1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 3, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
--------------- ----------------
Commission File No. 1-7819
Analog Devices, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2348234
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Technology Way, Norwood, MA 02062-9106
(Address of principal executive offices) (Zip Code)
(617) 329-4700
(Registrant's telephone number, including area code)
----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
The number of shares outstanding of each of the issuer's classes of Common
Stock as of September 6, 1996 was 118,547,501 shares of Common Stock.
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(thousands except per share amounts)
Three Months Ended
------------------
August 3, 1996 July 29, 1995
-------------- -------------
Net sales $305,042 $246,301
Cost of sales 152,331 121,183
-------- --------
Gross margin 152,711 125,118
Operating expenses:
Research and development 45,569 35,035
Selling, marketing, general and
administrative 48,562 47,374
-------- --------
94,131 82,409
-------- --------
Operating income 58,580 42,709
Nonoperating expenses (income):
Interest expense 3,266 938
Interest income (3,688) (1,721)
Other (181) 562
-------- --------
(603) (221)
-------- --------
Income before income taxes 59,183 42,930
Provision for income taxes 15,387 11,149
-------- --------
Net income $ 43,796 $ 31,781
======== ========
Shares used to compute earnings per share 129,694 119,777
======== ========
Earnings per share of common stock $ 0.35 $ 0.27
======== ========
See accompanying notes.
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ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(thousands except per share amounts)
Nine Months Ended
-----------------
August 3, 1996 July 29, 1995
-------------- -------------
Net sales $889,139 $684,352
Cost of sales 440,912 337,980
-------- --------
Gross margin 448,227 346,372
Operating expenses:
Research and development 131,274 98,551
Selling, marketing, general and
administrative 147,382 136,637
-------- --------
278,656 235,188
-------- --------
Operating income 169,571 111,184
Nonoperating expenses (income):
Interest expense 8,134 3,242
Interest income (12,394) (5,903)
Other 1,019 2,026
-------- --------
(3,241) (635)
-------- --------
Income before income taxes 172,812 111,819
Provision for income taxes 44,931 27,683
-------- --------
Net income $127,881 $ 84,136
======== ========
Shares used to compute earnings per share 127,771 118,596
======== ========
Earnings per share of common stock $ 1.03 $ 0.71
======== ========
See accompanying notes.
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ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(thousands except share amounts)
Assets August 3, 1996 October 28, 1995 July 29, 1995
-------------- ---------------- -------------
Cash and cash equivalents $ 198,929 $ 69,303 $ 62,268
Short-term investments 82,438 81,810 66,233
Accounts receivable, net 217,699 181,327 185,700
Inventories:
Finished goods 66,482 44,109 37,479
Work in process 117,480 77,526 74,383
Raw materials 31,046 22,327 23,928
---------- ---------- --------
215,008 143,962 135,790
Prepaid income taxes 45,600 39,650 27,780
Prepaid expenses 16,283 9,966 8,373
---------- ---------- --------
Total current assets 775,957 526,018 486,144
---------- ---------- --------
Property, plant and equipment,
at cost:
Land and buildings 136,058 139,718 130,328
Machinery and equipment 762,903 633,124 585,823
Office equipment 45,297 41,260 39,613
Leasehold improvements 73,506 42,165 40,802
---------- ---------- --------
1,017,764 856,267 796,566
Less accumulated depreciation
and amortization 465,078 424,305 412,985
---------- ---------- --------
Net property, plant and
equipment 552,686 431,962 383,581
---------- ---------- --------
Investments 67,623 13,980 13,980
Intangible assets, net 17,351 17,230 17,738
Deferred charges and other
assets 26,753 12,458 10,093
---------- ---------- --------
Total other assets 111,727 43,668 41,811
---------- ---------- --------
$1,440,370 $1,001,648 $911,536
========== ========== ========
See accompanying notes.
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ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(thousands except share amounts)
Liabilities and Stockholders'
Equity August 3, 1996 October 28, 1995 July 29, 1995
-------------- ---------------- -------------
Short-term borrowings and current
portion of long-term debt $ 1,923 $ 2,299 $ 2,155
Obligations under capital leases 8,422 60 96
Accounts payable 102,006 100,217 67,682
Deferred income on shipments to
domestic distributors 39,559 27,588 25,787
Income taxes payable 46,560 50,086 39,857
Accrued liabilities 80,568 74,138 65,997
---------- ---------- --------
Total current liabilities 279,038 254,388 201,574
---------- ---------- --------
Long-term debt 310,000 80,000 80,000
Noncurrent obligations under
capital leases 30,932 - -
Deferred income taxes 6,000 5,039 4,000
Other noncurrent liabilities 11,278 6,255 6,315
---------- ---------- --------
Total noncurrent liabilities 358,210 91,294 90,315
---------- ---------- --------
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $1.00 par value,
500,000 shares authorized,
none outstanding - - -
Common stock, $.16 2/3 par value,
450,000,000 shares authorized,
116,262,403 shares issued
(114,583,932 in October 1995,
76,214,980 in July 1995) 19,377 19,098 12,703
Capital in excess of par value 168,838 149,775 154,700
Retained earnings 609,345 481,464 446,330
Cumulative translation adjustment 5,562 5,870 5,999
--------- ---------- --------
803,122 656,207 619,732
Less -0- shares in treasury,
at cost (51,876 in October 1995,
and 2,777 in July 1995) - 241 85
---------- ---------- --------
Total stockholders' equity 803,122 655,966 619,647
---------- ---------- --------
$1,440,370 $1,001,648 $911,536
========== ========== ========
See accompanying notes.
