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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 MAY 5, 2001
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 June 2, 2001 was 360,611,469 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
----------------------------
May 5, 2001 April 29, 2000
----------- --------------
Net sales $ 601,442 $ 580,995
Cost of sales 258,635 257,184
--------- ---------
Gross margin 342,807 323,811
Operating expenses:
Research and development 124,821 90,026
Amortization of intangibles 13,996 676
Selling, marketing, general and administrative 77,563 71,073
--------- ---------
216,380 161,775
Operating income 126,427 162,036
Nonoperating (income) expenses:
Interest expense 16,245 822
Interest income (35,817) (13,595)
Other, net (1,173) 449
--------- ---------
(20,745) (12,324)
--------- ---------
Income before income taxes 147,172 174,360
Provision for income taxes 44,676 52,308
--------- ---------
Net income $ 102,496 $ 122,052
========= =========
Shares used to compute earnings per share - basic 358,739 352,706
========= =========
Shares used to compute earnings per share - diluted 380,777 382,321
========= =========
Earnings per share - basic $ 0.29 $ 0.35
========= =========
Earnings per share - diluted $ 0.27 $ 0.32
========= =========
See accompanying notes.
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ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(thousands except per share amounts)
Six Months Ended
-------------------------------
May 5, 2001 April 29, 2000
----------- --------------
Net sales $ 1,373,716 $ 1,071,272
Cost of sales 578,655 482,271
----------- -----------
Gross margin 795,061 589,001
Operating expenses:
Research and development 246,531 172,542
Purchased in-process research and development 9,500 --
Amortization of intangibles 24,302 1,172
Selling, marketing, general and administrative 163,116 135,597
----------- -----------
443,449 309,311
Operating income 351,612 279,690
Nonoperating (income) expenses:
Interest expense 33,114 2,503
Interest income (77,065) (25,501)
Other, net (29,289) 1,263
----------- -----------
(73,240) (21,735)
----------- -----------
Income before income taxes 424,852 301,425
Provision for income taxes 131,979 86,366
----------- -----------
Net income $ 292,873 $ 215,059
=========== ===========
Shares used to compute earnings per share - basic 357,905 351,029
=========== ===========
Shares used to compute earnings per share - diluted 382,084 378,389
=========== ===========
Earnings per share - basic $ 0.82 $ 0.61
=========== ===========
Earnings per share - diluted $ 0.77 $ 0.57
=========== ===========
See accompanying notes.
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ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(thousands)
Assets May 5, 2001 October 28, 2000 April 29, 2000
----------- ---------------- --------------
Cash and cash equivalents $1,217,084 $1,736,421 $ 514,894
Short-term investments 1,292,462 498,844 416,559
Accounts receivable, net 343,848 463,912 351,538
Inventories:
Raw materials 22,227 17,505 13,105
Work in process 191,453 179,918 150,002
Finished goods 105,154 134,671 117,291
---------- ---------- ----------
318,834 332,094 280,398
Deferred tax assets 113,000 108,989 98,000
Prepaid expenses and other current assets 38,237 27,754 11,236
---------- ---------- ----------
Total current assets 3,323,465 3,168,014 1,672,625
---------- ---------- ----------
Property, plant and equipment, at cost:
Land and buildings 277,730 238,550 179,068
Machinery and equipment 1,429,411 1,260,572 1,151,759
Office equipment 92,830 86,930 80,718
Leasehold improvements 130,709 120,710 113,807
---------- ---------- ----------
1,930,680 1,706,762 1,525,352
Less accumulated depreciation and amortization 992,471 927,536 860,591
---------- ---------- ----------
Net property, plant and equipment 938,209 779,226 664,761
---------- ---------- ----------
Investments 223,006 217,755 260,755
Intangible assets, net 256,271 192,698 34,956
Other assets 56,555 53,644 35,925
---------- ---------- ----------
Total other assets 535,832 464,097 331,636
---------- ---------- ----------
$4,797,506 $4,411,337 $2,669,022
========== ========== ==========
See accompanying notes.
