Analog Devices Inc. is a semiconductor manufacturer headquartered in Norwood near Boston, Massachusetts. The company has offices worldwide and it's production sites are located in Wilmington (USA), Cavite (Philippines) and Limerick (Ireland).
1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED OCTOBER 28, 1995 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] 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 (I.R.S. Employer incorporation or organization) Identification No.) ONE TECHNOLOGY WAY, NORWOOD, MA 02062-9106 (Address of principal executive offices) (Zip Code) (617) 329-4700 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: COMMON STOCK $.16 2/3 PAR VALUE NEW YORK STOCK EXCHANGE Title of Each Class Name of Each Exchange on Which Registered SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT: NONE Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. /X/ 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 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 /X/ NO The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $2,630,610,015 based on the closing price of the Common Stock on the New York Stock Exchange Composite Tape reporting system on December 29, 1995. Indicate the number of shares outstanding of each class of Common Stock: 114,677,500 shares of $.16 2/3 par value Common Stock as of December 29, 1995. DOCUMENTS INCORPORATED BY REFERENCE <TABLE> <CAPTION> DOCUMENT DESCRIPTION 10-K PART -------------------- --------- <S> <C> Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held March 12, 1996............... III </TABLE>
2 PART I ITEM 1. BUSINESS Analog Devices, Inc. ("Analog" or the "Company") designs, manufactures and markets a broad line of high-performance linear, mixed-signal and digital integrated circuits ("ICs") that address a wide range of real-world signal processing applications. The Company's principal products include general-purpose, standard-function linear and mixed-signal ICs ("SLICs"), special-purpose linear and mixed-signal ICs ("SPLICs") and digital signal processing ICs ("DSP ICs"). The Company also manufactures and markets devices using assembled product technology. Nearly all of the Company's products are components, which are typically incorporated by original equipment manufacturers (OEMs) in a wide range of equipment and systems for use in communications, computer, industrial, instrumentation, military/aerospace and high-performance consumer electronics applications. The Company sells its products worldwide; approximately 44% of the Company's fiscal 1995 net sales were made to customers in North America, while most of the balance was to customers in Western Europe and the Far East. INDUSTRY BACKGROUND Real-world phenomena, such as temperature, pressure, sound, images, speed, acceleration, position and rotation angle, are inherently analog in nature, consisting of continuously varying information. This information can be detected and measured using analog sensors, which represent real-world phenomena by generating continuously varying voltages and currents. The signals from these sensors are initially processed using analog methods, such as amplification, filtering and shaping. They are then usually converted to digital form for input to a microprocessor, which is used to manipulate, store or display the information. In many cases the signals are further processed after conversion to digital form using a technology called "digital signal processing." In addition, digital signals are frequently converted to analog form to provide signals for analog display, sound, or control functions. These manipulations and transformations are collectively known as "real-world signal processing." Significant advances in semiconductor technology over the past 10 to 15 years have led to substantial increases in the performance and functionality of ICs used for signal processing applications. These advances include the ability to create VLSI (Very Large Scale Integration) mixed-signal ICs that contain both high-performance analog circuitry and large amounts of high-density digital circuitry. The analog circuitry portion of the IC is used for manipulating real- world signals while still in analog form and for converting analog signals into digital form (or vice versa), and the digital portion is used for further processing analog signals subsequent to their conversion to digital form. The ICs resulting from these advances are used as components in equipment and systems to achieve higher performance and more efficient signal processing. COMPANY OVERVIEW AND STRATEGY Analog believes it is one of the world's largest suppliers of SLIC products. The Company's SLIC products are primarily high-performance, single-function devices. The majority of the Company's SLIC revenue is attributable to data converters (analog-to-digital and digital-to-analog) and amplifiers. SLICs are sold to a very large customer base for a wide variety of applications, including applications in the medical, engineering and scientific instruments market, factory automation market and military/aerospace market. Over the past five years, Analog has sought to balance its traditionally stable SLIC business with growth opportunities for SPLICs and DSP ICs. Building upon its expertise in linear IC technology, the Company has developed special-purpose linear and mixed-signal ICs tailored to specific high-volume applications in target markets. The Company also has extended its expertise in analog signal processing and data conversion to develop DSP ICs. The Company's SPLICs and DSP ICs address the emerging demand for high levels of performance in many communications, computer and other high-volume applications. These products have a high level of functionality (i.e., many functions on one chip) to satisfy OEMs' requirements for an integrated solution with low cost per function. 1
