01—Abstract
Summary
Summary of the 10-K filed November 25, 2008. Cited figures are marked; the original filing is the authoritative source.
Analog Devices (ADI) closed fiscal 2008 (ended November 1, 2008) with total revenue of $2.58 billiona, up 5% from $2.46 billion in fiscal 2007, and diluted EPS from continuing operations of $1.77, up 17%.
Reported diluted EPS was $2.65b, boosted by $261 million of income from discontinued operations, mainly the $248 million after-tax gain on the sale of the Baseband Chipset Business to MediaTek and the CPU voltage regulation business to ON Semiconductor. Gross margin held roughly flat at 61.1%, operating margin from continuing operations improved to 24.2%, and the company ended the year with $1.31 billion in cash and short-term investments and no debt. Operating cash flow was $669 million, or 26% of revenue, though it was reduced by $110 million of taxes on the divestiture gains.
The outlook is sharply weaker. Management said order rates slowed in late September 2008 and backlog fell significantly, so it plans for first-quarter fiscal 2009 revenue to decline about 20% from the fourth quarter. It also expects gross margin of roughly 57% to 58% as it cuts manufacturing output to avoid inventory buildup, and it plans operating expense reductions of about 10%, or $25 millionc.
Management guided first-quarter fiscal 2009 diluted EPS from continuing operations to $0.22 to $0.23d before restructuring charges. Shareholder returns were significant: $570 million of buybacks and $223 million of dividends in fiscal 2008, with $95 million left on the $4 billion repurchase authorization. The company also resolved the SEC stock option investigation with a $3 million penalty and no restatement.
Key risks for investors are demand volatility in a cyclical semiconductor market, the global credit crisis, reliance on TSMC for about 44% of revenue from third-party wafer fabs, and the fact that most of the cash is held outside the United States. Only about $89 million of the cash balance is held in the U.S., which limits domestic uses such as dividends and buybacks absent repatriation or borrowing under the $165 million revolving facility.
02—Key points
Key Highlights
- Fiscal 2008 revenue rose 5% to $2.58 billion, with growth in the industrial (+6%) and communications (+21%) end markets, offset by declines in consumer (-2%) and computer (-13%).
- Diluted EPS was $2.65 including discontinued operations, but only $1.77 from continuing operations (up 17%). The discontinued-operations figure reflects a $248 million after-tax gain on the sale of the Baseband Chipset and CPU voltage regulation businesses.
- Gross margin was 61.1% and continuing-operations operating margin improved to 24.2%, helped by $37 million lower special charges, although the operating expense base grew.
- Balance sheet is strong: $1.31 billion in cash and short-term investments, no debt, and $2.42 billion of shareholder equity. Operating cash flow was $669 million.
- Management guided sharply lower: first-quarter fiscal 2009 revenue down about 20% sequentially, gross margin of 57% to 58%, and diluted EPS of $0.22 to $0.23 excluding restructuring charges. Backlog fell significantly and order rates slowed in late September 2008.
- Capital returns continued: $570 million of share repurchases (19.4 million shares) and $223 million of dividends in fiscal 2008. The quarterly dividend was raised to $0.20, and $95 million remains on the $4 billion buyback authorization.
- Concentration and geographic risks: about 44% of revenue came from third-party foundries, primarily TSMC, and about 80% of revenue came from international customers. Most cash sits overseas, with only about $89 million in the U.S.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2008, Analog Devices kept $0.30.
- Revenue$2.58B100.0%
- Cost of revenue−$1.01B38.9%
- Gross profit$1.58B61.1%
- Operating costs−$952.3M36.9%
- Operating income$625.0M24.2%
- Interest, other & tax$161.3M6.2%
- Net income$786.3M30.4%
Where FY2008 revenue went
$2.58B- Cost of revenue: $1.01B, 39% of revenue
- Operating income: $625.0M, 24% of revenue
- R&D: $533.5M, 21% of revenue
- SG&A: $415.7M, 16% of revenue
Kept 24% as operating income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2008filed November 25, 2008Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Revenue | $2.58B$2.43B | +6.3% |
| Cost of Revenue | $1.01B$956.45M | +5.1% |
| Gross Profit | $1.58B$1.51B | +4.6% |
| R&D Expenses | $533.48M$509.55M | +4.7% |
| SG&A Expenses | $415.68M$389.50M | +6.7% |
| Operating Expenses | $952.25M$939.55M | +1.4% |
| Operating Income | $625.02M$568.72M | +9.9% |
| Interest Expense | $0$0 | — |
| Net Income | $786.28M$496.91M | +58.2% |
| EPS (Basic) | $2.69$1.54 | +74.7% |
| EPS (Diluted) | $2.65$1.50 | +76.7% |
| Shares Outstanding (Basic) | 292.69M323.25M | −9.5% |
| Shares Outstanding (Diluted) | 297.11M332.30M | −10.6% |
05—Questions
Frequently Asked Questions
Why did reported EPS ($2.65) differ so much from continuing-operations EPS ($1.77)?
The gap comes from discontinued operations. ADI sold its Baseband Chipset Business to MediaTek and its CPU voltage regulation and PC thermal monitoring business to ON Semiconductor in the first quarter of fiscal 2008. The sales produced a $248 million after-tax gain, which added about $0.88 per diluted share. Investors valuing the ongoing business should focus on the $1.77 figure, which is up 17% from fiscal 2007.
How much pressure is the company under for fiscal 2009?
Management expects first-quarter fiscal 2009 revenue to fall about 20% from the fourth quarter of fiscal 2008. Order rates slowed in late September 2008 and backlog fell significantly, which limits short-term visibility. The company plans to cut manufacturing output to avoid inventory buildup, which would lower gross margin by about 3 to 4 percentage points, and to reduce operating expenses by about $25 million, with a restructuring charge still to be determined.
Is the balance sheet strong enough to support the dividend and buybacks?
The company had $1.31 billion in cash and short-term investments and no debt at year-end, and management believes existing liquidity is sufficient for at least twelve months. However, only about $89 million of that cash is in the U.S., because most foreign earnings are intended to be reinvested indefinitely. Future U.S. dividends and buybacks depend on U.S.-available cash, so repatriation or borrowing under the $165 million revolving facility may be needed. The company had a $0.20 quarterly dividend declared in November 2008, costing about $58 million.
What are the main risks to the business?
The main risks include the cyclicality of the semiconductor industry, which can cause rapid swings in demand and overcapacity; the global credit crisis, which could delay or cancel customer orders; and reliance on a limited number of suppliers, primarily TSMC, for about 44% of revenue from third-party fabs. Customer concentration is moderate: the largest customer was about 4% of revenue and the top 20 about 32%. Other risks include international operations, currency exposure (mainly the Euro, though it is largely hedged), and IP litigation.
What drove the improvement in operating income?
Operating income from continuing operations rose 10% to $625 million, from $569 million in fiscal 2007. The increase came mainly from $118 million of higher revenue and $37 million lower special charges. Those gains were partly offset by a 10 basis point decline in gross margin, higher salary and bonus costs in R&D and SMG&A, and the absence of the $35 million one-time IP license revenue recorded in fiscal 2007. Nonoperating income fell $52 million on lower interest income, and the effective tax rate fell to 21.2% from 24.1%.
06—Continue