<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 May 1, 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)
<TABLE>
<CAPTION>
<S> <C>
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)
</TABLE>
(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 May 28, 1999 was 172,800,842 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
------------------------------
May 1, 1999 May 2, 1998*
----------- ------------
<S> <C> <C>
Net sales $340,067 $319,430
Cost of sales 176,435 160,993
-------- --------
Gross margin 163,632 158,437
Operating expenses:
Research and development 61,899 56,190
In-process research and development write-off 5,140 --
Selling, marketing, general and
administrative 49,167 57,014
Gain on sale of business, net -- (13,100)
-------- --------
116,206 100,104
Operating income 47,426 58,333
Equity in loss of WaferTech -- 1,915
Interest and other expense, net (3,278) (219)
-------- --------
Income before income taxes 50,704 56,637
Provision for income taxes 11,598 12,852
-------- --------
Net income $ 39,106 $ 43,785
======== ========
Shares used to compute earnings per share - basic 167,012 162,124
======== ========
Shares used to compute earnings per share - diluted 180,698 179,427
======== ========
Earnings per share - basic $0.23 $0.27
======== ========
Earnings per share - diluted $0.22 $0.25
======== ========
</TABLE>
*Restated to reflect change in accounting principle.
See accompanying notes.
2
<PAGE> 3
ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(thousands except per share amounts)
<TABLE>
<CAPTION>
Six Months Ended
------------------------------
May 1, 1999 May 2, 1998*
----------- ------------
<S> <C> <C>
Net sales $640,567 $637,221
Cost of sales 339,240 315,325
-------- --------
Gross margin 301,327 321,896
Operating expenses:
Research and development 114,483 111,165
In-process research and development write-off 5,140 --
Selling, marketing, general and
administrative 95,348 112,660
Gain on sale of business, net -- (13,100)
-------- --------
214,971 210,725
Operating income 86,356 111,171
Equity in loss of WaferTech 1,149 3,505
Interest and other expense, net (2,858) (986)
-------- --------
Income before income taxes 88,065 108,652
Provision for income taxes 19,065 24,608
-------- --------
Net income before cumulative effect of change in
accounting principle 69,000 84,044
Cumulative effect of change in accounting
principle, net of $20 million of income taxes -- (37,080)
-------- --------
Net income after cumulative effect of change in
accounting principle $ 69,000 $ 46,964
======== ========
</TABLE>
3
<PAGE> 4
ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Continued)
(Unaudited)
(thousands except per share amounts)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------
May 1, 1999 May 2, 1998*
----------- ------------
<S> <C> <C>
Shares used to compute earnings per share - basic 163,292 161,574
======== ========
Shares used to compute earnings per share - diluted 178,778 178,787
======== ========
Earnings per share before cumulative effect of
change in accounting principle
Earnings per share - basic $0.42 $0.53
======== ========
Earnings per share - diluted $0.40 $0.49
======== ========
Earnings per share after cumulative effect of
change in accounting principle
Earnings per share - basic $0.42 $0.30
======== ========
Earnings per share - diluted $0.40 $0.28
======== ========
</TABLE>
*Restated to reflect change in accounting principle.
See accompanying notes.
4
<PAGE> 5
ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(thousands)
<TABLE>
<CAPTION>
Assets May 1, 1999 October 31, 1998 May 2, 1998*
----------- ---------------- -----------
<S> <C> <C> <C>
Cash and cash equivalents $ 401,307 $ 263,331 $ 286,105
Short-term investments 117,788 41,575 33,819
Accounts receivable, net 225,127 207,361 255,872
Inventories:
Raw materials 22,221 25,624 27,558
Work in process 147,184 142,139 141,867
Finished goods 89,969 107,313 97,554
---------- ---------- ----------
259,374 275,076 266,979
Deferred tax assets 95,000 98,148 88,139
Prepaid expenses 13,654 18,038 18,473
---------- ---------- ----------
Total current assets 1,112,250 903,529 949,387
---------- ---------- ----------
Property, plant and equipment, at cost:
Land and buildings 161,109 158,792 158,598
Machinery and equipment 1,050,673 1,034,619 1,022,398
Office equipment 73,766 70,576 63,091
Leasehold improvements 104,749 103,482 95,939
---------- ---------- ----------
1,390,297 1,367,469 1,340,026
Less accumulated depreciation
and amortization 729,696 664,038 619,059
---------- ---------- ----------
Net property, plant and
equipment 660,601 703,431 720,967
---------- ---------- ----------
Investments 88,376 187,224 191,623
Intangible assets, net 30,731 15,815 17,227
Other assets 46,900 51,731 57,875
---------- ---------- ----------
Total other assets 166,007 254,770 266,725
---------- ---------- ----------
$1,938,858 $1,861,730 $1,937,079
========== ========== ==========
</TABLE>
*Restated to reflect change in accounting principle.
