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ADI > SEC Filings for ADI > Form 10-Q on 20-May-2014All Recent SEC Filings

Show all filings for ANALOG DEVICES INC

Form 10-Q for ANALOG DEVICES INC


20-May-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," "could" 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 inherently 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, including to reflect events or circumstances occurring after the date of the filing of this report, 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 3, 2014      May 4, 2013      $ Change     % Change
Revenue                      $    694,536     $    659,250     $  35,286         5 %
Gross margin %                       66.1 %           64.0 %
Net income                   $    187,433     $    164,472     $  22,961        14 %
Net income as a % of revenue         27.0 %           24.9 %
Diluted EPS                  $       0.59     $       0.52     $    0.07        13 %



                                                Six Months Ended
                              May 3, 2014     May 4, 2013     $ Change     % Change
Revenue                      $ 1,322,774     $ 1,281,384     $  41,390         3 %
Gross margin %                      65.6 %          63.4 %
Net income                   $   340,019     $   295,694     $  44,325        15 %
Net income as a % of revenue        25.7 %          23.1 %
Diluted EPS                  $      1.07     $      0.95     $    0.12        13 %

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
                        May 3, 2014                  May 4, 2013
                              % of                             % of
                Revenue     Revenue     Y/Y%     Revenue     Revenue
Industrial     $ 326,530        47 %     5  %   $ 311,128        47 %
Automotive       135,488        20 %    10  %     122,715        19 %
Consumer          77,705        11 %   (23 )%     101,233        15 %
Communications   154,813        22 %    25  %     124,174        19 %
Total revenue  $ 694,536       100 %     5  %   $ 659,250       100 %



                                    Six Months Ended
                         May 3, 2014                    May 4, 2013
                                % of                               % of
                 Revenue      Revenue     Y/Y%      Revenue      Revenue
Industrial     $   616,520        47 %     4  %   $   592,455        46 %
Automotive         259,773        20 %    13  %       230,532        18 %
Consumer           152,040        11 %   (27 )%       208,428        16 %
Communications     294,441        22 %    18  %       249,969        20 %
Total revenue  $ 1,322,774       100 %     3  %   $ 1,281,384       100 %

The decrease in revenue in the consumer end market in both the three- and six-month periods ended May 3, 2014 as compared to the same period of the prior fiscal year 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 both the three- and six-month periods ended May 3, 2014 as compared to the same period of the prior fiscal year primarily as a result of increasing electronic content in vehicles and higher demand for new vehicles. Communications end market revenue increased in the three- and six-month periods ended May 3, 2014 as compared to the same period of the prior fiscal year 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
                                           May 3, 2014                  May 4, 2013
                                                 % of                             % of
                                   Revenue     Revenue*    Y/Y%     Revenue     Revenue*
Converters                        $ 317,915        46 %     8  %   $ 295,459        45 %
Amplifiers / Radio frequency        186,287        27 %     9  %     170,793        26 %
Other analog                         88,103        13 %    (5 )%      92,441        14 %
Subtotal analog signal processing   592,305        85 %     6  %     558,693        85 %
Power management & reference         43,138         6 %    (1 )%      43,701         7 %
Total analog products             $ 635,443        91 %     5  %   $ 602,394        91 %
Digital signal processing            59,093         9 %     4  %      56,856         9 %
Total revenue                     $ 694,536       100 %     5  %   $ 659,250       100 %

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


                                                        Six Months Ended
                                             May 3, 2014                    May 4, 2013
                                                   % of                                % of
                                    Revenue      Revenue*     Y/Y%      Revenue      Revenue*
Converters                        $   608,466        46 %      6  %   $   573,399        45 %
Amplifiers / Radio frequency          351,001        27 %      7  %       328,771        26 %
Other analog                          167,522        13 %    (11 )%       187,599        15 %
Subtotal analog signal processing   1,126,989        85 %      3  %     1,089,769        85 %
Power management & reference           81,848         6 %     (1 )%        83,083         6 %
Total analog products             $ 1,208,837        91 %      3  %   $ 1,172,852        92 %
Digital signal processing             113,937         9 %      5  %       108,532         8 %
Total revenue                     $ 1,322,774       100 %      3  %   $ 1,281,384       100 %

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

The increase in total revenue in both the three- and six-month periods ended May 3, 2014 as compared to the same period of the prior fiscal year was the result of improving demand across most product type categories, which was partially 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- and six-month periods ended
May 3, 2014 and May 4, 2013 were as follows:

