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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 January 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from_______________ to ________________
Commission File No. 1-7819
Analog Devices, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2348234
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Technology Way, Norwood, MA 02062-9106
(Address of principal executive offices) (Zip Code)
(781) 329-4700
(Registrant's telephone number, including area code)
----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
The number of shares outstanding of each of the issuer's classes of Common
Stock as of February 26, 1999 was 161,344,938 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
------------------
JANUARY 30, 1999 JANUARY 31, 1998*
---------------- -----------------
Net sales $300,500 $317,791
Cost of sales 162,805 154,332
-------- --------
Gross margin 137,695 163,459
Operating expenses:
Research and development 52,584 54,975
Selling, marketing, general and
administrative 46,181 55,646
-------- --------
Operating income 38,930 52,838
Equity in loss of WaferTech 1,149 1,590
Interest and other expense, net 420 (767)
-------- --------
Income before income taxes 37,361 52,015
Provision for income taxes 7,467 11,756
-------- --------
Income before cumulative effect of change in
accounting principle 29,894 40,259
Cumulative effect of change in
accounting principle -- (37,080)
-------- --------
Net income $ 29,894 $ 3,179
======== ========
* Restated to reflect change in accounting principle.
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ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Continued)
(Unaudited)
(thousands except per share amounts)
THREE MONTHS ENDED
------------------
JANUARY 30, 1999 JANUARY 31, 1998*
---------------- -----------------
Shares used to compute earnings per share - basic 159,572 161,023
======== ========
Shares used to compute earnings per share - diluted 176,857 178,146
======== ========
Earnings per share before cumulative effect of
change in accounting principle
Earnings per share - basic $ 0.19 $ 0.26
======== ========
Earnings per share - diluted $ 0.18 $ 0.24
======== ========
Earnings per share after cumulative effect of
change in accounting principle
Earnings per share - basic $ 0.19 $ 0.03
======== ========
Earnings per share - diluted $ 0.18 $ 0.03
======== ========
* Restated to reflect change in accounting principle.
See accompanying notes.
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ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(thousands)
Assets JANUARY 30, 1999 OCTOBER 31, 1998 JANUARY 31, 1998*
---------------- ---------------- -----------------
Cash and cash equivalents $ 332,403 $ 263,331 $ 217,198
Short-term investments 129,670 41,575 76,546
Accounts receivable, net 213,727 207,361 261,272
Inventories:
Finished goods 96,475 107,313 83,776
Work in process 148,897 142,139 128,587
Raw materials 24,964 25,624 29,145
---------- ---------- ----------
270,336 275,076 241,508
Deferred tax assets 98,000 98,148 82,133
Prepaid expenses 14,638 18,038 19,585
---------- ---------- ----------
Total current assets 1,058,774 903,529 898,242
---------- ---------- ----------
Property, plant and equipment, at cost:
Land and buildings 159,617 158,792 158,346
Machinery and equipment 1,043,087 1,034,619 979,570
Office equipment 71,033 70,576 59,910
Leasehold improvements 103,989 103,482 92,617
---------- ---------- ----------
1,377,726 1,367,469 1,290,443
Less accumulated depreciation
and amortization 696,475 664,038 595,922
---------- ---------- ----------
Net property, plant and
equipment 681,251 703,431 694,521
---------- ---------- ----------
Investments 88,511 187,224 188,690
Intangible assets, net 15,115 15,815 17,925
Other assets 50,902 51,731 58,415
---------- ---------- ----------
Total other assets 154,528 254,770 265,030
---------- ---------- ----------
$1,894,553 $1,861,730 $1,857,793
========== ========== ==========
* Restated to reflect change in accounting principle.
See accompanying notes.