3 To build upon its position as a leader in real-world signal processing, Analog is pursuing strategies that include the following: - Expand Traditional SLIC Business. The Company has taken a three-pronged approach to grow its SLIC business. First, it is seeking to solidify its leading position in the market for general purpose operational amplifiers and data converters, particularly in instrumentation and factory automation applications. Second, it is expanding its SLIC product portfolio to address other market segments, such as power management ICs for mobile phones and laptop computers and interface ICs for modems and printers. Third, the Company is developing SLICs for new high-volume applications in the communications, computer and consumer markets, including radio frequency ("RF") products for both wireless and broadband wired communication applications. - Become a Major Supplier of General-Purpose DSP ICs. The Company's general-purpose DSP ICs consist of a family of programmable 16-bit fixed point and 32-bit floating point DSPs. These products offer processing speed, ease of programming and on-chip memory that allow system designers to cost effectively implement complex algorithms for signal processing applications. Analog believes that this product line will enable it to build a leading position in the general-purpose DSP market, principally for communications and computer applications. - Pursue Growth Opportunities for System-Level Signal-Processing ICs. The Company is leveraging its expertise in both analog signal processing and data conversion to develop SPLICs and DSP ICs that provide system-level solutions for various growth applications, particularly in the communications and computer markets. The Company's system-level ICs often replace a combination of SLICs and general-purpose DSPs that are used by customers in their initial product designs. The Company offers system-level ICs for wireless communications applications such as digital mobile phones and base stations, and for computer applications such as audio enhancement in multimedia PCs. - Leverage Core Technologies to Develop Innovative Products. The Company plans to continue applying its core technologies to develop a continuous flow of new products. In addition, the Company plans to continue to extend its core technologies to include new technologies, such as RF signal processing, which Analog has used primarily for wireless communications applications, and surface micromachining, which Analog has used to develop an accelerometer for automobile airbag systems. The Company intends to use its micromachining technology to address other applications outside the automotive industry. PRINCIPAL PRODUCTS The Company operates predominantly in one industry segment: the design, manufacture and marketing of a broad line of high-performance linear, mixed-signal and digital integrated circuits that address a wide range of real-world signal processing applications. Analog's products can be divided into four classifications: SLICs; SPLICs and DSP ICs; hard disk drive ICs; and assembled products. A substantial portion of the Company's products are proprietary (available only from Analog), while equivalents to most of its other products are available from a limited number of other suppliers. Many of the Company's products tend to be less price sensitive than other types of ICs, such as DRAM (Dynamic Random Access Memory) ICs, primarily because there are fewer suppliers and because OEMs, in many cases, after qualifying one manufacturer's high-performance linear or mixed-signal IC for a specific application, are reluctant to switch manufacturers due to the risk of degradation in the performance of their product and/or the effort required to qualify additional suppliers. The following table sets forth the approximate percentage of revenue attributable to each of the Company's four product groups for the past three fiscal years: <TABLE> <CAPTION> PRODUCTS 1995 1994 1993 ----------------------------------------------------------------------- <S> <C> <C> <C> SLICs 64% 60% 60% SPLICs and DSP ICs 24 20 20 Hard Disk Drive ICs 4 9 6 Assembled Products 8 11 14 </TABLE> 2
4 SLICs Analog believes that it is one of the world's largest suppliers of SLIC products. SLICs have been the foundation of the Company's business for more than 20 years. The Company's SLIC products are primarily high-performance, single- function devices. The majority of the Company's SLIC revenue is attributable to data converters (analog-to-digital and digital-to-analog) and amplifiers. Other SLIC products offered by the Company include analog signal-processing devices (such as analog multipliers), voltage references and comparators. The Company is currently expanding its SLIC product offerings in areas where it traditionally has had limited focus, principally interface circuits and power management ICs. It is also expanding its SLIC product line to include a much larger number of products designed to operate from single-supply 3- or 5-volt power sources to better meet the needs of customers designing portable, battery- operated equipment. Analog's SLIC products tend to be general purpose in nature, which allows customers to incorporate them in a wide variety of equipment and systems. Analog's product portfolio includes several hundred SLICs, any one of which can have as many as several hundred customers. SLICs typically have long product life cycles. The Company's SLIC customers include both OEMs and customers who build equipment