How strong was ADI's fiscal 2004 financial performance?

Very strong. Net sales increased 29% to $2,634 million, gross margin expanded to 59%, operating income more than doubled to $699 million, and net income rose to $571 million, or $1.45 per diluted share, compared with $0.78 in fiscal 2003. Net income as a percentage of sales increased to 21.7% from 14.6%.

Why is management cautious about fiscal 2005?

Order rates slowed in the third quarter of fiscal 2004 and remained low through year-end, as customers reduced inventories and cancelled orders. Fourth-quarter sales fell 12% sequentially, backlog entering fiscal 2005 was only $329 million, and the company said this limits revenue visibility. Management guided Q1 fiscal 2005 to $575–600 million in revenue and expects demand to recover in the second quarter.

What is ADI's capital allocation policy and balance sheet position?

ADI holds $2.69 billion in cash and short-term investments with no debt, having redeemed its $1.2 billion 4.75% convertible notes in October 2003. In fiscal 2004 it began paying dividends ($75 million total, $0.20 per share) and repurchased about $137 million of stock under a new $500 million authorization announced in August 2004. Capital expenditures were $146 million and are planned at about $150 million for fiscal 2005.

What are the main legal and regulatory risks disclosed?

The filing discloses an SEC inquiry into historical stock option grants to officers and directors, which management says is common across the industry; an Enron bankruptcy preference claim involving about $20 million of commercial paper that ADI sold to Fleet, pending a ruling on its motion to dismiss; an IRS audit covering fiscal 2001–2003; and a patent infringement suit by Plasma Physics. The Motorola patent litigation was settled in September 2004. Management believes none is likely to have a material adverse effect on financial position, though outcomes are uncertain.

How concentrated is ADI's supply chain and customer base?

Supply is partly concentrated: ADI relies on sole-source third-party foundries, primarily Taiwan Semiconductor Manufacturing Company, which is also a related party because one ADI director sits on TSMC's board. ADI purchased about $337 million from TSMC in fiscal 2004. On the customer side, the largest single customer (excluding distributors) was about 3% of sales and the top 20 about 29%, while about 50% of revenue flows through distributors and about 75% comes from outside the United States.

ADI 10-K FY2004 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed November 30, 2004. Cited figures are marked; the original filing is the authoritative source.

Analog Devices (ADI) closed fiscal 2004 (year ended October 30, 2004) with a very strong year on the top and bottom line.

Net sales rose 29% to $2,633.8 million^a from $2,047.3 million, driven by a broad-based upturn in demand across every end market, with industrial and communications accounting for roughly 77% of the increase. Gross margin expanded 410 basis points to 59%, operating expenses grew only 14%, and operating income reached $699 million (26.6% of sales) versus $374 million a year earlier. Net income more than doubled to $570.7 million, and diluted EPS rose 86% to $1.45.

Operating cash flow was $778 million^b, or 29.5% of sales. The balance sheet is conservative. ADI ended the year with $2,685 million in cash, cash equivalents and short-term investments and no debt outstanding, following the 2003 redemption of its $1.2 billion convertible notes.

Management also initiated its first cash dividend program ($0.20^c per share paid during fiscal 2004, with a $0.06 quarterly dividend declared in November 2004) and authorized a $500 million share repurchase program, of which about $137 million was used in fiscal 2004. The outlook is notably cautious. Fourth-quarter sales fell 12% sequentially as customers worked down inventory, order cancellations increased, and backlog dropped to $329 million from $387 million.

Management guided first-quarter fiscal 2005 revenue to $575–600 million and diluted EPS to $0.28^d–0.31, and expects a recovery in the second quarter onward. Key risks disclosed include semiconductor cyclicality, reliance on sole-source foundries (notably TSMC, a related party), roughly 75% international revenue exposure, an SEC inquiry into historical stock option grants, a pending Enron preference claim (about $20 million), and an ongoing IRS audit.

02—Key points

Key Highlights

Revenue grew 29% to $2.63 billion in fiscal 2004, with broad-based demand across industrial, communications, consumer and computer end markets.
Gross margin improved 410 basis points to 59%, and operating margin rose to 26.6% from 18.3%, as fixed manufacturing costs were spread over higher volume and operating expenses grew only 14%.
Net income rose to $570.7 million ($1.45 diluted EPS) from $298.3 million ($0.78), an increase of 86% per share.
Strong balance sheet: $2.69 billion in cash and short-term investments, no debt, and $778 million in operating cash flow.
Capital return begins: first-ever cash dividends ($0.20/share in fiscal 2004, raised to $0.06 quarterly) and a $500 million buyback authorization, with $137 million repurchased.
Demand softened in the second half: Q4 sales fell 12% sequentially on a customer inventory correction, and backlog declined to $329 million from $387 million.
Cautious Q1 fiscal 2005 guidance of $575–600 million in revenue and $0.28–0.31 diluted EPS, with management expecting recovery from Q2 onward.

03—Questions

Frequently Asked Questions

How strong was ADI's fiscal 2004 financial performance?
Very strong. Net sales increased 29% to $2,634 million, gross margin expanded to 59%, operating income more than doubled to $699 million, and net income rose to $571 million, or $1.45 per diluted share, compared with $0.78 in fiscal 2003. Net income as a percentage of sales increased to 21.7% from 14.6%.
Why is management cautious about fiscal 2005?
Order rates slowed in the third quarter of fiscal 2004 and remained low through year-end, as customers reduced inventories and cancelled orders. Fourth-quarter sales fell 12% sequentially, backlog entering fiscal 2005 was only $329 million, and the company said this limits revenue visibility. Management guided Q1 fiscal 2005 to $575–600 million in revenue and expects demand to recover in the second quarter.
What is ADI's capital allocation policy and balance sheet position?
ADI holds $2.69 billion in cash and short-term investments with no debt, having redeemed its $1.2 billion 4.75% convertible notes in October 2003. In fiscal 2004 it began paying dividends ($75 million total, $0.20 per share) and repurchased about $137 million of stock under a new $500 million authorization announced in August 2004. Capital expenditures were $146 million and are planned at about $150 million for fiscal 2005.
What are the main legal and regulatory risks disclosed?
The filing discloses an SEC inquiry into historical stock option grants to officers and directors, which management says is common across the industry; an Enron bankruptcy preference claim involving about $20 million of commercial paper that ADI sold to Fleet, pending a ruling on its motion to dismiss; an IRS audit covering fiscal 2001–2003; and a patent infringement suit by Plasma Physics. The Motorola patent litigation was settled in September 2004. Management believes none is likely to have a material adverse effect on financial position, though outcomes are uncertain.
How concentrated is ADI's supply chain and customer base?
Supply is partly concentrated: ADI relies on sole-source third-party foundries, primarily Taiwan Semiconductor Manufacturing Company, which is also a related party because one ADI director sits on TSMC's board. ADI purchased about $337 million from TSMC in fiscal 2004. On the customer side, the largest single customer (excluding distributors) was about 3% of sales and the top 20 about 29%, while about 50% of revenue flows through distributors and about 75% comes from outside the United States.

04—Continue

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