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 January 31, 1998
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)
(781) 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 February 27, 1998 was 162,687,271 shares of Common Stock.
2
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
JANUARY 31, 1998 FEBRUARY 1, 1997
---------------- ----------------
Net sales $330,721 $292,063
Cost of sales 162,660 148,621
-------- --------
Gross margin 168,061 143,442
Operating expenses:
Research and development 54,975 45,704
Selling, marketing, general and
administrative 55,646 45,131
-------- --------
110,621 90,835
-------- --------
Operating income 57,440 52,607
Nonoperating expenses (income):
Interest expense 2,429 3,780
Interest income (3,981) (3,394)
Other 785 (7)
-------- --------
(767) 379
-------- --------
Income before income taxes 58,207 52,228
Provision for income taxes 13,923 13,048
-------- --------
Net income $ 44,284 $ 39,180
======== ========
Shares used to compute basic earnings per share 161,023 158,515
======== ========
Basic earnings per share of common stock $0.28 $0.25
======== ========
Shares used to compute diluted earnings per share 178,146 175,950
======== ========
Diluted earnings per share of common stock $0.26 $0.23
======== ========
See accompanying notes.
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3
ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(thousands)
Assets JANUARY 31, 1998 NOVEMBER 1, 1997 FEBRUARY 1, 1997
---------------- ---------------- ----------------
Cash and cash equivalents $ 217,198 $ 289,601 $ 248,142
Short-term investments 76,546 51,006 19,682
Accounts receivable, net 245,738 255,886 234,160
Inventories:
Finished goods 83,776 66,253 63,724
Work in process 128,587 128,187 118,142
Raw materials 29,145 31,526 30,441
---------- ---------- ----------
241,508 225,966 212,307
Deferred tax assets 60,000 54,761 45,000
Prepaid expenses 19,585 18,209 15,896
---------- ---------- ----------
Total current assets 860,575 895,429 775,187
---------- ---------- ----------
Property, plant and equipment,
at cost:
Land and buildings 158,346 145,952 143,183
Machinery and equipment 979,570 938,602 831,436
Office equipment 59,910 58,714 50,123
Leasehold improvements 92,617 87,407 81,320
---------- ---------- ----------
1,290,443 1,230,675 1,106,062
Less accumulated depreciation
and amortization 595,922 569,040 504,150
---------- ---------- ----------
Net property, plant and
equipment 694,521 661,635 601,912
---------- ---------- ----------
Investments 188,690 131,468 116,059
Intangible assets, net 17,925 14,768 16,310
Other assets 58,415 60,553 26,257
---------- ---------- ----------
Total other assets 265,030 206,789 158,626
---------- ---------- ----------
$1,820,126 $1,763,853 $1,535,725
========== ========== ==========
See accompanying notes.
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4
ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(thousands except share amounts)
Liabilities and Stockholders'
Equity JANUARY 31, 1998 NOVEMBER 1, 1997 FEBRUARY 1, 1997
---------------- ---------------- ----------------
Short-term borrowings and current
portion of long-term debt $ 1,489 $ - $ 1,434
Obligations under capital leases 11,844 11,733 11,445
Accounts payable 95,447 97,654 79,167
Deferred income on shipments to
domestic distributors 44,224 37,013 34,074
Income taxes payable 60,525 52,550 50,393
Accrued liabilities 70,648 75,444 61,746
---------- ---------- ----------
Total current liabilities 284,177 274,394 238,259
---------- ---------- ----------
Long-term debt 310,000 310,000 310,000
Noncurrent obligations under
capital leases 35,871 38,852 47,625
Deferred income taxes 24,000 20,740 18,000
Other noncurrent liabilities 32,327 31,737 15,797
---------- ---------- ----------
Total noncurrent liabilities 402,198 401,329 391,422
---------- ---------- ----------
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $1.00 par value,
500,000 shares authorized,
none outstanding - - -
Common stock, $.16 2/3 par value,
600,000,000 shares authorized,
162,317,316 shares issued
(161,941,094 in November 1997,
159,886,615 in February 1997) 27,053 26,991 26,648
Capital in excess of par value 224,800 223,885 181,379
Retained earnings 875,868 831,584 692,546
Cumulative translation adjustment 6,185 6,724 5,982
---------- ---------- ---------
1,133,906 1,089,184 906,555
Less 19,934 shares in treasury,
at cost (35,094 in November 1997
and 21,120 in February 1997) 155 1,054 511
---------- ---------- ----------
Total stockholders' equity 1,133,751 1,088,130 906,044
---------- ---------- ----------
$1,820,126 $1,763,853 $1,535,725
========== ========== ==========
See accompanying notes.