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ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(thousands except share amounts)
Liabilities and Stockholders'
Equity JANUARY 30, 1999 OCTOBER 31, 1998 JANUARY 31, 1998*
---------------- ---------------- -----------------
Short-term borrowings and current
portion of long-term debt $ 2,333 $ 193 $ 1,489
Obligations under capital leases 14,386 14,266 11,844
Accounts payable 58,000 59,115 95,447
Deferred income on shipments to
domestic distributors 101,797 113,784 122,996
Income taxes payable 57,373 53,595 60,525
Accrued liabilities 79,369 79,906 70,648
---------- ---------- ----------
Total current liabilities 313,258 320,859 362,949
---------- ---------- ----------
Long-term debt 309,871 309,985 310,000
Noncurrent obligations under
capital leases 27,150 30,773 35,871
Deferred income taxes 33,000 31,789 24,000
Other noncurrent liabilities 45,119 39,935 32,327
---------- ---------- ----------
Total noncurrent liabilities 415,140 412,482 402,198
---------- ---------- ----------
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $1.00 par value,
500,000 shares authorized,
none outstanding -- -- --
Common stock, $.16 2/3 par value,
600,000,000 shares authorized,
164,684,927 shares issued
(164,092,719 in October 1998,
162,317,316 in January 1998) 27,448 27,349 27,053
Capital in excess of par value 254,788 248,970 224,800
Retained earnings 944,265 913,992 834,763
Cumulative translation adjustment 7,397 6,025 6,185
---------- ---------- ----------
1,233,898 1,196,336 1,092,801
Less 3,763,903 shares in treasury,
at cost (3,782,763 in October 1998
and 19,934 in January 1998) 67,743 67,947 155
---------- ---------- ----------
Total stockholders' equity 1,166,155 1,128,389 1,092,646
---------- ---------- ----------
$1,894,553 $1,861,730 $1,857,793
========== ========== ==========
* Restated to reflect change in accounting principle.
See accompanying notes.
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ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(thousands)
THREE MONTHS ENDED
------------------
JANUARY 30, 1999 JANUARY 31, 1998*
---------------- -----------------
OPERATIONS Cash flows from operations:
Net income $ 29,894 $ 3,179
Adjustments to reconcile net income
to net cash provided by operations:
Cumulative effect of change in accounting
principle, net of $20 million of income taxes -- 37,080
Depreciation and amortization 35,156 29,744
Equity in loss of WaferTech, net of dividends 1,149 1,590
Deferred income taxes 1,214 3,274
Other noncash expense 1,165 586
Changes in operating assets and liabilities (10,221) (1,282)
--------- ---------
Total adjustments 28,463 70,992
--------- ---------
Net cash provided by operations 58,357 74,171
--------- ---------
INVESTMENTS Cash flows from investments:
Purchase of short-term investments
available for sale (110,659) (43,364)
Long-term investments 105,601 (58,110)
Maturities of short-term investments
available for sale 22,564 17,824
Additions to property, plant and equipment, net (12,293) (62,200)
(Increase) decrease in other assets 2,403 (2,532)
--------- ---------
Net cash provided by (used for) investments 7,616 (148,382)
--------- ---------
FINANCING ACTIVITIES Cash flows from financing activities:
Proceeds from employee stock plans 4,820 1,283
Payments on capital lease obligations (3,503) (2,870)
Net increase in variable rate borrowings 2,030 1,489
--------- ---------
Net cash provided by (used for)
financing activities 3,347 (98)
--------- ---------
Effect of exchange rate changes on cash (248) 1,906
--------- ---------
Net increase (decrease) in cash and cash equivalents 69,072 (72,403)
Cash and cash equivalents at beginning of period 263,331 289,601
--------- ---------
Cash and cash equivalents at end of period $ 332,403 $ 217,198
========= =========
SUPPLEMENTAL INFORMATION Cash paid during the period for:
Income taxes $ 2,061 $ 2,232
========= =========
Interest $ 4,469 $ 4,559
========= =========
* Restated to reflect change in accounting principle.
See accompanying notes.
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Analog Devices, Inc.
