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ADI > SEC Filings for ADI > Form 10-Q on 18-Feb-2014All Recent SEC Filings

Show all filings for ANALOG DEVICES INC

Form 10-Q for ANALOG DEVICES INC


18-Feb-2014

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 2, 2013.
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," "continues," "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 herein. 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 1, 2014     February 2, 2013      $ Change        % Change
Revenue                              $        628,238     $        622,134     $     6,104             1 %
Gross margin %                                   65.1 %               62.7 %
Net income                           $        152,586     $        131,222     $    21,364            16 %
Net income as a % of revenue                     24.3 %               21.1 %
Diluted EPS                          $           0.48     $           0.42     $      0.06            14 %

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.
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
                      February 1, 2014              February 2, 2013
                              % of                                % of
                Revenue     Revenue     Y/Y%       Revenue      Revenue*
Industrial     $ 290,365        46 %     3  %   $    281,209        45 %
Automotive       124,157        20 %    15  %        107,760        17 %
Consumer          74,119        12 %   (31 )%        107,356        17 %
Communications   139,597        22 %    11  %        125,809        20 %
Total revenue  $ 628,238       100 %     1  %   $    622,134       100 %

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

The year-to-year decrease in revenue in the consumer end market was primarily the result of the sale of our microphone product line in the fourth quarter of fiscal 2013. Automotive end market revenue increased in the three-month period ended February 1, 2014 as compared to the three-month period ended February 2, 2013 primarily as a result of increasing electronic content in vehicles and higher demand for new vehicles. Communications end market revenue increased in the three-month period ended February 1, 2014 as compared to the three-month period ended February 2, 2013 primarily as a result of increased wireless base station deployment activity in China.
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
                                         February 1, 2014              February 2, 2013
                                                 % of                                % of
                                   Revenue     Revenue     Y/Y%       Revenue      Revenue*
Converters                        $ 290,551        46 %     5  %   $    277,940        45 %
Amplifiers / Radio frequency        164,714        26 %     4  %        157,978        25 %
Other analog                         79,419        13 %   (17 )%         95,158        15 %
Subtotal analog signal processing   534,684        85 %     1  %        531,076        85 %
Power management & reference         38,710         6 %    (2 )%         39,382         6 %
Total analog products             $ 573,394        91 %     1  %   $    570,458        92 %
Digital signal processing            54,844         9 %     6  %         51,676         8 %
Total revenue                     $ 628,238       100 %     1  %   $    622,134       100 %

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

The year-to-year increase in total revenue was primarily the result of improving demand across most product type categories, which was offset by declines in the other analog product category primarily as a result of the sale of our microphone product line in the fourth quarter of fiscal 2013.


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 1,
2014 and February 2, 2013 were as follows:

                                                                Three Months Ended
               Region                 February 1, 2014      February 2, 2013       $ Change        % Change
United States                        $         182,298     $         204,271     $  (21,973 )         (11 )%
Rest of North and South America                 19,436                23,512         (4,076 )         (17 )%
Europe                                         200,687               189,298         11,389             6  %
Japan                                           71,091                64,688          6,403            10  %
China                                          100,484                84,769         15,715            19  %
Rest of Asia                                    54,242                55,596         (1,354 )          (2 )%
Total revenue                        $         628,238     $         622,134     $    6,104             1  %

In the three-month periods ended February 1, 2014 and February 2, 2013, 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-to-year sales decline in North America was primarily the result of lower demand for products used in consumer applications. The year-over-year sales increase in China was primarily the result of an increase in demand in the communications and industrial end markets. The year-over-year sales increase in Japan was primarily the result of an increase in demand in the automotive and industrial end markets.

Gross Margin
                                      Three Months Ended
                February 1, 2014     February 2, 2013     $ Change    % Change
Gross margin   $        409,118     $        390,284     $  18,834       5 %
Gross margin %             65.1 %               62.7 %

Gross margin percentage increased by 240 basis points in the three months ended February 1, 2014, as compared to the same period of fiscal 2013, primarily as a result of improved factory utilization levels in our manufacturing facilities.

