<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 July 31, 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 August 27, 1999 was 174,459,082 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)
Three Months Ended
------------------
July 31, 1999 August 1, 1998*
------------- ---------------
Net sales $378,776 $295,700
Cost of sales 190,481 161,815
-------- --------
Gross margin 188,295 133,885
Operating expenses:
Research and development 67,142 55,088
Selling, marketing, general and
administrative 54,589 48,202
Restructuring charge -- 17,000
-------- --------
Operating income 66,564 13,595
Equity in loss of WaferTech -- 3,560
Interest and other expense, net (5,280) (794)
-------- --------
Income before income taxes 71,844 10,829
Provision for income taxes 17,243 1,721
-------- --------
Net income $ 54,601 $ 9,108
======== ========
Shares used to compute earnings per share - basic 172,710 162,451
======== ========
Shares used to compute earnings per share - diluted 183,480 178,546
======== ========
Earnings per share - basic $0.32 $0.05
======== ========
Earnings per share - diluted $0.30 $0.06
======== ========
*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)
Nine Months Ended
-----------------
July 31, 1999 August 1, 1998*
------------- ---------------
Net sales $1,019,343 $932,921
Cost of sales 529,721 477,140
---------- --------
Gross margin 489,622 455,781
Operating expenses:
Research and development 181,625 166,253
In-process research and development write-off 5,140 --
Selling, marketing, general and
administrative 149,937 160,862
Restructuring charge -- 17,000
Gain on sale of business, net -- (13,100)
---------- --------
Operating income 152,920 124,766
Equity in loss of WaferTech 1,149 7,065
Interest and other expense, net (8,138) (1,780)
---------- --------
Income before income taxes 159,909 119,481
Provision for income taxes 36,308 26,329
---------- --------
Net income before cumulative effect of change in
accounting principle 123,601 93,152
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 $ 123,601 $ 56,072
========== ========
3
<PAGE> 4
ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Continued)
(Unaudited)
(thousands except per share amounts)
Nine Months Ended
-----------------
July 31, 1999 August 1, 1998*
------------- ---------------
Shares used to compute earnings per share - basic 166,431 161,866
======== ========
Shares used to compute earnings per share - diluted 180,345 178,706
======== ========
Earnings per share before cumulative effect of
change in accounting principle
Earnings per share - basic $0.74 $0.58
======== ========
Earnings per share - diluted $0.70 $0.55
======== ========
Earnings per share after cumulative effect of
change in accounting principle
Earnings per share - basic $0.74 $0.35
======== ========
Earnings per share - diluted $0.70 $0.34
======== ========
*Restated to reflect change in accounting principle.
See accompanying notes.
4
<PAGE> 5
ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(thousands)
Assets July 31, 1999 October 31, 1998 August 1, 1998*
------------- ---------------- ---------------
Cash and cash equivalents $ 405,627 $ 263,331 $ 261,705
Short-term investments 231,505 41,575 38,792
Accounts receivable, net 251,691 207,361 224,434
Inventories:
Raw materials 13,909 25,624 27,714
Work in process 155,096 142,139 135,091
Finished goods 86,580 107,313 109,565
---------- ---------- ----------
255,585 275,076 272,370
Deferred tax assets 95,000 98,148 91,381
Prepaid expenses 9,827 18,038 18,233
---------- ---------- ----------
Total current assets 1,249,235 903,529 906,915
---------- ---------- ----------
Property, plant and equipment,
at cost:
Land and buildings 162,840 158,792 158,729
Machinery and equipment 1,066,595 1,034,619 1,034,437
Office equipment 73,627 70,576 65,444
Leasehold improvements 106,685 103,482 100,265
---------- ---------- ----------
1,409,747 1,367,469 1,358,875
Less accumulated depreciation
and amortization 763,423 664,038 644,907
---------- ---------- ----------
Net property, plant and
equipment 646,324 703,431 713,968
---------- ---------- ----------
Investments 104,297 187,224 190,051
Intangible assets, net 29,619 15,815 16,525
Other assets 46,702 51,731 51,720
---------- ---------- ----------
Total other assets 180,618 254,770 258,296
---------- ---------- ----------
$2,076,177 $1,861,730 $1,879,179
========== ========== ==========
See accompanying notes.