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ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(thousands)
Liabilities and Stockholders' Equity May 5, 2001 October 28, 2000 April 29, 2000
----------- ---------------- --------------
Short-term borrowings and current
portion of long-term debt $ 48 $ 5,752 $ --
Obligations under capital leases 7,135 9,938 13,457
Accounts payable 129,756 213,196 139,903
Deferred income on shipments to distributors 149,169 140,369 112,795
Income taxes payable 178,923 86,625 135,720
Accrued liabilities 191,982 194,017 152,007
---------- ---------- ----------
Total current liabilities 657,013 649,897 553,882
---------- ---------- ----------
Long-term debt 1,200,421 1,200,261 --
Non-current obligations under capital leases 8,905 12,699 12,655
Deferred income taxes 52,420 51,205 55,000
Other non-current liabilities 229,505 193,625 180,346
---------- ---------- ----------
Total non-current liabilities 1,491,251 1,457,790 248,001
---------- ---------- ----------
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $1.00 par value, 471,934 shares authorized,
none outstanding -- -- --
Common stock, $.16 2/3 par value, 600,000,000 shares
authorized, 360,684,042 shares issued
(357,969,010 in October 2000 and 355,095,676
in April 2000) 60,115 59,663 59,183
Capital in excess of par value 598,938 526,820 457,887
Retained earnings 2,010,816 1,717,943 1,325,870
Accumulated other comprehensive income 4,100 2,841 25,702
---------- ---------- ----------
2,673,969 2,307,267 1,868,642
Less 476,637 shares in treasury, at cost (45,186 in
October 2000 and 19,552 in April 2000) 24,727 3,617 1,503
---------- ---------- ----------
Total stockholders' equity 2,649,242 2,303,650 1,867,139
---------- ---------- ----------
$4,797,506 $4,411,337 $2,669,022
========== ========== ==========
See accompanying notes.
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ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(thousands)
Six Months Ended
------------------------------
May 5, 2001 April 29, 2000
----------- --------------
OPERATIONS
Cash flows from operations:
Net income $ 292,873 $ 215,059
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization 101,492 73,315
Gain on sale of investment (28,084) --
Write-off of purchased research and development 9,500 --
Deferred income taxes (3,245) (9,717)
Other non-cash expense 2,692 559
Changes in operating assets and liabilities 135,074 39,282
----------- -----------
Total adjustments 217,429 103,439
----------- -----------
Net cash provided by operations 510,302 318,498
----------- -----------
INVESTMENTS
Cash flows from investments:
Purchase of short-term investments
available for sale (1,444,042) (418,662)
Maturities of short-term investments
available for sale 650,424 408,656
Payments for acquisitions, net of cash acquired (37,526) (2,176)
Proceeds from sale of investment 60,936 --
Change in long-term investments -- 348
Additions to property, plant and equipment, net (234,845) (92,846)
Decrease in other assets (3,899) 6,737
----------- -----------
Net cash used for investments (1,008,952) (97,943)
----------- -----------
FINANCING ACTIVITIES
Cash flows from financing activities:
Proceeds from employee stock plans 9,108 20,693
Repurchase of common stock (21,831) --
Payments on capital lease obligations (6,742) (4,818)
Net (decrease) increase in variable rate borrowings (5,439) (82,215)
----------- -----------
Net cash (used for) provided by financing activities (24,904) (66,340)
----------- -----------
Effect of exchange rate changes on cash 4,217 4,788
----------- -----------
Net (decrease) increase in cash and cash equivalents (519,337) 159,003
Cash and cash equivalents at beginning of period 1,736,421 355,891
----------- -----------
Cash and cash equivalents at end of period $ 1,217,084 $ 514,894
=========== ===========
See accompanying notes.
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ANALOG DEVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND SIX MONTHS ENDED MAY 5, 2001
(all tabular amounts in thousands except per share amounts)
Note 1 - In the opinion of management, the information furnished in the
accompanying condensed consolidated financial statements reflects all normal
recurring adjustments that are necessary to fairly state the results for these
interim periods and should be read in conjunction with the Company's Annual
Report to Stockholders on Form 10-K for the fiscal year ended October 28, 2000
(2000 Annual Report).
The Company has a 52-53 week fiscal year that ends on the Saturday closest to
the last day in October. Fiscal 2001 is a 53-week fiscal year, with the
additional week occurring in the first quarter ended February 3, 2001.
Note 2 - Certain amounts reported in the previous year have been reclassified to
conform to the fiscal 2001 presentation.
Note 3 - Comprehensive Income
Total comprehensive income, i.e., net income plus available-for-sale securities
valuation adjustments, net gain or loss on derivative instruments designated as
cash flow hedges and currency translation adjustments to stockholders' equity,
for the first three months of fiscal 2001 and fiscal 2000 was $104 million and
$109 million, respectively. For the first six months of fiscal 2001 and fiscal
2000, total comprehensive income was $294 million and $229 million,
respectively.