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ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(thousands)
Nine Months Ended
-----------------
August 3, 1996 July 29, 1995
-------------- -------------
OPERATIONS
Cash flows from operations:
Net income $ 127,881 $ 84,136
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization 59,445 47,047
Deferred income taxes 988 700
Other noncash expenses (633) 529
Changes in operating assets and liabilities (91,438) (12,154)
--------- ---------
Total adjustments (31,638) 36,122
--------- ---------
Net cash provided by operations 96,243 120,258
--------- ---------
INVESTMENTS
Cash flows from investments:
Additions to property, plant and equipment, net (179,501) (145,838)
Investments (53,643) (13,980)
Purchases of short-term investments
available for sale (222,086) (103,040)
Purchases of short-term investments
held to maturity - (2,200)
Maturities of short-term investments
available for sale 216,458 111,659
Maturities of short-term investments
held to maturity 5,000 -
Increase in other assets (8,976) (328)
--------- ---------
Net cash used for investments (242,748) (153,727)
--------- ---------
FINANCING ACTIVITIES
Cash flows from financing activities:
Net proceeds from issuance of long-term debt 224,385 -
Proceeds from equipment financing 44,028 -
Payments on long term debt - (20,000)
Proceeds from employee stock plans 11,987 9,095
Net decrease in variable rate borrowings (232) (970)
Payments on capital lease obligations (4,734) (201)
--------- ---------
Net cash provided by (used for) financing activities 275,434 (12,076)
--------- ---------
Effect of exchange rate changes on cash 697 (1,300)
--------- ---------
Net increase (decrease) in cash and cash equivalents 129,626 (46,845)
Cash and cash equivalents at beginning of period 69,303 109,113
--------- ---------
Cash and cash equivalents at end of period $ 198,929 $ 62,268
========= =========
SUPPLEMENTAL INFORMATION
Cash paid during the period for:
Income taxes $ 47,773 $ 17,196
========= =========
Interest $ 7,045 $ 3,614
========= =========
See accompanying notes.
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Analog Devices, Inc.
Notes to Condensed Consolidated Financial Statements
August 3, 1996
Note 1 - In the opinion of management, the information furnished in the
accompanying financial statements reflects all adjustments, consisting only of
normal recurring adjustments, which are necessary to a fair statement of the
results for this interim period and should be read in conjunction with the most
recent Annual Report to Stockholders.
Note 2 - Certain amounts reported in the previous year have been reclassified to
conform to the 1996 presentation.
Note 3 - Debt
On December 18, 1995 the Company completed a public offering of $230,000,000 of
five-year 3 1/2% Convertible Subordinated Notes due December 1, 2000 with
semiannual interest payments on June 1 and December 1 of each year, commencing
June 1, 1996. The Notes are convertible, at the option of the holder, into the
Company's common stock at any time after 60 days following the date of original
issuance, unless previously redeemed, at a conversion price of $27.917 per
share, subject to adjustment in certain events. The net proceeds of the offering
were approximately $224 million after payment of the underwriting discount and
expenses of the offering which will be amortized over the term of the Notes.
Note 4 - Commitments and Contingencies
As previously reported in the Company's Annual Report on Form 10-K for the
fiscal year ended October 28, 1995, the Company has been engaged in an
enforcement proceeding brought by the International Trade Commission related
to patent infringement litigation with Texas Instruments, Inc., and litigation
with Maxim Integrated Products, Inc.
The Company was a defendant in two lawsuits brought in Texas by Texas
Instruments, Inc. ("TI"), alleging patent infringement, including patent
infringement arising from certain plastic encapsulation processes, and seeking
an injunction and unspecified damages against the Company. The alleged
infringement of one of these patents was also the subject matter of a
proceeding brought by TI against the Company before the International Trade
Commission ("ITC"). On January 10, 1994, the ITC brought an enforcement
proceeding against the Company alleging that the Company had violated the ITC's
cease and desist order of February 1992 (as modified in July 1993), which
prohibited the Company's importation of certain plastic encapsulated circuits,
and seeking substantial penalties against the Company for these alleged
violations. If the Company was found to have violated the cease and desist
order, the ITC could have imposed penalties of up to $100,000 per day of
violation from the date of the cease and desist order (February 1992) or a sum
equal to twice the value of the goods determined to be sold in violation of the
order. In addition, in June 1992, the Company commenced a lawsuit against TI in
Massachusetts alleging certain TI digital signal processors infringed one of
the Company's patents.
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Analog Devices, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
August 3, 1996
Note 4. Commitments and Contingencies (Continued)
Effective April 1, 1995, the Company and TI settled both Texas lawsuits and the
Massachusetts lawsuit principally by means of a royalty-free cross license of
certain of the Company's and TI's patents. On April 25, 1995, the Company filed
with the ITC a motion to terminate the ITC enforcement proceeding on the
grounds that further action by the ITC is unnecessary in light of the Company's
settlement with TI. On May 8, 1995, an Administrative Law Judge issued a
recommended determination to the ITC to grant the Company's motion to terminate
the ITC proceeding. The investigative office of the ITC had opposed the motion,
claiming that, notwithstanding the Company's settlement with TI, the Company's
alleged violation of the ITC's cease and desist order warranted the imposition
of substantial penalties. On September 11, 1996, the ITC determined to adopt
the recommended determination of the Administrative Law Judge to terminate the
enforcement proceeding and referred to the Department of Justice certain
allegations contained in a complaint that the Company willfully submitted false
and misleading reporting violations.