Research and Development (R&D)
                                                                Three Months Ended
                                      February 1, 2014     February 2, 2013      $ Change         % Change
R&D expenses                         $        128,646     $        125,164     $     3,482             3 %
R&D expenses as a % of revenue                   20.5 %               20.1 %

R&D expenses increased 3% year-over-year primarily as a result of increases in operational spending for engineering supplies and consultants and, to a lesser extent, R&D employee salary and benefit expenses and 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
                                      February 1, 2014     February 2, 2013      $ Change         % Change
SMG&A expenses                       $        98,178      $        97,560      $       618             1 %
SMG&A expenses as a % of revenue                15.6 %               15.7 %

SMG&A expenses increased slightly year-over-year as increases in operational spending were partially offset by decreases in SMG&A employee salary and benefit expenses and variable compensation 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 2012, we recorded special charges of approximately $8.4 million. These special charges included: $8.0 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; $0.2 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; and $0.2 million for the write-off of property, plant and equipment. These actions resulted in annual cost savings of approximately $12.0 million. We have terminated the employment of all employees associated with these actions. 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 February 1, 2014, we employed 35 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 we expect will be used to make additional investments in products that we expect will drive revenue growth in the future.
During the first quarter of fiscal 2014, we recorded a special charge of approximately $2.7 million for severance and fringe benefit costs in accordance with our ongoing benefit plan or statutory requirements at foreign locations for 30 engineering and SMG&A employees. As of February 1, 2014, we employed 12 of the 30 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 $4.5 million, once fully implemented.

Operating Income
                                                               Three Months Ended
                                      February 1, 2014     February 2, 2013      $ Change        % Change
Operating income                     $        179,609     $        153,489     $    26,120            17 %
Operating income as a % of revenue               28.6 %               24.7 %

The year-over-year increase in operating income in the three months ended February 1, 2014 was primarily the result of an increase in revenue of $6.1 million, a 240 basis point increase in gross margin percentage and a decrease in special charges of $11.4 million as more fully described above under the heading Special Charges-Reduction of Operating Costs.


Provision for Income Taxes
                                            Three Months Ended
                            February 1, 2014     February 2, 2013     $ Change
Provision for income taxes $        23,305      $        18,887      $    4,418
Effective income tax rate             13.2 %               12.6 %

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 increase in our effective tax rate for the first quarter of fiscal 2014 compared to the first quarter of fiscal 2013 was primarily due to the inclusion in the three months ended February 2, 2013 of a benefit from the reinstatement of the U.S. federal research and development tax credit in January 2013 retroactive to January 1, 2012, partially offset by an increase in income earned in lower tax rate jurisdictions.
We expect our effective tax rate to be approximately 13% for the remainder of fiscal 2014.

Net Income
                                                               Three Months Ended
                                      February 1, 2014     February 2, 2013      $ Change        % Change
Net Income                           $        152,586     $        131,222     $    21,364            16 %
Net Income as a % of revenue                     24.3 %               21.1 %
Diluted EPS                                     $0.48                $0.42

Net income increased 16% in the three months ended February 1, 2014 as compared to the same period of fiscal 2013 as the $26.1 million increase in operating income was partially offset by a higher provision for income taxes in the first quarter of fiscal 2014.
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 second quarter of fiscal 2014 to be in the range of approximately $660 million to $680 million. Our plan is for gross margin for the second quarter of fiscal 2014 to increase between 50 and 100 basis points and for operating expenses to increase by approximately 2% from the first quarter of fiscal 2014. We expect our effective tax rate to be approximately 13%. As a result, we are planning for diluted earnings per share to be in the range of $0.54 to $0.58 in the second quarter of fiscal 2014.

Liquidity and Capital Resources
At February 1, 2014, our principal source of liquidity was $4,701.1 million of cash and cash equivalents and short-term investments, of which approximately $1,244.1 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 1, 2014     February 2, 2013
Net cash provided by operating activities                             $157,473             $157,969
Net cash provided by operations as a % of revenue                         25.1 %               25.4 %
Net cash (used for) provided by investing activities          $        (44,323 )   $        160,401
Net cash used for financing activities                        $        (87,308 )   $        (52,822 )

