Analog Devices, Inc. — FY2011 Form 10-K Summary
Reporting period: Fiscal year ended October 29, 2011. The filing also provides fourth-quarter fiscal 2011 results and compares them with fourth-quarter fiscal 2010. Analog Devices designs, manufactures and sells analog, mixed-signal and digital signal-processing integrated circuits, serving industrial, automotive, consumer and communications markets. The company operates as one reportable segment.
Financial performance and key metrics
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Revenue | $2,993.3 million | $2,761.5 million | Up 8% |
| Gross margin | $1,986.5 million; 66.4% | $1,799.4 million; 65.2% | Up 120 bps |
| Operating income from continuing operations | $1,072.0 million; 35.8% of revenue | $900.1 million; 32.6% | Up 19% |
| Net income from continuing operations | $860.9 million; 28.8% of revenue | $711.2 million; 25.8% | Up 21% |
| Diluted EPS from continuing operations | $2.79 | $2.33 | Up $0.46 |
| Net income | $867.4 million | $712.1 million | Up 22% |
| Operating cash flow | $900.5 million; 30.1% of revenue | $991.2 million; 35.9% | Down 9% |
Fiscal 2011 included a $6.5 million after-tax gain from discontinued operations related to the release of escrow proceeds from the previously sold Baseband Chipset Business. Special charges were $2.2 million, compared with $16.5 million in fiscal 2010.
Fourth-quarter fiscal 2011
| Metric | Q4 FY2011 | Q4 FY2010 |
|---|---|---|
| Revenue | $716.1 million | $770.0 million |
| Gross margin | $460.5 million; 64.3% | $516.2 million; 67.0% |
| Operating income | $235.3 million; 33% of revenue | $285.7 million; 37% |
| Net income from continuing operations | $183.5 million | $225.0 million |
| Diluted EPS from continuing operations | $0.60 | $0.73 |
Management reported sequential revenue declines in both the third and fourth quarters after strong first-half growth. The second-quarter increase included customer inventory stocking following the March 2011 Japan earthquake and tsunami; later results were affected by inventory corrections and more cautious customer demand amid U.S. and European fiscal and credit concerns.
Business mix and material changes
- FY2011 revenue by end market: industrial 47%, communications 20%, consumer 20% and automotive 14%. Revenue increased 10% in industrial, 25% in automotive and 11% in communications, while consumer revenue declined 6%.
- FY2011 revenue by product: converters 45%, amplifiers/RF 26%, other analog 14%, power management/reference 7% and DSP 8%. Other analog revenue increased 23%; DSP revenue declined 1%.
- Analog products represented 92% of revenue and DSP products 8%.
- International customers generated approximately 82% of revenue. China represented 20%, Europe 28% and Japan 13% of FY2011 revenue.
- Approximately 55% of revenue was generated through distributors. Deferred income on distributor shipments declined to $233.2 million from $242.8 million.
- Backlog declined to approximately $379 million from $563 million. The filing cautions that orders are generally cancellable or deferrable and backlog is not a reliable indicator of future revenue.
- Research and development expense increased 3% to $505.6 million, while R&D as a percentage of revenue declined to 16.9% from 17.8%.
- Capital expenditures were $123.0 million, compared with $111.6 million in FY2010. The company completed the Cambridge wafer-fabrication consolidation and recorded $2.2 million of workforce-reduction charges.
- Analog Devices acquired Lyric Semiconductor for estimated consideration of $27.8 million, including approximately $14.0 million of contingent consideration at year-end. The acquisition added $18.9 million of goodwill and $12.2 million of in-process research and development.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $1,405.1 million; short-term investments were $2,187.4 million. Total cash, cash equivalents and short-term investments were $3,592.5 million.
- Approximately $1,170.5 million of these funds was held in the United States; much of the remaining foreign cash was intended to be reinvested indefinitely and was not readily available for certain U.S. uses.
- Total long-term debt, including current maturities, was approximately $886.4 million. Debt included $375 million of 5.0% notes due 2014, $375 million of 3.0% notes due 2016 and a $145 million term loan due 2013, with $14.5 million classified as current.
- The company had an undrawn $165 million revolving credit facility expiring in May 2013 and was compliant with applicable debt covenants.
- FY2011 operating cash flow funded $123.0 million of capital expenditures, $281.6 million of dividends and $330.3 million of share repurchases. Approximately $721.5 million remained available under the $5 billion repurchase authorization.
- The board declared a $0.25 per share dividend for payment in December 2011. Management expected quarterly dividends to continue at $0.25 per share, subject to board approval and financial conditions.
Guidance, outlook and risks
For the first quarter of fiscal 2012, management planned for revenue to decline approximately 5% to 10% from Q4 FY2011, gross margin of approximately 63.0% plus or minus 50 basis points, operating expenses of $226 million to $229 million and diluted EPS of approximately $0.44 to $0.51.
- Primary risks include semiconductor cyclicality, declining customer demand, inventory corrections, pricing pressure, lower backlog and product obsolescence.
- The company relies on third-party wafer fabricators, particularly TSMC, as well as assembly and test subcontractors. Supply interruptions, capacity constraints or manufacturing yield issues could delay shipments and reduce margins.
- Global exposure creates risks from currency movements, European sovereign debt concerns, geopolitical events, natural disasters and changing foreign regulations. Japan's earthquake and tsunami affected consumer demand and Japan represented approximately 13% of FY2011 revenue.
- Distributor arrangements include price-adjustment credits and product-return rights. Changes in distributor credits or returns could materially affect recognized revenue and gross margin.
- The company faces intellectual-property litigation, product warranty and indemnification claims, environmental obligations and uncertain tax matters. A remaining IRS matter related to fiscal 2004–2005 had a potential liability of approximately $36.5 million, although management believed an additional liability was not likely.
- Approximately $2.805 billion of foreign earnings were intended to remain permanently reinvested; the related unrecognized deferred U.S. tax liability was approximately $736 million.
- Contractual obligations totaled approximately $1.099 billion, including debt, interest, leases, deferred compensation and estimated pension funding. Lyric contingent consideration was excluded because timing and amounts were uncertain.
- The company reported no off-balance-sheet financing arrangements and stated that current liquidity and expected operating cash flow should fund operations, capital expenditures, research and development, dividends and potential repurchases for at least the next twelve months.
Important facts for investors to verify
- Confirm the pace of revenue recovery after the Q4 decline and whether the Q1 FY2012 guidance was achieved.
- Monitor gross-margin performance following the decline to 64.3% in Q4 FY2011 and the guided Q1 FY2012 level of approximately 63%.
- Assess backlog, distributor inventories, price-adjustment credits and inventory levels, particularly after the inventory correction.
- Evaluate the concentration of international revenue and external manufacturing reliance, including exposure to TSMC and Japan.
- Reconcile cash liquidity with the substantial amount held offshore and the company’s dividend, repurchase and debt-maturity commitments.
- Track debt repayment, floating-rate exposure and compliance with credit-facility covenants.
- Review the remaining IRS tax matter, uncertain tax positions, Lyric contingent consideration and potential intellectual-property or product-liability claims.