5
<PAGE> 6
ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(thousands except share amounts)
<TABLE>
<CAPTION>
Liabilities and Stockholders'
Equity July 31, 1999 October 31, 1998 August 1, 1998*
------------- ---------------- --------------
<S> <C> <C> <C>
Short-term borrowings and current
portion of long-term debt $ 2,606 $ 193 $ 1,922
Obligations under capital leases 14,607 14,266 12,065
Accounts payable 88,115 59,115 64,379
Deferred income on shipments
to distributors 103,763 113,784 129,277
Income taxes payable 61,582 53,595 63,647
Accrued liabilities 87,119 79,906 80,837
---------- ---------- ----------
Total current liabilities 357,792 320,859 352,127
---------- ---------- ----------
Long-term debt 80,000 309,985 309,985
Non-current obligations under
capital leases 19,842 30,773 29,831
Deferred income taxes 38,000 31,789 24,499
Other non-current liabilities 61,458 39,935 38,511
---------- ---------- ----------
Total non-current liabilities 199,300 412,482 402,826
---------- ---------- ----------
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $1.00 par value,
471,934 shares authorized,
none outstanding -- -- --
Common stock, $.16 2/3 par value,
600,000,000 shares authorized,
177,481,502 shares issued
(164,092,719 in October 1998 and
163,927,212 in August 1998) 29,581 27,349 27,322
Capital in excess of par value 501,609 248,970 232,437
Retained earnings 1,038,110 913,992 887,656
Cumulative translation adjustment 7,425 6,025 6,925
---------- ---------- ---------
1,576,725 1,196,336 1,154,340
Less 3,133,179 shares in treasury,
at cost (3,782,763 in October 1998
and 1,309,917 in August 1998) 57,640 67,947 30,114
---------- ---------- ----------
Total stockholders' equity 1,519,085 1,128,389 1,124,226
---------- ---------- ----------
$2,076,177 $1,861,730 $1,879,179
========== ========== ==========
</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) Nine Months Ended
-----------------
July 31, 1999 August 1,1998*
------------- --------------
OPERATIONS Cash flows from operations:
Net income $ 123,601 $ 56,072
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 106,827 93,310
Non-cash portion of restructuring charge -- 10,000
Write-off of acquired in-process R&D 5,140 --
Equity in loss of WaferTech, net of dividends 1,149 8,192
Deferred income taxes 6,225 3,754
Other non-cash expense 3,127 (1,192)
Changes in operating assets and liabilities 17,887 (8,889)
--------- ---------
Total adjustments 140,355 142,255
--------- ---------
Net cash provided by operations 263,956 198,327
--------- ---------
INVESTMENTS Cash flows from investments:
Purchase of short-term investments
available for sale (356,918) (111,735)
Maturities of short-term investments
available for sale 166,988 123,949
Change in long-term investments 105,501 (64,318)
Additions to property, plant and equipment, net (46,451) (143,986)
Payments for acquisitions, net of cash acquired (20,019) --
Decrease (increase) in other assets 5,040 (2,142)
--------- ---------
Net cash used for investments (145,859) (198,232)
--------- ---------
FINANCING ACTIVITIES
Cash flows from financing activities:
Proceeds from employee stock plans 31,444 22,507
Payments on capital lease obligations (10,591) (8,688)
Net increase in variable rate borrowings 2,265 1,920
Repurchase of common stock -- (44,717)
--------- ---------
Net cash provided by (used by) financing activities 23,118 (28,978)
--------- ---------
Effect of exchange rate changes on cash 1,081 987
--------- ---------
Net increase (decrease) in cash and cash equivalents 142,296 (27,896)
Cash and cash equivalents at beginning of period 263,331 289,601
--------- ---------
Cash and cash equivalents at end of period $ 405,627 $ 261,705
========= =========
SUPPLEMENTAL INFORMATION Non-cash disclosure:
Conversion of 3 1/2% Subordinated Notes
to common stock $ 229,952 $ 15
========= =========
* Restated to reflect change in accounting principle.
See accompanying notes.
7
<PAGE> 8
Analog Devices, Inc.