The Company is a defendant in a lawsuit brought by Maxim Integrated Products,
Inc. ("Maxim") in the United States District Court for the Northern District of
California seeking an injunction against, and claiming damages for, alleged
antitrust violations and unfair competition in connection with distribution
arrangements between the Company and certain distributors. Maxim alleged that
certain distributors ceased doing business with Maxim as a result of
shelf-sharing provisions in the distribution arrangements between the
distributors and the Company, resulting in improper restrictions to Maxim's
access to channels by which it distributed its products. Maxim asserted actual
and consequential damages in the amount of $14.1 million and claimed restitution
and punitive damages in an unspecified amount. Under applicable law, Maxim would
receive three times the amount of any actual damages suffered as a result of any
antitrust violation. On September 7, 1994, Maxim's claim was dismissed for lack
of evidence. Maxim appealed this ruling and oral argument of the appeal was held
in January 1996. On March 15, 1996, the Ninth Circuit issued its decision
affirming in part and reversing in part the District Court's decision. The Ninth
Circuit affirmed the District Court's decision dismissing the antitrust claims
and the state law claims challenging the legality of the shelf-sharing
provisions in the distribution arrangements between the Company and the
distributors. The Ninth Circuit reversed the decision of the District Court with
respect to the termination of Maxim by Pioneer Standard and certain activities
related thereto. The status conference on the Pioneer Standard claims scheduled
for July 12, 1996 was postponed and has yet to be rescheduled.
While there can be no assurance that the Company will prevail with respect to
the remaining issues in the above proceedings, the Company does not believe
that these matters will have a material adverse effect on the Company's
consolidated financial position or consolidated results of operations. However,
an adverse resolution could have an adverse effect on the Company's
consolidated results of operations in the quarter in which these matters are
resolved.
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Analog Devices, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
August 3, 1996
Note 5. Joint Venture Agreement
On June 25, 1996, the Company, Taiwan Semiconductor Manufacturing Co., Ltd.,
two other companies and several individual investors formed a joint venture,
called WaferTech, to build and operate a wafer manufacturing plant ("fab") in
Camas, Washington.
In return for a $140.4 million cash investment, the Company received an 18%
equity ownership in WaferTech and certain rights to procure output from the
fab at market price. The investment is to be made in three installments of
which $42.1 million was paid on June 25, 1996, $42.1 million is to be paid on
November 30, 1996 and the remaining $56.2 million is to be paid on November 3,
1997. In addition, the Company has an obligation to guarantee its pro rata
share of debt incurred by WaferTech, up to a maximum for the Company of $45
million. The Company intends to apply the equity basis of accounting to its
investment in WaferTech based on the Company's ability to exercise significant
influence over the operating and financial policies of the joint venture.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Third Quarter of Fiscal 1996 Compared to the Third Quarter of Fiscal 1995
Net sales of $305.0 million for the third quarter of fiscal 1996 grew $58.7
million or 24% from net sales of $246.3 million for the third quarter of fiscal
1995. The sales increase was attributable principally to increased sales volumes
of system-level IC products which rose 86% from the third quarter of fiscal
1995. This growth resulted from increased demand for communications products and
general-purpose digital signal processing ("DSP") products. System level IC
sales comprised approximately 40% of total 1996 third quarter revenues compared
to 26% of revenues for the third quarter of fiscal 1995.
The Company experienced a slowdown in incoming order rates as end use customers
and distributors adjusted their order patterns in recognition of their inventory
levels and the much shorter lead times being offered by the Company and other
suppliers in the semiconductor industry as additional capacity has come on line.
These adjustments appeared most pronounced in the distribution channel for the
Company's broadbased SLIC product line which had the most significant reduction
in product lead times during the second and third quarters of fiscal 1996. As a
result of the current market environment, the Company will be more dependent on
orders that are received and shipped in the same quarter, which is typically
associated with shortened lead times.
Sales of standard linear IC products ("SLICs") grew 5% from the same period last
year as demand slowed in the third quarter from the growth experienced in fiscal
1995 and in the first two quarters of fiscal 1996 versus the comparable periods
of fiscal 1995. Sales of SLIC products accounted for 56% of sales, down from 66%
one year ago as system-level product sales continue to be the fastest growing
portion of the Company's business. This mix shift is expected to continue during
the balance of the fiscal year.
Sales in the Southeast Asian region, which nearly doubled from last year, were
driven principally by increased sales of communications products and increased
sales of hard disk drive products. Sales to European customers increased 36%
from the year-earlier period with much of this growth resulting from the
Company's increased penetration of applications in the communications market,
particularly in handsets and basestations used in the GSM (Global System for
Mobile Communications) digital cellular telephone system now widely deployed in
Europe. In North America, sales increased 17% over the same period last year as
both OEM and distributor sales increased. Sales in Japan decreased 14% from
the third quarter of fiscal 1995 due mostly to weakness in the automatic test
equipment ("ATE") and industrial markets.
Gross margin decreased to 50.1% of sales for the quarter ended August 3, 1996
compared to 50.8% for the third quarter last year. This decrease was
principally due to a shift in the sales mix resulting from increased sales of
lower margin system-level IC products and to increased startup costs related to
wafer fab expansion. Offsetting both of these factors somewhat were
improvements in manufacturing yields and greater wafer availability and thus
more favorable pricing for foundry-sourced wafers used in the production of
system-level IC products.
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R&D expense was $45.6 million, an increase of $10.5 million or 30% from the
third quarter of fiscal 1995. The increase in R&D compared to the quarter ended
a year ago largely reflected an increase in personnel and expenditures in
support of significant initiatives in DSP, communications, computers,
accelerometers and SLIC product developments. At 14.9% of sales, the
R&D-to-sales ratio remained within the Company's targeted range of 14 to 15%.
Significant resource commitments to R&D efforts have yielded a continual flow of
new products critical to future sales. For the third quarter of fiscal 1996,
new-product sales (sales of products introduced within the previous six
quarters) accounted for nearly 30% of total sales.
Selling, marketing, general & administrative ("SMG&A") expense of $48.6 million
was reduced to 15.9% of sales compared to 19.2% for the year-ago quarter. This
decline was achieved by holding year-to-year SMG&A expense growth to 2.5%, in
part due to the lower SMG&A-to-sales ratio associated with the Company's
higher-volume system level IC products.
