<PAGE> 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 August 1, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from_______________ to ________________
Commission File No. 1-7819
Analog Devices, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2348234
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Technology Way, Norwood, MA 02062-9106
(Address of principal executive offices) (Zip Code)
(781) 329-4700
(Registrant's telephone number, including area code)
----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
The number of shares outstanding of each of the issuer's classes of Common
Stock as of August 28, 1998 was 162,611,880 shares of Common Stock.
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------
August 1, 1998 August 2, 1997
-------------- --------------
<S> <C> <C>
Net sales $294,920 $318,139
Cost of sales 161,522 158,901
-------- --------
Gross margin 133,398 159,238
Operating expenses:
Research and development 55,088 49,895
Selling, marketing, general and administrative 48,202 48,939
Restructuring charge 17,000 --
-------- --------
Operating income 13,108 60,404
Equity in loss (income) of WaferTech 3,560 (85)
Interest and other expense, net (794) (803)
-------- --------
Income before income taxes 10,342 61,292
Provision for income taxes 1,551 15,323
-------- --------
Net income $ 8,791 $ 45,969
======== ========
Shares used to compute basic earnings per share 162,451 159,796
======== ========
Basic earnings per share $ 0.05 $ 0.29
======== ========
Shares used to compute diluted earnings per share 178,546 177,773
======== ========
Diluted earnings per share $ 0.06 $ 0.27
======== ========
</TABLE>
See accompanying notes.
2
<PAGE> 3
ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(thousands except per share amounts)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------
August 1, 1998 August 2, 1997
-------------- --------------
<S> <C> <C>
Net sales $958,750 $911,015
Cost of sales 490,103 457,372
-------- --------
Gross margin 468,647 453,643
Operating expenses:
Research and development 166,253 143,367
Selling, marketing, general and administrative 160,862 140,929
Restructuring charge 17,000 --
Gain on sale of business, net (13,100) --
-------- --------
Operating income 137,632 169,347
Equity in loss of WaferTech 7,065 609
Interest and other expense, net (1,780) (951)
-------- --------
Income before income taxes 132,347 169,689
Provision for income taxes 30,832 42,422
-------- --------
Net income $101,515 $127,267
======== ========
Shares used to compute basic earnings per share 161,866 159,008
======== ========
Basic earnings per share $ 0.63 $ 0.81
======== ========
Shares used to compute diluted earnings per share 178,706 176,609
======== ========
Diluted earnings per share $ 0.60 $ 0.75
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 4
ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(thousands)
<TABLE>
<CAPTION>
Assets August 1, 1998 November 1, 1997 August 2, 1997
-------------- ---------------- --------------
<S> <C> <C> <C>
Cash and cash equivalents $ 261,705 $ 289,601 $ 235,699
Short-term investments 38,792 51,006 80,770
Accounts receivable, net 211,583 255,886 246,680
Inventories:
Finished goods 109,565 66,253 59,953
Work in process 135,091 128,187 135,082
Raw materials 27,714 31,526 26,823
---------- ---------- ----------
272,370 225,966 221,858
Deferred tax assets 66,910 54,761 55,800
Prepaid expenses 18,233 18,209 15,402
---------- ---------- ----------
Total current assets 869,593 895,429 856,209
---------- ---------- ----------
Property, plant and equipment, at cost:
Land and buildings 158,729 145,952 144,744
Machinery and equipment 1,034,437 938,602 893,452
Office equipment 65,444 58,714 56,054
Leasehold improvements 100,265 87,407 83,440
---------- ---------- ----------
1,358,875 1,230,675 1,177,690
Less accumulated depreciation
and amortization 644,907 569,040 548,600
---------- ---------- ----------
Net property, plant and equipment 713,968 661,635 629,090
---------- ---------- ----------
Investments 190,051 131,468 122,081
Intangible assets, net 16,525 14,768 15,280
Other assets 51,720 60,553 42,074
---------- ---------- ----------
Total other assets 258,296 206,789 179,435
---------- ---------- ----------
$1,841,857 $1,763,853 $1,664,734
========== ========== ==========
</TABLE>
See accompanying notes.
