UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended November 2, 2013
OR
o | 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 incorporation or organization) | (I.R.S. Employer 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 $0.162/3 Par Value | NASDAQ Global Select Market | |
Title of Each Class | Name of Each Exchange on Which Registered | |
Securities registered pursuant to Section 12(g) of the Act:
None
Title of Class
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES þ NO o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o NO þ
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 for 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 þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Sec. 229.405 of this chapter) 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. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o NO þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $12,124,000,000 based on the last reported sale of the Common Stock on The NASDAQ Global Select Market on May 4, 2013. Shares of voting and non-voting stock beneficially owned by executive officers, directors and holders of more than 5% of the outstanding stock have been excluded from this calculation because such persons or institutions may be deemed affiliates. This determination of affiliate status is not a conclusive determination for other purposes.
As of November 2, 2013, there were 311,045,084 shares of Common Stock, $0.162/3 par value per share, outstanding.
Documents Incorporated by Reference
Document Description | Form 10-K Part | |
Portions of the Registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held March 12, 2014 | III | |
Note About Forward-Looking Statements
This Annual Report on Form 10-K, including in particular the section entitled “Outlook,” contained in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and our future results that are subject to the safe harbor created under the Private Securities Litigation Reform Act of 1995 and other safe harbors under the Securities Act of 1933 and the Securities Exchange Act of 1934. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may” and "will," and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections regarding our future financial performance; our anticipated growth and trends in our businesses; our future capital needs and capital expenditures; our future market position and expected competitive changes in the marketplace for our products; our ability to pay dividends or repurchase stock; our ability to service our outstanding debt; our expected tax rate; the effect of new accounting pronouncements; and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified in Part I, Item 1A. "Risk Factors" and elsewhere in our Annual Report on Form 10-K. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements except to the extent required by law.
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PART I
ITEM 1. | BUSINESS |
Company Overview
We are a world leader in the design, manufacture and marketing of a broad portfolio of high-performance analog, mixed-signal and digital signal processing integrated circuits (ICs) used in virtually all types of electronic equipment. Since our inception in 1965, we have focused on solving the engineering challenges associated with signal processing in electronic equipment. Our signal processing products play a fundamental role in converting, conditioning, and processing real-world phenomena such as temperature, pressure, sound, light, speed and motion into electrical signals to be used in a wide array of electronic devices. As new generations of digital applications evolve, new needs for high-performance analog signal processing and digital signal processing (DSP) technology are generated. As a result, we produce a wide range of innovative products — including data converters, amplifiers and linear products, radio frequency (RF) ICs, power management products, sensors based on micro-electro mechanical systems (MEMS) technology and other sensors, and processing products, including DSP and other processors — that are designed to meet the needs of a broad base of customers.
We focus on key strategic markets where our signal processing technology is often a critical differentiator in our customers’ products, in particular, the industrial, automotive, consumer and communications markets. Used by over 60,000 customers worldwide, our products are embedded inside many different types of electronic equipment including:
• Industrial process control systems | • Medical imaging equipment | |
• Factory automation systems | • Patient monitoring devices | |
• Instrumentation and measurement systems | • Wireless infrastructure equipment | |
• Energy management systems | • Networking equipment | |
• Aerospace and defense electronics | • Optical systems | |
• Automobiles | • Digital cameras | |
• Digital televisions | • Portable electronic devices | |
We were incorporated in Massachusetts in 1965. Our headquarters are near Boston, in Norwood, Massachusetts. In addition, we have manufacturing facilities in Massachusetts, Ireland, and the Philippines, and have more than thirty design facilities worldwide. Our common stock is listed on The NASDAQ Global Select Market under the symbol ADI and is included in the Standard & Poor’s 500 Index.
Available Information
We maintain a website with the address www.analog.com. We are not including the information contained on our website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. We make available free of charge through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K (including exhibits), and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission (SEC). We also make available on our website our corporate governance guidelines, the charters for our audit committee, compensation committee, and nominating and corporate governance committee, our equity award granting policies, our code of business conduct and ethics which applies to our directors, officers and employees, and our related person transaction policy, and such information is available in print and free of charge to any shareholder of Analog Devices who requests it. In addition, we intend to disclose on our website any amendments to, or waivers from, our code of business conduct and ethics that are required to be publicly disclosed pursuant to rules of the SEC or NASDAQ.
Industry Background
Semiconductor components are the electronic building blocks used in electronic systems and equipment. These components are classified as either discrete devices, such as individual transistors, or ICs, in which a number of transistors and other elements are combined to form a more complicated electronic circuit. ICs may be divided into two general categories, digital and analog. Digital circuits, such as memory devices and microprocessors, generally process on-off electrical signals, represented by binary digits, “1” and “0”. In contrast, analog ICs monitor, condition, amplify or transform continuous analog signals associated with physical properties, such as temperature, pressure, weight, light, sound or motion, and play an important role in bridging between real world phenomena and a variety of electronic systems. Analog ICs also provide voltage regulation and power control to electronic systems.
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Organizational Structure
The organization is viewed based upon the products manufactured and the end markets served. The product group is focused on core technology development and leadership in converters, amplifiers and RF, MEMS, power management, and DSP. The end market-focused organization is dedicated to understanding, selecting, and resourcing initiatives that are more customized to a particular market or application. The focus of this team is to apply the full expanse of our broad technology portfolio to more integrated and targeted product strategies for the industrial, automotive, consumer, and communications markets. The end market group includes our sales organization.
These two groups collaborate at all levels. Our product group develops key technology for use by the end market groups, which apply these technologies to specific applications. Equally important, the applications expertise within each end market group is used to enhance and direct core technology development by our product group.
Principal Products
We design, manufacture and market a broad line of high-performance ICs that incorporate analog, mixed-signal and digital signal processing technologies. Our ICs are designed to address a wide range of real-world signal processing applications. Our product portfolio includes both general-purpose products used by a broad range of customers and applications, as well as application-specific products designed for specific clusters of customers in key target markets. By using readily available, high-performance, general-purpose products in their systems, our customers can reduce the time they need to bring new products to market. Given the high cost of developing more customized ICs, our standard products often provide a cost-effective solution for many low to medium volume applications. However, for some industrial, automotive, consumer, and communications products, we focus on working with leading customers to design application-specific solutions. We begin with our existing core technologies in data conversion, amplification, RF, MEMS, power management and DSP, and devise a solution to more closely meet the needs of a specific customer or group of customers. Because we have already developed the core technology for our general-purpose products, we can create application-specific solutions quickly.
We produce and market several thousand products and operate in one reportable segment based on the aggregation of five operating segments. Our ten highest revenue products, in the aggregate, accounted for approximately 9% of our revenue for fiscal 2013. A breakdown of our fiscal 2013 revenue by product category follows.
Percent of | ||
Fiscal 2013 | ||
Product Category | Revenue | |
Converters | 45% | |
Amplifiers/ Radio frequency | 26% | |
Other analog | 14% | |
Power management & reference | 7% | |
Digital signal processing | 9% | |
Analog Products
Our analog and mixed signal IC technology has been the foundation of our business for over four decades, and we are one of the world’s largest suppliers of high-performance analog ICs. Our analog signal processing ICs are primarily high-performance devices, offering higher dynamic range, greater bandwidth, and other enhanced features. The principal advantages these products have as compared to competitors’ products include higher accuracy, higher speed, lower cost per function, smaller size, lower power consumption and fewer components, resulting in improved performance and reliability. Our product portfolio includes several thousand analog ICs, any one of which can have as many as several hundred customers. Our analog ICs typically have long product life cycles. Our analog IC customers include original equipment manufacturers (OEMs) and customers who build electronic subsystems for integration into larger systems.
Converters — We are a leading supplier of data converter products. Data converters translate real-world analog signals into digital data and also translate digital data into analog signals. Data converters remain our largest and most diverse product family and an area where we are continuously innovating to enable our customers to redefine and differentiate their products. Our converter products combine sampling rates and accuracy with the low noise, power, price and small package size required by industrial, automotive, consumer, and communications electronics.
Amplifiers/Radio Frequency — We are also a leading supplier of high-performance amplifiers. Amplifiers are used to condition analog signals. High performance amplifiers emphasize the performance dimensions of speed and precision. Within this product portfolio we provide precision, instrumentation, high speed, intermediate frequency/RF, broadband, and other amplifiers. We also offer an extensive portfolio of precision voltage references that are used in a wide variety of applications.
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Our analog product line also includes a broad portfolio of high performance RF ICs covering the entire RF signal chain, from industry-leading stand-alone RF function blocks such as phase locked loops, frequency synthesizers, mixers, modulators, demodulators, and power detectors, to highly integrated broadband and short-range single chip transceiver solutions. Our high performance RF ICs support the high performance requirements of cellular infrastructure and a broad range of applications in our target markets.
Other Analog — Also within our analog technology portfolio are products that are based on MEMS technology. This technology enables us to build extremely small sensors that incorporate an electromechanical structure and the supporting analog circuitry for conditioning signals obtained from the sensing element. Our MEMS product portfolio includes accelerometers used to sense acceleration, gyroscopes used to sense rotation and inertial measurement units used to sense multiple degrees of freedom combining multiple sensing types along multiple axes. The majority of our current revenue from MEMS products is derived from the automotive end market. The consumer and, to a lesser extent, the industrial end markets, accounted for the balance of revenue from MEMS products in fiscal year 2013. In addition to our MEMS products, our other analog product category includes isolators that enable designers to implement isolation in designs without the cost, size, power, performance, and reliability constraints found with optocouplers. Our isolators have been designed into hundreds of applications, such as universal serial bus isolation in patient monitors, where it allows hospitals and physicians to adopt the latest advances in computer technology to supervise patient health and wirelessly transmit medical records. In smart metering applications, our isolators provide reliable electrostatic discharge performance that helps reduce meter tampering. Likewise, in satellites, where any malfunction can be catastrophic, our isolators help protect the power system while enabling designers to achieve small form factors.
Power Management & Reference — Power management & reference products make up the balance of our analog sales. Those products, which include functions such as power conversion, driver monitoring, sequencing and energy management, are developed to complement analog signal chain components across core market segments from micro power, energy-sensitive battery applications to efficient, high performance power systems in infrastructure and industrial applications.
Digital Signal Processing Products
Digital Signal Processing products (DSPs) complete our product portfolio. DSPs are optimized for high-speed numeric calculations, which are essential for instantaneous, or real-time, processing of digital data generated, in most cases, from analog to digital signal conversion. Our DSPs are designed to be fully programmable and to efficiently execute specialized software programs, or algorithms, associated with processing digitized real-time, real-world data. Programmable DSPs are designed to provide the flexibility to modify the device’s function quickly and inexpensively using software. Our general-purpose DSP IC customers typically write their own algorithms using software development tools provided by us and third-party suppliers. Our DSPs are designed in families of products that share common architectures and therefore can execute the same software across a range of products. We support these products with easy-to-use development tools, which are designed to reduce our customers’ product development costs and time-to-market. Our customers use our products to solve a wide range of signal processing challenges across our core market and segment focus areas within the industrial, automotive, consumer and communications end markets. As an integrated part of our customers' signal chain, there are typically many other Analog Devices products connected to our processors including converters, audio and video codecs and power management solutions.
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Markets and Applications
The breakdown of our fiscal 2013 revenue by end market is set out in the table below.
Percent of | ||
Fiscal 2013 | ||
End Market | Revenue* | |
Industrial | 46% | |
Automotive | 18% | |
Consumer | 15% | |
Communications | 20% | |
* The sum of the individual percentages do not equal 100% due to rounding.
The following describes some of the characteristics of, and customer products within, our major end markets:
Industrial — Our industrial market includes the following sectors:
Industrial and Instrumentation — Our industrial automation applications generally require ICs that offer performance greater than that available from commodity-level ICs but generally do not have production volumes that warrant custom ICs. There is a trend towards development of products focused on particular sub-applications, which incorporate combinations of analog, mixed-signal, and DSP ICs to achieve the necessary functionality. Our instrumentation customers differentiate themselves by using the highest performance analog and mixed-signal ICs available. Our industrial and instrumentation market includes applications such as:
• Process control systems | • Oscilloscopes | |
• Robotics | • Lab, chemical, and environmental analyzers | |
• Environmental control systems | • Weigh scales | |
Defense/Aerospace — The defense, commercial avionics and space markets all require high-performance ICs that meet rigorous environmental and reliability specifications. Many of our analog ICs can be supplied in versions that meet these standards. In addition, many products can be supplied to meet the standards required for broadcast satellites and other commercial space applications. Most of our products sold in this market are specially tested versions of products derived from our standard product offering. Customer products include:
• Navigation systems | • Radar systems | |
• Space and satellite communications | • Security devices | |
Energy Management — The desire to improve energy efficiency, conservation, reliability, and cleanliness is driving investments in renewable energy, power transmission and distribution systems, electric meters, and other innovative areas. The common characteristic behind these efforts is the addition of sensing, measurement, and communication technologies to electrical infrastructure. Our offerings include both standard and application-specific products and are used in applications such as:
• Utility meters | • Wind turbines | |
• Meter communication modules | • Solar inverters | |
• Substation relays and automation equipment | • Building energy automation/control | |
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Healthcare — Two significant trends in the healthcare market today are the increasing need for higher channel counts in medical imaging systems to improve resolution and throughput while achieving a lower cost per channel, and the movement of highly accurate patient monitoring devices from the hospital environment to the home, improving patient care and reducing overall healthcare costs. Our innovative technologies are designed into a variety of high performance imaging, patient monitoring, medical instrumentation, and home health devices. Our offerings include both standard and application-specific products and are used in applications such as:
• Ultrasound | • Infusion pumps | |
• CT scanners | • Clinical lab instrumentation | |
• Digital x-ray | • Surgical instrumentation | |
• Multi-parameter patient monitors | • Blood analyzers | |
• Pulse oximeters | • Activity monitors | |
Automotive — We develop differentiated high performance signal processing solutions that enable sophisticated automotive systems to be greener, safer and more comfortable. Through collaboration with manufacturers worldwide, ADI has achieved significant market share through a broad portfolio of analog, digital and MEMS ICs that increase fuel efficiency, enhance vehicle stability and improve the audio/video experience of passengers. Specifically, we have developed products used in applications such as:
Green | Safety | Comfort | ||||||||
• | Hybrid electric / electric vehicles | • | Crash sensors in airbag systems | • | Car audio amplifiers | |||||
• | Intelligent battery sensors | • | Electronic stability systems | • | Head unit solutions | |||||
• | Battery monitoring and management systems | • | Advanced driver assistance systems (RADAR/Vision) | • | Rear seat entertainment systems | |||||
• | Vehicle dynamic control systems | |||||||||
Consumer — To address the market demand for digital entertainment systems and the consumer demand for high quality voice transmissions, music, movies and photographs with a high degree of interactivity, we have developed analog and digital solutions that meet the rigorous cost and time-to-market requirements of the consumer electronics market. The emergence of high-performance, feature-rich consumer products has created a market for our high-performance ICs with a high level of specific functionality. These products include:
• Digital cameras | • High-performance audio/video equipment | |
• High-definition televisions and DVD recorders/players | • Portable media devices (smart phones, tablets and cellular handsets) | |
• Home theater systems | • Computers | |
Communications — The development of broadband, wireless and internet infrastructures around the world has created an important market for our communications products. Communications technology involves the acquisition of analog signals that are converted from analog to digital and digital to analog form during the process of transmitting and receiving data. The need for higher speed and reduced power consumption, coupled with more reliable, bandwidth-efficient communications, creates demand for our products, which are used in the full spectrum of signal processing for internet protocol, video streaming and voice communication. In wireless and broadband communication applications, our products are incorporated into:
• | Cellular basestation equipment | • | Wired networking equipment | |||
• | Wireless backhaul systems | • | Satellite systems | |||
See Note 4 in the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for further information about our products by category and end market.
Research and Development
Our markets are characterized by rapid technological changes and advances. Accordingly, we make substantial investments in the design and development of new products and manufacturing processes, and the improvement of existing products and manufacturing processes. We spent approximately $513 million during fiscal 2013 on the design, development and improvement of new and existing products and manufacturing processes, compared to approximately $512 million during fiscal 2012 and approximately $506 million during fiscal 2011.
