Analog Devices, Inc. — FY2010 Form 10-K Summary
Business context and reporting period
Analog Devices designs, manufactures and markets high-performance analog, mixed-signal and digital signal-processing integrated circuits for industrial, automotive, consumer, communications and computer applications. The filing covers the 52-week fiscal year ended October 30, 2010; fiscal 2009 ended October 31, 2009. The company operates as one reportable segment and serves more than 60,000 customers worldwide.
- FY2010 revenue mix by end market: industrial 46%, communications 22%, consumer 19%, automotive 12% and computer 2%.
- Approximately 81% of revenue was generated outside the United States and approximately 56% was sold through distributors.
- Revenue mix by product: converters 47%, amplifiers/RF 25%, other analog 12%, power management/reference 7% and digital signal processing 9%.
Financial performance and key metrics
| Metric | FY2010 | FY2009 | Change |
|---|---|---|---|
| Revenue | $2.762 billion | $2.015 billion | Up 37% |
| Gross margin | $1.799 billion; 65.2% | $1.119 billion; 55.5% | Up 970 basis points |
| Operating income from continuing operations | $900.1 million; 32.6% | $284.8 million; 14.1% | Up 216% |
| Net income from continuing operations | $711.2 million; 25.8% of revenue | $247.4 million; 12.3% | Up $463.8 million |
| Diluted EPS from continuing operations | $2.33 | $0.85 | Up $1.48 |
| Cash flow from operations | $991.2 million; 35.9% of revenue | $432.1 million; 21.4% | Up $559.0 million |
| Capital expenditures | $111.6 million | $56.1 million | Up $55.5 million |
Reported net income was $712.1 million, or $2.33 diluted EPS, including $0.9 million of net income from discontinued operations. Quarterly fourth-quarter revenue was $770.0 million, gross margin was 67.0%, operating income was $285.7 million and net income was $225.0 million, or $0.73 diluted EPS.
- Cash, cash equivalents and short-term investments totaled $2.688 billion at year-end, including $1.070 billion of cash and cash equivalents.
- Approximately $725.4 million of cash and short-term investments was held in the United States; the remainder was held by foreign subsidiaries and certain foreign earnings were intended to be reinvested indefinitely.
- Total assets were $4.329 billion and shareholders’ equity was $3.200 billion.
- Long-term debt was $400.6 million, consisting primarily of $375 million of 5.0% senior unsecured notes due July 1, 2014. The notes were swapped to a variable rate of three-month LIBOR plus 2.05%, or 2.34% at fiscal year-end.
- The company had an undrawn $165 million unsecured revolving credit facility expiring in May 2013 and was in compliance with its covenants.
- Fiscal 2010 dividends totaled $250.0 million, or $0.84 per share. The company repurchased approximately $39.8 million of common stock during the year, with $51.8 million remaining under the then-current authorization.
Material changes versus the prior comparable period
- Revenue recovered broadly from the 2009 downturn, with industrial revenue up 48%, automotive up 66%, consumer up 23%, communications up 21% and computer up 18%.
- All product categories grew: converters up 29%, amplifiers/RF up 40%, other analog up 55%, power management/reference up 65% and DSP up 35%.
- Gross margin benefited from higher manufacturing utilization, manufacturing-cost reductions, wafer-fabrication consolidation and a greater proportion of higher-margin industrial instrumentation and automation sales.
- R&D expense increased 10% to $492.3 million, but declined to 17.8% of revenue from 22.2%. Selling, marketing, general and administrative expense increased 17% to $390.6 million, but declined to 14.1% of revenue from 16.5%.
- Special charges declined to $16.5 million from $53.7 million. Fiscal 2010 charges primarily related to workforce reductions, facility closures and a $0.5 million impairment of power-management intellectual property.
- Restructuring actions completed or substantially implemented included the Cambridge wafer-fabrication closure, Limerick six-inch production consolidation and further operating-cost reductions. Management estimated approximately $25 million of annual savings from the Limerick action, approximately $41 million from the Cambridge action and approximately $16 million from the latest operating-cost reduction program.
- Backlog increased to approximately $563 million from $411 million, although most orders could be canceled or delayed without significant penalty and management cautioned that backlog is not a reliable indicator of future revenue.
Guidance, outlook, risks and unusual items
For the first quarter of fiscal 2011, management planned revenue of $715 million to $740 million, gross margin of approximately 66%, operating margin of 34.5% to 35.5% and diluted EPS from continuing operations of approximately $0.63 to $0.67. Fiscal 2011 capital expenditures were expected to be approximately $120 million to $130 million.
- Management expected existing liquidity, future operating cash flow and available financing to fund operations, capital expenditures, R&D, dividends and potential repurchases for at least the next twelve months.
- Key risks include semiconductor cyclicality, uncertain global economic recovery, demand volatility, pricing pressure, inventory obsolescence, reliance on third-party wafer foundries—primarily TSMC—independent distributors and subcontractors, manufacturing disruptions, foreign currency exposure, intellectual-property litigation, environmental regulation and retention of technical personnel.
- Distributor accounting defers revenue and related cost of sales until resale to end customers. Gross deferred distributor revenue was $327.2 million at year-end versus $230.8 million in 2009.
- Contractual obligations totaled approximately $586.8 million, including $375.0 million of principal debt, $75.0 million of stated debt interest, $33.4 million of interest-rate-swap payments, $85.7 million of operating leases, $8.7 million of deferred compensation and $9.0 million of estimated pension funding.
- Uncertain tax positions totaled $28.3 million. The company was appealing IRS matters involving potential additional tax liabilities of $46 million for fiscal 2004–2005 and $195 million for fiscal 2006–2007, although management believed additional liabilities were not likely.
- The company reported no off-balance-sheet financing arrangements and stated that current legal matters were not expected to materially affect financial position, results or cash flows.
- On November 19, 2010, after year-end, the board declared a $0.22 per-share dividend and authorized an additional $1 billion for share repurchases.
Important facts for investors to verify
- Whether the FY2010 recovery in industrial, automotive and communications demand persisted beyond the reported period and supported the FY2011 outlook.
- The sustainability of the 65.2% gross margin and the extent to which restructuring savings, utilization and product mix drove the improvement.
- Distributor inventory, deferred revenue and backlog quality, given cancellation rights and the company’s revenue-recognition policy.
- Exposure to TSMC and other concentrated suppliers, manufacturing capacity constraints and potential inventory write-downs.
- Availability of U.S. cash for dividends, repurchases and acquisitions because substantial cash was held offshore and certain foreign earnings were indefinitely reinvested.
- Interest-rate sensitivity from the LIBOR-based swap, tax-audit contingencies and other unresolved tax positions.
- Execution of the announced capital spending, dividend and repurchase plans and the effect on liquidity and share count.