Notes to Condensed Consolidated Financial Statements
July 31, 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 78% 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)
Three Months Ended
------------------
July 31, 1999 August 1, 1998*
------------- ---------------
Basic:
Net income $ 54,601 $ 9,108
======== ========
Weighted shares outstanding 172,710 162,451
======== ========
Earnings per share $0.32 $0.05
======== ========
Diluted:
Net income $ 54,601 $ 9,108
Interest related to convertible subordinated
notes, net of tax -- 1,411
-------- --------
Earnings available for common stock $ 54,601 $ 10,519
======== ========
Weighted shares outstanding 172,710 162,451
Assumed exercise of common stock equivalents 10,770 5,111
Assumed conversion of subordinated notes - 10,984
-------- --------
Weighted average common and common equivalent shares 183,480 178,546
======== ========
Earnings per share $ 0.30 $ 0.06
======== ========
Nine Months Ended
-----------------
July 31, 1999 August 1, 1998*
------------- ---------------
Basic:
Income before cumulative effect of change in
accounting principle $123,601 $ 93,152
Cumulative effect of change in accounting principle -- (37,080)
-------- --------
Net income $123,601 $ 56,072
======== ========
Weighted shares outstanding 166,431 161,866
======== ========
Earnings per share:
Income before cumulative effect of change in
accounting principle $0.74 $0.58
Cumulative effect of change in accounting principle -- (0.23)
-------- --------
Net income $ 0.74 $ 0.35
======== ========
9
<PAGE> 10
Note 5 - Earnings Per Share (continued)
Nine Months Ended
-----------------
July 31, 1999 August 1, 1998*
------------- ---------------
Diluted:
Income before cumulative effect of change in
accounting principle $123,601 $ 93,152
Interest related to convertible subordinated
notes, net of tax 1,906 4,275
-------- --------
Income before cumulative effect of change in
accounting principle including the effect
of dilutive securities 125,507 97,427
Cumulative effect of change in accounting principle - (37,080)
-------- --------
Net income $125,507 $ 60,347
======== ========
Weighted shares outstanding 166,431 161,866
Assumed exercise of common stock equivalents 13,914 5,856
Assumed conversion of subordinated notes - 10,984
-------- --------
Weighted average common and common equivalent shares 180,345 178,706
======== ========
Earnings per share:
Income before cumulative effect of change in
accounting principle $0.70 $ 0.55
Cumulative effect of change in accounting principle - (0.21)
-------- --------
Net income $0.70 $ 0.34
======== ========
* 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 up to a
maximum of $10 million to be paid if the acquired companies achieve certain
revenue and operational objectives. These acquisitions were accounted for as
purchases. The excess of the purchase price over the fair value of assets
acquired was allocated to existing technology, workforce in place, and
tradenames, which are being amortized over periods ranging from six to ten years
and goodwill which is being written off on a straight line basis over 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 third quarter of fiscal 1999 were $379 million, an increase of
28% from the third quarter of fiscal 1998. Net sales for the first three
quarters of fiscal 1999 were $1,019 million, an increase of 9% from the
comparable period of fiscal 1998. For the quarter and the nine months ended July
31, 1999 the growth was principally attributable to increased sales in both the
OEM and distributor channels. Sales to OEM customers in the communications,
computer and contract manufacturing markets increased more than 50% from the
first three quarters of fiscal 1998. This increase was partially offset by a
decline of more than 60% in automatic test equipment (ATE) revenue compared to
the three quarters ended August 1, 1998.
The decline in ATE sales primarily impacted the North American OEM channel,
causing sales to North American customers to decrease to 46% of total sales for
the first three quarters of fiscal 1999, compared to 50% of total sales for the
comparable period of fiscal 1998. Sales in Europe declined by 6% and sales in
Japan rose 15% compared to the comparable nine months of fiscal 1998. Increased
Southeast Asian sales for the quarter and nine-month period ended July 31, 1999
resulted primarily from increased sales of analog ICs and communications
products.
The gross margin for the third quarter of fiscal 1999 was 49.7%, compared to
45.3% for the third quarter of fiscal 1998. The gross margin was 48.0% for the
first three quarters of fiscal 1999 compared to 48.9% for the first three
quarters of fiscal 1998. The increase in gross margin in the third quarter was
primarily attributable to higher sales, tight control of internal manufacturing
spending, along with reduced costs due to the restructuring programs initiated
in fiscal 1998. The decrease in the gross margin for the nine-month period was
mainly attributable to the lower production levels experienced in the first
quarter of fiscal 1999 followed by a return to more customary levels during the
second quarter of fiscal 1999.
Research and development (R&D) expenses were $67 million and $182 million for
the three months and nine months ended July 31, 1999, compared to $55 million
and $166 million for the corresponding periods of fiscal 1998. As a percentage
of sales R&D spending decreased during the third quarter of fiscal 1999 to 17.7%
from 18.6% in the third quarter of fiscal 1998 and for the nine-month period
remained flat at 17.8% of sales. The quarter-to-quarter percentage decline
resulted from the Company's continued efforts to reduce R&D spending to a
targeted range of 15% to 16% of sales. 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
Selling, marketing, general and administrative (SMG&A) expenses for the third
quarter of fiscal 1999 were $55 million, an increase of $7 million from the $48
million reported for the third quarter of fiscal 1998. However, as a percentage
of sales SMG&A decreased from 16.3% for the third quarter of fiscal 1998 to
14.4% for the third quarter of fiscal 1999. SMG&A expenses for the nine months
ended July 31, 1999 were $150 million, compared to $161 million for the nine
months ended August 1, 1998. During 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 effective income tax rate increased to 24% for the third quarter and 23% for
the first nine-month period of fiscal 1999 from 16% for the third quarter and
22% for the first nine-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 August 1, 1998 have been restated
to reflect the accounting change.