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Our research and development strategy focuses on building technical leadership in core technologies of converters, amplifiers and RF, MEMS, power management, and DSP. In support of our research and development activities, we employ thousands of engineers involved in product and manufacturing process development throughout the world.
Patents and Other Intellectual Property Rights
We seek to establish and maintain our proprietary rights in our technology and products through the use of patents, copyrights, mask works, trademarks and trade secrets. We have a program to file applications for and obtain patents, copyrights, mask works and trademarks in the United States and in selected foreign countries where we believe filing for such protection is appropriate. We also seek to maintain our trade secrets and confidential information by nondisclosure policies and through the use of appropriate confidentiality agreements. We have obtained a substantial number of patents and trademarks in the United States and in other countries. As of November 2, 2013, we held approximately 1,950 U.S. patents and approximately 700 non-provisional pending U.S. patent applications with expiration dates ranging from 2013 through 2033. There can be no assurance, however, that the rights obtained can be successfully enforced against infringing products in every jurisdiction. While our patents, copyrights, mask works, trademarks and trade secrets provide some advantage and protection, we believe our competitive position and future success is largely determined by such factors as the system and application knowledge, innovative skills, technological expertise and management ability and experience of our personnel; the range and success of new products being developed by us; our market brand recognition and ongoing marketing efforts; and customer service and technical support. It is generally our policy to seek patent protection for significant inventions that may be patented, though we may elect, in certain cases, not to seek patent protection even for significant inventions, if we determine other protection, such as maintaining the invention as a trade secret, to be more advantageous. We also have trademarks that are used in the conduct of our business to distinguish genuine Analog Devices products and we maintain cooperative advertising programs to promote our brands and identify products containing genuine Analog Devices components.
Sales Channels
We sell our products globally through a direct sales force, third-party distributors, independent sales representatives and via our website. We have direct sales offices, sales representatives and/or distributors in over 40 countries outside North America.
We support our worldwide technical direct field sales efforts 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. We publish and distribute product catalogs, applications guides, technical handbooks and detailed data sheets for individual products. We also provide this information and sell products via our website. We maintain a staff of field application engineers who aid customers in incorporating our products into their products. In addition, we offer a variety of web-based tools that ease product selection and aid in the design process for our customers.
We derived approximately 55% of our fiscal 2013 revenue from sales made through distributors. These distributors typically maintain an inventory of our products. Some of them also sell products that compete with our products, including those for which we are an alternate source. In all regions of the world, we defer revenue and the related cost of sales on shipments to distributors until the distributors resell the products to their customers. We make sales to distributors under agreements that allow distributors to receive price adjustment credits and to return qualifying products for credit, as determined by us, in order to reduce the amounts of slow-moving, discontinued or obsolete product from their inventory. These agreements limit such returns to a certain percentage of our shipments to that distributor during the prior quarter. In addition, distributors are allowed to return unsold products if we terminate the relationship with the distributor. Additional information relating to our sales to distributors is set forth in Note 2n in the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K.
Segment Financial Information and Geographic Information
We operate and track our results in one reportable segment based on the aggregation of five operating segments.
Through subsidiaries and affiliates, we conduct business in numerous countries outside the United States. During fiscal 2013, we derived approximately 69% of our revenue from customers in international markets. Our international business is subject to risks customarily encountered in foreign operations, including fluctuations in foreign currency exchange rates and controls, import and export controls, and other laws, policies and regulations of foreign governments. Although we engage in hedging transactions to reduce our exposure to currency exchange rate fluctuations, our competitive position may be adversely affected by changes in the exchange rate of the United States dollar against other currencies.
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Revenue by geographic region, based on the primary location of our customers' design activity for our products, for fiscal 2013 was as follow:
Percent of | ||
Fiscal 2013 | ||
Geographic Area | Revenue | |
United States | 31% | |
Rest of North/South America | 4% | |
Europe | 32% | |
Japan | 11% | |
China | 13% | |
Rest of Asia | 9% | |
For further detail regarding revenue and financial information about our industry, segment and geographic areas, see our Consolidated Financial Statements and Note 4 in the related Notes contained in Item 8 of this Annual Report on Form 10-K.
Customers
We have tens of thousands of customers worldwide. No sales to an individual customer accounted for more than 10% of fiscal year 2013, 2012, or 2011 revenue. These customers use hundreds of different types of our products in a wide range of applications spanning the industrial, automotive, consumer and communication markets. Our largest single customer, excluding distributors, represented approximately 4% of our fiscal 2013 revenue. Our 20 largest customers, excluding distributors, accounted for approximately 34% of our fiscal 2013 revenue.
Seasonality
Sales to customers during our first fiscal quarter may be lower than other quarters due to plant shutdowns at some of our customers during the holiday season. In general, the seasonality for any specific period of time has not had a material impact on our results of operations. In addition, as explained in our risk factors contained in Item 1A of this Annual Report on Form 10-K, our revenue is more likely to be influenced on a quarter to quarter basis by cyclicality in the semiconductor industry.
Production and Raw Materials
Monolithic IC 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 and ceramic and plastic used for packaging.
We develop and employ a wide variety of proprietary manufacturing processes that are specifically tailored for use in fabricating high-performance analog, DSP, mixed-signal and MEMS ICs. We also use bipolar and complementary metal-oxide semiconductor, or CMOS, wafer fabrication processes.
Our IC products are fabricated both at our production facilities and by third-party wafer fabricators. Our products are manufactured in our own wafer fabrication facilities using proprietary processes and at third-party wafer-fabrication foundries using sub-micron digital CMOS processes. We currently source approximately 50% of our wafer requirements annually from third-party wafer fabrication foundries, primarily Taiwan Semiconductor Manufacturing Company (TSMC). We operate wafer fabrication facilities in Wilmington, Massachusetts and Limerick, Ireland. We also operate test facilities located in the Philippines and use third-party subcontractors for the assembly and testing of our products.
Capital spending was approximately $123 million in fiscal 2013, compared with approximately $132 million in fiscal 2012. We expect capital expenditures for fiscal 2014 to be approximately $150 million, of which about two-thirds relates to ongoing capital spending, and about one-third relates to capital spending for a new building we are constructing on our campus in Ireland.
Our products require a wide variety of components, raw materials and external foundry services, most of which we purchase from third-party suppliers. We have multiple sources for many of the components and materials that we purchase and incorporate into our products. However, a large portion of our external wafer purchases and foundry services are from a limited number of suppliers, primarily TSMC. If TSMC or any of our other key suppliers are unable or unwilling to manufacture and deliver sufficient quantities of components to us, on the time schedule and of the quality that we require, we may be forced to seek to engage additional or replacement suppliers, which could result in significant expenses and disruptions or delays in manufacturing, product development and shipment of product to our customers. Although we have experienced shortages of
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components, materials and external foundry services from time to time, these items have generally been available to us as needed.
Backlog
Backlog at the end of fiscal 2013 was approximately $345 million, down from approximately $357 million at the end of fiscal 2012. We define backlog as of a particular date to mean firm orders from a customer or distributor with a requested delivery date within thirteen weeks. Backlog is impacted by the tendency of customers to rely on shorter lead times available from suppliers, including us, in periods of depressed demand. In periods of increased demand, there is a tendency towards longer lead times that has the effect of increasing backlog and, in some instances, we may not have manufacturing capacity sufficient to fulfill all orders. As is customary in the semiconductor industry, we allow most orders to be cancelled or deliveries to be delayed by customers without significant penalty. Accordingly, we believe that our backlog at any time should not be used as an indication of our future revenue.
We typically do not have long-term sales contracts with our customers. In some of our markets where end-user demand may be particularly volatile and difficult to predict, some customers place orders that require us to manufacture product and have it available for shipment, even though the customer is unwilling to make a binding commitment to purchase all, or even any, of the product. In other instances, we manufacture product based on forecasts of customer demand. As a result, we may incur inventory and manufacturing costs in advance of anticipated sales and are subject to the risk of cancellation of orders leading to a sharp reduction of sales and backlog. Further, those orders or forecasts may be for products that meet the customer’s unique requirements so that those canceled orders would, in addition, result in an inventory of unsaleable products, resulting in potential inventory write-offs. As a result of lengthy manufacturing cycles for some of our products that are subject to these uncertainties, the amount of unsaleable product could be substantial.
Government Contracts
We estimate that approximately 3% of our fiscal 2013 revenue was attributable to sales to the U.S. government and U.S. government contractors and subcontractors. Our government contract business is predominantly in the form of negotiated, firm, fixed-price subcontracts. Most of these contracts and subcontracts contain standard provisions relating to termination at the election of the U.S. government.
Acquisitions, Divestitures and Investments
An element of our business strategy involves expansion through the acquisition of businesses, assets, products or technologies that allow us to complement our existing product offerings, expand our market coverage, increase our engineering workforce or enhance our technological capabilities. From time to time, we consider acquisitions and divestitures that may strengthen our business.
On October 31, 2013, we completed the sale of the assets and intellectual property related to our microphone product line to InvenSense, Inc. (InvenSense). We received $100.0 million in cash for the assets and intellectual property at the closing. In addition, we have agreed to provide InvenSense with various transition services subsequent to the closing. We may receive additional cash payments, not to exceed $70.0 million, based on the achievement of certain revenue milestones through the first anniversary of the closing date.
Additional information relating to our acquisition and divestiture activities during fiscal years 2013, 2012 and 2011 is set forth in Note 2u, Note 6 and Note 17 of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K.
Competition
We believe that competitive performance in the marketplace for signal processing products depends upon multiple factors, including technological innovation, strength of brand, diversity of product portfolio, product performance, technical support, delivery capabilities, customer service quality, reliability and price, with the relative importance of these factors varying among products, markets, and customers.
We compete with a number of semiconductor companies in markets that are highly competitive. Our competitors include but are not limited to:
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• Broadcom Corporation | • Microchip Technology, Inc. | |
• Freescale Semiconductor, Inc. | • NXP Semiconductors | |
• Infineon Technologies | • ST Microelectronics | |
• Intersil Corporation | • Silicon Laboratories, Inc. | |
• Linear Technology Corporation | • Texas Instruments, Inc. | |
• Maxim Integrated Products, Inc. | ||
We believe that our technical innovation emphasizing product performance and reliability, supported by our commitment to strong customer service and technical support, enables us to make a fundamental difference to our customers’ competitiveness in our chosen markets.
Environment, Health and Safety
We are committed to protecting the environment and the health and safety of our employees, customers and the public. We endeavor to adhere to applicable environmental, health and safety (EHS) regulatory and industry standards across all of our facilities, and to encourage pollution prevention, reduce our water and energy consumption, reduce waste generation, and strive towards continual improvement. We strive to achieve excellence in EHS management practices as an integral part of our total quality management system.
Our management systems are certified to ISO 14001, OHSAS 18001, ISO 9001 and TS16949. We are a member of the Electronic Industry Citizenship Coalition (EICC). Our Sustainability Report, first published in 2009, states our commitment to consuming less energy and applying fair labor standards, among other things. We are not including the information contained in our Sustainability Report in, or incorporating it by reference into this Annual Report on Form 10-K.
Our manufacturing facilities are subject to numerous and increasingly strict federal, state, local and foreign EHS laws and regulations, particularly with respect to the transportation, storage, handling, use, emission, discharge and disposal of certain chemicals used or produced in the semiconductor manufacturing process. Our products are subject to increasingly stringent regulations regarding chemical content in jurisdictions where we sell products, including the Restriction of Hazardous Substances (RoHS) directive in the European Union and China and the Registration, Evaluation, Authorization and Restriction of Chemicals (REACH) directive in the European Union. Contracts with many of our customers reflect these and additional EHS compliance standards. Compliance with these laws and regulations has not had a material impact on our capital expenditures, earnings, financial condition or competitive position. There can be no assurance, however, that current or future environmental laws and regulations will not impose costly requirements upon us. Any failure by us to comply with applicable environmental laws, regulations and contractual obligations could result in fines, suspension of production, the need to alter manufacturing processes and legal liability.
Employees
As of November 2, 2013, we employed approximately 9,100 individuals worldwide. Our future success depends in large part on the continued service of our key technical and senior management personnel, and on our ability to continue to attract, retain and motivate qualified employees, particularly those highly-skilled design, process, test and applications engineers involved in the design, support and manufacture of new and existing products and processes. We believe that relations with our employees are good; however, the competition for such personnel is intense, and the loss of key personnel could have a material adverse impact on our results of operations and financial condition.
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ITEM 1A. RISK FACTORS
Set forth below and elsewhere in this report and in other documents we file with the SEC are descriptions of the risks and uncertainties that could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this report.
Disruptions in global credit and financial markets could materially and adversely affect our business and results of operations.
There is significant continuing uncertainty regarding the stability of global credit and financial markets. These economic uncertainties may lead consumers and businesses to postpone spending, which may cause our customers to cancel, decrease or delay their existing and future orders for our products and make it difficult for us to accurately forecast and plan our future business activities. Uncertainty regarding the future stability of the Euro Zone could cause the value of the Euro to deteriorate, thus reducing the purchasing power of our European customers. In addition, financial difficulties experienced by our suppliers or distributors could result in product delays, increased accounts receivable defaults and inventory challenges. During the past few years, many governments adopted stimulus or spending programs designed to ease the economic impact of the crisis. Some of our businesses benefited from these stimulus programs and there can be no assurance that such programs will continue in the future. If economic conditions deteriorate, we may record additional charges relating to restructuring costs or the impairment of assets and our business and results of operations could be materially and adversely affected.
Our future revenue, gross margins, operating results and net income are difficult to predict and may materially fluctuate.
Our future revenue, gross margins, operating results and net income are difficult to predict and may be materially affected by a number of factors, including:
• | the effects of adverse economic conditions in the markets in which we sell our products; |
• | changes in customer demand for our products and for end products that incorporate our products; |
• | our ability to effectively manage our cost structure in both the short term and over a longer duration; |
• | the timing of new product announcements or introductions by us, our customers or our competitors; |
• | competitive pricing pressures; |
• | fluctuations in manufacturing yields, adequate availability of wafers and other raw materials, and manufacturing, assembly and test capacity; |
• | the ability of our third-party suppliers, subcontractors and manufacturers to supply us with sufficient quantities of raw materials, products and/or components; |
• | any significant decline in our backlog; |
• | the timing, delay or cancellation of significant customer orders and our ability to manage inventory; |
• | our ability to hire, retain and motivate adequate numbers of engineers and other qualified employees to meet the demands of our customers; |
• | changes in geographic, product or customer mix; |
• | our ability to utilize our manufacturing facilities at efficient levels; |
• | potential significant litigation-related costs; |
• | the difficulties inherent in forecasting future operating expense levels, including with respect to costs associated with labor, utilities, transportation and raw materials; |
• | the costs related to compliance with increasing worldwide environmental and social responsibility regulations; |
• | changes in our effective tax rates in the United States, Ireland or worldwide; and |
• | the effects of public health emergencies, natural disasters, widespread travel disruptions, security risks, terrorist activities, international conflicts and other events beyond our control. |
In addition, the semiconductor market has historically been cyclical and subject to significant economic upturns and downturns. Our business is subject to rapid technological changes and there can be no assurance (i) that products stocked in our inventory will not be rendered obsolete before we ship them, or (ii) that we will be able to produce products in a timely fashion to accommodate changing customer demand. As a result of these and other factors, there can be no assurance that we will not
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experience material fluctuations in future revenue, gross margins, operating results and net income on a quarterly or annual basis. In addition, if our revenue, gross margins, operating results and net income do not meet the expectations of securities analysts or investors, the market price of our common stock may decline.
Changes in our effective tax rate may impact our results of operations.
A number of factors may increase our future effective tax rate, including: changes in tax laws or the interpretation of such tax laws; increases in tax rates in various jurisdictions; variation in the jurisdictions in which profits are earned and taxed; any adverse resolution of ongoing tax audits or adverse rulings from taxing authorities worldwide; changes in the valuation of our deferred tax assets and liabilities; adjustments to income taxes upon finalization of various tax returns; increases in expenses not deductible for tax purposes, including executive compensation subject to the limitations of Section 162(m) of the Internal Revenue Code and amortization of assets acquired in connection with strategic transactions; decreased availability of tax deductions for stock-based compensation awards worldwide; and changes in available tax credits. Any significant increase in our future effective tax rates could adversely impact our net income during future periods.
