Analog Devices Announces Financial Results for the Fourth Quarter and for Fiscal Year 2008

Analog Devices, Inc. (NYSE: ADI), a global leader in high-performance semiconductors for signal processing applications, today announced financial results for its fiscal fourth quarter and fiscal year ended November 1, 2008.

"The fourth quarter culminated a year of solid performance for ADI. We entered the year with a rebalanced, higher margin product portfolio and an intensified focus on our core businesses. This strategy led to increased revenue and significant earnings growth for ADI in 2008,” said Jerald G. Fishman, President and CEO. "While we exited the year faced with very difficult global economic conditions, we believe this focus on our market-leading core signal processing technologies gives us a competitive advantage that will endure throughout and beyond the current downturn.”

Mr. Fishman continued, "As we enter fiscal 2009, we plan to further concentrate our investment on these top priorities, and reduce spending in areas that offer less opportunity for differentiation and growth. We’ve also undertaken other expense management actions to align our cost structure with a demand environment recently reshaped by the global credit crisis. These actions are expected to provide expense savings in the first quarter, and additional savings and margin benefits in subsequent quarters.”

Results for the Fourth Quarter of Fiscal 2008

Revenue was $661 million, up slightly from the immediately prior quarter and an increase of 6% from the same period one year ago.

Gross margin was $404 million, or 61.1% of revenue, compared to $402 million, or 61.0% of revenue, in the immediately prior quarter, and $374 million, or 60.0% of revenue, for the same period one year ago.

Operating income from continuing operations was $161 million, or 24.3% of revenue, compared to $161 million, or 24.5% of revenue, in the immediately prior quarter, and $120 million, or 19.2% of revenue, from the same period one year ago. Excluding one-time items, non-GAAP operating income from continuing operations was $164 million, or 24.8% of revenue, compared to $161 million, or 24.5% of revenue, in the immediately prior quarter, and $145 million, or 23.2% of revenue, from the same period one year ago. The table reconciling the Company’s non-GAAP operating income from continuing operations to GAAP operating income from continuing operations is provided in this release on Schedule G. A more complete table covering prior periods is available on the Analog Devices Investor Relations web site at http://investor.analog.com.

Diluted earnings per share (EPS) from continuing operations was $0.49, an 11% increase from $0.44 in the immediately prior quarter, and a 63% increase from $0.30 in the same period a year ago.

The Board of Directors declared a cash dividend of $0.20 per outstanding share of common stock which will be paid on December 24, 2008 to all shareholders of record at the close of business on December 5, 2008.

Net cash provided by operating activities in the fourth quarter of fiscal 2008 was $142 million, after a reduction of $37 million of taxes associated with the sales of two businesses earlier in the year, as compared to $196 million in the immediately prior quarter, and $183 million in the same period one year ago.

• Capital expenditures for the fourth quarter of fiscal year 2008 totaled $47 million, or 7% of revenue.
• Cash dividends paid during the fourth quarter of fiscal 2008 totaled $58 million.
• Share repurchases of ADI common stock during the fourth quarter of fiscal 2008 totaled $17 million.

Cash and short-term investments at the end of the fourth quarter of fiscal 2008 totaled approximately $1.3 billion.

Accounts receivable at the end of the fourth quarter of fiscal 2008 decreased by 3% compared to the immediately prior quarter, with days sales outstanding declining from 45 days to 44 days.

Inventory at the end of the fourth quarter of fiscal 2008 increased by 2% compared to the immediately prior quarter. Days cost of sales in inventory was 112 days at the end of the fourth quarter of fiscal 2008, compared to 110 days at the end of the immediately prior quarter.

Revenue by end market:

• Revenue from industrial customers, 47% of total revenue, declined 5% from the immediately prior quarter and increased 4% from the same quarter a year ago. Revenue from automotive customers showed the largest sequential decrease as a result of general weakness in the global automotive sector.
• Revenue from communications customers, 27% of total revenue, increased 11% from the immediately prior quarter and increased 34% on a year-over-year basis, principally due to strong growth in revenue from basestation and wireless handset customers.
• Revenue from consumer customers, 21% of total revenue, increased 2% on a sequential basis as growth in revenue from digital camera and home entertainment system customers offset declines in other consumer applications. On a year-over-year basis, consumer revenue decreased 11% as revenues declined in all application areas, consistent with the global slowdown in consumer spending.
• Revenue from computer customers, 5% of total revenue, decreased 4% from the immediately prior quarter and decreased 8% from the same quarter a year ago, in line with an overall weak PC market worldwide.

