1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 4, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from_______________ to ________________
Commission File No. 1-7819
Analog Devices, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2348234
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Technology Way, Norwood, MA 02062-9106
(Address of principal executive offices) (Zip Code)
(617) 329-4700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
The number of shares outstanding of each of the issuer's classes of
Common Stock as of June 3, 1996 was 116,136,741 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 4, 1996 April 29, 1995
----------- --------------
Net sales $ 303,328 $ 230,046
Cost of sales 150,362 113,652
--------- ---------
Gross margin 152,966 116,394
Operating expenses:
Research and development 44,848 33,266
Selling, marketing, general and
administrative 50,017 45,592
--------- ---------
94,865 78,858
--------- ---------
Operating income 58,101 37,536
Nonoperating expenses (income):
Interest expense 3,040 1,022
Interest income (4,807) (1,991)
Other 417 732
--------- ---------
(1,350) (237)
--------- ---------
Income before income taxes 59,451 37,773
Provision for income taxes 15,458 9,066
--------- ---------
Net income $ 43,993 $ 28,707
========= =========
Shares used to compute earnings per share 129,435 118,368
========= =========
Earnings per share of common stock $ 0.35 $ 0.24
========= =========
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 4, 1996 April 29, 1995
----------- --------------
Net sales $ 584,097 $ 438,051
Cost of sales 288,581 216,797
--------- ---------
Gross margin 295,516 221,254
Operating expenses:
Research and development 85,705 63,516
Selling, marketing, general and
administrative 98,820 89,263
--------- ---------
184,525 152,779
--------- ---------
Operating income 110,991 68,475
Nonoperating expenses (income):
Interest expense 4,868 2,304
Interest income (8,706) (4,182)
Other 1,200 1,464
--------- ---------
(2,638) (414)
--------- ---------
Income before income taxes 113,629 68,889
Provision for income taxes 29,544 16,534
--------- ---------
Net income $ 84,085 $ 52,355
========= =========
Shares used to compute earnings per share 126,810 118,007
========= =========
Earnings per share of common stock $ 0.68 $ 0.44
========= =========
See accompanying notes.
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ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(thousands except share amounts)
Assets May 4, 1996 October 28, 1995 April 29, 1995
----------- ---------------- --------------
Cash and cash equivalents $ 224,903 $ 69,303 $ 66,320
Short-term investments 112,573 81,810 66,594
Accounts receivable, net 212,825 181,327 178,271
Inventories:
Finished goods 55,078 44,109 42,203
Work in process 107,046 77,526 72,149
Raw materials 29,351 22,327 20,262
---------- ---------- --------
191,475 143,962 134,614
Prepaid income taxes 42,000 39,650 24,000
Prepaid expenses 13,181 9,966 5,910
---------- ---------- --------
Total current assets 796,957 526,018 475,709
---------- ---------- --------
Property, plant and equipment,
at cost:
Land and buildings 140,740 139,718 127,206
Machinery and equipment 725,172 633,124 553,028
Office equipment 43,239 41,260 35,870
Leasehold improvements 58,482 42,165 40,032
---------- ---------- --------
967,633 856,267 756,136
Less accumulated depreciation
and amortization 452,225 424,305 399,351
---------- ---------- --------
Net property, plant and
equipment 515,408 431,962 356,785
---------- ---------- --------
Intangible assets, net 16,214 17,230 18,246
Deferred charges and other
assets 43,121 26,438 25,340
---------- ---------- --------
Total other assets 59,335 43,668 43,586
---------- ---------- --------
$1,371,700 $1,001,648 $876,080
========== ========== ========
See accompanying notes.
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ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(thousands except share amounts)
Liabilities and Stockholders'
Equity May 4, 1996 October 28, 1995 April 29, 1995
----------- ---------------- --------------
Short-term borrowings and current
portion of long-term debt $ 4,013 $ 2,299 $ 3,081
Obligations under capital leases 8,422 60 133
Accounts payable 93,507 100,217 68,458
Deferred income on shipments to
domestic distributors 35,931 27,588 21,075
Income taxes payable 29,632 50,086 31,133
Accrued liabilities 94,097 74,138 82,934
---------- ---------- --------
Total current liabilities 265,602 254,388 206,814
---------- ---------- --------
Long-term debt 310,000 80,000 80,000
Noncurrent obligations under
capital leases 33,037 - -
Deferred income taxes 6,500 5,039 4,000
Other noncurrent liabilities 9,418 6,255 5,583
---------- ---------- --------
Total noncurrent liabilities 358,955 91,294 89,583
---------- ---------- --------
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $1.00 par value,
500,000 shares authorized,
none outstanding - - -
Common stock, $.16 2/3 par value,
450,000,000 shares authorized,
115,580,780 shares issued
(114,583,932 in October 1995,
75,627,515 in April 1995) 19,264 19,098 12,605
Capital in excess of par value 157,455 149,775 146,756
Retained earnings 565,549 481,464 414,549
Cumulative translation adjustment 5,379 5,870 6,123
--------- ---------- --------
747,647 656,207 580,033
Less 57,730 shares in treasury,
at cost (51,876 in October 1995,
and 14,221 in April 1995) 504 241 350
---------- ---------- --------
Total stockholders' equity 747,143 655,966 579,683
---------- ---------- --------
$1,371,700 $1,001,648 $876,080
========== ========== ========
See accompanying notes.