Notes to Condensed Consolidated Financial Statements
January 30, 1999
Note 1 - In the opinion of management, the information furnished in the
accompanying financial statements reflects all adjustments which are necessary
to fairly state the results for this interim period and should be read in
conjunction with the Company's Annual Report to Stockholders on Form 10-K for
the fiscal year ended October 31, 1998, (1998 Annual Report).
Note 2 - Certain amounts reported in the previous year have been reclassified to
conform to the 1999 presentation.
Note 3 - Investments
During the first quarter of fiscal 1999 Analog Devices Inc., (the Company),
completed the sale of 14% of its 18% equity ownership in WaferTech, its joint
venture with Taiwan Semiconductor Manufacturing Company and other investors. The
Company sold 14% of its investment to other WaferTech partners and received $105
million in cash, which was equal to the carrying value of the 14% equity
ownership at October 31, 1998.
Note 4 - Comprehensive Income
In the first quarter of fiscal 1999 the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income", (FAS 130). FAS
130 establishes new rules for the reporting and display of comprehensive income
and its components. Components of comprehensive income include net income and
certain transactions that have generally been reported in the consolidated
statement of shareholders' equity. FAS 130 requires that these transactions be
included with net income and presented separately as comprehensive income in the
financial statements. The adoption of this Statement had no impact on the
Company's net income or shareholders' equity and, during the periods presented,
the Company had no material transactions other than net income that should be
reported as comprehensive income.
Note 5 - Earnings Per Share
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share," in the first quarter of fiscal 1998. 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 convertible debt financing. In calculating diluted earnings per
share, the dilutive effect of stock options is computed using the average market
price for the period. The following table sets forth the computation of basic
and diluted earnings per share:
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Note 5 - Earnings Per Share (continued)
THREE MONTHS ENDED
------------------
JANUARY 30, 1999 JANUARY 31, 1998*
---------------- ----------------
Basic:
Income before cumulative effect of change in
accounting principle $ 29,894 $ 40,259
Cumulative effect of change in accounting principle -- (37,080)
--------- ---------
Net income $ 29,894 $ 3,179
========= =========
Weighted shares outstanding 159,572 161,023
========= =========
Earnings per share:
Income before cumulative effect of change in
accounting principle $ 0.19 $ 0.26
Cumulative effect of change in accounting principle -- (0.23)
--------- ---------
Net income $ 0.19 $ 0.03
========= =========
Diluted:
Income before cumulative effect of change in
accounting principle $ 29,894 $ 40,259
Interest related to convertible subordinated
notes, net of tax 1,425 1,411
--------- ---------
Income before cumulative effect of change in
accounting principle including the effect
of dilutive securities 31,319 41,670
Cumulative effect of change in accounting principle -- (37,080)
--------- ---------
Net income $ 31,319 $ 4,590
========= =========
Weighted shares outstanding 159,572 161,023
Assumed exercise of common stock equivalents 6,307 6,138
Assumed conversion of subordinated notes 10,978 10,985
--------- ---------
Weighted average common and common equivalent shares 176,857 178,146
========= =========
Earnings per share:
Income before cumulative effect of change in
accounting principle $ 0.18 $ 0.24
Cumulative effect of change in accounting principle -- (0.21)
--------- ---------
Net income $ 0.18 $ 0.03
========= =========
* Restated to reflect change in accounting principle.
Note 6 - Convertible Debt
On February 9, 1999 the Company announced that on March 11, 1999 it will redeem
in full its 3 1/2% Convertible Subordinated Notes due 2000 (Notes) in the
outstanding aggregate principal amount of $230 million. Prior to redemption,
holders may convert their Notes into shares of Analog Devices Inc. (ADI) common
stock, at a price of $20.938 per share. Cash will be paid in lieu of fractional
shares. Alternatively, holders may have their Notes redeemed at a total
redemption price of $1,023.72 per $1000 principal amount of Notes. As of March
11, 1999, $229,967,000 of the Notes were converted into an aggregate of
10,983,163 shares of the Company's common stock.