Long-term contracts are not typical for us and reductions, cancellations or delays in orders for our products could adversely affect our operating results.
We typically do not have long-term sales contracts with our customers. In certain markets where end-user demand may be particularly volatile and difficult to predict, some customers place orders that require us to manufacture product and have it available for shipment, even though the customer is unwilling to make a binding commitment to purchase all, or even any, of the product. In other instances, we manufacture product based on forecasts of customer demands. As a result, we may incur inventory and manufacturing costs in advance of anticipated sales and are subject to the risk of cancellations of orders, leading to a sharp reduction of sales and backlog. Further, orders or forecasts may be for products that meet the customer’s unique requirements so that those canceled or unrealized orders would, in addition, result in an inventory of unsaleable products, causing potential inventory write-offs. As a result of lengthy manufacturing cycles for certain of the products that are subject to these uncertainties, the amount of unsaleable product could be substantial. Incorrect forecasts, or reductions, cancellations or delays in orders for our products could adversely affect our operating results.
Our future success depends upon our ability to continue to innovate, improve our products, develop and market new products, and identify and enter new markets.
Our future success significantly depends on our continued ability to improve our products and develop and market innovative new products. Product development, innovation and enhancement is often a complex, time-consuming and costly process involving significant investment in research and development, with no assurance of return on investment. There can be no assurance that we will be able to develop and introduce new and improved products in a timely or efficient manner or that new and improved products, if developed, will achieve market acceptance. Our products generally must conform to various evolving and sometimes competing industry standards, which may adversely affect our ability to compete in certain markets or require us to incur significant costs. In addition, our customers generally impose very high quality and reliability standards on our products, which often change and may be difficult or costly to satisfy. Any inability to satisfy customer quality standards or comply with industry standards and technical requirements may adversely affect demand for our products and our results of operations. In addition, our growth is dependent on our continued ability to identify and penetrate new markets where we have limited experience and competition is intense. Also, some of our customers in these markets are less established, which could subject us to increased credit risk. There can be no assurance that the markets we serve will grow in the future, that our existing and new products will meet the requirements of these markets, that our products will achieve customer acceptance in these markets, that competitors will not force price reductions or take market share from us, or that we can achieve or maintain adequate gross margins or profits in these markets. Furthermore, a decline in demand in one or several of our end-user markets could have a material adverse effect on the demand for our products and our results of operations.
We may not be able to compete successfully in markets within the semiconductor industry in the future.
We face intense technological and pricing competition in the semiconductor industry, and we expect this competition to increase in the future, including from companies located outside the United States. Many companies have sufficient financial, manufacturing, technical, sales and marketing resources to develop and market products that compete with our products. Some of our competitors may have more advantageous supply or development relationships with our current and potential customers or suppliers. Our competitors also include emerging companies selling specialized products in markets we serve.
Competition is generally based on design and quality of products, product performance, features and functionality, and product pricing, availability and capacity, with the relative importance of these factors varying among products, markets and customers. Existing or new competitors may develop products or technologies that more effectively address the demands of our customers and markets with enhanced performance, features and functionality, lower power requirements, greater levels of integration or
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lower cost. Increased competition in certain markets has resulted in and may continue to result in declining average selling prices, reduced gross margins and loss of market share in those markets. There can be no assurance that we will be able to compete successfully in the future against existing or new competitors, or that our operating results will not be adversely affected by increased competition.
We rely on third-party suppliers, subcontractors and manufacturers for some industry-standard wafers, manufacturing processes and assembly and test services, and generally cannot control their availability or conditions of supply.
We rely, and plan to continue to rely, on suppliers, assembly and test subcontractors, and third-party wafer fabricators to supply most of our wafers that can be manufactured using industry-standard submicron processes. This reliance involves several risks, including reduced control over availability, capacity utilization, delivery schedules, manufacturing yields, and costs. We currently source approximately 50% of our wafer requirements annually from third-party wafer fabrication foundries, primarily Taiwan Semiconductor Manufacturing Company, or TSMC. In addition, these suppliers often provide manufacturing services to our competitors and therefore periods of increased industry demand may result in capacity constraints. In certain instances, the third-party supplier is the sole source of highly specialized processing services. If our suppliers are unable or unwilling to manufacture and deliver components to us on the time schedule and of the quality or quantity that we require or provide us with required manufacturing processes, we may be forced to seek to engage additional or replacement suppliers, which could result in additional expenses and delays in product development or shipment of product to our customers. If replacement suppliers or manufacturing processes are not available, we may also experience delays in product development or shipment which could, in turn, result in the temporary or permanent loss of customers.
The markets for semiconductor products are cyclical, and increased production may lead to overcapacity and lower prices, and conversely, we may not be able to satisfy unexpected demand for our products.
The cyclical nature of the semiconductor industry has resulted in periods when demand for our products has increased or decreased rapidly. If we expand our operations and workforce too rapidly or procure excessive resources in anticipation of increased demand for our products, and that demand does not materialize at the pace at which we expect, or declines, or if we overbuild inventory in a period of decreased demand, our operating results may be adversely affected as a result of increased operating expenses, reduced margins, underutilization of capacity or asset impairment charges. These capacity expansions by us and other semiconductor manufacturers could also lead to overcapacity in our target markets which could lead to price erosion that would adversely impact our operating results. Conversely, during periods of rapid increases in demand, our available capacity may not be sufficient to satisfy the demand. In addition, we may not be able to expand our workforce and operations in a sufficiently timely manner, procure adequate resources and raw materials, or locate suitable third-party suppliers, to respond effectively to changes in demand for our existing products or to the demand for new products requested by our customers, and our current or future business could be materially and adversely affected.
Our semiconductor products are complex and we may be subject to product warranty and indemnity claims, which could result in significant costs and damage to our reputation and adversely affect the market acceptance of our products.
Semiconductor products are highly complex and may contain defects when they are first introduced or as new versions are developed. We generally warrant our products to our customers for one year from the date title passes from us. We invest significant resources in the testing of our products; however, if any of our products contain defects, we may be required to incur additional development and remediation costs, pursuant to warranty and indemnification provisions in our customer contracts and purchase orders. These problems may divert our technical and other resources from other product development efforts and could result in claims against us by our customers or others, including liability for costs associated with product recalls, which may adversely impact our operating results. We may also be subject to customer indemnity claims. Our customers have on occasion been sued, and may in the future be sued, by third parties alleging infringement of intellectual property rights, or damages resulting from use of our products. Those customers may seek indemnification from us under the terms and conditions of our sales contracts with them. In certain cases, our potential indemnification liability may be significant. If any of our products contains defects, or has reliability, quality or compatibility problems, our reputation may be damaged, which could make it more difficult for us to sell our products to existing and prospective customers and could adversely affect our operating results.
We have manufacturing processes that utilize a substantial amount of technology as the fabrication of integrated circuits is a highly complex and precise process. Minute impurities, contaminants in the manufacturing environment, difficulties in the fabrication process, defects in the masks used in the wafer manufacturing process, manufacturing equipment failures, wafer breakage or other factors can cause a substantial percentage of wafers to be rejected or numerous dice on each wafer to be nonfunctional. While we have significant expertise in semiconductor manufacturing, it is possible that some processes could become unstable. This instability could result in manufacturing delays and product shortages, which could have a material adverse effect on our operating results.
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We are involved in frequent litigation, including regarding intellectual property rights, which could be costly to bring or defend and could require us to redesign products or pay significant royalties.
The semiconductor industry is characterized by frequent claims and litigation involving patent and other intellectual property rights, including claims arising under our contractual obligations to indemnify our customers. Other companies or individuals have obtained patents covering a variety of semiconductor designs and processes, and we might be required to obtain licenses under some of these patents or be precluded from making and selling infringing products, if those patents are found to be valid and infringed by us. In the event a third party makes a valid intellectual property claim against us and a license is not available to us on commercially reasonable terms, or at all, we could be forced either to redesign or to stop production of products incorporating that intellectual property, and our operating results could be materially and adversely affected. Litigation may be necessary to enforce our patents or other of our intellectual property rights or to defend us against claims of infringement, and this litigation could be costly and divert the attention of our key personnel. We could be subject to indemnity, warranty or product liability claims that could lead to significant costs and expenses as we defend those claims or pay damage awards. There can be no assurance that we are adequately insured to protect against all claims and potential liabilities. We may incur costs and expenses relating to a recall of our customers’ products due to an alleged failure of components we supply. An adverse outcome in litigation could have a material adverse effect on our financial position or on our operating results or cash flows in the period in which the litigation is resolved.
We may be unable to adequately protect our proprietary intellectual property rights, which may limit our ability to compete effectively.
Our future success depends, in part, on our ability to protect our intellectual property. We primarily rely on patent, mask work, copyright, trademark and trade secret laws, as well as nondisclosure agreements and other methods, to protect our proprietary technologies and processes. Despite our efforts to protect our intellectual property, it is possible that competitors or other unauthorized third parties may obtain, copy, use or disclose our technologies, products and processes. Moreover, the laws of foreign countries in which we design, manufacture, market and sell our products may afford little or no effective protection of our proprietary intellectual property.
There can be no assurance that the claims allowed in our issued patents will be sufficiently broad to protect our technology. In addition, any of our existing or future patents may be challenged, invalidated or circumvented. As such, any rights granted under these patents may not provide us with adequate protection. We may not be able to obtain foreign patents or pending applications corresponding to our U.S. patents and applications. Even if foreign patents are granted, effective enforcement in foreign countries may not be available. If our patents and mask works do not adequately protect our technology, our competitors may be able to offer products similar to ours. Our competitors may also be able to develop similar technology independently or design around our patents.
We generally enter into confidentiality agreements with our employees, consultants and strategic partners. We also try to control access to and distribution of our technologies, documentation and other proprietary information. Despite these efforts, internal or external parties may attempt to copy, disclose, obtain or use our products or technology without our authorization. Also, former employees may seek employment with our business partners, customers or competitors, and there can be no assurance that the confidential nature of our proprietary information will be maintained in the course of such future employment.
A significant disruption in, or breach in security of, our information technology systems could materially and adversely affect our business or reputation.
We rely on information technology systems throughout our Company to keep financial records, process orders, manage inventory, coordinate shipments to customers, and operate other critical functions. Our information technology systems may be susceptible to damage, disruptions or shutdowns due to power outages, hardware failures, telecommunication failures, user errors, catastrophes or other unforeseen events. We may also be subject to security breaches caused by computer viruses, illegal break-ins or hacking, sabotage, or acts of vandalism by third parties. Our security measures or those of our third party service providers may not detect or prevent security breaches. If we were to experience a prolonged disruption in the information technology systems that involve our interactions with customers or suppliers, it could result in the loss of sales and customers and significant incremental costs, which could adversely affect our business. In addition, security breaches of our information technology systems could result in the misappropriation or unauthorized disclosure of confidential information belonging to us or to our employees, partners, customers or suppliers, which could result in our suffering significant financial or reputational damage.
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If we do not retain our key personnel, our ability to execute our business strategy will be adversely affected.
Our continued success depends to a significant extent upon the recruitment, retention and effective succession of our executive officers and key management and technical personnel, particularly our experienced engineers. The competition for these employees is intense. The loss of the services of one or more of our key personnel could have a material adverse effect on our operating results. In addition, there could be a material adverse effect on our business should the turnover rates for engineers and other key personnel increase significantly or if we are unable to continue to attract qualified personnel. We do not maintain any key person life insurance policy on any of our officers or employees.
To remain competitive, we may need to acquire other companies, purchase or license technology from third parties, or enter into other strategic transactions in order to introduce new products or enhance our existing products.
An element of our business strategy involves expansion through the acquisitions of businesses, assets, products or technologies that allow us to complement our existing product offerings, expand our market coverage, increase our engineering workforce or enhance our technological capabilities. We may not be able to find businesses that have the technology or resources we need and, if we find such businesses, we may not be able to purchase or license the technology or resources on commercially favorable terms or at all. Acquisitions and technology licenses are difficult to identify and complete for a number of reasons, including the cost of potential transactions, competition among prospective buyers and licensees, the need for regulatory approvals, and difficulties related to integration efforts. Both in the U.S. and abroad, governmental regulation of acquisitions has become more complex, increasing the costs and risks of undertaking significant acquisitions. In order to finance a potential transaction, we may need to raise additional funds by issuing securities or borrowing money. We may not be able to find financing on favorable terms, and the sale of our stock may result in the dilution of our existing shareholders or the issuance of securities with rights that are superior to the rights of our common shareholders.
Acquisitions also involve a number of risks, including:
• | difficulty integrating acquired technologies, operations and personnel with our existing businesses; |
• | diversion of management attention in connection with both negotiating the acquisitions and integrating the assets; |
• | strain on managerial and operational resources as management tries to oversee larger operations; |
• | the future funding requirements for acquired companies, which may be significant; |
• | potential loss of key employees; |
• | exposure to unforeseen liabilities of acquired companies; and |
• | increased risk of costly and time-consuming litigation. |
If we are unable to successfully address these risks, we may not realize some or all of the expected benefits of the acquisition, which may have an adverse effect on our business plans and operating results.
We rely on supplies, services and manufacturing capacity located in geologically unstable areas, which could affect our ability to produce products.
We, like many companies in the semiconductor industry, rely on supplies, services, internal manufacturing capacity, wafer fabrication foundries and other sub-contractors in geologically unstable locations around the world. This reliance involves risks associated with the impact of earthquakes on us and the semiconductor industry, including temporary loss of capacity, availability and cost of key raw materials, utilities and equipment and availability of key services, including transport of our products worldwide. For example, in fiscal 2011, our revenue in Japan declined as a result of the severe earthquake and tsunami in that country. In addition, flooding in Thailand and the Philippines in 2012 had disruptive effects on local semiconductor-related businesses. Any prolonged inability to utilize one of our manufacturing facilities, or those of our subcontractors or third-party wafer fabrication foundries, as a result of fire, flood, natural disaster, unavailability of utilities or otherwise, could result in a temporary or permanent loss of customers for affected products, which could have a material adverse effect on our results of operations and financial condition.
We are exposed to business, economic, political, legal and other risks through our significant worldwide operations.
We have significant operations and manufacturing facilities outside the United States, including in Ireland and the Philippines. Approximately 69% of our revenue is derived from customers in international markets. Although we engage in hedging transactions to reduce our exposure to currency exchange rate fluctuations, there can be no assurance that our competitive position will not be adversely affected by changes in the exchange rate of the United States dollar against other currencies. Potential interest rate increases, as well as high energy costs, could have an adverse impact on industrial and consumer spending patterns and could adversely impact demand for our products. At November 2, 2013, our principal source
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of liquidity was $4,682.9 million of cash and cash equivalents and short-term investments, of which approximately $1,318.9 million was held in the United States and the remaining balance was held outside the United States in various foreign subsidiaries. As we intend to reinvest our foreign earnings indefinitely, this cash held outside the United States is not readily available to meet our cash requirements in the United States. We require a substantial amount of cash in the United States for operating requirements, stock repurchases, cash dividends and acquisitions. If we are unable to address our U.S. cash requirements through operations, through borrowings under our current credit facility, through future debt or equity offerings or from other sources of cash obtained at an acceptable cost, it may be necessary for us to consider repatriation of earnings that are permanently reinvested, and we may be required to pay additional taxes under current tax laws, which could have a material effect on our results of operations and financial condition.
In addition to being exposed to the ongoing economic cycles in the semiconductor industry, we are also subject to the economic, political and legal risks inherent in international operations, including the risks associated with the recent crisis in global credit and financial markets, ongoing uncertainties and political and economic instability in many countries around the world, as well as economic disruption from acts of terrorism and the response to them by the United States and its allies. Other business risks associated with global operations include increased managerial complexities, air transportation disruptions, expropriation, currency controls, currency exchange rate movement, additional costs related to foreign taxes, tariffs and freight rate increases, exposure to different business practices and legal standards, particularly with respect to price protection, competition practices, intellectual property, anti-corruption and environmental compliance, trade and travel restrictions, pandemics, import and export license requirements and restrictions, difficulties in staffing and managing worldwide operations, and accounts receivable collections. We also incur significant costs associated with our foreign defined benefit pension plans. There can be no assurance that the value of the plan assets will be sufficient in the future and it is possible that we may be required to make higher cash contributions to the plans in future years, which would reduce the cash available for other business purposes.
