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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE
FISCAL YEAR ENDED OCTOBER 31, 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)
----------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK $.16 2/3 PAR VALUE NEW YORK STOCK EXCHANGE
Title of Each Class Name of Each Exchange on Which Registered
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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 aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $4,932,238,195 based on the closing price of
the Common Stock on the New York Stock Exchange Composite Tape reporting system
on December 31, 1998.
As of December 31, 1998, there were 160,576,413 shares of $.16 2/3 par
value Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT DESCRIPTION 10-K PART
-------------------- ---------
Portions of Annual Report to Shareholders for the
fiscal year ended October 31, 1998 I and II
Portions of the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held March 9, 1999 III
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PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW
Analog Devices, Inc. (Analog, ADI or the Company) is a semiconductor company
that designs, manufactures and markets precision high-performance integrated
circuits (ICs) used in analog and digital signal processing. Virtually all of
ADI's products are components, which are typically incorporated by original
equipment manufacturers (OEMs) in a wide range of equipment and systems for use
in communications, computer, industrial, instrumentation, military/aerospace,
automotive and high-performance consumer electronics applications.
The Company's principal products include general-purpose, standard-function
analog and mixed-signal ICs and DSP ICs. DSP ICs include general-purpose digital
signal processing ICs (DSPs) and application-specific devices that typically
incorporate analog and mixed-signal circuitry and a DSP core.
The Company sells its products worldwide through a direct sales force,
third-party industrial distributors and independent sales representatives.
Approximately 50% of fiscal 1998 revenue was derived from customers in North
America, while most of the balance was derived from customers in Western Europe
and the Far East.
ADI is headquartered near Boston in Norwood, Massachusetts, and has
manufacturing facilities in Massachusetts, California, North Carolina, Ireland,
the Philippines and Taiwan. Founded in 1965, ADI employs approximately 7,200
persons worldwide.
INDUSTRY BACKGROUND
Real-world phenomena, such as temperature, pressure, sound, images, speed and
acceleration are inherently analog in nature, consisting of continuously varying
information. This information can be detected and measured using analog sensors,
which represent real-world phenomena by generating continuously varying voltages
and currents. The signals from these sensors are initially processed using
analog methods, such as amplification, filtering and shaping. They are then
usually converted to digital form for input to a microprocessor, which is used
to manipulate, store or display the information. In many cases the signals are
further processed after conversion to digital form using a technology called
"digital signal processing," or DSP. In addition, digital signals are frequently
converted to analog form to provide signals for analog display, sound, or
control functions. These manipulations and transformations are known
collectively as "real-world signal processing."
Significant advances in semiconductor technology over the past 10 to 15 years
have led to substantial increases in the performance and functionality of ICs
used in signal processing applications. These advances include the ability to
create VLSI (Very Large Scale Integration) mixed-signal ICs that contain both
high-performance analog circuitry and large amounts of high-density digital
circuitry. The analog circuitry portion of the IC is used for manipulating
real-world signals while still in analog form and for converting analog signals
into digital form (or vice versa), and the digital portion is used for further
processing analog signals subsequent to their conversion to digital form. The
ICs resulting from these advances are used as components in equipment and
systems to achieve higher performance and more efficient signal processing.
MARKETS AND APPLICATIONS
The Company's products are sold primarily to OEMs for incorporation into
equipment, instruments and systems sold to end users for a wide variety of
applications, including engineering, medical and scientific instruments;
industrial equipment; communications equipment; computers and computer
peripherals; military/aerospace equipment; high-end consumer electronics
products and automotive products. The Company's growth has been aided both by
the expansion of these markets and the increasing need for high-performance
real-time signal processing.
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Listed below are some of the characteristics of each of the Company's major
markets:
COMMUNICATIONS--includes data and fax modems, digital cellular telephones and
portable, wireless communication base station equipment and broadband wired
applications. The need for ever higher speed, coupled with more reliable, more
bandwidth-efficient communications is creating increasing demand for systems
that include both digital and analog signal processing capability. Demand for
signal processing ICs for this market is also being driven by the equipment
manufacturers' need for components that enable them to develop cost-effective
products that feature high performance, small size, low weight and minimal power
consumption.
INDUSTRIAL--includes data acquisition systems, automatic process control
systems, robotics, environmental control systems and automatic test equipment
(ATE). These products generally require ICs that offer performance greater than
that available from commodity-level ICs, but generally do not have production
volumes that warrant custom or application-specific ICs. Combinations of analog
ICs are therefore usually employed to achieve the necessary functionality,
except in ATE applications where the high level of electronic circuitry required
per tester has created opportunities for the design of system-level ICs for this
application.
INSTRUMENTATION--includes engineering, medical and scientific instruments. These
products are usually designed using the highest performance analog ICs
available, where production volumes generally do not warrant custom or
application-specific ICs.
COMPUTERS AND COMPUTER PERIPHERALS--includes high-performance personal
computers, workstations and peripheral devices such as displays and scanners.
The Company currently supplies a variety of ICs used in this market for
functions such as graphic displays; interfaces between PCs and peripherals such
as modems and printers; power and battery management; and enhanced sound input
and output capability for business and entertainment applications.
MILITARY/AEROSPACE--includes military, commercial avionics and space markets,
all of which require high-performance ICs that meet rigorous environmental and
reliability specifications. Nearly all of the Company's analog ICs can be
supplied in versions that meet appropriate military standards. In addition, many
products can be supplied to meet the standards required for broadcast satellites
and other commercial space applications. Most of the Company's products sold in
this market are derived from standard commercial grade ICs, although the Company
sometimes develops products expressly for military/aerospace applications.
CONSUMER ELECTRONICS--The emergence of high-performance consumer products, such
as compact disc players, DVD players and digital camcorders and cameras, has led
to the need for high-performance system-level ICs with a high level of specific
functionality. Although the Company's revenue from this market has not been
significant, the Company now supplies ICs for sophisticated products used by
consumers for computing, communications and entertainment applications, and
believes that many of these applications will involve digital signal processing.
AUTOMOTIVE--Although the automotive market has historically been served with
low-cost, low-performance ICs, demand has emerged for higher performance devices
for a wide range of applications. In response, the Company is developing
products specifically for the automotive market. The Company supplies a
micromachined IC used as a crash sensor in airbag systems, which serves as an
alternative to an electromechanical sensor. The Company believes that other
micromachined devices derived from this product may be suitable for other
automotive applications, such as roll-over sensing, Global Positioning Satellite
(GPS) automotive navigation systems, anti-lock brakes and "smart" suspension
systems and other applications including earthquake detectors and Microsoft
high-end joysticks.
PRINCIPAL PRODUCTS
The Company's business predominantly comprises the design, manufacture and
marketing of a broad line of high-performance linear, mixed-signal and digital
integrated circuits that address a wide range of real-world signal processing
applications. The Company's IC products include analog ICs, DSP ICs,
micromachined products and assembled products.
A substantial portion of the Company's products are proprietary, while
equivalents to other products are available from a limited number of other
suppliers.
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INTEGRATED CIRCUITS (ICS)
ANALOG ICS
Analog IC products have been the foundation of the Company's business for more
than 20 years, and the Company believes it is one of the world's largest
suppliers of analog ICs. Analog ICs sales represent approximately 75% of the
Company's total sales. The Company's analog ICs are primarily high-performance,
single-function devices. The majority of the Company's analog IC product revenue
is attributable to sales of data converters (analog-to-digital and
digital-to-analog) and amplifiers. Other analog IC products offered by the
Company include analog signal-processing devices (such as analog multipliers),
voltage references and comparators. Over the past few years the Company has been
expanding its analog IC product offerings into product areas where its focus was
previously limited, principally interface circuits and power management ICs. It
is also expanding its analog IC product line to include a much larger number of
products designed to operate from single-supply 3 or 5 volt power sources to
better meet the needs of customers designing portable battery-operated
equipment.
ADI's analog ICs products tend to be general purpose in nature, which allows
customers to incorporate them in a wide variety of equipment and systems. ADI's
product portfolio includes several hundred analog ICs, any one of which can have
as many as several hundred customers. Analog ICs typically have long product
life cycles. The Company's analog ICs customers include both OEMs and customers
who build equipment for their own use. Historically, most analog ICs have been
purchased by OEMs that serve the instrumentation, industrial and
military/aerospace markets, but they are now also being used for applications in
communications, computers, camcorders, scanners, automatic test equipment,
imaging and other consumer applications requiring high-performance real-world
signal processing. By using standard, high-performance, readily available,
off-the-shelf components in their designs, ADI's customers can reduce the time
required to develop and bring new products to market. Given the high cost of
developing customized ICs, analog ICs usually provide the most cost-effective
solutions for low to medium volume applications. In addition, combinations of
analog ICs connected together on a printed circuit board can provide
functionality not currently achievable using a single IC.
Other analog ICs include circuits that are designed to serve the needs of
particularly demanding applications, e.g. very high speed analog timing and pin
driver circuits needed by OEMs in the automatic test equipment business.
Manufacturers of portable instrumentation need analog ICs designed to address
demanding battery life requirements, and need similar kinds of functions
available in analog IC products integrated into a single, very low power chip.
Other principal requirements can include higher accuracy, lower cost per
function, smaller size, lower weight, and fewer components for improved
reliability. These application specific products allow ADI's customers to design
smaller, lighter, higher performance, more power-efficient and lower-cost end
products. The Company believes that these benefits have become more important to
the Company's OEM customers as they increase their focus on high-performance,
small, lightweight products, many of which are battery powered.
DSP ICS
Analog's DSP ICs include general-purpose DSP ICs and multi-function mixed-signal
devices that feature high levels of functional integration on a single chip. In
the preceding three years, sales of these products represented between 18% and
23% of the Company's total sales.
The Company's general-purpose DSP ICs are designed to efficiently execute
specialized programs (algorithms) associated with processing digitized
real-time, real-world data. General-purpose DSP IC customers typically write
their own algorithms using software tools provided by the Company and software
tools obtained from third-party suppliers. All of these devices share a common
architecture which allows system designers to address cost, performance and
time-to-market constraints. ADI supports these products with specialized
applications and easy-to-use, low-cost design tools, which reduce product
development costs and time to market.
ADI's DSP ICs, other than its general-purpose DSPs, are multi-function
mixed-signal devices, some of which include a DSP core. Examples of these
devices include chipsets for communication applications (GSM cellular phones,
remote access servers, data and fax modems), audio input/output devices for
computer applications and devices designed to control motors.
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MICROMACHINED PRODUCTS
The Company's technology base includes a number of new products using an
advanced IC technology known in the industry as surface micromachining. This
technology enables extremely small mechanical structures to be built on the
surface of a chip along with supporting circuitry. Specialized manufacturing
processes in wafer fabrication, packaging and testing are required to produce
these products.
The first series of micromachined products from ADI are accelerometers used in a
wide variety of applications. The majority of current revenues from ADI's
micromachined products derive from accelerometers used by automotive
manufacturers in airbag applications. Emerging applications include GPS
Automobile Navigation systems, earthquake detectors and Microsoft high-end
joysticks. Sales of these products represent less than 5% of the Company's total
sales.
ASSEMBLED PRODUCTS
The Company's assembled products include multi-chip modules (MCMs), hybrids and
printed circuit board modules. A MCM is a device made up of several IC chips
assembled in an automated fashion in a multilayer package that provides high
interconnect density at low cost. A hybrid consists of several chips and
discrete components mounted and wired together on a substrate, which is then
enclosed in a package. A printed-board module consists of surface-mount
components assembled on a small printed board that is then encapsulated in a
small plastic case.
Revenues from this product group have been declining for several years,
primarily because hybrids are being replaced in many new designs with smaller,
lower-cost monolithic ICs that offer higher levels of performance and
integration at lower cost. Sales of these products have declined to less than 5%
of the Company's total sales.
RESEARCH AND DEVELOPMENT
The markets served by Analog are characterized by rapid technological changes
and advances. Accordingly, the Company makes substantial investments in the
design and development of new products and processes, and for significant
improvement of existing products and processes. ADI spent $219 million during
fiscal 1998 on the design, development and improvement of new and existing
products and processes, compared to $196 million and $178 million during fiscal
1997 and 1996 respectively.
In support of its research and development activities, the Company employs
hundreds of engineers involved in product and process development at several
design centers and manufacturing sites located throughout the world.
As of October 31, 1998, the Company owned approximately 500 U.S. patents and had
175 patent applications on file with the United States patent office. The
Company believes that while its patents may provide some advantage, its
competitive position is largely determined by such factors as the knowledge,
ability and experience of the Company's personnel, new product development,
market recognition and ongoing marketing efforts, customer service and technical
support.
SALES CHANNELS
ADI sells its products in both North America and internationally through a
direct sales force, third-party distributors and independent sales
representatives. Approximately 50% of fiscal 1998 revenue was derived from
customers in North America. As of December 1, 1998, the Company had 14 sales
offices in the United States, and its third-party distribution channel consisted
of six national and regional third-party distributors and several independent
sales representatives at numerous locations throughout the U.S. and Canada.
Approximately 26% of the Company's fiscal 1998 revenue was derived from sales to
customers in Europe; 13% to customers in Japan; and 11% to customers in other
international markets. As of December 1, 1998, the Company had direct sales
offices in Australia, Austria, China, Denmark, France, Germany, Hong Kong,
India, Israel, Italy, Japan, Korea, the Netherlands, Singapore, Sweden, Taiwan
and the United Kingdom. The Company also had sales representatives and/or
distributors in approximately 40 countries outside North America, including
countries where the Company also has direct sales offices. For further detail
regarding geographic information, see Note 3 in the Notes to the Company's
Consolidated Financial Statements incorporated herein by reference to the 1998
Annual Report to Shareholders and filed herewith as part of Exhibit 13.2.
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Approximately 42% of ADI's fiscal 1998 revenue was derived from sales made
through distributors. The Company's distributors typically maintain an inventory
of Analog products. Some of these distributors also sell products competitive
with the Company's products, including those for which the Company is an
alternate source. Sales to certain distributors are made under agreements which
provide protection to the distributors for their inventory of Company products
against price reductions and products that are slow-moving or have been
discontinued by the Company.
The Company's worldwide sales efforts are supported by an extensive promotional
program that includes editorial coverage and paid advertising in trade
publications; direct mail programs; promotional brochures; technical seminars
and participation in trade shows. The Company publishes and distributes
full-length databooks, short-form catalogs, applications guides, technical
handbooks and detailed data sheets for individual products. The Company also
provides products and application information via its worldwide web site on the
Internet. The Company also maintains a staff of application engineers who aid
customers in incorporating Analog's products into their products during their
product development cycles.
For fiscal 1998, Analog's 20 largest customers accounted for approximately 30%
of the Company's net sales. The largest single customer represented
approximately 6% of net sales.
PRODUCTION AND RAW MATERIALS
Monolithic integrated circuit components are manufactured in a sequence of
semiconductor production steps that include wafer fabrication, wafer testing,
cutting the wafer into individual "chips" (or dice), assembly of the dice into
packages and electrical testing of the devices in final packaged form. The raw
materials used to manufacture these devices include silicon wafers, processing
chemicals (including liquefied gases), precious metals, ceramic packages and
plastic used for plastic packaging.
ADI employs a wide variety of Company-developed proprietary processes
specifically tailored for use in fabricating high-performance linear and
mixed-signal and system-level ICs. The Company also uses industry-standard
bipolar and CMOS wafer fabrication processes.
ADI's IC products are fabricated both at the Company's production facilities and
by third-party wafer fabricators. The Company relies primarily on its own
facilities for fabricating wafers that require linear and mixed-signal
processes. The Company operates wafer fabrication facilities in Wilmington and
Cambridge, Massachusetts; Santa Clara and Sunnyvale, California; and Limerick,
Ireland. The Company also operates assembly and test facilities located in the
United States, Ireland, the Philippines and Taiwan and also uses third-party
subcontractors. The Company uses Taiwan Semiconductor Manufacturing Company,
(TSMC) and Chartered Semiconductor Manufacturing Pte., Ltd., (CSM) for the
production of digital and VLSI mixed-signal devices. To provide access to
advanced process technology at competitive costs, the Company has entered into a
joint venture agreement (WaferTech, LLC) with TSMC, Altera, Integrated Silicon
Solutions and several individual investors to build an eight-inch wafer
fabrication facility in Camas, Washington. Subsequent to the year ended October
31, 1998, the Company concluded an agreement to sell 14% of its 18% equity
ownership in WaferTech, for cash equal to the carrying value of the 14% equity
ownership at October 31, 1998, to other WaferTech partners. This sale is
expected to be completed by the end of the first quarter of fiscal 1999.
Hybrid products are manufactured by mounting and connecting together several
integrated circuit chips in a single package. Some of the chips used in the
Company's hybrids are manufactured by the Company and some are purchased from
outside suppliers. The production process for modular components, subsystems and
systems consists primarily of assembly, packaging and testing. Some of the
Company's assembled products are assembled and tested within the Company's U.S.
manufacturing facilities, while others are assembled and tested at Company-owned
facilities outside the United States or by subcontractors, principally in the
Far East.
To respond to production capacity requirements, the Company significantly
expanded its manufacturing capacity during the last three years. Major wafer
fabrication expansions have been completed in Wilmington and Cambridge,
Massachusetts; Sunnyvale, California and Limerick, Ireland. In addition, the
Company has completed construction of an additional assembly and test facility
in Cavite, Philippines.
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BACKLOG
Backlog at the end of fiscal 1998 was approximately $174 million, down from
approximately $280 million at the end of fiscal 1997. While backlog has declined
primarily as a result of the lower level of demand for the Company's products
from the year earlier period, it is also impacted by the tendency of its
customers to rely on shorter lead times available from suppliers, including ADI,
in periods of depressed demand. Additionally, the Company may allow customers to
revise the quantities or delivery schedules of products ordered to reflect
changes in their needs. As is customary in the semiconductor industry, in
certain circumstances, the Company allows such orders to be canceled or
deliveries delayed by customer without significant penalty. Accordingly, the
Company believes that its backlog at any time should not be used as a measure of
future revenues.