See accompanying notes.
5
<PAGE> 6
ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(thousands except share amounts)
<TABLE>
<CAPTION>
Liabilities and Stockholders'
Equity
May 1, 1999 October 31, 1998 May 2, 1998*
----------- ---------------- -----------
<S> <C> <C> <C>
Short-term borrowings and current
portion of long-term debt $ 101 $ 193 $ 332
Obligations under capital leases 14,496 14,266 11,954
Accounts payable 68,797 59,115 95,811
Deferred income on shipments
to distributors 96,749 113,784 131,078
Income taxes payable 52,783 53,595 64,335
Accrued liabilities 79,022 79,906 84,268
---------- ---------- ----------
Total current liabilities 311,948 320,859 387,778
---------- ---------- ----------
Long-term debt 80,000 309,985 309,989
Non-current obligations under
capital leases 23,510 30,773 32,863
Deferred income taxes 34,000 31,789 24,000
Other non-current liabilities 47,100 39,935 36,716
---------- ---------- ----------
Total non-current liabilities 184,610 412,482 403,568
---------- ---------- ----------
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,
176,297,695 shares issued
(164,092,719 in October 1998,
163,578,201 in May 1998) 29,384 27,349 27,264
Capital in excess of par value 489,907 248,970 233,297
Retained earnings 983,371 913,992 878,548
Cumulative translation adjustment 7,443 6,025 7,195
---------- ---------- ---------
1,510,105 1,196,336 1,146,304
Less 3,765,989 shares in treasury,
at cost (3,782,763 in October 1998
and 24,682 in May 1998) 67,805 67,947 571
---------- ---------- ----------
Total stockholders' equity 1,442,300 1,128,389 1,145,733
---------- ---------- ----------
$1,938,858 $1,861,730 $1,937,079
========== ========== ==========
</TABLE>
*Restated to reflect change in accounting principle.
See accompanying notes.
6
<PAGE> 7
ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(thousands)
<TABLE>
<CAPTION>
Six Months Ended
------------------------------
May 1, 1999 May 2, 1998*
----------- ------------
<S> <C> <C>
OPERATIONS
Cash flows from operations:
Net income $ 69,000 $ 46,964
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 70,891 61,002
Write-off of acquired in-process R&D 5,140 --
Equity in loss of WaferTech, net of dividends 1,149 4,632
Deferred income taxes 2,236 3,253
Other non-cash expense 2,318 838
Changes in operating assets and liabilities (8,063) 5,361
--------- ---------
Total adjustments 73,671 112,166
--------- ---------
Net cash provided by operations 142,671 159,130
--------- ---------
INVESTMENTS
Cash flows from investments:
Purchase of short-term investments
available for sale (162,038) (77,183)
Change in long-term investments 108,354 (58,860)
Maturities of short-term investments
available for sale 85,825 94,370
Additions to property, plant and equipment, net (26,009) (119,292)
Payments for acquisitions, net of cash acquired (20,019) --
Decrease (increase) in other assets 5,902 (6,152)
--------- ---------
Net cash used for investments (7,985) (167,117)
--------- ---------
FINANCING ACTIVITIES
Cash flows from financing activities:
Proceeds from employee stock plans 10,540 8,775
Payments on capital lease obligations (7,033) (5,768)
Net (decrease) increase in variable
rate borrowings (119) 315
--------- ---------
Net cash provided by financing activities 3,388 3,322
--------- ---------
Effect of exchange rate changes on cash (98) 1,169
--------- ---------
Net increase (decrease) in cash and cash equivalents 137,976 (3,496)
Cash and cash equivalents at beginning of period 263,331 289,601
--------- ---------
Cash and cash equivalents at end of period $ 401,307 $ 286,105
========= =========
SUPPLEMENTAL INFORMATION
Non-cash disclosure:
Conversion of 3 1/2% Subordinated Notes
to common stock $ 229,952 $ 15
========= =========
</TABLE>
* Restated to reflect change in accounting principle.
