Analog Devices, Inc. — Fiscal 2011 First-Quarter 10-Q
Business context and reporting period
Analog Devices designs, develops, manufactures, and markets integrated circuits, operating as one reportable segment. The filing covers the three months ended January 29, 2011, compared with the three months ended January 30, 2010. Previously sold baseband chipset, CPU voltage regulation, and PC thermal monitoring businesses are reported as discontinued operations.
Financial performance and liquidity
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Revenue | $728.5 million | $603.0 million | +21% |
| Gross margin | 66.2% | 61.1% | +510 bps |
| Operating income from continuing operations | $259.4 million | $149.1 million | +74% |
| Operating margin | 35.6% | 24.7% | +1,090 bps |
| Income from continuing operations | $215.6 million | $119.6 million | +80% |
| Net income | $222.1 million | $120.5 million | +84% |
| Diluted EPS from continuing operations | $0.70 | $0.39 | +$0.31 |
| Diluted EPS | $0.72 | $0.40 | +$0.32 |
| Cash flow from operations | $216.8 million | $213.8 million | +1% |
Gross margin benefited from higher sales, increased manufacturing utilization, manufacturing-cost reductions, and wafer-fabrication consolidation. R&D expense increased 7% to $122.7 million, while selling, marketing, general and administrative expense increased 13% to $100.0 million; both declined as a percentage of revenue.
Cash, cash equivalents, and short-term investments totaled $2.961 billion at January 29, 2011, including $1.570 billion of cash and cash equivalents and $1.391 billion of short-term investments. Approximately $922.4 million of the combined balance was held in the United States; certain foreign-held cash is intended to remain reinvested abroad and may not be available for U.S. dividends or repurchases.
Total debt was approximately $537.5 million, consisting primarily of $375 million of senior unsecured notes and a $145 million term loan. The term loan generated $14.5 million classified as current debt and bears interest at LIBOR plus 1.25%. The company remained in compliance with applicable debt covenants and had not borrowed under its $165 million revolving credit facility.
Investing activities provided $208.1 million, primarily reflecting short-term investment sales and maturities. Financing activities provided $75.7 million, including $145.0 million of term-loan proceeds and $102.0 million of employee stock-plan proceeds, offset by $113.6 million of share repurchases and $65.8 million of dividends. Capital expenditures were $25.5 million; fiscal 2011 capital expenditures were expected to total $115 million to $135 million.
Revenue mix and material changes
- Industrial revenue was $336.8 million, or 46% of total revenue, up 28% year over year.
- Automotive revenue was $94.7 million, or 13%, up 30%.
- Communications revenue was $163.5 million, or 22%, up 22%.
- Consumer revenue was $120.9 million, or 17%, down 1%; computer revenue was $12.6 million, or 2%, up 2%.
- Analog products represented 92% of revenue and increased 22%; digital signal processing revenue increased 7%.
- Revenue increased in all geographic regions except Japan, with the largest increases in Europe and China. Approximately 82% of revenue came from international markets.
Management attributed the improvement to recovering global economic activity, stronger industrial, communications, automotive, and healthcare demand, improved manufacturing utilization, and prior cost-structure initiatives. No special charge was recorded in Q1 FY2011, compared with $16.5 million in Q1 FY2010. The company also recognized a $6.5 million after-tax gain from the release of escrow related to the previously sold Baseband Chipset Business.
Guidance, outlook, risks, and unusual items
For the second quarter of fiscal 2011, management expected revenue of $730 million to $760 million, gross margin of approximately 66.5%, operating expenses up approximately 2% to 3%, and diluted EPS from continuing operations of $0.65 to $0.69.
Management expected existing liquidity, operating cash flow, and available financing to fund operations, capital expenditures, research and development, dividends, and anticipated share repurchases for at least the next twelve months. The board declared a subsequent $0.22-per-share dividend payable March 23, 2011.
- Revenue recognition for distributor shipments is deferred until resale to end customers. Deferred income on distributor shipments increased $10.5 million during the quarter, and future price-protection credits or product returns could affect reported revenue and gross margin.
- Inventory increased to $283.0 million, with days of inventory rising to 105 from 100 at fiscal year-end, reflecting higher production to support anticipated demand.
- Semiconductor demand is cyclical and exposed to economic slowdowns, excess capacity, pricing pressure, changing product mix, and customer order cancellations.
- The company relies on third-party wafer foundries, assembly and test providers, and suppliers, including TSMC; capacity constraints, yield issues, disasters, or supply interruptions could affect shipments.
- International operations create foreign-exchange, political, regulatory, tax, credit, and supply-chain risks. Derivatives are used to hedge currency and interest-rate exposures.
- Potential additional tax liabilities of approximately $46 million related to fiscal 2004–2005 IRS matters and $195 million related to fiscal 2006–2007 matters were under appeal and had not been accrued because management believed additional liability was unlikely.
- The $145 million term loan creates additional floating-rate exposure; a 100-basis-point change in LIBOR would change annual interest expense by approximately $1.0 million.
- Management stated that disclosure controls were effective and that no material change occurred in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the 66% gross-margin level and substantial operating-margin expansion were sustainable after the economic recovery and manufacturing-utilization benefits.
- Whether Q2 FY2011 revenue and EPS guidance of $730 million–$760 million and $0.65–$0.69 was achieved.
- The quality of revenue growth, particularly industrial and communications demand, consumer weakness, Japan trends, and distributor inventory and credit activity.
- The location and repatriation constraints of cash, including the portion available for U.S. dividends and share repurchases.
- Future cash requirements for the $375 million notes, $145 million term loan, dividends, repurchases, and planned capital expenditures.
- Developments in the unresolved IRS examinations and the potential tax exposure not recorded in the financial statements.
- Supplier, foundry-capacity, inventory-obsolescence, pricing, intellectual-property, and semiconductor-cycle risks identified in the filing.