GOVERNMENT CONTRACTS
The Company estimates that approximately 11% of its fiscal 1998 total worldwide
revenue was attributable to sales to the U.S. government and government
contractors and subcontractors. Analog's government contract related business is
predominantly in the form of negotiated, firm fixed-price subcontracts. All such
contracts and subcontracts contain standard provisions relating to termination
at the election of the United States government.
COMPETITION
ADI competes with a large number of semiconductor companies in markets that are
highly competitive. The Company believes it is one of the largest suppliers of
high-performance linear and mixed-signal signal-processing components.
Competitors for the Company's linear and mixed-signal products include
Burr-Brown Corp., Cirrus Logic Inc., Harris Corp., Linear Technology Corp.,
Maxim Integrated Products, Inc., National Semiconductor Corp., Sierra
Semiconductor Corp., Siliconix Inc., Texas Instruments, Inc. and others.
ADI's competitors in the DSP IC market include Lucent Technologies Inc.,
Motorola Semiconductor Products and Texas Instruments, Inc.
Sales of the Company's micromachined products currently comprise acceleration
sensors, and its main competitors are Bosch, Motorola and Denso. All three
competitors use a hybrid (two chip) solution whereas ADI uses a single chip
solution which the Company believes provides cost, reliability and functional
advantages in the marketplace.
Many other companies offer components that compete with ADI's products; some
also offer other electronic products, and some have financial resources
substantially larger than ADI's. Also, some formerly independent competitors
have been purchased by larger companies. However, to the Company's knowledge, no
manufacturer competes with ADI across all of the product types offered by the
Company in its signal-processing components product line.
The Company believes that competitive performance in the marketplace for
real-world signal-processing components depends upon several factors, including
product price, technical innovation, product quality and reliability, range of
products, customer service and technical support. The Company believes its
aggressive technical innovation emphasizing product performance and reliability,
supported by its commitment to strong customer service and technical support,
enables the Company to continue to compete successfully in its chosen markets
against both foreign and domestic semiconductor manufacturers.
ENVIRONMENT
Analog's manufacturing facilities are subject to numerous environmental laws and
regulations, particularly with respect to industrial waste and emissions.
Compliance with these laws and regulations has not had a material impact on the
Company's capital expenditures, earnings or competitive position.
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EMPLOYEES
As of October 31, 1998, the Company employed approximately 7,200 persons. The
Company's future success depends in large part on the continued service of its
key technical and senior management personnel, and on its ability to continue to
attract, retain and motivate qualified employees, particularly those highly
skilled design, process and test engineers involved in the manufacture of
existing products and the development of new products and processes. The
competition for such personnel is intense, and the loss of key employees could
have a material adverse effect on the Company. The Company believes that
relations with its employees are good.
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ITEM 2. PROPERTIES
The Company's corporate headquarters is located in Norwood, Massachusetts.
Manufacturing and other operations are conducted in several locations worldwide.
The following tables provide certain information as to the Company's principal
general offices and manufacturing facilities:
PLANT LOCATION
- --------------
OWNED: USE FLOOR SPACE
------ --- -----------
Wilmington, Wafer fabrication, components assembly 265,200 sq. ft.
Massachusetts and testing, engineering and
administrative offices
Wilmington, Engineering, marketing and 108,000 sq. ft.
Massachusetts administrative offices
Wilmington, Components engineering, marketing and 65,500 sq. ft.
Massachusetts administrative offices
Westwood, Components and subsystems assembly and 100,500 sq. ft.
Massachusetts testing, engineering and administrative
offices
Limerick, Wafer fabrication, wafer probe and 315,400 sq. ft.
Ireland testing, engineering and administrative
offices
Greensboro, Components and board assembly and 122,600 sq. ft.
North Carolina testing, engineering and administrative
offices
Cavite, Components assembly and testing, 168,300 sq. ft.
Philippines engineering and administrative offices
Manila, Components assembly and testing, 75,300 sq. ft.
Philippines engineering and administrative offices
<TABLE>
<CAPTION>
PRINCIPAL LEASE
--------- -----
PROPERTIES USE FLOOR SPACE EXPIRATION RENEWALS
---------- --- ----------- ---------- --------
LEASED: (FISCAL YEAR)
------- -------------
<S> <C> <C> <C> <C>
Norwood, Corporate headquarters, engineering, 129,900 sq. ft. 2007 3, five-yr.
Massachusetts components testing, sales and marketing periods
offices
Cambridge, Wafer fabrication, components testing 116,000 sq. ft. 2001 2, five-yr.
Massachusetts and assembly engineering, marketing periods
administrative offices
Santa Clara, Wafer fabrication, components assembly 72,800 sq. ft. 2002 3, five-yr.
California and testing, engineering and periods
administrative offices
Santa Clara, Administrative offices and engineering 43,500 sq. ft. 2002 3, five-yr.
California periods
Sunnyvale, Wafer fabrication 38,700 sq. ft. 2000 3, five-yr.
California periods
Taipei, Components testing, engineering and 45,700 sq. ft. 2001 1, five to
Taiwan administrative offices seven yr.
period
</TABLE>
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ITEM 2. PROPERTIES -- (CONTINUED)
In addition to the principal leased properties listed in the previous table, the
Company also leases sales offices and other premises at 28 locations in the
United States and 37 locations overseas under operating lease agreements. These
leases expire at various dates through the year 2030. The Company anticipates no
difficulty in retaining occupancy of any of its manufacturing, office or sales
facilities through lease renewals prior to expiration or through month-to-month
occupancy, or in replacing them with equivalent facilities. For information
concerning the Company's obligations under all operating and capital leases see
Note 10 in the Notes to the Company's Consolidated Financial Statements
incorporated herein by reference to the 1998 Annual Report to Shareholders and
filed herewith as part of Exhibit 13.2.
ITEM 3. LEGAL PROCEEDINGS
The information required by this item is set forth in Note 11 in the Notes to
the Company's Consolidated Financial Statements incorporated herein by reference
to the 1998 Annual Report to Shareholders and filed herewith as part of Exhibit
13.2.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during the
last quarter of the fiscal year ended October 31, 1998.
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EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth (i) the name and age of each present executive
officer of the Company; (ii) the position(s) presently held by each person
named; and (iii) the principal occupations held by each person named for at
least the past five years.
<TABLE>
<CAPTION>
EXECUTIVE OFFICER AGE POSITION BUSINESS EXPERIENCE
----------------- --- -------- -------------------
<S> <C> <C> <C>
Ray Stata.................. 64 Chairman of the Board Chairman, of the Board since 1973;
Chief Executive Officer from 1973 to November
1996; President from 1971 to November 1991.
Jerald G. Fishman.......... 53 President, Chief Executive Chief Executive Officer since November 1996;
Officer, and Director President and Director since November 1991;
Executive Vice President from 1988 to November
1991; Group Vice President - Components from
1982 to 1988.
Ross Brown................. 54 Vice President, Human Vice President, Human Resources since May
Resources 1993; U.S. Personnel Manager for Digital
Equipment Corp. from 1990 to 1993; Senior
Group Personnel Manager at Digital from
1986 to 1990.
Samuel H. Fuller........... 52 Vice President, Research Vice President, Research and Development
and Development since March 1998; Vice President of
Research and Chief Scientist of Digital
Equipment Corp. from 1983 to 1998.
Russell K. Johnsen......... 44 Vice President and General Vice President and General Manager,
Manager, Communications Communications Division since May 1994;
Division Vice President and General Manager,
Analog Devices Semiconductor Division
from November 1993 to May 1994; General
Manager of the Wide Area Networks Division
of National Semiconductor Corp. from 1992
to 1993.
Robert R. Marshall......... 44 Vice President, Worldwide Vice President, Worldwide Manufacturing
Manufacturing since February 1994; Vice President,
Manufacturing, Limerick Site, Analog
Devices, B.V. - Limerick, Ireland from
November 1991 to February 1994; Plant
Manager, Analog Devices, B.V. - Limerick,
Ireland from January 1991 to November 1991.
</TABLE>
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<TABLE>
<CAPTION>
EXECUTIVE OFFICER AGE POSITION BUSINESS EXPERIENCE
----------------- --- -------- -------------------
<S> <C> <C> <C>
William A. Martin .......... 39 Treasurer Treasurer since March 1993; Assistant Treasurer from
October 1991 to March 1993; Manager of Treasury Finance
from March 1987 to October 1991; Manager of International
Treasury from October 1985 to March 1987.
Robert McAdam .............. 48 Vice President and General Vice President and General Manager, Standard Linear
Manager, Standard Linear Products Division since February 1994; Vice President and
Products Division General Manager, Analog Devices, B.V. - Limerick, Ireland
from January 1991 to February 1994; Product Line Manager,
Analog Devices, B.V. - Limerick, Ireland from October
1988 to January 1991.
Brian P. McAloon ........... 48 Vice President, Sales Vice President, Sales since May 1992; Vice President,
Sales and Marketing - Europe and Southeast Asia from 1990
to 1992; General Manager, Analog Devices, B.V. -
Limerick, Ireland from 1987 to 1990.
Joseph E. McDonough ........ 51 Vice President, Finance and Vice President, Finance and Chief Financial Officer since
Chief Financial Officer November 1991; Vice President since 1988 and Treasurer
from 1985 to March 1993; Director of Taxes from 1983 to
1985.
H. Goodloe Suttler ......... 47 Vice President, Marketing, Vice President, Marketing, Quality and Planning since
Quality and Planning October 1993; Vice President and General Manager, Analog
Devices Semiconductor Division from November 1991 to
October 1993; General Manager of Analog Devices
Semiconductor Division from August 1988 to November 1991.
Franklin Weigold ........... 59 Vice President and General Vice President and General Manager, Transportation and
Manager, Transportation and Industrial Products Division since March 1992; President
Industrial Products Division and Chief Operating Officer of Unitrode from June 1990 to
March 1992.
</TABLE>
There is no family relationship among the named officers.
11
<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the New York Stock Exchange ("NYSE")
under the symbol ADI. The table below sets forth the NYSE high and low sale
prices of the Common Stock during the two most recent fiscal years.
FISCAL 1998 FISCAL 1997
------------------ --------------------
PERIOD HIGH LOW HIGH LOW
------ ------ ------ ------ ------
First Quarter $33.56 $23.75 $29.25 $19.63
Second Quarter $39.63 $27.13 $29.25 $21.00
Third Quarter $39.00 $21.44 $33.75 $23.88
Fourth Quarter $24.38 $12.00 $36.69 $26.00
The Company's $60,000,000 credit agreement restricts the aggregate of all cash
dividend payments declared or made subsequent to November 2, 1996 to an amount
not exceeding $150,000,000 plus 50% of the consolidated net income of the
Company for the period from November 3, 1996 through the end of the Company's
then most recent fiscal quarter. At October 31, 1998 this amount was equal to
$280,314,000. The Company has never paid any cash dividends on its Common Stock
and currently has no intentions to do so.
The approximate number of holders of record of the Company's Common Stock at
December 31, 1998 was 6,100. This number does not include shareholders for whom
shares are held in a "nominee" or "street" name.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(thousands except per share amounts) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations data:
Net sales....................... $1,230,571 $1,243,494 $1,193,786 $941,546 $773,474
Net income before cumulative
effect of change in
accounting principle ......... 119,488 - - - -
Cumulative effect of change
in accounting principle ...... 37,080 - - - -
Net income after cumulative
effective of change in
accounting principle ......... 82,408 178,219 171,901 119,270 74,496
Net income per share:
Basic ........................ 0.51 1.13 1.12 0.79 0.51
Diluted ...................... 0.50 1.04 1.03 0.75 0.48
Pro forma amounts with the change
in accounting principle related
to revenue recognition applied
retroactively:
Net sales ...................... $1,230,571 $1,214,602 $1,183,186 * *
Net income ..................... 119,488 167,515 168,328 * *
Net income per share:
Basic ........................ 0.74 1.06 1.10 * *
Diluted ...................... 0.71 0.98 1.01 * *
Balance Sheet data:
Total assets ................... $1,861,730 $1,763,853 $1,508,272 $993,349 $813,088
Long-term debt and non-
current obligations under
capital leases ............... 340,758 348,852 353,666 80,000 80,061
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
* Data was not available in sufficient detail to provide pro forma
information for these years
12
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item is incorporated herein by reference to the
"Management Analysis" set forth on pages 1 through 8 of the 1998 Annual Report
to Shareholders and is filed herewith as part of Exhibit 13.1.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated herein by reference to the
"Management Analysis" set forth on pages 1 through 8 of the 1998 Annual Report
to Shareholders and is filed herewith as part of Exhibit 13.1.
13
<PAGE> 15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated herein by reference to the
Company's 1998 Annual Report to Shareholders under the headings "Financial
Section - Consolidated Statements of Income, - Consolidated Balance Sheets, -
Consolidated Statements of Stockholders' Equity, - Consolidated Statements of
Cash Flows, - Notes to Consolidated Financial Statements, - Report of Ernst &
Young LLP, Independent Auditors and - Supplementary Financial Information," and
is filed herewith as Exhibit 13.2.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this item is contained in part under the caption "EXECUTIVE
OFFICERS OF THE COMPANY" in Part I hereof, and the remainder is contained in the
Company's Proxy Statement for the Annual Meeting of Stockholders to be held on
March 9, 1999 (the "1999 Proxy Statement") under the caption "Election of
Directors" and is incorporated herein by reference. Information relating to a
delinquent filing of a Form 4 by an Executive Officer of the Company is
contained in the Company's 1999 Proxy Statement under the caption "Beneficial
Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is contained in the Company's 1999 Proxy Statement
under the captions "Directors' Compensation," "Executive Compensation," and
"Severance and Other Agreements," and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is contained in the Company's 1999 Proxy Statement
under the caption "Security Ownership of Certain Beneficial Owners and
Management" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is contained in the Company's 1999 Proxy Statement
under the caption "Transactions with Related Parties," and is incorporated
herein by reference.
14
<PAGE> 16
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The following consolidated financial statements are included in the
Company's 1998 Annual Report to Shareholders and are incorporated herein by
reference pursuant to Item 8:
- Consolidated Statements of Income for the years ended October 31,
1998, November 1, 1997 and
- November 2, 1996
- Consolidated Balance Sheets as of October 31, 1998 and November 1,
1997
- Consolidated Statements of Stockholders' Equity for the years ended
October 31, 1998, November 1, 1997 and November 2, 1996
- Consolidated Statements of Cash Flows for the years ended October 31,
1998, November 1, 1997 and November 2, 1996
(a) 2. FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedule is included in
Item 14(d):
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted since the required information is not
present, or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the
consolidated financial statements or the notes thereto.
(a) 3. LISTING OF EXHIBITS
EXHIBIT
NO. DESCRIPTION
------- -----------
3.1 Restated Articles of Organization of Analog Devices, Inc., as
amended, filed as an exhibit to the Company's Form S-8 (File No.
333-04821) filed on May 30, 1996 regarding the Company's amended
1988 Stock Option Plan, and incorporated herein by reference.
3.2 By-laws of Analog Devices, Inc. as amended, filed as an exhibit to
the Company's Form 10-K for the fiscal year ended November 1, 1997
and incorporated herein by reference.
4.1 Rights Agreement, as amended, between Analog Devices, Inc. and The
First National Bank of Boston, as Rights Agent, filed as an exhibit
to a Form 8 filed on June 27, 1989 amending the Registration
Statement on Form 8-A relating to Common Stock Purchase Rights, and
incorporated herein by reference.
4.2 Indenture dated as of March 1, 1993 between Analog Devices, Inc. and
The First National Bank of Boston, filed as an exhibit to the
Company's Form 10-K for the fiscal year ended October 29, 1994 and
incorporated herein by reference.
4.3 Indenture dated as of December 18, 1995 between Analog Devices, Inc.
and State Street Bank and Trust Company, as Trustee, filed as an
exhibit to the Company's Form 10-K for the fiscal year ended October
28, 1995 and incorporated herein by reference.
* 4.4 Analog Devices, Inc. Deferred Compensation Plan, filed as an exhibit
to a Form S-8 filed on December 8, 1995 and incorporated herein by
reference, as amended by Amendment No. 1 and Amendment No. 2, filed
as Exhibits to Post-Effective Amendment No. 1 to Form S-8 filed on
April 15, 1997, and Amendment No. 3, filed as an Exhibit to
Post-Effective Amendment No. 2 to form S-8 filed on November 12,
1997.
15
<PAGE> 17
EXHIBIT
NO. DESCRIPTION
------- -----------
4.5 Rights Agreement, dated as of March 18, 1998 between Analog Devices
Inc. and BankBoston, N.A., as Rights agent, filed as and exhibit and
incorporated herein by reference to Analog Devices Inc.'s
Registration Statement of Form 8-A (File No. 011-07819) filed on
March 19, 1998.
* 10.1 Bonus Plan of Analog Devices, Inc., filed as an exhibit to the
Company's Form 10-K for the fiscal year ended November 1, 1997 and
incorporated herein by reference
* 10.2 1991 Restricted Stock Plan of Analog Devices, Inc., filed as an
exhibit to the Company's Form 10-K for the fiscal year ended
November 1, 1997 and incorporated herein by reference
* 10.3 1998 Stock Option Plan of Analog Devices, Inc., filed on February
6, 1998 as an appendix to the Company's Definitive Proxy
Statement on Schedule 14A and incorporated herein by reference.
* 10.4 Restated 1988 Stock Option Plan of Analog Devices, Inc., filed as an
exhibit to the Company's Form 10-Q for the fiscal quarter ended May
3, 1997 and incorporated herein by reference.