for their own use. Historically, most SLICs have been purchased by OEMs which serve the industrial and military/aerospace markets, but they are now also being used for applications in commercial and consumer communications equipment, personal computers (PCs) and peripheral equipment used with PCs and computers. By using standard, high-performance, readily available, off-the-shelf components in their designs, Analog's customers can reduce the time required to develop and bring new products to market. Given the high cost of developing customized ICs, SLICs usually provide the most cost-effective solutions for low- to medium-volume applications. In addition, combinations of SLICs connected together on a printed circuit board can provide functionality that cannot currently be implemented with a single-chip device. SPLICs AND DSP ICs SPLICs and DSP ICs, which are collectively referred to as system-level ICs, are multi-function devices that feature high levels of functional integration on a single chip. Most SPLICs are mixed-signal devices (some of which include DSP capability) and the balance are linear-only devices. SPLICs are almost always designed to the requirements of a specific application, and the design process often includes significant input from one or more potential key customers. Market demand for SPLICs is driven by the benefits that result from combining a number of functions on a single circuit as opposed to a combination of SLICs and other ICs. These benefits include higher performance, lower cost per function, smaller size, lower weight, fewer parts and decreased power consumption. These products enable customers to achieve easier design-ins and faster time to market. The Company believes that these benefits are becoming more important to the Company's OEM customers as they increase their focus on high-performance, small, lightweight products, many of which are battery powered. The Company's general-purpose DSP ICs are designed to efficiently execute specialized programs (algorithms) associated with processing real-time, real-world data. The Company's fixed-point and floating-point DSP ICs share a common architecture and code compatibility, which allows system designers to address cost, performance and time-to- market constraints. Analog's DSP ICs are supported with specialized applications and easy-to-use, low-cost design tools, which reduce product development cost and time to market. The Company's DSP ICs include general-purpose DSPs and mixed-signal ICs that include a DSP core along with data conversion and analog signal processing circuitry. Demand for system-level ICs that incorporate both DSP functionality and sophisticated mixed-signal capability tailored to specific applications is increasing as customers continue to demand as much functionality as possible from a single chip. HARD DISK DRIVE ICs ICs in this product category are used in hard disk drives that serve as rotating mass storage devices in end products such as PCs, workstations and network servers. These ICs process analog signals from a hard disk drive's read/write head during read operations and position the read/write head over the desired track on a hard disk drive platter during read and write operations. 3
5 ASSEMBLED PRODUCTS The Company's assembled products consist of hybrids, printed-board modules and multi-chip modules ("MCMs"). A hybrid consists of several chips and discrete components mounted and wired together on a substrate. A printed-board module consists of surface-mount components assembled on a small printed board that is then encapsulated in a small plastic case. An MCM consists of several chips assembled in an automated fashion in a multilayer package that provides high interconnect density at low cost. Revenues from this product group have been declining since 1989, as hybrids have been replaced in many new designs with smaller, lower-cost monolithic ICs that offer higher levels of performance and integration. The Company plans to continue marketing printed-board modules (primarily input/output modules used in industrial control and factory automation applications). Orders for assembled products overall showed a year-over-year increase in fiscal 1995 following several years of decline as demand for recently designed MCMs offset declining demand for older hybrid products. MARKET AND APPLICATIONS The Company's products are sold primarily to OEMs that incorporate them in equipment, instruments and systems sold to end users for a wide variety of applications, including communications equipment; computers and computer peripherals; engineering, medical and scientific instruments; factory automation equipment; military/aerospace equipment; high-end consumer electronics products; and automotive. The Company's growth has been aided both by the expansion of these markets and the increasing use of computer technology in the equipment and systems sold in these markets. For fiscal 1995, Analog's 20 largest customers accounted for approximately 25% of the Company's net sales. The largest single customer represented less than 5% of net sales. Sales of the Company's products are not highly seasonal. Listed below are some of the characteristics of each of the Company's major served markets: COMMUNICATIONS -- includes data and fax modems, digital cellular telephones and portable, wireless communications equipment and broadband wired applications. The need for ever higher speed, coupled with more reliable, more bandwidth-efficient communications is creating increasing demand for systems that include both digital and analog signal processing capability. Demand for signal processing ICs for this market is also being driven by