                                                    Three Months Ended
            Region               May 3, 2014      May 4, 2013      $ Change      % Change
United States                   $     193,608    $     206,181    $ (12,573 )      (6 )%
Rest of North and South America        25,431           28,194       (2,763 )     (10 )%
Europe                                232,299          216,071       16,228         8  %
Japan                                  74,591           71,874        2,717         4  %
China                                 109,583           83,970       25,613        31  %
Rest of Asia                           59,024           52,960        6,064        11  %
Total revenue                   $     694,536    $     659,250    $  35,286         5  %



                                                    Six Months Ended
            Region               May 3, 2014     May 4, 2013     $ Change      % Change
United States                   $    375,906    $    410,452    $ (34,546 )      (8 )%
Rest of North and South America       44,867          51,706       (6,839 )     (13 )%
Europe                               432,986         405,369       27,617         7  %
Japan                                145,682         136,562        9,120         7  %
China                                210,067         168,739       41,328        24  %
Rest of Asia                         113,266         108,556        4,710         4  %
Total revenue                   $  1,322,774    $  1,281,384    $  41,390         3  %

In the three- and six-month periods ended May 3, 2014 and May 4, 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 South Korea and Taiwan.
On a regional basis, the sales decline in the three- and six-month periods ended May 3, 2014 as compared to the same period of the prior fiscal year in the Americas was primarily the result of the sale of our microphone product line in the fourth quarter of fiscal 2013. The sales increases in the three- and six-month periods ended May 3, 2014 as compared to the same period of the prior fiscal year in all other regions were the result of an increase in demand in the automotive, communications, and industrial end markets, partially offset by a lower demand for products used in consumer applications.


Gross Margin
                                    Three Months Ended                                              Six Months Ended
                May 3, 2014      May 4, 2013      $ Change       % Change      May 3, 2014      May 4, 2013      $ Change       % Change
Gross margin   $    458,743     $    422,195     $  36,548           9 %      $    867,861     $    812,479     $  55,382           7 %
Gross margin %         66.1 %           64.0 %                                        65.6 %           63.4 %

Gross margin percentage increased by 210 and 220 basis points in the three and six months ended May 3, 2014, respectively, as compared to the three and six months ended May 4, 2013, respectively, primarily as a result of improved utilization levels in our manufacturing facilities. Research and Development (R&D)
Three Months Ended Six Months Ended May 3, 2014 May 4, 2013 $ Change % Change May 3, 2014 May 4, 2013 $ Change % Change R&D

expenses   $    136,258     $    128,110     $    8,148           6 %      $    264,904     $    253,274     $  11,630           5 %
R&D
expenses
as a % of
revenue            19.6 %           19.4 %                                         20.0 %           19.8 %

R&D expenses increased in the three and six months ended May 3, 2014, as compared to the same periods of fiscal 2013, primarily as a result of increases in variable compensation expense linked to our overall profitability and revenue growth, increases in operational spending for engineering supplies and wafers and, to a lesser extent, the annual merit increases for R&D employees and related benefit expenses.
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 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 3, 2014 May 4, 2013 $ Change % Change May 3, 2014 May 4, 2013 $ Change % Change

SMG&A
expenses   $    102,085     $    102,703     $    (618 )        (1 )%     $    200,263     $    200,263     $         -           - %
SMG&A
expenses
as a % of
revenue            14.7 %           15.6 %                                        15.1 %           15.6 %

SMG&A expenses remained flat in the three and six months ended May 3, 2014, as compared to the same periods of fiscal 2013. Decreases in SMG&A salary and benefit expenses were attributable to a reduction of stock-based compensation expense, as the same periods of fiscal 2013 included $6.3 million related to the accelerated vesting of restricted stock units following the death of the Company's then CEO in the second quarter of fiscal 2013, and were offset by increases in operational spending 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 May 3, 2014, we employed 19 of the 235 employees included in these cost reduction actions. 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. We expect that these annual cost savings 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 May 3, 2014, we employed 4 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                                             Six Months Ended
            May 3, 2014      May 4, 2013      $ Change      % Change      May 3, 2014      May 4, 2013      $ Change      % Change
Operating
income     $    220,400     $    191,382     $  29,018          15 %     $    400,009     $    344,871     $  55,138          16 %
Operating
income as
a % of
revenue            31.7 %           29.0 %                                       30.2 %           26.9 %

The year-over-year increase in operating income in the three months ended May 3, 2014 was primarily the result of an increase in revenue of $35.3 million and a 210 basis point increase in gross margin percentage partially offset by a $8.1 million increase in R&D expenses as more fully described above under the heading Research and Development (R&D).
The year-over-year increase in operating income in the six months ended May 3, 2014 was primarily the result of an increase in revenue of $41.4 million and a 220 basis point increase in gross margin percentage.