* 10.5 1989 Director Stock Option Plan of Analog Devices, Inc., as amended,
filed as an exhibit to the Company's Form 10-K for the fiscal year
ended November 2, 1996 and incorporated herein by reference.
* 10.6 1992 Director Option Plan of Analog Devices, Inc., filed as an
exhibit to the Company's Form 10-K for the fiscal year ended
November 1, 1997 and incorporated herein by reference
* 10.7 1994 Director Option Plan of Analog Devices, Inc., as amended, filed
as an exhibit to the Company's Form 10-Q for the fiscal quarter
ended February 1, 1997 and incorporated herein by reference, as
amended by Amendment No. 2, filed as an exhibit to the Company's
Form S-8 (File No. 333-47789), filed on March 11, 1998 and
incorporated herein by reference.
10.8 Amended and restated lease agreement dated May 1, 1992 between
Analog Devices, Inc. and the trustees of Everett Street Trust
relating to the premises at 3 Technology Way, Norwood,
Massachusetts, filed as an exhibit to the Company's Form 10-K for
the fiscal year ended November 1, 1997 and incorporated herein by
reference.
10.9 Guaranty dated as of May 1, 1994 between Analog Devices, Inc. and
Metropolitan Life Insurance Company relating to the premises at 3
Technology Way, Norwood, Massachusetts, filed as an exhibit to the
Company's Form 10-Q for the fiscal quarter ended April 30, 1994 and
incorporated herein by reference.
10.10 Letter Agreement dated as of May 18, 1994 between Analog Devices,
Inc. and Metropolitan Life Insurance Company relating to the
premises at 3 Technology Way, Norwood, Massachusetts, filed as an
exhibit to the Company's Form 10-Q for the fiscal quarter ended
April 30, 1994 and incorporated herein by reference.
10.11 Reimbursement Agreement dated May 18, 1992 between Analog Devices,
Inc. and the trustees of Everett Street Trust, filed as an exhibit
to the Company's Form 10-K for the fiscal year ended November 1,
1997 and incorporated herein by reference.
10.12 Lease agreement dated August 8, 1990 between Precision Monolithics,
Inc. and Bourns, Inc. relating to the premises at 1525 Comstock
Road, Santa Clara, California, filed as an exhibit to the Company's
Form 10-K for the fiscal year ended November 2, 1996 and
incorporated herein by reference.
10.13 Lease amendment dated May 1, 1996 to the Lease Agreement dated
August 8, 1990 between Analog Devices, Inc. and Bourns, Inc.,
relating to premises located at 1525 Comstock Road, Santa Clara,
California, filed as an exhibit to the Company's Form 10-Q for the
fiscal quarter ended May 4, 1996 and incorporated herein by
reference.
16
<PAGE> 18
EXHIBIT
NO. DESCRIPTION
------- -----------
10.14 Lease agreement dated August 8, 1990, as amended, between Precision
Monolithics, Inc. and Bourns, Inc. relating to the premises at 1500
Space Park Drive, Santa Clara, California, filed as an exhibit to
the Company's Form 10-K for the fiscal year ended November 2, 1996
and incorporated herein by reference.
10.15 Lease amendment dated May 1, 1996 to the Lease Agreement dated
August 8, 1990 between Analog Devices, Inc. and Bourns, Inc.,
relating to premises located at 1500 Space Park Drive, Santa Clara,
California, filed as an exhibit to the Company's Form 10-Q for the
fiscal quarter ended May 4, 1996 and incorporated herein by
reference.
10.16 Credit Agreement dated as of March 12, 1993 among Analog Devices,
Inc. and Morgan Guaranty Trust Company of New York, Bank of America
National Trust and Savings Association, Continental Bank, N.A., The
First National Bank of Boston and Morgan Guaranty Trust Company of
New York, as Agent, filed as an exhibit to the Company's Form 10-Q
for the fiscal quarter ended May 1, 1993 and incorporated herein by
reference.
10.17 Amendment No. 1 dated as of May 18, 1993 to the Company's Credit
Agreement dated March 12, 1993, filed as an exhibit to the Company's
Form 10-Q for the fiscal quarter ended July 31, 1993 and
incorporated herein by reference.
10.18 Amendment No. 2 dated as of September 8, 1994 to the Company's
Credit Agreement dated March 12, 1993, filed as an exhibit to the
Company's Form 10-K for the fiscal year ended October 29, 1994 and
incorporated herein by reference.
10.19 Amendment No. 3 dated as of October 25, 1996 to the Company's Credit
Agreement dated March 12, 1993, filed as an exhibit to the Company's
Form 10-K for the fiscal year ended November 2, 1996 and
incorporated herein by reference.
* 10.20 Form of Employee Retention Agreement, as amended, filed as an
exhibit to the Company's Form 10-K for the fiscal year ended
November 1, 1997 and incorporated herein by reference.
* 10.21 Employee Change in Control Severance Policy of Analog Devices, Inc.,
as amended, filed as an exhibit to the Company's 10-K for the fiscal
year ended October 30, 1993 and incorporated herein by reference.
* 10.22 Senior Management Change in Control Severance Policy of Analog
Devices, Inc., as amended, filed as an exhibit to the Company's 10-K
for the fiscal year ended October 30, 1993 and incorporated herein
by reference.
* 10.23 Description of Consulting Arrangement between Analog Devices, Inc.
and John L. Doyle, filed as an exhibit to the Company's Form 10-K
for the fiscal year ended November 2, 1996 and incorporated herein
by reference.
* 10.24 Letter agreement between Analog Devices, Inc. and Jerald G. Fishman
dated December 15, 1994 relating to acceleration of stock options
and restricted stock awards upon termination of employment, filed as
an exhibit to the Company's Form 10-K for the fiscal year ended
October 29, 1994 and incorporated herein by reference.
** 10.25 Option Agreement dated as of May 16, 1995 between Analog Devices
B.V. and Taiwan Semiconductor Manufacturing Company, Ltd., filed as
an exhibit to the Company's Form 10-Q for the fiscal quarter ended
July 29, 1995 and incorporated herein by reference.
** 10.26 Wafer Production Agreement dated as of May 16, 1995 between Taiwan
Semiconductor Manufacturing Company, Ltd. and Analog Devices B.V.,
filed as an exhibit to the Company's Form 10-Q for the fiscal
quarter ended July 29, 1995 and incorporated herein by reference.
17
<PAGE> 19
EXHIBIT
NO. DESCRIPTION
------- -----------
10.27 Lease Agreement dated June 16, 1995 between Analog Devices, Inc. and
Ferrari Brothers, relating to the premises at 610 Weddell Drive,
Sunnyvale, California, filed as an exhibit to the Company's Form
10-K for the fiscal year ended November 2, 1996 and incorporated
herein by reference.
10.28 Lease amendment dated March 1, 1996 to the Lease Agreement dated
June 16, 1995 between Analog Devices, Inc. and Ferrari Brothers,
relating to premises located at 610 Weddell Drive, Sunnyvale,
California, filed as an exhibit to the Company's Form 10-Q for the
fiscal quarter ended May 4, 1996 and incorporated herein by
reference.
** 10.29 Manufacturing Agreement dated as of March 17, 1995 between Chartered
Semiconductor Manufacturing Pte. Ltd. and Analog Devices B.V., filed
as an exhibit to the Company's Form 10-Q for the fiscal quarter
ended February 3, 1996 and incorporated herein by reference.
** 10.30 Deposit Agreement dated January 30, 1996 between Chartered
Semiconductor Manufacturing Pte. Ltd. and Analog Devices B.V., filed
as an exhibit to the Company's Form 10-Q for the fiscal quarter
ended February 3, 1996 and incorporated herein by reference.
10.31 Lease Agreement dated February 8, 1996 between Analog Devices, Inc.
and Massachusetts Institute of Technology, relating to premises
located at 21 Osborn Street, Cambridge, Massachusetts, filed as an
exhibit to the Company's Form 10-Q for the fiscal quarter ended
February 3, 1996 and incorporated herein by reference.
** 10.32 Amended and Restated Limited Liability Company Agreement of
WaferTech, LLC, a Delaware limited liability company, dated as of
August 9, 1996. Filed as Exhibit 10.47 to the Form 10-Q of Altera
Corporation (File No. 0-16617) for the fiscal quarter ended June 30,
1996, and incorporated herein by reference.
** 10.33 Purchase Agreement by and between Taiwan Semiconductor Manufacturing
Co., Ltd., as seller and Analog Devices, Inc., Altera Corporation
and Integrated Silicon Solutions, Inc., as buyers dated as of June
25, 1996. Filed as Exhibit 10.48 to the Form 10-Q of Altera
Corporation (File No. 0-16617) for the fiscal quarter ended June 30,
1996, and incorporated herein by reference.
* 10.34 Trust Agreement for Deferred Compensation Plan, filed as an exhibit
to the Company's Post Effective Amendment No. 2 to Form S-3 filed
November 12, 1997 and incorporated herein by reference.
10.35 Lease agreement dated September 19, 1996 between Ren Min Company
Limited and Analog Devices Taiwan, Limited relating to the premises
at Five-Kung-Five Road, Taipei, Taiwan, filed as an exhibit to the
Company's Form 10-K for the fiscal year ended November 1, 1997 and
incorporated herein by reference.
+ 13.1 Management Analysis corresponding to pages 1 through 8
of the 1998 Annual Report to Shareholders for the fiscal year ended
October 31, 1998.
+ 13.2 Financial Statements and Notes thereto, Report of Ernst & Young LLP,
Independent Auditors and Supplementary Financial Information,
corresponding to pages 9 through 33 of the 1998 Annual Report to
Shareholders, for the fiscal year ended October 31, 1998.
+ 18 Letter from Ernst & Young, LLP re: Change in Accounting Principle
+ 21 Subsidiaries of the Company.
+ 23 Consent of Ernst & Young LLP.
18
<PAGE> 20
27 Financial Data Schedule.
- ----------------
* Management contracts and compensatory plan or arrangements required to be
filed as an Exhibit pursuant to Item 14(c) of Form 10-K.
** Confidential treatment has been granted as to certain portions of these
Exhibits.
+ Filed herewith.
(b) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K with the Securities and Exchange
Commission during the fiscal quarter ended October 31, 1998.
19
<PAGE> 21
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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)
By: /s/ Jerald G. Fishman By: /s/ Joseph E. McDonough
------------------------------- -----------------------------------
Jerald G. Fishman Joseph E. McDonough
President Vice President-Finance
Chief Executive Officer and Chief Financial Officer
and Director (Principal Financial and
(Principal Executive Officer) Accounting Officer)
Date: January 28, 1999 Date: January 28, 1999
----------------------------- ---------------------------------
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ Ray Stata Chairman of the Board January 28, 1999
- ----------------------------- ----------------
Ray Stata
/s/ Jerald G. Fishman President, January 28, 1999
- ----------------------------- Chief Executive Officer ----------------
Jerald G. Fishman and Director
/s/ John L. Doyle Director January 28, 1999
- ----------------------------- ----------------
John L. Doyle
/s/ Charles O. Holliday Director January 28, 1999
- ----------------------------- ----------------
Charles O. Holliday
/s/ Joel Moses Director January 28, 1999
- ----------------------------- ----------------
Joel Moses
/s/ F. Grant Saviers Director January 28, 1999
- ----------------------------- ----------------
F. Grant Saviers
/s/ Lester C. Thurow Director January 28, 1999
- ----------------------------- ----------------
Lester C. Thurow
20
<PAGE> 22
ANALOG DEVICES, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED OCTOBER 31, 1998
ITEM 14(d)
FINANCIAL STATEMENT SCHEDULE
21
<PAGE> 23
ANALOG DEVICES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED OCTOBER 31, 1998, NOVEMBER 1, 1997 AND NOVEMBER 2, 1996
(THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT ADDITION BALANCE AT
BEGINNING OF CHARGED TO END OF
DESCRIPTION PERIOD INCOME STATEMENT DEDUCTIONS PERIOD
- ----------- ------------ ---------------- ---------- ----------
<S> <C> <C> <C> <C>
ACCOUNTS RECEIVABLE RESERVES AND ALLOWANCES:
Year ended November 2, 1996 $12,738 $ 2,611 $ 564 $14.785
======= ======= ======= =======
Year ended November 1, 1997 $14,785 $25,456 $ 234 $40,007
======= ======= ======= =======
Year ended October 31, 1998 $40,007 $ 3,023 $10,698* $32,332
======= ======= ======= =======
</TABLE>
* Amount reflects reclassification of certain reserves from accounts
receivable to accrued liabilities made in connection with the Company's
accounting change (see Notes 2(l) and 4 to the consolidated financial
statements).
22
<PAGE> 1
Exhibit 13.1
MANAGEMENT ANALYSIS
COMPANY OVERVIEW
Analog Devices, Inc. (Analog, ADI or the Company) is a semiconductor company
that designs, manufactures and markets precision high-performance integrated
circuits (ICs) used in analog and digital signal processing (DSP). Virtually all
of ADI's products are components, which are typically incorporated by original
equipment manufacturers (OEMs) in a wide range of equipment and systems for use
in communications, computer, industrial, instrumentation, military/aerospace,
automotive and high-performance consumer electronics applications.
The Company's principal products include general-purpose, standard-function
analog and mixed-signal ICs and DSP ICs. DSP ICs include general-purpose digital
signal processing ICs and application-specific devices that typically
incorporate analog and mixed-signal circuitry and a DSP core.
The Company sells its products worldwide through a direct sales force,
third-party industrial distributors and independent sales representatives.
Approximately 50% of fiscal 1998 revenue was derived from customers in North
America, while most of the balance was derived from customers in Western Europe
and the Far East.
RESULTS OF OPERATIONS
Sales were $1,231 million in fiscal 1998, $1,243 million in fiscal 1997 and
$1,194 million in fiscal 1996. Demand in fiscal 1998 started off strong and
declined in the second half of the year, due to a cyclical downturn in the
semiconductor industry. As a result, sales in 1998 declined 1% from the prior
year. However, excluding sales from the disk drive IC business, which was
disposed of early in 1998, sales increased by 3% year on year.
Sales of analog IC products increased 5% during fiscal 1998 and 8% during fiscal
1997. The majority of the analog IC product revenue increase in both of these
years was attributable to the increasing use of analog ICs in the growing
communications, computer and computer peripherals markets, offset by a decline
in revenue in industrial markets. Analog IC revenue represented between 70% and
75% of the Company's total revenue during fiscal 1998, 1997 and 1996.
DSP IC product sales declined 7% during fiscal 1998, primarily due to a decline
in sales of Global System for Mobile Communications (GSM) cellular phone
chipsets. Excluding the impact of the reduction of GSM revenue, DSP IC revenue
increased 32% in fiscal 1998. In fiscal 1997, DSP IC revenue declined 13%
primarily as a result of a decline in sales of computer audio products, GSM
chipsets and products used in automatic test equipment. DSP IC revenue was
between 18% and 23% of the Company's total revenue during fiscal 1998, 1997 and
1996.
Sales of micromachined products represented less than 5% of the Company's
revenue in fiscal 1998, 1997 and 1996.
Sales of assembled products declined from 5% in fiscal 1996 to less than 5% of
the Company's total revenue during fiscal 1998 and fiscal 1997. Assembled
products include multi-chip modules, hybrids and printed circuit board modules.
In fiscal 1998, sales to North American customers increased significantly over
fiscal 1997, principally as a result of increased sales of analog IC products.
Sales in Europe declined from the prior year as GSM sales declined. Sales in
Japan remained essentially flat in comparison to the prior year. Sales declined
in other Southeast Asian countries, primarily due to the decline in sales of
disk drive IC products (as a result of the sale of that business in early 1998),
offset by increases in the sales of analog IC products.
Sales in North America increased from fiscal 1996 to fiscal 1997 as a result of
an increase in sales of analog IC products. Sales in Europe and Japan remained
essentially flat from fiscal 1996 to fiscal 1997. Sales declines in Southeast
Asia (SEA) from fiscal 1996 to fiscal 1997 were the result of a decline in
computer audio sales partially offset by an increase in sales of analog IC
products in the region.
1
<PAGE> 2
Gross margin declined to 47.8% of sales in fiscal 1998, from 49.9% in fiscal
1997. This decline was principally due to a reduction in demand in 1998, which
caused the Company to reduce production rates, particularly in the second half
of the year. The gross margin ratio in fiscal 1997 remained essentially flat in
comparison to fiscal 1996. It is anticipated that gross margin will be adversely
impacted by lower production rates until sales growth resumes.
Research and development (R&D) expenses increased approximately 12% in fiscal
1998 to $219 million, or 17.8% of sales. This increase was due to the continued
development of innovative products and processes and higher spending in the
development of new products and technologies targeted for the communications,
computer and automotive markets, including initiatives in general-purpose
digital signal processing, ICs for modem and wireless communications
applications, RF signal processing, broadband wired communications,
micromachining technology and accelerometer products. The Company believes that
a continued commitment to research and development is essential in order to
maintain product leadership in its existing products and to provide innovative
new product offerings, and therefore expects to continue to make significant
investments in research and development in the future. However, because of the
decline in demand in the second half of fiscal 1998, the Company decided to
curtail further increases in R&D spending. In fiscal 1997, R&D expenses
increased 10% to $196 million or 15.8% of sales, up from 14.9% in fiscal 1996.
Selling, marketing, general and administrative (SMG&A) expenses were $207
million in fiscal 1998, an increase of $15 million from the $192 million
recorded in the prior year. This increase was primarily attributable to a $6
million charge related to the realignment of the Company's sales and
distribution organizations, and an $8 million charge related to collection
difficulties the Company experienced with customers whose business and financing
had been adversely affected by the Southeast Asian economic situation. As a
result, SMG&A expense as a percentage of sales increased from 15.4% in fiscal
1997 to 16.9% in fiscal 1998. In fiscal 1997, SMG&A expenses decreased by $4
million from the $196 million incurred in fiscal 1996 and represented 15.4 % of
sales, down from 16.4% in fiscal 1996.