4
<PAGE> 5
ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(thousands except share amounts)
<TABLE>
<CAPTION>
Liabilities and Stockholders'
Equity August 1, 1998 November 1, 1997 August 2, 1997
-------------- ---------------- --------------
<S> <C> <C> <C>
Short-term borrowings and current
portion of long-term debt $ 1,922 $ -- $ 1,458
Obligations under capital leases 12,065 11,733 11,625
Accounts payable 64,379 97,654 83,814
Deferred income on shipments to
domestic distributors 46,512 37,013 32,874
Income taxes payable 63,647 52,550 68,570
Accrued liabilities 80,837 75,444 65,933
---------- ---------- ----------
Total current liabilities 269,362 274,394 264,274
---------- ---------- ----------
Long-term debt 309,985 310,000 310,000
Noncurrent obligations under
capital leases 29,831 38,852 41,703
Deferred income taxes 24,499 20,740 21,000
Other noncurrent liabilities 38,511 31,737 19,587
---------- ---------- ----------
Total noncurrent liabilities 402,826 401,329 392,290
---------- ---------- ----------
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,
163,927,212 shares issued
(161,941,094 in November 1997,
161,296,898 in August 1997) 27,322 26,991 26,883
Capital in excess of par value 232,437 223,885 194,909
Retained earnings 933,099 831,584 780,632
Cumulative translation adjustment 6,925 6,724 6,062
---------- ---------- ----------
1,199,783 1,089,184 1,008,486
Less 1,309,917 shares in treasury,
at cost (35,094 in November 1997
and 10,186 in August 1997) 30,114 1,054 316
---------- ---------- ----------
Total stockholders' equity 1,169,669 1,088,130 1,008,170
---------- ---------- ----------
$1,841,857 $1,763,853 $1,664,734
========== ========== ==========
</TABLE>
See accompanying notes
5
<PAGE> 6
ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(thousands)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------
August 1, 1998 August 2, 1997
-------------- --------------
<S> <C> <C>
OPERATIONS
Cash flows from operations:
Net income $ 101,515 $ 127,267
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization 93,310 75,556
Noncash portion of restructuring charge 10,000 --
Equity in loss of WaferTech 7,065 609
Deferred income taxes 3,754 4,016
Other (1,192) (807)
Changes in operating assets and liabilities (17,252) (21,556)
--------- ---------
Total adjustments 95,685 57,818
--------- ---------
Net cash provided by operations 197,200 185,085
--------- ---------
INVESTMENTS
Cash flows from investments:
Additions to property, plant and equipment, net (143,986) (119,121)
Maturities of short-term investments
available for sale 123,949 124,224
Purchases of short-term investments
available for sale (111,735) (115,184)
Long-term investments (63,191) (52,911)
Increase in other assets (2,142) (16,095)
--------- ---------
Net cash used for investments (197,105) (179,087)
--------- ---------
FINANCING ACTIVITIES
Cash flows from financing activities:
Repurchase of common stock (44,717) --
Proceeds from employee stock plans 22,507 16,605
Payments on capital lease obligations (8,688) (8,421)
Proceeds from equipment financing -- 7,123
Net increase (decrease) in variable
rate borrowings 1,920 (2,500)
--------- ---------
Net cash (used by) provided by financing activities (28,978) 12,807
--------- ---------
Effect of exchange rate changes on cash 987 6,785
--------- ---------
Net (decrease) increase in cash and cash equivalents (27,896) 25,590
Cash and cash equivalents at beginning of period 289,601 210,109
--------- ---------
Cash and cash equivalents at end of period $ 261,705 $ 235,699
========= =========
SUPPLEMENTAL INFORMATION
Cash paid during the period for:
Income taxes $ 21,125 $ 24,389
========= =========
Interest $ 12,345 $ 12,760
========= =========
</TABLE>
See accompanying notes.
6
<PAGE> 7
Analog Devices, Inc.
Notes to Condensed Consolidated Financial Statements
August 1, 1998
Note 1 - In the opinion of management, the information furnished in the
accompanying financial statements reflects all adjustments which are necessary
to fairly state the results for this interim period and should be read in
conjunction with the most recent Annual Report to Stockholders.
Note 2 - Certain amounts reported in the previous year have been reclassified to
conform to the 1998 presentation.
Note 3 - Investments
During the first quarter of fiscal 1998 the Company made the final payment of
$56 million in connection with its joint venture with Taiwan Semiconductor
Manufacturing Company ("TSMC") and other investors for the construction and
operation of a semiconductor fabrication facility in Camas, Washington
("WaferTech"). The Company has invested $140 million in WaferTech and has an 18%
equity ownership in the joint venture.
