Analog Devices, Inc. — Fiscal 2009 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended August 1, 2009, compared primarily with August 2, 2008. The filing is unaudited. Analog Devices designs, manufactures and markets integrated circuits and reports one operating segment. Results of the Baseband Chipset and CPU voltage regulation/PC thermal monitoring businesses are presented as discontinued operations.
Financial Performance and Position
| Metric | Q3 FY2009 | Q3 FY2008 | 9M FY2009 | 9M FY2008 |
|---|---|---|---|---|
| Revenue | $492.0 million | $659.0 million | $1.443 billion | $1.922 billion |
| Gross margin | $266.2 million; 54.1% | $401.8 million; 61.0% | $796.8 million; 55.2% | $1.174 billion; 61.1% |
| Operating income | $78.9 million; 16.0% of revenue | $161.2 million; 24.5% | $156.4 million; 10.8% | $464.3 million; 24.2% |
| Income from continuing operations | $65.5 million | $129.2 million | $141.8 million | $380.9 million |
| Diluted EPS from continuing operations | $0.22 | $0.44 | $0.49 | $1.28 |
| Net income | $65.5 million | $138.6 million | $142.2 million | $642.4 million |
| Operating cash flow | Not separately reported | Not separately reported | $269.5 million | $527.1 million |
Q3 revenue declined 25% year over year, while nine-month revenue also declined 25%. Gross margin fell 690 basis points in the quarter and 590 basis points for the nine-month period, primarily because of lower demand and underutilized manufacturing capacity. Operating expenses declined, including R&D of $107.6 million in Q3 and selling, marketing, general and administrative expense of $79.7 million.
Q3 income from discontinued operations was zero, compared with $9.4 million in the prior-year quarter. Nine-month discontinued operations contributed only $0.4 million in FY2009 versus $261.5 million in FY2008, which included substantial gains on business sales.
At August 1, 2009, cash and cash equivalents were $632.7 million and short-term investments were $1.092 billion, for total cash and short-term investments of $1.724 billion. Current assets were $2.360 billion versus current liabilities of $353.9 million. Accounts receivable were $244.0 million and inventory was $276.1 million.
Long-term debt was $374.9 million, compared with none at November 1, 2008. The debt consists primarily of $375 million of 5.0% notes due July 1, 2014. Interest-rate swaps convert the fixed rate into three-month LIBOR plus 2.05%, or 2.64% as of August 1, 2009. A $165 million revolving credit facility was undrawn, and the company was in compliance with its covenants.
Operating cash flow was $269.5 million for the first nine months, or 18.7% of revenue, compared with $527.1 million, or 27.4%, in the prior-year period. Capital expenditures were $39.7 million, dividends paid were $174.7 million, and net debt issuance proceeds were $370.4 million. Fiscal 2009 capital expenditures were expected to be approximately $55 million.
Material Changes Versus the Prior Comparable Period
- Revenue decreased 25% in both the quarter and nine-month period, reflecting broad weakness in the global economy and semiconductor demand.
- Industrial revenue declined 29% in Q3, consumer revenue declined 21%, communications revenue declined 15%, and computer revenue declined 52%.
- Analog products represented 92% of Q3 revenue and declined 23%; digital signal processing revenue declined 42%.
- R&D expense decreased 21% in Q3 and 16% for nine months; selling, marketing, general and administrative expense decreased 24% and 19%, respectively.
- Nine-month results included $53.7 million of special charges related primarily to workforce reductions, facility closures and a $12.9 million non-cash impairment charge.
- The company issued $375 million of notes and entered into related interest-rate swaps, increasing leverage but strengthening U.S. liquidity.
- The company’s total cash and short-term investments increased $414.8 million from the end of FY2008, while accounts receivable and inventory declined.
- The company repurchased approximately $3.8 million of common stock during the first nine months and had $91.6 million remaining under its authorization.
Guidance, Outlook, Risks and Unusual Items
Management reported stronger order rates during Q3 and the first two weeks of August, a Q3 book-to-bill ratio above one, and higher fourth-quarter opening backlog. It expected Q4 FY2009 revenue of approximately $510 million to $530 million, gross margin of approximately 55.0%, operating expenses up approximately 1% to 2%, and diluted EPS from continuing operations of approximately $0.24 to $0.26.
Management expected annual savings of approximately $25 million from the Limerick facility consolidation beginning in Q1 FY2010, approximately $36.4 million from operating-cost reductions once fully implemented, and approximately $41 million from the Cambridge facility closure beginning in Q3 FY2010. These estimates depend on successful execution and market conditions.
Key risks include continuing global economic and credit-market weakness, cyclical semiconductor demand, customer order cancellations, excess or obsolete inventory, manufacturing underutilization, competitive pricing, reliance on third-party wafer foundries, foreign-exchange and interest-rate exposure, international operations, distributor credit risk, intellectual-property litigation, environmental compliance, and the ability to service the new debt.
The company disclosed unresolved IRS examination matters involving potential additional tax liabilities of approximately $46 million for fiscal 2004–2005 and $195 million for fiscal 2006–2007. The company believes additional liabilities are not likely, has not accrued them, and is appealing the matters. Tax outcomes could materially affect future tax expense, earnings and operating cash flow.
Approximately $1.298 billion of the company’s cash and short-term investments was held outside the United States and was intended to be reinvested indefinitely, limiting its availability for certain U.S. dividends and share repurchases. Management nevertheless believed available liquidity and expected operating cash flow were sufficient for at least the next twelve months.
On August 17, 2009, the board declared a $0.20 per-share dividend payable September 16, 2009. The company expected quarterly dividends to continue at $0.20 per share, subject to board approval.
Important Facts for Investors to Verify
- Whether the anticipated Q4 revenue recovery and book-to-bill improvement were sustained.
- Actual Q4 gross margin, operating expense growth and diluted EPS compared with guidance.
- Progress, timing and realized savings from the Limerick, operating-cost reduction and Cambridge closure programs.
- Manufacturing utilization, inventory levels, customer demand and potential additional restructuring or impairment charges.
- Interest-rate sensitivity: management estimated that a 100-basis-point change in LIBOR would change annual interest expense by approximately $3.8 million.
- Status and ultimate resolution of the IRS examinations and the disclosed potential tax exposures.
- Availability of U.S.-held cash for dividends, repurchases and other corporate needs, given the concentration of cash overseas.
- Future cash generation, debt-service capacity and compliance with credit-facility and debt covenants.