Note 4 - Earnings Per Share
Basic earnings per share is computed based only on the weighted average number
of common shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common shares outstanding during
the period, plus the dilutive effect of future issues of common stock relating
to stock option programs and other potentially dilutive securities. In
calculating diluted earnings per share, the dilutive effect of stock options is
computed using the average market price for the period. Shares related to
convertible debt financing are excluded because the effect would be
anti-dilutive. Certain of the Company's stock options were excluded because they
were antidilutive, but these options could be dilutive in the future. The
following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended
-----------------------------
May 5, 2001 April 29, 2000
----------- --------------
Basic:
Net income $102,496 $122,052
======== ========
Weighted shares outstanding 358,739 352,706
======== ========
Earnings per share $ 0.29 $ 0.35
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Diluted:
Net income $102,496 $122,052
======== ========
Weighted shares outstanding 358,739 352,706
Assumed exercise of common stock equivalents 22,038 29,615
-------- --------
Weighted average common and common equivalent shares 380,777 382,321
======== ========
Earnings per share $ 0.27 $ 0.32
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Six Months Ended
----------------------------
May 5, 2001 April 29, 2000
----------- --------------
Basic:
Net income $292,873 $215,059
======== ========
Weighted shares outstanding 357,905 351,029
======== ========
Earnings per share $ 0.82 $ 0.61
======== ========
Diluted:
Net income $292,873 $215,059
======== ========
Weighted shares outstanding 357,905 351,029
Assumed exercise of common stock equivalents 24,179 27,360
-------- --------
Weighted average common and common equivalent shares 382,084 378,389
======== ========
Earnings per share $ 0.77 $ 0.57
======== ========
Note 5 - Investments
On December 27, 2000, the Company sold its investment in WaferTech, LLC to
Taiwan Semiconductor Manufacturing Company. The Company received approximately
$61 million in cash and realized a pretax gain of approximately $28 million. The
realized gain is included in other nonoperating income.
Note 6 - Acquisitions
During the first quarter of fiscal 2001, the Company completed several
acquisitions. On October 31, 2000, the Company acquired Thomas Neuroth AG
(Neuroth) of Vienna, Austria for approximately $4 million in cash, with
additional contingent cash consideration of up to $4 million payable if certain
operational objectives are achieved. Neuroth is a developer of highly integrated
circuits for symmetric DSL broadband access. On November 10, 2000, the Company
acquired Signal Processing Associates Pty. Ltd., (SPA) of Victoria, Australia
for approximately $3 million in cash, with additional contingent cash
consideration of up to $1.5 million payable if certain operational objectives
are achieved. SPA is a developer and supplier of voice processing and fax/data
relay software for telecommunications applications. On December 18, 2000, the
Company acquired Integrated Micro Instruments, Inc. (IMI) of Berkeley,
California for approximately $1 million in cash and 13,750 shares of common
stock (valued at approximately $746,000), with an additional 50,000 shares of
common stock issuable over the next five years upon the satisfaction of certain
conditions. IMI develops MEMS process designs. On January 4, 2001, the Company
acquired ChipLogic, Inc. (ChipLogic) of Santa Clara, California for cash of
approximately $4 million and approximately 1 million shares of common stock
(valued at approximately $60 million), with 489,375 shares of additional common
stock issuable if certain operational objectives are achieved. In the second
quarter of fiscal 2001, approximately $1.4 million of expense was recorded
related to 44,000 shares of common stock to be issued related to the achievement
of certain of these objectives. ChipLogic is a developer of high-performance
integrated circuits and software focused on the convergence of voice, broadband
access and network protocol processing. In connection with the acquisition of
ChipLogic, the Company recorded a charge of $9.5 million for the write-off of
in-process research and development in the first quarter of fiscal 2001. On
January 16, 2001, the Company acquired Staccato Systems, Inc. (Staccato) of
Mountain View, California for approximately $23 million in cash, with additional
contingent cash consideration of up to $7 million payable if certain operational
objectives are achieved. Approximately $2 million of the contingent
consideration has been paid. Staccato is in the field of audio synthesis
technology. Any contingent consideration paid to Staccato will be accounted for
as additional goodwill. Of the $4 million of contingent consideration payable to
Neuroth, $3 million will be allocated to goodwill and $1 million will be
accounted for as acquisition-related expense. All other contingent consideration
will be accounted for as acquisition-related expense. These acquisitions were
accounted for as purchases, and the excess of the purchase price over the fair
value of the assets acquired was allocated to goodwill, which is being amortized
on the straight-line basis over five years.
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Pro forma results of operations for Neuroth, SPA, IMI, ChipLogic and Staccato
have not been provided herein as they were not material to the Company on either
an individual or an aggregate basis. The results of operations of each
acquisition are included in the Company's consolidated statement of income from
the date of each acquisition.
Note 7 - Segment Information
The Company operates in two segments: the design, manufacture and marketing of a
broad range of integrated circuits, which comprises approximately 98% of the
Company's revenue, and the design, manufacture and marketing of a range of
assembled products, which accounts for the remaining 2% of the Company's
revenue. Effectively, the Company operates in one reportable segment.
Note 8 - New Accounting Standards
Revenue Recognition
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101, (SAB 101), "Revenue Recognition in Financial Statements." SAB 101
summarizes the application of generally accepted accounting principles to
revenue recognition in financial statements. The Company will adopt SAB 101 in
the fourth quarter of fiscal 2001 and does not expect SAB 101 to have a material
effect on its financial position or results of operations.