the equipment manufacturers' need for components that enable them to develop cost-effective products that feature high performance, small size, low weight and minimal power consumption. COMPUTERS AND COMPUTER PERIPHERALS -- includes high-performance personal computers, workstations and peripheral devices such as hard disk drives. The Company currently supplies a variety of ICs used in this market for functions such as graphic displays; interfaces between PCs and peripherals such as modems and printers; power and battery management; and enhanced sound input and output capability for business and entertainment applications. INSTRUMENTATION -- includes manufacturers of engineering, medical and scientific instruments. These products are usually designed using the highest performance SLICs available, where production volumes generally do not warrant custom or application-specific ICs. FACTORY AUTOMATION -- includes data acquisition systems, automatic process control systems, robotics, environmental control systems and automatic test equipment ("ATE"). These products generally require ICs that offer performance greater than that available from commodity-level ICs, but generally do not have production volumes that warrant custom or application-specific ICs. Combinations of SLICs are therefore usually employed to achieve the necessary functionality, except in ATE applications where the high level of electronic circuitry required per tester has created opportunities for SPLICs. MILITARY/AEROSPACE -- includes the military, commercial avionics and space markets, all of which require high-performance ICs that meet rigorous environmental and reliability specifications. Nearly all of the Company's SLICs can be supplied in versions that meet appropriate military standards. In addition, many products can be supplied to meet the standards required for broadcast satellites and other commercial space applications. Most of the Company's products sold into this market are derived from standard commercial grade ICs, although the Company sometimes develops products expressly for military/aerospace applications. 4
6 CONSUMER ELECTRONICS -- The emergence of high-performance consumer products, such as compact disc players, digital VCRs, digital audio tape equipment and digital camcorders, has led to the need for high-performance SPLICs with a high level of functionality. Although the Company's revenue from this market is not currently significant, the Company expects to supply ICs for sophisticated products used by consumers for computing, communications and entertainment applications, and believes that many of these applications will involve digital signal processing. AUTOMOTIVE -- Although the automotive market has historically been served with low-cost, low-performance ICs, demand has emerged for higher performance devices for a wide range of applications. In response, Analog is developing products specifically for the automotive market. The Company began shipments of its first automotive product, a micromachined IC employed as a crash sensor in airbag systems, in 1993. This product serves as an alternative to an electromechanical sensor. The Company began shipments of this device to Delco in 1994 for use in several 1995 model-year General Motors "W body" cars. It is also being used in, or has been selected for, several other manufacturers' airbag systems. RESEARCH AND DEVELOPMENT The markets served by Analog are characterized by rapid technological changes and advances. Accordingly, the Company makes substantial investments in the design and development of new products and processes, and for significant improvement of existing products and processes. Analog spent $134.3 million during fiscal 1995 for the design, development and improvement of new and existing products and processes, compared to $106.9 million during fiscal 1994 and $94.1 million during fiscal 1993. In fiscal 1995, approximately half of the Company's R&D expenditures were devoted to the design and development of SPLICs and DSP ICs, and the development and improvement of processes used for these products. The Company believes that it will be able to leverage its core technological competencies and leadership position in linear and DSP technology to design and develop a wide range of highly integrated, high-performance, cost-effective mixed-signal SPLICs, many of which will include DSP capability. At the same time, however, the Company expects to continue developing new and improved SLIC products to increase its share of the SLIC market. In support of its research and development activities, the Company employs several hundred engineers involved in product and process development at several design centers and manufacturing sites located throughout the world. As of October 28, 1995, the Company owned 311 U.S. patents and had 210 patent applications on file with the United States patent office. The Company believes that while its patents may provide some advantage, its competitive position is largely determined by such factors as the knowledge, ability and experience of the Company's personnel, new product development, market recognition and ongoing marketing efforts, customer service and technical support. SALES CHANNELS Analog sells its products in both North America and internationally through a direct sales force, third-party distributors and independent sales representatives. Approximately 44% of fiscal 1995 revenue was derived from customers in North America. As of December 1, 1995, the Company had 15 sales offices in the United States, and its third-party distribution channel consisted of nine national and regional third-party distributors and several independent sales