Note 4 - Gain on Sale of Business
During the second quarter of fiscal 1998, the Company completed the sale of its
disk drive IC business to Adaptec, Inc. This disposal is in line with the
Company's strategic decision to concentrate on other areas of its business,
specifically analog ICs and DSP products. The Company received approximately $27
million in cash for the disk drive product line and after providing for the
write-off of inventory, fixed assets and other costs incurred to complete the
transaction, recorded a net gain of approximately $13 million. The Company has
entered into other arrangements with Adaptec that provide for payments to the
Company aggregating $13 million for assisting Adaptec in future research and
development efforts and up to $20 million in royalties based on sales by Adaptec
of products incorporating the acquired ADI technology.
Note 5 - Restructuring Charge
The Company recorded a restructuring charge of $17 million during the third
quarter of fiscal 1998. Seven million of this charge relates to a worldwide
workforce reduction of approximately 350 employees in the manufacturing, selling
and G&A areas. As a result of a review of its business strategies, the Company
is scaling back its efforts in certain business areas and has written off $10
million, which is the carrying value of specific assets associated with these
businesses.
Note 6 - Common Stock Repurchase
During the third quarter of fiscal 1998 the Company was authorized by the Board
of Directors to repurchase up to a maximum of 4 million shares of its
outstanding common stock. As of August 1, 1998 the Company had purchased
approximately 1,816,300 shares of stock for $44.7 million. The Company expects
to purchase the remaining 2.2 million shares as market conditions allow. The
repurchased shares will be held as treasury shares and will be available for
issuance under the Company's stock option plans, employees stock purchase plan
and other stock benefit plans.
7
<PAGE> 8
Analog Devices, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
August 1, 1998
Note 7 - Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share", which the Company adopted in the first quarter of
fiscal 1998. The Company changed the method used to compute earnings per share
and will restate all prior periods. Under the new requirements, primary and
fully diluted earnings per share were replaced by basic and diluted earnings per
share. Basic earnings per share is computed based only on the weighted average
number of common shares outstanding during the period and the dilutive effect of
future issues of common stock relating to stock option programs and convertible
debt financing is excluded. Diluted earnings per share is computed essentially
in the same manner as fully diluted earnings per share with some exceptions. The
primary exception affecting the Company's calculation of diluted EPS is that the
dilutive effect of stock options is always based on the average market price of
the stock during the period, not the higher of the average and period end market
price which was required under APB 15. The following table sets forth the
computation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
August 1, 1998 August 2, 1997
-------------- --------------
<S> <C> <C>
Net income $ 8,791 $ 45,969
======== ========
Weighted average common shares outstanding 162,451 159,796
======== ========
BASIC EARNINGS PER SHARE $ 0.05 $ 0.29
======== ========
Net income $ 8,791 $ 45,969
Interest related to convertible subordinated
notes, net of tax 1,411 1,425
-------- --------
Earnings available for common stock $ 10,202 $ 47,394
======== ========
Weighted average common shares outstanding 162,451 159,796
Assumed exercise of common stock equivalents 5,111 6,992
Assumed conversion of subordinated notes 10,984 10,985
-------- --------
Weighted average common and common
equivalent shares 178,546 177,773
======== ========
DILUTED EARNINGS PER SHARE $ 0.06 $ 0.27
======== ========
</TABLE>
8
<PAGE> 9
Analog Devices, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
August 1, 1998
Note 7 - Earnings Per Share (Continued)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------
August 1, 1998 August 2, 1997
-------------- --------------
<S> <C> <C>
Net income $101,515 $127,267
======== ========
Weighted average common shares outstanding 161,866 159,008
======== ========
BASIC EARNINGS PER SHARE $ 0.63 $ 0.81
======== ========
Net income $101,515 $127,267
Interest related to convertible subordinated
notes, net of tax 4,275 4,275
-------- --------
Earnings available for common stock $105,790 $131,542
======== ========
Weighted average common shares outstanding 161,866 159,008
Assumed exercise of common stock equivalents 5,856 6,616
Assumed conversion of subordinated notes 10,984 10,985
-------- --------
Weighted average common and common
equivalent shares 178,706 176,609
======== ========
DILUTED EARNINGS PER SHARE $ 0.60 $ 0.75
======== ========
</TABLE>
Note 8 - New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133 "Accounting for Derivative Instruments and
Hedging Activities" ("FAS 133"). FAS 133 establishes standards for accounting
and reporting of derivative instruments for periods beginning after June 15,
1999 and early adoption is permitted. FAS 133 requires that all derivative
instruments be recognized in the balance sheet as either assets or liabilities
and measured at fair value. Furthermore, FAS 133 requires current recognition in
earnings of changes in the fair value of derivative instruments depending on the
intended use of the derivative and the resulting designation. The Company has
not determined the timing of adopting FAS 133 or the impact of such adoption on
its financial statements.
