Analog Devices, Inc. — Fiscal 2018 Form 10-K Summary
Business context and reporting period
Analog Devices designs and sells high-performance analog, mixed-signal, digital signal processing, sensor, RF, power-management and related integrated circuits. The company serves industrial, automotive, consumer and communications markets and operates as one reportable segment.
The filing covers the 53-week fiscal year ended November 3, 2018. Fiscal 2017 comprised 52 weeks. Fiscal 2018 includes a full year of results from the March 2017 acquisition of Linear Technology Corporation.
Financial performance and key metrics
| Metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Revenue | $6.201 billion | $5.108 billion | +21% |
| Gross margin | 68.3% | 59.9% | +840 basis points |
| Operating income | $1.882 billion | $1.055 billion | +78% |
| Operating margin | 30.3% | 20.7% | +960 basis points |
| Net income | $1.495 billion | $727.3 million | +106% |
| Diluted EPS | $3.97 | $2.07 | +92% |
| Cash dividends per share | $1.89 | $1.77 | +7% |
Fourth quarter fiscal 2018: Revenue was $1.597 billion, gross margin was 68.5%, operating income was $513.4 million, net income was $433.0 million and diluted EPS was $1.15.
Fiscal 2018 revenue by end market was industrial $3.103 billion, automotive $988.7 million, consumer $856.8 million and communications $1.253 billion. Industrial represented 50% of revenue, communications 20%, automotive 16% and consumer 14%.
Research and development expense was $1.165 billion, or 18.8% of revenue. Amortization of intangibles was $428.9 million, and special charges were $61.3 million. Interest expense was $253.6 million and the effective tax rate was 8.7%.
Cash flow, liquidity and capital structure
- Operating cash flow was $2.442 billion, or 39.4% of revenue, compared with $1.154 billion in fiscal 2017.
- Investing cash flow was an outflow of $314.0 million, including $254.9 million of capital expenditures and $52.8 million for acquisitions.
- Financing cash flow was an outflow of $2.358 billion, primarily reflecting debt repayments, dividends and share repurchases.
- Cash and cash equivalents were $816.6 million at year-end, including approximately $383.5 million held in the United States.
- Total debt carrying value was $6.333 billion; principal outstanding was $6.375 billion. The company had $1.8 billion of floating-rate term debt, of which $1.0 billion was hedged.
- The company had an undrawn $1.0 billion revolving credit facility expiring July 2020 and was compliant with applicable debt covenants.
- Capital expenditures increased to $254.9 million from $204.1 million. Management expected fiscal 2019 capital expenditures to be approximately 4% of revenue.
- The share repurchase program was reinstated in August 2018 and increased to an aggregate authorization of $8.2 billion. Approximately $2.6 billion remained available at year-end.
Material changes versus the prior comparable period
- Revenue growth reflected a full year of Linear results, broad-based demand increases and one additional operating week. Consumer revenue declined 18%, primarily due to lower demand for portable consumer applications.
- Gross margin benefited from the absence of the $358.7 million fiscal 2017 cost-of-sales charge related to the sale of Linear inventory marked up to fair value, favorable product mix and improved factory utilization.
- Operating expenses increased due to higher R&D, amortization and restructuring costs, although acquisition-related transaction and integration costs declined.
- Debt declined from $7.851 billion to $6.333 billion as the company repaid term-loan principal and used proceeds from $750 million of senior unsecured notes issued in March 2018 to repay debt.
- Fiscal 2018 net income benefited from provisional tax effects of the Tax Cuts and Jobs Act, including a $637.0 million deferred-tax remeasurement benefit and a $691.0 million one-time transition-tax charge. The net tax impact was not representative of recurring operating performance.
Guidance, outlook, commentary and risks
Management stated that existing liquidity, expected operating cash flow and available financing should fund operations, capital expenditures, research and development, dividends and other needs for at least the next twelve months. No specific revenue or earnings guidance is provided in the filing. The company expected fiscal 2019 capital expenditures to be approximately 4% of revenue and expected quarterly dividends to continue at $0.48 per share, subject to board approval.
The company planned to consolidate certain Linear-related manufacturing operations, including closure of the Hillview wafer fabrication facility and Singapore test facility over two to four years. The actions generated $44.5 million of fiscal 2018 special charges and were expected to produce approximately $60 million of annual savings once fully implemented.
- Semiconductor cyclicality, demand volatility, pricing pressure, inventory obsolescence and customer order cancellations could affect revenue and margins.
- Approximately half of wafer requirements were sourced from third-party foundries, creating supplier, capacity, geographic and disruption risks.
- Distributor sales represented approximately 56% of fiscal 2018 revenue. Effective fiscal 2019, the company adopted the new revenue standard using the full retrospective method, with a significant effect on the timing of distributor revenue recognition.
- Linear integration, goodwill and acquired-intangible balances remain important execution and impairment considerations. Goodwill was $12.253 billion and net intangible assets were $4.778 billion at year-end.
- The company had a provisional $755 million transition-tax liability payable over eight years and had not completed its accounting for all effects of the Tax Cuts and Jobs Act.
- An Irish tax assessment of approximately €43.0 million, or $52.0 million at year-end exchange rates, remained under appeal. The company had not recorded an additional liability and stated that an adverse outcome could materially affect future tax expense and earnings.
- Other risks include interest-rate and foreign-currency exposure, trade restrictions, dependence on key personnel and intellectual property, cybersecurity, environmental compliance, product liability and litigation.
Most important facts for investors to verify
- Separate recurring operating performance from the significant fiscal 2018 tax benefits and acquisition-related accounting effects.
- Reconcile reported fiscal 2018 growth for the additional fiscal week and the full-year contribution from Linear.
- Review debt maturities, floating-rate exposure, covenant requirements and the company’s ability to fund debt repayment, dividends and repurchases.
- Assess the effects of the fiscal 2019 revenue-recognition adoption on distributor revenue, deferred income and gross margin comparability.
- Monitor execution and expected savings from the Hillview and Singapore facility consolidations.
- Track the Irish transfer-pricing appeal, remaining Tax Cuts and Jobs Act provisional amounts and the company’s indefinite-reinvestment assertions.
- Evaluate industrial and communications demand against potential consumer weakness and broader semiconductor-cycle risks.