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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 AUGUST 4, 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 September 1, 2001 was 361,769,129 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 4, 2001 JULY 29, 2000
-------------- -------------
Net sales $ 479,886 $ 700,658
Cost of sales 226,008 300,519
--------- ---------
Gross margin 253,878 400,139
Operating expenses:
Research and development 112,101 102,830
Amortization of intangibles 14,006 599
Special charge 26,157 --
Selling, marketing, general and administrative 66,583 77,198
--------- ---------
218,847 180,627
Operating income 35,031 219,512
Nonoperating (income) expenses:
Interest expense 15,716 360
Interest income (30,158) (15,769)
Other, net (212) (44,020)
--------- ---------
(14,654) (59,429)
--------- ---------
Income before income taxes 49,685 278,941
Provision for income taxes 10,382 86,740
--------- ---------
Net income $ 39,303 $ 192,201
========= =========
Shares used to compute earnings per share - basic 359,535 355,018
========= =========
Shares used to compute earnings per share - diluted 381,903 383,544
========= =========
Earnings per share - basic $ 0.11 $ 0.54
========= =========
Earnings per share - diluted $ 0.10 $ 0.50
========= =========
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 4, 2001 JULY 29, 2000
-------------- -------------
Net sales $ 1,853,602 $ 1,771,930
Cost of sales 804,663 782,790
----------- -----------
Gross margin 1,048,939 989,140
Operating expenses:
Research and development 358,632 275,372
Purchased in-process research and development 9,500 --
Amortization of intangibles 38,308 1,771
Special charge 26,157 --
Selling, marketing, general and administrative 229,699 212,795
----------- -----------
662,296 489,938
Operating income 386,643 499,202
Nonoperating (income) expenses:
Interest expense 48,830 2,863
Interest income (107,223) (41,270)
Other, net (29,501) (42,757)
----------- -----------
(87,894) (81,164)
----------- -----------
Income before income taxes 474,537 580,366
Provision for income taxes 142,361 173,106
----------- -----------
Net income $ 332,176 $ 407,260
=========== ===========
Shares used to compute earnings per share - basic 358,448 352,359
=========== ===========
Shares used to compute earnings per share - diluted 382,024 380,107
=========== ===========
Earnings per share - basic $ 0.93 $ 1.15
=========== ===========
Earnings per share - diluted $ 0.87 $ 1.07
=========== ===========
See accompanying notes.
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ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(thousands)
Assets AUGUST 4, 2001 OCTOBER 28, 2000 JULY 29, 2000
-------------- ---------------- -------------
Cash and cash equivalents $1,550,254 $1,736,421 $ 619,084
Short-term investments 1,121,256 498,844 439,323
Accounts receivable, net 270,403 463,912 420,440
Inventories:
Raw materials 21,619 17,505 16,101
Work in process 179,357 179,918 172,682
Finished goods 77,501 134,671 125,118
---------- ---------- ----------
278,477 332,094 313,901
Deferred tax assets 105,000 108,989 115,000
Prepaid expenses and other current assets 33,257 27,754 25,629
---------- ---------- ----------
Total current assets 3,358,647 3,168,014 1,933,377
---------- ---------- ----------
Property, plant and equipment, at cost:
Land and buildings 288,956 238,550 201,488
Machinery and equipment 1,449,090 1,260,572 1,195,596
Office equipment 96,903 86,930 83,334
Leasehold improvements 131,671 120,710 115,945
---------- ---------- ----------
1,966,620 1,706,762 1,596,363
Less accumulated depreciation and amortization 1,024,049 927,536 892,481
---------- ---------- ----------
Net property, plant and equipment 942,571 779,226 703,882
---------- ---------- ----------
Investments 233,223 217,755 249,566
Intangible assets, net 242,177 192,698 36,652
Other assets 52,336 53,644 27,822
---------- ---------- ----------
Total other assets 527,736 464,097 314,040
---------- ---------- ----------
$4,828,954 $4,411,337 $2,951,299
========== ========== ==========
See accompanying notes.