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ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(thousands) Six Months Ended
----------------
May 4, 1996 April 29, 1995
----------- --------------
OPERATIONS
Cash flows from operations:
Net income $ 84,085 $ 52,355
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization 37,106 30,741
Deferred income taxes 1,477 658
Other noncash expenses (674) 52
Changes in operating assets and liabilities (76,235) 4,866
-------- --------
Total adjustments (38,326) 36,317
-------- --------
Net cash provided by operations 45,759 88,672
-------- --------
INVESTMENTS
Cash flows from investments:
Additions to property, plant and equipment, net (120,056) (102,480)
Purchases of short-term investments
available for sale (154,258) (68,330)
Purchases of short-term investments
held to maturity - (2,200)
Maturities of short-term investments
available for sale 118,495 76,588
Maturities of short-term investments
held to maturity 5,000 -
Increase in other assets (11,550) (15,473)
--------- ---------
Net cash used for investments (162,369) (111,895)
--------- ---------
FINANCING ACTIVITIES
Cash flows from financing activities:
Net proceeds from issuance of long-term debt 224,385 -
Proceeds from equipment financing 44,028 -
Net increase (decrease) in variable rate
borrowings 1,914 (10)
Payments on capital lease obligations (2,629) (164)
Proceeds from employee stock plans 2,661 1,457
Payments on long-term debt - (20,000)
--------- --------
Net cash provided by (used for) financing
activities 270,359 (18,717)
--------- -------
Effect of exchange rate changes on cash 1,851 (853)
--------- -------
Net increase (decrease) in cash and cash
equivalents 155,600 (42,793)
Cash and cash equivalents at beginning of period 69,303 109,113
-------- --------
Cash and cash equivalents at end of period $224,903 $ 66,320
======== ========
SUPPLEMENTAL INFORMATION
Cash paid during the period for:
Income taxes $ 44,981 $ 11,608
======== ========
Interest $ 3,115 $ 2,611
======== ========
See accompanying notes.
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Analog Devices, Inc.
Notes to Condensed Consolidated Financial Statements
May 4, 1996
Note 1 - In the opinion of management, the information furnished in the
accompanying financial statements reflects all adjustments, consisting only of
normal recurring adjustments, which are necessary to a fair statement of the
results for this interim period and should be read in conjunction with the most
recent Annual Report to Stockholders.
Note 2 - Certain amounts reported in the previous year have been reclassified to
conform to the 1996 presentation.
Note 3 - Debt
On December 18, 1995 the Company completed a public offering of $230,000,000 of
five-year 3-1/2% Convertible Subordinated Notes due December 1, 2000 with
semiannual interest payments on June 1 and December 1 of each year, commencing
June 1, 1996. The Notes are convertible, at the option of the holder, into the
Company's common stock at any time after 60 days following the date of original
issuance, unless previously redeemed, at a conversion price of $27.917 per
share, subject to adjustment in certain events. The net proceeds of the offering
were approximately $224 million after payment of the underwriting discount and
expenses of the offering which will be amortized over the term of the Notes.
Note 4 - Commitments and Contingencies
As previously reported in the Company's Annual Report on Form 10-K for the
fiscal year ended October 28, 1995, the Company is engaged in an enforcement
proceeding brought by the International Trade Commission related to patent
infringement litigation with Texas Instruments, Inc., and antitrust litigation
with Maxim Integrated Products, Inc.
The Company was a defendant in two lawsuits brought in Texas by Texas
Instruments, Inc. ("TI"), alleging patent infringement, including patent
infringement arising from certain plastic encapsulation processes, and seeking
an injunction and unspecified damages against the Company. The alleged
infringement of one of these patents is also the subject matter of a proceeding
brought by TI against the Company before the International Trade Commission
("ITC"). On January 10, 1994, the ITC brought an enforcement proceeding against
the Company alleging that the Company had violated the ITC's cease and desist
order of February 1992 (as modified in July 1993), which prohibited the
Company's importation of certain plastic encapsulated circuits, and seeking
substantial penalties against the Company for these alleged violations. If it is
determined that the Company has violated the cease and desist order, the ITC
could seek to impose penalties of up to $100,000 per day of violation from the
date of the cease and desist order (February 1992) or a sum equal to twice the
value of the goods determined to be sold in violation of the order. In addition,
in June 1992, the Company commenced a lawsuit against TI in Massachusetts
alleging certain TI digital signal processors infringed one of the Company's
patents.
