Analog Devices, Inc. — Fiscal 2015 First-Quarter Form 10-Q
Business context and reporting period
Analog Devices designs, develops, manufactures and markets integrated circuits and operates as one reportable segment. The filing covers the three months ended January 31, 2015, compared with the three months ended February 1, 2014. Results include the Hittite Microwave Corporation acquisition completed on July 22, 2014 for approximately $2.4 billion.
Key financial metrics
| Metric | Q1 FY2015 | Prior comparable period | Change |
|---|---|---|---|
| Revenue | $772.0 million | $628.2 million | Up 23% |
| Gross margin | $503.6 million; 65.2% | $409.1 million; 65.1% | Up 10 bps |
| Operating income | $207.9 million; 26.9% of revenue | $179.6 million; 28.6% | Up 16%; margin down 170 bps |
| Net income | $178.8 million; 23.2% of revenue | $152.6 million; 24.3% | Up 17%; margin down 110 bps |
| Diluted EPS | $0.57 | $0.48 | Up $0.09 |
| Operating cash flow | $168.7 million | $157.5 million | Up $11.2 million |
| Capital expenditures | $23.8 million | $48.1 million | Down $24.4 million |
Revenue by end market was $349.8 million from industrial, $203.7 million from communications, $123.7 million from automotive and $94.8 million from consumer. Year over year, industrial revenue increased 21%, communications 45%, consumer 27%, while automotive declined 1%.
At January 31, 2015, cash and cash equivalents were $650.2 million and short-term investments were $2.223 billion. Total debt carrying value was $872.9 million, consisting principally of $375.0 million of 3.0% notes due in 2016 and $500.0 million of 2.875% notes due in 2023. The company had not borrowed under its $500.0 million revolving credit facility and was compliant with its debt covenants.
Net cash increased $81.0 million during the quarter to $650.2 million. Financing uses included $115.1 million of dividends and $59.6 million of share repurchases, partially offset by $42.8 million of employee stock-plan proceeds. Inventory was $367.2 million, with days of inventory increasing to 125 from 109 at the prior fiscal year-end.
Material changes versus the prior comparable period
- Revenue growth was primarily driven by the Hittite acquisition and increased demand across most end markets and regions.
- Gross margin percentage improved modestly despite acquisition-related amortization of purchased inventory and intangible assets.
- Operating expenses increased substantially: research and development rose 18% to $151.7 million, selling, marketing, general and administrative expenses rose 22% to $120.2 million, and intangible amortization increased to $23.8 million from $0.1 million.
- Operating and net income increased, but operating and net margins declined because expense growth, particularly acquisition-related amortization and operating costs, exceeded the gross-margin improvement.
- The effective tax rate decreased to 11.0% from 13.2%, benefiting from the reinstated U.S. research and development tax credit and an acquisition accounting adjustment.
- Other comprehensive loss increased to $23.9 million, mainly due to foreign currency translation and losses on derivative instruments.
- The company implemented organizational changes combining market and technology teams and continued to assess the Hittite acquisition accounting. A $3.8 million acquisition accounting adjustment was recorded in the quarter, and the purchase accounting remained incomplete at the filing date.
Guidance, outlook, commentary and risks
- Management expected fiscal 2015 capital expenditures of $150 million to $165 million, including approximately $20 million for new facilities and upgrades.
- Management expected quarterly dividends to continue at $0.40 per share, subject to board approval. A $0.40 dividend was declared on February 16, 2015, payable March 10, 2015.
- Management stated that available liquidity, expected operating cash flow and financing sources should fund operations, capital expenditures, research and development, dividends and potential repurchases for at least the next twelve months.
- Approximately $2.9 billion of cash and short-term investments was held at quarter-end, but only approximately $741.0 million was held in the United States; foreign-held cash was intended to remain permanently reinvested and was not readily available for U.S. dividends, repurchases or other requirements.
- Distributor revenue is deferred until resale to end customers. Price-adjustment credits and product returns could materially affect future revenue and gross margin. Gross deferred revenue was $348.2 million at January 31, 2015.
- Key risks include semiconductor cyclicality, demand volatility, inventory obsolescence, competitive pricing, reliance on third-party wafer foundries and suppliers, limited GaAs foundry capacity affecting Hittite, foreign exchange exposure, international operations, tax-rate changes, intellectual-property litigation, product defects, cybersecurity, natural disasters and acquisition-integration risk.
- Approximately 50% of annual wafer requirements were sourced from third-party foundries. The company also identified potential tax exposure of $36.5 million related to an open U.S. Tax Court matter concerning Section 965.
- The company reported no material changes to internal control over financial reporting, and management concluded disclosure controls were effective as of January 31, 2015.
Important facts for investors to verify
- Whether revenue growth and margin performance remain durable after separating Hittite acquisition contributions from organic demand.
- The pace and duration of Hittite integration, final purchase accounting adjustments and the level of ongoing amortization expense.
- Inventory growth relative to demand, particularly the increase to 125 days of cost of sales in inventory.
- Availability of U.S.-based cash to fund dividends, repurchases and acquisitions, given the concentration of liquidity outside the United States.
- Repayment or refinancing plans for the $375.0 million of notes due in fiscal 2016.
- Potential changes in distributor price-protection credits, returns and deferred revenue.
- Exposure to the $36.5 million tax matter, unrecognized tax benefits and future effective tax-rate changes.
- Supply-chain continuity, including third-party foundries and Hittite’s transition away from a principal GaAs foundry.