We expect to continue to expand our business and operations in China. Our success in the Chinese markets may be adversely affected by China’s continuously evolving laws and regulations, including those relating to taxation, import and export tariffs, currency controls, environmental regulations, indigenous innovation, and intellectual property rights and enforcement of those rights. Enforcement of existing laws or agreements may be inconsistent. In addition, changes in the political environment, governmental policies or U.S.-China relations could result in revisions to laws or regulations or their interpretation and enforcement, exposure of our proprietary intellectual property, increased taxation, restrictions on imports, import duties or currency revaluations, which could have an adverse effect on our business plans and operating results.
Our operating results are dependent on the performance of independent distributors.
A significant portion of our sales are through independent distributors that are not under our control. These independent distributors generally represent product lines offered by several companies and thus could reduce their sales efforts applied to our products or they could terminate their representation of us. We generally do not require letters of credit from our distributors and are not protected against accounts receivable default or declarations of bankruptcy by these distributors. Our inability to collect open accounts receivable could adversely affect our operating results. Termination of a significant distributor, whether at our initiative or the distributor’s initiative or through consolidation in the distribution industry, could disrupt our current business, and if we are unable to find suitable replacements, our operating results could be adversely affected.
We are subject to increasingly strict environmental, health and safety (EHS) regulations, which could increase our expenses and affect our operating results.
Our industry is subject to increasingly strict EHS requirements, particularly those environmental requirements that control and restrict the sourcing, use, transportation, emission, discharge, storage and disposal of certain chemicals, minerals, elements and materials used or produced in the semiconductor manufacturing process. Public attention to environmental, sustainability and social responsibility concerns continues to increase, and our customers routinely include stringent environmental and other standards in their contracts with us. Changes in environmental laws or regulations may require us to invest in costly equipment or alter the way our products are made. In addition, we use hazardous and other regulated materials that subject us to risks of strict liability for damages caused by potential or actual releases of such materials. Any failure to control such materials adequately or to comply with statutory or regulatory standards or contractual obligations could result in liability for damages, penalties, and civil and criminal fines, and might damage our reputation, increase our expenses, and adversely affect our operating results.
Compliance with new “conflict minerals” rules recently promulgated by the Securities and Exchange Commission will result in increased costs related to investigations to determine the sources of raw materials used in our products, and to any resulting changes to products, processes or sources of supply. The implementation of these rules could also adversely affect the
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sourcing, supply and pricing of materials used in our products. New climate change laws and regulations could require us to change our manufacturing processes or obtain substitute materials that may cost more or be less available for our manufacturing operations. In addition, new restrictions on emissions of carbon dioxide or other greenhouse gases could result in significant costs for us. The Commonwealth of Massachusetts has adopted greenhouse gas regulations, and the U.S. Congress may pass federal greenhouse gas legislation in the future. The U.S. Environmental Protection Agency (EPA) has issued greenhouse gas reporting regulations that may apply to certain of our operations. The EPA is developing other climate change-based regulations, as are certain states, that also may increase our expenses and adversely affect our operating results. We expect increased worldwide regulatory activity relating to climate change in the future. Compliance with these laws and regulations has not had a material impact on our capital expenditures, earnings, financial condition or competitive position. There is no assurance that the cost to comply with current or future EHS laws and regulations will not exceed our estimates or adversely affect our financial condition or results of operations. Additionally, any failure by us to comply with applicable EHS requirements or contractual obligations could result in penalties, civil and criminal fines, suspension of or changes to production, legal liability and damage to our reputation.
If we are unable to generate sufficient cash flow, we may not be able to service our debt obligations, including making payments on our outstanding senior unsecured notes.
In April 2011, we issued in a public offering $375.0 million aggregate principal amount of 3.0% senior unsecured notes due April 15, 2016 (the 2016 Notes). In June 2013, we issued in a public offering $500.0 million aggregate principal amount of 2.875% senior unsecured notes due June 1, 2023 (the 2023 Notes and together with the 2016 Notes, the Notes). Our ability to make payments of principal and interest on our indebtedness when due depends upon our future performance, which will be subject to general economic conditions, industry cycles and financial, business and other factors affecting our consolidated operations, many of which are beyond our control. If we are unable to generate sufficient cash flow from operations in the future to service our outstanding debt, we may be required to, among other things:
• | seek additional financing in the debt or equity markets; |
• | refinance or restructure all or a portion of our indebtedness, including the Notes; |
• | borrow under our existing revolving credit facility; |
• | divert funds that would otherwise be invested in our operations; |
• | sell selected assets; or |
• | reduce or delay planned capital expenditures or operating expenditures. |
Such measures might not be sufficient to enable us to service our debt, including the Notes, which could negatively impact our financial results. In addition, any such financing, refinancing or sale of assets might not be possible on economically favorable terms.
Restrictions in our revolving credit facility and outstanding debt instruments may limit our activities.
Our current revolving credit facility and our outstanding senior unsecured notes impose, and future debt instruments to which we may become subject may impose, restrictions that limit our ability to engage in activities that could otherwise benefit our Company, including to undertake certain transactions, to create certain liens on our assets and to incur certain subsidiary indebtedness. Our ability to comply with these financial restrictions and covenants is dependent on our future performance, which is subject to prevailing economic conditions and other factors, including factors that are beyond our control such as foreign exchange rates, interest rates, changes in technology and changes in the level of competition. In addition, our revolving credit facility requires us to maintain compliance with specified financial ratios. If we breach any of the covenants under our revolving credit facility or the indenture governing our outstanding Notes and do not obtain appropriate waivers, then, subject to applicable cure periods, our outstanding indebtedness thereunder could be declared immediately due and payable.
Our stock price may be volatile.
The market price of our common stock has been volatile in the past and may be volatile in the future, as it may be significantly affected by the following factors:
• | crises in global credit, debt and financial markets; |
• | actual or anticipated fluctuations in our revenue and operating results; |
• | changes in financial estimates by securities analysts or our failure to perform in line with those estimates or our published guidance; |
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• | changes in market valuations of other semiconductor companies; |
• | announcements by us or our competitors of significant new products, technical innovations, material transactions, acquisitions or dispositions, litigation or capital commitments; |
• | departures of key personnel; |
• | alleged noncompliance with laws, regulations or ethics standards by us or any of our employees, officers or directors; and |
• | negative media publicity targeting us or our suppliers, customers or competitors. |
The stock market has historically experienced volatility, especially within the semiconductor industry, that often has been unrelated to the performance of particular companies. These market fluctuations may cause our stock price to fall regardless of our operating results.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. | PROPERTIES |
Our corporate headquarters is located in Norwood, Massachusetts. Manufacturing and other operations are conducted in several locations worldwide. The following tables provide certain information about our principal general offices and manufacturing facilities:
Principal Properties | Approximate | |||
Owned: | Use | Total Sq. Ft. | ||
Wilmington, MA | Wafer fabrication, testing, engineering, marketing and administrative offices | 586,000 sq. ft. | ||
Cavite, Philippines | Wafer probe and testing, warehouse, engineering and administrative offices | 605,000 sq. ft. | ||
Limerick, Ireland | Wafer fabrication, wafer probe and testing, engineering and administrative offices | 351,500 sq. ft. | ||
Greensboro, NC | Product testing, engineering and administrative offices | 99,000 sq. ft. | ||
San Jose, CA | Engineering, administrative offices | 77,000 sq. ft. | ||
Principal | Lease | |||||||
Properties | Approximate | Termination | ||||||
Leased: | Use | Total Sq. Ft. | (fiscal year) | Renewals | ||||
Norwood, MA | Corporate headquarters, engineering, components testing, sales and marketing offices | 130,000 sq. ft. | 2017 | 2, five-yr. periods | ||||
Bangalore, India | Engineering | 75,000 sq. ft. | 2018 | 1, five-yr. period | ||||
Greensboro, NC | Engineering and administrative offices | 51,000 sq. ft. | 2018 | 2, three-yr. periods | ||||
Shanghai, China | Engineering | 59,000 sq. ft. | 2018 | 2, 1 two-yr. period, 1 three-yr. period | ||||
Tokyo, Japan | Engineering | 36,400 sq. ft. | 2014 | 1, two-yr. period | ||||
Beijing, China | Engineering | 33,000 sq. ft. | 2014 | 1, two-yr. period | ||||
In addition to the principal leased properties listed in the above table, we also lease sales offices and other premises at 18 locations in the United States and 48 locations internationally under operating lease agreements. These leases expire at various dates through the year 2020. We do not anticipate experiencing significant difficulty in retaining occupancy of any of our 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 our obligations under all operating leases see Note 11 in the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K.
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ITEM 3. LEGAL PROCEEDINGS
From time to time in the ordinary course of our business, various claims, charges and litigation are asserted or commenced against us arising from, or related to, contractual matters, patents, trademarks, personal injury, environmental matters, product liability, insurance coverage and personnel and employment disputes. As to such claims and litigation, we can give no assurance that we will prevail. We do not believe that any current legal matters will have a material adverse effect on our financial position, results of operations or cash flows.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
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EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth (i) the name, age and position of each of our executive officers and (ii) the business experience of each person named in the table during at least the past five years. There is no family relationship among any of our executive officers.
Executive Officer | Age | Position(s) | Business Experience | ||||
Vincent Roche | 53 | President and Chief Executive Officer | Chief Executive Officer since May 2013; President since November 2012; Vice President, Strategic Segments Group and Global Sales from October 2009 to November 2012; Vice President, Worldwide Sales from March 2001 to October 2009; Vice President and General Manager, Silicon Valley Business Units and Computer & Networking from 1999 to March 2001; Product Line Director from 1995 to 1999; Product Marketing Manager from 1988 to 1995. | ||||
David A. Zinsner | 44 | Vice President, Finance and Chief Financial Officer | Vice President, Finance and Chief Financial Officer since January 2009; Senior Vice President and Chief Financial Officer Intersil Corporation from 2005 to December 2008; Corporate Controller and Treasurer Intersil Corporation from 2000 to 2005. Corporate Treasurer Intersil Corporation from 1999 to 2000. | ||||
Samuel H. Fuller | 67 | Vice President, Research and Development and Chief Technology Officer | Vice President, Research and Development since March 1998; Chief Technology Officer since March 2006; Vice President of Research and Chief Scientist of Digital Equipment Corp. from 1983 to 1998 and Engineering Manager of the VAX Architecture Group of Digital Equipment Corp. from 1978 to 1983. | ||||
Robert R. Marshall | 59 | Vice President, Worldwide Manufacturing | Vice President, Worldwide 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. | ||||
William Matson | 54 | Vice President, Human Resources | Vice President, Human Resources since November 2006; Chief Human Resource Officer of Lenovo from January 2005 to June 2006; General Manager of IBM Business Transformation Outsourcing from September 2003 to April 2005; Vice President, Human Resources of IBM Asia Pacific Region from December 1999 to September 2003. | ||||
Robert McAdam | 62 | Executive Vice President, Strategic Business Segments Group | Executive Vice President, Strategic Business Segments Group since November 2012; Vice President, Core Products and Technologies Group from October 2009 to November 2012; Vice President and General Manager, Analog Semiconductor Components from February 1994 to September 2009; Vice President and 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. | ||||
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Executive Officer | Age | Position(s) | Business Experience | ||||
Richard Meaney | 56 | Vice President, Products and Technologies Group | Vice President, Products and Technologies Group since November 2012; Vice President, Converters from August 2009 to November 2012; Vice President, Precision Signal Processing from October 1999 to August 2009; Product Line Director from August 1991 to September 1999; Engineering Manager from August 1988 to July 1991; Design Engineer Analog Devices B.V. Limerick, Ireland from August 1979 to July 1988. | ||||
Margaret K. Seif | 52 | Vice President, General Counsel and Secretary | Vice President, General Counsel and Secretary since January 2006; Senior Vice President, General Counsel and Secretary of RSA Security Inc. from January 2000 to November 2005; Vice President, General Counsel and Secretary of RSA Security Inc. from June 1998 to January 2000. | ||||
Thomas Wessel | 46 | Vice President, Worldwide Sales | Vice President, Worldwide Sales since March 2012; Vice President, Worldwide Automotive Segment from November 2009 to March 2012; Vice President, European Sales and Marketing from June 2008 to November 2009; Managing Director, European Sales and Marketing from June 2005 to June 2008. | ||||
Eileen Wynne | 47 | Vice President, Corporate Controller and Chief Accounting Officer | Vice President and Chief Accounting Officer since May 2013; Corporate Controller since April 2011; Assistant Corporate Controller from February 2004 to April 2011. | ||||
Robert Yung | 51 | Vice President, Corporate Development and Chief Strategy Officer | Vice President, Corporate Development and Chief Strategy Officer since December 2011; Executive Vice President and Chief Technology Officer, Tessera Technologies, Inc. from May 2009 to May 2011; Vice President and Chief Technology Officer of PMC-Sierra Inc., from September 2005 to May 2009. | ||||
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PART II
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock is listed on The NASDAQ Global Select Market under the symbol ADI. Prior to April 2, 2012, our common stock was listed on the New York Stock Exchange. The tables below set forth the high and low sales prices per share of our common stock on the applicable exchange and the dividends declared for each quarterly period within our two most recent fiscal years.
High and Low Sales Prices of Common Stock
Fiscal 2013 | Fiscal 2012 | |||||||||||||||
Period | High | Low | High | Low | ||||||||||||
First Quarter | $44.74 | $38.74 | $40.38 | $32.18 | ||||||||||||
Second Quarter | $47.27 | $41.81 | $40.83 | $36.95 | ||||||||||||
Third Quarter | $50.00 | $43.86 | $39.94 | $34.25 | ||||||||||||
Fourth Quarter | $49.79 | $45.28 | $41.79 | $37.82 | ||||||||||||
Dividends Declared Per Outstanding Share of Common Stock
In fiscal 2013 and fiscal 2012, we paid a cash dividend in each quarter as follows:
Period | Fiscal 2013 | Fiscal 2012 | ||||||
First Quarter | $0.30 | $0.25 | ||||||
Second Quarter | $0.34 | $0.30 | ||||||
Third Quarter | $0.34 | $0.30 | ||||||
Fourth Quarter | $0.34 | $0.30 | ||||||
During the first quarter of fiscal 2014, on November 25, 2013, our Board of Directors declared a cash dividend of $0.34 per outstanding share of common stock. The dividend will be paid on December 17, 2013 to all shareholders of record at the close of business on December 6, 2013. The payment of future dividends, if any, will be based on several factors including our financial performance, outlook and liquidity.
Information regarding our equity compensation plans and the securities authorized for issuance thereunder is set forth in Item 12 below.
Issuer Purchases of Equity Securities
Period | Total Number of Shares Purchased(a) | Average Price Paid Per Share(b) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(c) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||
August 4, 2013 through August 31, 2013 | 576 | $ | 48.31 | — | $ | 560,974,387 | ||||||||
September 1, 2013 through September 28, 2013 | 86,773 | $ | 47.34 | 84,500 | $ | 556,976,413 | ||||||||
September 29, 2013 through November 2, 2013 | 829,172 | $ | 46.64 | 828,100 | $ | 518,353,105 | ||||||||
Total | 916,521 | $ | 46.71 | 912,600 | $ | 518,353,105 | ||||||||
_______________________________________
(a) | Includes 3,921 shares withheld by us from employees to satisfy employee tax obligations upon vesting of restricted stock units granted to our employees under our equity compensation plans. |
(b) | The average price paid per share of stock repurchased under the stock repurchase program includes the commissions paid to the brokers. The average price paid for shares in connection with vesting of restricted stock are averages of the closing stock price at the vesting date which is used to calculate the number of shares to be withheld. |
(c) | Shares repurchased pursuant to the stock repurchase program publicly announced on August 12, 2004. In the aggregate, our Board of Directors has authorized us to repurchase $5.0 billion of our common stock. Under the repurchase program, we may repurchase outstanding shares of our common stock from time to time in the open market and through privately |
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negotiated transactions. Unless terminated earlier by resolution of our Board of Directors, the repurchase program will expire when we have repurchased all shares authorized for repurchase under the repurchase program.