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Note 7 - Acquisitions
Subsequent to the quarter ended January 30, 1999, the Company acquired two DSP
tools companies, White Mountain DSP, Inc. of New Hampshire and Edinburgh
Portable Compilers Limited, of Scotland. The total cost of these acquisitions
was approximately $21 million in cash and $2 million in common stock of the
Company, with additional contingent cash consideration to be paid if the
acquired companies achieve certain revenue and operational objectives. In
connection with these acquisitions, the Company expects to record a charge of
less than $5 million, in the second quarter of fiscal 1999, for the write-off of
in-process Research & Development.
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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 consolidated
condensed financial statements and the notes thereto included in Item 1 of this
Quarterly Report and the audited consolidated financial statements and notes
thereto and Management's Analysis for the fiscal year ended October 31, 1998,
contained in the Company's 1998 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 the Company's 1998 Annual Report, that could cause actual
results to differ materially from the Company's expectations. Readers are
cautioned not to place undue reliance on any forward-looking statements, as they
reflect management's analysis only as of the date hereof. The Company undertakes
no obligation to release the results of any revision to these forward-looking
statements which may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
Results of Operations
The Company experienced strong demand in the first half of fiscal 1998, which
declined in the second half of the year primarily due to a cyclical downturn in
the semiconductor industry. Demand during the first quarter of fiscal 1999
recovered somewhat from sales levels that were very depressed in the second half
of fiscal 1998. As a result, net sales for the first quarter of fiscal 1999 were
$301 million, 1% above the fourth quarter of fiscal 1998 but $17 million or 5%
below the first quarter of fiscal 1998. This decline from the prior year was
mainly due to a decrease in analog IC sales, primarily caused by a decline in
sales to automatic test equipment (ATE) customers. These decreases were
partially offset by increased sales of communications and computer products.
The decline in ATE sales primarily impacted the North American OEM channel,
causing sales to North American customers to decrease to 46.9% of total sales
for the first quarter of fiscal 1999, compared to 50.7% for the year earlier
period. Sales in Europe and Japan declined in comparison to the first quarter of
fiscal 1998 and Southeast Asian sales rose as a result of increased sales of
analog IC and communications products.
Gross margin for the first quarter of fiscal 1999 was 45.8% compared to 51.4%
for the first quarter of fiscal 1998. The decrease in gross margin from the
prior year period was primarily due to a reduction in production rates resulting
from lower demand. The Company expects that gross margin will continue to be
adversely impacted by lower production rates until sales growth resumes.
Research and development (R&D) expenses were $53 million for the three months
ended January 30, 1999, compared to $55 million for the three months ended
January 31, 1998. This decline was attributable to the Company's decision to
curtail the growth in R&D spending until sales growth resumes. However, the
Company believes that a continued commitment to research and development is
essential in order to maintain product leadership in its existing products and
to provide innovative new product offerings, and therefore expects to continue
to make significant investments in research and development in the future.
Selling, marketing, general & administrative (SMG&A) expenses were $46 million
in the first quarter of fiscal 1999, compared to $56 million for the first
quarter of fiscal 1998. Of the $10 million decrease, $8 million was attributable
to a charge that was recorded in the first quarter of fiscal 1998 related to
collection difficulties the Company experienced with customers whose business
and financing had been adversely affected by the Southeast Asia economic
situation. The remainder of the decrease resulted from the Company's continued
effort to constrain spending.
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The effective income tax rate decreased from 22.6% for the first three-month
period of fiscal 1998 to 20% for the first three-month period of fiscal 1999
primarily due to a shift in the mix of worldwide profits.