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Analog Devices, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
May 4, 1996
Note 4. Commitments and Contingencies (Continued)
Effective April 1, 1995, the Company and TI settled both Texas lawsuits and the
Massachusetts lawsuit principally by means of a royalty-free cross license of
certain of the Company's and TI's patents. On April 25, 1995, the Company filed
with the ITC a motion to terminate the ITC enforcement proceeding on the grounds
that further action by the ITC is unnecessary in light of the Company's
settlement with TI. On May 8, 1995, an Administrative Law Judge issued a
recommended determination to the ITC to grant the Company's motion to terminate
the ITC proceeding. The investigative office of the ITC has opposed the motion,
claiming that, notwithstanding the Company's settlement with TI, the Company's
alleged violation of the ITC's cease and desist order warrants the imposition of
substantial penalties. The Company's motion is pending before the ITC.
The Company is a defendant in a lawsuit brought by Maxim Integrated Products,
Inc. ("Maxim") in the United States District Court for the Northern District of
California seeking an injunction against, and claiming damages for, alleged
antitrust violations and unfair competition in connection with distribution
arrangements between the Company and certain distributors. Maxim alleged that
certain distributors ceased doing business with Maxim as a result of
shelf-sharing provisions in the distribution arrangements between the
distributors and the Company, resulting in improper restrictions to Maxim's
access to channels by which it distributed its products. Maxim asserted actual
and consequential damages in the amount of $14.1 million and claimed restitution
and punitive damages in an unspecified amount. Under applicable law, Maxim would
receive three times the amount of any actual damages suffered as a result of any
antitrust violation. On September 7, 1994, Maxim's claim was dismissed for lack
of evidence. Maxim appealed this ruling and oral argument of the appeal was held
in January 1996. On March 15, 1996, the Ninth Circuit issued its decision
affirming in part and reversing in part the District Court's decision. The Ninth
Circuit affirmed the District Court's decision dismissing the antitrust claims
and the state law claims challenging the legality of the shelf-sharing
provisions in the distribution arrangements between the Company and the
distributors. The Ninth Circuit reversed the decision of the District Court with
respect to the termination of Maxim by Pioneer Standard and certain activities
related thereto. The District Court has scheduled a status conference on the
Pioneer Standard claims for July 12, 1996.
Although the Company believes it should prevail in these matters, the Company is
unable to determine their ultimate outcome or estimate the ultimate amount of
liability, if any, at this time. An adverse resolution of these matters could
have a material adverse effect on the Company's consolidated financial position
or on its consolidated results of operations or cash flows in the period in
which the matters are resolved.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Second Quarter of Fiscal 1996 Compared to the Second Quarter of Fiscal 1995
Net sales of $303.3 million for the second quarter of fiscal 1996 grew $73.3
million or 32% from net sales of $230.0 million for the second quarter of fiscal
1995. The sales increase was attributable to increases in sales volumes of both
standard linear IC and system-level IC products. Revenues from standard linear
IC products ("SLICs") increased 22% year over year, with strength in
communications and industrial-related demand contributing to much of this
growth. Revenues from system-level products, which include digital signal
processing products ("DSPs"), grew 70% year over year, fueled by strong demand
for ICs used in communications applications and for general-purpose DSPs.
Revenues for both of these product groups more than doubled from the second
quarter last year. SLIC products accounted for 58% of total sales in the second
quarter of fiscal 1996 compared to 63% in the same period last year.
System-level product sales accounted for 36% of total sales in the second
quarter of fiscal 1996 compared to 28% in the second quarter of fiscal 1995.
Geographically, the strongest regions for sales were North America, Europe and
Southeast Asia. In North America, OEM and distribution sales were strong
compared to the year-ago quarter, both increasing approximately 32% over this
period. Sales to European customers increased more than 50% from the
year-earlier period with much of this growth resulting from the Company's
increased penetration of applications in the communications market, particularly
in handsets and basestations used in the GSM (Global System for Mobile
Communications) digital cellular telephone system now widely deployed in Western
Europe.
Gross margin of 50.4% for the second quarter of fiscal 1996 held approximately
flat to 50.6% for the second quarter of fiscal 1995.
R&D expense was $44.8 million, an increase of $11.6 million or 35% from the
second quarter of fiscal 1995, as the Company continued to increase its R&D
investment in real-world-signal processing opportunities for linear, mixed
signal and DSP products. At 14.8% of sales, the R&D-to-sales ratio remained
within the Company's targeted range of 14 to 15%. Significant resource
commitments to R&D efforts have yielded a continual flow of new products aimed
at driving future sales growth. For the second quarter of fiscal 1996,
new-product sales (sales of products introduced within the previous six
quarters) totaled $71 million or 23% of total sales.
