Business Context and Reporting Period
Analog Devices, Inc. designs, manufactures and markets high-performance analog, mixed-signal, MEMS, radio-frequency, power-management and digital signal-processing integrated circuits. Its principal end markets are industrial, automotive, consumer and communications. The company operates as one reportable segment and serves more than 60,000 customers globally.
This Form 10-K covers the 53-week fiscal year ended November 3, 2012; fiscal 2011 was a 52-week year. The additional week was included in the first quarter. The filing also reports fourth-quarter fiscal 2012 results ended November 3, 2012.
Financial Performance and Position
| Metric | Fiscal 2012 | Fiscal 2011 | Change |
|---|---|---|---|
| Revenue | $2,701.1 million | $2,993.3 million | Down 10% |
| Gross margin | 64.5% | 66.4% | Down 190 basis points |
| Operating income | $824.0 million | $1,072.0 million | Down 23% |
| Operating margin | 30.5% | 35.8% | Down 530 basis points |
| Net income from continuing operations | $651.2 million | $860.9 million | Down 24% |
| Diluted EPS from continuing operations | $2.13 | $2.79 | Down 24% |
| Operating cash flow | $814.5 million | $900.5 million | Down 10% |
| Operating cash flow margin | 30.2% | 30.1% | Up slightly |
Fiscal 2012 revenue was $2.7 billion, with 91% from analog products and 9% from DSP products. End-market revenue consisted of industrial 46%, communications 20%, automotive 17% and consumer 17%. International customers represented approximately 70% of revenue.
At year-end, cash and cash equivalents were $528.8 million and short-term investments were $3.37 billion, for total cash and short-term investments of $3.90 billion. Approximately $1.11 billion was held in the United States, with the remainder held by foreign subsidiaries and intended to be reinvested indefinitely. Total debt was $821.6 million, including $14.5 million classified as current. The company also had an undrawn $165 million revolving credit facility expiring in May 2013.
Fiscal 2012 cash uses included $344.7 million of dividends, $160.5 million of share repurchases, $132.2 million of capital expenditures, $56.5 million of term-loan principal repayments and $24.2 million for the Multigig acquisition. Inventory increased 6% to $313.7 million, while backlog declined to approximately $357 million from $379 million. Backlog is cancellable or deferrable in many cases and is not considered a reliable indicator of future revenue.
Fourth-Quarter Fiscal 2012
| Metric | Q4 FY2012 | Q4 FY2011 |
|---|---|---|
| Revenue | $695.0 million | $716.1 million |
| Gross margin | 63.8% | 64.3% |
| Operating income | $215.3 million | $235.3 million |
| Net income | $179.2 million | $183.5 million |
| Diluted EPS | $0.58 | $0.60 |
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because of continued global macroeconomic weakness and customer inventory reductions. Industrial, consumer and communications revenue declined 12%, 16% and 12%, respectively; automotive revenue increased 11%.
- Gross margin contracted because of lower manufacturing utilization and an unfavorable mix shift away from higher-margin industrial automation, instrumentation and wireless-base-station products.
- R&D expense increased 1% to $512.0 million, or 19.0% of revenue, reflecting continued investment despite lower sales. Selling, marketing, general and administrative expense decreased 3% to $396.5 million.
- Special charges increased to $8.4 million from $2.2 million, primarily for severance and related cost-reduction actions involving 95 employees. The company estimated approximately $12 million of annual savings once fully implemented.
- Cash from operations decreased $86.0 million, while cash and cash equivalents declined $876.3 million because of substantial purchases of short-term investments, dividends, repurchases, capital spending, debt repayments and the Multigig acquisition.
- The company acquired Multigig for total estimated consideration of $26.8 million, including $24.2 million of initial cash payments. The acquisition was not material to consolidated results.
- Fiscal 2012 dividends increased to $1.15 per share from $0.94 per share. The company repurchased approximately 4.2 million shares for $160.5 million and had $561 million remaining under its repurchase authorization.
Guidance, Outlook, Risks and Unusual Items
Management expected first-quarter fiscal 2013 revenue to decline approximately 6% to 12% from fourth-quarter fiscal 2012. Planned first-quarter gross margin was approximately 62.0%, operating expenses approximately $223 million, and the tax rate approximately 18%. Planned diluted EPS was approximately $0.40 to $0.48. Management also expected fiscal 2013 capital expenditures of approximately $90 million to $120 million and quarterly dividends of $0.30 per share, subject to board approval.
Key risks include semiconductor cyclicality, weakening global demand, customer order cancellations and inventory reductions, pricing pressure, manufacturing underutilization, inventory obsolescence, reliance on third-party foundries and suppliers such as TSMC, distributor concentration, international operations and foreign exchange exposure, intellectual-property litigation, product defects and warranty claims, environmental regulation, pension funding requirements, tax uncertainties and the availability of U.S. cash for dividends and repurchases.
Debt consisted principally of $375 million of 5.0% senior notes due July 2014, $375 million of 3.0% senior notes due April 2016 and a term loan scheduled to mature in December 2013. The company was compliant with applicable debt covenants at year-end. It terminated the interest-rate swap associated with the 5.0% notes and received $19.8 million in proceeds, including accrued interest.
The company reported $12.2 million of remaining contingent consideration related to the Lyric acquisition, $10.1 million of liabilities for uncertain tax positions and a potential $36.5 million tax liability related to an open Section 965 matter, for which management concluded no additional liability was likely and recorded no provision. The company stated that current litigation was not expected to have a material adverse effect. Independent auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
Most Important Facts for Investors to Verify
- Whether the projected fiscal 2013 revenue decline and diluted EPS range were achieved and how quickly demand recovered across industrial, communications and consumer markets.
- Whether gross margin stabilized near or above the planned 62.0% level and whether manufacturing utilization and product mix improved.
- The conversion of the $3.90 billion liquidity balance into usable U.S. cash, given the $1.11 billion held domestically and the indefinite reinvestment of certain foreign earnings.
- The company’s ability to refinance or repay the $420.6 million of scheduled debt obligations due primarily in fiscal 2014, while maintaining dividends, repurchases, R&D and capital expenditures.
- Inventory levels, distributor deferred revenue, price-adjustment credits and backlog quality, because distributor orders may be cancellable and revenue is recognized upon resale.
- Exposure to TSMC and other concentrated suppliers, as well as potential capacity, quality or geopolitical disruptions.
- Progress and cash requirements associated with Multigig, Lyric contingent consideration and other acquisition-related obligations.
- Changes in pension underfunding, tax contingencies, environmental requirements and intellectual-property or product-liability matters.