During fiscal 1998, the Company completed the sale of its disk drive IC business
to Adaptec, Inc. 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 also entered into other
arrangements with Adaptec that provide for payments to the Company aggregating
$13 million, of which $10 million was earned in fiscal 1998, for assisting
Adaptec in research and development efforts.
The Company recorded a restructuring charge of $17 million during the third
quarter of fiscal 1998. Of this charge, $7 million related to a worldwide
workforce reduction of approximately 350 employees, which was completed during
the fourth quarter of fiscal 1998, in the manufacturing, selling and general and
administrative areas. This action is expected to result in annual savings of
approximately $10 million. In addition, the Company performed a review of its
business strategy and concluded that the key to success in the DSP market is to
focus on opportunities in the general-purpose DSP market that can provide
consistent growth, while at the same time being more selective in pursuing
vertical market DSP opportunities. As a result of this review, the Company
scaled back its efforts in some of the higher volume, lower margin, shorter life
cycle product areas and wrote off $10 million, which was the carrying value of
specific assets associated with these businesses.
Including the impact of both the restructuring charge and the net gain on the
sale of the disk drive IC business, the Company's operating income was 12.8% of
sales for fiscal 1998, compared to 18.8% for fiscal 1997. The Company's
operating income was 19.0% of sales for fiscal 1996.
The Company's equity interest in the WaferTech facility resulted in a loss of
$9.8 million in fiscal 1998, compared to income of $0.2 million in fiscal 1997.
This change was a result of increased costs incurred by WaferTech as they ramped
up their facility during fiscal 1998.
Due to a shift in the mix of worldwide income and the utilization of $5.6
million capital loss carryforwards for tax purposes, the effective income tax
rate decreased to 20.6% in fiscal 1998, from 24.4% in fiscal 1997. Accordingly,
the Company's valuation allowance was reduced from $5.6 million at November 1,
1997 to $0 at October 31, 1998.
2
<PAGE> 3
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 will be
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.
Net income before the cumulative effect of the change in accounting principle
decreased 33% to $119 million and diluted earnings per share was $0.71 for
fiscal 1998. Net income after the cumulative effect of the change in accounting
principle decreased 54% to $82 million and diluted earnings per share was $0.50
for fiscal 1998. Net income was $178 million in fiscal 1997 and $172 million in
fiscal 1996 and diluted earnings per share was $1.04 in fiscal 1997 and $1.03 in
fiscal 1996.
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" will be adopted in the first quarter of fiscal 1999 and the Company will
provide the additional disclosure as required. Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" also requires adoption in fiscal 1999 and the Company is in the
process of determining the effects of this disclosure on its consolidated
financial statements. In February 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 132, "Pension and Other
Postretirement Benefit Plans", which requires adoption in fiscal 1999 and the
Company will provide additional disclosure as required. In June 1998, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 133, (FAS 133), "Accounting for Derivative Instruments and Hedging
Activities", which requires adoption in periods beginning after June 15, 1999
and earlier adoption is permitted. The Company has not determined the timing of
the adoption of FAS 133 or the impact of such adoption on its financial
statements. In March 1998, Statement of Position, (SOP), 98-1 "Accounting for
the Cost of Computer Software Developed for or Obtained for Internal Use" was
issued. The Company is required to adopt SOP 98-1 in fiscal 2000. The Company
has not determined the timing of the adoption of SOP 98-1 or the impact of such
adoption on its financial statements.
The impact of inflation on the Company's business during the past three years
has not been significant.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1998, the Company had $305 million of cash, cash equivalents and
short-term investments compared to $341 million at November 1, 1997. The
Company's operating activities generated net cash of $225 million, or 18% of
sales, and $286 million, or 23% of sales, in fiscal 1998 and fiscal 1997,
respectively. Investing activities used $187 million in fiscal 1998 and $226
million in fiscal 1997 while financing activities used $62 million in fiscal
1998 and generated $15 million in fiscal 1997. The Company's primary source of
funds in fiscal 1998 and fiscal 1997 was net cash generated by operations.
Accounts receivable of $207 million at the end of fiscal 1998 decreased $49
million or 19% from $256 million at the end of fiscal 1997. This decrease
resulted principally from a $35 million decrease in sales from the fourth
quarter of fiscal 1997 to the fourth quarter of fiscal 1998 and a reduction in
the number of days sales outstanding from 70 at the end of fiscal 1997 to 63 at
the end of fiscal 1998. As a percentage of annualized fourth quarter sales,
accounts receivable was 17.4% at the end of fiscal 1998, down from 19.2% at the
end of fiscal 1997.
3
<PAGE> 4
Inventories rose $49 million or 22% over the prior year to $275 million at the
end of fiscal 1998. Inventories as a percentage of annualized fourth quarter
sales increased to 23% for the year ended October 31, 1998 from 17% for the year
ended November 1, 1997. Most of the increase occurred in the first half of
fiscal 1998 in anticipation of increased demand. When demand declined in the
second half of fiscal 1998, production rates were curtailed and the inventory
levels were held relatively flat.
Accounts payable and accrued liabilities at the end of fiscal 1998 decreased $34
million or 20% compared to the balance at the end of fiscal 1997, due
principally to decreased expense activity related to lower revenue and tighter
cost constraints as well as decreased capital expenditures in the fourth quarter
of fiscal 1998 when compared to the year earlier period.
The Company continued to improve its manufacturing facilities during fiscal 1998
and incurred capital expenditures of $167 million during the year, down from the
$179 million incurred in fiscal 1997. The Company currently plans to make
capital expenditures of approximately $100 million in fiscal 1999, primarily in
connection with the continued improvement of its manufacturing facilities.
Depreciation expense is expected to increase to approximately $140 million in
fiscal 1999.
During fiscal 1998, the Company made the final payment of $56 million in
accordance with a previous joint venture agreement with Taiwan Semiconductor
Manufacturing Co., Ltd., (TSMC), and other investors for the construction and
operation of a semiconductor fabrication facility in Camas, Washington. For a
total investment of $140 million, the Company acquired an 18% equity ownership
in the joint venture, known as WaferTech. The first installment of $42 million
was paid in fiscal 1996, and the second installment of $42 million was paid in
fiscal 1997. Subsequent to the year ended October 31, 1998, the Company
concluded an agreement to sell 14% of its 18% equity ownership in WaferTech, for
cash equal to the carrying value of the 14% equity ownership at October 31,
1998, to other WaferTech partners. This sale is expected to be completed by the
end of the first quarter of fiscal 1999.
In fiscal 1998, financing activities used cash of $62 million and this included
$84 million used to buy back 4.4 million shares of the Company's common stock at
an average price of $19.13 per share. In May and October 1998, the Board of
Directors authorized the Company to repurchase up to 4 million and 8 million
shares, respectively, of common stock over the succeeding 12 months. The
issuance of common stock under stock purchase and stock option plans generated
cash of $28 million, and $12 million of cash was used for the repayment of
capital lease obligations.
At October 31, 1998, the Company's principal sources of liquidity included $305
million of cash, cash equivalents and short-term investments. Short-term
investments at the end of fiscal 1998 consisted of commercial paper,
certificates of deposit and Euro time deposits with maturities greater than
three months and less than six months at the time of acquisition. The Company
also has various lines of credit both in the U.S. and overseas, including a $60
million credit facility in the U.S. which expires in 2000, all of which were
substantially unused at the end of fiscal 1998. At the end of fiscal 1998, the
Company's debt-to-equity ratio was 31%.
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.
QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
The Company has fixed rate debt obligations and related interest rate swap and
cap agreements. An increase in interest rates would not significantly increase
interest expense due to the fixed nature of the Company's debt obligations.
Because of the size and structure of these obligations, a 100 basis point
increase in interest rates would not result in a material change in the
Company's interest expense or the fair value of the debt obligations and related
interest rate swap and cap agreements. The fair value of the Company's
investment portfolio or related interest income would not be significantly
impacted by either a 100 basis point increase or decrease in interest rates due
mainly to the short-term nature of the major portion of the Company's investment
portfolio and the relative insignificance of interest income to consolidated
pre-tax income, respectively.
As more fully described in Note 2 (g) in the Notes to the Company's Consolidated
Financial Statements, the Company regularly hedges its non-U.S. dollar-based
exposures by entering into forward foreign exchange contracts, foreign currency
option contracts and currency swap agreements. The terms of these contracts
typically are for periods matching the duration of the underlying exposure and
generally range from three months up to one year. The short-term nature of
4
<PAGE> 5
these contracts has resulted in these instruments having insignificant fair
values at October 31, 1998 and November 1, 1997. The Company's largest foreign
currency exposure is against the Japanese yen, primarily because Japan has a
higher proportion of local currency denominated sales. Relative to foreign
currency exposures existing at October 31, 1998 and November 1, 1997, a 10%
unfavorable movement in foreign exchange rates would not expose the Company to
significant losses in earnings or cash flows or significantly diminish the fair
value of its foreign currency financial instruments, primarily due to the short
lives of the affected financial instruments that effectively hedge substantially
all of the Company's year-end exposures to fluctuations in foreign currency
exchange rates. The calculation assumes that each exchange rate would change in
the same direction relative to the U.S. dollar. In addition to the direct
effects of changes in exchange rates, such changes typically affect the volume
of sales or the foreign currency sales price as competitors' products become
more or less attractive. The Company's sensitivity analysis of the effects of
changes in foreign currency exchange rates does not factor in a potential change
in sales levels or local currency selling prices.
LITIGATION
For information concerning certain pending litigation involving the Company, see
Note 11 of the Notes to the Company's Consolidated Financial Statements.
FORWARD-LOOKING STATEMENTS
The "Management Analysis" and other sections of this report contain
forward-looking statements that are based on current expectations, estimates,
forecasts and projections about the industry and markets in which the Company
operates, management's beliefs and assumptions made by management. In addition,
other written or oral statements which constitute forward-looking statements may
be made by or on behalf of the Company. Words such as "expects", "anticipates",
"intends", "plans", "believes", "seeks", "estimates", variations of such words
and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions which are difficult to
predict. (See "Factors Which May Affect Future Results" below.) Therefore,
actual outcomes and results may differ materially from what is expressed or
forecasted in such forward-looking statements. The Company undertakes no
obligation to update publicly any forward-looking statements, whether as a
result of new information, future events or otherwise.
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, such as the recent
economic downturn in Southeast Asia and the outcome and impact of the Year 2000.
In addition, the semiconductor market has historically been cyclical and subject
to significant economic downturns at various times. The Company 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
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
5
<PAGE> 6
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 increased substantially its manufacturing capacity through both
expansion of its production facilities and increased access to third-party
foundries. However, the Company can give no assurance that it will not encounter
unanticipated production problems at either its own facilities or at third-party
foundries, or that the increased capacity will be sufficient to satisfy demand
for its products. The Company relies, and plans to continue to rely, on assembly
and test subcontractors and on third-party wafer fabricators to supply most of
its wafers that can be manufactured using industry-standard digital processes,
and such reliance involves several risks, including reduced control over
delivery schedules, manufacturing yields and costs. In addition, the Company's
capacity additions resulted in a significant increase in operating expenses, and
if revenue levels do not increase to offset these additional expense levels, the
Company's future operating results could be adversely affected. In addition,
asset values could be impaired if the additional capacity is underutilized for
an extended period of time. Also, non-compliance with "take or pay" covenants in
certain of its supply agreements, could adversely impact operating results. The
Company's business is subject to rapid technological changes and there can be no
assurance that products stocked in inventory will not be rendered obsolete
before they are shipped by the Company. The Company also believes that other
semiconductor manufacturers have expanded their production capacity over the
past several years, and there can be no assurance that the expansion by the
Company and its competitors will not lead to overcapacity in the Company's
target markets, which could lead to price erosion that would adversely affect
the Company's operating results.
In fiscal 1998, 50% 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 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 in one of these
suppliers. In addition, the Company's major partner in its joint venture,
WaferTech, is TSMC which is located in the SEA region. As well as being exposed
to the ongoing economic cycles in this industry, the Company is also subject to
the economic and political risks inherent in international operations, including
the risks associated with the ongoing uncertainties in the economies in SEA.
These risks include air transportation disruptions, expropriation, currency
controls and changes in currency exchange rates, tax and tariff rates and
freight rates. Although the Company engages in certain hedging transactions to
reduce its exposure to currency exchange rate fluctuations, there can be no
assurance that the Company's competitive position will not be adversely affected
by changes in the exchange rate of the U.S. dollar against other currencies.
The semiconductor industry is characterized by frequent claims and litigation
involving patent and other intellectual property rights. The Company has from
time to time received, and may in the future receive, claims from third parties
asserting that the Company's products or processes infringe their patents or
other intellectual property rights. In the event a third party makes a valid
intellectual property claim and a license is not available on commercially
reasonable terms, the Company's operating results could be materially and
adversely affected. Litigation may be necessary to enforce patents or other
intellectual property rights of the Company or to defend the Company against
claims of infringement, and such litigation can be costly and divert the
attention of key personnel. See Note 11 of the Notes to the Company's
Consolidated Financial Statements, 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.
6
<PAGE> 7
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 compliant hardware and
software running on many of its major platforms.
The Company has made the year 2000 issue a significant priority and a task force
is engaged in the ongoing effort to reduce the year 2000 related risk in the
balance of the Company's systems and equipment. It is estimated that the cost of
this project, which essentially 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 December 31, 1998 is summarized below.
Centrally Managed Global Systems
Centrally managed global systems are the enterprisewide, centrally managed
operating systems, which include customer service, customer order entry,
work-in-progress (WIP) tracking, warehousing, production planning, and financial
systems. These systems have been split into "mission critical" and "non-mission
critical". Mission critical is defined as systems that can seriously impair the
Company's ability to conduct its business. Of the 15 mission critical
applications identified as of August 1, 1998, three systems were not Y2K
compliant, Promis (WIP tracking), the order entry system in Japan and the
Electronic Data Interchange (EDI) translator. Since that time Promis system
upgrades have been completed in three of the five manufacturing sites, and the
remaining two are scheduled to be upgraded in early 1999. Also scheduled in
early 1999 is the migration to SAP for order entry in Japan and the upgrade of
the EDI translator. These actions will result in 100% compliance for mission
critical systems. In addition, several mission critical systems, such as SAP,
Forecasting, Data Warehouse and Distributor Management systems have been
specifically tested and certified to be year 2000 compliant. The Company is on
schedule towards retiring its non-compliant mainframe in early 1999. Non-mission
critical is defined as systems which would not cause serious impairment to the
organization. The task force is continually reviewing and re-prioritizing the
non-mission critical systems to ensure that the appropriate items are receiving
the proper attention.
Design and Engineering Systems
The Company's Computer Aided Design (CAD) Council is leading a worldwide year
2000 compliancy review of hardware and software related to design and
engineering systems. The team has completed its analysis and the required
changes to CAD operating systems are underway. The systems are expected to be
compliant in early 1999, even though some reporting tools will not be available
until June 1999. Critical CAD applications software packages have all been
certified Y2K compliant. Migration to these new packages, however, will proceed
over the next 8 to 10 months. The Company believes that if all design
engineering systems are not compliant in time, this will result in inconvenience
and inefficiencies rather than any significant risk to operations.
Site Based Manufacturing Systems
Manufacturing site managers are committed to ensuring a successful transition of
operations in the year 2000. All critical manufacturing equipment has been
identified and analyzed. The analysis process includes ensuring that date
compliance is necessary. The Company is considering "rolling back" the internal
date mechanism as a contingency plan for some equipment and the task force is in
the process of testing the effects of this solution. All manufacturing sites are
performing Y2K compliance testing and this effort is expected to continue
through the first quarter of fiscal 1999. All testing is being done to the
latest vendor specifications and by using the suite of test programs provided by
Sematech, a semiconductor research organization. Thus far, no crucial piece of
equipment has been identified where there is a Y2K compliance problem for which
no solution exists. In all instances where a Y2K compliance issue has arisen,
the Company has been able to develop a solution, without having to replace the
equipment. While the review is not yet complete, the Company does not foresee
any manufacturing equipment-related obstacles which would prevent the
continuation of operations in Year 2000.
7
<PAGE> 8
Personal Computers (PCs)
The Company has a PC Standards Committee, comprised of participants from various
Company locations. This committee has selected a tool and developed a hardware
and software certification plan. This plan requires certification of PC Basic
Input/Output System (BIOS), software applications and user files. The Company
has targeted the first quarter of 1999 to certify the BIOS on its 3,500
networked PCs and will issue a tool to assist users to analyze their data files
for potential year 2000 issues. In addition, a year 2000 "patch" is available
for the Microsoft Office Suite (Excel, Word and Access) and this is scheduled to
be implemented in April 1999. The Company does not foresee any year 2000 issues
in this area.
Facility Related Systems
Systems such as heating, sprinklers, elevators and card-key access are also
being reviewed by site teams. Each team has a designated facilitator and there
are representatives from each department participating. All of the teams have
taken a thorough inventory of their site's systems and the Company expects to be
100% compliant by December 31, 1999 with 80% of the facility systems to be
compliant by the second quarter of 1999.
Third Party
The corporate year 2000 task force is also reviewing third-party connectivity
issues. The Company's EDI translator supplier, Harbinger, has been successfully
tested for Y2K compliance. The EDI carrier, GEIS, has notified the Company that
it is compliant as well. Other external service providers, primarily financial
and human resource services, as well as outside vendors, have also been surveyed
as to their state of readiness and most expect to be Y2K compliant. In addition,
the Company was able to test its financial interface for Y2K compliance with its
major financial services provider and the results were successful.