9
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This information should be read in connection with the unaudited consolidated
condensed financial statements and the notes thereto included in Item 1 of this
Quarterly Report and the audited consolidated financial statements and notes
thereto and Management's Analysis for the fiscal year ended November 1, 1997,
contained in the Annual Report on Form 10-K.
The following discussion and analysis may contain forward-looking statements.
Such statements are subject to certain risks and uncertainties, including those
discussed below or in the Company's Form 10-K for the fiscal year ended November
1, 1997, that could cause actual results to differ materially from the Company's
expectations. Readers are cautioned not to place undue reliance on any
forward-looking statements, as they reflect management's analysis only as of the
date hereof. The Company undertakes no obligation to release the results of any
revision to these forward-looking statements which may be made to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Results of Operations
Net sales for the third quarter of fiscal 1998 were $295 million, a decrease of
7% from the $318 million reported for the third quarter of fiscal 1997. Net
sales for the first three quarters of fiscal 1998 were $959 million, an increase
of 5% from the $911 million reported for the comparable period of fiscal 1997.
The decrease from the third quarter of fiscal 1997 was primarily due to a
decline in sales of SLIC products, the sale of the disk drive IC business in the
second quarter of fiscal 1998 and the decline in demand for GSM chipsets. The
decline in sales of SLIC products primarily occurred in the distributor channel
as the distributors adjusted their order patterns in recognition of their higher
inventory levels relative to current demand levels. These decreases were
partially offset by increases in the DSP based business. Consistent with the
current market environment for the industry, the Company has experienced
diminished backlog and a softening of demand for its products, which has
resulted in increased levels of inventory and more dependence on orders that are
received and shipped in the same quarter.
The gross margin for the third quarter of fiscal 1998 was 45.2%, compared to
50.1% for the third quarter of fiscal 1997. The gross margin was 48.9% for the
first three quarters of fiscal 1998 compared to 49.8% for the first three
quarters of fiscal 1997. The decline in gross margin was primarily due to lower
demand combined with a reduction in production rates. The Company anticipates
gross margins to remain at a depressed level until sales volumes increase.
Research and development expenses ("R&D") were $55 million and $166 million for
the three months and nine months ended August 1, 1998, compared to $50 million
and $143 million for the corresponding periods of fiscal 1997. While the Company
believes that a continued commitment to research and development is essential in
order to maintain product leadership with its existing products and to provide
innovative new product offerings, during the third quarter of fiscal 1998 the
Company began to curtail the growth in R&D spending and reduced R&D expense from
$56 million in the second quarter of fiscal 1998, to $55 million in the third
quarter of 1998. The Company has undertaken a review of its DSP strategy and
concluded that the key to success in the DSP market is the continued active
pursuit of opportunities in the general-purpose DSP market and a narrower focus
on carefully selected opportunities in vertical market segments that can provide
consistent growth and generate high, sustainable margin.
10
<PAGE> 11
Selling, marketing, general & administrative ("SMG&A") expenses for the third
quarter of fiscal 1998 were $48.2 million a decrease of $.7 million from the
$48.9 million reported for third quarter of fiscal 1997. This decrease is a
result of a concerted effort to constrain spending during a period of weakness
in demand. SMG&A expense for the nine months ended August 1, 1998 were $161
million, an increase of $20 million from the $141 million for the nine months
ended August 2, 1997. This increase was primarily attributable to a charge of $6
million recorded in the second quarter related to the consolidation and
realignment of the Company's North American third-party distribution channel and
initiatives to streamline the Company's cost structure, along with a $8 million
charge related to bad debt reserves recorded in the first quarter of fiscal
1998.