See accompanying notes.
7
<PAGE> 8
Analog Devices, Inc.
Notes to Condensed Consolidated Financial Statements
May 1, 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 approximately 78% of its equity ownership in WaferTech,
LLC, its joint venture with Taiwan Semiconductor Manufacturing Company and other
investors. As a result of this sale, the Company's equity ownership in WaferTech
was reduced from 18% to 4%. 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
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:
8
<PAGE> 9
Note 5 - Earnings Per Share (continued)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
May 1, 1999 May 2, 1998*
----------- ------------
<S> <C> <C>
Basic:
Net income $ 39,106 $ 43,785
======== ========
Weighted shares outstanding 167,012 162,124
======== ========
Earnings per share $0.23 $0.27
======== ========
Diluted:
Net income $ 39,106 $ 43,785
Interest related to convertible subordinated
notes, net of tax 481 1,453
-------- --------
Earnings available for common stock $ 39,587 $ 45,238
======== ========
Weighted shares outstanding 167,012 162,124
Assumed exercise of common stock equivalents 9,464 6,319
Assumed conversion of subordinated notes 4,222 10,984
-------- --------
Weighted average common and common equivalent
shares 180,698 179,427
======== ========
Earnings per share $0.22 $0.25
======== ========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
-------------------------------
May 1, 1999 May 2, 1998*
----------- ------------
<S> <C> <C>
Basic:
Income before cumulative effect of change in
accounting principle $ 69,000 $ 84,044
Cumulative effect of change in accounting principle - (37,080)
-------- --------
Net income $ 69,000 $ 46,964
======== ========
Weighted shares outstanding 163,292 161,574
======== ========
Earnings per share:
Income before cumulative effect of change in
accounting principle $0.42 $0.53
Cumulative effect of change in accounting principle - (0.23)
-------- --------
Net income $0.42 $0.30
======== ========
</TABLE>
9
<PAGE> 10
Note 5 - Earnings Per Share (continued)
<TABLE>
<CAPTION>
Six Months Ended
-------------------------------
May 1, 1999 May 2, 1998*
----------- ------------
<S> <C> <C>
Diluted:
Income before cumulative effect of change in
accounting principle $ 69,000 $ 84,044
Interest related to convertible subordinated
notes, net of tax 1,906 2,864
-------- --------
Income before cumulative effect of change in
accounting principle including the effect
of dilutive securities 70,906 86,908
Cumulative effect of change in accounting principle -- (37,080)
-------- --------
Net income $ 70,906 $ 49,828
======== ========
Weighted shares outstanding 163,292 161,574
Assumed exercise of common stock equivalents 11,264 6,229
Assumed conversion of subordinated notes 4,222 10,984
-------- --------
Weighted average common and common equivalent shares 178,778 178,787
======== ========
Earnings per share:
Income before cumulative effect of change in
accounting principle $0.40 $0.49
Cumulative effect of change in accounting principle -- (0.21)
-------- --------
Net income $0.40 $0.28
======== =========
</TABLE>
* Restated to reflect change in accounting principle.
Note 6 - Convertible Debt
As of March 11, 1999 the Company had converted $229,967,000 of the $230 million
principal amount of its 3 1/2% Convertible Subordinated Notes (Notes) due 2000
into an aggregate of 10,983,163 shares of the Company's common stock, and the
remaining Notes were redeemed by a cash payment of $33,000. This conversion did
not have an impact on diluted earnings per share.