Schedule E of this document provides additional details about revenue by end market for the fourth quarter, immediately prior quarter, and year-ago quarter. A more complete table covering prior periods is available on the Analog Devices Investor Relations web site at: http://investor.analog.com

Revenue by product type:

• Analog product revenue, 90% of total revenue, was approximately flat compared with the immediately prior quarter and grew 6% year-over-year.

• Revenue from ADI’s market-leading data converters and amplifiers totaled $460 million, or 70% of total revenue:
  • Data converter revenue, 47% of total revenue, grew 2% sequentially and 8% year-over-year.
  • Amplifier revenue, 23% of total revenue, was approximately flat compared with the immediately prior quarter and increased 9% year-over-year.
• General purpose digital signal processing (DSP) products, 9% of total revenue, increased 1% sequentially and 9% year-over-year.

Schedule F of this document provides additional details about revenue by product type for the fourth quarter, immediately prior quarter, and year-ago quarter. A more complete table covering prior periods is available on the Analog Devices Investor Relations web site at: http://investor.analog.com

Results for Fiscal Year 2008

Financial summary

• Product revenue was $2.6 billion, an increase of 6% from $2.4 billion in fiscal year 2007. On an equivalent 52-week basis, fiscal 2008 product revenue increased 8% compared to fiscal 2007, which was a 53-week fiscal year.
• Gross margin was $1.6 billion, or 61.1% of revenue, compared to $1.5 billion, or 60.6% of revenue, in fiscal 2007, excluding a one-time license payment received in the first quarter of fiscal 2007. The table reconciling the Company’s non-GAAP results to GAAP results is provided in this release on Schedule G.
• Operating expenses totaled $952 million, compared to $940 million in fiscal 2007. Excluding restructuring and one-time items, non-GAAP operating expenses totaled $949 million in fiscal 2008, compared to $908 million in fiscal 2007.
• Operating income from continuing operations was $625 million, or 24.2% of revenue, compared to $569 million, or 23.1% of revenue, in fiscal 2007. Excluding one-time items, non-GAAP operating income from continuing operations was $628 million, or 24.3% of revenue, in fiscal 2008, compared to $566 million, or 23.3% of revenue, in fiscal 2007.
• Diluted EPS from continuing operations was $1.77, a 17% increase from $1.51 in fiscal 2007. Non-GAAP diluted EPS from continuing operations in fiscal 2008 was $1.77, a 20% increase from $1.48 in fiscal 2007.
• Net cash provided by operating activities was $669 million, after a reduction of $110 million of taxes associated with the sales of two businesses, as compared to $820 million in fiscal 2007.

End market and product revenue highlights

End markets

• Revenue from industrial customers, 49% of total revenue, increased 6% year-to-year, with the strongest growth in instrumentation, automotive, defense, and power meter applications. Revenue from industrial customers has grown at a 5-year compound annual growth rate (CAGR) of 11%.
• Revenue from communications customers, 25% of total revenue, grew 21% year-to-year, driven by growth in basestation, wireless handset, and optical applications. Revenue from communications customers has grown at a 5-year CAGR of 7%. Basestation customer revenue, the largest component of communications revenue, has grown at a 5-year CAGR of 18%.
• Revenue from consumer customers, 21% of total revenue, decreased 2% year-to-year. Revenue from advanced television and digital camera applications increased, while revenue from other consumer applications decreased from the prior year. Revenue from consumer customers has grown at a 5-year CAGR of 15%.

Products

• Revenue from analog products, 90% of total revenue, increased 6% in fiscal 2008, and has grown at a 5-year CAGR of 11%.
• Revenue from data converters and amplifiers totaled $1.8 billion, or 69% of total revenue:

• Data converter revenue, 46% of total revenue, increased 8% in fiscal 2008, and has grown at a 5-year CAGR of 12%.
• Amplifier revenue, 23% of total revenue, increased 6% in fiscal 2008, and has grown at a 5-year CAGR of 10%.

• General purpose DSP revenue, 9% of total revenue, increased 10% in fiscal 2008, and has grown at a 5-year CAGR of 8%.