The Company recorded a restructuring charge of $17 million during the third
quarter of fiscal 1998. Seven million of this charge relates to a worldwide
workforce reduction of approximately 350 employees in the manufacturing, selling
and G&A areas. This action will result in an annual savings of approximately
$10 million, and will commence during the fourth quarter of fiscal 1998. In
addition, the Company has undertaken a review of its business strategy and
concluded that the key to success in the DSP market is the continued active
pursuit of opportunities in the general-purpose DSP market and a narrower focus
on carefully selected opportunities in vertical market segments that can provide
consistent growth and generate high, sustainable margins. As a result of this
review the Company is scaling back its efforts in certain business areas and has
written off $10 million, which is the carrying value of specific assets
associated with these businesses.
The effective income tax rate decreased to 15% for the third quarter and 23% for
the first nine month period of fiscal 1998 from 25% for the third quarter and
first nine month period of fiscal 1997 due to a shift in the mix of worldwide
profits.
Net income for the third quarter of fiscal 1998 of $9 million decreased $37
million compared to the third quarter of fiscal 1997. Net income for the first
nine months of fiscal 1998 of $102 million decreased $26 million compared to the
first nine months of fiscal 1997. Diluted earnings per share were $0.06 and
$0.60 for the three months and nine months ended August 1, 1998, compared to
$0.27 and $0.75 for the comparable periods of fiscal 1997.
Liquidity and Capital Resources
At August 1, 1998, cash, cash equivalents and short-term investments totaled
$300 million. The Company's primary source of funds for the first nine months of
fiscal 1998 was $197 million of cash provided by operations. The principal uses
of funds in the first nine months of fiscal 1998 were $45 million used to
repurchase common stock, a $56 million payment made in connection with the
Company's joint venture agreement with TSMC and others and the purchase of $144
million of property, plant and equipment.
Accounts receivable totaled $212 million at the end of the third quarter of
fiscal 1998, a decrease of $44 million from the fourth quarter of fiscal 1997
and $35 million from the third quarter of fiscal 1997. The number of days sales
outstanding has consistently decreased to 65 days for the third quarter of
fiscal 1998, compared to 71 and 70 for the third and fourth quarters of fiscal
1997, respectively.
Inventories of $272 million at August 1, 1998 rose $46 million compared to the
fourth quarter of fiscal 1997 and were $51 million above the third quarter of
fiscal 1997. The increase in inventory levels was a result of the Company
running its factories during the first half of the year at production rates
which turned out to be higher than the levels of incoming demand. The Company is
adjusting production rates to be more in-line with current levels of demand.
11
<PAGE> 12
Net additions to property, plant and equipment of $25 million for the third
quarter of fiscal 1998 were funded with cash generated from operations. This
level of spending is down significantly from the prior three quarters where the
average expense was $60 million. This decrease in capital expenditures was a
result of the Company's efforts to constrain all spending, including capital
expenditures, in the current business environment. The Company currently plans
to spend approximately $160 million on capital expenditures during fiscal 1998.
During the third quarter of fiscal 1998 the Company was authorized by the Board
of Directors to repurchase up to a maximum of 4 million shares of its
outstanding common stock. As of August 1, 1998 the Company had purchased
approximately 1,816,300 shares of stock for $44.7 million. The Company expects
to purchase the remaining 2.2 million shares as market conditions allow. The
repurchased shares will be held as treasury shares and will be available for
issuance under the Company's stock option plans, employees stock purchase plan
and other stock benefit plans.
At August 1, 1998, the Company's principal sources of liquidity were $300
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 August 1, 1998. At August 1, 1998, 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. In addition, the
semiconductor market has historically been cyclical and subject to significant
economic downturns at various times. This can cause customer and distributor
inventory levels to fluctuate and can disrupt the order patterns from both
customers and distributors. The Company is exposed to the risk of obsolescence
of its inventory depending on the mix of future business. As a result of these
and other factors, there can be no assurance that the Company will not
experience material fluctuations in future operating results on a quarterly or
annual basis.
The Company's success depends in part on its continued ability to develop and
market new products. There can be no assurance that the Company will be able to
develop and introduce new products in a timely manner or that such products, if
developed, will achieve market acceptance. In addition, the Company's growth is
dependent on its continued ability to penetrate new markets such as the
communications, computer and automotive segments of the electronics market,
where the Company has limited experience and competition is intense. There can
be no assurance that the markets being served by the Company will grow in the
future; that the Company's existing and new products will meet the requirements
of such markets; that the Company's products will achieve customer acceptance in
such markets; that competitors will not force prices to an unacceptably low
level or take market share from the Company; or that the Company can achieve or
maintain profits in these markets. Also, some of the customers in these markets
are less well established which could subject the Company to increased credit
risk.