Derivatives
Effective October 29, 2000, the Company adopted Statement of Financial
Accounting Standards No. 133, (FAS 133), "Accounting for Derivative Instruments
and Hedging Activities," as amended by Statement of Financial Accounting
Standards No. 138, (FAS 138), "Accounting for Certain Instruments and Certain
Hedging Activities." FAS 133 requires that an entity recognize all derivatives
as either assets or liabilities and measure such instruments at fair market
value. Under certain circumstances, a portion of the derivative's gain or loss
is initially reported as a component of other comprehensive income (OCI) until
the hedged transaction affects earnings. For a derivative not designated as a
hedging instrument, the gain or loss is recognized in income in the period of
change. The adoption of FAS 133 on October 29, 2000 did not have a material
impact on operations; however, it resulted in a $5 million loss recognized in
OCI. This loss is being reclassified into earnings during fiscal 2001.
Foreign Exchange Exposure Management - The Company has significant international
sales and purchase transactions in foreign currencies and has a policy of
hedging forecasted and actual foreign currency risk with forward foreign
exchange contracts. The Company's forward foreign exchange contracts are
primarily denominated in Japanese yen and certain European currencies and are
for periods consistent with the terms of the underlying transactions, generally
one year or less. Derivative instruments are employed to eliminate or minimize
certain foreign currency exposures that can be confidently identified and
quantified. In accordance with FAS 133, hedges related to anticipated
transactions are designated and documented at the inception of the respective
hedge as cash flow hedges and evaluated for effectiveness monthly. As the terms
of the forward contract and the underlying transaction are matched at inception,
forward contract effectiveness is calculated by comparing the fair value of the
contract to the change in the forward value of the anticipated transaction, with
the effective portion of the gain or loss on the derivative instrument reported
as a component of OCI in stockholders' equity and reclassified into earnings in
the same period during which the hedged transaction affects earnings. Any
residual change in fair value of the instruments, or ineffectiveness, is
recognized immediately in other expense. No ineffectiveness was recognized in
the first or second quarters of fiscal 2001.
Additionally, the Company enters into foreign currency forward contracts to
hedge the gains and losses generated by the remeasurement of certain recorded
assets and liabilities in a non-functional currency. Changes in the fair value
of these undesignated hedges are recognized in other expense immediately as an
offset to the changes in the fair value of the asset or liability being hedged.
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Interest Rate Risk Management - The Company enters into interest rate swap and
cap agreements to manage its exposure to interest rate movements by effectively
converting a portion of its debt and certain financing arrangements from fixed
to variable rates. Maturity dates of interest rate swap and cap agreements
generally match those of the underlying debt or financing arrangements. These
agreements, which have maturities of up to seven years, involve the exchange of
fixed rate payments for variable rate payments without the exchange of the
underlying principal amounts. Variable rates are based on six-month U.S. dollar
LIBOR and are reset on a semiannual basis. The differential between fixed and
variable rates to be paid or received is accrued as interest rates change in
accordance with the agreements and recognized over the life of the agreements as
an adjustment to interest expense. Given the insignificant value of the current
interest rate swap and cap agreements, the Company has not designated these
instruments as hedges. The change in fair value related to these instruments is
recognized immediately in Other expense.
Derivative financial instruments involve, to a varying degree, elements of
market and credit risk not recognized in the consolidated financial statements.
The market risk associated with these instruments resulting from currency
exchange rate or interest rate movements is expected to offset the market risk
of the underlying transactions, assets and liabilities being hedged. The
counterparties to the agreements relating to the Company's foreign exchange and
interest rate instruments consist of a number of major international financial
institutions with high credit ratings. The Company does not believe that there
is significant risk of nonperformance by these counterparties because the
Company continually monitors the credit ratings of such counterparties, and
limits the financial exposure and the amount of agreements entered into with any
one financial institution. While the contract or notional amounts of derivative
financial instruments provide one measure of the volume of these transactions,
they do not represent the amount of the Company's exposure to credit risk. The
amounts potentially subject to credit risk (arising from the possible inability
of counterparties to meet the terms of their contracts) are generally limited to
the amounts, if any, by which the counterparties' obligations under the
contracts exceed the obligations of the Company to the counterparties.
Accumulated Derivative Gains or Losses
The following table summarizes activity in other comprehensive income related to
derivatives classified as cash flow hedges held by the Company during the period
of October 29, 2000 (the date of adoption of FAS 133) through May 5, 2001:
Cumulative effect of adopting FAS 133 as of October 29, 2000 $ 5,200
Less: Reclassifications into earnings from other comprehensive income (3,300)
-------
1,900
Changes in fair value of derivatives - (gain) loss (5,800)
Reclassification into earnings from other comprehensive income 1,300
-------
Accumulated (gain) loss included in other comprehensive income $(2,600)
=======
The amount of accumulated gain that will be reclassified into earnings over the
next twelve months is $2.6 million.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This information should be read in conjunction with the unaudited condensed
consolidated financial statements and related notes included in Item 1 of this
Quarterly Report and the audited consolidated financial statements and related
notes and Management Analysis for the fiscal year ended October 28, 2000,
contained in our 2000 Annual Report.