The number of holders of record of our common stock at November 25, 2013 was 2,373. This number does not include shareholders for whom shares are held in a “nominee” or “street” name. On November 1, 2013, the last reported sales price of our common stock on The NASDAQ Global Select Market was $49.68 per share.
Comparative Stock Performance Graph
The following graph compares cumulative total shareholder return on our common stock since November 1, 2008 with the cumulative total return of the Standard & Poor’s (S&P) 500 Index and the S&P Semiconductors Index. This graph assumes the investment of $100 on November 1, 2008 in our common stock, the S&P 500 Index and the S&P Semiconductors Index and assumes all dividends are reinvested. Measurement points are the last trading day for each respective fiscal year.
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ITEM 6. SELECTED FINANCIAL DATA
The following table includes selected financial data for each of our last five fiscal years.
(thousands, except per share amounts) | 2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||
Statement of Operations data: | |||||||||||||||||||
Total revenue from continuing operations | $ | 2,633,689 | $ | 2,701,142 | $ | 2,993,320 | $ | 2,761,503 | $ | 2,014,908 | |||||||||
Income from continuing operations, net of tax | 673,487 | 651,236 | 860,894 | 711,225 | 247,408 | ||||||||||||||
Total income from discontinued operations, net of tax | — | — | 6,500 | 859 | 364 | ||||||||||||||
Net income | 673,487 | 651,236 | 867,394 | 712,084 | 247,772 | ||||||||||||||
Income per share from continuing operations, net of tax: | |||||||||||||||||||
Basic | 2.19 | 2.18 | 2.88 | 2.39 | 0.85 | ||||||||||||||
Diluted | 2.14 | 2.13 | 2.79 | 2.33 | 0.85 | ||||||||||||||
Net income per share | |||||||||||||||||||
Basic | 2.19 | 2.18 | 2.90 | 2.39 | 0.85 | ||||||||||||||
Diluted | 2.14 | 2.13 | 2.81 | 2.33 | 0.85 | ||||||||||||||
Cash dividends declared per common share | 1.32 | 1.15 | 0.94 | 0.84 | 0.80 | ||||||||||||||
Balance Sheet data: | |||||||||||||||||||
Total assets | $ | 6,381,750 | $ | 5,620,347 | $ | 5,277,635 | $ | 4,328,831 | $ | 3,369,407 | |||||||||
Debt | $ | 872,241 | $ | 821,598 | $ | 886,376 | $ | 400,635 | $ | 379,626 | |||||||||
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (all tabular amounts in thousands except per share amounts) |
During the first quarter of fiscal 2008, we sold our baseband chipset business and related support operations, which we refer to as the Baseband Chipset Business, to MediaTek Inc. The financial results of this business is presented as discontinued operations in the consolidated statements of income for all periods presented. Unless otherwise noted, this Management’s Discussion and Analysis relates only to financial results from continuing operations.
Results of Operations
Overview
Fiscal Year | 2013 over 2012 | 2012 over 2011 | |||||||||||||||||||||||
2013 | 2012 | 2011 | $ Change | % Change | $ Change | % Change | |||||||||||||||||||
Revenue | $ | 2,633,689 | $ | 2,701,142 | $ | 2,993,320 | $ | (67,453 | ) | (2 | )% | $ | (292,178 | ) | (10 | )% | |||||||||
Gross Margin % | 64.3 | % | 64.5 | % | 66.4 | % | |||||||||||||||||||
Net income from Continuing Operations | $ | 673,487 | $ | 651,236 | $ | 860,894 | $ | 22,251 | 3 | % | $ | (209,658 | ) | (24 | )% | ||||||||||
Net income from Continuing Operations as a % of Revenue | 25.6 | % | 24.1 | % | 28.8 | % | |||||||||||||||||||
Diluted EPS from Continuing Operations | $ | 2.14 | $ | 2.13 | $ | 2.79 | $ | 0.01 | — | % | $ | (0.66 | ) | (24 | )% | ||||||||||
Diluted EPS | $ | 2.14 | $ | 2.13 | $ | 2.81 | $ | 0.01 | — | % | $ | (0.68 | ) | (24 | )% | ||||||||||
Fiscal 2013 and fiscal 2011 were 52-week years. Fiscal 2012 was a 53-week year. The additional week in fiscal 2012 was included in the first quarter ended February 4, 2012.
The year-to-year revenue changes by end market and product category are more fully outlined below under Revenue Trends by End Market and Revenue Trends by Product Type.
During fiscal 2013, our revenue decreased 2% compared to fiscal 2012. Our diluted earnings per share from continuing operations increased to $2.14 in fiscal 2013 from $2.13 in fiscal 2012. Cash flow from operations in fiscal 2013 was $912.3 million, or 34.6% of revenue. The year-to-year decrease in revenue was primarily attributable to one less week of operations in fiscal 2013 as compared to fiscal 2012 and continued weakness in the global economic environment. We believe that our variable cost structure and continued efforts to manage production, inventory levels and expenses helped to mitigate the effect of the lower sales level on our earnings.
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Revenue Trends by End Market
The following table summarizes revenue by end market. The categorization of revenue by end market is determined using a variety of data points including the technical characteristics of the product, the “sold to” customer information, the “ship to” customer information and the end customer product or application into which our product will be incorporated. As data systems for capturing and tracking this data evolve and improve, the categorization of products by end market can vary over time. When this occurs, we reclassify revenue by end market for prior periods. Such reclassifications typically do not materially change the sizing of, or the underlying trends of results within, each end market.
2013 | 2012 | 2011 | |||||||||||||||||||||
Revenue | % of Total Product Revenue* | Y/Y% | Revenue | % of Total Product Revenue | Revenue | % of Total Product Revenue | |||||||||||||||||
Industrial | $ | 1,219,798 | 46 | % | (2 | )% | $ | 1,246,380 | 46 | % | $ | 1,416,686 | 47 | % | |||||||||
Automotive | 481,803 | 18 | % | 4 | % | 463,927 | 17 | % | 418,419 | 14 | % | ||||||||||||
Consumer | 403,649 | 15 | % | (13 | )% | 464,103 | 17 | % | 556,056 | 19 | % | ||||||||||||
Communications | 528,439 | 20 | % | — | % | 526,732 | 20 | % | 602,159 | 20 | % | ||||||||||||
Total Revenue | $ | 2,633,689 | 100 | % | (2 | )% | $ | 2,701,142 | 100 | % | $ | 2,993,320 | 100 | % | |||||||||
* | The sum of the individual percentages do not equal the total due to rounding. |
The year-to-year decrease in revenue in the industrial and consumer end markets in fiscal 2013 was primarily the result of a weak global economic environment and one less week of operations in fiscal 2013 as compared to fiscal 2012. Automotive end market revenue increased in fiscal 2013 primarily as a result of increasing electronic content in vehicles.
The year-to-year decrease in revenue in the industrial, consumer and communications end markets in fiscal 2012 was primarily the result of a broad-based decrease in demand in these end markets. Automotive end market revenue increased in fiscal 2012 primarily as a result of increasing electronic content in vehicles.
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Revenue Trends by Product Type
The following table summarizes revenue by product categories. The categorization of our products into broad categories is based on the characteristics of the individual products, the specification of the products and in some cases the specific uses that certain products have within applications. The categorization of products into categories is therefore subject to judgment in some cases and can vary over time. In instances where products move between product categories, we reclassify the amounts in the product categories for all prior periods. Such reclassifications typically do not materially change the sizing of, or the underlying trends of results within, each product category.
2013 | 2012 | 2011 | |||||||||||||||||||||
Revenue | % of Total Product Revenue* | Y/Y% | Revenue | % of Total Product Revenue* | Revenue | % of Total Product Revenue | |||||||||||||||||
Converters | $ | 1,180,072 | 45 | % | (1 | )% | $ | 1,192,064 | 44 | % | $ | 1,343,487 | 45 | % | |||||||||
Amplifiers/Radio frequency | 682,759 | 26 | % | (2 | )% | 697,687 | 26 | % | 788,299 | 26 | % | ||||||||||||
Other analog | 372,281 | 14 | % | (6 | )% | 397,376 | 15 | % | 410,323 | 14 | % | ||||||||||||
Subtotal analog signal processing | 2,235,112 | 85 | % | (2 | )% | 2,287,127 | 85 | % | 2,542,109 | 85 | % | ||||||||||||
Power management & reference | 172,920 | 7 | % | (5 | )% | 182,134 | 7 | % | 217,615 | 7 | % | ||||||||||||
Total analog products | $ | 2,408,032 | 91 | % | (2 | )% | $ | 2,469,261 | 91 | % | $ | 2,759,724 | 92 | % | |||||||||
Digital signal processing | 225,657 | 9 | % | (3 | )% | 231,881 | 9 | % | 233,596 | 8 | % | ||||||||||||
Total Revenue | $ | 2,633,689 | 100 | % | (2 | )% | $ | 2,701,142 | 100 | % | $ | 2,993,320 | 100 | % | |||||||||
_____________________________________
* | The sum of the individual percentages do not equal the total due to rounding. |
The year-to-year decrease in total revenue in fiscal 2013 as compared to fiscal 2012 was the result of one less week of operations in fiscal 2013 as compared to fiscal 2012 and a broad-based decrease in demand across most product type categories.
The year-to-year decrease in total revenue in fiscal 2012 as compared to fiscal 2011 was the result of a broad-based demand shift across all product categories.
Revenue Trends by Geographic Region
Revenue by geographic region, based upon the primary location of our customers' design activity for its products, for fiscal 2013, 2012 and 2011 was as follows.
Change | |||||||||||||||||||||||||
Fiscal Year | 2013 over 2012 | 2012 over 2011 | |||||||||||||||||||||||
2013 | 2012 | 2011 | $ Change | % Change | $ Change | % Change | |||||||||||||||||||
United States | $ | 821,269 | $ | 818,653 | $ | 866,142 | $ | 2,616 | — | % | $ | (47,489 | ) | (5 | )% | ||||||||||
Rest of North and South America | 99,215 | 114,133 | 144,585 | (14,918 | ) | (13 | )% | (30,452 | ) | (21 | )% | ||||||||||||||
Europe | 840,585 | 852,668 | 967,417 | (12,083 | ) | (1 | )% | (114,749 | ) | (12 | )% | ||||||||||||||
Japan | 292,804 | 333,558 | 398,587 | (40,754 | ) | (12 | )% | (65,029 | ) | (16 | )% | ||||||||||||||
China | 349,575 | 341,196 | 360,594 | 8,379 | 2 | % | (19,398 | ) | (5 | )% | |||||||||||||||
Rest of Asia | 230,241 | 240,934 | 255,995 | (10,693 | ) | (4 | )% | (15,061 | ) | (6 | )% | ||||||||||||||
Total Revenue | $ | 2,633,689 | $ | 2,701,142 | $ | 2,993,320 | $ | (67,453 | ) | (2 | )% | $ | (292,178 | ) | (10 | )% | |||||||||
In fiscal years 2013, 2012 and 2011, the predominant countries comprising “Rest of North and South America” are Canada and Mexico; the predominant countries comprising “Europe” are Germany, Sweden, France and the United Kingdom; and the predominant countries comprising “Rest of Asia” are Taiwan and South Korea.
On a regional basis, the year-over-year sales declines in Japan and Rest of Asia for fiscal 2013 were primarily the result of lower demand for products used in consumer applications. The year-over-year sales increase in China for fiscal 2013 was primarily the result of an increase in demand in the industrial end market.
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Sales decreased in all regions in fiscal 2012 as compared to fiscal 2011 as a result of a broad-based decrease in demand.
Gross Margin
Change | |||||||||||||||||||||||||
Fiscal Year | 2013 over 2012 | 2012 over 2011 | |||||||||||||||||||||||
2013 | 2012 | 2011 | $ Change | % Change | $ Change | % Change | |||||||||||||||||||
Gross Margin | $ | 1,692,411 | $ | 1,741,001 | $ | 1,986,541 | $ | (48,590 | ) | (3 | )% | $ | (245,540 | ) | (12 | )% | |||||||||
Gross Margin % | 64.3 | % | 64.5 | % | 66.4 | % | |||||||||||||||||||
Gross margin percentage in fiscal 2013 decreased 20 basis points compared to fiscal 2012 primarily as a result of a slight mix shift in favor of lower margin products being sold.
Gross margin percentage in fiscal 2012 decreased 190 basis points compared to fiscal 2011 primarily as a result of decreased operating levels in our manufacturing facilities as well as a reduced percentage of sales of our products sold into the industrial automation and instrumentation sectors of the industrial end market and the wireless base station sector of the communications end market, which earn higher margins as compared to products sold into our other end market sectors.
Research and Development (R&D)
Change | |||||||||||||||||||||||||
Fiscal Year | 2013 over 2012 | 2012 over 2011 | |||||||||||||||||||||||
2013 | 2012 | 2011 | $ Change | % Change | $ Change | % Change | |||||||||||||||||||
R&D Expenses | $ | 513,255 | $ | 512,003 | $ | 505,570 | $ | 1,252 | — | % | $ | 6,433 | 1 | % | |||||||||||
R&D Expenses as a % of Revenue | 19.5 | % | 19.0 | % | 16.9 | % | |||||||||||||||||||
R&D expenses remained flat in fiscal 2013 as compared to fiscal 2012 as increases in R&D employee salary and benefit expenses and other operational spending were offset by lower variable compensation expense linked to our overall profitability and revenue growth.
R&D expenses increased in fiscal 2012 as compared to fiscal 2011 as a result of annual salary increases that became effective during the second quarter of fiscal 2012 and a general increase in spending, partially offset by lower variable compensation expense linked to our overall profitability and revenue growth.
R&D expenses as a percentage of revenue will fluctuate from year-to-year depending on the amount of revenue and the success of new product development efforts, which we view as critical to our future growth. We have hundreds of R&D projects underway, none of which we believe are material on an individual basis. We expect to continue the development of innovative technologies and processes for new products. We believe that a continued commitment to R&D is essential to maintain product leadership with our existing products as well as to provide innovative new product offerings, and therefore, we expect to continue to make significant R&D investments in the future.
Selling, Marketing, General and Administrative (SMG&A)
Change | |||||||||||||||||||||||||
Fiscal Year | 2013 over 2012 | 2012 over 2011 | |||||||||||||||||||||||
2013 | 2012 | 2011 | $ Change | % Change | $ Change | % Change | |||||||||||||||||||
SMG&A Expenses | $ | 396,233 | $ | 396,519 | $ | 406,707 | $ | (286 | ) | — | % | $ | (10,188 | ) | (3 | )% | |||||||||
SMG&A Expenses as a % of Revenue | 15.0 | % | 14.7 | % | 13.6 | % | |||||||||||||||||||
SMG&A expenses remained flat in fiscal 2013 as compared to fiscal 2012 as decreases in SMG&A employee salary and benefit expenses and variable compensation expense linked to our overall profitability and revenue growth were partially offset by increases in other operational spending. In addition, fiscal 2013 also included $6.3 million of stock-based compensation expense following the death of our CEO in the second quarter of fiscal 2013 due to the accelerated vesting of restricted stock units in accordance with the terms of his restricted stock unit agreement.
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SMG&A expenses decreased in fiscal 2012 as compared to fiscal 2011 as lower variable compensation expense, which is a variable expense linked to our overall profitability and revenue growth, was partially offset by annual salary increases that became effective during the second quarter of fiscal 2012.
Special Charges
We monitor global macroeconomic conditions on an ongoing basis, and continue to assess opportunities for improved operational effectiveness and efficiency and better alignment of expenses with revenues. As a result of these assessments, we have undertaken various restructuring actions over the past several years. The expense reductions relating to ongoing actions are described below.
During fiscal 2008 through fiscal 2010, we recorded special charges of approximately $43.3 million. These special charges included: $39.1 million for severance and fringe benefit costs in accordance with our ongoing benefit plan or statutory requirements at foreign locations for 245 manufacturing employees and 470 engineering and SMG&A employees; $2.1 million for lease obligation costs for facilities that we ceased using during the first quarter of fiscal 2009; $0.8 million for the write-off of property, plant and equipment; $0.5 million for contract termination costs and $0.3 million for clean-up and closure costs that were expensed as incurred; and $0.5 million related to the impairment of intellectual property. This action resulted in annual cost savings of approximately $52.0 million per year. We have terminated the employment of all employees associated with these actions.