In the fourth quarter of fiscal 1998, the Company changed its accounting method
for recognizing revenue on all shipments to international distributors and
certain shipments to domestic distributors. The change was made with an
effective date of November 2, 1997 (the beginning of fiscal 1998). While the
Company has historically deferred revenue on most shipments made to domestic
distributors until the products were resold by the distributors to end users, it
recognized revenue on shipments to international distributors and certain
shipments to domestic distributors upon shipment to the distributors, net of
appropriate reserves for returns and allowances. As a result of this accounting
change, revenue recognition on shipments to distributors worldwide is deferred
until the products are resold to the end users. The Company believes that
deferral of revenue on shipments to distributors and related gross margin until
the product is shipped by the distributors is a more meaningful measurement of
results of operations because it better conforms to the substance of the
transaction considering the changing business environment in the international
marketplace; is consistent with industry practice; and will, accordingly, better
focus the entire organization on sales to end users and, therefore, is a
preferable method of accounting. The cumulative effect in prior years of the
change in accounting principle was a charge of approximately $37 million (net of
$20 million of income taxes) or $0.21 per diluted share. The results of
operations and cash flows for the period ended January 31, 1998 have been
restated to reflect the accounting change.
Liquidity and Capital Resources
At January 30, 1999, cash, cash equivalents and short-term investments totaled
$462 million, an increase of $157 million from the fourth quarter of fiscal 1998
and an increase of $168 million from the first quarter of fiscal 1998. The
increase in cash, cash equivalents and short-term investments was primarily due
to operating cash inflows, $105 million received in January 1999 related to the
sale of the Company's investment in WaferTech and lower capital spending. Cash
provided by operating activities was $58 million or 19% of sales in the first
quarter of fiscal 1999 compared to $74 million or 23% of sales in the first
quarter of fiscal 1998.
Accounts receivable totaled $214 million at the end of the first quarter of
fiscal 1999, an increase of $6 million from the fourth quarter of fiscal 1998
and a decrease of $48 million from the first quarter of fiscal 1998. The
Company's days sales outstanding has improved from 75 at January 31, 1998 to 65
at January 30, 1999.
Inventories of $270 million at January 30, 1999 declined $5 million compared to
the fourth quarter of fiscal 1998 and were $29 million higher than the end of
the first quarter of fiscal 1998. The increase in inventory levels from the
prior year period was a result of production rates in the first half of fiscal
1998 that did not anticipate the downturn in the second half of fiscal 1998. The
Company has since adjusted production rates to conform to current levels of
demand.
During the first quarter of fiscal 1999 the Company completed the sale of 14% of
its 18% equity ownership in WaferTech, its joint venture with Taiwan
Semiconductor Manufacturing Company and other investors. The Company sold 14% of
its investment to other WaferTech partners and received $105 million in cash,
which was equal to the carrying value of the 14% equity ownership at October 31,
1998.
Net additions to property, plant and equipment of $12 million for the first
quarter of fiscal 1999 were funded with a combination of cash on hand and cash
generated from operations. The first quarter's level of spending was down
substantially from the $62 million spent in the first quarter of fiscal 1998.
The decrease in capital expenditures was attributable to the Company's efforts
to constrain all spending, including capital expenditures, until sales growth
resumes. The Company currently plans to make capital expenditures of
approximately $100 million during fiscal 1999.
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At January 30, 1999, the Company's principal sources of liquidity were $462
million of cash and cash equivalents and short-term investments. In addition,
the Company has various lines of credit both in the U.S. and overseas, including
a $60 million credit facility in the U.S., which expires in 2000, all of which
were substantially unused at January 30, 1999. At January 30, 1999, the
Company's debt-to-equity ratio was 30%.
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.
Factors Which May Affect Future Results
The Company's future operating results are difficult to predict and may be
affected by a number of factors including the timing of new product
announcements or introductions by the Company and its competitors, competitive
pricing pressures, fluctuations in manufacturing yields, adequate availability
of wafers and manufacturing capacity, changes in product mix and economic
conditions in the United States and international markets, and the outcome and
impact of the Year 2000. In addition, the semiconductor market has historically
been cyclical and subject to significant economic downturns at various times.
The Company's 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 they are shipped by the
Company. As a result of these and other factors, there can be no assurance that
the Company will not experience material fluctuations in future operating
results on a quarterly or annual basis.