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 our 2000 Annual Report, which could cause actual results
to differ materially from our expectations. Readers are cautioned not to place
undue reliance on any forward-looking statements, as they reflect management's
current analysis. We undertake no obligation to release the results of any
revision to these forward-looking statements that may be made to reflect events
or circumstances after the date of this report or to reflect the occurrence of
unanticipated events.
Results of Operations
Net sales for the second quarter of fiscal 2001 were $601 million, an increase
of 4% from the $581 million reported for the second quarter of fiscal 2000. Net
sales for the first six months of fiscal 2001 were $1,374 million, an increase
of 28% from the $1,071 million reported for the comparable period of fiscal
2000. Analog IC product sales grew by 11% over the same quarter in fiscal 2000
and 34% over the same six-month period in fiscal 2000. Although sales of DSP IC
products grew by 12% in the first six months of fiscal 2001 over the same prior
year period, DSP IC product sales declined 18% in the second quarter of fiscal
year 2001 from the same prior year quarter primarily due to significant order
cancellations and adjustments particularly from telecommunications customers and
contract manufacturers. The high levels of demand we experienced last year
resulted in excess customer inventories in the current year that are still being
absorbed in virtually every market we serve.
A 42% increase in second quarter fiscal 2001 sales in Europe over the same prior
year quarter was partially offset by a 9% decrease in North American sales. For
the six months ended May 5, 2001, sales increased in all regions, with the
largest increase occurring in Europe. International sales in the second quarter
of fiscal 2001 represented 61% of total sales compared to 56% in the second
quarter of fiscal 2000.
Although we experienced overall sales growth in the three months and six months
ended May 5, 2001 over the same prior year periods, deteriorating market
conditions have resulted in a 22% sales decline compared to the fiscal quarter
ended February 3, 2001, as the OEM and distributor channels continued to
struggle with excess inventories and uncertain demand. We anticipate continued
weak market conditions to result in a 10% decline in sequential revenue for our
third quarter of fiscal 2001.
Gross margin was 57.0% for the second quarter of fiscal 2001, an increase of 130
basis points from the 55.7% gross margin achieved in the second quarter of
fiscal 2000. The gross margin was 57.9% for the first six months of fiscal 2001,
an increase of 290 basis points from the 55.0% gross margin achieved in the
first six months of fiscal 2000. For the quarter ended May 5, 2001, the
improvement in gross margin was due to a revenue shift to our higher margin
analog products partially offset by reduced revenue levels and the impact of
additional inventory reserves. For the six months ended May 5, 2001, the
improvement in gross margin over the same prior year period was primarily due to
the favorable effect of fixed costs allocated across a higher sales base and
improved manufacturing efficiencies at our wafer fabrication, assembly and test
facilities.
Research and development (R&D) expenses were $125 million and $247 million for
the three and six months ended May 5, 2001, respectively, compared to $90
million and $173 million for the corresponding periods of fiscal 2000. As a
percentage of sales, R&D spending increased during the second quarter of fiscal
2001 to 20.8%, up from 15.5% in the second quarter of fiscal 2000. The increases
in R&D spending for both the three months and six months ended May 5, 2001 as
compared to the same periods in the prior year are due primarily to increased
engineering headcount and related employee expenses to continue development of
new products. We expect to continue the development of innovative technologies
and processes for new products targeted for broadband and wireless
communications applications, imaging, audio and high-performance power and
thermal management products for computer and consumer product applications. We
believe that a continued commitment to research and development is essential in
order to maintain product leadership with our existing products and to provide
innovative new product offerings, and therefore we expect to continue to make
significant R&D investments in the future.
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During the first quarter of fiscal 2001, we recorded a charge of $9.5 million
for the write-off of in-process R&D in connection with the acquisition of
ChipLogic, Inc. of Santa Clara, California. The total cost of the acquisition
was approximately $60 million in common stock and $4 million in cash, with
additional contingent consideration of 489,375 shares of common stock payable if
ChipLogic achieves certain operational objectives. The contingent consideration
is expected to be accounted for as acquisition-related expense.
Amortization of intangibles was $14 million and $24 million in the three and six
months ended May 5, 2001, respectively, compared to $0.7 million and $1.2
million in the three and six months ended April 29, 2000, respectively. The
quarter over quarter and year over year increases in amortization were
attributable to the amortization of goodwill associated with the acquisition of
BCO Technologies plc, Ltd. completed in the fourth quarter of fiscal 2000, and
the acquisitions of Thomas Neuroth AG, Signal Processing Associates Pty. Ltd.,
Integrated Micro Instruments, Inc., ChipLogic, Inc. and Staccato Systems, Inc.
completed in the first quarter of fiscal 2001.