During fiscal 2011, we recorded a special charge of approximately $2.2 million for severance and fringe benefit costs in accordance with our ongoing benefit plan or statutory requirements at foreign locations for 25 engineering and SMG&A employees. This action was completed in the fourth quarter of fiscal 2012. This action resulted in annual cost savings of approximately $4.0 million.
During fiscal 2012, we recorded special charges of approximately $8.4 million. The special charge included $7.9 million for severance and fringe benefit costs in accordance with our ongoing benefit plan or statutory requirements at foreign locations for 95 manufacturing, engineering and SMG&A employees; $0.1 million for contract termination costs; $0.2 million for lease obligation costs for facilities that we ceased using during the third quarter of fiscal 2012 and $0.2 million for the write-off of property, plant and equipment. This action resulted in annual savings in SMG&A expenses of approximately $12.0 million per year. We have terminated the employment of all employees associated with this action.
During fiscal 2013, we recorded special charges of approximately $29.8 million for severance and fringe benefit costs in accordance with our ongoing benefit plan or statutory requirements at foreign locations for 235 engineering and SMG&A employees. As of November 2, 2013, we employed 98 of the 235 employees included in this cost reduction action. These employees must continue to be employed by us until their employment is involuntarily terminated in order to receive the severance benefit. We estimate these actions will result in annual cost savings of approximately $32.6 million, once fully implemented, which will be used to make additional investments in products that we expect will drive revenue growth in the future.
Operating Income from Continuing Operations
Change | |||||||||||||||||||||||||
Fiscal Year | 2013 over 2012 | 2012 over 2011 | |||||||||||||||||||||||
2013 | 2012 | 2011 | $ Change | % Change | $ Change | % Change | |||||||||||||||||||
Operating income from Continuing Operations | $ | 753,075 | $ | 824,048 | $ | 1,072,025 | $ | (70,973 | ) | (9 | )% | $ | (247,977 | ) | (23 | )% | |||||||||
Operating income from Continuing Operations as a % of Revenue | 28.6 | % | 30.5 | % | 35.8 | % | |||||||||||||||||||
The year-over-year decrease in operating income from continuing operations in fiscal 2013 as compared to fiscal 2012 was primarily the result of a decrease in revenue of $67.5 million, a 20 basis point decrease in gross margin percentage, and an increase of $21.4 million in special charges as more fully described above under the heading Special Charges.
The year-over-year decrease in operating income from continuing operations in fiscal 2012 as compared to fiscal 2011 was primarily the result of a decrease in revenue of $292.2 million and a 190 basis point decrease in gross margin percentage.
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Nonoperating (Income) Expense
Change | |||||||||||||||||||
Fiscal Year | 2013 over 2012 | 2012 over 2011 | |||||||||||||||||
2013 | 2012 | 2011 | $ Change | $ Change | |||||||||||||||
Interest expense | $ | 27,102 | $ | 26,422 | $ | 19,146 | $ | 680 | $ | 7,276 | |||||||||
Interest income | (12,753 | ) | (14,448 | ) | (9,060 | ) | 1,695 | (5,388 | ) | ||||||||||
Other, net | (76,597 | ) | (1,459 | ) | 492 | (75,138 | ) | (1,951 | ) | ||||||||||
Total nonoperating (income) expense | $ | (62,248 | ) | $ | 10,515 | $ | 10,578 | $ | (72,763 | ) | $ | (63 | ) | ||||||
The year-over-year increase in nonoperating income in fiscal 2013 as compared to fiscal 2012 was primarily the result of recognizing a gain of $85.4 million from the sale of a product line, as more fully described below under the heading Divestitures, partially offset by the net loss on extinguishment of debt of approximately $10.2 million in conjunction with the redemption of our $375 million aggregate principal amount of 5.0% senior unsecured notes in fiscal 2013 as more fully described below under the heading Liquidity and Capital Resources.
The year-over-year increase in nonoperating interest expense in fiscal 2012 as compared to fiscal 2011 was primarily a result of our issuance of $375.0 million aggregate principal amount of 3.0% senior unsecured notes on April 4, 2011 which was partially offset by the impact of the termination of our interest rate swap agreement more fully described below under the heading Debt. The increases were partially offset by an increase in nonoperating interest income due to higher interest rates earned on our investments and the investment of higher cash balances in fiscal 2012 as compared to fiscal 2011, and an increase in nonoperating other income as a result of the gain from the sale of other investments in the second quarter of fiscal 2012.
Provision for Income Taxes
Change | |||||||||||||||||||||||||
Fiscal Year | 2013 over 2012 | 2012 over 2011 | |||||||||||||||||||||||
2013 | 2012 | 2011 | $ Change | % Change | $ Change | % Change | |||||||||||||||||||
Provision for Income Taxes | $ | 141,836 | $ | 162,297 | $ | 200,553 | $ | (20,461 | ) | (13 | )% | $ | (38,256 | ) | (19 | )% | |||||||||
Effective Income Tax Rate | 17.4 | % | 19.9 | % | 18.9 | % | |||||||||||||||||||
Our effective tax rate reflects the applicable tax rate in effect in the various tax jurisdictions around the world where our income is earned.
The decrease in our effective tax rate for fiscal 2013 compared to fiscal 2012 was primarily due to income earned in lower tax rate jurisdictions as a result of an international tax restructuring effective January 1, 2013. In addition, our effective tax rate for fiscal 2013 was lower by approximately 3% as a result of various discrete items including the reinstatement of the U.S. federal research and development tax credit and the reversal of certain prior period tax liabilities. These decreases in our effective tax rate were partially offset by the recording of a tax reserve of $36.5 million related to one open tax matter related to Section 965 of the Internal Revenue Code which increased our effective tax rate by approximately 5% and the tax effect of the gain on the sale of a product line in fiscal 2013 which increased our effective tax rate by approximately 3%.
The increase in our effective tax rate for fiscal 2012 compared to fiscal 2011 was primarily due to the expiration of the U.S. federal research and development tax credit in December 2011.
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Income from Continuing Operations, Net of Tax
Change | |||||||||||||||||||||||||
Fiscal Year | 2013 over 2012 | 2012 over 2011 | |||||||||||||||||||||||
2013 | 2012 | 2011 | $ Change | % Change | $ Change | % Change | |||||||||||||||||||
Income from Continuing Operations, net of tax | $ | 673,487 | $ | 651,236 | $ | 860,894 | $ | 22,251 | 3 | % | $ | (209,658 | ) | (24 | )% | ||||||||||
Income from Continuing Operations, net of tax as a % of Revenue | 25.6 | % | 24.1 | % | 28.8 | % | |||||||||||||||||||
Diluted EPS from Continuing Operations | $ | 2.14 | $ | 2.13 | $ | 2.79 | $ | 0.01 | — | % | $ | (0.66 | ) | (24 | )% | ||||||||||
The year-over-year increase in net income from continuing operations in fiscal 2013 from fiscal 2012 was primarily a result of the lower provision for income taxes and the $72.8 million increase in nonoperating income, partially offset by the $71.0 million decrease in operating income from continuing operations.
The year-over-year decrease in net income from continuing operations in fiscal 2012 from fiscal 2011 was primarily a result of the $248.0 million decrease in operating income from continuing operations partially offset by a lower provision for income taxes in fiscal 2012.
The impact of inflation and foreign currency exchange rate movement on our results of operations during the past three fiscal years has not been significant.
Discontinued Operations
Fiscal Year | |||||||||||
2013 | 2012 | 2011 | |||||||||
Total income from Discontinued Operations, net of tax | $ | — | $ | — | $ | 6,500 | |||||
Diluted earnings per share from Discontinued Operations | — | — | 0.02 | ||||||||
We sold our Baseband Chipset Business to MediaTek Inc. during the first quarter of fiscal 2008. Accordingly, the results of the operations of this business has been presented as discontinued operations within the consolidated financial statements. In fiscal 2011, additional proceeds of $10.0 million were released from escrow and $6.5 million net of tax was recorded as additional gain from the sale of discontinued operations.
Divestitures
On October 31, 2013, we completed the sale of the assets and intellectual property related to our microphone product line to InvenSense, Inc. (InvenSense). We received $100.0 million in cash for the assets and intellectual property and after providing for the write-off of inventory, fixed assets and other costs incurred to complete the transaction, recorded a net gain of $85.4 million in nonoperating income during fiscal 2013. We have agreed to provide InvenSense with various transition services subsequent to the closing. We may receive additional cash payments, not to exceed $70.0 million, based on the achievement of certain revenue milestones through the first anniversary of the closing date. The sale of the assets and intellectual property related to the microphone product line did not qualify as a discontinued operation as it did not meet the requirement to be considered a component of an entity.
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Acquisitions
In fiscal 2012, we acquired privately-held Multigig, Inc. (Multigig) of San Jose, California. The acquisition of Multigig is expected to enhance our clocking capabilities in stand-alone and embedded applications and strengthen our high speed signal processing solutions. The acquisition-date fair value of the consideration transferred totaled $26.8 million, which consisted of $24.2 million in initial cash payments at closing and an additional $2.6 million subject to an indemnification holdback that was payable within 15 months of the transaction date. During the third quarter of fiscal 2012, we reduced this holdback amount by $0.1 million as a result of indemnification claims. During the third quarter of fiscal 2013, we paid the remaining $2.5 million due under the holdback. Our assessment of fair value of the tangible and intangible assets acquired and liabilities assumed was based on their estimated fair values at the date of acquisition, resulting in the recognition of $15.6 million of in-process research and development (IPR&D), $1.1 million of developed technology, $7.0 million of goodwill and $3.1 million of net deferred tax assets. The goodwill recognized is attributable to future technologies that have yet to be determined as well as the assembled workforce of Multigig. Future technologies do not meet the criteria for recognition separately from goodwill because they are a part of future development and growth of the business. None of the goodwill is expected to be deductible for tax purposes. During the fourth quarter of fiscal 2012, we finalized our purchase accounting for Multigig which resulted in adjustments of $0.4 million to deferred taxes and goodwill. In addition, we will be obligated to pay royalties to the Multigig employees on revenue recognized from the sale of certain Multigig products through the earlier of 5 years or the aggregate maximum payment of $1.0 million. Royalty payments to Multigig employees require post-acquisition services to be rendered and, as such, we will record these amounts as compensation expense in the related periods. As of November 2, 2013, no royalty payments have been made. We recognized $0.5 million of acquisition-related costs that were expensed in fiscal 2012, which were included in operating expenses in the consolidated statement of income.
In fiscal 2011, we acquired privately-held Lyric Semiconductor, Inc. (Lyric) of Cambridge, Massachusetts. The acquisition of Lyric gives us the potential to achieve significant improvement in power efficiency in mixed signal processing. The acquisition-date fair value of the consideration transferred totaled $27.8 million, which consisted of $14.0 million in initial cash payments at closing and contingent consideration of up to $13.8 million. The contingent consideration arrangement requires additional cash payments to the former equity holders of Lyric upon the achievement of certain technological and product development milestones payable during the period from June 2011 through June 2016. We estimated the fair value of the contingent consideration arrangement utilizing the income approach. Changes in the fair value of the contingent consideration subsequent to the acquisition date primarily driven by assumptions pertaining to the achievement of the defined milestones will be recognized in operating income in the period of the estimated fair value change. As of November 2, 2013, the Company had paid $8.0 million in contingent consideration. These payments are reflected in the statements of cash flows as cash used in financing activities related to the liability recognized at fair value as of the acquisition date and cash provided by operating activities related to the fair value adjustments previously recognized in earnings. The fair value of the tangible and intangible assets acquired and liabilities assumed was based on their estimated fair values at the date of acquisition, resulting in the recognition of $12.2 million of IPR&D, $18.9 million of goodwill and $3.3 million of net deferred tax liabilities. The goodwill recognized is attributable to future technologies that have yet to be determined as well as the assembled workforce of Lyric. Future technologies do not meet the criteria for recognition separately from goodwill because they are a part of future development and growth of the business. None of the goodwill is expected to be deductible for tax purposes. The fair value of the remaining contingent consideration was approximately $6.5 million as of November 2, 2013, of which $3.8 million is included in accrued liabilities and $2.7 million is included in other non-current liabilities in our consolidated balance sheet. In addition, we will be obligated to pay royalties to the former equity holders of Lyric on revenue recognized from the sale of Lyric products and licenses through the earlier of 20 years or the accrual of a maximum of $25.0 million. Royalty payments to Lyric employees require post-acquisition services to be rendered and, as such, we will record these amounts as compensation expense in the related periods. As of November 2, 2013, no royalty payments have been made. We recognized $0.2 million of acquisition related costs that were expensed in fiscal 2011. These costs are included in operating expenses in the consolidated statement of income.
We have not provided pro forma results of operations for Multigig and Lyric herein as these acquisitions were not considered material to us on either an individual or an aggregate basis. We included the results of operations of each acquisition in our consolidated statement of income from the date of each acquisition.
Liquidity and Capital Resources
At November 2, 2013, our principal source of liquidity was $4,682.9 million of cash and cash equivalents and short-term investments, of which approximately $1,318.9 million was held in the United States. The balance of our cash and cash equivalents and short-term investments was held outside the United States in various foreign subsidiaries. As we intend to
reinvest our foreign earnings indefinitely, this cash held outside the United States is not available to meet certain aspects of our cash requirements in the United States, including cash dividends and common stock repurchases. Our cash and cash equivalents consist of highly liquid investments with maturities of three months or less at the time of acquisition, including money market
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funds, and our short-term investments consist primarily of corporate obligations, such as commercial paper and floating rate notes, bonds and bank time deposits. We maintain these balances with high credit quality counterparties, continually monitor the amount of credit exposure to any one issuer and diversify our investments in order to minimize our credit risk.
We believe that our existing sources of liquidity and cash expected to be generated from future operations, together with existing and anticipated available long-term financing, will be sufficient to fund operations, capital expenditures, research and development efforts, dividend payments (if any) and repurchases of our stock (if any) under our stock repurchase program in the immediate future and for at least the next twelve months.
Fiscal Year | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Net Cash Provided by Operations | $ | 912,345 | $ | 814,542 | $ | 900,529 | ||||||
Net Cash Provided by Operations as a % of Revenue | 34.6 | % | 30.2 | % | 30.1 | % | ||||||
Net Cash Used for Investing Activities | $ | (949,926 | ) | $ | (1,339,690 | ) | $ | (703,738 | ) | |||
Net Cash (Used for) Provided by Financing Activities | $ | (100,557 | ) | $ | (349,627 | ) | $ | 138,612 | ||||
At November 2, 2013, cash and cash equivalents totaled $392.1 million. The following changes contributed to the net decrease in cash and cash equivalents of $136.7 million in fiscal 2013.
Operating Activities
During fiscal 2013, we generated cash from operating activities of $912.3 million, an increase of $97.8 million compared to the $814.5 million generated in fiscal 2012. The increase in cash flow from operating activities was related to higher net income adjusted for non-cash items and the gain on the sale of the product line coupled with net cash inflows from working capital changes.
Investing Activities
During fiscal 2013, cash used for investing activities included $918.7 million for the net purchases of available-for-sale short term investments, $123.1 million for property, plant and equipment additions and $100.0 million in proceeds from the sale of a product line.
Financing Activities
During fiscal 2013, cash used for financing activities included net proceeds of $493.9 million from the issuance of $500.0 million aggregate principal amount of 2.875% senior unsecured notes on June 3, 2013, proceeds of $306.3 million from employee stock options and proceeds of $11.0 million from the settlement of derivative instruments. We paid $392.8 million related to the redemption of the $375.0 million aggregate principal amount of 5.0% senior unsecured notes, distributed $406.0 million to our shareholders in dividend payments, paid $60.5 million for the repurchase of 1.4 million shares of our common stock and repaid the remaining outstanding principal balance on our $145 million term loan facility of $60.1 million.