Operating income rose from $42.7 million for the third quarter of fiscal 1995 to
$58.6 million for the third quarter of fiscal 1996, an increase of 37%. As a
percentage of sales, operating income increased to 19.2% compared to 17.3% for
the third quarter of fiscal 1995. This improvement resulted principally from
increased sales and the lower SMG&A expense-to-sales ratio.
Interest expense increased $2.3 million from the third quarter of fiscal 1995
due to the issuance of $230 million of 3 1/2% Convertible Subordinated Notes in
December 1995. Interest income increased $2.0 million over this same period due
to an increased level of invested cash which principally resulted from
investment of the net proceeds from the issuance of the Notes.
The effective income tax rate was flat to the year earlier period at 26%.
The growth in sales combined with the improvement in operating income resulted
in a 38% increase in net income to $43.8 million or 14.4% of sales for the third
quarter of fiscal 1996. Earnings per share increased to $.35 from $.27 for last
year's third quarter. Shares used to compute earnings per share increased
significantly compared to the third quarter of fiscal 1995 principally due to
the inclusion of common stock equivalents under the "if converted" method for
the Company's $230 million 3 1/2% Convertible Subordinated Notes which were
issued in the first quarter of fiscal 1996.
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Third Quarter of Fiscal 1996 Compared to the Second Quarter of Fiscal 1996
Net sales increased slightly from $303.3 million for the second quarter of
fiscal 1996 to $305.0 million for the third quarter of fiscal 1996 as industry
demand softened somewhat. This slowdown appeared to be due to a broadbased
inventory correction by end use customers and distributors in response to the
shorter lead times available for many products from the Company and other
suppliers. Inventory adjustments were most prevalent in the Company's SLIC
business in all regions of the world, but most significantly in the distribution
channel, following the spot order slowdowns which occurred in the OEM channel in
the second quarter of fiscal 1996.
On a worldwide basis, sales of the Company's SLIC products decreased 4%
quarter-to-quarter. The decrease in sales of SLIC products was more than offset
by continuing strength in sales of system-level IC products which increased 11%
over this same period despite continued softness in demand for PC audio products
and ICs used in ATE pin electronics applications. The increase in sales of
system-level IC products resulted from increased demand for products within the
communications and DSP product sectors. The decrease in sales of SLIC products
and the increase in sales of system-level products were principally
volume-based. Sales decreased in most regions of the world, with the exception
of Southeast Asia.
Gross margin decreased slightly from 50.4% of sales for the prior quarter to
50.1% of sales for the third quarter of fiscal 1996 due to a sales mix shift to
a larger proportion of lower margin system-level IC products and to additional
expenses associated with wafer fab expansion. The effect of these factors,
however, was mitigated by improved gross margins for both SLIC and system-level
IC products, accomplished through yield improvements and by a more
favorable pricing environment for purchased wafers.
R&D expenses for the third quarter of fiscal 1996 of $45.6 million or 14.9% of
sales were slightly higher than the $44.8 million or 14.8% of sales for the
second quarter of fiscal 1996.
SMG&A expenses decreased 2.9% from $50.0 million for the preceding quarter to
$48.6 million for the third quarter of fiscal 1996, leading to a
quarter-to-quarter decrease in SMG&A expenses as a percentage of sales from
16.5% to 15.9%. This decrease was in part due to a greater proportion of
higher-volume system-level IC products in the sales mix which carry a lower
SMG&A expense component than SLIC products. As a result of the improvement in
the SMG&A expense-to-sales ratio, which offset the slight erosion in overall
gross margin, operating profit was maintained at 19.2% of sales compared to the
previous quarter.
Interest income decreased from $4.8 million in the second quarter of fiscal 1996
to $3.7 million in the third quarter of fiscal 1996 primarily as a result of
decreased cash, cash equivalent and short-term investment balances. The
effective income tax rate remained at 26%.
The Company recorded net income of $43.8 million or 14.4% of sales in the third
quarter of fiscal 1996, compared to $44.0 million or 14.5% of sales in the
second quarter of fiscal 1996. Earnings per share remained unchanged at $.35.
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First Nine Months of Fiscal 1996 Compared to the First Nine Months of Fiscal
1995
Net sales of $889.1 million rose $204.8 million or 30% from the same period of
fiscal 1995. The increase in sales was attributable to an increase in sales
volumes of both the Company's system-level IC and SLIC products which grew 72%
and 19%, respectively, over the same period of fiscal 1995.
The 72% increase in sales of system-level IC products represented increased
demand and broader participation in growing application markets for the
Company's general-purpose DSPs and communications products. As a result of the
significant growth experienced in this product grouping, system-level product
sales accounted for 36% of total sales in the first nine months of fiscal 1996
compared to 27% in the same period last year.
In the third quarter of fiscal 1996, incoming order rates softened as end
customers and distributors adjusted their order patterns in recognition of
improved availability of products from semiconductor manufacturers due to
shortened industry lead times. Such adjustments were most prevalent in the
Company's SLIC business which had the greatest reduction in product lead times
during the second and third quarters of fiscal 1996. This ordering environment,
which led to a 4% sequential decline in SLIC sales from the second to third
quarter of fiscal 1996, offset some of the 27% sales growth experienced in sales
of SLIC products in the first half of fiscal 1996 when compared to the same
period of fiscal 1995. For the first nine months of fiscal 1996, the strongest
demand for SLIC products remained in applications for the communications,
medical and instrumentation end markets. SLIC products accounted for 58% of
total sales in the first nine months of fiscal 1996 compared to 64% in the first
nine months of fiscal 1995.