Selling, marketing, general & administrative (SMG&A) expenses for the second
quarter of fiscal 2001 were $78 million, an increase of $7 million from the $71
million reported for the second quarter of fiscal 2000. SMG&A expenses for the
six months ended May 5, 2001 were $163 million, compared to $136 million for the
six months ended April 29, 2000. In the second quarter of fiscal 2001, SMG&A
expenses as a percentage of sales remained relatively flat to the same period in
the prior year, despite slightly higher sales, which reflects our continuing
control over SMG&A spending.
Interest expense was $16 million and $33 million for the three and six months
ended May 5, 2001, respectively, and $1 million and $3 million for the same
prior year periods. These significant increases in interest expense were a
result of the issuance of $1.2 billion of 4.75% convertible subordinated notes
in the fourth quarter of fiscal 2000.
Interest income was $36 million and $77 million for the three and six months
ended May 5, 2001, respectively, and $14 million and $26 million for the same
prior year periods. These increases in interest income were attributable to the
interest earned on higher cash balances resulting from increased cash flow from
operations as well as the unused portion of the funds from the issuance of the
4.75% convertible subordinated notes in the fourth quarter of fiscal 2000.
During the first quarter of fiscal 2001, we completed the sale of our remaining
investment in WaferTech, LLC to Taiwan Semiconductor Manufacturing Company for
approximately $61 million. We recorded a pretax realized gain on the sale of
this investment of approximately $28 million, which is included in other
nonoperating income.
Our effective income tax rate for the second quarter of fiscal 2001 remained
relatively to the prior year quarter at approximately 30%. The effective income
tax rate increased to 31.1% for the first six months of fiscal 2001 from 28.7%
for the first six months of fiscal 2000, primarily due to a shift in the mix of
worldwide profits as well as a taxable gain on the sale of our WaferTech
investment in the first quarter of fiscal 2001.
Liquidity and Capital Resources
At May 5, 2001, cash, cash equivalents and short-term investments totaled $2,510
million, an increase of $274 million from the fourth quarter of fiscal 2000 and
an increase of $1,578 million from the second quarter of fiscal 2000. The
increase in cash, cash equivalents and short-term investments in the first six
months of fiscal 2001 was primarily due to operating cash inflows of $510
million and approximately $61 million received in the first quarter for the sale
of an investment, partially offset by increased capital expenditures and
payments for acquisitions. The year-over-year increase in cash, cash equivalents
and short-term investments was primarily due to increased operating cash flows
and $1,172 million of proceeds from the issuance of our 4.75% convertible
subordinated notes in the fourth quarter of fiscal 2000.
Accounts receivable totaled $344 million at the end of the second quarter of
fiscal 2001, a decrease of $120 million from the fourth quarter of fiscal 2000
primarily due to a 22% sequential decline in sales. Days sales outstanding
slightly improved from 53 days at April 29, 2000 to 52 days at May 5, 2001.
Inventories of $319 million at May 5, 2001 were $13 million lower than the
inventory levels at October 28, 2000 and $38 million higher than at the end of
the second quarter of fiscal 2000. At May 5, 2001, days cost of sales in
inventory increased to 119 days from 94 days at April 29, 2000 as demand
continues to decline from the prior year record high levels.
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During the first quarter of fiscal 2001, we completed the sale of our remaining
investment in WaferTech, LLC to Taiwan Semiconductor Manufacturing Company for
approximately $61 million. We recorded a pretax realized gain on the sale of
this investment of approximately $28 million.
Net additions to property, plant and equipment of $235 million for the first six
months of fiscal 2001 were funded with a combination of cash on hand and cash
generated from operations. Capital spending in the first six months of fiscal
2001 was up substantially from the $93 million spent in the first six months of
fiscal 2000. We had expanded our manufacturing capacity over the last few
quarters as demand for our products increased rapidly. Because of the recent
slowdown in our served markets, we have curtailed our capital spending but
continue to add strategic capacity in anticipation of a resumption of growth. We
currently plan to make capital expenditures of approximately $355 million during
fiscal 2001.
During the first quarter of fiscal 2001, we completed several acquisitions. On
October 31, 2000, we acquired Thomas Neuroth AG (Neuroth) of Vienna, Austria for
approximately $4 million in cash, with additional contingent cash consideration
of up to $4 million payable if certain operational objectives are achieved.
Neuroth is a developer of highly integrated circuits for symmetric DSL broadband
access. On November 10, 2000, we acquired Signal Processing Associates Pty.