Note 7 - Acquisitions
During the second quarter of fiscal 1999, the Company acquired two DSP tools
companies, White Mountain DSP, Inc. of Nashua, New Hampshire and Edinburgh
Portable Compilers Limited, of Edinburgh, 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.
These acquisitions were accounted for as purchases, and the excess of the
purchase price over the fair value of assets acquired was allocated to existing
technology, workforce in place, tradenames and goodwill, which are being
amortized over periods ranging from six to ten years. In connection with these
acquisitions, the Company recorded a charge of $5.1 million for the write-off of
in-process research & development.
10
<PAGE> 11
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
Net sales for the second quarter of fiscal 1999 were $340 million, an increase
of 6% from the $319 million reported for the second quarter of fiscal 1998. Net
sales for the first two quarters of fiscal 1999 were $641 million, an increase
of 1% from the $637 million reported for the comparable period of fiscal 1998.
For the quarter and the six months ended May 1, 1999 the growth was primarily
attributable to increased OEM sales in the communications, computer and contract
manufacturing markets, which in the second quarter of fiscal 1999 increased over
50% from the second quarter of fiscal 1998. This increase was partially offset
by a decline of more than 60% in automatic test equipment (ATE) revenue compared
to the quarter ended May 2, 1998. Sales in the distributor channel remained
relatively flat for the quarter and the six months ended May 1, 1999 compared to
the corresponding periods of 1998, with a slight decline in North America being
offset by an increase in Southeast Asia (SEA), as more contract manufacturing
moved to SEA.
The decline in ATE sales primarily impacted the North American OEM channel,
causing sales to North American customers to decrease to 47% of total sales for
the second quarter of fiscal 1999, compared to 51% of total sales for the
comparable period of fiscal 1998. Sales in Europe declined by 6% and sales in
Japan rose 20% compared to the second quarter of fiscal 1998. Increased
Southeast Asian sales for the quarter and six month period ended May 1, 1999
resulted primarily from increased sales of analog IC and communications
products.
The gross margin for the second quarter of fiscal 1999 was 48.1%, compared to
49.6% for the second quarter of fiscal 1998. The gross margin was 47.0% for the
first two quarters of fiscal 1999 compared to 50.5% for the first two quarters
of fiscal 1998. The decline in gross margin was primarily attributable to the
Company's lower production rates during the first half of fiscal 1999 compared
to the prior year.
Research and development (R&D) expenses were $62 million and $114 million for
the three months and six months ended May 1, 1999, compared to $56 million and
$111 million for the corresponding periods of fiscal 1998. R&D spending
increased during the second quarter of fiscal 1999 primarily due to the
acquisition of two DSP tools companies during February 1999 and increased
technology license fees. 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, and
therefore expects to continue to make significant R&D investments in the future.
11
<PAGE> 12
During the second quarter of fiscal 1999 the Company incurred a charge of
$5,140,000 for the write-off of in-process R&D in connection with the
acquisition of two DSP tools companies, White Mountain DSP, Inc. of Nashua, New
Hampshire and Edinburgh Portable Compilers Limited, of Edinburgh, 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.
Selling, marketing, general & administrative (SMG&A) expenses for the second
quarter of fiscal 1999 were $49 million, a decrease of $8 million from the $57
million reported for second quarter of fiscal 1998. SMG&A expenses for the six
months ended May 1, 1999 were $95 million, compared to $113 million for the six
months ended May 2, 1998. In the first half of fiscal 1998 the Company incurred
a charge of $8 million related to collection difficulties the Company
experienced with customers whose business and financing had been adversely
affected by the Southeast Asia economic situation, as well as a charge of $6
million related to the realignment of the Company's sales and distribution
organizations. The remaining decrease was attributable to the Company's
continued effort to constrain spending.
The effective income tax rate decreased to 21% for the second quarter and the
first six-month period of fiscal 1999 from 23% for the second quarter and first
six-month period of fiscal 1998 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 May 2, 1998 have been restated to
reflect the accounting change.