The semiconductor industry is intensely competitive. Certain of the Company's
competitors have greater technical, marketing, manufacturing and financial
resources than the Company. The Company's competitors also include emerging
12
<PAGE> 13
companies attempting to sell products to specialized markets currently served by
the Company. Competitors of the Company have, in some cases, developed and
marketed products having similar design and functionality as the Company's
products. There can be no assurance that the Company will be able to compete
successfully in the future against existing or new competitors or that the
Company's operating results will not be adversely affected by increased price
competition.
The Company has substantially increased its manufacturing capacity through both
expansion of its production facilities and increased access to third-party
foundries; there can be no assurance that the Company will not encounter
unanticipated production problems at either its own facilities or at third-party
foundries; or if the demand were to increase significantly that the increased
capacity would be sufficient to satisfy demand for its products. The Company
relies, and plans to continue to rely, on assembly and test subcontractors and
on third-party wafer fabricators to supply most of its wafers that can be
manufactured using industry-standard digital processes, and such reliance
involves several risks, including reduced control over delivery schedules,
manufacturing yields and costs. In addition, the Company's capacity additions
will result in a significant increase in operating expenses, and if revenue
levels do not increase to offset these additional expense levels, the Company's
future operating results could be adversely affected, including the potential
adverse impact in operating results for "take or pay" covenants in certain of
its supply agreements. While the Company tries to ensure that its manufacturing
capacity and demand for its products are in relative balance, no assurance can
be given that from time to time an imbalance between the Company's manufacturing
capacity and the demand for its products would not occur. Any such imbalance
could adversely affect the Company's consolidated results of operations.
For the first nine months of fiscal 1998, 51% of the Company's revenues were
derived from customers in international markets. The Company has manufacturing
facilities outside the U.S., in Ireland, the Philippines and Taiwan. The Company
also has supply agreements that include "take or pay" covenants with suppliers
located in Southeast Asia ("SEA") and as part of these arrangements, the Company
has $26 million on deposit with two of these suppliers. The Company also has a
$21 million investment with one of these suppliers. In addition, the Company's
has invested $140 million in its joint venture, WaferTech (located in Camas,
Washington), the major partner is TSMC which is located in Taiwan. The Company
is therefore subject to the economic and political risks inherent in
international operations, including risks associated with the ongoing
uncertainties in the economies in SEA. These risks include air transportation
disruptions, expropriation, currency controls and changes in currency exchange
rates, tax and tariff rates and freight rates. Although the Company engages in
certain hedging transactions to reduce its exposure to currency exchange rate
fluctuations, there can be no assurance that the Company's competitive position
will not be adversely affected by changes in the exchange rate of the U.S.
dollar against other currencies.
The semiconductor industry is characterized by frequent claims and litigation
involving patent and other intellectual property rights. The Company has from
time to time received, and may in the future receive, claims from third parties
asserting that the Company's products or processes infringe their patents or
other intellectual property rights. In the event a third party makes a valid
intellectual property claim and a license is not available on commercially
reasonable terms, the Company's operating results could be materially and
adversely affected. Litigation may be necessary to enforce patents or other
intellectual property rights of the Company or to defend the Company against
claims of infringement, and such litigation can be costly and divert the
attention of key personnel. See the Company's Annual Report on Form 10-K for the
fiscal year ended November 1, 1997 for information concerning certain pending
litigation involving the Company. An adverse outcome in such litigation, may, in
certain cases, have a material adverse effect on the Company's consolidated
financial position or on its consolidated results of operations or cash flows in
the period in which the litigation is resolved.
13
<PAGE> 14
Year 2000
The Company has year 2000 compliant software on many of its major platforms,
including its financial and order entry systems. However, 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.
The task force's efforts are concentrated in six separate areas, as outlined
below:
Centrally Managed Global 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. There were 15 mission critical
applications identified and as of August 31, 1998 80% of these are year 2000
compliant. The task force is addressing the remaining 20% and it is currently
expected that they will be compliant during the first half of fiscal 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 remaining systems to ensure that the appropriate items are
receiving the proper attention.
