Analog Devices, Inc. — Fiscal 2014 Second-Quarter Form 10-Q
Reporting period: Three and six months ended May 3, 2014, compared with May 4, 2013. Analog Devices designs, manufactures and markets integrated circuits and reports one aggregated operating segment. The filing is unaudited.
Financial performance and key metrics
| Metric | Three months ended May 3, 2014 | Year-over-year change | Six months ended May 3, 2014 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $694.5 million | Up 5% | $1.323 billion | Up 3% |
| Gross margin | $458.7 million; 66.1% | Up 210 bps | $867.9 million; 65.6% | Up 220 bps |
| Operating income | $220.4 million; 31.7% of revenue | Up 15% | $400.0 million; 30.2% | Up 16% |
| Net income | $187.4 million; 27.0% of revenue | Up 14% | $340.0 million; 25.7% | Up 15% |
| Diluted EPS | $0.59 | Up $0.07 | $1.07 | Up $0.12 |
| Operating cash flow | Not separately provided | Not applicable | $395.9 million | Down from $410.2 million |
Gross-margin expansion was primarily attributed to improved utilization of manufacturing facilities. R&D expense increased 6% in the quarter and 5% year to date, while selling, marketing, general and administrative expense was essentially flat. The effective tax rate was 13.8% in the quarter and 13.5% year to date, compared with 12.4% and 12.5%, respectively, in the comparable periods.
Revenue mix and material changes
- Second-quarter revenue by end market was industrial $326.5 million, automotive $135.5 million, consumer $77.7 million and communications $154.8 million.
- Communications revenue increased 25% year over year, primarily from increased wireless base-station deployment activity in China. Automotive revenue increased 10%, supported by higher electronic content and vehicle demand. Industrial revenue increased 5%.
- Consumer revenue declined 23% because of the sale of the microphone product line in the fourth quarter of fiscal 2013.
- China revenue increased 31% in the quarter and 24% year to date. U.S. revenue declined 6% in the quarter and 8% year to date.
- Analog products represented 91% of second-quarter revenue. Converters increased 8%, amplifiers/radio frequency increased 9%, and digital signal processing increased 4%.
- Special charges were zero in the second quarter and $2.7 million year to date, compared with $14.1 million in the first six months of fiscal 2013. The fiscal 2014 charge relates to workforce reductions.
Cash, liquidity, debt and capital allocation
- Cash and cash equivalents were $402.8 million at May 3, 2014. Short-term investments were $4.404 billion, producing total cash and short-term investments of $4.807 billion.
- Approximately $1.287 billion of cash and short-term investments was held in the United States; the remainder was held by foreign subsidiaries and intended to be reinvested indefinitely.
- Six-month investing cash outflows were $214.3 million, including $92.2 million of capital expenditures. Financing cash outflows were $169.6 million, including $221.8 million of dividends and $111.6 million of share repurchases.
- Long-term debt was $872.5 million, consisting principally of $375 million of 3.0% notes due 2016 and $500 million of 2.875% notes due 2023. The company had not borrowed under its $500 million revolving credit facility and was compliant with applicable covenants.
- Fiscal 2014 capital expenditures were expected to total approximately $180 million, including $124 million of ongoing spending and $56 million for new buildings.
- The board declared a $0.37 per-share dividend payable June 10, 2014. Management expected quarterly dividends to continue at $0.37 per share, subject to board approval.
- Approximately $991.0 million remained available under the share-repurchase authorization at May 3, 2014.
Guidance, outlook and unusual items
Management planned third-quarter fiscal 2014 revenue to increase approximately 1% to 5% from the second quarter. Gross margin was expected to increase approximately 50 basis points, operating expenses were expected to be flat to up 3%, and the effective tax rate was expected to be approximately 13.5%. Planned diluted EPS was $0.60 to $0.64.
Deferred income on shipments to distributors increased to $267.9 million from $247.4 million at fiscal year-end, reflecting higher shipments into the channel to support anticipated demand. Distributor price-adjustment credits and returns could materially affect future revenue and gross margin.
The company recorded a $36.5 million reserve in fiscal 2013 relating to an open U.S. Tax Court matter involving Section 965. The ultimate tax outcome remains uncertain. The filing also identifies risks from semiconductor cyclicality, demand and inventory forecasting, competition and pricing, reliance on third-party manufacturing, international operations and foreign exchange, distributor credit exposure, intellectual property and litigation, information technology disruptions, environmental regulation, pension funding and access to U.S. cash.
Important facts for investors to verify
- Whether the anticipated demand supporting increased distributor shipments and inventory materializes without elevated returns, price credits or inventory write-downs.
- The sustainability of the 66% gross-margin level and the expected third-quarter 50-basis-point improvement.
- The geographic concentration of liquidity, including restrictions on the use of foreign-held cash for U.S. dividends and repurchases.
- The outcome and timing of the $36.5 million Section 965 tax matter and potential changes to the effective tax rate.
- Execution of the $180 million fiscal-year capital-spending plan and continued compliance with debt covenants.
- Exposure to cyclical semiconductor demand, third-party foundry capacity, China communications demand, competitive pricing and distributor credit risk.