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ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(thousands, except share amounts)
Liabilities and Stockholders' Equity AUGUST 4, 2001 OCTOBER 28, 2000 JULY 29, 2000
-------------- ---------------- -------------
Short-term borrowings and current
portion of long-term debt $ 466 $ 5,752 $ 8,832
Obligations under capital leases 6,533 9,938 11,884
Accounts payable 102,683 213,196 162,744
Deferred income on shipments to distributors 151,591 140,369 134,269
Income taxes payable 167,374 86,625 161,667
Accrued liabilities 186,313 194,017 138,251
---------- ---------- ----------
Total current liabilities 614,960 649,897 617,647
---------- ---------- ----------
Long-term debt 1,200,000 1,200,261 --
Non-current obligations under capital leases 7,494 12,699 11,168
Deferred income taxes 55,076 51,205 49,000
Other non-current liabilities 243,787 193,625 214,730
---------- ---------- ----------
Total non-current liabilities 1,506,357 1,457,790 274,898
---------- ---------- ----------
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, 361,406,617 shares issued
(357,969,010 in October 2000 and 357,314,704
in July 2000) 60,236 59,663 59,554
Capital in excess of par value 600,105 526,820 479,532
Retained earnings 2,050,119 1,717,943 1,518,071
Accumulated other comprehensive income 2,177 2,841 3,765
---------- ---------- ----------
2,712,637 2,307,267 2,060,922
Less 99,577 shares in treasury, at cost (45,186 in
October 2000 and 26,593 in July 2000) 5,000 3,617 2,168
---------- ---------- ----------
Total stockholders' equity 2,707,637 2,303,650 2,058,754
---------- ---------- ----------
$4,828,954 $4,411,337 $2,951,299
========== ========== ==========
See accompanying notes.
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ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(thousands)
NINE MONTHS ENDED
-------------------------------
AUGUST 4, 2001 JULY 29, 2000
-------------- -------------
OPERATIONS Cash flows from operations:
Net income $ 332,176 $ 407,260
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization 154,977 110,444
Gain on sale of investment (28,084) (43,857)
Non-cash portion of special charge 12,364 --
Write-off of purchased research and development 9,500 --
Deferred income taxes 7,413 (20,865)
Other non-cash expense 4,949 558
Changes in operating assets and liabilities 203,992 (17,984)
----------- -----------
Total adjustments 365,111 28,296
----------- -----------
Net cash provided by operations 697,287 435,556
----------- -----------
INVESTMENTS Cash flows from investments:
Purchase of short-term investments
available for sale (2,203,987) (589,408)
Maturities of short-term investments
available for sale 1,581,575 556,638
Payments for acquisitions, net of cash acquired (37,480) (5,176)
Proceeds from sale of investment 60,936 64,641
Change in long-term investments (3,500) 348
Additions to property, plant and equipment, net (278,637) (167,895)
Decrease in other assets 2,121 4,904
----------- -----------
Net cash used for investments (878,972) (135,948)
----------- -----------
FINANCING ACTIVITIES Cash flows from financing activities:
Proceeds from employee stock plans 27,656 41,093
Repurchase of common stock (21,831) --
Payments on capital lease obligations (8,755) (7,878)
Net decrease in variable rate borrowings (5,442) (73,317)
----------- -----------
Net cash used for financing activities (8,372) (40,102)
----------- -----------
Effect of exchange rate changes on cash 3,890 3,687
----------- -----------
Net (decrease) increase in cash and cash equivalents (186,167) 263,193
Cash and cash equivalents at beginning of period 1,736,421 355,891
----------- -----------
Cash and cash equivalents at end of period $ 1,550,254 $ 619,084
=========== ===========
See accompanying notes.
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ANALOG DEVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED AUGUST 4, 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 third quarter of fiscal 2001 and fiscal 2000 was $37 million and $170
million, respectively. For the first nine months of fiscal 2001 and fiscal 2000,
total comprehensive income was $332 million and $399 million, respectively.
Note 4 - Special Charge
During the third quarter of fiscal 2001, the Company recorded a special charge
of approximately $26.1 million related to cost reduction actions taken in
response to the current economic climate. The actions consisted of workforce
reductions in manufacturing and, to a lesser extent, selling, marketing and
administrative areas as well as a decision to further consolidate worldwide test
operations. The Company anticipates further special charges in the fourth
quarter of fiscal 2001 as it continues to implement cost reductions.