Selling, marketing, general & administrative ("SMG&A") expense of $50.0 million
was reduced to 16.5% of sales compared to 19.8% for the year-ago quarter. This
decline was achieved by holding year-to-year expense growth to 10%, in part due
to the lower SMG&A-to-sales ratio associated with the Company's higher-volume
system-level products.
Operating profit rose from $37.5 million for the second quarter of fiscal 1995
to $58.1 million for the second quarter of fiscal 1996, an increase of 55%. As a
percentage of sales, operating income increased to 19.2% of sales compared to
16.3% for the second quarter of fiscal 1995. This improvement resulted primarily
from maintaining the gross margin ratio on increased sales while lowering the
SMG&A expense-to-sales ratio.
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Interest expense increased $2.0 million from the second quarter of fiscal 1995
while interest income increased $2.8 million over this same period, as the sale
of $230,000,000 of 3 1/2% Convertible Notes in December 1995 had the effect of
creating additional interest income from investment of the net proceeds and
additional interest expense. In total, nonoperating income increased $1.1
million from the year-ago period.
The effective income tax rate increased from 24.0% of sales for the second
quarter of fiscal 1995 to 26.0% for the second quarter of fiscal 1996 due to a
shift in the mix of worldwide profits.
The growth in sales and operating leverage gained on maintaining tight control
on SMG&A expenses together with an increase in nonoperating income resulted in a
53% increase in net income to $44.0 million or 14.5% of sales for the second
quarter of fiscal 1996. Earnings per share increased to $.35 from $.24 for last
year's second quarter. Shares used to compute earnings per share increased
significantly compared to the second quarter of fiscal 1995 principally due to
the inclusion of common stock equivalents under the "if converted" method for
the Company's $230,000,000 3 1/2% Convertible Subordinated Notes which were
issued in the first quarter of fiscal 1996.
Second Quarter of Fiscal 1996 Compared to the First Quarter of Fiscal 1996
Net sales increased from $280.8 million for the first quarter of fiscal 1996 to
$303.3 million for the second quarter of fiscal 1996, an increase of $22.6
million or 8%. SLIC sales for the thirteen-week second quarter of fiscal 1996
increased slightly from the unusually strong fourteen-week first quarter. Sales
of SLIC products remained strongest in proprietary high-speed and communications
products. The Company experienced some spot order slowdown in SLIC products,
particularly in the OEM channel, as lead times were reduced for many of the
Company's products. Sales of system-level IC products rose 18% from the prior
quarter as the Company continued to benefit from increased demand and broader
participation in growing application markets for its general-purpose DSPs and
mixed-signal ICs, including GSM handsets, basestations, and other communications
segments. Increased sales of system-level IC products was largely volume-based.
Orders for audio codecs used in PCs remained sluggish, and the Company
experienced some slowdown in the rapid growth of products used in ATE
applications in response to overall weakness in the semiconductor test equipment
market, although design win activity in ATE remains strong.
Sales through the distribution channel strengthened from the first quarter,
particularly in the U.S. and in Europe for SLIC and DSP products. Communications
sales of GSM handset products were particularly strong in Europe. Sales to
customers in Japan decreased from the previous quarter primarily due to
inventory corrections resulting in some semiconductor demand weakness in this
region in the second quarter of fiscal 1996.
Gross margin decreased slightly from 50.8% of sales for the prior quarter to
50.4% of sales for the second quarter of fiscal 1996 due to a continuing mix
shift to higher-volume, lower margin system-level products and additional
expenses incurred as a result of capacity additions. The effect of these
factors, however, was offset somewhat by an improvement in gross margins for
both SLIC and system-level products.
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R&D expenses for the second quarter of fiscal 1996 of $44.8 million were $4.0
million or 9.8% higher than $40.9 million for the first quarter, in line with
the Company's commitment to pursue the best opportunities for ICs in real-world
signal-processing applications.
SMG&A expenses increased only 2.5% from the preceding quarter, leading to a
quarter-to-quarter decrease in the SMG&A expense-to-sales ratio from 17.4% to
16.5%. As a result of this expense control coupled with stable gross margins,
operating profit increased 10% to 19.2% of sales versus 18.8% of sales for the
immediately prior quarter.
After nonoperating income of $1.4 million and an unchanged effective income tax
rate of 26%, the Company recorded a 10% increase in net income to $44.0 million
or 14.5% of sales compared to $40.1 million or 14.3% of sales for the first
quarter of fiscal 1996. Earnings per share increase from $.33 to $.35 over this
same period.