Liquidity and Capital Resources
At July 31, 1999, cash, cash equivalents and short-term investments totaled $637
million, an increase of $332 million from the fourth quarter of fiscal 1998 and
$337 million from the third quarter of fiscal 1998. The increase in cash, cash
equivalents and short-term investments was primarily due to operating cash
inflows of $264 million, $105 million received in January 1999 related to the
sale of the Company's investment in WaferTech and lower capital spending.
Accounts receivable totaled $252 million at the end of the third quarter of
fiscal 1999, an increase of $44 million from the fourth quarter of fiscal 1998
and $27 million from the third quarter of fiscal 1998 due to higher sales
levels. The Company's days sales outstanding has improved from 63 at October 31,
1998 and 69 at August 1, 1998 to 60 at July 31, 1999.
Inventories of $256 million at July 31, 1999 were $19 million lower than the end
of the fourth quarter of fiscal 1998 and $17 million lower than the end of the
third 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
fiscal 1999.
12
<PAGE> 13
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 78% 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 $46 million for the first nine
months of fiscal 1999 were funded with a combination of cash on hand and cash
generated from operations. Capital spending in the first nine months of fiscal
1999 was down substantially from the $144 million spent in the first nine months
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 expects that total capital
expenditures for fiscal 1999 will be approximately $85 million.
At July 31, 1999, the Company's principal sources of liquidity were $637 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 July 31, 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
31% in the prior year.
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.
13
<PAGE> 14
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.
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 nine months of fiscal 1999, 54% 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 $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.
14
<PAGE> 15
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.
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, will be
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 July 31, 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. Contingency planning to
ensure business continuity into the millennium is expected to be completed in
November 1999.
15
<PAGE> 16
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 systems are 97% complete. All operating systems are
expected to be fully Y2K compliant during the fourth quarter of fiscal 1999.
Critical CAD application software packages have been vendor-certified as Y2K
compliant. Most application package testing is complete and the installation of
the required upgrades will be complete by the end of October 1999. 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 has been verified as Y2K compliant. 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. All manufacturing sites have completed their Y2K
remedial actions. 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 100% of the
desktops for the Microsoft Office Suite (Excel, Word and Access). All other
business applications have been reviewed and have been upgraded. 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 sites' systems and the Company believes its
mission critical items are 100% year 2000 compliant.
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. 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 that adequate supplies of critical raw materials and spare
parts are in stock by December 31, 1999. In
16
<PAGE> 17
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 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 through the balance of calendar 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 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 July
31, 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: September 14, 1999 By:/s/ Jerald G. Fishman
-----------------------------
Jerald G. Fishman
President and
Chief Executive Officer
(Principal Executive Officer)
Date: September 14, 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
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<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-30-1999
<PERIOD-START> MAY-02-1999
<PERIOD-END> JUL-31-1999
<EXCHANGE-RATE> 1
<CASH> 405,627
<SECURITIES> 231,505
<RECEIVABLES> 251,691<F1>
<ALLOWANCES> 0
<INVENTORY> 255,585
<CURRENT-ASSETS> 1,249,235
<PP&E> 1,409,747
<DEPRECIATION> 763,423
<TOTAL-ASSETS> 2,076,177
<CURRENT-LIABILITIES> 357,792
<BONDS> 80,000
0
0
<COMMON> 29,581
<OTHER-SE> 1,489,504
<TOTAL-LIABILITY-AND-EQUITY> 2,076,177
<SALES> 378,776
<TOTAL-REVENUES> 378,776
<CGS> 190,481
<TOTAL-COSTS> 190,481
<OTHER-EXPENSES> 121,731
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,044
<INCOME-PRETAX> 71,844
<INCOME-TAX> 17,243
<INCOME-CONTINUING> 54,601
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 54,601
<EPS-BASIC> .32
<EPS-DILUTED> .30
<FN>
<F1>Asset value represents NET amount.
</FN>
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