Ltd., (SPA) of Victoria, Australia for approximately $3 million in cash, with
additional contingent cash consideration of up to $1.5 million payable if
certain operational objectives are achieved. SPA is a developer and supplier of
voice processing and fax/data relay software for telecommunications
applications. On December 18, 2000, we acquired Integrated Micro Instruments,
Inc. (IMI) of Berkeley, California for approximately $1 million in cash and
13,750 shares of our common stock, with an additional 50,000 shares of common
stock issuable over the next five years upon the satisfaction of certain
conditions. IMI develops MEMS process designs. On January 4, 2001, we acquired
ChipLogic, Inc. (ChipLogic) of Santa Clara, California for approximately 1
million shares of our common stock, with 489,375 shares of additional common
stock issuable if certain operational objectives are achieved. In the second
quarter of fiscal 2001, approximately $1.4 million of expense was recorded
related to 44,000 shares of common stock to be issued related to the achievement
of certain of these objectives. ChipLogic is a developer of high-performance
integrated circuits and software focused on the convergence of voice, broadband
access and network protocol processing. On January 16, 2001, we acquired
Staccato Systems, Inc. (Staccato) of Mountain View, California for approximately
$23 million in cash, with additional contingent cash consideration of up to $7
million payable if certain operational objectives are achieved. Approximately $2
million of the contingent consideration has been paid. Staccato is in the field
of audio synthesis technology.
At May 5, 2001, our principal sources of liquidity were $2,510 million of cash,
cash equivalents and short-term investments.
We believe that our 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 and research and development efforts for the foreseeable future.
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Factors Which May Affect Future Results
We may experience material fluctuations in future operating results.
Our 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 us and our competitors, competitive pricing pressures,
fluctuations in manufacturing yields, adequate availability of wafers and
manufacturing capacity, the effects of adverse changes in overall economic
conditions, the risk that our backlog could decline significantly, our ability
to continue hiring engineers and other qualified employees needed to meet the
expected demands of our largest customers and 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, including the recent decline in
demand experienced during the first six months of fiscal 2001. Our business is
subject to rapid technological changes and there can be no assurance, depending
on the mix of future business, that products stocked in inventory will not be
rendered obsolete before we ship them. As a result of these and other factors,
there can be no assurance that we will not experience material fluctuations in
future operating results on a quarterly or annual basis.
Our future success depends upon our ability to develop and market new products
and enter new markets.
Our success depends in part on our continued ability to develop and market new
products. There can be no assurance that we will be able to develop and
introduce new products in a timely manner or that new products, if developed,
will achieve market acceptance. In addition, our growth is dependent on our
continued ability to penetrate new markets where we have limited experience and
competition is intense. There can be no assurance that the markets we serve will
grow in the future; that our existing and new products will meet the
requirements of these markets; that our products will achieve customer
acceptance in these markets; that competitors will not force prices to an
unacceptably low level or take market share from us; or that we can achieve or
maintain profits in these markets. Also, some of our customers in these markets
are less well established, which could subject us to increased credit risk.
We may not be able to compete successfully in the semiconductor industry in the
future.
The semiconductor industry is intensely competitive. Some of our competitors
have greater technical, marketing, manufacturing and financial resources than we
do. Our competitors also include emerging companies attempting to sell products
to specialized markets such as those that we serve. Our competitors have, in
some cases, developed and marketed products having similar design and
functionality as our products. There can be no assurance that we will be able to
compete successfully in the future against existing or new competitors or that
our operating results will not be adversely affected by increased price
competition.
We may not be able to satisfy increasing demand for our products, and increased
production may lead to overcapacity and lower prices.
The cyclical nature of the semiconductor industry has resulted in sustained or
short-term periods when demand for our products has increased or decreased
rapidly. We and the semiconductor industry experienced a period of rapid
increases in demand in fiscal 1999 and 2001, and as a result we have increased
our manufacturing capacity through both expansion of our production facilities
and increased access to third-party foundries. However, we cannot be sure that
we will not encounter unanticipated production problems at either our own
facilities or at third-party foundries, or that the increased capacity will be
sufficient to satisfy demand for our products. We believe that other
semiconductor manufacturers have expanded their production capacity over the
past several years. This expansion by us and our competitors, or continuation of
the decline in the demand for semiconductor products that began in early fiscal
2001, has led to overcapacity in our target markets, which has resulted in a
decline in our growth rate and could lead to price erosion that would adversely
affect our operating results.
We rely on third-party subcontractors and manufacturers for some
industry-standard wafers and therefore cannot control their availability or
conditions of supply.
We rely, and plan to continue to rely, on assembly and test subcontractors and
on third-party wafer fabricators to supply most of our wafers that can be
manufactured using industry-standard digital processes. This reliance involves
several risks, including reduced control over delivery schedules, manufacturing
yields and costs.
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Our revenues may not increase enough to offset the expense of additional
capacity.
Our capacity additions resulted in a significant increase in operating expenses.
If revenue levels do not increase enough to offset these additional expense
levels, our future operating results could be adversely affected. In addition,
asset values could be impaired if the additional capacity is underutilized for
an extended period of time.
We rely on manufacturing capacity located in geologically unstable areas, which
could affect the availability of supplies and services.
We, and many companies in the semiconductor industry, rely on internal
manufacturing capacity located in California and Taiwan as well as wafer
fabrication foundries in Taiwan and other sub-contractors in geologically
unstable locations around the world. This reliance involves risks associated
with the impact of earthquakes on us and the semiconductor industry, including
temporary loss of capacity, availability and cost of key raw materials and
equipment, and availability of key services including transport. In addition,
California is currently experiencing internittent interruption in the
availability of electricity. To date the impact on us has been negligible.