First Six Months of Fiscal 1996 Compared to the First Six Months of Fiscal 1995
Net sales of $584.1 million rose $146.0 million or 33% from the same period of
fiscal 1995. The increase in sales was mainly attributable to an increase in
sales volumes of both the Company's standard linear and system-level IC products
which grew 27% and 64%, respectively, over the same period of fiscal 1995. For
the first six months of fiscal 1996, sales growth for SLIC products was
strongest in the industrial and instrumentation markets and in high-growth
applications in the communications market while sales of system-level ICs were
strongest in wireless communications, pin electronics for automatic test
equipment and both fixed-point and floating-point general-purpose DSPs. The
Company experienced some spot order slowdown in SLIC products in the second
quarter of fiscal 1996, particularly in the OEM channel, as lead times were
reduced for many of the Company's products. In the system-level IC product
group, orders for audio codecs for the PC market were sluggish for the first six
months of fiscal 1996. Also, orders for pin electronics components for ATE
slowed during the second quarter of fiscal 1996 in response to overall weakness
in the semiconductor equipment sector. Weakness in these end markets, however,
has been offset by the significant growth experienced in communications and DSP.
Assembled product sales were down slightly in comparison to the first six months
of fiscal 1995 as newer multichip modules, primarily for communications
customers, continue to replace older military hybrids.
For the first half of fiscal 1996, sales to North American and international
customers increased 35% and 32%, respectively, over the same period of fiscal
1995. Internationally, the largest year-to-year sales gains were registered in
Europe, particularly for the Company's communications products. Sales in Japan
increased from the year-earlier period primarily due to increased sales of
SLICs for factory automation and other industrial automation applications. Most
of this increase occurred in the first quarter of fiscal 1996 as semiconductor
demand softened in Japan during the second quarter primarily due to inventory
corrections made by equipment manufacturers. The distributor channel had a
positive effect on sales growth in North America, Europe and Japan for the
overall six-month period, especially for SLIC products, as worldwide sales
through distribution increased 36% compared to the year-ago period. For the
first six months of fiscal 1996, approximately 41% of the Company's sales were
derived from sales through distributors.
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Gross margin of 50.6% of sales for the first six months of fiscal 1996 was
essentially flat compared to 50.5% for the comparable period of fiscal 1995 as
improvement in gross margin for both SLIC and system-level IC products was
offset by a shift in the mix of products sold to a greater proportion of
lower-margin system-level products, and the commencement of startup costs
associated with wafer fab expansion.
R&D expenses increased $22.2 million or 35% over the prior year, reflecting
continued investment in new product and process development.
SMG&A expenses grew only 10.7%, as the Company constrained spending growth to a
rate significantly below sales growth. As a result, SMG&A expense as a
percentage of sales fell more than three points to 16.9% from 20.4% for the
year-earlier period.
Operating profit reached $111.0 million or 19.0% of sales for the first half of
fiscal 1996, an increase of 62% from $68.5 million for the first half of fiscal
1995. This performance gain reflected the growth in sales, stable gross margin
and a slower rate of SMG&A expense growth versus sales.
Interest expense increased $2.6 million and interest income increased $4.5
million year-over-year, both resulting from the sale of $230,000,000 of 3 1/2%
Convertible Subordinated Notes during the first quarter of fiscal 1996.
The effective income tax rate increased to 26.0% from 24.0% for the year-ago
period due to a change in the mix of worldwide profits to higher tax rate
jurisdictions including the U.S.
Net income grew 61% to $84.1 million or $.68 per share compared to $52.4 million
or $.44 per share for the first six months of fiscal 1995. As a percentage of
sales, net income improved to 14.4% from 12.0% for the year-earlier period.
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Liquidity and Capital Resources
At May 4, 1996, cash, cash equivalents and short-term investments totaled $337.5
million, an increase of $204.6 million from the second quarter of fiscal 1995
and an increase of $186.4 million from the fourth quarter of fiscal 1995. The
increase in cash, cash equivalents and short-term investments from the second
and fourth quarters of fiscal 1995 was largely attributable to the sale of
$230,000,000 of 3 1/2% Convertible Subordinated Notes during the first quarter
of fiscal 1996, the net proceeds from which were approximately $224 million.
The Company's operating activities generated net cash of $45.8 million, or 7.8%
of sales, for the first six months of fiscal 1996 compared to $88.7 million, or
20.2% of sales, for the first six months of fiscal 1995. The $42.9 million
decrease in operating cash flows from the year-earlier period was principally
due to an increase in working capital requirements associated with growth in
accounts receivable and inventories and the payment of income taxes. These
changes were offset in part by higher net income and an increase in accounts
payable and accrued liabilities. Cash flow from operations generated for the
second quarter of fiscal 1996 was $12.5 million or 4.1% of sales versus $33.2
million or 11.8% of sales for the prior quarter and $38.6 million or 16.8% of
sales for the second quarter of fiscal 1995. The decrease in operating cash
flows compared to both of these quarters was mainly due to greater net working
capital requirements in the second quarter of fiscal 1996, as increased net
income was more than offset by growth in accounts receivable and inventories.
