminated the employment of all employees associated with this action. During fiscal 2013, we recorded special charges of approximately $29.8 million for severance and fringe benefit costs in accordance with our ongoing benefit plan or statutory requirements at foreign locations for 235 engineering and SMG&A employees. As of November 2, 2013, we employed 98 of the 235 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 these actions will result in annual cost savings of approximately $32.6 million, once fully implemented, which will be used to make additional investments in products that we expect will drive revenue growth in the future.
Operating Income from Continuing Operations

                                                                                      Change
                                  Fiscal Year                       2013 over 2012             2012 over 2011
                      2013          2012           2011         $ Change      % Change      $ Change      % Change
Operating income
from Continuing
Operations         $ 753,075     $ 824,048     $ 1,072,025     $ (70,973 )      (9 )%     $ (247,977 )     (23 )%
Operating income
from Continuing
Operations as a %
of Revenue              28.6 %        30.5 %          35.8 %

The year-over-year decrease in operating income from continuing operations in fiscal 2013 as compared to fiscal 2012 was primarily the result of a decrease in revenue of $67.5 million, a 20 basis point decrease in gross margin percentage, and an increase of $21.4 million in special charges as more fully described above under the heading Special Charges.
The year-over-year decrease in operating income from continuing operations in fiscal 2012 as compared to fiscal 2011 was primarily the result of a decrease in revenue of $292.2 million and a 190 basis point decrease in gross margin percentage.


Nonoperating (Income) Expense
                                                                                       Change
                                           Fiscal Year                    2013 over 2012     2012 over 2011
                                2013           2012           2011           $ Change           $ Change
Interest expense            $   27,102     $   26,422     $   19,146     $          680     $       7,276
Interest income                (12,753 )      (14,448 )       (9,060 )            1,695            (5,388 )
Other, net                     (76,597 )       (1,459 )          492            (75,138 )          (1,951 )
Total nonoperating (income)
expense                     $  (62,248 )   $   10,515     $   10,578     $      (72,763 )   $         (63 )

The year-over-year increase in nonoperating income in fiscal 2013 as compared to fiscal 2012 was primarily the result of recognizing a gain of $85.4 million from the sale of a product line, as more fully described below under the heading Divestitures, partially offset by the net loss on extinguishment of debt of approximately $10.2 million in conjunction with the redemption of our $375 million aggregate principal amount of 5.0% senior unsecured notes in fiscal 2013 as more fully described below under the heading Liquidity and Capital Resources. The year-over-year increase in nonoperating interest expense in fiscal 2012 as compared to fiscal 2011 was primarily a result of our issuance of $375.0 million aggregate principal amount of 3.0% senior unsecured notes on April 4, 2011 which was partially offset by the impact of the termination of our interest rate swap agreement more fully described below under the heading Debt. The increases were partially offset by an increase in nonoperating interest income due to higher interest rates earned on our investments and the investment of higher cash balances in fiscal 2012 as compared to fiscal 2011, and an increase in nonoperating other income as a result of the gain from the sale of other investments in the second quarter of fiscal 2012. Provision for Income Taxes

                                                                                   Change
                                 Fiscal Year                      2013 over 2012             2012 over 2011
                      2013          2012          2011        $ Change      % Change     $ Change      % Change
Provision for
Income Taxes       $ 141,836     $ 162,297     $ 200,553     $ (20,461 )     (13 )%     $ (38,256 )     (19 )%
Effective Income
Tax Rate                17.4 %        19.9 %        18.9 %

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 fiscal 2013 compared to 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 fiscal 2013 was lower by approximately 3% as a result of various discrete items including the reinstatement of the U.S. federal research and development tax credit and the reversal of certain prior period tax liabilities. These decreases in our effective tax rate were partially offset by the recording of a tax reserve of $36.5 million related to one open tax matter related to Section 965 of the Internal Revenue Code which increased our effective tax rate by approximately 5% and the tax effect of the gain on the sale of a product line in fiscal 2013 which increased our effective tax rate by approximately 3%.
The increase in our effective tax rate for fiscal 2012 compared to fiscal 2011 was primarily due to the expiration of the U.S. federal research and development tax credit in December 2011.


Income from Continuing Operations, Net of Tax
                                                                                     Change
                                 Fiscal Year                       2013 over 2012               2012 over 2011
                      2013          2012          2011          $ Change       % Change      $ Change      % Change
Income from
Continuing
Operations, net of
tax                $ 673,487     $ 651,236     $ 860,894     $     22,251         3 %      $ (209,658 )     (24 )%
Income from
Continuing
Operations, net of
tax as a % of
Revenue                 25.6 %        24.1 %        28.8 %
Diluted EPS from
Continuing
Operations         $    2.14     $    2.13     $    2.79     $       0.01         - %      $    (0.66 )     (24 )%

The year-over-year increase in net income from continuing operations in fiscal 2013 from fiscal 2012 was primarily a result of the lower provision for income taxes and the $72.8 million increase in nonoperating income, partially offset by the $71.0 million decrease in operating income from continuing operations. The year-over-year decrease in net income from continuing operations in fiscal 2012 from fiscal 2011 was primarily a result of the $248.0 million decrease in operating income from continuing operations partially offset by a lower provision for income taxes in fiscal 2012.
The impact of inflation and foreign currency exchange rate movement on our results of operations during the past three fiscal years has not been significant.

Discontinued Operations
                                                               Fiscal Year
                                                         2013     2012      2011
Total income from Discontinued Operations, net of tax   $   -    $   -    $ 6,500
Diluted earnings per share from Discontinued Operations     -        -       0.02

We sold our Baseband Chipset Business to MediaTek Inc. during the first quarter of fiscal 2008. Accordingly, the results of the operations of this business has been presented as discontinued operations within the consolidated financial statements. In fiscal 2011, additional proceeds of $10.0 million were released from escrow and $6.5 million net of tax was recorded as additional gain from the sale of discontinued operations.
Divestitures

On October 31, 2013, we completed the sale of the assets and intellectual property related to our microphone product line to InvenSense, Inc. (InvenSense). We received $100.0 million in cash for the assets and intellectual property and after providing for the write-off of inventory, fixed assets and other costs incurred to complete the transaction, recorded a net gain of $85.4 million in nonoperating income during fiscal 2013. We have agreed to provide InvenSense with various transition services subsequent to the closing. We may receive additional cash payments, not to exceed $70.0 million, based on the achievement of certain revenue milestones through the first anniversary of the closing date. The sale of the assets and intellectual property related to the microphone product line did not qualify as a discontinued operation as it did not meet the requirement to be considered a component of an entity.


Acquisitions
In fiscal 2012, we acquired privately-held Multigig, Inc. (Multigig) of San Jose, California. The acquisition of Multigig is expected to enhance our clocking capabilities in stand-alone and embedded applications and strengthen our high speed signal processing solutions. The acquisition-date fair value of the consideration transferred totaled $26.8 million, which consisted of $24.2 million in initial cash payments at closing and an additional $2.6 million subject to an indemnification holdback that was payable within 15 months of the transaction date. During the third quarter of fiscal 2012, we reduced this holdback amount by $0.1 million as a result of indemnification claims. During the third quarter of fiscal 2013, we paid the remaining $2.5 million due under the holdback. Our assessment of fair value of the tangible and intangible assets acquired and liabilities assumed was based on their estimated fair values at the date of acquisition, resulting in the recognition of $15.6 million of in-process research and development (IPR&D), $1.1 million of developed technology, $7.0 . . .

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