Schedules E and F of this document provide additional details about revenue by end market and product type for fiscal years 2007 and 2008. A more complete table covering prior periods is available on the Analog Devices Investor Relations web site at: http://investor.analog.com

Outlook for the First Quarter of Fiscal 2009

The following statements are based on current expectations. These statements are forward looking and actual results may differ materially, including as a result of the important factors discussed at the end of this release. These statements supersede all prior statements regarding business outlook set forth in prior ADI news releases.

Regarding the revenue outlook for the company for the first quarter of fiscal 2009, Mr. Fishman said, "The global credit crisis and deteriorating economic conditions have resulted in much more cautious customer spending behavior and generally lower demand. Order rates slowed in late September, and backlog declined significantly from the prior quarter, which limits our short-term visibility. Forecasting revenue in this environment is very difficult. Our operating plan is for revenues to decline sequentially by approximately 20% in the first quarter of fiscal 2009. We are planning to take steps to avoid a large inventory buildup by significantly reducing manufacturing output, which we expect will temporarily impact our gross margin by approximately 3 to 4 percentage points. We are therefore planning for gross margin to be approximately 57% to 58% in the first quarter, depending on the actual product mix and level of sales we achieve. Further, we are planning to take actions that we expect will result in operating expense reductions from fourth quarter levels of approximately 10%, or $25 million. We expect to realize over half of that savings in the first quarter and the balance in the second quarter. As a result of these actions, we plan to record a restructuring charge in the first quarter. Assuming these levels of sales, gross margin, and cost reduction, EPS from continuing operations in the first quarter would be approximately $0.22 to $0.23, excluding restructuring charges.”

"We are responding to the current economic environment by taking actions that we expect will reduce expenses in the short term while strengthening our position for the long term,” Mr. Fishman continued. "We anticipate that our variable and discretionary cost reductions will modulate with general economic conditions, while the actions related to realigning our product portfolio and streamlining our manufacturing infrastructure will result in short-term savings as well as a fundamentally lower cost structure. As such, we believe that we have taken steps to mitigate the short term reduction in our earnings while at the same time positioning ADI for significant earnings leverage when growth resumes.”

Conference Call Scheduled for 5:00

Mr. Fishman will discuss the fourth quarter and fiscal year 2008 results, as well as the short-term outlook via webcast, accessible at http://investor.analog.com today beginning at 5:00 pm ET. Investors who prefer to join by telephone may call 706-634-7193 ten minutes before the call begins and provide the password "ADI."

A replay will be available almost immediately after the call. The replay may be accessed for up to one week by dialing 800-642-1687 (replay only) and providing the conference ID: 72243160 or by visiting the Analog Devices Investor Relations web site.

Non-GAAP Financial Information

This release includes non-GAAP financial measures for prior periods that are not in accordance with, nor an alternative to, generally accepted accounting principles and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. Tables reconciling the Company’s non-GAAP measures to GAAP measures are provided in this release.

Manner in Which Management Uses the Non-GAAP Financial Measures

Management uses non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income and non-GAAP diluted earnings per share to evaluate the Company’s operating performance against past periods and to budget and allocate resources in future periods. These non-GAAP measures also assist management in understanding and evaluating the underlying baseline operating results and trends in the Company’s business.

Economic Substance Behind Management’s Decision to Use Non-GAAP Financial Measures

The items excluded from the non-GAAP measures were excluded because they are of a non-recurring or non-cash nature.

The following items are excluded from our Non-GAAP gross margin:

Non-Recurring Revenue Associated with the License of Certain Intellectual Property Rights to a Third Party. On November 9, 2006, we received a one-time, non-recurring payment of $35 million in exchange for granting a license of certain intellectual property rights to a third party. This payment increased revenue in the first quarter of fiscal 2007 by $35 million. We exclude this item and the related tax effects from our non-GAAP results because it is a one-time item not associated with the ongoing operations of our business.

The following items are excluded from our Non-GAAP operating expenses:

Restructuring-Related Expense. These expenses are incurred in connection with facility closures and other reorganization efforts. Apart from ongoing expense savings as a result of such items, these expenses and the related tax effects have no direct correlation to the operation of our business in the future.