For the first nine months of fiscal 1996, sales to North American and
international customers increased 28% and 31%, respectively, over the same
period of fiscal 1995. Sales in Europe increased 43% compared to the first nine
months of fiscal 1995, largely due to increased demand for the Company's
communications products targeted for GSM. Sales in Southeast Asia increased 42%
from the year-earlier period primarily due to increased sales of communications
products and hard disk drive and other computer products. While sales in Japan
increased 7% over the first nine months of fiscal 1995, essentially all of this
increase occurred in the first quarter of fiscal 1996 as semiconductor demand
softened in Japan during the second quarter primarily due to inventory
corrections made by equipment manufacturers.
Gross margin of 50.4% of sales for the first nine months of fiscal 1996 was down
slightly from 50.6% for the comparable period of fiscal 1995 as yield
improvements were offset by a shift in the mix of product sales to a greater
proportion of lower-margin system-level IC products, and expenses incurred as a
result of capacity additions.
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R&D expenses increased $32.7 million or 33% over the prior year, reflecting the
Company's commitment to maintaining a high level of R&D effort in order to
maximize the opportunities available in real world signal processing. SMG&A
expenses grew only 8%, as the Company constrained spending growth to a rate
significantly below sales growth. As a result, SMG&A expense as a percentage of
sales decreased to 16.6% from 20.0% for the same period of fiscal 1995.
Operating income was $169.6 million or 19.1% of sales for the first nine months
of fiscal 1996, an increase of 53% from $111.2 million for the first nine months
of fiscal 1995. This performance gain reflected the growth in sales, stable
gross margin and a slower rate of SMG&A expense growth versus sales.
Interest expense increased $4.9 million and interest income increased $6.5
million for the nine month period ended August 3, 1996 as compared to the nine
month period ended July 29, 1995, with both changes resulting from the issuance
of $230 million of 3 1/2% Notes during the first quarter of fiscal 1996.
The effective income tax rate increased to 26.0% from 24.8% for the year-ago
period due primarily to a change in the mix of worldwide profits to higher tax
rate jurisdictions.
Net income grew 52% to $127.9 million or $1.03 per share compared to $84.1
million or $0.71 per share for the first nine months of fiscal 1995. As a
percentage of sales, net income improved to 14.4% from 12.3% for the year
earlier period.
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Liquidity and Capital Resources
At August 3, 1996, cash, cash equivalents and short-term investments totaled
$281.4 million, an increase of $152.9 million from the end of the third quarter
of fiscal 1995 and an increase of $130.3 million from the end of the fourth
quarter of fiscal 1995. These increases were mainly attributable to proceeds
from the sale of $230,000,000 of 3 1/2% Convertible Subordinated Notes in the
first quarter of fiscal 1996, together with positive cash flow from operations
for the first nine months of fiscal 1996. These cash inflows were largely offset
by cash used for investing activities including capital expenditures and
investments and deposits made to secure wafer supply.
The Company's operating activities generated net cash of $96.2 million, or 10.8%
of sales, for the first nine months of fiscal 1996 compared to $120.3 million,
or 17.6% of sales, for the first nine months of fiscal 1995. The $24.1 million
decrease in operating cash flows from the year-earlier period was principally
due to higher working capital requirements associated with increases in accounts
receivable and inventory balances. These changes were offset in part by
increased net income. Net cash flow from operations generated for the third
quarter of fiscal 1996 was $50.5 million or 16.5% of sales versus $12.5 million
or 4.1% of sales for the prior quarter and $31.6 million or 12.8% sales for the
third quarter of fiscal 1995. The increase in operating cash flows compared to
the previous quarter was principally due to a decrease in working capital
requirements while the increase from the year ago quarter primarily resulted
from increased net income. The noncash effect of depreciation and amortization
was $59.4 million for the first nine months of fiscal 1996 and $22.3 million for
the third quarter of fiscal 1996, compared to $47.0 million and $16.3 million,
respectively, for the same periods of fiscal 1995, primarily as a result of
increased capital expenditures related to the Company's internal capacity
expansion programs. As a percentage of sales, depreciation and amortization
expense was 6.7% for the first nine months of fiscal 1996 compared to 6.9% for
the first nine months of fiscal 1995.
Accounts receivable of $217.7 million increased $36.4 million or 20% and $32.0
million or 17% from the end of the fourth and third quarters of fiscal 1995,
respectively. These increases were primarily the result of the higher sales
level in comparison to these periods. As a percentage of annualized quarterly
sales, accounts receivable was 17.8% at the end of the third quarter of fiscal
1996 compared to 17.6% and 18.8% for the fourth and third quarters of fiscal
1995, respectively.
Inventories of $215.0 million at the end of the first nine months of fiscal 1996
rose $23.5 million, $71.0 million and $79.2 million from the end of the second
quarter of fiscal 1996, the fourth quarter of fiscal 1995 and the third quarter
of fiscal 1995, respectively. Inventories also increased as a percentage of
annualized quarterly sales to 17.6% compared to 15.8% for the second quarter of
fiscal 1996, 14.0% for the fourth quarter of fiscal 1995 and 13.8% for the third
quarter of fiscal 1995. The growth in inventories over the past year was
principally due to increased inventory levels needed to service increased
demand, as well as improve customer response times. In addition, the increase in
inventories during the second and third quarters of fiscal 1996 reflected the
expansion of internal manufacturing capacity and greater availability to the
Company of externally purchased foundry CMOS wafers used to serve the Company's
DSP and communications product lines.
15
16
Accounts payable and accrued liabilities increased $48.9 million or 37% compared
to the balance at the end of the third quarter of fiscal 1995 due principally to
increased expense activity related to the higher revenue level and increased
capital expenditures associated with wafer fabrication capacity expansion.