At February 1, 2014, cash and cash equivalents totaled $417.2 million. The following changes contributed to the net increase in cash and cash equivalents of $25.1 million in the first three months of fiscal 2014, as compared to the same period of fiscal 2013.
Operating Activities
During the first three months of fiscal 2014 we generated cash from operating activities of $157.5 million, a slight decrease compared to the first three months of fiscal 2013 primarily as a result of net cash outflows from working capital changes, partially offset by higher net income adjusted for non-cash items.
Investing Activities
During the first three months of fiscal 2014 cash used for investing activities included $48.1 million for property, plant and equipment additions and $7.1 million for the net purchases of available-for-sale short term investments. Financing Activities
During the first three months of fiscal 2014 cash used for financing activities included proceeds of $79.6 million from the exercise of employee stock options. We distributed $106.0 million to our shareholders in dividend payments and repurchased 1.8 million shares of our common stock for $89.0 million.

Working Capital
                                       February 1, 2014       November 2, 2013       $ Change        % Change
Accounts receivable, net                       $328,787               $325,144     $     3,643            1 %
Days sales outstanding                               48                     44
Inventory                                      $289,935               $283,337     $     6,598            2 %
Days cost of sales in inventory                     121                    111

The increase in accounts receivable in dollars and in days was primarily the result of higher product shipments made in the final month of the first quarter of fiscal 2014 as compared to the final month of the fourth quarter of fiscal 2013.
Inventory increased as compared to the end of the fourth quarter of fiscal 2013 as a result of lower than expected shipments made into the distributor channel and anticipated higher sales demand. Our inventory levels are impacted by our need to support forecasted sales demand and variations between those forecasts and actual demand. Days cost of sales in inventory increased from 111 days at the end of the fourth quarter of fiscal 2013 to 121 days at the end of the first quarter of fiscal 2014 as a result of the increased inventory levels and a decrease in cost of sales resulting from improved factory utilization. Current liabilities decreased to $519.5 million at February 1, 2014, a decrease of $51.0 million, or 9%, from $570.5 million at the end of fiscal 2013. This decrease was primarily due to a decrease in income taxes payable and accrued liabilities. The decrease in accrued liabilities was primarily the result of lower salary and variable compensation expense accruals.
As of February 1, 2014 and November 2, 2013, we had gross deferred revenue of $306.3 million and $309.2 million, respectively, and gross deferred cost of sales of $61.1 million and $61.8 million, respectively. Deferred income on shipments to distributors decreased in the first three months of fiscal 2014 primarily as a result of increased shipment volumes of lower margin products to end customers, partially offset by a stronger concentration of higher margin product shipments into 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 1, 2014, we had $872.4 million in principal outstanding on our long term debt. Our debt obligations consist of the following:
$375.0 Million Aggregate Principal Amount of 3.0% Senior Unsecured Notes (2016 Notes)
On April 4, 2011, we issued $375.0 million aggregate principal amount of 3.0% senior unsecured notes due April 15, 2016 (the 2016 Notes) with semi-annual fixed interest payments due on April 15 and October 15 of each year, commencing October 15, 2011.
$500.0 Million Aggregate Principal Amount of 2.875% Senior Unsecured Notes (2023 Notes)
On June 3, 2013, we issued $500.0 million aggregate principal amount of 2.875% senior unsecured notes due June 1, 2023 (the 2023 Notes) with semi-annual fixed interest payments due on June 1 and December 1 of each year, commencing December 1, 2013.
The indentures governing the 2016 Notes and the 2023 Notes contain covenants that may limit our ability to: incur, create, assume or guarantee any debt for borrowed money secured by a lien upon a principal property; enter into sale and lease-back transactions with respect to a principal property; and consolidate with or merge into, or transfer or lease all or substantially all of our assets to, any other party. As of February 1, 2014, we were compliant with these covenants. See Note 14, Debt, of the Notes to our Condensed Consolidated Financial Statements contained in Item 1 of this Quarterly Report on Form 10-Q for further information on our outstanding debt. Revolving Credit Facility
During December 2012, we terminated our five-year, $165.0 million unsecured revolving credit facility with certain institutional lenders entered into in May 2008. On December 19, 2012, we entered into a five-year, $500.0 million senior unsecured revolving credit facility with certain institutional lenders. To date, we have not borrowed under this credit facility but we may borrow in the future . . .

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