Liquidity and Capital Resources
At May 1, 1999, cash, cash equivalents and short-term investments totaled $519
million, an increase of $199 million from the second quarter of fiscal 1998. The
increase in cash, cash equivalents and short-term investments was primarily due
to operating cash inflows of $143 million, $105 million received in January 1999
related to the sale of the Company's investment in WaferTech and lower capital
spending.
12
<PAGE> 13
Accounts receivable totaled $225 million at the end of the second quarter of
fiscal 1999, a decrease of $31 million from the second quarter of fiscal 1998.
The Company's days sales outstanding has improved from 73 at May 2, 1998 to 60
at May 1, 1999.
Inventories of $259 million at May 1, 1999 were $8 million lower than the end of
the second quarter of fiscal 1998. The decrease in inventory levels was a result
of adjustments by the Company to its production rates to conform to lower levels
of demand in the second half of fiscal 1998 and the resumption of sales growth
in the second quarter of fiscal 1999.
During the first quarter of fiscal 1999 the Company completed the sale of
approximately 78% of its equity ownership in WaferTech, LLC, its joint venture
with Taiwan Semiconductor Manufacturing Company (TSMC) and other investors. As a
result of this sale, the Company's equity ownership in WaferTech was reduced
from 18% to 4%. 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 $26 million for the first half
of fiscal 1999 were funded with a combination of cash on hand and cash generated
from operations. Capital spending in the first half of fiscal 1999 was down
substantially from the $119 million spent in the first half 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
resumed. The Company currently plans to make capital expenditures of
approximately $90 million during fiscal 1999.
At May 1, 1999, the Company's principal sources of liquidity were $519 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 May 1, 1999.
As of March 11, 1999 the Company had converted $229,967,000 of the $230 million
principal amount of its 3 1/2% Convertible Subordinated Notes (Notes) due 2000
into an aggregate of 10,983,163 shares of the Company's common stock, and the
remaining Notes were redeemed by a cash payment of $33,000. As a result of this
conversion, the Company's debt-to-equity ratio was reduced to 8% as compared to
30% in the previous quarter.
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 advent 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
13
<PAGE> 14
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.
Such reliance involves several risks, including reduced control over delivery
schedules, manufacturing yields and costs. In addition, the Company's capacity
additions resulted in a significant increase in operating expenses. 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
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 six 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 $20 million on deposit as well as 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
14
<PAGE> 15
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.
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 an ongoing effort to reduce year 2000 related risks in the
Company's systems and equipment. It is estimated that the aggregate cost of this
project, which formally 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 May 28, 1999 is summarized below.
Centrally Managed Global Systems
Centrally managed global systems are the enterprise-wide, headquarters managed
operational 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. All mission critical applications
have been tested and certified to be Year 2000 compliant as of April 1, 1999. In
addition, system integration testing was performed at our Disaster Recovery site
in March 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 conversion efforts to
ensure that appropriate items are receiving the proper attention. The Company
retired its non-compliant mainframe in early 1999.
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 design and
engineering systems. The team has completed its analysis and the required
updates to the CAD operating
15
<PAGE> 16
systems are 85% complete. All operating systems are expected to be fully Y2K
compliant by early in the fourth quarter of fiscal 1999. Critical CAD
application software packages have been vendor-certified as Y2K compliant.
Migration to and testing of these package updates will proceed over the next six
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 compliance testing and will be verified Y2K compliant by the end of
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 have identified, tested and analyzed all critical
manufacturing equipment. 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
has verified the effectiveness of this contingency plan. It is expected that all
manufacturing sites will complete their Y2K remedial actions by July 1999. Year
2000 testing is being done to the latest vendor specifications and the Company
used the suite of test programs provided by Sematech, a semiconductor research
organization. Thus far, no crucial piece of equipment has been identified as
having 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. 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 developed a hardware and software
certification plan. This plan calls for year 2000 certification of PC Basic
Input/Output System (BIOS), software applications and user files. The Company
certified the BIOS on its 3,500 networked PCs in the 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" has been applied to 90% of the desktops
for the Microsoft Office Suite (Excel, Word and Access). All other business
applications have been reviewed and are expected to be upgraded by July 1999.