Net additions to property, plant and equipment of $179.5 million or 20.2% of
sales for the first nine months of fiscal 1996 and $59.4 million or 19.5% of
sales for the third quarter of fiscal 1996, were funded with a combination of
cash on hand, cash generated from financing activities and internally generated
cash flow from operations. The majority of these expenditures in fiscal 1996
were related to capacity expansion including the addition of six-inch wafer
capacity to the Company's existing wafer fabrication facilities in Wilmington,
Massachusetts and Limerick, Ireland, continued upgrading and modernization of
the Company's wafer fabrication module in Sunnyvale, California and construction
of a new assembly and test facility in the Philippines. Also, during the second
quarter of fiscal 1996, the Company commenced an accelerometer dedicated fab
project at its leased facility in Cambridge, Massachusetts. The Company
currently plans to make capital expenditures of approximately $70 million in the
fourth quarter of fiscal 1996, primarily in connection with the continued
expansion of it manufacturing facilities. The Company currently plans to make
capital expenditures of $150 million in fiscal 1997.
In June 1996, the Company entered into a joint venture agreement with Taiwan
Semiconductor Manufacturing Co. ("TSMC"), two other companies and several
individual investors for the construction and operation of a semiconductor
fabrication facility in Camas, Washington. The Company received an 18% equity
ownership in the joint venture, known as WaferTech, in return for a $140.4
million investment. The investment is to be made in three installments of which
the first was made on June 25, 1996 in the amount of $42.1 million. The
remaining two installments of $42.1 million and $56.2 million are due November
30, 1996 and November 3, 1997, respectively. See Note 5 - "Joint Venture
Agreement," to the Condensed Consolidated Financial Statements contained in
this Form 10-Q for the fiscal quarter ended August 3, 1996 for additional
information concerning this agreement.
In January 1996, in accordance with a previous agreement, the Company made an
additional $7.0 million equity investment in Chartered Semiconductor
Manufacturing Pte., Ltd. ("CSM") in Singapore for a total equity investment of
$21.0 million which represents a less than 5% ownership interest. This
investment is structured to provide access to CSM's eight inch 0.5 micron wafer
fabrication facility through wafer supply and pricing commitments.
In January 1996, the Company also entered into an additional agreement with CSM,
whereby the Company will provide a total deposit of approximately $20.0 million
to be paid in several installments in 1996 and 1997. Under the terms of this
agreement, the deposit will guarantee access to additional quantities of
sub-micron wafers through fiscal 2000.
16
17
During the third quarter of fiscal 1996, the Company's wafer supply arrangement
with TSMC for future capacity was modified. Under the modified arrangement, the
Company will be required to maintain a constant deposit of $6.4 million with
TSMC in order to secure minimum quantities of wafers from 1996 to 1999.
Cash generated by financing activities of $275.4 million for the first nine
months of fiscal 1996 resulted primarily from the sale of $230,000,000 of
five-year 3 1/2% Convertible Subordinated Notes due December 1, 2000. The net
proceeds from this offering, which was completed December 18, 1995, were
approximately $224 million. See Note 3 - "Debt," to the Condensed Consolidated
Financial Statements contained in this Form 10-Q for the fiscal quarter ended
August 3, 1996 for additional information concerning these Notes. In addition,
during the first nine months of fiscal 1996, the Company obtained $44.0 million
of equipment financing related to the lease of certain machinery and equipment.
Financing activities for the first nine months of fiscal 1996 also generated
cash of $12.0 million from the issuance of common stock under stock purchase
and stock option plans.
At August 3, 1996, the Company's principal sources of liquidity included $198.9
million of cash and cash equivalents and $82.4 million of short-term
investments. Short-term investments at the end of the third quarter of fiscal
1996 consisted of commercial paper, banker's acceptances and certificates of
deposit with maturities greater than three months and less than six months at
time of acquisition. The Company also has various lines of credit both in the
U.S. and overseas, including a $60 million credit facility in the U.S. which
expires in 1998, all of which were substantially unused at the end of the third
quarter of fiscal 1996. The Company's debt-to-equity ratio at August 3, 1996
was 44%.
The Company believes that its existing sources of liquidity and cash expected to
be generated from future operations, together with current and anticipated
available long-term financing, will be sufficient to fund operations, capital
expenditures, obligations under the joint venture agreement and research and
development efforts for the foreseeable future.
Litigation
As set forth in Note 4 to the Condensed Consolidated Financial Statements and
Part II, Item 1., "Legal Proceedings," contained in this Form 10-Q for the
fiscal quarter ended August 3, 1996, the Company has been engaged in an
enforcement proceeding brought by the International Trade Commission related to
patent infringement litigation with Texas Instruments, Inc., and litigation
with Maxim Integrated Products, Inc.
While there can be no assurance that the Company will prevail with respect to
the remaining issues in the above proceedings, the Company does not believe
that these matters will have a material adverse effect on the Company's
consolidated financial position or consolidated results of operations. However,
an adverse resolution could have an adverse effect on the Company's
consolidated results of operations in the quarter in which these matters are
resolved.
17
18
Factors Affecting Future Results
The Company's future operating results are difficult to predict and may be
affected by a number of factors including the timing of new product
announcements or introductions by the Company and its competitors, competitive
pricing pressures, fluctuations in manufacturing yields, adequate availability
of wafers and manufacturing capacity, changes in product mix and economic
conditions in the United States and international markets. In addition, the
semiconductor market has historically been cyclical and subject to significant
economic downturns at various times. As a result of these and other factors,
there can be no assurance that the Company will not experience material
fluctuations in future operating results on a quarterly or annual basis.