Working Capital
Fiscal Year | |||||||||||||
2013 | 2012 | $ Change | % Change | ||||||||||
Accounts Receivable | $ | 325,144 | $ | 339,881 | $ | (14,737 | ) | (4 | )% | ||||
Days Sales Outstanding* | 44 | 45 | |||||||||||
Inventory | $ | 283,337 | $ | 313,723 | $ | (30,386 | ) | (10 | )% | ||||
Days Cost of Sales in Inventory* | 111 | 114 | |||||||||||
_______________________________________
* | We use the annualized fourth quarter revenue in our calculation of days sales outstanding and we use the annualized fourth quarter cost of sales in our calculation of days cost of sales in inventory. |
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The decrease in accounts receivable was primarily the result of lower revenue in the fourth quarter of fiscal 2013 compared to the fourth quarter of fiscal 2012. Days sales outstanding decreased as a result of lower product shipments in the final month of the fourth quarter of fiscal 2013 compared to the final month of the fourth quarter of fiscal 2012.
Inventory as of November 2, 2013 decreased as compared to the end of the fourth quarter of fiscal 2012 as a result of our continued efforts to balance manufacturing production, demand and inventory levels. Days cost of sales in inventory decreased from 114 days at the end of fiscal 2012 to 111 days at the end of fiscal 2013 primarily as a result of cost of sales decreasing 7% while inventory decreased by 10% for the same period.
Current liabilities increased to $570.5 million at November 2, 2013 from $525.1 million recorded at the end of fiscal 2012, as increases in income taxes payable, accrued liabilities and deferred income on shipments to distributors, more fully described below, were partially offset by a decrease in the current portion of long term debt.
As of November 2, 2013 and November 3, 2012, we had gross deferred revenue of $309.2 million and $299.0 million, respectively, and gross deferred cost of sales of $61.8 million and $60.5 million, respectively. Deferred income on shipments to distributors increased in fiscal 2013 primarily as a result of a mix shift in favor of higher margin products sold into the channel. Sales to distributors are made under agreements that allow distributors to receive price-adjustment credits and to return qualifying products for credit, as determined by us, in order to reduce the amounts of slow-moving, discontinued or obsolete product from their inventory. Given the uncertainties associated with the levels of price-adjustment credits to be granted to distributors, the sales price to the distributors is not fixed or determinable until the distributors resell the products to their customers. Therefore, we defer revenue recognition from sales to distributors until the distributors have sold the products to their customers. The amount of price-adjustments is dependent on future overall market conditions, and therefore the levels of these adjustments could fluctuate significantly from period to period. To the extent that we experience a significant increase in the amount of credits we issue to our distributors, there could be a material impact on the ultimate revenue and gross margin recognized relating to these transactions.
Debt
As of November 2, 2013, we had $872.2 million in principal outstanding on our long term debt. Our debt obligations consist of the following:
$375.0 million aggregate principal amount of 3.0% senior unsecured notes
On April 4, 2011, we issued $375.0 million aggregate principal amount of 3.0% senior unsecured notes due April 15, 2016 (the 2016 Notes) with semi-annual fixed interest payments due on April 15 and October 15 of each year, commencing October 15, 2011.
$500.0 million aggregate principal amount of 2.875% senior unsecured notes
On June 3, 2013, we issued $500.0 million aggregate principal amount of 2.875% senior unsecured notes due June 1, 2023 (the 2023 Notes) with semi-annual fixed interest payments due on June 1 and December 1 of each year, commencing December 1, 2013.
The indentures governing the 2016 Notes and the 2023 Notes contain covenants that may limit our ability to: incur, create, assume or guarantee any debt for borrowed money secured by a lien upon a principal property; enter into sale and lease-back transactions with respect to a principal property; and consolidate with or merge into, or transfer or lease all or substantially all of our assets to, any other party. As of November 2, 2013, we were compliant with these covenants. See Note 16 in the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for further information on our outstanding debt.
Revolving Credit Facility
During December 2012, we terminated our $165.0 million unsecured revolving credit facility with certain institutional lenders entered into in May 2008. On December 19, 2012, we entered into a five-year, $500.0 million senior unsecured revolving credit facility with certain institutional lenders. To date, we have not borrowed under this credit facility but we may borrow in the future and use the proceeds for repayment of existing indebtedness, stock repurchases, acquisitions, capital expenditures, working capital and other lawful corporate purposes. The terms of the facility impose restrictions on our ability to undertake certain transactions, to create certain liens on assets and to incur certain subsidiary indebtedness. In addition, the credit agreement contains a consolidated leverage ratio covenant of total consolidated funded debt to consolidated EBITDA (earnings before interest, taxes, depreciation, and amortization) of not greater than 3.0 to 1.0. As of November 2, 2013, we were compliant with these covenants.
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$145.0 million term loan facility
On December 22, 2010, Analog Devices Holdings B.V., our wholly owned subsidiary, entered into a credit agreement with Bank of America, N.A., London Branch as administrative agent. The borrower's obligations were guaranteed by us. The credit agreement provided for a $145.0 million term loan facility, which was set to mature on December 22, 2013. During the first quarter of fiscal 2013, we repaid the remaining outstanding principal balance on the loan of $60.1 million and the credit agreement was terminated.
$375.0 million aggregate principal amount of 5.0% senior unsecured notes
During the third quarter of fiscal 2013, we redeemed our outstanding 5.0% senior unsecured notes which were due on July 1, 2014 (the 2014 Notes). The redemption price was 104.744% of the principal amount of the 2014 Notes. We recognized a net loss on the debt extinguishment of approximately $10.2 million recorded in other, net expense within non-operating (income) expense. The loss was comprised of the make-whole premium of $17.8 million paid to bondholders on the 2014 Notes in accordance with the terms of the 2014 Notes, the recognition of the remaining $8.6 million of unamortized proceeds received from the termination of the interest rate swap associated with the debt, and the write-off of approximately $1.0 million of debt issuance and discount costs that remained to be amortized. The write-off of the remaining unamortized portion of debt issuance costs, discount and swap proceeds are reflected in our condensed consolidated statements of cash flows within operating activities, and the make-whole premium is reflected within financing activities.
Stock Repurchase Program
Our common stock repurchase program has been in place since August 2004. In the aggregate, our Board of Directors has authorized us to repurchase $5.0 billion of our common stock under the program. Under the program, we may repurchase outstanding shares of our common stock from time to time in the open market and through privately negotiated transactions. Unless terminated earlier by resolution of our Board of Directors, the repurchase program will expire when we have repurchased all shares authorized under the program. As of November 2, 2013, we had repurchased a total of approximately 130.1 million shares of our common stock for approximately $4,481.6 million under this program. As of November 2, 2013, an additional $518.4 million worth of shares remains available for repurchase under the current authorized program. The repurchased shares are held as authorized but unissued shares of common stock. We also from time to time repurchase shares in settlement of employee tax withholding obligations due upon the vesting of restricted stock units or the exercise of stock options. Any future common stock repurchases will be based on several factors, including our financial performance, outlook, liquidity and the amount of cash we have available in the United States.
Capital Expenditures
Net additions to property, plant and equipment were $123.1 million in fiscal 2013 and were funded with a combination of cash on hand and cash generated from operations. We expect capital expenditures for fiscal 2014 to be approximately $150 million, of which about two-thirds relates to ongoing capital spending, and about one-third relates to capital spending for a new building we are constructing on our campus in Ireland. These capital expenditures will be funded with a combination of cash on hand and cash generated from operations.
Dividends
On November 25, 2013, our Board of Directors declared a cash dividend of $0.34 per outstanding share of common stock. The dividend will be paid on December 17, 2013 to all shareholders of record at the close of business on December 6, 2013 and is expected to total approximately $105.8 million. We currently expect quarterly dividends to continue at $0.34 per share, although they remain subject to determination and declaration by our Board of Directors. The payment of future dividends, if any, will be based on several factors, including our financial performance, outlook and liquidity.
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Contractual Obligations
The table below summarizes our contractual obligations and the amounts we owe under these contracts in specified periods as of November 2, 2013:
Payment due by period | ||||||||||||||||||||
Less than | More than | |||||||||||||||||||
(thousands) | Total | 1 Year | 1-3 Years | 3-5 Years | 5 Years | |||||||||||||||
Contractual obligations: | ||||||||||||||||||||
Operating leases (a) | $ | 69,071 | $ | 28,045 | $ | 27,766 | $ | 11,507 | $ | 1,753 | ||||||||||
Debt obligations | 875,000 | — | 375,000 | — | 500,000 | |||||||||||||||
Interest payments associated with long-term debt obligations | 171,795 | 25,545 | 45,625 | 28,750 | 71,875 | |||||||||||||||
Deferred compensation plan (b) | 17,431 | 67 | — | — | 17,364 | |||||||||||||||
Pension funding (c) | 3,511 | 3,511 | — | — | — | |||||||||||||||
Total | $ | 1,136,808 | $ | 57,168 | $ | 448,391 | $ | 40,257 | $ | 590,992 | ||||||||||
_______________________________________
(a) | Certain of our operating lease obligations include escalation clauses. These escalating payment requirements are reflected in the table. |
(b) | These payments relate to obligations under our deferred compensation plan. The deferred compensation plan allows certain members of management and other highly-compensated employees and non-employee directors to defer receipt of all or any portion of their compensation. The amount in the “More than 5 Years” column of the table represents the remaining total balance under the deferred compensation plan to be paid to participants who have not terminated employment. Since we cannot reasonably estimate the timing of withdrawals for participants who have not yet terminated employment, we have included the future obligation to these participants in the “More than 5 Years” column of the table. |
(c) | Our funding policy for our foreign defined benefit plans is consistent with the local requirements of each country. The payment obligations in the table are estimates of our expected contributions to these plans for fiscal year 2014. The actual future payments may differ from the amounts presented in the table and reasonable estimates of payments beyond one year are not practical because of potential future changes in variables, such as plan asset performance, interest rates and the rate of increase in compensation levels. |
Purchase orders for the purchase of raw materials and other goods and services are not included in the table above. We are not able to determine the total amount of these purchase orders that represent contractual obligations, as purchase orders may represent authorizations to purchase rather than binding agreements. In addition, our purchase orders generally allow for cancellation without significant penalties. We do not have significant agreements for the purchase of raw materials or other goods specifying minimum quantities or set prices that exceed our expected short-term requirements.
Our 2011 acquisition of Lyric Semiconductor involves the potential payment of contingent consideration. The table above does not reflect any such obligations, as the timing and amounts are uncertain. See Note 6 in the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for more information regarding our acquisitions.
As of November 2, 2013, our total liabilities associated with uncertain tax positions was $71.3 million, which are included in “Other non-current liabilities” in our consolidated balance sheet contained in Item 8 of this Annual Report on Form 10-K. Due to the complexity associated with our tax uncertainties, we cannot make a reasonably reliable estimate of the period in which we expect to settle the non-current liabilities associated with these uncertain tax positions. Therefore, we have not included these uncertain tax positions in the above contractual obligations table.
The expected timing of payments and the amounts of the obligations discussed above are estimated based on current information available as of November 2, 2013.
Off-balance Sheet Financing
As of November 2, 2013, we had no off-balance sheet financing arrangements.
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Outlook
The following statements are based on current expectations. These statements are forward-looking, and actual results may differ materially as a result of, among other things, the important factors contained in Part I, Item 1A. "Risk Factors" and elsewhere in this Annual Report on Form 10-K. Unless specifically mentioned, these statements do not give effect to the potential impact of any mergers, acquisitions, divestitures, or business combinations that may be announced or closed after the date of filing this report. These statements supersede all prior statements regarding our business outlook made by us.
We are planning for revenue in the first quarter of fiscal 2014 to be down approximately 5% to down approximately 10% from the fourth quarter of fiscal 2013. Our plan is for gross margin percentage for the first quarter of fiscal 2014 to be approximately 64% to 65%. We are planning for operating expenses in the first quarter of fiscal 2014 to be approximately $226 million and our tax rate to be approximately 13%. As a result, our plan is for Diluted EPS to be approximately $0.44 to $0.52 in the first quarter of fiscal 2014.
New Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) that are adopted by us as of the specified effective date. Unless otherwise discussed, management believes that the impact of recently issued standards will not have a material impact on our future financial condition and results of operations. See Note 2t, New Accounting Pronouncements, of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for a description of recently issued and adopted accounting pronouncements, including the dates of adoption and impact on our historical financial condition and results of operations.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of the financial condition and results of operations is based upon the consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience, knowledge of current conditions and beliefs of what could occur in the future based on available information. We consider the following accounting policies to be both those most important to the portrayal of our financial condition and those that require the most subjective judgment. If actual results differ significantly from management’s estimates and projections, there could be a material effect on our financial statements. We also have other policies that we consider key accounting policies, such as our policy for revenue recognition, including the deferral of revenue on sales to distributors until the products are sold to the end user; however, the application of these policies does not require us to make significant estimates or judgments that are difficult or subjective.
Inventory Valuation
We value inventories at the lower of cost (first-in, first-out method) or market. Because of the cyclical nature of the semiconductor industry, changes in inventory levels, obsolescence of technology, and product life cycles, we write down inventories to net realizable value. We employ a variety of methodologies to determine the net realizable value of inventory. While a portion of the calculation is determined via reference to the age of inventory and lower of cost or market calculations, an element of the calculation is subject to significant judgments made by us about future demand for our inventory. If actual demand for our products is less than our estimates, additional adjustments to existing inventories may need to be recorded in future periods. To date, our actual results have not been materially different than our estimates, and we do not expect them to be materially different in the future.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts, when appropriate, for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, our actual losses may exceed our estimates, and additional allowances would be required. To date, our actual results have not been materially different than our estimates, and we do not expect them to be materially different in the future.
Long-Lived Assets
We review property, plant, and equipment and finite lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of assets may not be recoverable. Recoverability of these assets is measured by comparison of their carrying value to future undiscounted cash flows that the assets are expected to generate over their remaining economic lives. If such assets are considered to be impaired, the impairment to be recognized in earnings equals the
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amount by which the carrying value of the assets exceeds their fair value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique. Although we have recognized no material impairment adjustments related to our property, plant, and equipment and identified intangible assets during the past three fiscal years, except those made in conjunction with restructuring actions, deterioration in our business in the future could lead to such impairment adjustments in future periods. Evaluation of impairment of long-lived assets requires estimates of future operating results that are used in the preparation of the expected future undiscounted cash flows. Actual future operating results and the remaining economic lives of our long-lived assets could differ from the estimates used in assessing the recoverability of these assets. These differences could result in impairment charges, which could have a material adverse impact on our results of operations. In addition, in certain instances, assets may not be impaired but their estimated useful lives may have decreased. In these situations, we amortize the remaining net book values over the revised useful lives. We review indefinite-lived intangible assets for impairment annually, on the first day of the fourth quarter (on or about August 1) or more frequently if indicators of impairment exist. The impairment test involves the comparison of the fair value of the intangible asset with its carrying amount.
Goodwill
Goodwill is subject to annual impairment tests or more frequently if indicators of potential impairment exist and suggest that the carrying value of goodwill may not be recoverable from estimated discounted future cash flows. We test goodwill for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis in the fourth quarter (on or about August 1) or more frequently if we believe indicators of impairment exist. For our latest annual impairment assessment that occurred on August 4, 2013, we identified our reporting units to be our five operating segments, which meet the aggregation criteria for one reportable segment. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. We generally determine the fair value of our reporting units using the income approach methodology of valuation that includes the discounted cash flow method as well as other generally accepted valuation methodologies, which requires significant judgment by management. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, we perform the second step of the goodwill impairment test to determine the amount of impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill. These impairment tests may result in impairment losses that could have a material adverse impact on our results of operations.
Value of Contingent Consideration related to Business Combination
We record contingent consideration resulting from a business combination at its fair value on the acquisition date. We generally determine the fair value of the contingent consideration using the income approach methodology of valuation. Each reporting period thereafter, we revalue these obligations and record increases or decreases in their fair value as an adjustment to operating expenses within the consolidated statement of income. Changes in the fair value of the contingent consideration can result from changes in assumed discount periods and rates, and from changes pertaining to the achievement of the defined milestones. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period. Accordingly, future business and economic conditions, as well as changes in any of the assumptions described above, can materially impact the amount of contingent consideration expense we record in any given period.