The Company does not foresee any material 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 with
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 by the third 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 Y2K 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 are already Y2K compliant.
The Company identified 112 vital suppliers that could put the Company at risk
should their service be interrupted. The Company verified their state of
readiness and as of May 1999 did not identify any high risk suppliers.
Contingency plans are underway to ensure adequate supplies of critical raw
materials and spare parts are in stock for 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.
16
<PAGE> 17
The Company currently believes that its most likely worst case year 2000
scenario would relate to problems with systems of third parties which could
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.
17
<PAGE> 18
PART II - OTHER INFORMATION
ANALOG DEVICES, INC.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders held on March 9, 1999, the stockholders of
the Company elected Messrs. John L. Doyle and Ray Stata to serve as Class III
Directors for a term of three years by the following votes:
<TABLE>
<CAPTION>
Nominee Votes for Votes Withheld Broker Non Votes
- ------- --------- -------------- ----------------
<S> <C> <C> <C>
John L. Doyle 128,320,814 10,774,594 -0-
Ray Stata 128,347,633 10,747,775 -0-
</TABLE>
Each of the following directors who were not up for reelection at the Annual
Meeting of Stockholders will continue to serve as directors: Messrs. Jerald G.
Fishman, Charles O. Holliday, Jr., Joel Moses, F. Grant Saviers and Lester C.
Thurow.
The stockholders also approved an amendment to the Company's 1992 Employee Stock
Purchase Plan to increase the number of shares reserved for issuance thereunder
from 4,800,000 to 6,800,000, by a vote of 131,466,882 in favor, 7,193,873
opposed and 434,653 abstaining.
In addition, the stockholders approved an amendment to the Company's 1994
Director Option Plan to increase the number of shares of common stock underlying
the initial option grant to newly elected non-employee directors from 10,500 to
30,000, by a vote of 109,717,069 in favor, 28,760,812 opposed and 617,527
abstaining.
Stockholders also ratified the selection by the Board of Directors of Ernst &
Young LLP as the Company's independent auditors for the fiscal year ending
October 30, 1999, by a vote of 138,735,911 in favor, 143,879 opposed and 215,618
abstaining.
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
1, 1999.
18
<PAGE> 19
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 11, 1999 By:/s/ Jerald G. Fishman
------------------------------------
Jerald G. Fishman
President and
Chief Executive Officer
(Principal Executive Officer)
Date: June 11, 1999 By:/s/ Joseph E. McDonough
------------------------------------
Joseph E. McDonough
Vice President-Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
19
<PAGE> 20
EXHIBIT INDEX
Analog Devices, Inc.
Item
- ----
27 Financial Data Schedule
20
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-30-1999
<PERIOD-START> JAN-31-1999
<PERIOD-END> MAY-01-1999
<EXCHANGE-RATE> 1
<CASH> 401,307
<SECURITIES> 117,788
<RECEIVABLES> 225,127<F1>
<ALLOWANCES> 0
<INVENTORY> 259,374
<CURRENT-ASSETS> 1,112,250
<PP&E> 1,390,297
<DEPRECIATION> 729,696
<TOTAL-ASSETS> 1,938,858
<CURRENT-LIABILITIES> 311,948
<BONDS> 80,000
0
0
<COMMON> 29,384
<OTHER-SE> 1,412,916
<TOTAL-LIABILITY-AND-EQUITY> 1,938,858
<SALES> 340,067
<TOTAL-REVENUES> 340,067
<CGS> 176,435
<TOTAL-COSTS> 176,435
<OTHER-EXPENSES> 116,206
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,985
<INCOME-PRETAX> 50,704
<INCOME-TAX> 11,598
<INCOME-CONTINUING> 39,106
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,106
<EPS-BASIC> .23
<EPS-DILUTED> .22
<FN>
<F1>Asset value represents net amount
</FN>
</TABLE>