representatives with numerous locations throughout the U.S. and Canada. Approximately 28% of the Company's fiscal 1995 revenue was derived from sales to customers in Europe; 17% to customers in Japan; and 11% to customers in other international markets. As of December 1, 1995, the Company had direct sales offices in Australia, Austria, Denmark, France, Germany, Hong Kong, India, Israel, Italy, Japan, Korea, The Netherlands, Singapore, Sweden, Taiwan and the United Kingdom. The Company also had sales representatives and/or distributors in approximately 27 countries outside North America, including countries where the Company also has direct sales offices. Approximately 42% of Analog's fiscal 1995 revenue was derived from sales made through distributors. The Company's distributors typically maintain an inventory of Analog products. Some of these distributors also sell products competitive with the Company's products, including those for which the Company is an alternate source. Sales to certain distributors are made under agreements which provide protection to the distributors for their inventory of Company products against price reductions and products that are slow-moving or have been discontinued by the Company. These agreements generally contain a provision for the return of the products to the Company in the event the relationship with the distributor is terminated. 5
7 Sales to North American distributors are not recognized until the products are resold by distributors to their customers. Sales made to distributors outside North America are recognized upon shipment to the distributor, but the Company provides specific reserves for possible returns and allowances. The Company's worldwide sales efforts are supported 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. The Company publishes and distributes full-length databooks, short-form catalogs, applications guides, technical handbooks and detailed data sheets for individual products. The Company also maintains a staff of application engineers who aid customers in incorporating Analog's products into their products during their product development cycles. PRODUCTION AND RAW MATERIALS Monolithic integrated circuit components are manufactured in a sequence of 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, ceramic packages and plastic used for plastic packaging. In addition to using industry-standard bipolar and CMOS wafer fabrication processes, Analog employs a number of Company-developed proprietary processes specifically tailored for use in fabricating high-performance linear and mixed-signal SLICs and SPLICs. Analog's IC products are fabricated both at the Company's production facilities and by third-party wafer fabricators. Assuming that the Company can continue to maintain favorable relationships with its third-party wafer fabricators, it intends to continue using such suppliers for meeting most of its needs for wafers that can be fabricated using industry- standard digital processes. The Company intends to rely primarily on its own facilities for production of wafers fabricated with linear and mixed-signal processes. The Company operates wafer fabrication facilities in Wilmington, Massachusetts; Santa Clara, California; and Limerick, Ireland for production of linear and mixed-signal devices. The Company also operates assembly and test facilities located in the United States, Ireland, the Philippines and Taiwan. The Company uses two principal foundries, Taiwan Semiconductor Manufacturing Company and Chartered Semiconductor Corporation for the production of digital and VLSI mixed-signal devices. Hybrid products are manufactured by mounting and connecting together several integrated circuit chips in a single package. Some of the chips used in the Company's hybrids are manufactured by the Company and some are purchased from outside suppliers. The production process for modular components, subsystems and systems consists primarily of assembly, packaging and testing. Some of the Company's assembled products are assembled and tested within the Company's U.S. manufacturing facilities, while others are assembled and tested at Company-owned facilities outside the United States or by subcontractors, principally in the Far East. As a result of strong demand for its products, the Company was manufacturing capacity constrained throughout most of fiscal 1995. While the Company is planning in fiscal 1996 to increase substantially its manufacturing capacity through both expansion of its production facilities and increased access to third-party wafer foundries, there can be no assurance that the Company will complete the expansion of its production facilities or secure increased access to third-party foundries in a timely manner, that the Company will not encounter unanticipated production problems at either its own facilities or at third-party foundries or that the increased capacity will be sufficient to satisfy demand for its products. 6
