01—Abstract
Summary
Summary of the 10-K filed January 28, 1999. Cited figures are marked; the original filing is the authoritative source.
Analog Devices' fiscal 1998 (year ended October 31, 1998) was a year of cyclical pressure layered on top of several accounting and one-time items.
Net sales were $1,230.6 milliona, down 1% from $1,243.5 million in fiscal 1997, though management notes sales grew about 3% excluding the disk drive IC business sold to Adaptec in early 1998. Demand was strong early in the year and weakened in the second half amid a semiconductor downturn and Southeast Asian economic weakness, and gross margin fell to 47.8% from 49.9%. Operating income fell to 12.8% of sales from 18.8%, reflecting a $17 million restructuring charge, a $9.8 million loss from the WaferTech joint venture, and higher SMG&A, partly offset by a $13.1 million gain on the disk drive sale.
Reported net income was $82.4 millionb, or $0.50 diluted EPS, down 54% from $178.2 million ($1.04) in fiscal 1997. That figure includes a $37.1 million non-cash cumulative effect charge from changing revenue recognition on distributor shipments, which now defers revenue until distributors resell to end users. Excluding the charge, net income before the accounting change was $119.5 million, or $0.71 diluted EPS, a 33% decline.
Management and investors should note that the accounting change makes year-over-year comparisons less clean, and the company provides pro forma figures to address this. Balance sheet and cash flow remain solid. Cash, cash equivalents and short-term investments totaled $305 millionc, operating cash flow was $225 million, and capital expenditures were $167 million.
The company repurchased 4.4 million shares for $84 milliond and has authorized up to 12 million additional repurchases. Long-term debt was roughly $310 million, mostly convertible notes, against stockholders' equity of $1.13 billion, and the $60 million credit facility was unused. Key risks disclosed include ongoing patent litigation (Lemelson, Linear Technology, Sextant, Maxim), exposure to Asian suppliers and WaferTech, and a cautious outlook on gross margins until production rates recover.
02—Key points
Key Highlights
- Net sales of $1,230.6 million in fiscal 1998, down 1% from $1,243.5 million; up about 3% excluding the disk drive IC business sold to Adaptec
- Reported net income of $82.4 million ($0.50 diluted EPS), down 54%, after a $37.1 million cumulative-effect charge from the distributor revenue recognition change; income before the change was $119.5 million ($0.71 diluted EPS)
- Gross margin fell to 47.8% from 49.9%, and operating margin fell to 12.8% from 18.8%, due to lower production rates, a $17 million restructuring charge, and a $9.8 million WaferTech equity loss
- Analog IC products (about 75% of sales) grew 5%, while DSP IC sales declined 7% due to weaker GSM cellular chipset demand
- R&D spending rose about 12% to $219 million (17.8% of sales), though management said it would curtail further increases
- Strong liquidity: $305 million in cash and short-term investments, $225 million operating cash flow, and an unused $60 million credit facility; debt-to-equity ratio of 31%
- Share repurchases of 4.4 million shares for $84 million, with authorization for up to 12 million additional shares
03—Questions
Frequently Asked Questions
Why did reported net income drop so sharply compared with fiscal 1997?
Net income fell to $82.4 million from $178.2 million, mainly because of a $37.1 million non-cash cumulative effect charge from a change in revenue recognition. Under the new method, revenue on shipments to distributors is deferred until the distributors resell to end users. Income before this accounting change was $119.5 million, down 33%, reflecting weaker demand in the second half of the year, lower gross margins, and the restructuring and WaferTech charges.
How much did demand weakness affect ADI's results?
Demand was strong early in fiscal 1998 but declined in the second half amid a cyclical semiconductor downturn. Management reduced production rates, which pressured gross margins, and gross margin fell to 47.8% from 49.9%. Sales in Europe declined on lower GSM chipset sales, while North American sales increased significantly due to analog IC growth.
What is the outlook for gross margins and R&D spending?
Management expects gross margins to remain under pressure from lower production rates until sales growth resumes. R&D spending will continue to be a priority to maintain product leadership, but management has decided to curtail further increases in R&D given the second-half demand decline.
Is ADI's balance sheet strong enough to support its operations and shareholder returns?
Yes. The company had $305 million in cash and short-term investments, generated $225 million in operating cash flow, and had stockholders' equity of $1.13 billion. Long-term debt of about $310 million is mostly convertible subordinated notes, the $60 million credit facility was unused, and the debt-to-equity ratio was 31%. The company repurchased $84 million of stock during the year and has authorization for further buybacks. It has never paid cash dividends.
What are the main legal and operational risks?
The company faces several patent suits, including Lemelson (seeking unspecified and potentially treble damages), Linear Technology, Sextant Avionique (a French court found the accelerometer infringed French patents), and an appeal in Maxim's case. Management believes these will not materially affect financial position but notes that adverse outcomes could hit quarterly or annual results. Operational risks include reliance on Asian suppliers and the WaferTech joint venture, $26 million in deposits with suppliers in Southeast Asia, and exposure to the regional economic downturn.
04—Continue