Design and Engineering Systems
The Corporate CAD (Computer Aided Design) Council is leading a worldwide year
2000 compliancy review of hardware and software related to the design and
engineering systems. As of August 31, 1998 this review was 90% complete and
decisions have been made to migrate to year 2000 compliant operating systems
during the first half of fiscal 1999.
Site Based Manufacturing Systems
Manufacturing site managers are committed to ensuring a successful transition of
operations in the year 2000. Year 2000 is a standard agenda item for all
manufacturing review meetings. All critical manufacturing systems are in the
process of being reviewed for year 2000 compliancy. The review process includes,
but is not limited to, ensuring date compliance is necessary, meeting with
vendors to determine if there is a fix available, and making decisions as to
whether or not a new, date compliant piece of equipment should be purchased. In
some instances the Company is considering "rolling back" the internal date
mechanism as a contingency for some equipment, and the task force is in the
process of testing the effects of this solution.
Personal Computers
The Company has a PC Standards Committee, comprised of participants from each
site. This committee has developed methodology to review hardware and software
compliance for all of the Company's 3,500 networked PC's. 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 steady progress is being
made in addressing any year 2000 issues.
Third Party
The Corporate year 2000 task force is also reviewing third-party systems. For
the Company's Electronic Data Interchange ("EDI") systems, all partners were
surveyed and the Company believes it will be able to support all of its EDI
partners. For external elements on which the Company is dependent, the Company
has received confirmation from suppliers that they will be compliant in the
first half of fiscal 1999. If they are not compliant at that time the Company
has plans in place to convert to another year 2000 compliant vendor.
Other external service providers, primarily financial and human resource
services, have also been surveyed. Ninety percent of the surveys were returned
and most expect to be year 2000 compliant. For systems which are not expected to
be year 2000 compliant the Company is in the process of developing contingency
plans. The Company is in the process of surveying its outside vendors as to the
state of their readiness.
14
<PAGE> 15
Summary
Because hundreds of people are spending a portion of their time on the project,
it is difficult to calculate the cost of these efforts with any precision. It is
estimated that this project is costing approximately $5 million per year for
fiscal 1998 and fiscal 1999. The Company presently believes that the year 2000
issue will not pose significant operational problems. However, year 2000 issues
could have a significant impact on the Company's operations and its financial
results if modifications cannot be completed on a timely basis; unforeseen needs
or problems arise; or, if the systems operated by third parties are not year
2000 compliant.
Other Considerations
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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Information concerning market risk is contained on page 5 of the Company's 1997
Annual Report to Shareholders and is incorporated herein by reference.
15
<PAGE> 16
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
August 1, 1998.
16
<PAGE> 17
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 15, 1998 By: /s/ Jerald G. Fishman
--------------------------------------
Jerald G. Fishman
President and Chief Executive Officer
(Principal Executive Officer)
Date: September 15, 1998 By: /s/ Joseph E. McDonough
--------------------------------------
Joseph E. McDonough
Vice President-Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
17
<PAGE> 18
EXHIBIT INDEX
Analog Devices, Inc.
Item
27 Financial Data Schedule
18
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<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-02-1997
<PERIOD-END> AUG-01-1998
<EXCHANGE-RATE> 1
<CASH> 261,705
<SECURITIES> 38,792
<RECEIVABLES> 211,583<F1>
<ALLOWANCES> 0
<INVENTORY> 272,370
<CURRENT-ASSETS> 869,593
<PP&E> 1,358,875
<DEPRECIATION> 644,907
<TOTAL-ASSETS> 1,841,857
<CURRENT-LIABILITIES> 269,362
<BONDS> 309,985
0
0
<COMMON> 27,322
<OTHER-SE> 1,142,347
<TOTAL-LIABILITY-AND-EQUITY> 1,841,857
<SALES> 958,750
<TOTAL-REVENUES> 958,750
<CGS> 490,103
<TOTAL-COSTS> 490,103
<OTHER-EXPENSES> 338,080
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,198
<INCOME-PRETAX> 132,347
<INCOME-TAX> 30,832
<INCOME-CONTINUING> 101,515
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 101,515
<EPS-PRIMARY> .63
<EPS-DILUTED> .60
<FN>
<F1>Asset value represents net amount
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