Analog Devices, Inc. — Fiscal 2010 First-Quarter Form 10-Q
Reporting period: Three months ended January 30, 2010, compared with the three months ended January 31, 2009. Results are unaudited. Analog Devices designs, manufactures and markets integrated circuits and reports one operating segment. Previously sold baseband chipset and CPU voltage regulation businesses are presented as discontinued operations.
Financial Performance and Position
| Metric | Q1 FY2010 | Q1 FY2009 | Change |
|---|---|---|---|
| Revenue | $603.0 million | $476.6 million | +26.5% |
| Gross margin | $368.5 million; 61.1% | $269.0 million; 56.4% | +470 bps |
| Operating income | $149.1 million; 24.7% of revenue | $19.6 million; 4.1% | + $129.5 million |
| Income from continuing operations | $119.6 million; 19.8% of revenue | $24.6 million; 5.2% | + $95.0 million |
| Net income | $120.5 million | $24.9 million | + $95.5 million |
| Diluted EPS from continuing operations | $0.39 | $0.08 | +388% |
| Diluted EPS | $0.40 | $0.09 | +344% |
| Operating cash flow | $213.8 million; 35.5% of revenue | $59.9 million; 12.6% | + $153.9 million |
- Revenue growth was broad-based. Industrial revenue was $260.0 million, automotive $74.6 million, consumer $117.7 million, communications $135.5 million and computer $15.2 million.
- Analog products represented 91% of revenue, including $511.7 million of analog signal processing and $38.7 million of power management and reference products. Digital signal processing revenue was $52.5 million.
- R&D expense declined 4.5% to $114.4 million, or 19.0% of revenue. Selling, marketing, general and administrative expense was $88.5 million, or 14.7% of revenue.
- Cash, cash equivalents and short-term investments totaled approximately $2.179 billion at January 30, 2010, including $914.3 million of cash and cash equivalents and $1.265 billion of short-term investments. Approximately $627.7 million was held in the United States; the remainder was held by foreign subsidiaries and may not be available for certain U.S. uses.
- Long-term debt was $381.4 million, primarily representing $375 million of 5% senior unsecured notes due July 2014. The notes were swapped to a floating rate of three-month LIBOR plus 2.05%, or 2.30% at January 30, 2010.
- The company had an undrawn $165 million revolving credit facility and was compliant with its financial covenants.
- Capital expenditures were $17.2 million. Fiscal 2010 capital expenditures were expected to be approximately $75 million to $85 million.
- Dividends paid were $58.9 million, or $0.20 per share. The board subsequently declared another $0.20 per-share dividend, payable March 24, 2010.
Material Changes Versus the Prior Comparable Period
- Revenue increased $126.4 million, driven by higher demand across all product categories and regions. Management cited stronger industrial demand, automotive inventory replenishment and government incentives, consumer demand, and improved communications sales.
- Gross margin expanded primarily because of higher sales and increased manufacturing utilization.
- Operating income benefited from revenue growth, margin expansion and lower special charges. Special charges declined to $16.5 million from $41.7 million.
- Interest income fell to $2.2 million from $7.8 million because of lower investment rates, while interest expense increased to $2.5 million following the 2009 debt issuance.
- Operating cash flow increased substantially. Net cash from financing was $104.7 million, primarily because of $163.5 million of net proceeds from employee stock-plan exercises, partially offset by dividends.
- Cash and cash equivalents increased by $274.5 million; cash, cash equivalents and short-term investments increased by approximately $363 million during the quarter.
- Discontinued operations contributed $0.9 million, including a $0.6 million net-of-tax gain from additional proceeds related to prior business sales, compared with $0.4 million in the prior-year quarter.
Guidance, Outlook, Risks and Unusual Items
- For the second quarter of fiscal 2010, management planned revenue of approximately $635 million to $650 million, gross margin of approximately 62% to 63%, operating margin of approximately 29% to 31%, and diluted EPS from continuing operations of $0.48 to $0.51.
- Restructuring and facility actions generated expected annual savings of approximately $25 million from the Limerick consolidation and approximately $41 million from the Cambridge facility closure. Additional operating-cost actions were expected to produce quarterly savings of approximately $4 million beginning in fiscal 2011.
- First-quarter special charges included workforce reductions, facility closure and cleanup costs, and a $0.5 million impairment of intellectual property related to abandoned power-management development efforts.
- Tax contingencies remain significant. The company disclosed potential additional liabilities of approximately $46 million related to fiscal 2004–2005 IRS examinations and $195 million related to fiscal 2006–2007 examinations; no additional liabilities were recorded for the disputed matters.
- Key risks include semiconductor cyclicality, uncertain global economic recovery, customer order cancellations, inventory obsolescence, competitive pricing, reliance on third-party wafer manufacturers, manufacturing capacity and yield issues, foreign currency and international operating risks, intellectual-property litigation, tax-rate changes and access to U.S. cash.
- A 100-basis-point change in LIBOR would change annual interest expense by approximately $3.8 million. Approximately 52% of first-quarter revenue came from products fabricated at third-party wafer facilities.
- The company had approximately $136 million of unrecognized stock-based compensation cost expected to be recognized over a weighted-average period of 1.7 years.
Important Facts for Investors to Verify
- Whether the forecast second-quarter revenue, margin and EPS ranges were achieved and whether the projected restructuring savings materialized.
- The sustainability of the 61.1% gross margin and the extent to which utilization, product mix and restructuring benefits drove the improvement.
- The availability and repatriation constraints on foreign-held cash relative to U.S. dividend, repurchase and operating needs.
- The resolution and potential cash impact of the IRS examinations and other tax contingencies.
- Exposure to third-party foundries, distributor inventory and deferred revenue; gross deferred revenue from distributor shipments was $253.3 million at January 30, 2010.
- The effect of the floating-rate debt swap as LIBOR changes and the company’s compliance with debt and revolving-credit covenants.
- Demand trends across industrial, automotive, consumer and communications markets, particularly given the semiconductor industry’s cyclical risks.