01—Abstract
Summary
Summary of the 10-K filed December 23, 2003. Cited figures are marked; the original filing is the authoritative source.
Analog Devices' fiscal 2003 (year ended November 1, 2003) was a strong recovery year.
Net sales rose 20% to $2,047 milliona from $1,708 million, gross margin expanded 190 basis points to 54.9%, and diluted EPS rose to $0.78 from $0.28. Net income reached $298 million, up from $105 million. Growth was led by demand for analog and DSP products used in wireless handsets, PCs, and consumer applications, while broadband infrastructure sales declined.
Operating income nearly tripled to $374 millionb (18.3% of sales), helped by the cessation of goodwill amortization under FAS 142 and lower special charges. Operating cash flow was $433 million. The balance sheet was significantly de-levered.
ADI redeemed all $1.2 billionc of its 4.75% convertible subordinated notes on October 1, 2003, at a cost of about $1,223 million, leaving the company with no funded debt other than operating leases. Cash, cash equivalents and short-term investments fell to $2,117 million from $2,898 million, and stockholders' equity rose to $3,288 million. The company also initiated a $0.04 per share quarterly dividend, its first cash dividend in the periods presented.
Management guided for approximately 25% revenue growth in fiscal 2004, continued gross margin improvement, capital expenditures of roughly $130 milliond (about 5% of sales), and an effective tax rate near 22%. Near-term guidance called for revenue to rise about 5% sequentially in Q1 fiscal 2004 and diluted EPS of $0.27 to $0.28. Investors should note the ongoing litigation exposure (Motorola patent suit, Plasma Physics, and the Enron preference claim), the IRS audit of fiscal 2001 and 2002, and the cyclical nature of the semiconductor industry, along with the company's reliance on Asian foundries such as TSMC.
02—Key points
Key Highlights
- Net sales grew 20% to $2,047 million in fiscal 2003, with analog products up 16% and DSP products up 35%.
- Gross margin improved to 54.9% from 53.0%, while diluted EPS rose to $0.78 from $0.28.
- Net income nearly tripled to $298 million, aided by the adoption of FAS 142 (approximately $44 million annual benefit from ending goodwill amortization).
- All $1.2 billion of 4.75% convertible notes were redeemed on October 1, 2003 for about $1,223 million, leaving no funded debt at year-end.
- Cash, cash equivalents and short-term investments totaled $2,117 million at fiscal year-end, down from $2,898 million after the debt redemption.
- Management guides to roughly 25% revenue growth in fiscal 2004, with capex of about $130 million and an effective tax rate near 22%.
- A quarterly cash dividend of $0.04 per share was declared in November 2003, marking a return to shareholder cash distributions.
03—Questions
Frequently Asked Questions
Why did ADI's net income increase so sharply in fiscal 2003?
Net income rose to $298 million from $105 million, primarily because net sales grew 20% and gross margin expanded. Operating expenses grew more slowly than revenue. Stopping goodwill amortization under FAS 142 added roughly $44 million to annual net income, and special charges fell to $9.5 million from $48.5 million. The effective tax rate also fell to 22% from 25%.
What did ADI do with its convertible debt, and how does it affect the balance sheet?
ADI redeemed all $1.2 billion of its 4.75% Convertible Subordinated Notes due 2005 on October 1, 2003, at 101.90% of par, a total cost of about $1,223 million. The company recorded a net pre-tax loss of $0.2 million after offsetting a $10.8 million redemption gain against an $11.0 million write-off of deferred financing costs. Long-term debt went from $1,274 million to zero, which makes the balance sheet essentially debt-free apart from operating leases.
Which end markets drove growth, and where is the company weakest?
Demand was strongest for consumer-oriented products, including wireless handsets, PCs and laptops, and digital cameras and flat-panel displays. Broadband infrastructure sales declined year over year, and demand tied to industrial and enterprise capital spending was flat. Geographically, Southeast Asia rose to 37% of sales, reflecting customers shifting manufacturing to Asia, while North America fell to 26% from 30%.
What are the main risks and legal exposures disclosed in the filing?
Key risks include the cyclical semiconductor market, reliance on sole-source foundries such as TSMC, dependence on a few facilities in geologically unstable areas, and the 74% of revenue from international markets. Pending legal matters include a Motorola suit alleging infringement of five patents, a Plasma Physics patent complaint, and an Enron bankruptcy preference claim tied to about $20 million of commercial paper. ADI says it does not expect these to have a material adverse effect on financial position, but adverse outcomes could affect results in the period of resolution. The IRS is also auditing fiscal 2001 and 2002.
What is the outlook for fiscal 2004?
Management plans for revenue growth of about 25%, with gross margins continuing to improve and operating expense growth well below revenue growth. Depreciation is expected to fall to about $155 million, and capex is projected at roughly $130 million. For the first quarter of fiscal 2004, revenue was expected to rise about 5% sequentially, with diluted EPS guided to $0.27 to $0.28. Management noted these are forward-looking statements subject to the risk factors in the filing.
04—Continue