The Company currently believes that its most reasonably likely worst case year
2000 scenario would relate to problems with systems of third parties which would
create the greatest risks with infrastructure, including water and sewer
services, electricity, transportation, telecommunications and critical supplies
or raw materials and spare parts. Because the Company's ability to eliminate
these problems is limited, contingency plans are limited to ensuring that
adequate supplies of critical raw materials and spare parts are in stock at
December 31, 1999. 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.
All trademarked Analog Devices products are the property of Analog Devices Inc.
All other trademarks are the property of their respective holders.
8
<PAGE> 1
Exhibit 13.2
ANALOG DEVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended October 31, 1998, November 1, 1997 and November 2, 1996
(thousands except per share amounts) 1998 1997 1996
=======================================================================================================================
<S> <C> <C> <C>
REVENUE Net sales.............................................. $ 1,230,571 $ 1,243,494 $ 1,193,786
COSTS AND Cost of sales.......................................... 642,085 622,531 592,936
EXPENSES ------------ ------------- ------------
Gross margin........................................... 588,486 620,963 600,850
Operating expenses:
Research and development............................ 219,354 196,148 177,772
Selling, marketing, general
and administrative................................ 207,487 191,613 195,842
Restructuring charge................................ 17,000 - -
Gain on sale of business............................ (13,100) - -
------------ ------------- ------------
430,741 387,761 373,614
Operating income....................................... 157,745 233,202 227,236
Equity in loss (income) of WaferTech................... 9,780 (214) 97
Nonoperating (income) expenses:
Interest expense.................................... 11,229 12,507 11,289
Interest income..................................... (16,838) (16,178) (16,535)
Other............................................... 3,115 1,208 1,645
------------ ------------- ------------
(2,494) (2,463) (3,601)
------------ ------------- ------------
EARNINGS Income before income taxes............................. 150,459 235,879 230,740
Provision for income taxes:
Payable currently................................... 43,343 63,794 52,115
Deferred ........................................... (12,372) (6,134) 6,724
------------ ------------- ------------
30,971 57,660 58,839
------------ ------------- ------------
Net income before cumulative effect of change in
accounting principle................................ 119,488 178,219 171,901
------------ ------------- ------------
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................................ $ 82,408 $ 178,219 $ 171,901
============ ============= ============
Shares used to compute earnings per share - Basic...... 161,574 159,594 153,362
============ ============= ============
Shares used to compute earnings per share - Diluted.... 177,875 177,309 171,377
============ ============= ============
Earnings per share before cumulative effect of change
in accounting principle
Earnings per share - Basic............................. $0.74 $1.13 $1.12
============ ============= ============
Earnings per share - Diluted........................... $0.71 $1.04 $1.03
============ ============= ============
Earnings per share after cumulative effect of change
in accounting principle
Earnings per share - Basic............................. $0.51 $1.13 $1.12
============ ============= ===========
Earnings per share - Diluted........................... $0.50 $1.04 $1.03
============ ============= ===========
</TABLE>
See accompanying notes.
9
<PAGE> 2
ANALOG DEVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, 1998 and November 1, 1997
(thousands except share amounts)
ASSETS 1998 1997
=======================================================================================================================
<S> <C> <C>
CURRENT Cash and cash equivalents............................................. $ 263,331 $ 289,601
ASSETS Short-term investments................................................ 41,575 51,006
Accounts receivable less allowances of $32,332
($40,007 in 1997)................................................... 207,361 255,886
Inventories........................................................... 275,076 225,966
Deferred tax assets................................................... 98,148 54,761
Prepaid expenses and other current assets............................. 18,038 18,209
---------- ----------
Total current assets.................................................. 903,529 895,429
---------- ----------
PROPERTY, Land and buildings.................................................... 158,792 145,952
PLANT AND Machinery and equipment............................................... 1,034,619 938,602
EQUIPMENT, Office equipment...................................................... 70,576 58,714
AT COST Leasehold improvements................................................ 103,482 87,407
---------- ----------
1,367,469 1,230,675
Less accumulated depreciation and amortization........................ 664,038 569,040
---------- ----------
Net property, plant and equipment..................................... 703,431 661,635
---------- ----------
OTHER Investments........................................................... 187,224 131,468
ASSETS Intangible assets, net................................................ 15,815 14,768
Other assets.......................................................... 51,731 60,553
---------- ----------
Total other assets.................................................... 254,770 206,789
---------- ----------
$1,861,730 $1,763,853
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
=======================================================================================================================
CURRENT Short-term borrowings and current portion of
LIABILITIES long-term debt...................................................... $ 193 $ -
Obligations under capital leases...................................... 14,266 11,733
Accounts payable...................................................... 59,115 97,654
Deferred income on shipments to distributors.......................... 113,784 37,013
Income taxes payable.................................................. 53,595 52,550
Accrued liabilities................................................... 79,906 75,444
---------- ----------
Total current liabilities............................................. 320,859 274,394
---------- ----------
NONCURRENT Long-term debt........................................................ 309,985 310,000
LIABILITIES Noncurrent obligations under capital leases........................... 30,773 38,852
Deferred income taxes................................................. 31,789 20,740
Other noncurrent liabilities.......................................... 39,935 31,737
---------- ----------
Total noncurrent liabilities.......................................... 412,482 401,329
---------- ----------
Commitments and Contingencies
STOCKHOLDERS' Preferred stock, $1.00 par value, 500,000 shares
EQUITY authorized, none outstanding........................................ - -
Common stock, $0.16 2/3 par value, 600,000,000
shares authorized, 164,092,719 shares issued
(161,941,094 in 1997)............................................... 27,349 26,991
Capital in excess of par value, net of deferred
compensation of $9,291 ($6,343 in 1997)............................ 248,970 223,885
Retained earnings..................................................... 913,992 831,584
Cumulative translation adjustment..................................... 6,025 6,724
---------- ----------
1,196,336 1,089,184
Less 3,782,763 shares in treasury, at cost
(35,094 in 1997).................................................... 67,947 1,054
---------- ----------
Total stockholders' equity............................................ 1,128,389 1,088,130
---------- ----------
$1,861,730 $1,763,853
========== ==========
</TABLE>
See accompanying notes.
10
<PAGE> 3
ANALOG DEVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years ended October 31, 1998,
November 1, 1997 and November 2, 1996 COMMON STOCK CAPITAL IN CUMULATIVE TREASURY STOCK
------------------ EXCESS OF RETAINED TRANSLATION ----------------
(THOUSANDS) SHARES AMOUNT PAR VALUE EARNINGS ADJUSTMENT SHARES AMOUNT
===============================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, October 28,
1995 114,584 $19,098 $149,775 $481,464 $ 5,870 (52) $ (241)
- -------------------------------------------------------------------------------------------------------------------------------
ACTIVITY Net income - 1996 171,901
IN FISCAL Issuance of stock under
1996 stock plans and other,
net of repurchases 2,228 371 15,474 52 241
Exercise of warrants 2,250 375 11,721
Compensation recognized
under Restricted Stock Plan 1,949
Tax benefit on exercise of non-
qualified stock options and
disqualifying dispositions
under stock plans 4,052
Four-for-three stock split 39,683 6,614 (6,614)
Currency translation
adjustment 785
- -------------------------------------------------------------------------------------------------------------------------------
Balance, November 2,
1996 158,745 26,458 176,357 653,365 6,655 - -
- -------------------------------------------------------------------------------------------------------------------------------
ACTIVITY Net income - 1997 178,219
IN FISCAL Issuance of stock under
1997 stock plans and other,
net of repurchases 3,196 533 19,446 (35) (1,054)
Compensation recognized
under Restricted Stock Plan 2,309
Tax benefit on exercise of non-
qualified stock options and
disqualifying dispositions
under stock plans 25,773
Currency translation
adjustment 69
- -------------------------------------------------------------------------------------------------------------------------------
Balance, November 1,
1997 161,941 26,991 223,885 831,584 6,724 (35) (1,054)
- -------------------------------------------------------------------------------------------------------------------------------
ACTIVITY Net income - 1998 82,408
IN FISCAL Issuance of stock under
1998 stock plans and other,
net of repurchases 2,152 358 8,738 652 17,299
Compensation recognized
under Restricted Stock Plan 2,918
Tax benefit on exercise of non-
qualified stock options and
disqualifying dispositions
under stock plans 13,429
Repurchase of common stock (4,400) (84,192)
Currency translation
adjustment (699)
- -------------------------------------------------------------------------------------------------------------------------------
Balance, October 31,
1998 164,093 $27,349 $248,970 $913,992 $ 6,025 (3,783) $(67,947)
===============================================================================================================================
</TABLE>
See accompanying notes.
11
<PAGE> 4
ANALOG DEVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended October 31, 1998, November 1, 1997 and November 2, 1996
(thousands) 1998 1997 1996
=======================================================================================================================
<S> <C> <C> <C> <C>
OPERATIONS Cash flows from operations:
Net income ............................................ $ 82,408 $ 178,219 $ 171,901
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....................... 127,560 103,554 83,809
Noncash portion of restructuring costs.............. 10,000 - -
Gain on sale of business............................ (13,100) - -
Equity in loss of WaferTech, net of dividends....... 10,907 211 97
Deferred income taxes............................... (12,372) (6,134) 6,565
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable.......... 51,061 (25,129) (67,744)
Increase in inventories............................. (48,883) (7,739) (76,748)
Decrease (increase) in prepaid expenses and other
current assets.................................. 240 (3,605) (4,782)
Increase in investments - trading................... (7,319) (8,965) -
Increase in accounts payable,
deferred income and accrued liabilities......... (31,840) 4,828 24,728
Increase in income taxes payable.................... 14,476 32,916 425
Increase in other liabilities....................... 4,467 17,584 5,563
---------- ---------- ----------
Total adjustments...................................... 142,277 107,521 (28,087)
---------- ---------- ----------
Net cash provided by operations........................... 224,685 285,740 143,814
---------- ---------- ----------
INVESTMENTS Cash flows from investments:
Additions to property, plant and equipment, net........ (166,911) (179,374) (234,099)
Purchase of short-term investments available for sale.. (143,449) (153,269) (262,648)
Maturities of short-term investments available for sale 152,880 192,073 254,648
Long-term investments.................................. (56,110) (51,599) (54,499)
Proceeds from sale of business......................... 27,000 - -
Increase in other assets............................... (370) (33,650) (8,971)
---------- ---------- ----------
Net cash used for investments............................. (186,960) (225,819) (305,569)
---------- ---------- ----------
FINANCING Cash flows from financing activities:
ACTIVITIES Repurchase of common stock............................. (84,192) - -
Proceeds from employee stock plans..................... 27,638 19,283 14,028
Payments on capital lease obligations.................. (11,640) (11,164) (7,227)
Proceeds from equipment financing...................... 6,094 7,123 61,793
Net increase (decrease) in variable rate borrowings.... 60 (109) (3,580)
Proceeds from issuance of long-term debt............... - - 224,385
Proceeds from warrants exercised....................... - - 12,096
---------- ---------- ----------
Net cash provided by (used for) financing activities...... (62,040) 15,133 301,495
---------- ---------- ----------
Effect of exchange rate changes on cash................... (1,955) 4,438 1,066
---------- ---------- ----------
Net (decrease) increase in cash and cash equivalents...... (26,270) 79,492 140,806
Cash and cash equivalents at beginning of year............ 289,601 210,109 69,303
---------- ---------- ----------
Cash and cash equivalents at end of year.................. $ 263,331 $ 289,601 $ 210,109
========== ========== ==========
SUPPLE- Cash paid during the year for:
MENTAL Income taxes........................................... $ 23,582 $ 27,621 $ 52,541
INFORMATION ========== ========== ==========
Interest............................................... $ 15,535 $ 16,158 $ 10,171
========== ========== ==========
</TABLE>
See accompanying notes.
12
<PAGE> 5
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1998, NOVEMBER 1, 1997 AND NOVEMBER 2, 1996
(ALL TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1. DESCRIPTION OF BUSINESS
Analog Devices, Inc. (Analog, ADI or the Company) is a semiconductor company
that designs, manufactures and markets high-performance integrated circuits
(ICs) used in analog and digital signal processing (DSP). Nearly all of ADI's
products are components, which are typically incorporated by original equipment
manufacturers (OEMs) in a wide range of equipment and systems for use in
communications, computer, industrial, instrumentation, military/aerospace,
automotive and high-performance consumer electronics applications.
The Company's principal products include general-purpose, standard-function
analog and mixed-signal ICs and DSP ICs. DSP ICs include general-purpose digital
signal processing ICs and application-specific devices that typically
incorporate analog and mixed-signal circuitry and a DSP core.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
all of its wholly owned subsidiaries. Upon consolidation, all significant
intercompany accounts and transactions are eliminated. The Company's fiscal year
ends on the Saturday closest to the last day in October. Fiscal years 1998 and
1997 were each 52 week years, while 1996 was a 53 week year.
Certain amounts reported in previous years have been reclassified to conform to
the 1998 presentation, such reclassifications were immaterial.
b. CASH, CASH EQUIVALENTS AND INVESTMENTS
Cash and cash equivalents are highly liquid investments with insignificant
interest rate risk and maturities of three months or less at the time of
acquisition. Investments with maturities between three and twelve months at time
of acquisition are considered short-term investments. Cash, cash equivalents and
short-term investments consist primarily of commercial paper, but also include
certificates of deposit and bankers' acceptances. Long-term investments consist
of equity securities as well as bank money market funds and other deposits.
The Company classifies its investments in debt and equity securities as
"held-to-maturity," "available-for-sale," and "trading" at the time of purchase
and such designation is evaluated as of each balance sheet date.
Held-to-maturity securities, which are carried at amortized cost, include only
those securities the Company has the positive intent and ability to hold to
maturity. Securities, such as bank time deposits, which by their nature are
typically held to maturity, are classified as such. While it is the intent of
management to hold securities to maturity, unforeseen events, while not
generally expected, could cause the Company to liquidate certain securities
prior to maturity. Accordingly, those securities which could readily be sold
back to the seller are classified as available-for-sale or trading.
Available-for-sale securities are carried at fair value with unrealized gains
and losses, net of related tax, if any, reported as a separate component of
stockholders' equity. Realized gains and losses, declines in value judged to be
"other than temporary," as well as interest, dividends and capital gains
distributions on all securities are included in earnings.
Cash equivalents and short-term investments classified as available-for-sale
were $241 million and $300 million at October 31, 1998 and November 1, 1997,
respectively and those classified as held-to-maturity were $42 million and $17
million at October 31, 1998 and November 1, 1997, respectively. All of these
securities have contractual maturities of six months or less at time of
acquisition. Because of the short term to maturity, and hence relative price
insensitivity to changes in market interest rates, amortized cost approximates
fair value for all of these securities. As such, no unrealized gains or losses
were recorded during each of these years. Long-term investments classified as
available-for-sale were $13 million and held-to-maturity were $2 million at
November 1, 1997, and there were no long-term investments with either of these
classifications at October 31, 1998.
13
<PAGE> 6
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Realized and unrealized gains and losses on equity securities classified as
available-for-sale during fiscal 1998 and fiscal 1997 were not material.
Long-term investments classified as trading were $30 million and $9 million at
October 31, 1998 and November 1, 1997, respectively and were based on published
market quotes on October 30, 1998 and October 31, 1997. In both fiscal years,
these investments primarily consisted of equity securities. Gross realized and
unrealized gains and losses from trading securities were not material in fiscal
1998 and fiscal 1997.
c. INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out method) or
market. Inventories at October 31, 1998 and November 1, 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 25,624 $ 31,526
Work in process 142,139 128,187
Finished goods 107,313 66,253
- --------------------------------------------------------------------------------
Total inventories $ 275,076 $ 225,966
================================================================================
</TABLE>
d. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost less allowances for
depreciation and amortization. The straight-line method of depreciation is used
for all classes of assets for financial statement purposes; both straight-line
and accelerated methods are used for income tax purposes. Capitalized leases and
leasehold improvements are amortized based upon the lesser of the term of the
lease or the useful life of the asset. Depreciation and amortization are based
on the following useful lives:
<TABLE>
<S> <C>
Buildings & Building Equipment Up to 25 years
Machinery & Equipment 3-10 years
Office Equipment 3-8 years
</TABLE>
Total depreciation and amortization of property, plant and equipment was
$124,735,000, $101,432,000 and $81,740,000 in fiscal 1998, 1997 and 1996,
respectively. Property, plant and equipment included $75,006,000 and $68,912,000
of capitalized leases in 1998 and 1997, net of $23,679,000 and $13,859,000
respectively, of accumulated depreciation.
e. GRANT ACCOUNTING
The Company's manufacturing facility in Limerick, Ireland has received various
grants from the Industrial Development Authority of the Republic of Ireland.
These grants include capital, employment, and research and development grants.
Capital grants for the acquisition of property and equipment are netted against
the related capital expenditures and amortized as a credit to depreciation
expense over the useful life of the related asset. Employment grants, which
relate to employee hiring and training, and research and development grants are
recognized in earnings in the period in which the related expenditures are
incurred by the Company.
f. TRANSLATION OF FOREIGN CURRENCIES
The functional currency for the Company's foreign sales operations is the
applicable local currency. Gains and losses resulting from translation of these
foreign currencies into U.S. dollars are accumulated in a separate component of
stockholders' equity. Transaction gains and losses are included in income
currently, including those at the Company's principal foreign manufacturing
operations where the functional currency is the U.S. dollar. Foreign currency
transaction gains or losses included in other expenses, net, were not material
in fiscal 1998, 1997 and 1996.
14
<PAGE> 7
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
g. FOREIGN CURRENCY INSTRUMENTS AND INTEREST RATE AGREEMENTS
The Company enters into forward foreign exchange contracts, foreign currency
option contracts and currency swap agreements to offset certain operational and
balance sheet exposures from changes in foreign currency exchange rates. Such
exposures result from the portion of the Company's operations, assets and
liabilities that are denominated in currencies other than the U.S. dollar,
primarily Japanese yen and European currencies. These foreign exchange contract,
option and swap transactions are entered into to support product sales,
purchases and financing transactions made in the normal course of business, and
accordingly, are not speculative in nature.
