Analog Devices, Inc. 10-Q Summary
Business Context and Reporting Period
Analog Devices designs, develops, manufactures and markets integrated circuits and reports as one operating segment. This Form 10-Q covers the three and six months ended May 2, 2015, compared with May 3, 2014. Fiscal 2015 results include the July 2014 acquisition of Hittite Microwave Corporation, which affects year-over-year comparability.
Financial Performance and Position
| Metric | Three Months Ended May 2, 2015 | Year-over-Year Change | Six Months Ended May 2, 2015 | Year-over-Year Change |
|---|---|---|---|---|
| Revenue | $821.0 million | 18% | $1.593 billion | 20% |
| Gross margin | 66.4% | Up 30 basis points | 65.8% | Up 20 basis points |
| Operating income | $249.0 million | 13% | $456.9 million | 14% |
| Operating margin | 30.3% | Down from 31.7% | 28.7% | Down from 30.2% |
| Net income | $205.3 million | 10% | $384.1 million | 13% |
| Diluted EPS | $0.65 | Up from $0.59 | $1.21 | Up from $1.07 |
- End-market revenue for the quarter was industrial $390.7 million, communications $181.6 million, automotive $139.7 million and consumer $109.0 million. Industrial, consumer and communications grew 20%, 40% and 17%, respectively; automotive grew 3%.
- Six-month operating cash flow was $512.7 million, or 32.2% of revenue, compared with $395.9 million, or 29.9%, in the prior-year period.
- Capital expenditures were $73.0 million in the first six months. Investing cash flow was an outflow of $222.3 million, while financing cash flow was an outflow of $220.8 million, including $240.0 million of dividends and $83.9 million of share repurchases.
- Cash and cash equivalents were $636.2 million at May 2, 2015. Cash and short-term investments totaled approximately $3.1 billion, including approximately $764.0 million held in the United States.
- Debt carrying value was $873.1 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 $375.0 million 2016 notes were classified as current.
- The company had not borrowed under its $500.0 million revolving credit facility and was compliant with applicable debt covenants.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by the Hittite acquisition and increased demand across most end markets and regions.
- Gross margin improved modestly from product mix, including higher-margin Hittite products, partially offset by acquisition-related purchased inventory and intangible amortization.
- Operating income and net income increased, but operating and net margins declined because of acquisition-related amortization and higher research and development and selling, marketing, general and administrative expenses.
- Amortization of acquired intangibles was $24.2 million in the quarter and $48.0 million in the first six months, compared with negligible expense in the prior-year periods.
- Accounts receivable increased 3% from November 1, 2014, while inventory increased 7%; days of inventory increased from 109 to 126.
- Current liabilities increased to $1.068 billion from $709.1 million, primarily because the 2016 notes were reclassified as current.
Guidance, Outlook, Commentary and Risks
- Management expected fiscal 2015 capital expenditures of approximately $160 million to $165 million, including approximately $15 million for new and upgraded facilities.
- Management expected quarterly dividends to continue at $0.40 per share, subject to board approval. A $0.40 dividend was declared on May 18, 2015, payable June 9, 2015.
- Management stated that existing liquidity, operating cash generation and available financing should fund operations, capital expenditures, research and development, dividends and potential repurchases for at least the next twelve months.
- Foreign cash is intended to be reinvested indefinitely and may not be readily available for U.S. dividends, repurchases, acquisitions or other needs without potential additional tax consequences.
- The Hittite purchase-price accounting remained incomplete at the filing date, including valuation of acquired inventory and deferred taxes. The company also was transitioning Hittite away from a principal GaAs foundry, creating supply and execution risk.
- Revenue recognition for distributor shipments is deferred until resale. Price-adjustment credits and product returns could materially affect future revenue and gross margin.
- Key disclosed risks include semiconductor cyclicality, demand and forecast volatility, inventory obsolescence, pricing pressure, reliance on third-party foundries and suppliers, international operations and currency exposure, tax disputes, litigation and intellectual property claims, cybersecurity, natural disasters, and acquisition integration.
- The company had a $36.5 million reserve related to an open U.S. tax matter for fiscal years 2006 and 2007. The filing also disclosed $67.8 million of unrealized tax benefits at May 2, 2015.
Investor Verification Points
- Verify the extent to which reported growth and margin performance remain attributable to Hittite acquisition effects versus organic demand.
- Monitor the amortization schedule and remaining purchase-accounting adjustments for Hittite.
- Assess inventory growth, 126 days of inventory and distributor deferred revenue and credit exposure.
- Confirm the company’s ability to fund the $375.0 million 2016 debt maturity while maintaining dividends, repurchases and planned capital spending.
- Review the geographic location and repatriation constraints of the $3.1 billion liquidity balance.
- Track Hittite’s foundry transition and the $10.0 million increase in non-cancelable raw-material purchase obligations.
- Evaluate the open tax matter, changes in the effective tax rate and the potential impact of future tax-law or audit developments.