Provision for Income Taxes
                                         Three Months Ended                                Six Months Ended
                            May 3, 2014      May 4, 2013       $ Change      May 3, 2014      May 4, 2013       $ Change
Provision for income taxes $     29,935     $     23,189     $    6,746     $     53,240     $     42,076     $   11,164
Effective income tax rate          13.8 %           12.4 %                          13.5 %           12.5 %

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 tax rate for all periods presented was below the U.S. federal statutory tax rate of 35%, primarily due to lower statutory tax rates applicable to our operations in the foreign jurisdictions in which we earn income. Income from non-US jurisdictions accounted for approximately 77% of our total revenues for the six months ended May 3, 2014, resulting in a material portion of our pretax income being earned and taxed outside the U.S., primarily in Bermuda and Ireland, at rates ranging from 0% to 35%. The impact on our provision for income taxes of income earned in foreign jurisdictions being taxed at rates different than the U.S. statutory rate was a benefit of approximately $42.8 million and a foreign effective tax rate of approximately 3.3% in our second quarter of fiscal 2014, compared to $37.9 million and a foreign effective tax rate of approximately 4.1% in our second quarter of fiscal 2013. The impact on our provision for income taxes of income earned in foreign jurisdictions being taxed at rates different than the U.S. statutory rate was a benefit of approximately $82.3 million and a foreign effective tax rate of approximately 4.4% in the first six months of fiscal 2014 compared to approximately $69.8 million and a foreign effective tax rate of approximately 7.1% for the first six months of fiscal 2013. A reduction in the ratio of


domestic taxable income to worldwide taxable income effectively lowers the overall tax rate, due to the fact that the tax rates in the majority of foreign jurisdictions where we earn income are significantly lower than the U.S. statutory rate. In addition, our effective income tax rate can be impacted each year by discrete factors or events. Our effective tax rate for the first six months of fiscal 2014 was not significantly impacted by discrete items. Our effective tax rate for the first six months of fiscal 2013 included a tax benefit of $6.6 million recorded as a result of the reversal of certain prior period tax liabilities and 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.
We expect our effective tax rate to be approximately 13.5% for the remainder of fiscal 2014.

Net Income
                                Three Months Ended                                             Six Months Ended
             May 3, 2014      May 4, 2013      $ Change      % Change      May 3, 2014      May 4, 2013      $ Change      % Change
Net Income  $    187,433     $    164,472     $  22,961          14 %     $    340,019     $    295,694     $  44,325         15 %
Net Income
as a % of
revenue             27.0 %           24.9 %                                       25.7 %           23.1 %
Diluted EPS        $0.59            $0.52                                        $1.07            $0.95

Net income increased 14% in the three months ended May 3, 2014 as compared to the same period of fiscal 2013 as the $29.0 million increase in operating income was partially offset by a higher provision for income taxes in the second quarter of fiscal 2014.
Net income increased 15% in the six months ended May 3, 2014 as compared to the same period of fiscal 2013 as the $55.1 million increase in operating income was partially offset by a higher provision for income taxes in the first six months 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 third quarter of fiscal 2014 to increase approximately 1% to 5% from the second quarter of fiscal 2014. Our plan is for gross margin for the third quarter of fiscal 2014 to increase approximately 50 basis points from the second quarter of fiscal 2014 and for operating expenses to be flat to up 3% from the second quarter of fiscal 2014. We expect our effective tax rate to be approximately 13.5%. As a result, we are planning for diluted earnings per share to be in the range of $0.60 to $0.64 in the third quarter of fiscal 2014.

Liquidity and Capital Resources
At May 3, 2014, our principal source of liquidity was $4,807.2 million of cash and cash equivalents and short-term investments, of which approximately $1,287.2 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.


                                                        Six Months Ended
                                                   May 3, 2014     May 4, 2013
. . .
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