Analog Devices, Inc. — Fiscal 2009 Form 10-K Summary
Business context and reporting period
Analog Devices designs, manufactures and markets high-performance analog, mixed-signal and digital signal-processing integrated circuits. Its products serve industrial, communications, consumer and computer applications. The filing covers the 52-week fiscal year ended October 31, 2009; the requested “2009 Q4” corresponds to the fourth quarter within this annual filing.
- Fiscal 2009 revenue mix by end market: industrial 52%, communications 25%, consumer 20% and computer 3%.
- Analog products represented 91% of revenue, including converters at 48% and amplifiers at 25%; DSP products represented 9%.
- Approximately 80% of revenue came from international customers and 54% of product revenue was sold through distributors.
Financial performance and key metrics
| Metric | Fiscal 2009 | Fiscal 2008 | Change |
|---|---|---|---|
| Revenue | $2,014.9 million | $2,582.9 million | Down 22% |
| Gross margin | $1,118.6 million | $1,577.3 million | Down 29% |
| Gross margin percentage | 55.5% | 61.1% | Down 560 basis points |
| Operating income from continuing operations | $284.8 million | $625.0 million | Down 54% |
| Operating margin | 14.1% | 24.2% | Down 1,010 basis points |
| Net income from continuing operations | $247.4 million | $525.2 million | Down 53% |
| Diluted EPS from continuing operations | $0.85 | $1.77 | Down 52% |
| Net income | $247.8 million | $786.3 million | Down 68% |
| Cash flow from operations | $432.1 million | $669.4 million | Down 35% |
Fourth-quarter fiscal 2009 revenue was $571.6 million, with gross margin of 56.3%, operating income from continuing operations of $128.4 million and diluted EPS from continuing operations of $0.36.
- R&D expense was $447.0 million, or 22.2% of revenue, compared with $533.5 million in fiscal 2008.
- Selling, marketing, general and administrative expense was $333.2 million, or 16.5% of revenue, compared with $415.7 million in fiscal 2008.
- The effective tax rate was 16.8%, compared with 21.2% in fiscal 2008.
- Fiscal 2009 included $53.7 million of special charges, primarily related to workforce reductions and wafer-fabrication facility closures.
- Backlog increased to approximately $411 million from $333 million, although most customer orders may be cancelled or delayed without significant penalty.
Cash flow, liquidity and capital structure
- Cash, cash equivalents and short-term investments totaled $1.816 billion at October 31, 2009, including $639.7 million of cash and cash equivalents and $1.176 billion of short-term investments.
- Approximately $412.7 million of these funds was held in the United States; the remainder was held by foreign subsidiaries and certain foreign earnings were intended to be reinvested indefinitely.
- Fiscal 2009 operating cash flow was $432.1 million, capital expenditures were $56.1 million and dividend payments were $233.0 million.
- The company issued $375 million of 5.0% senior unsecured notes due July 1, 2014, receiving net proceeds of $370.4 million. Interest-rate swaps converted the fixed rate to three-month LIBOR plus 2.05%; the rate was 2.34% at year-end.
- Long-term debt was $379.6 million at year-end. The company also had an undrawn $165 million revolving credit facility expiring in May 2013.
- Current liabilities declined to $386.6 million from $569.1 million, while inventory declined 20% to $253.2 million.
- The company stated that available liquidity and expected operating cash flow should fund operations, capital expenditures, research and development, dividends and potential share repurchases for at least the next twelve months.
Material changes versus the prior comparable period
- Revenue declined across every end market: industrial down 24%, communications down 13%, consumer down 22% and computer down 44%.
- All product categories declined: converters down 19%, amplifiers down 25%, other analog down 18%, power management and reference down 18%, and DSP products down 34%.
- Lower demand and reduced manufacturing utilization compressed gross margin by 560 basis points.
- Management reduced R&D and selling, marketing, general and administrative spending to offset lower revenue, but the reductions were insufficient to prevent a substantial decline in operating income.
- The Cambridge, Massachusetts wafer-fabrication facility ceased production in the fourth quarter. The company expects approximately $41 million of annual savings once the closure is fully implemented, but expects additional first-quarter fiscal 2010 lease, cleanup and closure expenses.
- The company completed an employee stock-option exchange involving approximately 33.6 million surrendered options and 15.2 million replacement options; incremental expense was immaterial.
- Fiscal 2008 net income benefited from a $261.1 million after-tax gain and operating income from discontinued operations. Fiscal 2009 discontinued operations contributed only $0.4 million, making year-over-year net income comparisons unusually unfavorable.
Guidance, outlook, risks and unusual items
Management planned for first-quarter fiscal 2010 revenue to be approximately flat with fourth-quarter fiscal 2009 revenue. It expected gross margin of approximately 58.0% to 58.5%, operating expenses excluding Cambridge-related restructuring items to remain approximately flat sequentially, and diluted EPS from continuing operations of approximately $0.36 to $0.37 excluding those restructuring items.
- Key risks include continued global economic weakness, semiconductor cyclicality, volatile customer demand, pricing pressure, inventory obsolescence and order cancellations.
- Approximately 49% of fiscal 2009 revenue came from products fabricated at third-party wafer facilities, primarily TSMC, creating supplier concentration and capacity risk.
- Distributor arrangements include price-adjustment credits and product-return rights; deferred revenue on distributor shipments was $230.8 million at year-end.
- The company faces foreign-exchange, international operating, environmental, intellectual-property, product-liability and litigation risks.
- Uncertain tax positions totaled $26.2 million. The company was appealing proposed IRS adjustments with potential additional tax liabilities of approximately $46 million for fiscal 2004–2005 and $195 million for fiscal 2006–2007; no additional liability was recorded for these matters.
- Contractual obligations totaled approximately $630.0 million, including $375.0 million of principal debt, $93.8 million of debt interest, $42.4 million under interest-rate swaps, $80.8 million of operating leases and estimated fiscal 2010 pension funding of $30.1 million.
- The company reported no off-balance-sheet financing arrangements and received unqualified audit opinions on its financial statements and internal control over financial reporting.
Investor verification checklist
- Verify the annual-versus-quarterly period: the filing is a fiscal-year 2009 Form 10-K, with fourth-quarter data presented separately in unaudited supplementary information.
- Reconcile continuing-operations results with total net income, particularly the large fiscal 2008 discontinued-operations gain.
- Assess whether the planned fiscal 2010 gross-margin improvement and cost savings from facility closures were achieved.
- Review liquidity available in the United States versus cash held overseas and the implications for dividends, repurchases and debt service.
- Monitor TSMC and other third-party manufacturing dependence, distributor inventories, backlog quality and cancellation risk.
- Follow the IRS examinations, uncertain tax positions and any additional Cambridge closure costs.