Forward foreign exchange contracts are utilized to manage the risk associated
with currency fluctuations on certain firm sales and purchase commitments
denominated in foreign currencies and certain non-U.S. dollar denominated asset
and liability positions. The Company's forward foreign exchange contracts are
primarily denominated in Japanese yen and certain European currencies and are
for periods consistent with the terms of the underlying transactions, generally
one year or less. The forward foreign exchange contracts that relate to firm,
foreign currency sales and purchase commitments are designated and effective as
hedges of firm, identifiable foreign currency commitments, and accordingly, the
gains and losses resulting from the impact of currency exchange rate movements
on these contracts are not recognized in operations until the underlying hedged
transactions are recognized. Upon recognition, such gains and losses are
recorded in operations as an adjustment to the carrying amount of the underlying
transactions in the period in which these transactions are recognized.
Unrealized gains and losses resulting from the impact of currency exchange rate
movements on forward foreign exchange contracts designated to offset certain
non-U.S. dollar denominated assets and liabilities are recognized as other
income or expense in the period in which the exchange rates change and offset
the foreign currency gains and losses on the underlying exposures being hedged.
The contract amounts of forward foreign exchange contracts outstanding were $140
million and $163 million at October 31, 1998 and November 1, 1997, respectively.
The Company also may periodically enter into foreign currency option contracts
to offset certain probable anticipated, but not firmly committed, foreign
currency transactions related to the sale of product during the ensuing nine
months. When the dollar strengthens significantly against the foreign
currencies, the decline in value of future currency cash flows is partially
offset by the gains in value of the purchased currency options designated as
hedges. Conversely, when the dollar weakens, the increase in value of future
foreign currency cash flows is reduced only by the premium paid to acquire the
options. The Company's foreign currency option contracts are primarily
denominated in Japanese yen and generally have maturities which do not exceed
six months. These foreign currency option contracts are designated and effective
as hedges of anticipated foreign currency sales transactions, and accordingly,
the premium cost and any realized gains associated with these contracts are
deferred and included in the consolidated balance sheet as prepaid expenses and
accrued liabilities, respectively, until such time as the underlying sales
transactions are recognized. Upon recognition, such premium costs and any
realized gains are recorded in sales as a component of the underlying sales
transactions being hedged. The contract amounts of foreign currency option
contracts outstanding were $26 million and $29 million, at October 31, 1998 and
November 1, 1997, respectively. Deferred gains or losses attributable to foreign
currency option contracts were not material at October 31, 1998 and November 1,
1997.
The Company uses currency swap agreements to hedge the value of its net
investment in certain of its foreign subsidiaries. Realized and unrealized gains
and losses on such agreements related to the net foreign investment being hedged
are recognized in the cumulative translation adjustment component of
stockholders' equity, with the related amounts due to or from counterparties
included in accrued liabilities or other current assets. The contract amount of
currency swap agreements outstanding, which were principally denominated in
Japanese yen, was $10.0 million at October 31, 1998 and November 1, 1997. The
currency swap agreement outstanding at October 31, 1998 has a remaining maturity
of 1.5 years and is expected to remain in effect until expiration.
15
<PAGE> 8
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company enters into interest rate swap and cap agreements to manage its
exposure to interest rate movements by effectively converting a portion of its
debt and certain financing arrangements from fixed to variable rates. Maturity
dates of interest rate swap and cap agreements generally match those of the
underlying debt or financing arrangements. These agreements, which have
maturities of up to nine years involve the exchange of fixed rate payments for
variable rate payments without the exchange of the underlying principal amounts.
Variable rates are based on six-month U.S. dollar LIBOR and are reset on a
semiannual basis. The differential between fixed and variable rates to be paid
or received is accrued as interest rates change in accordance with the
agreements and recognized over the life of the agreements as an adjustment to
interest expense. The notional principal amounts of interest rate swap and cap
agreements outstanding were approximately $50 million, at October 31, 1998 and
November 1, 1997.
The cash requirements of the above-described financial instruments approximate
their fair value. Cash flows associated with these financial instruments are
classified consistent with the cash flows from the transactions being hedged.
Derivative financial instruments involve, to a varying degree, elements of
market and credit risk not recognized in the consolidated financial statements.
The market risk associated with these instruments resulting from currency
exchange rate or interest rate movements is expected to offset the market risk
of the underlying transactions, assets and liabilities being hedged. The
counterparties to the agreements relating to the Company's foreign exchange and
interest rate instruments consist of a number of major international financial
institutions with high credit ratings. The Company does not believe that there
is significant risk of nonperformance by these counterparties because the
Company continually monitors the credit ratings of such counterparties, and
limits the financial exposure and the amount of agreements entered into with any
one financial institution. While the contract or notional amounts of derivative
financial instruments provide one measure of the volume of these transactions,
they do not represent the amount of the Company's exposure to credit risk. The
amounts potentially subject to credit risk (arising from the possible inability
of counterparties to meet the terms of their contracts) are generally limited to
the amounts, if any, by which the counterparties' obligations under the
contracts exceed the obligations of the Company to the counterparties.
h. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following estimated fair value amounts have been determined by the Company
using available market information and appropriate valuation methodologies.
However, considerable judgment is required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that the Company could realize in
a current market exchange.
<TABLE>
<CAPTION>
OCTOBER 31, 1998 NOVEMBER 1, 1997
---------------- ----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
=====================================================================================================================
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 263,331 $ 263,331 $ 289,601 $ 289,601
Short-term investments 41,575 41,575 51,006 51,006
Long-term investments 30,488 30,488 23,168 23,168
Liabilities:
Short-term borrowings (193) (193) - -
Long-term debt, including
current portion (309,985) (328,290) (310,000) (427,640)
Foreign Currency Instruments and
Interest Rate Agreements:
Interest rate swap
and cap agreements 14 1,201 (31) (413)
Forward foreign currency
exchange contracts (3,045) (1,575) 2,260 (400)
Foreign currency option
contracts 479 211 267 187
Currency swap agreements 1,325 1,324 1,632 1,363
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 9
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash, cash equivalents and investments-The carrying amounts of these items are a
reasonable estimate of their fair value due to the short term to maturity and
readily available market for these types of investments.
Short-term borrowings-The carrying amounts of these variable-rate borrowings
approximate fair value due to the short period of time to maturity.
Long-term debt-The fair value of long-term debt is estimated based on current
interest rates available to the Company for debt instruments with similar terms,
degree of risk and remaining maturities.
Interest rate swap and cap agreements-The fair value of interest rate swap and
cap agreements are obtained from dealer quotes. These values represent the
estimated amount the Company would receive or pay to terminate the agreements
taking into consideration current interest rates.
Forward foreign currency exchange contracts-The estimated fair value of forward
foreign currency exchange contracts is based on the estimated amount at which
they could be settled based on forward market exchange rates.
Foreign currency option contracts and currency swap agreements-The fair values
of foreign currency option contracts and currency swap agreements are obtained
from dealer quotes. These values represent the estimated net amount the Company
would receive or pay to terminate the agreements.
i. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingencies at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Such estimates relate to
the useful lives of fixed assets, allowances for doubtful accounts and customer
returns, inventory reserves, potential reserves relating to litigation matters,
accrued liabilities, and other reserves. Actual results could differ from those
estimates, and such differences may be material to the financial statements.
j. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of investments and trade accounts receivable.
The Company maintains cash, cash equivalents and short-term investments with
high credit quality financial institutions and monitors the amount of credit
exposure to any one financial institution.
The Company sells its products to distributors and original equipment
manufacturers involved in a variety of industries including industrial
automation, instrumentation, military/aerospace, and to an increasing degree,
communications, computers and peripherals, and high-performance consumer
electronics. The Company has adopted credit policies and standards to
accommodate growth in these markets. The Company performs continuing credit
evaluations of its customers' financial condition and although the Company
generally does not require collateral, letters of credit may be required from
its customers in certain circumstances. Reserves are provided for estimated
amounts of accounts receivable which may not be collected.
17
<PAGE> 10
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
k. CONCENTRATION OF OTHER RISKS
The semiconductor industry is characterized by rapid technological change,
competitive pricing pressures, and cyclical market patterns. The Company's
financial results are affected by a wide variety of factors, including general
economic conditions worldwide, economic conditions specific to the semiconductor
industry, the timely implementation of new manufacturing technologies, the
ability to safeguard patents and intellectual property in a rapidly evolving
market, and reliance on assembly and test subcontractors, third-party wafer
fabricators and independent distributors. In addition, the semiconductor market
has historically been cyclical and subject to significant economic downturns at
various times. The Company is exposed to the risk of obsolescence of its
inventory depending on the mix of future business. As a result, the Company may
experience significant period-to-period fluctuations in future operating results
due to the factors mentioned above or other factors.
l. REVENUE RECOGNITION
Revenue from product sales to end users is recognized upon shipment. As further
explained in Note 4, commencing in 1998, revenue on shipments to all
distributors is deferred until products are resold by the distributors to end
users. Prior to 1998, revenue on most shipments to domestic distributors was
deferred until resale to end users because arrangements with these distributors
included returns and price concessions which could not be reasonably estimated.
Revenue on all shipments to international distributors and certain shipments to
domestic distributors were recognized upon shipment to the distributor, with
appropriate provision of reserves for returns and allowances.
m. INCOME TAXES
Deferred tax assets and liabilities are determined based on the differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted income tax rates and laws that will be in effect when
the temporary differences are expected to reverse. Additionally, deferred tax
assets and liabilities are separated into current and noncurrent amounts based
on the classification of the related assets and liabilities for financial
reporting purposes.
n. STOCK-BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees with
an exercise price equal to the fair value of the shares at the date of grant.
The Company accounts for stock option grants in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees" and accordingly, recognizes no
compensation expense for the stock option grants.
o. EARNINGS PER SHARE OF COMMON STOCK
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share," in the first quarter of fiscal 1998. The Company changed
the method used to compute earnings per share and restated 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 options 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 earnings per share 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:
18
<PAGE> 11
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1998 1997 1996
=======================================================================================================================
<S> <C> <C> <C>
Basic:
Income before cumulative effect of change in
accounting principle $ 119,488 $ 178,219 $ 171,901
Cumulative effect of change in accounting principle (37,080) - -
----------- ----------- -----------
Net income 82,408 178,219 171,901
=========== =========== ===========
Weighted shares outstanding 161,574 159,594 153,362
=========== =========== ===========
Earnings per share:
Income before cumulative effect of change in
accounting principle $0.74 $1.13 $1.12
Cumulative effect of change in accounting principle (0.23) - -
----------- ----------- -----------
Net income $0.51 $1.13 $1.12
=========== =========== ===========
Diluted:
Income before cumulative effect of change in
accounting principle $ 119,488 $ 178,219 $ 171,901
Interest related to convertible subordinated notes,
net of tax 5,686 5,700 4,990
----------- ----------- -----------
Income before cumulative effect of change in accounting
principle including the effect of dilutive securities 125,174 183,919 176,891
----------- ----------- -----------
Cumulative effect of change in accounting principle (37,080) - -
----------- ----------- -----------
Net income $ 88,094 $ 183,919 $ 176,891
=========== =========== ===========
Weighted shares outstanding 161,574 159,594 153,362
Assumed exercise of common stock equivalents 5,317 6,730 8,459
Assumed conversion of subordinated notes 10,984 10,985 9,556
----------- ----------- -----------
Weighted average common and common equivalent shares 177,875 177,309 171,377
=========== =========== ===========
Earnings per share:
Income before cumulative effect of change in
accounting principle $0.71 $1.04 $1.03
Cumulative effect of change in accounting principle (0.21) - -
----------- ----------- -----------
Net income $0.50 $1.04 $1.03
=========== =========== ===========
=======================================================================================================================
</TABLE>
p. NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" will be adopted in the first quarter of fiscal 1999 and the Company will
provide the additional disclosure as required. Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" also requires adoption in fiscal 1999 and the Company is in the
process of determining the effects of this disclosure on its consolidated
financial statements. In February 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 132, "Pension and Other
Postretirement Benefit Plans", which requires adoption in fiscal 1999 and the
Company will provide additional disclosure as required. In June 1998, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 133, (FAS 133), "Accounting for Derivative Instruments and Hedging
Activities", which requires adoption in periods beginning after June 15, 1999
and earlier adoption is permitted. The Company has not determined the timing of
the adoption of FAS 133 or the impact of such adoption on its financial
statements. In March 1998, Statement of Position, (SOP), 98-1 "Accounting for
the Cost of Computer Software Developed for or Obtained for Internal Use" was
issued. The Company is required to adopt SOP 98-1 in fiscal 2000. The Company
has not determined the timing of the adoption of SOP 98-1 or the impact of such
adoption on its financial statements.
19
<PAGE> 12
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INDUSTRY AND GEOGRAPHIC SEGMENT INFORMATION
INDUSTRY
The Company operates predominantly in one industry segment: the design,
manufacture and marketing of a broad line of high-performance integrated
circuits that address a wide range of real-world signal processing applications.
GEOGRAPHIC INFORMATION
The Company operates in three major geographic areas. Information on the
Company's geographic operations is set forth in the table below. The predominant
countries comprising European operations are England, France, Germany and
Ireland. The predominant country comprising Asian operations is Japan. For
segment reporting purposes, sales generated by North American operations in the
table include export sales of $128,253,000, $147,601,000 and $159,862,000 in
1998, 1997 and 1996, respectively. Transfers between geographic areas are
negotiated based on market comparables. Operating income reflects the allocation
of corporate expenses of $34,102,000, $22,049,000 and $24,093,000 in 1998, 1997
and 1996, respectively, to the appropriate geographic area based upon their
beneficial and causal relationship to each area. Corporate identifiable assets
consist of cash equivalents, short-term investments and intangible assets. North
American identifiable assets includes the Company's equity investment in
WaferTech which was $135,002,000, $86,715,000 and $42,073,000 in fiscal 1998,
1997 and 1996, respectively.
<TABLE>
<CAPTION>
GEOGRAPHIC SEGMENT INFORMATION 1998 1997 1996
======================================================================================================================
<S> <C> <C> <C>
SALES North America, including export............. $ 748,283 $ 711,252 $ 658,627
Europe...................................... 312,523 359,333 364,308
Asia........................................ 169,765 172,909 170,851
----------- ----------- -----------
Total sales............................... $ 1,230,571 $ 1,243,494 $ 1,193,786
=========== =========== ===========
TRANSFERS North America, including export............. $ 303,048 $ 334,783 $ 348,574
BETWEEN Europe...................................... 183,537 240,592 189,911
AREAS Asia........................................ 59,065 48,131 39,749
----------- ----------- -----------
Total transfers between areas............. $ 545,650 $ 623,506 $ 578,234
=========== =========== ===========
OPERATING North America, including export............. $ 84,491 $ 102,959 $ 121,974
INCOME Europe...................................... 70,968 125,118 103,158
Asia........................................ 2,286 5,125 2,104
----------- ----------- -----------
Total operating income.................... $ 157,745 $ 233,202 $ 227,236
=========== =========== ===========
IDENTIFIABLE North America............................... $ 1,071,859 $ 891,345 $ 734,637
ASSETS Europe...................................... 344,476 398,033 364,084
Asia........................................ 146,177 142,838 116,527
Corporate................................... 299,218 331,637 293,024
----------- ----------- -----------
Total assets.............................. $ 1,861,730 $ 1,763,853 $ 1,508,272
=========== =========== ===========
</TABLE>
20
<PAGE> 13
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. ACCOUNTING CHANGE - RECOGNITION OF REVENUE ON CERTAIN SALES TO DISTRIBUTORS
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 will be
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
estimated pro forma effect of the accounting change on the current and prior
years' results are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
=======================================================================================================================
<S> <C> <C> <C>
As reported:
Net Sales $1,230,571 $1,243,494 $1,193,786
Net income 82,408 178,219 171,901
Basic earnings per share $0.51 $1.13 $1.12
Diluted earnings per share $0.50 $1.04 $1.03
Pro forma amounts with the change in accounting
principle related to revenue recognition
applied retroactively: (unaudited)
Net sales $1,230,571 $1,214,602 $1,183,186
Net income 119,488 167,515 168,328
Basic earnings per share $0.74 $1.06 $1.10
Diluted earnings per share $0.71 $0.98 $1.01
=======================================================================================================================
</TABLE>
5. GAIN ON SALE OF BUSINESS
During fiscal 1998, the Company completed the sale of its disk drive IC business
to Adaptec, Inc. 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 also entered into other
arrangements with Adaptec that provide for payments to the Company aggregating
$13 million, of which $10 million was earned in fiscal 1998, for assisting
Adaptec in research and development efforts.
6. RESTRUCTURING CHARGE
The Company recorded a restructuring charge of $17 million during the third
quarter of fiscal 1998. Of this charge, $7 million related to a worldwide
workforce reduction of approximately 350 employees, which was completed during
the fourth quarter of fiscal 1998, in the manufacturing, selling and general and
administrative areas. This action is expected to result in annual savings of
approximately $10 million. In addition, the Company performed a review of its
business strategy and concluded that the key to success in the DSP market is to
focus on opportunities in the general-purpose DSP market that can provide
consistent growth, while at the same time being more selective in pursuing
vertical market DSP opportunities. As a result of this review the Company scaled
back its efforts in some of the higher volume, lower margin, shorter life cycle
product areas and wrote off $10 million, which was the carrying value of
specific assets, associated with these businesses.