The Company's success depends in part on its continued ability to develop and
market new products. There can be no assurance that the Company will be able to
develop and introduce new products in a timely manner or that such products, if
developed, will achieve market acceptance. In addition, the Company's growth is
dependent on its continued ability to penetrate new markets such as the
communications, computer and automotive segments of the electronics market,
where the Company has limited experience and competition is intense. There can
be no assurance that the markets being served by the Company will grow in the
future; that the Company's existing and new products will meet the requirements
of such markets; that the Company's products will achieve customer acceptance in
such markets; that competitors will not force prices to an unacceptably low
level or take market share from the Company; or that the Company can achieve or
maintain profits in these markets. Also, some of the customers in these markets
are less well established which could subject the Company to increased credit
risk.
The semiconductor industry is intensely competitive. Certain of the Company's
competitors have greater technical, marketing, manufacturing and financial
resources than the Company. The Company's competitors also include emerging
companies attempting to sell products to specialized markets 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 has substantially increased its manufacturing capacity through both
expansion of its production facilities and increased access to third-party
foundries. However, the Company cannot be sure that it will not encounter
unanticipated production problems at either its own facilities or at third-party
foundries, or that the increased capacity will be sufficient to satisfy demand
for its products. The Company relies, and plans to continue to rely, on assembly
and test subcontractors and on third-party wafer fabricators to supply most of
its wafers that can be manufactured using industry-standard digital processes,
and such reliance involves several risks, including reduced control over
delivery schedules, manufacturing yields and costs. In addition, the Company's
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capacity additions resulted 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. In addition,
asset values could be impaired if the additional capacity is underutilized for
an extended period of time. Also, non-compliance with "take or pay" covenants in
certain of its supply agreements, could adversely impact operating results. The
Company also believes that other semiconductor manufacturers have expanded their
production capacity over the past 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 three months of fiscal 1999, 53% of the Company's revenues was
derived from customers in international markets. The Company has manufacturing
facilities outside the U.S. in Ireland, the Philippines and Taiwan. The Company
also has supply agreements that include "take or pay" covenants with suppliers
located in Southeast Asia (SEA) and as part of these arrangements, the Company
has $23 million on deposit with two of these suppliers. The Company also has a
$21 million investment in one of these suppliers. In addition, the Company's
major partner in its joint venture, WaferTech, is TSMC, which is located in SEA.
In addition to being exposed to the ongoing economic cycles in the semiconductor
industry, the Company is also subject to the economic and political risks
inherent in international operations, including the risks associated with the
ongoing uncertainties in the economies in SEA. These risks include air
transportation disruptions, expropriation, currency controls and changes in
currency exchange rates, tax and tariff rates and freight rates. Although the
Company engages in certain hedging transactions to reduce its exposure to
currency exchange rate fluctuations, there can be no assurance that the
Company's competitive position will not be adversely affected by changes in the
exchange rate of the U.S. dollar against other currencies.
The semiconductor industry is characterized by frequent claims and litigation
involving patent and other intellectual property rights. The Company has from
time to time received, and may in the future receive, claims from third parties
asserting that the Company's products or processes infringe their patents or
other intellectual property rights. In the event a third party makes a valid
intellectual property claim and a license is not available on commercially
reasonable terms, the Company's operating results could be materially and
adversely affected. Litigation may be necessary to enforce patents or other
intellectual property rights of the Company or to defend the Company against
claims of infringement, and such litigation can be costly and divert the
attention of key personnel. See the Company's 1998 Annual Report for information
concerning certain pending litigation involving the Company. An adverse outcome
in such litigation, may, in certain cases, have a material adverse effect on the
Company's consolidated financial position or on its consolidated results of
operations or cash flows in the period in which the litigation is resolved.
The Company's software applications have been updated to accommodate the new
Euro currency. System testing was completed during the fourth quarter of
calendar 1998 and the Euro functionality was implemented as planned on January
1, 1999. No major system-related issues were encountered and none are
anticipated. The impact, either positive or negative, of the Euro on the
European economy generally and on the Company's operations in Europe in the
future is unknown at this time.