Through August 4, 2001, the cost reductions included severance and fringe
benefit costs of $13.8 million for approximately 500 employees in the U.S.,
Europe and Southeast Asia, of which approximately half of these employees have
been terminated as of August 4, 2001. Further, the number of temporary and
contract workers employed by the Company was also reduced. The special charge
also included approximately $12.3 million related to the write-down of test
equipment to be abandoned as a result of the consolidation of worldwide test
operations.
A summary of the special charge is as follows (in thousands):
NON-CASH CASH BALANCE @
TOTAL COSTS COSTS PAYMENTS AUGUST 4, 2001
----------- -------- -------- --------------
Workforce reductions $13,793 -- $(2,305) $11,488
Consolidation of worldwide test operations 12,364 (12,364) -- --
------- ------- ------- -------
Total $26,157 (12,364) $(2,305) $11,488
======= ======== ======= =======
The Company expects to complete the above actions within the next twelve months.
Note 5 - 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-
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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
-----------------------------------
AUGUST 4, 2001 JULY 29, 2000
-------------- -------------
Basic:
Net income $ 39,303 $ 192,201
========== ==========
Weighted shares outstanding 359,535 355,018
========== ==========
Earnings per share $0.11 $0.54
===== =====
Diluted:
Net income $ 39,303 $ 192,201
========== ==========
Weighted shares outstanding 359,535 355,018
Assumed exercise of common stock equivalents 22,368 28,526
---------- ----------
Weighted average common and common equivalent shares 381,903 383,544
========== ==========
Earnings per share $0.10 $0.50
===== =====
NINE MONTHS ENDED
-----------------------------------
AUGUST 4, 2001 JULY 29, 2000
-------------- -------------
Basic:
Net income $ 332,176 $ 407,260
========== ==========
Weighted shares outstanding 358,448 352,359
========== ==========
Earnings per share $0.93 $1.15
===== =====
Diluted:
Net income $ 332,176 $ 407,260
========== ==========
Weighted shares outstanding 358,448 352,359
Assumed exercise of common stock equivalents 23,576 27,748
---------- ----------
Weighted average common and common equivalent shares 382,024 380,107
========== ==========
Earnings per share $0.87 $1.07
===== =====
Note 6 - 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 7 - 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
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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 $0.7 million), 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 third quarter of
fiscal 2001, approximately $0.5 million of expense was recorded related to
11,000 shares of common stock issued related to the achievement of certain of
these objectives. Through the first nine months of fiscal 2001, approximately
$1.9 million of expense was recorded related to 55,000 shares of common stock
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.
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 8 - Segment Information
The Company operates in two segments: the design, manufacture and marketing of a
broad range of integrated circuits, which comprises approximately 97% of the
Company's revenue, and the design, manufacture and marketing of a range of
assembled products, which accounts for the remaining 3% of the Company's
revenue. Effectively, the Company operates in one reportable segment.
Note 9 - 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 immediately. The
adoption of FAS 133 on October 29, 2000 did not have a material impact on
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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 nine months 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.
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 August 4, 2001:
Cumulative effect of adopting FAS 133 as of October 29, 2000 $ 5,142
Less: Reclassifications into earnings from other comprehensive income (4,481)
--------
661
Changes in fair value of derivatives - (gain) loss (6,029)
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Reclassification into earnings from other comprehensive income 4,380
--------
Accumulated (gain) loss included in other comprehensive income $ (988)
========
The amount of accumulated gain that will be reclassified into earnings over the
next twelve months is $1 million.
Business Combinations & Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations" and No. 142,
"Goodwill and Other Intangible Assets." FAS 141 requires that all business
combinations initiated after June 30, 2001, to be accounted for using the
purchase method of accounting. FAS 142, which is effective for fiscal years
beginning after December 15, 2001, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets will
continue to be amortized over their useful lives. The Company must adopt these
new pronouncements no later than November 2002 with earlier adoption permitted.
The Company has not yet determined the timing of adoption of these statements or
the impact of such adoption on its financial statements.
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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 third quarter of fiscal 2001 were $480 million, a decrease of
32% from the $701 million reported for the third quarter of fiscal 2000. Net
sales for the first nine months of fiscal 2001 were $1,854 million, an increase
of 5% from the $1,772 million reported for the comparable period of fiscal 2000.