Proceeds from the one-time settlement of litigation. In the second quarter of fiscal 2007, we settled a lawsuit against Maxim Integrated Products and received a one-time non-recurring payment of $19 million. A portion of this payment ($8.5 million) was to compensate us for the legal expenses we incurred during the years 2001 through 2007 in connection with this lawsuit. As the original legal expenses were recorded as general and administrative expenses in the income statement, we recorded the recovery of these legal expenses in the same line item in our operating expenses. The remaining $10.5 million was recorded as non-operating income because it is not associated with the normal operations of our business. We exclude this payment and the related tax effects from our non-GAAP results because it is a one-time item not associated with the ongoing operations of our business.

The following items are excluded from our Non-GAAP operating income:

Non-Recurring Revenue Associated with the License of Certain Intellectual Property Rights to a Third Party. On November 9, 2006, we received a one-time, non-recurring payment of $35 million in exchange for granting a license of certain intellectual property rights to a third party. This payment increased revenue in the first quarter of fiscal 2007 by $35 million. We exclude this item and the related tax effects from our non-GAAP results because it is a one-time item not associated with the ongoing operations of our business.

Restructuring-Related Expense. These expenses are incurred in connection with facility closures and other reorganization efforts. Apart from ongoing expense savings as a result of such items, these expenses and the related tax effects have no direct correlation to the operation of our business in the future.

Proceeds from the one-time settlement of litigation. In the second quarter of fiscal 2007, we settled a lawsuit against Maxim Integrated Products and received a one-time non-recurring payment of $19 million. A portion of this payment ($8.5 million) was to compensate us for the legal expenses we incurred during the years 2001 through 2007 in connection with this lawsuit. As the original legal expenses were recorded as general and administrative expenses in the income statement, we recorded the recovery of these legal expenses in the same line item in our operating expenses. The remaining $10.5 million was recorded as non-operating income because it is not associated with the normal operations of our business. We exclude this payment and the related tax effects from our non-GAAP results because it is a one-time item not associated with the ongoing operations of our business.

The following items are excluded from our Non-GAAP diluted earnings per share:

Non-Recurring Revenue Associated with the License of Certain Intellectual Property Rights to a Third Party. On November 9, 2006, we received a one-time, non-recurring payment of $35 million in exchange for granting a license of certain intellectual property rights to a third party. This payment increased revenue in the first quarter of fiscal 2007 by $35 million. We exclude this item and the related tax effects from our non-GAAP results because it is a one-time item not associated with the ongoing operations of our business.

Acquisition-Related Expense. During the first quarter of fiscal 2007, we recorded a tax adjustment when we finalized the accounting associated with an acquisition which occurred in the fourth quarter of fiscal 2006. We excluded this income tax expense from our non-GAAP results because it was not associated with the income tax expense on our current operating results.

Restructuring-Related Expense. These expenses are incurred in connection with facility closures and other reorganization efforts. Apart from ongoing expense savings as a result of such items, these expenses and the related tax effects have no direct correlation to the operation of our business in the future.

Proceeds from the one-time settlement of litigation. In the second quarter of fiscal 2007, we settled a lawsuit against Maxim Integrated Products and received a one-time non-recurring payment of $19 million. A portion of this payment ($8.5 million) was to compensate us for the legal expenses we incurred during the years 2001 through 2007 in connection with this lawsuit. As the original legal expenses were recorded as general and administrative expenses in the income statement, we recorded the recovery of these legal expenses in the same line item in our operating expenses. The remaining $10.5 million was recorded as non-operating income because it is not associated with the normal operations of our business. We exclude this payment and the related tax effects from our non-GAAP results because it is a one-time item not associated with the ongoing operations of our business.

Gain on Sale of Investment. We realized a gain of $8 million in the first quarter of fiscal 2007 from the sale of a minority shareholding in a company. We excluded this amount and the related tax effects because it is a one-time item not associated with our ongoing operating results.

Tax Savings Associated with Reinstatement of the Federal R&D Tax Credit. The IRS reinstated the R&D tax credit in December 2006, retroactive to January 1, 2006. This retroactive reinstatement resulted in a $10 million income tax savings to the Company in the first quarter of fiscal 2007. This credit expired during our first fiscal quarter of 2008, but was reinstated again during our fourth quarter of fiscal 2008, retroactive to January 1, 2008. This retroactive reinstatement resulted in a $3 million income tax savings to the Company in the fourth quarter of fiscal 2008. We excluded this income tax savings from our non-GAAP measures because it is not associated with the income tax expense on our current operating results.