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ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(thousands)
THREE MONTHS ENDED
------------------
JANUARY 31, 1998 FEBRUARY 1, 1997
---------------- ----------------
OPERATIONS
Cash flows from operations:
Net income $ 44,284 $39,180
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization 29,744 23,792
Deferred income taxes 3,274 995
Other noncash expense (income) 586 (81)
Changes in operating assets and liabilities (5,307) (16,993)
-------- --------
Total adjustments 28,297 7,713
-------- --------
Net cash provided by operations 72,581 46,893
-------- --------
INVESTMENTS
Cash flows from investments:
Additions to property, plant and equipment, net (62,200) (42,022)
Long-term investments (56,520) (47,677)
Purchases of short-term investments
available for sale (43,364) -
Maturities of short-term investments
available for sale 17,824 70,128
(Increase) decrease in other assets (2,532) 312
-------- --------
Net cash used for investments (146,792) (19,259)
-------- --------
FINANCING ACTIVITIES
Cash flows from financing activities:
Proceeds from employee stock plans 1,283 3,985
Payments on capital lease obligations (2,870) (2,718)
Proceeds from equipment financing - 7,123
Net increase (decrease) in variable
rate borrowings 1,489 (973)
-------- --------
Net cash (used for) provided by
financing activities (98) 7,417
-------- --------
Effect of exchange rate changes on cash 1,906 2,982
-------- --------
Net (decrease) increase in cash and cash equivalents (72,403) 38,033
Cash and cash equivalents at beginning of period 289,601 210,109
-------- --------
Cash and cash equivalents at end of period $217,198 $248,142
======== ========
SUPPLEMENTAL INFORMATION
Cash paid during the period for:
Income taxes $ 2,232 $ 6,839
======== ========
Interest $ 4,559 $ 4,688
======== ========
See accompanying notes.
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6
Analog Devices, Inc.
Notes to Condensed Consolidated Financial Statements
January 31, 1998
Note 1 - In the opinion of management, the information furnished in the
accompanying financial statements reflects all adjustments which are necessary
to fairly state 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 1998 presentation.
Note 3 - Investments
During the first quarter of fiscal 1998 the Company made the final payment of
$56 million in connection with its joint venture with Taiwan Semiconductor
Manufacturing Company and other investors for the construction and operation of
a semiconductor fabrication facility in Camas, Washington ("WaferTech"). The
Company has invested $140 million in WaferTech and has an 18% equity ownership
in the joint venture.
Note 4 - Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share", which the Company adopted in the first quarter of
fiscal 1998. The Company changed the method used to compute earnings per share
and will restate all prior periods. Under the new requirements, primary and
fully diluted earnings per share were replaced by basic and diluted earnings per
share. Basic earnings per share is computed based only on the weighted average
number of common shares outstanding during the period and the dilutive effect of
future issues of common stock relating to stock option programs and convertible
debt financing is excluded. Diluted earnings per share is computed essentially
in the same manner as fully diluted earnings per share with some exceptions. The
primary exception affecting the Company's calculation of diluted EPS is that the
dilutive effect of stock options is always based on the average market price of
the stock during the period, not the higher of the average and period end market
price which was required under APB 15. The following table sets forth the
computation of basic and diluted earnings per share:
THREE MONTHS ENDED
------------------
JANUARY 31, 1998 FEBRUARY 1, 1997
---------------- ----------------
Net income $ 44,284 $ 39,180
======== ========
Weighted average common shares 161,023 158,515
======== ========
BASIC EARNINGS PER SHARE $0.28 $0.25
======== ========
Net income $ 44,284 $ 39,180
Interest related to convertible subordinated
notes, net of tax 1,411 1,425
-------- --------
Earnings available for common stock $ 45,695 $ 40,605
======== ========
Weighted average common shares outstanding 160,942 158,195
Assumed exercise of common stock equivalents 6,219 6,770
Assumed conversion of subordinated notes 10,985 10,985
-------- --------
Weighted average common and common
equivalent shares 178,146 175,950
======== ========
DILUTED EARNINGS PER SHARE $ 0.26 $ 0.23
======== ========
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This information should be read in connection with the unaudited consolidated
condensed financial statements and the notes thereto included in Item 1 of this
Quarterly Report and the audited consolidated financial statements and notes
thereto and Management's Analysis for the fiscal year ended November 1, 1997,
contained in the Annual Report on Form 10-K.