The Company's success depends in part on its ability to develop and market new
products. There can be no assurance that the Company will be able to develop and
introduce new products in a timely manner or that such products, if developed,
will achieve market acceptance. In addition, the Company's growth is dependent
on its ability to penetrate new markets such as the communications, computer and
automotive segments of the electronics market, where the Company has limited
experience and competition is intense. There can be no assurance that the
markets being served by the Company will grow in the future; that the Company's
existing and new products will meet the requirements of such markets; that the
Company's products will achieve customer acceptance in such markets; that
competitors will not force prices to an unacceptably low level or take market
share from the Company; or that the Company can achieve or maintain profits in
these markets. Also, some of the customers in these markets are less well
established which could subject the Company to increased credit risk.
The semiconductor industry is intensely competitive. Certain of the Company's
competitors have greater technical, marketing, manufacturing and financial
resources than the Company. The Company's competitors also include emerging
companies attempting to sell products to specialized markets such as those
served by the Company. Competitors of the Company have, in some cases, developed
and marketed products having similar design and functionality as the Company's
products. There can be no assurance that the Company will be able to compete
successfully in the future against existing or new competitors or that the
Company's operating results will not be adversely affected by increased price
competition.
During fiscal 1996, the Company has increased substantially its manufacturing
capacity through both expansion of its production facilities and increased
access to third-party foundries; there can be no assurance that the Company
will not encounter unanticipated production problems at either its own
facilities or at third-party foundries. The Company relies, and plans to
continue to rely, on third-party wafer fabricators to supply most of its
wafers that can be manufactured using industry-standard digital processes, and
such reliance involves several risks, including the absence of adequate
guaranteed capacity and reduced control over delivery schedules,
18
19
manufacturing yields and costs. In addition, the Company's capacity additions
will result in a significant increase in operating expenses and, if revenue
levels do not increase to offset these additional expense levels, the Company's
future operating results could be adversely affected. The Company also believes
that other semiconductor manufacturers are also expanding or planning to expand
their production capacity over the next several years, and there can be no
assurance that the expansion by the Company and its competitors will not lead to
overcapacity in the Company's target markets, which could lead to price erosion
that would adversely affect the Company's operating results.
For the first nine months of fiscal 1996, 58% of the Company's revenues were
derived from customers in international markets. The Company has manufacturing
facilities in Ireland, the Philippines and Taiwan. The Company is therefore
subject to the economic and political risks inherent in international
operations, including expropriation, air transportation disruptions, currency
controls and changes in currency exchange rates, tax and tariff rates and
freight rates. Although the Company engages in certain hedging transactions to
reduce its exposure to currency exchange rate fluctuations, there can be no
assurance that the Company's competitive position will not be adversely affected
by changes in the exchange rate of the U.S. dollar against other currencies.
The semiconductor industry is characterized by frequent claims and litigation
involving patent and other intellectual property rights. The Company has from
time to time received, and may in the future receive, claims from third parties
asserting that the Company's products or processes infringe their patents or
other intellectual property rights. In the event a third party makes a valid
intellectual property claim and a license is not available on commercially
reasonable terms, the Company's operating results could be materially and
adversely affected. Litigation may be necessary to enforce patents or other
intellectual property rights of the Company or to defend the Company against
claims of infringement, and such litigation can be costly and divert the
attention of key personnel. An adverse resolution of such litigation, may, in
certain cases, have a material adverse effect on the Company's consolidated
financial position or on its consolidated results of operations or cash flows
in the period in which the litigation is resolved. See Part II, Item 1 - "Legal
Proceedings," contained in this Form 10-Q for the fiscal quarter ended August
3, 1996 and Part I, Item 3 - "Legal Proceedings," contained in the Company's
Annual Report on Form 10-K for the fiscal year ended October 28, 1995 for
information concerning pending litigation involving the Company.
Because of these and other factors, past financial performance should not be
considered an indicator of future performance. Investors should not use
historical trends to anticipate future results and should be aware that the
trading price of the Company's common stock may be subject to wide fluctuations
in response to quarter-to-quarter variations in operating results, general
conditions in the semiconductor industry, changes in earnings estimates and
recommendations by analysts or other events.
19
20
PART II - OTHER INFORMATION
ANALOG DEVICES, INC.
Item 1. Legal Proceedings
As previously reported in the Company's Annual Report on Form 10-K for the
fiscal year ended October 28, 1995, the Company has been engaged in an
enforcement proceeding brought by the International Trade Commission related
to patent infringement litigation with Texas Instruments, Inc.
The Company was a defendant in two lawsuits brought in Texas by Texas
Instruments, Inc. ("TI"), alleging patent infringement, including patent
infringement arising from certain plastic encapsulation processes, and seeking
an injunction and unspecified damages against the Company. The alleged
infringement of one of these patents was also the subject matter of a
proceeding brought by TI against the Company before the International Trade
Commission ("ITC"). On January 10, 1994, the ITC brought an enforcement
proceeding against the Company alleging that the Company had violated the ITC's
cease and desist order of February 1992 (as modified in July 1993), which
prohibited the Company's importation of certain plastic encapsulated circuits,
and seeking substantial penalties against the Company for these alleged
violations. If the Company was found to have violated the cease and desist
order, the ITC could have imposed penalties of up to $100,000 per day of
violation from the date of the cease and desist order (February 1992) or a sum
equal to twice the value of the goods determined to be sold in violation of the
order. In addition, in June 1992, the Company commenced a lawsuit against TI in
Massachusetts alleging certain TI digital signal processors infringed one of
the Company's patents.
Effective April 1, 1995, the Company and TI settled both Texas lawsuits and the
Massachusetts lawsuit principally by means of a royalty-free cross license of
certain of the Company's and TI's patents. On April 25, 1995, the Company filed
with the ITC a motion to terminate the ITC enforcement proceeding on the
grounds that further action by the ITC is unnecessary in light of the Company's
settlement with TI. On May 8, 1995, an Administrative Law Judge issued a
recommended determination to the ITC to grant the Company's motion to terminate
the ITC proceeding. The investigative office of the ITC had opposed the motion,
claiming that, notwithstanding the Company's settlement with TI, the Company's
alleged violation of the ITC's cease and desist order warranted the imposition
of substantial penalties. On September 11, 1996, the ITC determined to adopt
the recommended determination of the Administrative Law Judge to terminate the
enforcement proceeding and referred to the Department of Justice certain
allegations contained in a complaint that the Company willfully submitted false
and misleading reporting violations.