Tax Adjustment Associated with IRS Examination. During the fourth quarter of fiscal year 2007, the IRS completed its field examination of fiscal years 2004 and 2005. The IRS issued proposed adjustments related to these two fiscal years. During the fourth quarter of fiscal 2007, we provided $4.4 million for taxes and penalties related to certain of these proposed adjustments. We exclude this income tax expense from our non-GAAP results because it is not associated with the income tax expense on our current operating results.

Why Management Believes the Non-GAAP Financial Measures Provide Useful Information to Investors

Management believes that the presentation of non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income, and non-GAAP diluted EPS is useful to investors because it provides investors with the operating results that management uses to manage the company.

Material Limitations Associated with Use of the Non-GAAP Financial Measures

Analog Devices believes that non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income, and non-GAAP diluted EPS have material limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP and that these measures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP measures. In addition, our non-GAAP measures may not be comparable to the non-GAAP measures reported by other companies. The Company’s use of non-GAAP measures, and the underlying methodology in excluding certain items, is not necessarily an indication of the results of operations that may be expected in the future, or that the Company will not, in fact, record such items in future periods.

Management’s Compensation for Limitations of Non-GAAP Financial Measures

Management compensates for these material limitations in non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income and non-GAAP diluted earnings per share by also evaluating our GAAP results and the reconciliations of our non-GAAP measures to the most directly comparable GAAP measure. Investors should consider our non-GAAP financial measures in conjunction with the corresponding GAAP measures.

About Analog Devices, Inc.

Innovation, performance, and excellence are the cultural pillars on which Analog Devices has built one of the longest standing, highest growth companies within the technology sector. Acknowledged industry-wide as the world leader in data conversion and signal conditioning technology, Analog Devices serves over 60,000 customers, representing virtually all types of electronic equipment. Celebrating over 40 years as a leading global manufacturer of high-performance integrated circuits used in analog and digital signal processing applications, Analog Devices is headquartered in Norwood, Massachusetts, with design and manufacturing facilities throughout the world. Analog Devices' common stock is listed on the New York Stock Exchange under the ticker "ADI” and is included in the S&P 500 Index.

This release may be deemed to contain forward-looking statements which include, among other things, our statements regarding expected revenue, earnings, operating expenses, gross margins, restructuring charges, and other financial results, expected customer demand for our products, and expected results of our ongoing expense reduction efforts, that are based on our current expectations, beliefs, assumptions, estimates, forecasts, and projections about the industry and markets in which Analog Devices operates. The statements contained in this release are not guarantees of future performance, are inherently uncertain, involve certain risks, uncertainties, and assumptions that are difficult to predict, and 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 hereof. Therefore, actual outcomes and results may differ materially from what is expressed in such forward-looking statements, and such statements should not be relied upon as representing Analog Devices’ expectations or beliefs as of any date subsequent to the date of this press release. We do not undertake any obligation to update forward-looking statements made by us. Important factors that may affect future operating results include: continuing adversity in economic conditions in the United States and internationally as a result of the ongoing crisis in global credit and financial markets, further erosion of consumer confidence and adverse changes to customer spending behaviors, the effects of changes in customer demand for our products and for end products that incorporate our products, competitive pricing pressures, unavailability of raw materials or wafer fabrication, assembly and test capacity, any delay or cancellation of significant customer orders, any inability to manage inventory to meet customer demand, changes in geographic, product or customer mix, adverse results in litigation matters, and other risk factors described in our most recent filings with the Securities and Exchange Commission. Our results of operations for the periods presented in this release are not necessarily indicative of our operating results for any future periods. Any projections in this release are based on limited information currently available to Analog Devices, which is subject to change. Although any such projections and the factors influencing them will likely change, we will not necessarily update the information, as we will only provide guidance at certain points during the year. Such information speaks only as of the original issuance date of this release.

Analog Devices and the Analog Devices logo are registered trademarks or trademarks of Analog Devices, Inc. All other trademarks mentioned in this document are the property of their respective owners. The use of the word partner does not imply a partnership relationship between Analog Devices and any other company.