The noncash effect of depreciation and amortization expense was $37.1 million
for the first half of fiscal 1996 and $19.8 million for the second quarter of
fiscal 1996, higher than the $30.7 million and $15.7 million for the comparable
periods of fiscal 1995, primarily as a result of increased capital expenditures
related to the Company's internal capacity expansion programs. As a percentage
of sales, depreciation and amortization expense was 6.4% for the first six
months of fiscal 1996 compared to 7.0% for the first six months of fiscal 1995.
Accounts receivable of $212.8 million increased $22.4 million or 11.8%, $31.5
million or 17.4% and $34.6 million or 19.4% from the end of the first quarter of
fiscal 1996, the fourth quarter of fiscal 1995 and the second quarter of fiscal
1995, respectively. These increases were primarily the result of the higher
sales level in comparison to these periods. As a percentage of annualized
quarterly sales, accounts receivable was 17.5% at the end of the second quarter
of fiscal 1996 compared to 17.0%, 17.6% and 19.4% for the previous quarter and
the fourth and second quarters of fiscal 1995, respectively.
Inventories of $191.5 million at the end of the first six months of fiscal 1996
rose $33.7 million, $47.5 million and $56.9 million from the end of the first
quarter of fiscal 1996, the fourth quarter of fiscal 1995 and the second quarter
of fiscal 1995, respectively. Inventories also increased as a percentage of
annualized quarterly sales to 15.8% compared to 14.0% for both the first quarter
of fiscal 1996 and the fourth quarter of fiscal 1995 and 14.6% for the second
quarter of fiscal 1995. The growth in inventories over the past year was
principally due to a build in inventory levels needed to service increasing
sales volumes, as well as improve customer response times. In addition, the
increase in inventories in the second quarter of fiscal 1996 reflects the
ramping of new internal manufacturing capacity and greater availability to the
Company of externally purchased foundry CMOS wafers used to serve the Company's
DSP and communications product lines. As additional wafer capacity becomes
available, inventories are expected to continue to increase in support of demand
in faster growing product areas.
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Accounts payable and accrued liabilities increased $36.2 million or 24% compared
to the balance at the end of the second quarter of fiscal 1995 due principally
to increased expense activity related to the higher revenue level and increased
capital expenditures associated with wafer fabrication capacity expansion.
Net additions to property, plant and equipment of $120.1 million or 20.6% of
sales for the first six months of fiscal 1996 and $58.0 million or 19.1% of
sales for the second quarter of fiscal 1996, were funded with a combination of
cash on hand, cash generated from financing activities and internally generated
cash flow from operations. The majority of these expenditures in fiscal 1996
were related to capacity expansion including the addition of six-inch wafer
capacity to the Company's existing wafer fabrication facilities in Wilmington,
Massachusetts and Limerick, Ireland, continued upgrading and modernization of
the Company's wafer fabrication module in Sunnyvale, California and construction
of a new assembly and test facility in the Philippines. Also, during the second
quarter of fiscal 1996, the Company commenced an accelerometer dedicated fab
project at its newly leased facility in Cambridge, Massachusetts.
In January 1996, in accordance with a previous agreement, the Company made an
additional $7.0 million equity investment in Chartered Semiconductor
Manufacturing Pte., Ltd. ("CSM") in Singapore for a total equity investment of
$21.0 million, in exchange for a less than 5% ownership interest. This
investment is structured to provide access to CSM's eight inch 0.5 micron wafer
fabrication facility through wafer supply and pricing commitments beginning in
1996. The investment in CSM is classified in the balance sheet line item,
"Deferred Charges and Other Assets."
The Company entered into an additional agreement with CSM during January 1996,
whereby the Company will provide a total deposit of approximately $20.0 million
to be paid in several installments in 1996 and 1997. Under the terms of this
agreement, the deposit will guarantee access to certain quantities of sub-micron
wafers through fiscal 2000.
The Company currently plans to make capital expenditures of approximately $275
million during fiscal 1996, primarily in connection with the continued expansion
of it manufacturing facilities. In addition, the Company is continuing to
explore various options for further increasing its manufacturing capacity,
including joint ventures, acquisitions, equity investments in, or loans to,
wafer suppliers and construction of additional facilities.
Cash generated by financing activities of $270.4 million for the first six
months of fiscal 1996 resulted primarily from the completion on December 18,
1995 of the public sale of $230,000,000 of five-year 3 1/2% Convertible
Subordinated Notes due December 1, 2000. See Note 3 - "Debt," to the Condensed
Consolidated Financial Statements contained in this Form 10-Q for the fiscal
quarter ended May 4, 1996 for additional information concerning these notes. In
addition, during the first six months of fiscal 1996, the Company obtained $44.0
million of financing related to the sale-leaseback of certain machinery and
equipment.