The following discussion and analysis may contain forward-looking statements.
Such statements are subject to certain risks and uncertainties, including those
discussed below or in the Company's Form 10-K for the fiscal year ended November
1, 1997, that could cause actual results to differ materially from the Company's
expectations. Readers are cautioned not to place undue reliance on any
forward-looking statements, as they reflect management's analysis only as of the
date hereof. The Company undertakes no obligation to release the results of any
revision to these forward-looking statements which may be made to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Results of Operations
Net sales for the first quarter of fiscal 1998 were $331 million, an increase of
$39 million or 13% from the first quarter of fiscal 1997. Higher sales volumes
of standard linear IC ("SLICs") products was the primary reason for the
increase. SLICs are primarily high-performance, single function devices. Demand
for the Company's SLICs was broad based across all served application markets
and geographies with the greatest strength in North America. In addition to the
continued growth in the industrial and instrumentation markets, applications
such as cellular base stations, ultrasound imaging, analog and digital
camcorders, scanners and graphics digitizing products for flat panel display
monitors are providing growth opportunities for the Company.
The gross margin for the first quarter of fiscal 1998 was 50.8% compared to
49.1% for the first quarter of fiscal 1997. The increase in gross margin was
primarily due to the 13% revenue growth combined with a mix shift in favor of
higher margin products in the quarter ended January 31, 1998.
Research and development expenses were 16.6% of sales for the three months ended
January 31, 1998, compared to 15.6% of sales for the three months ended February
1, 1997. This increase is mainly due to an increase in customer funded
initiatives and to the continued development of innovative SLIC products and
processes and higher spending in the development of new products utilizing the
Company's high-speed linear and digital signal processing technologies. The
Company believes that a continued commitment to research and development is
essential in order to maintain product leadership with its existing products and
to provide innovative new product offerings, and therefore, expects to continue
to make significant investments in research and development in the future.
Selling, marketing, general & administrative ("SMG&A") expenses for the first
quarter of fiscal 1998 included a special charge of $8 million attributable to
collection difficulties the Company experienced with a GSM customer whose
business and financing have been adversely affected by the Southeast Asia
economic situation, and other reserves to cover the increased risks associated
with accounts receivable from customers in Southeast Asia. SMG&A expenses,
excluding the $8 million special charge, declined as a percentage of sales to
14.4%, compared to 15.5% for the year ago quarter.
The effective income tax rate decreased from 25% for the first three month
period of fiscal 1997 to 24% for the first three month period of fiscal 1998 due
to a shift in the mix of worldwide profits.
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8
Net income for the first quarter of fiscal 1998 of $44 million increased 13%
compared to the first quarter of fiscal 1997. Diluted earnings per share were
$0.26, compared to $0.23 for the first quarter of fiscal 1997. Excluding the
effect of the $8 million special charge recorded in G&A, diluted earnings per
share were $0.29 which is an increase of 26% compared to the quarter ended
February 1, 1997.
Liquidity and Capital Resources
At January 31, 1998, cash, cash equivalents and short-term investments totaled
$294 million. The Company's primary source of funds for the first three months
of fiscal 1998 was $73 million of cash provided by operations. The principal
uses of funds in the first quarter of fiscal 1998 were a $56 million payment
made in connection with the Company's joint venture agreement and the purchase
of $62 million of property, plant and equipment.
Net additions to property, plant and equipment of $62 million for the first
quarter of fiscal 1998 were funded with a combination of cash on hand and cash
generated from operations. Capital expenditures for the quarter included
approximately $10 million for the purchase of land in San Jose, California,
which the Company plans to use for future expansion. The remainder of the
expenditures related to the Company's continued upgrade and expansion of its
existing manufacturing facilities worldwide.