However, electricity is a critical resource to us, without which our products
could not be manufactured at factories exposed to continued lengthy power
interruptions. Our future operations in Taiwan may also be affected by recent
diplomatic and political tensions involving the governments of the United States
and the People's Republic of China involving, among other things, U.S diplomatic
support of and arms sales to Taiwan.
We are exposed to economic and political risks through our significant
international operations.
During the first six months of fiscal 2001, 58% of our revenues were derived
from customers in international markets. We have manufacturing facilities
outside the United States in Ireland, the United Kingdom, the Philippines and
Taiwan. In addition to being exposed to the ongoing economic cycles in the
semiconductor industry, we are also subject to the economic and political risks
inherent in international operations, including the risks associated with the
ongoing uncertainties in many developing economies around the world. These risks
include air transportation disruptions, expropriation, currency controls and
changes in currency exchange rates, tax and tariff rates and freight rates.
Although we engage in hedging transactions to reduce our exposure to currency
exchange rate fluctuations, there can be no assurance that our competitive
position will not be adversely affected by changes in the exchange rate of the
U.S. dollar against other currencies.
We are involved in frequent litigation regarding intellectual property rights,
which could be costly to undertake and could require us to redesign products or
pay significant royalties.
The semiconductor industry is characterized by frequent claims and litigation
involving patent and other intellectual property rights. We have from time to
time received, and may in the future receive, claims from third parties
asserting that our 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, we could be forced either to redesign or to stop production of
products incorporating that intellectual property, and our operating results
could be materially and adversely affected. Litigation may be necessary to
enforce patents or other of our intellectual property rights or to defend us
against claims of infringement, and this litigation can be costly and divert the
attention of key personnel. See Note 11 of the Notes to our Consolidated
Financial Statements for the fiscal year ended October 28, 2000 for information
concerning pending litigation involving us. An adverse outcome in this
litigation could have a material adverse effect on our consolidated financial
position or on our consolidated results of operations or cash flows in the
period in which the litigation is resolved.
Leverage and debt service obligations may adversely affect our cash flow.
We have a substantial amount of outstanding indebtedness. There is the
possibility that we may be unable to generate cash sufficient to pay the
principal of, interest on, and other amounts due in respect of, this
indebtedness when due. Our substantial leverage could have significant negative
consequences. This substantial leverage could increase our vulnerability to
general adverse economic and industry conditions. It may require the dedication
of a substantial portion of our expected cash flow from operations to service
the indebtedness, thereby reducing the amount of our expected cash flow
available for other purposes, including capital expenditures. It may also limit
our flexibility in planning for, or reacting to, changes in our business and the
industry in which we operate.
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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is incorporated herein by reference to the
"Management Analysis" set forth on pages 18 through 25 of the 2000 Annual Report
to Shareholders.
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PART II - OTHER INFORMATION
ANALOG DEVICES, INC.
ITEM 2. Changes in Securities and Use of Proceeds
On February 6, 2001, we issued and delivered an aggregate of 27,136 shares of
our common stock to three individuals in partial fulfillment of the payment by
us of consideration to the three former stockholders of White Mountain DSP,
Inc., which we acquired on February 5, 1999. We issued and delivered these
shares under an exemption from registration under Section 4(2) of the Securities
Act of 1933, as amended.
ITEM 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders held on March 13, 2001, the stockholders
of the Company elected Messers. Jerald G. Fishman and F. Grant Saviers to serve
as Class II Directors for a term of three years by the following votes:
Nominee Votes For Votes Withheld Broker Non Votes
- --------------------------------------------------------------------------------
Jerald G. Fishman 308,884,304 6,494,278 0
F. Grant Saviers 302,610,228 12,768,354 0
Each of the following directors who were not up for reelection at the Annual
Meeting of Stockholders will continue to serve as directors: Messrs. John L.
Doyle, Ray Stata, Joel Moses, Lester C. Thurow and Charles O. Holliday, Jr.
Stockholders also ratified the selection by the Board of Directors of Ernst &
Young LLP as the Company's independent auditors for the fiscal year ending
November 3, 2001, by a vote of 314,080,371 in favor, 289,701 opposed and
1,008,510 abstaining.
ITEM 6. Exhibits and reports on Form 8-K
(a) Exhibits
None
(b) Report on Form 8-K
None
Items 1, 3 and 5 of PART II are not applicable and have been omitted.
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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: June 18, 2001 By: /s/ Jerald G. Fishman
---------------------------------
Jerald G. Fishman
President and
Chief Executive Officer
(Principal Executive Officer)
Date: June 18, 2001 By: /s/ Joseph E. McDonough
---------------------------------
Joseph E. McDonough
Vice President-Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
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