21
<PAGE> 14
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INVESTMENTS
Investments at October 31, 1998 and November 1, 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
================================================================================
<S> <C> <C>
WaferTech, LLC $ 135,002 $ 86,715
CSM 20,784 20,784
Other 31,438 23,969
- --------------------------------------------------------------------------------
$ 187,224 $ 131,468
================================================================================
</TABLE>
During fiscal 1998, the Company made the final payment of $56 million in
accordance with a previous joint venture agreement with Taiwan Semiconductor
Manufacturing Co., Ltd., and other investors for the construction and operation
of a semiconductor fabrication facility in Camas, Washington. For a total
investment of $140 million, the Company acquired an 18% equity ownership in the
joint venture, known as WaferTech. The first installment of $42 million was paid
in fiscal 1996, and the second installment of $42 million was paid in fiscal
1997. The Company applied the equity basis of accounting to this investment in
WaferTech based on the Company's ability to exercise significant influence on
the operating and financial policies of the joint venture. Subsequent to the
year ended October 31, 1998, the Company concluded an agreement to sell 14% of
its 18% equity ownership in WaferTech for cash equal to the carrying value of
the 14% equity ownership at October 31, 1998, to other WaferTech partners.
The Company has an equity investment in Chartered Semiconductor Manufacturing
Pte., Ltd. in Singapore of approximately $21 million which represents a less
than 5% ownership interest. The Company accounts for this investment under the
cost method and therefore changes in the value of the investment are not
recognized unless an impairment in the value of the investment is deemed by
management to be "other than temporary."
Other investments consist primarily of long-term investments in debt and equity
securities which are related to the Company's deferred compensation plan and are
largely offset by a corresponding liability.
8. ACCRUED LIABILITIES
Accrued liabilities at October 31, 1998 and November 1, 1997 consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
================================================================================
<S> <C> <C>
Accrued compensation
and benefits $ 36,582 $ 49,089
Other 43,324 26,355
- --------------------------------------------------------------------------------
Total accrued liabilities $ 79,906 $ 75,444
================================================================================
</TABLE>
9. Debt and Credit Facilities
Long-term debt at October 31, 1998 and November 1, 1997 consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
================================================================================
<S> <C> <C>
3 1/2% Convertible Subordinated
Notes due December 1, 2000 $ 229,985 $ 230,000
6 5/8% Notes due March 1, 2000 80,000 80,000
- --------------------------------------------------------------------------------
Long-term debt $ 309,985 $ 310,000
================================================================================
</TABLE>
22
<PAGE> 15
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The 3 1/2% Convertible Subordinated Notes are convertible, at the option of the
holder, into the Company's common stock at any time, unless previously redeemed
by the Company, at a conversion price of $20.938 per share, subject to
adjustment in certain events.
Simultaneous with the sale of the 6 5/8% Notes, the Company entered into an
interest rate swap and cap agreement for the term of the Notes having a notional
principal amount of $40 million whereby the effective net interest rate on $40
million of the Notes will be the six-month LIBOR rate (up to a maximum of 7%)
plus 1.4%. For the year ended October 31, 1998, the net effective interest rate
on $40 million of the Notes was 7.2% after giving effect to the interest rate
swap agreement.
The Company has a revolving credit agreement with several banks which commits
them to lend up to $60 million. The Company did not borrow against this
agreement at any time during fiscal 1998 or fiscal 1997. There was $0.2 million
of foreign currency borrowings outstanding at October 31, 1998, which were at
prevailing market rates for the respective currencies. Borrowings under the
Company's credit agreement and lines of credit are generally due within six
months.
10. LEASE COMMITMENTS
The Company leases certain of its facilities and equipment under various
operating and capital leases which expire at various dates through 2030. The
lease agreements frequently include renewal and purchase provisions and require
the Company to pay taxes, insurance and maintenance costs.
Total rental expense under operating leases was $16,275,000, $13,058,000 and
$11,573,000 in 1998, 1997 and 1996, respectively.
The following is a schedule of future minimum lease payments under capital
leases and rental payments required under long-term operating leases at October
31, 1998:
<TABLE>
<CAPTION>
OPERATING CAPITAL
FISCAL YEARS LEASES LEASES
================================================================================
<S> <C> <C>
1999 $ 13,532 $ 15,726
2000 10,505 15,689
2001 7,142 8,806
2002 4,672 4,745
2003 2,372 3,644
Later Years 14,128 57
- --------------------------------------------------------------------------------
Total $ 52,351 48,667
=========
Less amount representing interest (3,628)
---------
Present value of minimum lease payments $ 45,039
=========
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is a defendant in a federal lawsuit brought in Arizona by the
Lemelson Medical, Education & Research Foundation, L.P. (Lemelson). On July 31,
1998, Lemelson commenced an action in federal court against the Company and 26
other companies alleging infringement of 16 patents allegedly covering various
manufacturing processes and techniques used in the fabrication of semiconductor
products. Lemelson served the Company with a complaint on November 24, 1998
seeking unspecified damages, treble damages for willful infringement and
injunctive relief. While the Company can give no assurance that it will prevail
in this litigation, it believes that resolution of this litigation will not have
a material adverse effect on the Company's consolidated financial position,
although an unfavorable outcome could have a material adverse effect on the
Company's results of operations or cash flow in the quarter, or annual period in
which this matter is resolved.
23
<PAGE> 16
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is a defendant in a federal lawsuit brought in California by Linear
Technology Corporation (LTC). On June 26, 1997, LTC filed suit against the
Company, Impala Linear Corporation, Toyoda Automatic Loom Works, Ltd., Maxim
Integrated Products, Inc. and Unitrode Corporation alleging patent infringement
and seeking injunctive relief and unspecified damages. The parties are presently
engaged in discovery. The case was originally scheduled for trial on liability
issues beginning on September 7, 1999. The original district judge recused
himself and the case has not yet been re-scheduled for trial. While the Company
can give no assurance that it will prevail in this litigation, it believes that
resolution of this litigation will not have a material adverse effect on the
Company's consolidated financial position, although an unfavorable outcome could
have a material adverse effect on the Company's results of operations or cash
flow in the quarter, or annual period in which this matter is resolved.
Patent infringement suits are pending against the Company by Sextant Avionique,
S.A. in France and the United States and Commissariat A. L'energie Atomique
C.E.A. in France, claiming that the Company's accelerometer infringes certain
patents. In the United States proceeding commenced by Sextant Avionique, S.A. on
August 8, 1995, the federal district court entered judgment following trial in
favor of the Company finding the Company did not infringe Sextant's patents.
Sextant appealed the decision and the case was heard on appeal. The parties are
awaiting the appellate court's determination. In the French proceeding commenced
by Sextant Avionique, S.A., the French court found that the Company infringed
Sextant's French patents, and therefore, unless the decision is reversed, the
Company will be unable to manufacture or sell any infringing accelerometers in
France. The Company does not believe that the French court's decision will have
any material adverse effect on its consolidated financial position or
consolidated results of operations.
The Company is a defendant-respondent in a federal lawsuit and appeal brought in
California by Maxim Integrated Products, Inc. (Maxim) alleging intentional
interference with contract and claiming damages of approximately $50 million
against the Company. On November 11, 1992, Maxim filed suit in federal court in
California alleging the Company had violated federal antitrust law and advancing
pendent state law claims against the Company relating to certain distributorship
agreements of the Company and seeking, among other things, injunctive relief and
actual, consequential and punitive damages. On September 14, 1994, the federal
district court granted summary judgment for the Company with respect to all
Maxim's claims. Maxim appealed the decision and the U.S. Court of Appeals for
the Ninth Circuit affirmed the district court's decision with respect to the
antitrust and related state law claims and reversed the district court's summary
judgment decision with respect to Maxim's remaining claims. A trial by jury was
held on remand and, on April 28, 1998, the Company was found not liable on
Maxim's claim of intentional interference with contractual relations. On May 18,
1998, the district court entered final judgment in favor of the Company on all
of Maxim's remaining claims. Maxim subsequently filed a motion for a new trial
which the court denied on November 2, 1998. Maxim has appealed the final
judgment entered against it.
From time to time as a normal incidence of the nature of the Company's business,
various claims, charges and litigation are asserted or commenced against the
Company arising from, or related to, contractual matters, patents, trademarks,
personal injury, environmental matters, product liability, and personnel and
employment disputes. As to such claims and litigation, the Company can give no
assurance that it will prevail. However, the Company does not believe that these
matters will have a material adverse effect on the Company's consolidated
financial position, although an adverse outcome of any of these matters could
have a material adverse effect on the Company's consolidated results of
operations or cash flow in the quarter, or annual period in which one or more
these matters are resolved.
IRISH GRANTS
The Company's manufacturing facility in Limerick, Ireland has received operating
and capital grants from Ireland's Industrial Development Authority. A liability
to repay up to $16 million of the grants received by the Company would arise in
the unlikely event the Company should discontinue its Irish operations prior to
the end of the commitment periods noted in the grant agreements which expire at
various dates through 2006.
WAFER SUPPLY AGREEMENTS
The Company maintains a deposit of $20 million with Chartered Semiconductor
Manufacturing Pte., Ltd. This deposit is classified in the balance sheet line
item "Other assets." Under the terms of this agreement, the deposit will
guarantee
24
<PAGE> 17
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
access to certain quantities of sub-micron wafers through fiscal 2000. If the
Company does not purchase the minimum quantities under the agreement, the
deposit will be forfeited for the value of the wafer shortfall up to the total
amount of $20 million. At the end of the agreement term, the Company's deposit
will be returned, net of any forfeitures.
12. STOCKHOLDERS' EQUITY
STOCK PLANS
In fiscal 1998, the stockholders approved the 1998 Stock Option Plan, which
provides for the issuance of nonstatutory and incentive stock options to
purchase up to 15,000,000 shares of common stock. Officers, employees,
directors, consultants and advisors of the Company and its subsidiaries are
eligible to be granted options under this plan at a price not less than 100%
(110% in the case of incentive stock options granted to 10% or greater
stockholders) of the fair market value of the common stock at the time the
option is granted. The Company's 1988 Stock Option Plan was terminated upon
adoption of the 1998 Stock Option Plan; however, options to purchase common
stock remain outstanding under the plan. There are no remaining options
outstanding under the Company's 1980 Stock Option Plan.
While the Company may grant options to employees which become exercisable at
different times or within different periods, the Company has generally granted
options to employees which are exercisable on a cumulative basis in annual
installments of 33 1/3% each on the third, fourth and fifth anniversaries of the
date of grant.
Under the 1994 Director Option Plan, which was amended in 1998, each nonemployee
director is granted annually a nonstatutory option to purchase 10,500 shares of
common stock at an exercise price equal to the fair market value on the date of
grant. A total of 550,000 shares of common stock may be issued under this plan.
These options are exercisable on a cumulative basis in annual installments of 33
1/3% each on the first, second and third anniversaries of the date of grant. The
Company also has options outstanding under the 1992 Director Option Plan and the
1989 Director Stock Option Plan. Options granted under these plans are
exercisable on a cumulative basis in annual installments of 33 1/3% each on the
third, fourth and fifth anniversaries of the date of grant.
Information with respect to activity under the stock option plans is set forth
below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
SHARES ----------------------------------
AVAILABLE WEIGHTED AVERAGE
STOCK OPTION ACTIVITY FOR GRANT NUMBER PRICE PER SHARE
========================================================================================================================
<S> <C> <C> <C>
Balance, October 28, 1995 4,997 14,203 $ 6.01
- ------------------------------------------------------------------------------------------------------------------------
Additional shares authorized for 1988 Stock Option Plan 9,200 - -
Options granted (3,881) 3,901 $ 16.22
Options exercised - (2,072) $ 2.80
Options canceled 451 (454) $ 10.37
- ------------------------------------------------------------------------------------------------------------------------
Balance, November 2, 1996 10,767 15,578 $ 8.87
- ------------------------------------------------------------------------------------------------------------------------
Options granted (4,081) 4,081 $ 23.33
Options exercised - (2,432) $ 4.21
Options canceled 312 (322) $ 14.13
- ------------------------------------------------------------------------------------------------------------------------
Balance, November 1, 1997 6,998 16,905 $ 12.92
- ------------------------------------------------------------------------------------------------------------------------
Shares authorized for 1998 Stock Option Plan 15,000 - -
- ------------------------------------------------------------------------------------------------------------------------
Additional shares authorized for 1994 Director Stock
Option Plan 150 - -
Shares authorized for Medialight acquisition 102 - -
Options granted (19,946) 19,946 $ 16.73
Options exercised - (2,014) $ 6.35
Options canceled 9,128 (9,128) $ 23.15
Shares canceled upon termination of 1988 Stock
Option Plan (2,579) - -
- ------------------------------------------------------------------------------------------------------------------------
Balance, October 31, 1998 8,853 25,709 $ 12.78
========================================================================================================================
</TABLE>
25
<PAGE> 18
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OPTION AMENDMENT
In September 1998 the Board of Directors approved a stock option program
amendment pursuant to which all employees with stock options granted during the
period beginning December 1, 1996 and ending on August 3, 1998 could elect to
reduce the option exercise price to $14.75 per share (equal to the then fair
market value). Upon such election, the vesting schedule for the affected options
was reset, whereby one-third vests on September 8, 2001, one-third on September
8, 2002 and the final one-third on September 8, 2003. A total of 8,221,498
options with exercise prices ranging from $22.25 to $34.25 per share were
amended under the program. The activity as a result of this option program
amendment is presented in the preceding table as cancellations and subsequent
grants.
The following table summarizes information about options outstanding at October
31, 1998:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICE 10/31/98 LIFE (YEARS) PRICE AT 10/31/98 PRICE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.96 - $ 7.88 3,713 4.15 $ 5.08 2,521 $ 4.13
$ 8.50 - $ 11.67 3,241 6.04 $ 9.96 998 $ 9.68
$ 12.38 - $ 16.22 14,842 9.83 $ 14.10 14 $ 12.98
$ 16.25 - $ 20.13 3,376 7.09 $ 16.31 76 $ 17.19
$ 20.44 - $ 29.94 537 8.71 $ 24.27 119 $ 24.85
- ------------------------------------------------------------------------------------------------------------------------
$ 1.96 - $ 29.94 25,709 8.15 $ 12.78 3,728 $ 6.58
========================================================================================================================
</TABLE>
The Company has an employee stock purchase plan (ESPP) that allows eligible
employees to purchase, through payroll deductions, shares of the Company's
common stock at 85% of the fair market value at specified dates. Employees
purchased 602,500 shares in 1998 (579,200 and 664,200 in 1997 and 1996,
respectively) for $11.8 million ($10.2 million and $9.0 million in 1997 and
1996, respectively). At October 31, 1998, 857,400 common shares remained
available for issuance under the stock purchase plan.
Under the 1991 Restricted Stock Plan, a maximum of 2,700,000 shares of common
stock was authorized for awards by the Company to key employees for nominal
consideration. This plan succeeded the Company's 1978 Restricted Stock Plan
which provided for the issuance of up to 7,372,800 shares of common stock.
Shares awarded from both plans are restricted as to transfer, usually for a
period of five years and, under certain conditions, may be subject to repurchase
by the Company at the original purchase price per share. Shares awarded under
the Company's restricted stock plans, net of cancellations, for 1998, 1997 and
1996 were 217,500, 168,000 and 212,000, respectively. The fair market value of
the shares at the date of award was $6,293,000, $4,002,000 and $3,770,000 in
fiscal 1998, 1997 and 1996, respectively and was accounted for as deferred
compensation and is being amortized over the restricted period. During 1998,
1997 and 1996, $2,918,000, $2,309,000 and $1,949,000, respectively, of such
compensation was charged to expense. At October 31, 1998, there were 597,500
shares of common stock available for issuance under the 1991 Restricted Stock
Plan.
As of October 31, 1998, a total of 46,979,672 common shares were reserved for
issuance under the Company's stock plans.
COMMON STOCK REPURCHASE
In May and October of 1998, the Board of Directors authorized the Company to
repurchase up to 4 million and 8 million shares, respectively, of its common
stock over the succeeding 12 months. At October 31, 1998 the Company had
purchased 4,400,000 shares of its common stock an average purchase price of
$19.13 per share. The Company expects to purchase the remaining 7,600,000 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,
employee stock purchase plan and other benefit plans.
26
<PAGE> 19
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK-BASED COMPENSATION
As permitted under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," the Company has elected to follow
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations, in accounting for stock-based awards to
employees. Under APB 25, the Company generally recognized no compensation
expense with respect to such awards.
Pro forma information regarding net income and earnings per share is required by
FAS 123 for awards granted after October 28, 1995 as if the Company had
accounted for its stock-based awards to employees under the fair value method of
FAS 123. The fair value of the Company's stock-based awards to employees was
estimated using a Black-Scholes option pricing model. The Black-Scholes option
valuation model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions, including the expected stock price volatility. Because the
Company's stock-based awards to employees have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock-based awards to employees. The fair value
of the Company's stock-based awards to employees was estimated assuming no
expected dividends and the following weighted average assumptions:
<TABLE>
<CAPTION>
OPTIONS ESPP
-------------------------------- -------------------------------
1998 1997 1996 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Expected life (years) 6.1 6.2 6.2 1.0 1.0 1.0
Expected stock price volatility 49.5% 47.7% 43.5% 57.6% 56.0% 55.8%
Risk-free interest rate 5.3% 6.2% 5.7% 5.4% 5.8% 5.8%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The following is a summary of weighted average grant date values generated by
application of the Black-Scholes model:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE GRANT DATE VALUE
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Stock option plans $ 9.82 $ 12.68 $ 8.36
ESPP $ 8.33 $ 9.53 $ 7.37
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
As required under FAS 123, the reported net income and diluted earnings per
share have been presented to reflect the impact had the Company been required to
include the amortization of the Black-Scholes option value as expense. For
purposes of this disclosure, the estimated fair value of the options is
amortized to expense over the options' vesting periods. The Company's pro forma
information follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net income $ 56,719 $170,173 $170,717
Pro forma diluted earnings per share $0.32 $0.97 $1.00
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The effects on pro forma disclosures of applying FAS 123 are not likely to be
representative of the effects on pro forma disclosures of future years. Because
FAS 123 is applicable only to options granted subsequent to October 28, 1995,
the pro forma effect will not be fully reflected until 2000.