Our analog IC product sales decreased by 20% from the same quarter in fiscal
2000 due to a severe decline in the semiconductor industry, and increased 14%
over the same nine-month period in fiscal 2000. Sales of DSP IC products
decreased by 21% in the first nine months of fiscal 2001 over the same prior
year period and declined 59% in the third 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.
Sales declined in all geographic regions in the third quarter of fiscal 2001 as
compared to the third quarter of fiscal 2000, with sales in North America
experiencing the largest decline. For the nine months ended August 4, 2001,
sales increases in Europe and Japan were offset by sales decreases in North
America. The remaining international sales, primarily in Southeast Asia,
remained relatively flat. International sales in the third quarter of fiscal
2001 represented 65% of total sales compared to 57% in the third quarter of
fiscal 2000.
Although we experienced overall sales growth in the nine months ended August 4,
2001 over the same prior year period, continued deteriorating market conditions
have resulted in a 20% sales decline compared to the fiscal quarter ended May 5,
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 further decline in sequential revenue for our fourth quarter of
fiscal 2001.
Gross margin was 52.9% for the third quarter of fiscal 2001, a decrease of 420
basis points from the 57.1% gross margin achieved in the third quarter of fiscal
2000. For the quarter ended August 4, 2001, the deterioration in gross margin
was due to reduced revenue levels, the impact of inventory reserves and low
utilization in our internal fabs. The gross margin decline was minimized by
several actions taken over the past six months to reduce manufacturing costs,
including scheduled periodic shutdowns of manufacturing operations worldwide,
reductions in force in many of our manufacturing locations, the outsourcing of
production for many of the products which have experienced the most significant
decline in revenue and efforts to reduce all discretionary spending. Gross
margin was 56.6% for the first nine months of fiscal 2001, an increase of 80
basis points from the 55.8% gross margin achieved in the first nine months of
fiscal 2000. We anticipate weak market conditions to result in a further decline
in gross margin for our fourth quarter of fiscal 2001.
Research and development (R&D) expenses were $112 million and $359 million for
the three and nine months ended August 4, 2001, respectively, compared to $103
million and $275 million for the corresponding periods of fiscal 2000. As a
percentage of sales, R&D spending increased during the third quarter of fiscal
2001 to 23.4%, up from 14.7% in the third quarter of fiscal 2000. The increases
in R&D spending for both the three months and nine months ended August 4, 2001
as compared to the same periods in the prior year were 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-
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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.
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 accounted for as acquisition-related expense.
Amortization of intangibles was $14 million and $38 million in the three and
nine months ended August 4, 2001, respectively, compared to $0.6 million and
$1.7 million in the three and nine months ended July 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.
During the third quarter of fiscal 2001, we recorded a special charge of
approximately $26.1 million related to cost reduction actions taken in response
to the current economic climate. The actions consisted of workforce reductions
in manufacturing and, to a lesser extent, selling, marketing and administrative
areas as well as a decision to further consolidate worldwide test operations. We
anticipate further special charges in the fourth quarter of fiscal 2001 as we
continue to implement cost reductions.
Through August 4, 2001, the cost reductions included severance and fringe
benefit costs of $13.8 million for approximately 500 employees in the U.S.,
Europe and Southeast Asia, of which approximately half of these employees have
been terminated as of August 4, 2001. Further, the number of temporary and
contract workers employed by us was also reduced. The special charge also
included approximately $12.3 million related to the write-down of test equipment
to be abandoned as a result of the consolidation of worldwide test operations.
We anticipate the workforce reductions to result in annual salary savings of
approximately $18 million.
Selling, marketing, general & administrative (SMG&A) expenses for the third
quarter of fiscal 2001 were $67 million, a decrease of $10 million from the $77
million reported for the third quarter of fiscal 2000. This decrease was
attributable to cost restraints resulting from reduced revenue levels. SMG&A
expenses for the nine months ended August 4, 2001 were $230 million, compared to
$213 million for the nine months ended July 29, 2000. In the third quarter of
fiscal 2001, SMG&A expenses as a percentage of sales increased to 14% from 11%
for the same period in the prior year as a result of reduced sales levels.