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At May 4, 1996, the Company's principal sources of liquidity included $224.9
million of cash and cash equivalents and $112.6 million of short-term
investments. Short-term investments at the end of the second quarter of fiscal
1996 consisted of commercial paper, banker's acceptances, certificates of
deposit and Euro time deposits with maturities greater than three months and
less than six months at time of acquisition. The Company also has various lines
of credit both in the U.S. and overseas, including a $60 million credit facility
in the U.S. which expires in 1998, all of which were substantially unused at May
4, 1996. At May 4, 1996, the Company's debt-to-equity ratio was 48%.
The Company believes that its existing sources of liquidity and cash expected to
be generated from future operations, together with current and anticipated
available long-term financing, will be sufficient to fund operations, capital
expenditures and research and development efforts for the foreseeable future.
Litigation
As set forth in Note 4 to the Condensed Consolidated Financial Statements and
Part II, Item 1., "Legal Proceedings," contained in this Form 10-Q for the
fiscal quarter ended May 4, 1996, the Company is engaged in an enforcement
proceeding brought by the International Trade Commission related to patent
infringement litigation with Texas Instruments, Inc., and antitrust litigation
with Maxim Integrated Products, Inc.
Although the Company believes it should prevail in these matters, the Company is
unable to determine their ultimate outcome or estimate the ultimate amount of
liability, if any, at this time. An adverse resolution of these matters could
have a material adverse effect on the Company's consolidated financial position
or on its consolidated results of operations or cash flows in the period in
which the matters are resolved.
Factors Affecting Future Results
The Company's future operating results are difficult to predict and may be
affected by a number of factors including the timing of new product
announcements or introductions by the Company and its competitors, competitive
pricing pressures, fluctuations in manufacturing yields, adequate availability
of wafers and manufacturing capacity, changes in product mix and economic
conditions in the United States and international markets. In addition, the
semiconductor market has historically been cyclical and subject to significant
economic downturns at various times. As a result of these and other factors,
there can be no assurance that the Company will not experience material
fluctuations in future operating results on a quarterly or annual basis.
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16
The Company's success depends in part on its continued ability to develop and
market new products. There can be no assurance that the Company will be able to
develop and introduce new products in a timely manner or that such products, if
developed, will achieve market acceptance. In addition, the Company's growth is
dependent on its continued ability to penetrate new markets such as the
communications, computer and automotive segments of the electronics market,
where the Company has limited experience and competition is intense. There can
be no assurance that the markets being served by the Company will continue to
grow; that the Company's existing and new products will meet the requirements of
such markets; that the Company's products will achieve customer acceptance in
such markets; that competitors will not force prices to an unacceptably low
level or take market share from the Company; or that the Company can achieve or
maintain profits in these markets. Also, some of the customers in these markets
are less well established which could subject the Company to increased credit
risk.
The semiconductor industry is intensely competitive. Certain of the Company's
competitors have greater technical, marketing, manufacturing and financial
resources than the Company. The Company's competitors also include emerging
companies attempting to sell products to specialized markets such as those
served by the Company. Competitors of the Company have, in some cases, developed
and marketed products having similar design and functionality as the Company's
products. There can be no assurance that the Company will be able to compete
successfully in the future against existing or new competitors or that the
Company's operating results will not be adversely affected by increased price
competition.
The Company is planning in fiscal 1996 to increase substantially its
manufacturing capacity through both expansion of its production facilities and
increased access to third-party foundries; there can be no assurance that the
Company will complete the expansion of its production facilities or secure
increased access to third party foundries in a timely manner; or that the
Company will not encounter unanticipated production problems at either its own
facilities or at third-party foundries. The Company relies, and plans to
continue to rely, on third-party wafer fabricators to supply most of its wafers
that can be manufactured using industry-standard digital processes, and such
reliance involves several risks, including the absence of adequate guaranteed
capacity and reduced control over delivery schedules, manufacturing yields and
costs. In addition, the Company's capacity additions will result in a
significant increase in operating expenses and, if revenue levels do not
increase to offset these additional expense levels, the Company's future
operating results could be adversely affected. The Company also believes that
other semiconductor manufacturers are also expanding or planning to expand their
production capacity over the next several years, and there can be no assurance
that the expansion by the Company and its competitors will not lead to
overcapacity in the Company's target markets, which could lead to price erosion
that would adversely affect the Company's operating results.