PREFERRED STOCK
The Company has 500,000 authorized shares of $1.00 par value Preferred Stock.
The Board of Directors is authorized to fix designations, relative rights,
preferences and limitations on the preferred stock at the time of issuance.
27
<PAGE> 20
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMMON STOCK PURCHASE RIGHTS
In March 1998, the Board of Directors adopted a Stockholder Rights Plan (the
Stockholder Rights Plan) which replaced a plan adopted by the Board in 1988.
Pursuant to the Stockholder Rights Plan, each share of the Company's Common
Stock (Common Stock) has an associated right (the Rights). Under certain
circumstances, each Right would entitle the registered holder to purchase from
the Company one one-thousandth of a share of Series A Junior Participating
Preferred Stock at a Purchase Price of $180 in cash, subject to adjustment.
The Rights are not exercisable and cannot be transferred separately from the
Common Stock until ten business days (or such later date as may be determined by
the Board of Directors) after (i) the public announcement that a person or group
of affiliated or associated persons has acquired (or obtained the right to
acquire) beneficial ownership of 15% or more of the Common Stock or (ii) the
commencement of a tender offer or exchange offer that would result in a person
or group beneficially owning 20% or more of the outstanding Common Stock. If and
when the Rights become exercisable, each holder of a Right shall have the right
to receive, upon exercise, that number of shares of Common Stock (or in certain
circumstances, cash property or other securities of the Company) which equals
the price of the Right divided by 50% of the current market price (as defined in
the Stockholder Rights Plan) per share of Common Stock at the date of the
occurrence of such event. In the event that at any time after any person becomes
an acquiring person, (i) the Company is consolidated with, or merged with and
into, another entity and the Company is not the surviving entity of such
consolidation or merger or if the Company is the surviving entity, but shares of
its outstanding common stock are changed or exchanged for stock or securities or
cash or any other property, or (ii) 50% or more to the Company's assets or
earning power is sold or transferred, each holder of a Right shall thereafter
have the right to receive upon exercise, that number of shares of common stock
of the acquiring company which equals the exercise price of the Right divided by
50% of the current market price of such common stock at the date of the
occurrence of the event.
The Rights have certain anti-takeover effects, in that they would cause
substantial dilution to a person or group that attempts to acquire a significant
interest in the Company on terms not approved by the Board of Directors. The
Rights expire on March 17, 2008 but may be redeemed by the Company for $.001 per
right at any time prior to the tenth day following a person's acquisition of 15%
or more of the Company's common stock. So long as the Rights are not separately
transferable, each new share of Common Stock issued will have a Right associated
with it.
13. RETIREMENT PLANS
The Company and its subsidiaries have various savings and retirement plans
covering substantially all employees. The Company maintains a defined
contribution plan for the benefit of its eligible United States employees. This
plan provides for Company contributions of up to 5% of each participant's total
eligible compensation. In addition, the Company contributes an amount equal to
each participant's contribution, if any, up to a maximum of 2% of each
participant's total eligible compensation. During fiscal 1996, the Company's
contributions increased to match an additional 50% of employee contributions
between 2% and 4% of total eligible compensation. The Company also has various
defined benefit pension and other retirement plans for certain foreign employees
that are consistent with local statutes and practices. The total expense related
to all of the Company's retirement plans in 1998, 1997 and 1996 was $21 million,
$19 million and $17 million, respectively, which primarily consists of costs
related to the domestic defined contribution plan. Also included in total
expense is pension expense related to foreign defined benefit plans of
approximately $3 million for 1998, 1997 and 1996. Summary data related to these
foreign plans at October 31, 1998 was as follows: accumulated benefit
obligation, substantially vested, of $27 million; projected benefit obligation
of $56 million; plan assets at fair value of $59 million; discount rates ranging
from 4% to 12%; compensation increase rates ranging from 3% to 11% and expected
rate of return on assets ranging up to 12%. Summary data related to these
foreign plans at November 1, 1997 was as follows: accumulated benefit
obligation, substantially vested, of $26 million; projected benefit obligation
of $51 million; plan assets at fair value of $51 million; discount rates ranging
from 4% to 12%; compensation increase rates ranging from 3% to 10% and expected
rate of return on assets ranging up to 13%.
28
<PAGE> 21
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. INCOME TAXES
The reconciliation of income tax computed at the U.S. federal statutory rates to
income tax expense is as follows:
<TABLE>
<CAPTION>
LIABILITY METHOD
---------------------------------------
1998 1997 1996
======================================================================================================================
<S> <C> <C> <C>
U.S. federal statutory tax rate 35.0% 35.0% 35.0%
Income tax provision reconciliation:
Tax at statutory rate $ 52,660 $ 82,578 $ 80,759
Irish income subject to lower tax rate (10,960) (19,880) (17,813)
Change in valuation allowance (5,559) (1,835) (2,641)
State income taxes, net of federal benefit 502 964 1,338
Research and development tax credits (4,400) (5,000) (1,300)
Foreign Sales Corporation (1,745) (3,161) (3,575)
Amortization of goodwill 545 528 506
Net foreign tax in excess of
U.S. federal statutory tax rate 125 2,765 957
Other, net (197) 701 608
- -----------------------------------------------------------------------------------------------------------------------
Total income tax provision $ 30,971 $ 57,660 $ 58,839
=======================================================================================================================
</TABLE>
For financial reporting purposes, income before income taxes includes the
following components:
<TABLE>
<CAPTION>
1998 1997 1996
=======================================================================================================================
<S> <C> <C> <C>
Pretax income:
Domestic $ 34,290 $ 84,599 $ 101,760
Foreign 116,169 151,280 128,980
- -----------------------------------------------------------------------------------------------------------------------
150,459 $ 235,879 $ 230,740
=======================================================================================================================
</TABLE>
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
=======================================================================================================================
<S> <C> <C> <C>
Current:
Federal $ 24,588 $ 35,500 $ 34,278
Foreign 17,983 26,811 15,737
- -----------------------------------------------------------------------------------------------------------------------
State 772 1,483 2,100
Total current $ 43,343 $ 63,794 $ 52,115
=======================================================================================================================
Deferred (prepaid):
Federal $ (7,792) $ (3,364) $ 1,318
Foreign (4,580) (2,770) 5,406
- -----------------------------------------------------------------------------------------------------------------------
Total deferred (prepaid) $ (12,372) $ (6,134) $ 6,724
=======================================================================================================================
</TABLE>
The Company's practice is to reinvest indefinitely the earnings of certain
international subsidiaries. Accordingly, no U.S. income taxes have been provided
for approximately $509,022,000 of unremitted earnings of international
subsidiaries.
The Company had recorded a valuation allowance to reflect the estimated amount
of deferred tax assets that may not be realized due to the expiration of book
and tax capital losses. The balance for the valuation allowance for deferred
assets was $0 at October 31, 1998, $5.6 million at November 1, 1997 and $7.4
million at November 2, 1996.
29
<PAGE> 22
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The significant components of the Company's deferred tax assets and liabilities
for the fiscal years ended October 31, 1998 and November 1, 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Inventory reserves $ 36,176 $ 21,734
Capital loss carryover -- 5,559
Deferred income on shipments to distributors 39,210 13,601
Reserves for compensation and benefits 11,968 6,965
Restricted stock 2,466 2,689
Intercompany profits in foreign inventories 5,066 4,973
Reserve for bad debts 5,694 6,508
Foreign tax credits (492) 1,795
Other 4,340 2,289
- -----------------------------------------------------------------------------------------------
Total gross deferred tax assets 104,428 66,113
Valuation allowance for deferred tax assets -- (5,559)
- -----------------------------------------------------------------------------------------------
Total deferred tax assets $104,428 $ 60,554
- -----------------------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation $(38,069) $(26,533)
- -----------------------------------------------------------------------------------------------
Total gross deferred liabilities $(38,069) $(26,533)
- -----------------------------------------------------------------------------------------------
Net deferred tax assets $ 66,359 $ 34,021
===============================================================================================
</TABLE>
The change in deferred taxes of $32 million from fiscal 1997 to fiscal 1998,
includes $20 million of deferred taxes as a result of the cumulative effect of
the change in accounting principle.
30
<PAGE> 23
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Analog Devices, Inc.
We have audited the accompanying consolidated balance sheets of Analog Devices,
Inc. as of October 31, 1998 and November 1, 1997, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended October 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Analog
Devices, Inc. at October 31, 1998 and November 1, 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended October 31, 1998, in conformity with generally accepted accounting
principles.
As discussed in Notes 2(l) and 4 to the consolidated financial statements, in
the fiscal year ended October 31, 1998, the Company changed its method for
recognizing revenue on certain shipments to distributors.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
December 1, 1998
31
<PAGE> 24
(Page intentionally left blank)
32
<PAGE> 25
ANALOG DEVICES, INC.
SUPPLEMENTARY FINANCIAL INFORMATION (Unaudited)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1998 QUARTER QUARTER(A) QUARTER(B) QUARTER
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales
As previously reported $330,721 $333,109 $294,920 $297,650
Effect of distributor accounting change (12,930) (13,679) 780 --
-------- -------- -------- --------
As restated 317,791 319,430 295,700 297,650
-------- -------- -------- --------
Gross margin
As previously reported 169,651 165,598 133,398 132,705
Effect of distributor accounting change (6,192) (7,161) 487 --
------- -------- -------- --------
As restated 163,459 158,437 133,885 132,705
------- -------- -------- --------
Cumulative effect of change in accounting principle (37,080) -- -- --
------- -------- -------- --------
Net income
As previously reported 44,284 48,440 8,791 26,336
Effect of distributor accounting change (41,105) (4,655) 317 --
-------- -------- -------- --------
As restated 3,179 43,785 9,108 26,336
-------- -------- -------- --------
BASIC EARNINGS PER SHARE:
Earnings before cumulative effect of accounting change
As previously reported 0.28 0.30 0.05 0.16
Effect of distributor accounting change (0.02) (0.03) -- --
-------- -------- -------- --------
As restated 0.26 0.27 0.05 0.16
-------- -------- -------- --------
Cumulative effect of change in accounting principle (0.23) -- -- --
-------- -------- -------- --------
Earnings after effect of distributor accounting change 0.03 0.27 0.05 0.16
======== ======== ======== ========
DILUTED EARNINGS PER SHARE:
Earnings before cumulative effect of accounting change
As previously reported 0.26 0.28 0.06 0.16
Effect of distributor accounting change (0.02) (0.03) -- --
-------- -------- -------- --------
As restated 0.24 0.25 0.06 0.16
-------- -------- -------- --------
Cumulative effect of change in accounting principle (0.21) -- -- --
-------- -------- -------- --------
Earnings after effect of distributor accounting change 0.03 0.25 0.06 0.16
======== ======== ======== ========
1997
Sales $292,063 $300,813 $318,139 $332,479
Gross margin 143,773 150,632 159,238 167,320
Net income 39,180 42,117 45,969 0,953
Basic earning per share 0.25 0.27 0.29 0.32
Diluted earnings per share 0.23 0.25 0.27 0.29
Pro forma amounts for 1997 assuming the change in
accounting principle related to revenue recognition
was applied retroactively:
Net income $ 33,218 $ 40,488 $ 42,435 $ 51,374
Basic earning per share 0.21 0.26 0.27 0.32
Diluted earnings per share 0.20 0.24 0.25 0.29
</TABLE>
(a) Includes $13.1 million gain on sale of a business, see Note 5 of the Notes
to the Company's Consolidated Financial Statements.
(b) Includes a $17 million restructuring charge, see Note 6 of the Notes to the
Company's Consolidated Financial Statements
33
<PAGE> 1
Exhibit 18
December 1, 1998
Joseph E. McDonough
Vice President, Finance and
Chief Financial Officer
Analog Devices, Inc.
Three Technology Way
Norwood, MA 02062
Dear Mr. McDonough:
Notes 2 (l) and 4 of the Notes to Consolidated Financial Statements of Analog
Devices, Inc. included in its Form 10-K for the year ended October 31, 1998
describe a change in the method of recognizing revenue on shipments to
international distributors and certain shipments to domestic distributors.
Previously, the Company recognized revenue from these transactions upon shipment
of product to the distributor, but provided specific reserves for possible
returns and allowances. Following the accounting change, revenue on shipments of
products is deferred for these transactions until the products are resold to end
users. You have advised us that you believe that the change is to a preferable
method in your circumstances because it provides better correspondence with the
substance of the event being recognized considering the changing business
environment in the international marketplace, is consistent with industry
practice and provides greater consistency among all transactions of the Company.
There are no authoritative criteria for determining a 'preferable' method of
revenue recognition for these transactions based on the particular
circumstances; however, we conclude that the change in the method of accounting
for recognizing revenue on shipments to international distributors and certain
shipments to domestic distributors is to an acceptable alternative method which,
based on your business judgment to make this change for the reasons cited above,
is preferable in your circumstances.
Very truly yours,
/s/ Ernst & Young LLP
<PAGE> 1
Exhibit 21
----------
SUBSIDIARIES
The following is a list of the Company's subsidiaries:
<TABLE>
<CAPTION>
PERCENTAGE OF VOTING
SECURITIES OWNED BY
ORGANIZED REGISTRANT AS OF
UNDER LAW OF OCTOBER 31, 1998
------------ --------------------
<S> <C> <C>
Analog Devices Limited United Kingdom 100%
Analog Devices, GmbH Germany 100%
Analog Devices, S.A. France 100%
Analog Devices, K.K. Japan 100%
Analog Devices APS Denmark 100%
Analog Devices Nederland, B.V. The Netherlands 100%
Analog Devices International, Inc. Massachusetts 100%
Analog Devices Israel, Ltd. Israel 100%
Analog Devices A.B. Sweden 100%
Analog Devices SRL Italy 100%
Analog Devices, HDLSGESMBH M.B.H. Austria 100%
Analog Devices Korea, Ltd. Korea 100%
Analog Devices, B.V. The Netherlands 100%
Analog Devices Finance N.V. Netherlands Antilles 100%
Analog Devices Holdings, B.V. The Netherlands 100%
Analog Devices Research &
Development Ltd. Ireland 100%
Analog Devices (Philippines), Inc. The Philippines 100%
Analog Devices Foreign Sales
Corporation, B.V. The Netherlands 100%
Analog Devices Foundry Services, Inc. Delaware 100%
Analog Devices Asian Sales, Inc. Delaware 100%
Analog Devices Taiwan, Ltd. Taiwan 100%
Analog Devices Ireland, Ltd. Ireland 100%
Analog Devices Hong Kong, Ltd. Hong Kong 100%
Analog Devices Pty, Ltd. Australia 100%
Analog Devices India Private Limited India 100%
Analog Devices Gen. Trias, Inc. Philippines 100%
Analog Devices International
Financial Services Company Ireland 100%
Analog Devices Foreign Sales
Corporation Barbados 100%
Mosaic Microsystems Limited United Kingdom 100%
Analog Development (Israel) 1996 Ltd. Israel 100%
Analog Devices (China) Co. Ltd. China 100%
Analog Devices Canada, Ltd. Canada 100%
Analog/NCT Supply Ltd. Delaware 50%
Analog Devices Realty Holdings, Inc. Philippines 40%
WaferTech, LLC Delaware 18%
Analog Supplies Company Japan 15%
Analyzed Investments, Ltd. Ireland 7.4%
</TABLE>
23
<PAGE> 1
Exhibit 23
----------
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Analog Devices, Inc. of our report dated December 1, 1998, included in the
1998 Annual Report to Shareholders of Analog Devices, Inc.
Our audit also included the financial statement schedule of Analog Devices, Inc.
listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this schedule based
on our audits. In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
We consent to the incorporation by reference in the Registration Statements and
related prospectuses (Form S-8 Nos. 2-63561, 2-90023, 2-95495, 33-2502, 33-4067,
33-22604, 33-22605, 33-29484, 33-39851, 33-39852, 33-43128, 33-46520, 33-46521,
33-60696, 33-60642, 33-61427, 33-64849, 333-04771, 333-04819, 333-04821,
333-08493, 333-47789, 333-47787, 333-48243, 333-56529 and 333-69359 and Form S-3
Nos. 333-08505, 333-08509 and 333-17651) of Analog Devices, Inc. of our report
dated December 1, 1998, with respect to the consolidated financial statements
incorporated herein by reference, and our report included in the preceding
paragraph with respect to the financial statement schedule included in this
Annual Report (Form 10-K) of Analog Devices, Inc.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
January 22, 1999
24
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-02-1997
<PERIOD-END> OCT-31-1998
<EXCHANGE-RATE> 1
<CASH> 263,331
<SECURITIES> 41,575
<RECEIVABLES> 239,693
<ALLOWANCES> 32,332
<INVENTORY> 275,076
<CURRENT-ASSETS> 903,529
<PP&E> 1,367,469
<DEPRECIATION> 664,038
<TOTAL-ASSETS> 1,861,730
<CURRENT-LIABILITIES> 320,859
<BONDS> 309,985
0
0
<COMMON> 27,349
<OTHER-SE> 1,101,040
<TOTAL-LIABILITY-AND-EQUITY> 1,861,730
<SALES> 1,230,571
<TOTAL-REVENUES> 1,230,571
<CGS> 642,085
<TOTAL-COSTS> 642,085
<OTHER-EXPENSES> 430,741
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,229
<INCOME-PRETAX> 150,459
<INCOME-TAX> 30,971
<INCOME-CONTINUING> 119,488
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (37,080)
<NET-INCOME> 82,408
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.50
</TABLE>