R&D and SMG&A expenses declined 11% sequentially as a result of several actions
taken to reduce certain of our engineering and administrative expenses,
including eliminating bonuses, reducing compensation for our higher paid
employees and reducing discretionary expenses.
Interest expense was $16 million and $49 million for the three and nine months
ended August 4, 2001, respectively, and $0.4 million and $3 million for the same
prior year periods. The significant increase in interest expense for both the
three and nine month periods was 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 $30 million and $107 million for the three and nine months
ended August 4, 2001, respectively, and $16 million and $41 million for the same
prior year periods. The three and nine month 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
obtained from the issuance of $1.2 billion of 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 in cash. We recorded a pretax realized gain on the
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sale of this investment of approximately $28 million, which is included in other
nonoperating income. During the third quarter of fiscal 2000, we sold our
investment in Chartered Semiconductor Manufacturing Pte., Ltd. for approximately
$65 million in cash, and we recorded a pretax realized gain on the sale of this
investment of approximately $44 million, which is included in other nonoperating
income.
Our effective income tax rate for the third quarter of fiscal 2001 was 21% as
compared to 31% for the prior year quarter. The decrease in the effective tax
rate for the three month period ended August 4, 2001 was due principally to the
decline in our income. The effective income tax rate remained relatively flat at
30.0% for the first nine months of fiscal 2001 as compared to 29.8% for the
first nine months of fiscal 2000, primarily due to a shift in the mix of
worldwide profits offset by a taxable gain on the sale of our WaferTech
investment in the first quarter of fiscal 2001.
Liquidity and Capital Resources
At August 4, 2001, cash, cash equivalents and short-term investments totaled
$2,672 million, an increase of $436 million from the fourth quarter of fiscal
2000 and an increase of $1,613 million from the third quarter of fiscal 2000.
The increase in cash, cash equivalents and short-term investments in the first
nine months of fiscal 2001 was primarily due to operating cash flows of $697
million and approximately $61 million received in the first quarter for the sale
of an investment, partially offset by capital expenditures and payments for
acquisitions. The increase in cash, cash equivalents and short-term investments
from the third quarter of fiscal 2000 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 $270 million at the end of the third quarter of
fiscal 2001, a decrease of $194 million from the fourth quarter of fiscal 2000
primarily due to a 40% decline in sales. Days sales outstanding improved from 55
days at July 29, 2000 to 51 days at August 4, 2001.
Inventories of $278 million at August 4, 2001 were $54 million lower than the
inventory levels at October 28, 2000 and $35 million lower than at the end of
the third quarter of fiscal 2000. The inventory reductions in both periods were
attributable to lower production levels and increased inventory reserves. At
August 4, 2001, days cost of sales in inventory increased to 111 days from 94
days at July 29, 2000 as demand continued to decline from the prior year record
high levels.
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 in cash. We recorded a pretax realized gain on the
sale of this investment of approximately $28 million.
Net additions to property, plant and equipment of $279 million for the first
nine months of fiscal 2001 were funded with a combination of cash on hand and
cash generated from operations. Capital spending in the first nine months of
fiscal 2001 was up substantially from the $168 million spent in the first nine
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 $325 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 third
quarter of fiscal 2001, approximately $0.5 million of expense was recorded
related to 11,000 shares of common stock issued related to the achievement of
certain of these objectives. Through the first nine months of fiscal 2001,
approximately $1.9 million of expense was recorded related to 55,000 shares of
common stock
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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 August 4, 2001, our principal sources of liquidity were $2,672 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 nine 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 2000, 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 has recently experienced intermittent 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.
We are exposed to economic and political risks through our significant
international operations.
During the first nine months of fiscal 2001, 60% 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
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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.
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 our 2000 Annual Report
to Shareholders.
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PART II - OTHER INFORMATION
ANALOG DEVICES, INC.
ITEM 6. Exhibits and reports on Form 8-K
(a) Exhibits
None
(b) Report on Form 8-K
None
Items 1, 2, 3, 4 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: September 18, 2001 By: /s/ Jerald G. Fishman
--------------------------------
Jerald G. Fishman
President and
Chief Executive Officer
(Principal Executive Officer)
Date: September 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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