Item 6. Exhibits and reports on Form 8-K
(a) See Exhibit Index
(b) Form 8-K - Reporting Date - June 25, 1996
Item reported - Item 5. Other Events. On July 16, 1996, the Registrant
filed information relating to a joint venture agreement dated June 25,
1996 between the Company, Taiwan Semiconductor Manufacturing Co., Ltd.,
two other companies and several individual investors for the
construction and operation of a semiconductor fabrication facility in
Camas, Washington.
20
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Analog Devices, Inc.
--------------------
(Registrant)
Date: September 16, 1996 By: /s/ Ray Stata
-------------
Ray Stata
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: September 16, 1996 By: /s/ Joseph E. McDonough
-----------------------
Joseph E. McDonough
Vice President-Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
21
22
EXHIBIT INDEX
Analog Devices, Inc.
Item
*10-1 Amended and Restated Limited Liability Company Agreement of WaferTech,
LLC, a Delaware limited liability company, dated as of August 9, 1996.
Filed as Exhibit 10.47 to the Form 10-Q of Altera Corporation (File No.
0-16617) for the quarterly period ended June 30, 1996, and incorporated
herein by reference.
*10-2 Purchase Agreement by and between Taiwan Semiconductor Manufacturing
Co., Ltd., as seller and Analog Devices, Inc., Altera Corporation and
Integrated Silicon Solutions, Inc., as buyers dated as of June 25, 1996.
Filed as Exhibit 10.48 to the Form 10-Q of Altera Corporation (File No.
0-16617) for the quarterly period ended June 30, 1996, and incorporated
herein by reference.
11-1 Computation of Earnings per Share.
27 Financial Data Schedule
- --------------------
* Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
22
1
Exhibit 11-1
Analog Devices, Inc.
Computation of Earnings Per Share (Unaudited)
(in thousands, except per share data)
Three Months Ended
------------------
August 3, 1996 July 29, 1995
-------------- -------------
PRIMARY EARNINGS PER SHARE
Weighted average common and common equivalent shares:
Weighted average common shares outstanding 114,716 112,122
Assumed exercise of common stock equivalents (1) 6,739 7,655
Assumed conversion of subordinated notes 8,239 -
-------- --------
Weighted average common and common
equivalent shares 129,694 119,777
======== ========
Net income $ 43,796 $ 31,781
Interest related to convertible subordinated
notes, net of tax 1,455 -
-------- --------
Earnings available for common stock $ 45,251 $ 31,781
======== ========
PRIMARY EARNINGS PER SHARE $ 0.35 $ 0.27
======== ========
FULLY DILUTED EARNINGS PER SHARE
Weighted average common and common equivalent shares:
Weighted average common shares outstanding 114,716 112,122
Assumed exercise of common stock equivalents (1) 6,785 7,806
Assumed conversion of subordinated notes 8,239 -
-------- --------
Weighted average common and common
equivalent shares 129,740 119,928
======== ========
Net income $ 43,796 $ 31,781
Interest related to convertible subordinated
notes, net of tax 1,455 -
-------- --------
Earnings available for common stock $ 45,251 $ 31,781
======== ========
FULLY DILUTED EARNINGS PER SHARE $ 0.35 $ 0.27
======== ========
(1) Computed based on the treasury stock method.
1
2
Exhibit 11-1(Cont'd)
Analog Devices, Inc.
Computation of Earnings Per Share (Unaudited)
(in thousands, except per share data)
Nine Months Ended
-----------------
August 3, 1996 July 29, 1995
-------------- -------------
PRIMARY EARNINGS PER SHARE
Weighted average common and common equivalent shares:
Weighted average common shares outstanding 114,015 111,614
Assumed exercise of common stock equivalents (1) 6,946 6,982
Assumed conversion of subordinated notes 6,810 -
-------- --------
Weighted average common and common
equivalent shares 127,771 118,596
======== ========
Net income $127,881 $ 84,136
Interest related to convertible subordinated
notes, net of tax 3,575 -
-------- --------
Earnings available for common stock $131,456 $ 84,136
======== ========
PRIMARY EARNINGS PER SHARE $ 1.03 $ 0.71
======== ========
FULLY DILUTED EARNINGS PER SHARE
Weighted average common and common equivalent shares:
Weighted average common shares outstanding 114,015 111,614
Assumed exercise of common stock equivalents (1) 7,076 7,156
Assumed conversion of subordinated notes 6,810 -
-------- --------
Weighted average common and common
equivalent shares 127,901 118,770
======== ========
Net income $127,881 $ 84,136
Interest related to convertible subordinated
notes, net of tax 3,575 -
-------- --------
Earnings available for common stock $131,456 $ 84,136
======== ========
FULLY DILUTED EARNINGS PER SHARE $ 1.03 $ 0.71
======== ========
(1) Computed based on the treasury stock method.
2
5
1,000
U.S. DOLLARS
9-MOS
NOV-02-1996
OCT-29-1995
AUG-03-1996
1
198,929
82,438
217,699
0
215,008
775,957
1,017,764
465,078
1,440,370
279,038
310,000
19,377
0
0
783,745
1,440,370
889,139
889,139
440,912
440,912
278,656
0
8,134
172,812
44,931
127,881
0
0
0
127,881
1.03
1.03
ASSET VALUE REPRESENTS NET AMOUNT