8 BACKLOG Backlog at the end of fiscal year 1995 was approximately $286.8 million; it was approximately $152.8 million at the end of the fiscal year 1994. The Company defines its backlog at any point in time as those orders for which customers have requested shipment within the next 13 weeks. The quantities of the Company's products to be delivered and their delivery schedules, as covered by customer purchase orders, are frequently revised by customers to reflect changes in their needs. As is customary in the semiconductor industry, the Company may allow such orders to be canceled or deliveries delayed by the customer without significant penalty. In addition, the Company's backlog includes its orders from domestic distributors as to which revenues are not recognized until the products are sold by the distributors. Accordingly, the Company believes that its backlog at any time should not be used as a measure of future revenues. GOVERNMENT CONTRACTS The Company estimates that approximately 13% of its total worldwide revenue is attributable to sales to the U.S. government and government contractors and subcontractors. Analog's government contract-related business is predominantly in the form of negotiated, firm fixed-priced subcontracts. All such contracts and subcontracts contain standard provisions related to termination at the election of the United States government. The Company expects that the U.S. government's intention to further reduce U.S. military spending will result in a continuing gradual reduction in the percentage of the Company's total sales going to governmental users and contractors. COMPETITION Analog competes with a large number of semiconductor companies in markets that are highly competitive. The Company believes it is one of the largest suppliers of high-performance linear and mixed-signal signal-processing components. These types of products fall into both the SLIC and SPLIC product categories. Competitors for the Company's linear and mixed-signal products include Brooktree Corp., Burr-Brown Corp., Cirrus Logic Inc., Exar Corp., Harris Corp., Linear Technology Corp., Maxim Integrated Products, Inc., National Semiconductor Corp., Sierra Semiconductor Corp., Siliconix Inc., Silicon Systems (a subsidiary of TDK Corp), Texas Instruments, Inc. and others. Sales of DSP ICs represent a growing percentage of the Company's total sales. Analog's competitors for DSP ICs include AT&T, Integrated Device Technology, Inc., Motorola Semiconductor Products and Texas Instruments, Inc. Many other companies offer components that compete with Analog's products; some also offer other electronic products, and some have financial resources substantially larger than Analog's. Also, some formerly independent competitors have been purchased by larger companies (which in some cases may be viewed as a means by which the acquiring company gains in-house capability). However, to the Company's knowledge, no manufacturer competes with Analog across all of the product types offered by the Company in its signal-processing components product line. Analog believes that competitive performance in the marketplace for real-world signal-processing components depends upon several factors, including product price, technical innovation, product quality and reliability, range of products, customer service and technical support. Analog believes its aggressive technical innovation emphasizing product performance and reliability, supported by its commitment to strong customer service and technical support, will allow the Company to continue to compete successfully in its chosen markets against both foreign and domestic semiconductor manufacturers. ENVIRONMENT Analog's manufacturing facilities are subject to numerous environmental laws and regulations, particularly with respect to industrial waste and emissions. Compliance with these laws and regulations has not had a material impact on the Company's capital expenditures, earnings or competitive position. 7
9 EMPLOYEES As of October 28, 1995, the Company employed approximately 6,000 persons. The Company's future success depends in large part on the continued service of its key technical and senior management personnel, and on its ability to continue to attract, retain and motivate qualified employees, particularly those highly skilled design, process and test engineers involved in the manufacture of existing products and the development of new products and processes. The competition for such personnel is intense, and the loss of key employees could have a material adverse effect on the Company. The Company believes that relations with its employees are good. INTERNATIONAL OPERATIONS Analog has direct sales offices in 16 countries outside the United States. For fiscal 1995, Analog's international sales accounted for approximately 56% of total sales, the majority of which were made through its direct international sales offices while the balance, approximately 40% of the total, were made through distributors. In addition, the Company has manufacturing facilities in Ireland, the Philippines and Taiwan. The Company also has arrangements with subcontractors, principally in the Far East, for the wafer fabrication, assembly and testing of certain products. 8
10 ITEM 2. PROPERTIES The Company's corporate headquarters is located in Norwood, Massachusetts. Manufacturing and other operations are carried on in several locations worldwide. The following tables provide certain information as to the Company's principal general offices and manufacturing facilities: <TABLE> <CAPTION> PLANT LOCATION OWNED: USE FLOOR SPACE ------ --- ----------- <S> <C> <C> Wilmington, Wafer fabrication, components assembly and testing, engineering 245,200 sq. ft. Massachusetts and administrative offices Wilmington, Engineering, marketing and administrative offices 108,000 sq. ft. Massachusetts Wilmington, Components engineering, marketing and administrative offices 67,200 sq. ft. Massachusetts Limerick, Wafer fabrication, components assembly and testing, engineering 286,200 sq. ft. Ireland and administrative offices Greensboro, Components and board assembly and testing, engineering and 100,000 sq. ft. North Carolina administrative offices Manila, Philippines Components assembly and testing, engineering and administrative 85,000 sq. ft. offices </TABLE> <TABLE> <CAPTION> PRINCIPAL LEASE PROPERTIES USE FLOOR SPACE EXPIRATION RENEWALS LEASED --- ----------- ---------- -------- ------ (FISCAL YEAR) <S> <C> <C> <C> <C> Norwood, Corporate headquarters, engineering, 135,000 sq. ft. 2007 3, five-yr. Massachusetts (1) components assembly and sales and marketing periods offices Westwood, Components and subsystems assembly and 100,400 sq. ft. 1996 2, ten-yr. Massachusetts (2) testing, engineering and administrative offices periods Santa Clara, Wafer fabrication, components assembly and 72,800 sq. ft. 2000 2, five-yr. California testing, engineering and administrative offices periods Santa Clara, Administrative offices and engineering 43,500 sq. ft. 2000 2, five-yr. California periods Sunnyvale, Wafer fabrication 27,000 sq. ft. 2000 3, five-yr. California periods Taipei, Components testing, engineering and 45,700 sq. ft. 1997 3 to 5 yr. Taiwan administrative offices option to extend </TABLE> (1) See Note 6 - "Commitments and Contingencies" in the Notes to Consolidated Financial Statements for information regarding contingent liabilities related to the lease of the Norwood, Massachusetts property. (2) The Westwood, Massachusetts facility is subject to a 25-year capital lease with an option to purchase. 9
11 ITEM 2. PROPERTIES -- (CONTINUED) In addition to the principal leased properties listed in the previous table, the Company also leases sales offices and other premises at 25 locations in the United States and 25 locations overseas under operating lease agreements. These leases expire at various dates through the year 2010. The Company anticipates no difficulty in retaining occupancy of any of its manufacturing, office or sales facilities through lease renewals prior to expiration or through month-to-month occupancy, or in replacing them with equivalent facilities. See Note 5 - "Lease Commitments" in the Notes to Consolidated Financial Statements for information concerning the Company's obligations under all operating and capital leases. 10
12 ITEM 3. LEGAL PROCEEDINGS TEXAS INSTRUMENTS LITIGATION The Company was a defendant in two lawsuits brought in Texas by Texas Instruments, Inc. ("TI"), alleging patent infringement, including patent infringement arising from certain plastic encapsulation processes, and seeking an injunction and unspecified damages against the Company. The alleged infringement of one of these patents is also the subject matter of a proceeding brought by TI against the Company before the International Trade Commission ("ITC"). On January 10, 1994, the ITC brought an enforcement proceeding against the Company alleging that the Company had violated the ITC's cease and desist order of February 1992 (as modified in July 1993), which prohibited the Company's importation of certain plastic encapsulated circuits, and seeking substantial penalties against the Company for these alleged violations. If it is determined that the Company has violated the cease and desist order, the ITC could seek to impose penalties of up to $100,000 per day of violation from the date of the cease and desist order (February 1992) or a sum equal to twice the value of the goods determined to be sold in violation of the order. In addition, in June 1992, the Company commenced a lawsuit against TI in Massachusetts alleging certain TI digital signal processors infringed one of the Company's patents. Effective April 1, 1995, the Company and TI settled both Texas lawsuits and the Massachusetts lawsuit principally by means of a royalty-free cross license of certain of the Company's and TI's patents. On April 25, 1995, the Company filed with the ITC a motion to terminate the ITC enforcement proceeding on the grounds that further action by the ITC is unnecessary in light of the Company's settlement with TI. On May 8 1995, an Administrative Law Judge issued a recommended determination to the ITC to grant the Company's motion to terminate the ITC proceeding. The investigative office of the ITC has opposed the motion, claiming that, notwithstanding the Company's settlement with TI, the Company's alleged violation of the ITC's cease and desist order warrants the imposition of substantial penalties. The Company's motion is pending before the ITC. MAXIM LITIGATION The Company is a defendant in a lawsuit brought by Maxim Integrated Products, Inc. ("Maxim") in the United States District Court for the Northern District of California seeking an injunction against, and claiming damages for, alleged antitrust violations and unfair competition in connection with distribution arrangements between the Company and certain distributors. Maxim alleged that certain distributors ceased doing business with Maxim as a result of the distribution arrangements between the distributors and the Company, resulting in improper restrictions to Maxim's access to channels by which it distributes its products. Maxim asserted actual and consequential damages in the amount of $14.1 million and claimed restitution and punitive damages in an unspecified amount. Under applicable law, Maxim would receive three times the amount of any actual damages suffered as a result of any antitrust violation. On September 7, 1994, Maxim's claim was dismissed for lack of evidence. Maxim has appealed this ruling and oral argument of the appeal was held in January 1996. For additional information concerning the above-described lawsuits and the potential impact of such suits upon the Company's financial condition and results of operations, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." OTHER In addition, from time to time as a normal incidence of the nature of the Company's business, various claims, charges and litigation are asserted or commenced against the Company arising from or related to contractual matters, patents, personal injury, environmental matters and product liability. Such litigation includes patent infringement actions brought against the Company by Sextant Avionique, S.A. ("Sextant") in Paris, France, which claims that the Company's accelerometer infringes certain Sextant patents and seeks to enjoin such infringement. While there can be no assurance that the Company will prevail in all of these matters, the Company does not believe that these matters will have a material adverse effect on the Company's consolidated financial position or consolidated results of operations. However, an adverse resolution could have an adverse effect on the Company's consolidated results of operations in the quarter in which these matters are resolved. 11