Accounting for Income Taxes
We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, benefits, and deductions, and in the calculation of certain tax assets and liabilities, which arise from differences in the timing of the recognition of revenue and expense for tax and financial statement purposes, as well as the interest and penalties relating to these uncertain tax positions. We assessed the likelihood of the realization of deferred tax assets and concluded that a valuation allowance is needed to reserve the amount of the deferred tax assets that may not be realized due to the uncertainty of the timing and amount of the realization of certain state credit carryovers. In reaching our conclusion, we evaluated certain relevant criteria including the existence of deferred tax liabilities that can be used to absorb deferred tax assets, the taxable income in prior carryback years in the impacted state jurisdictions that can be used to absorb net operating losses and taxable income in future years. Our judgments regarding future profitability may change due to future market conditions, changes in U.S. or international tax laws and other factors. These changes, if any, may require material adjustments to these deferred tax assets, resulting in a reduction in net income or an increase in net loss in the period when such determinations are made, which in turn, may result in an increase or decrease to our tax provision in a subsequent period.
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We account for uncertain tax positions by determining if it is “more likely than not” that a tax position will be sustained by the appropriate taxing authorities prior to recording any benefit in the financial statements. An uncertain income tax position is not recognized if it has less than a 50% likelihood of being sustained. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. We reevaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in known facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. A change in these factors would result in the recognition of a tax benefit or an additional charge to the tax provision.
In the ordinary course of global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of cost reimbursement and royalty arrangements among related entities. Although we believe our estimates are reasonable, no assurance can be given that the final tax outcome of these matters will not be different than that which is reflected in our historical income tax provisions and accruals. In the event our assumptions are incorrect, the differences could have a material impact on our income tax provision and operating results in the period in which such determination is made. In addition to the factors described above, our current and expected effective tax rate is based on then-current tax law. Significant changes during the year in enacted tax law could affect these estimates.
Stock-Based Compensation
Stock-based compensation expense associated with stock options and related awards is recognized in the statement of income. Determining the amount of stock-based compensation to be recorded requires us to develop estimates to be used in calculating the grant-date fair value of stock options. We calculate the grant-date fair values using the Black-Scholes valuation model. The use of valuation models requires us to make estimates of the following items:
Expected volatility — We are responsible for estimating volatility and have considered a number of factors, including third-party estimates, when estimating volatility. We currently believe that the exclusive use of implied volatility results in the best estimate of the grant-date fair value of employee stock options because it reflects the market’s current expectations of future volatility. In evaluating the appropriateness of exclusively relying on implied volatility, we concluded that: (1) options in our common stock are actively traded with sufficient volume on several exchanges; (2) the market prices of both the traded options and the underlying shares are measured at a similar point in time to each other and on a date close to the grant date of the employee share options; (3) the traded options have exercise prices that are both near-the-money and close to the exercise price of the employee share options; and (4) the remaining maturities of the traded options used to estimate volatility are at least one year.
Expected term — We use historical employee exercise and option expiration data to estimate the expected term assumption for the Black-Scholes grant-date valuation. We believe that this historical data is currently the best estimate of the expected term of a new option, and that generally, all of our employees exhibit similar exercise behavior. In general, the longer the expected term used in the Black-Scholes valuation model, the higher the grant-date fair value of the option.
Risk-free interest rate — The yield on zero-coupon U.S. Treasury securities for a period that is commensurate with the expected term assumption is used as the risk-free interest rate.
Expected dividend yield — Expected dividend yield is calculated by annualizing the cash dividend declared by our Board of Directors for the current quarter and dividing that result by the closing stock price on the date of grant of the option. Until such time as our Board of Directors declares a cash dividend for an amount that is different from the current quarter’s cash dividend, the current dividend will be used in deriving this assumption. Cash dividends are not paid on options, restricted stock or restricted stock units.
The amount of stock-based compensation expense recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term “forfeitures” is distinct from “cancellations” or “expirations” and represents only the unvested portion of the surrendered option. Based on an analysis of our historical forfeitures, we have applied an annual forfeiture rate of 4.4% to all unvested stock-based awards as of November 2, 2013. The rate of 4.4% represents the portion that is expected to be forfeited each year over the vesting period. This analysis is re-evaluated quarterly and the forfeiture rate is adjusted as necessary. Ultimately, the actual expense recognized over the vesting period will only be for those awards that vest.
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Contingencies
From time to time, we receive demands from third parties alleging that our products or manufacturing processes infringe the patent or intellectual property rights of these parties. We periodically assess each matter to determine if a contingent liability should be recorded. In making this determination, we may, depending on the nature of the matter, consult with internal and external legal counsel and technical experts. Based on the information we obtain, combined with our judgment regarding all the facts and circumstances of each matter, we determine whether it is probable that a contingent loss may be incurred and whether the amount of such loss can be reasonably estimated. If a loss is probable and reasonably estimable, we record a contingent loss. In determining the amount of a contingent loss, we consider advice received from experts in the specific matter, current status of legal proceedings, settlement negotiations that may be ongoing, prior case history and other factors. If the judgments and estimates made by us are incorrect, we may need to record additional contingent losses that could materially adversely impact our results of operations.
Post-Retirement Benefits
We have significant pension costs and liabilities related to our foreign defined benefit pension plans that are developed from actuarial valuations specific to each country. Inherent in these valuations are key assumptions including discount rates, expected return on plan assets, mortality rates, merit and promotion increases. We are required to consider current market conditions, including changes in interest rates, in making our assumptions. Changes in the related pension costs or liabilities may occur in the future due to changes in our assumptions. Our assumptions as to the expected long-term rates of return on plan assets are based upon the composition of plan assets, historical long-term rates of return on similar assets and current and expected market conditions. The discount rate used for non-U.S. plans reflects the market rate for high-quality fixed-income investments on our annual measurement date (November 2) and is subject to change each year. The discount rates used for plans outside the U.S. are based on a combination of relevant indices regarding corporate and government securities, the duration of the liability and appropriate judgment. Changes in pension income/costs or assets/liabilities may occur in the future due to changes in the assumptions and changes in asset values. If the actual results and events of our pension plan differ from our current assumptions, our benefit obligations may be over-or under-valued. See the disclosures about pension obligations, the composition of plan assets, assumptions and other matters in Note 13 of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K.
We performed a sensitivity analysis on the discount rate and long-term rate of return on assets, which are key assumptions in determining our net periodic post-retirement benefit cost. The table below illustrates the impact of an increase(decrease) of 25 basis points in these assumptions for the year ended November 2, 2013.
Increase (Decrease) in Pension Expense | |||||||
25 Basis Point Increase | 25 Basis Point Decrease | ||||||
Long-term rate of return on assets used to determine net periodic benefit cost | $ | (0.5 | ) | $ | 0.5 | ||
Discount rate used to determine net periodic benefit cost | $ | (1.8 | ) | $ | 1.9 | ||
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Exposure
Our interest income and expense are sensitive to changes in the general level of interest rates. In this regard, changes in interest rates affect the interest earned on our marketable securities and short term investments, as well as the fair value of our investments and debt.
Based on our marketable securities and short-term investments outstanding as of November 2, 2013 and November 3, 2012, our annual interest income would change by approximately $46 million and $41 million, respectively, for each 100 basis point increase in interest rates.
To provide a meaningful assessment of the interest rate risk associated with our investment portfolio, we performed a sensitivity analysis to determine the impact a change in interest rates would have on the value of our investment portfolio assuming a 100 basis point parallel shift in the yield curve. Based on investment positions as of November 2, 2013 and November 3, 2012, a hypothetical 100 basis point increase in interest rates across all maturities would result in a $15 million and $10 million decline, respectively in the fair market value of the portfolio. Such losses would only be realized if we sold the investments prior to maturity.
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As of November 2, 2013, we had $875 million in principal amount of senior unsecured notes outstanding, which consisted of $375 million 3% senior unsecured notes (the 2016 Notes), due April 15, 2016 and $500 million 2.875% senior unsecured notes (the 2023 Notes), due June 1, 2023. As of November 2, 2013, a hypothetical 100 basis point increase in market interest rates would reduce the fair value of our 2016 Notes outstanding by approximately $9 million. As of November 2, 2013, a similar increase in market interest rates would reduce the fair value of our 2023 Notes by $41 million.
Foreign Currency Exposure
As more fully described in Note 2i in the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K, we regularly hedge our non-U.S. dollar-based exposures by entering into forward foreign currency exchange contracts. The terms of these contracts are for periods matching the duration of the underlying exposure and generally range from one month to twelve months. Currently, our largest foreign currency exposure is the Euro, primarily because our European operations have the highest proportion of our local currency denominated expenses. Relative to foreign currency exposures existing at November 2, 2013 and November 3, 2012, a 10% unfavorable movement in foreign currency exchange rates over the course of the year would expose us to approximately $2 million and $1 million, respectively, in losses in earnings or cash flows.
The market risk associated with our derivative instruments results from currency exchange rates that are expected to offset the market risk of the underlying transactions, assets and liabilities being hedged. The counterparties to the agreements relating to our foreign exchange instruments consist of a number of major international financial institutions with high credit ratings. Based on the credit ratings of our counterparties as of November 2, 2013, we do not believe that there is significant risk of nonperformance by them. 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 our 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 our obligations to the counterparties.
The following table illustrates the effect that a 10% unfavorable or favorable movement in foreign currency exchange rates, relative to the U.S. dollar, would have on the fair value of our forward exchange contracts as of November 2, 2013 and November 3, 2012:
November 2, 2013 | November 3, 2012 | ||||||
Fair value of forward exchange contracts asset | $ | 2,267 | $ | 1,061 | |||
Fair value of forward exchange contracts after a 10% unfavorable movement in foreign currency exchange rates asset | $ | 22,763 | $ | 16,800 | |||
Fair value of forward exchange contracts after a 10% favorable movement in foreign currency exchange rates liability | $ | (17,216 | ) | $ | (13,885 | ) | |
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. Our 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.
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ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
ANALOG DEVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended November 2, 2013, November 3, 2012 and October 29, 2011
(thousands, except per share amounts) | 2013 | 2012 | 2011 | ||||||||
Revenue | |||||||||||
Revenue | $ | 2,633,689 | $ | 2,701,142 | $ | 2,993,320 | |||||
Costs and Expenses | |||||||||||
Cost of sales(1) | 941,278 | 960,141 | 1,006,779 | ||||||||
Gross margin | 1,692,411 | 1,741,001 | 1,986,541 | ||||||||
Operating expenses: | |||||||||||
Research and development(1) | 513,255 | 512,003 | 505,570 | ||||||||
Selling, marketing, general and administrative(1) | 396,233 | 396,519 | 406,707 | ||||||||
Special charges | 29,848 | 8,431 | 2,239 | ||||||||
939,336 | 916,953 | 914,516 | |||||||||
Operating income from continuing operations | 753,075 | 824,048 | 1,072,025 | ||||||||
Nonoperating (income) expenses: | |||||||||||
Interest expense | 27,102 | 26,422 | 19,146 | ||||||||
Interest income | (12,753 | ) | (14,448 | ) | (9,060 | ) | |||||
Other, net | (76,597 | ) | (1,459 | ) | 492 | ||||||
(62,248 | ) | 10,515 | 10,578 | ||||||||
Earnings | |||||||||||
Income from continuing operations before income taxes | 815,323 | 813,533 | 1,061,447 | ||||||||
Provision for income taxes: | |||||||||||
Payable currently | 159,535 | 172,098 | 198,849 | ||||||||
Deferred | (17,699 | ) | (9,801 | ) | 1,704 | ||||||
141,836 | 162,297 | 200,553 | |||||||||
Income from continuing operations, net of tax | 673,487 | 651,236 | 860,894 | ||||||||
Gain on sale of discontinued operations, net of tax | — | — | 6,500 | ||||||||
Net income | $ | 673,487 | $ | 651,236 | $ | 867,394 | |||||
Shares used to compute earnings per share — Basic | 307,763 | 298,761 | 299,417 | ||||||||
Shares used to compute earnings per share — Diluted | 314,041 | 306,191 | 308,236 | ||||||||
Earnings per share — Basic | |||||||||||
Income from continuing operations, net of tax | $ | 2.19 | $ | 2.18 | $ | 2.88 | |||||
Net income | $ | 2.19 | $ | 2.18 | $ | 2.90 | |||||
Earnings per share — Diluted | |||||||||||
Income from continuing operations, net of tax | $ | 2.14 | $ | 2.13 | $ | 2.79 | |||||
Net income | $ | 2.14 | $ | 2.13 | $ | 2.81 | |||||
Dividends declared and paid per share | $ | 1.32 | $ | 1.15 | $ | 0.94 | |||||
(1) Includes stock-based compensation expense as follows: | |||||||||||
Cost of sales | $ | 6,593 | $ | 7,254 | $ | 7,294 | |||||
Research and development | $ | 21,901 | $ | 23,169 | $ | 23,289 | |||||
Selling, marketing, general and administrative | $ | 28,392 | $ | 23,077 | $ | 21,775 | |||||
See accompanying Notes.
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ANALOG DEVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended November 2, 2013, November 3, 2012 and October 29, 2011
(thousands) | 2013 | 2012 | 2011 | ||||||||
Income from continuing operations, net of tax | $ | 673,487 | $ | 651,236 | $ | 860,894 | |||||
Foreign currency translation adjustment (net of taxes of $1,404 in 2013, $3,612 in 2012 and $1,667 in 2011) | (499 | ) | 3,020 | (647 | ) | ||||||
Net unrealized gains (losses) on securities: | |||||||||||
Net unrealized holding gains (losses) (net of taxes of $67 in 2013, $115 in 2012 and $67 in 2011) on available-for-sale securities classified as short-term investments | 497 | 525 | (459 | ) | |||||||
Net unrealized holding losses (net of taxes of $0 in 2013, $129 in 2012 and $64 in 2011) on securities classified as other investments | — | 241 | (118 | ) | |||||||
Net realized holding gain (net of taxes of $0 in 2013, $430 in 2012 and $0 in 2011) on securities classified as other investments reclassified into earnings | — | (799 | ) | — | |||||||
Net unrealized gains (losses) on securities | 497 | (33 | ) | (577 | ) | ||||||
Derivative instruments designated as cash flow hedges: | |||||||||||
Changes in fair value of derivatives (net of taxes of $4,242 in 2013, $1,233 in 2012 and $539 in 2011) | 9,708 | (7,923 | ) | 3,347 | |||||||
Realized (gain) loss reclassification (net of taxes of $354 in 2013, $1,160 in 2012 and $1,171 in 2011) | (1,776 | ) | 7,401 | (7,793 | ) | ||||||
Net change in derivative instruments designated as cash flow hedges | 7,932 | (522 | ) | (4,446 | ) | ||||||
Accumulated other comprehensive (loss) income — pension plans: | |||||||||||
Transition asset (net of taxes of $4 in 2013, $1 in 2012 and $1 in 2011) | 20 | 15 | 12 | ||||||||
Net actuarial (loss) gain (net of taxes of $4,146 in 2013, $7,243 in 2012 and $1,770 in 2011) | (24,099 | ) | (44,784 | ) | 13,084 | ||||||
Net prior service (cost) income (net of taxes of $3 in 2013, $584 in 2012 and $0 in 2011) | (3 | ) | 4,079 | — | |||||||
Net change in accumulated other comprehensive (loss) income — pension plans (net of taxes of $4,145 in 2013, $6,658 in 2012 and $1,771 in 2011) | (24,082 | ) | (40,690 | ) | 13,096 | ||||||
Other comprehensive (loss) income | (16,152 | ) | (38,225 | ) | 7,426 | ||||||
Comprehensive income from continuing operations | 657,335 | 613,011 | 868,320 | ||||||||
Gain on sale of discontinued operations, net of tax | — | — | 6,500 | ||||||||
Comprehensive income | $ | 657,335 | $ | 613,011 | $ | 874,820 | |||||
See accompanying Notes.
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ANALOG DEVICES, INC.
CONSOLIDATED BALANCE SHEETS
November 2, 2013 and November 3, 2012
(thousands, except per share amounts) | 2013 | 2012 | |||||
ASSETS | |||||||
Current Assets | |||||||
Cash and cash equivalents | $ | 392,089 | $ | 528,833 | |||
Short-term investments | 4,290,823 | 3,371,545 | |||||
Accounts receivable less allowances of $2,593 ($2,721 in 2012) | 325,144 | 339,881 | |||||
Inventories(1) | 283,337 | 313,723 | |||||
Deferred tax assets | 136,299 | 90,335 | |||||
Prepaid income tax | 2,391 | 8,624 | |||||