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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Year 2000
Over the past five years the Company has made significant investments in new
manufacturing, financial and operating hardware and software. These investments
were made to support the growth of its operations; however, the by-product of
this effort is that the Company now has year 2000, (Y2K), compliant hardware and
software running on many of its major platforms.
The Company has made the year 2000 issue a significant priority and a task force
is engaged in the ongoing effort to reduce the year 2000 related risk in the
balance of the Company's systems and equipment. It is estimated that the
aggregate cost of this project, which commenced at the beginning of fiscal 1998,
is approximately $10 million in total, for fiscal 1998 and fiscal 1999. The task
force's efforts are concentrated in six separate areas. The status of each area
as of January 30, 1999 is summarized below.
Centrally Managed Global Systems
Centrally managed global systems are the enterprisewide, centrally managed
operating systems, which include customer service, customer order entry,
work-in-progress (WIP) tracking, warehousing, production planning, and financial
systems. These systems have been split into "mission critical" and "non-mission
critical." Mission critical is defined as systems that can seriously impair the
Company's ability to conduct its business. Of the 15 mission critical
applications identified as of August 1, 1998, three systems were not Y2K
compliant: Promis (WIP tracking), the order entry system in Japan and the
Electronic Data Interchange (EDI) translator. Since that time Promis system
upgrades have been completed in three of the five manufacturing sites, and the
remaining two are scheduled to be upgraded in early 1999. The migration to SAP
for order entry in Japan and the upgrade of the EDI translator were successfully
completed in the first quarter of fiscal 1999. Once the remaining two Promis
systems are upgraded, all mission critical systems will be 100% compliant. In
addition, several mission critical systems, such as SAP, Forecasting, Data
Warehouse and Distributor Management systems have been specifically tested and
certified to be year 2000 compliant. The Company is on schedule towards retiring
its non-compliant mainframe in early 1999. Non-mission critical is defined as
systems which would not cause serious impairment to the organization. The task
force is continually reviewing and re-prioritizing the non-mission critical
systems to ensure that the appropriate items are receiving the proper attention.
Design and Engineering Systems
The Company's Computer Aided Design (CAD) Council is leading a worldwide year
2000 compliance review of hardware and software related to the Company's design
and engineering systems. The team has completed its analysis and the required
updates to CAD operating systems are 75% complete. All operating systems are
expected to be fully Y2K compliant by the end of the third quarter of fiscal
1999. Critical CAD application software upgrade packages have been vendor
certified Y2K compliant and migration to, and testing of, these new packages
will proceed over the next 6 to 8 months. The Company routinely completes full
archives of all designs that are currently shipping, or in development, to
enable the recovery of any design database needed for future derivative
products. This archive system is currently undergoing compliancy testing and
will be verified Y2K compliant by the third quarter of fiscal 1999. The Company
believes that if all design engineering systems are not compliant in time, this
will result in inconvenience and inefficiencies rather than any significant risk
to operations.
Site Based Manufacturing Systems
Manufacturing site managers are committed to ensuring a successful transition of
operations in the year 2000. All critical manufacturing equipment has been
identified and analyzed. The analysis process included ensuring that date
compliance is necessary. The Company is considering "rolling back" the internal
date mechanism as a contingency plan for certain equipment and the task force is
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in the process of testing the effectiveness of this contingency plan. All
manufacturing sites are performing Y2K compliance testing and this effort is
expected to be complete by the end of March 1999. All testing is being done to
the latest vendor specifications and the Company is using the suite of test
programs provided by Sematech, a semiconductor research organization. Thus far,
no crucial piece of equipment has been identified where there is a Y2K
compliance problem for which no solution exists. In all instances where a Y2K
compliance issue has arisen, the Company has been able to develop a solution,
without having to replace the equipment. While the review is not yet complete,
the Company does not foresee any manufacturing equipment-related obstacles which
would prevent the continuation of operations in Year 2000.