For the first six months of fiscal 1996, 57% of the Company's revenues were
derived from customers in international markets. The Company has manufacturing
facilities in Ireland, the Philippines and Taiwan. The Company is therefore
subject to the economic and political risks inherent in international
operations, including expropriation, air transportation disruptions, currency
controls and changes in currency exchange rates, tax and tariff rates and
freight rates. Although the Company engages in certain hedging transactions to
reduce its exposure to currency exchange rate fluctuations, there can be no
assurance that the Company's competitive position will not be adversely affected
by changes in the exchange rate of the U.S. dollar against other currencies.
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The semiconductor industry is characterized by frequent claims and litigation
involving patent and other intellectual property rights. The Company has from
time to time received, and may in the future receive, claims from third parties
asserting that the Company's products or processes infringe their patents or
other intellectual property rights. In the event a third party makes a valid
intellectual property claim and a license is not available on commercially
reasonable terms, the Company's operating results could be materially and
adversely affected. Litigation may be necessary to enforce patents or other
intellectual property rights of the Company or to defend the Company against
claims of infringement, and such litigation can be costly and divert the
attention of key personnel. See Part II, Item 1 - "Legal Proceedings," contained
in this Form 10-Q for the fiscal quarter ended May 4, 1996 and Part I, Item 3 -
"Legal Proceedings," contained in the Company's Annual Report on Form 10-K for
the fiscal year ended October 28, 1995 for information concerning pending
litigation involving the Company. An adverse resolution of such litigation, may,
in certain cases, have a material adverse effect on the Company's consolidated
financial position or on its consolidated results of operations or cash flows in
the period in which the litigation is resolved.
Because of these and other factors, past financial performance should not be
considered an indicator of future performance. Investors should not use
historical trends to anticipate future results and should be aware that the
trading price of the Company's common stock may be subject to wide fluctuations
in response to quarter-to-quarter variations in operating results, general
conditions in the semiconductor industry, changes in earnings estimates and
recommendations by analysts or other events.
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PART II - OTHER INFORMATION
ANALOG DEVICES, INC.
Item 1. Legal Proceedings
Maxim Litigation
As previously reported in the Company's Annual Report on Form 10-K for the
fiscal year ended October 28, 1995, the Company is a defendant in a lawsuit
brought by Maxim Integrated Products, Inc. ("Maxim") in the United States
District Court for the Northern District of California seeking an injunction
against, and claiming damages for, alleged antitrust violations and unfair
competition in connection with distribution arrangements between the Company and
certain distributors. Maxim alleged that certain distributors ceased doing
business with Maxim as a result of shelf-sharing provisions in the distribution
arrangements between the distributors and the Company, resulting in improper
restrictions to Maxim's access to channels by which it distributed its products.
Maxim asserted actual and consequential damages in the amount of $14.1 million
and claimed restitution and punitive damages in an unspecified amount. Under
applicable law, Maxim would receive three times the amount of any actual damages
suffered as a result of any antitrust violation. On September 7, 1994, Maxim's
claim was dismissed for lack of evidence. Maxim appealed this ruling and oral
argument of the appeal was held in January 1996. On March 15, 1996, the Ninth
Circuit issued its decision affirming in part and reversing in part the District
Court's decision. The Ninth Circuit affirmed the District Court's decision
dismissing the antitrust claims and the state law claims challenging the
legality of the shelf-sharing provisions in the distribution arrangements
between the Company and the distributors. The Ninth Circuit reversed the
decision of the District Court with respect to the termination of Maxim by
Pioneer Standard and certain activities related thereto. The District Court has
scheduled a status conference on the Pioneer Standard claims for July 12, 1996.
Item 6. Exhibits and reports on Form 8-K
(a) See Exhibit Index
(b) There were no reports on Form 8-K filed for the three months ended May
4, 1996.
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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, 1996 By:/s/ Ray Stata
----------
Ray Stata
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: June 18, 1996 By:/s/ Joseph E. McDonough
--------------------
Joseph E. McDonough
Vice President-Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
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EXHIBIT INDEX
Analog Devices, Inc.
Item
10-1 Restated Articles of Organization of the Registrant, as amended
(incorporated herein by reference to the Registrant's Form S-8 filed on
May 30, 1996 relating to the 1988 Stock Option Plan).
10-2 Lease amendment dated March 1, 1996 to the Lease Agreement dated June
16, 1995 between Analog Devices, Inc. and Ferrari Brothers, relating to
premises located at 610 Wendall Drive, Sunnyvale, California.
10-3 Lease amendment dated May 1, 1996 to the Lease Agreement dated August
8, 1990 between Analog Devices, Inc. and Bourns, Inc., relating to
premises located at 1525 Comstock Road, Santa Clara, California.
10-4 Lease amendment dated May 1, 1996 to the Lease Agreement dated August
8, 1990 between Analog Devices, Inc. and Bourns, Inc., relating to
premises located at 1500 Space Park Drive, Santa Clara, California.
11-1 Computation of Earnings per Share.
27 Financial Data Schedule
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