During the first quarter of fiscal 1998 the Company made the final payment of
$56 million in connection with its joint venture with Taiwan Semiconductor
Manufacturing Company and other investors for the construction and operation of
a semiconductor fabrication facility in Camas, Washington ("WaferTech"). The
Company has invested $140 million in WaferTech and has an 18% equity ownership
in the joint venture.
The Company currently plans to make capital expenditures of approximately $275
million during fiscal 1998, primarily in connection with the continued expansion
of its manufacturing capacity.
At January 31, 1998, the Company's principal sources of liquidity were $294
million of cash and cash equivalents and short-term investments. In addition,
the Company 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 2000, all of which
were substantially unused at January 31, 1998. At January 31, 1998, the
Company's debt-to-equity ratio was 32%.
The Company believes that its existing sources of liquidity and cash expected to
be generated future operations, together with current and anticipated available
long-term financing, will be sufficient to fund operations, capital expenditures
and research and development efforts for the foreseeable future.
8
9
Factors Which May Affect 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. The Company is exposed to the risk of
obsolescence of its inventory depending on the mix of future business. 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 continued 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 continued 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 currently 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.
The Company has substantially increased 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; or if the demand were to increase significantly that the increased
capacity would be sufficient to satisfy demand for its products. The Company
relies, and plans to continue to rely, on assembly and test subcontractors and
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 reduced control over delivery schedules,
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, including the potential
adverse impact in operating results for "take or pay" covenants in certain of
its supply agreements. While the Company tries to ensure that its manufacturing
capacity and demand for its products are in relative balance, no assurance can
be given that from time to time an imbalance between the Company's manufacturing
capacity and the demand for its products would not occur. Any such imbalance
could adversely affect the Company's consolidated results of operations.
9
10
For the first three months of fiscal 1998, 51% of the Company's revenues were
derived from customers in international markets. The Company has manufacturing
facilities outside the U.S., in Ireland, the Philippines and Taiwan. The Company
also has supply agreements that include "take or pay" covenants with suppliers
located in Southeast Asia ("SEA") and as part of these arrangements, the Company
has $26 million on deposit with two of these suppliers. The Company also has a
$21 million investment with one of these suppliers. In addition, the Company's
major partner in its joint venture, WaferTech, is TSMC which is located in the
SEA region. The Company is therefore subject to the economic and political risks
inherent in international operations, including risks associated with the
ongoing uncertainties in the economies in SEA. These risks include air
transportation disruptions, expropriation, 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. See the Company's Annual Report on form 10-K for the
fiscal year ended November 1, 1997 for information concerning certain pending
litigation involving the Company. An adverse outcome in 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.
The Company already has installed Year 2000 compliant software in many of its
major systems. A task force is engaged in the ongoing effort to complete this
activity for the balance of the Company's systems. The cost of these efforts is
not expected to be material. The Company presently believes that the Year 2000
issue will not pose significant operational problems. However, Year 2000 issues
could have a significant impact on the Company's operations and its financial
results if modifications cannot be completed on a timely basis; unforeseen needs
or problems arise; or, if the systems operated by the Company's customers,
vendors or subcontractors are not Year 2000 compliant.
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.
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PART II - OTHER INFORMATION
ANALOG DEVICES, INC.
Item 6. Exhibits and reports on Form 8-K
(a) See Exhibit Index
(b) There were no reports on Form 8-K filed for the three months ended
January 31, 1998.
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12
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: March 16, 1998 By:/s/ Jerald G. Fishman
------------------
Jerald G. Fishman
President and
Chief Executive Officer
(Principal Executive Officer)
Date: March 16, 1998 By:/s/ Joseph E. McDonough
--------------------
Joseph E. McDonough
Vice President-Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
12
13
EXHIBIT INDEX
Analog Devices, Inc.
Item
27 Financial Data Schedule
13
5
1,000
U.S. DOLLARS
3-MOS
OCT-31-1998
NOV-02-1997
JAN-31-1998
1
217,198
76,546
245,738
0
241,508
860,575
1,290,443
595,922
1,820,126
284,177
310,000
0
0
27,053
1,106,698
1,820,126
330,721
330,721
162,660
162,660
110,621
0
2,429
58,207
13,923
44,284
0
0
0
44,284
.28
.26
Asset Value Represents Net Amount