Personal Computers (PCs)
The Company has a PC Standards Committee, comprised of participants from various
Company locations. This committee has selected a tool and developed a hardware
and software certification plan. This plan requires certification of PC Basic
Input/Output System (BIOS), software applications and user files. The Company
has certified the BIOS on its 3,500 networked PCs first quarter of 1999 and less
than 2% were found to be non-Y2K compliant. The Company will also issue a tool
to assist users in analyzing their data files for potential year 2000 issues. In
addition, a year 2000 "patch" is available for the Microsoft Office Suite
(Excel, Word and Access) and this is scheduled to be implemented in April 1999.
The Company does not foresee any year 2000 issues in this area.
Facility Related Systems
Systems such as heating, sprinklers, elevators and card-key access are also
being reviewed by site teams. Each team has a designated facilitator and there
are representatives from each department participating. All of the teams have
taken a thorough inventory of their site's systems and the Company expects to be
100% compliant, with 80% of the facility systems to be compliant by the second
quarter of 1999.
Third Party
The corporate year 2000 task force is also reviewing third-party connectivity
issues. The Company's EDI translator supplier, Harbinger, has been successfully
tested for Y2K compliance. The EDI carrier, GEIS, has notified the Company that
it is compliant as well. Other external service providers, primarily financial
and human resource services, as well as outside vendors, have also been surveyed
as to their state of readiness and most expect to be Y2K compliant. The Company
has identified 200 crucial, sole-source suppliers that could put Analog at risk
and is currently conducting on site audits to verify their state of readiness
for Y2K. As a contingency plan the Company is going to ensure that adequate
supplies of critical raw materials and spare parts are in stock at December 31,
1999. In addition, the Company tested its financial interface with its
major financial services provider for Y2K compliance, and the results were
successful.
The Company currently believes that its most reasonably likely worst case year
2000 scenario would relate to problems with systems of third parties which would
create the greatest risks with infrastructure, including water and sewer
services, electricity, transportation, telecommunications and critical supplies
of raw materials and spare parts. The Company is assessing various scenarios and
contingency planning will continue during 1999 as the Company completes the
remedial work on its internal systems and assesses the state of readiness of its
third-party suppliers.
Summary
The Company believes that the year 2000 issue will not pose significant
operational problems. However, year 2000 issues could have a significant impact
on the Company's operations and its financial results if modifications to
internal systems and equipment cannot be completed on a timely basis; unforeseen
needs or problems arise; or if the systems operated by third parties are not
year 2000 compliant.
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PART II - OTHER INFORMATION
ANALOG DEVICES, INC.
Item 6. Exhibits and reports on Form 8-K
(a) See Exhibit Index.
(b) There were no reports on Form 8-K filed for the three months ended
January 30, 1999.
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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: March 15, 1999 By: /s/ Jerald G. Fishman
-----------------------
Jerald G. Fishman
President and
Chief Executive Officer
(Principal Executive Officer)
Date: March 15, 1999 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
3.1 Restated Articles of Organization of Analog Devices, Inc., filed
herewith.
10.1 Assignment and Assumption Agreement between Analog Devices Inc. and
Taiwan Semiconductor Manufacturing Co., Ltd., dated as of January 28,
1999, filed herewith.
10.2 Assignment and Assumption Agreement between Analog Devices Inc. and
Altera Corporation dated as of January 29, 1999, filed herewith.
10.3 Amendment to Second Amended and Restated Limited Liability Company
Agreement of WaferTech LLC, dated as of November 30, 1998, filed
herewith.
10.4 Second Amendment to Second Amended and Restated Limited Liability
Company Agreement of WaferTech LLC, dated as of January 21, 1999,
filed herewith.
27.1 Financial Data Schedule for the three months ended January 30, 1999.
27.2 Restated Financial Data Schedule for the three months ended January
31, 1998.
27.3 Restated Financial Data Schedule for the six months ended May 2, 1998.
27.4 Restated Financial Data Schedule for the nine months ended August 1,
1998.
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