13 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the last quarter of the fiscal year ended October 28, 1995. EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth (i) the name and age of each present executive officer of the Company; (ii) the position(s) presently held by each person named; and (iii) the principal occupations held by each person named for at least the past five years. <TABLE> <CAPTION> EXECUTIVE OFFICER AGE POSITION BUSINESS EXPERIENCE ----------------- --- -------- ------------------- <S> <C> <C> <C> Ray Stata ............. 61 Chairman of the Board and Chairman of the Board and Chief Executive Chief Executive Officer Officer since 1973; President from 1971 to November 1991. Jerald G. Fishman ..... 50 President, Chief Operating President, Chief Operating Officer and Officer and Director Director since November 1991; Executive Vice President from 1988 to November 1991; Group Vice President - Components from 1982 to 1988. William A. Martin ..... 36 Treasurer Treasurer since March 1993; Assistant Treasurer from October 1991 to March 1993; Manager of Treasury Finance from March 1987 to October 1991; Manager of International Treasury from October 1985 to March 1987. Brian P. McAloon ...... 45 Vice President, Sales Vice President, Sales since May 1992; Vice President, Sales and Marketing - Europe and Southeast Asia from 1990 to 1992; General Manager, Analog Devices, B.V. - Limerick, Ireland from 1987 to 1990. Joseph E. McDonough ... 48 Vice President, Finance and Vice President, Finance and Chief Financial Chief Financial Officer Officer since November 1991; Vice President since 1988 and Treasurer from 1985 to March 1993; Director of Taxes from 1983 to 1985. </TABLE> There is no family relationship among the named officers. 12
14 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is listed on the New York Stock Exchange under the symbol ADI. The table below sets forth the high and low prices of the Common Stock during the two most recent fiscal years. <TABLE> <CAPTION> 1995 1994 ----------------- ----------------- PERIOD HIGH LOW HIGH LOW ------ ---- --- ---- --- <S> <C> <C> <C> <C> First Quarter $16.25 $13.63 $11.63 $ 8.63 Second Quarter $18.75 $13.38 $13.88 $10.88 Third Quarter $25.25 $17.13 $13.88 $10.88 Fourth Quarter $26.25 $19.88 $16.38 $11.75 </TABLE> On November 28, 1995, the Company's Board of Directors authorized a three-for-two stock split effected in the form of a 50% stock dividend distributed on January 3, 1996 to stockholders of record December 12, 1995. All stock prices in the table above have been restated to reflect the split. The Company's $60,000,000 credit agreement restricts the aggregate of all cash dividend payments declared or made subsequent to January 30, 1993 to an amount not exceeding $29,734,000 plus 50% of the consolidated net income of the Company for the period from January 31, 1993 through the end of the Company's then most recent fiscal quarter. At October 28, 1995 this amount was equal to $144,782,000. Although prior credit agreements may not have restricted the payment of dividends, the Company has never paid any cash dividends on its Common Stock. The approximate number of holders of record of the Company's Common Stock at December 29, 1995 was 4,429. This number does not include shareholders for whom shares are held in a "nominee" or "street" name. ITEM 6. SELECTED FINANCIAL DATA <TABLE> <CAPTION> (thousands except per share amounts) 1995 1994 1993 1992 1991 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Statement of Operations data: Net sales ............... $ 941,546 $773,474 $666,319 $567,315 $537,738 Net income .............. 119,270 74,496 44,457 14,935 8,203 Net income per share (1) ............. 1.00 .64 .39 .14 .08 Balance Sheet data: Total assets ............ $1,001,648 $815,871 $678,492 $561,867 $503,317 Long-term obligations ... 80,000 80,061 100,297 70,632 36,819 - -------------------------------------------------------------------------------------------------------------------- </TABLE> (1) All references to per share amounts have been restated to reflect the three-for-two stock split effected in the form of a 50% stock dividend distributed on January 3, 1996 to stockholders of record December 12, 1995. 13
15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS FISCAL 1995 COMPARED TO FISCAL 1994 The Company reported net sales of $941.5 million in fiscal 1995, up $168 million or 22% from net sales of $773.5 million in fiscal 1994. Fiscal year 1995 sales growth was attributable to significant increases in sales volumes of both the Company's standard linear IC and system-level IC products as worldwide demand for precision integrated circuit products accelerated throughout fiscal 1995, exceeding the Company's expectations and capacity. Demand for the Company's ICs was strong both in its core industrial and instrumentation markets and in high-growth applications in the communications, computer and portable, wireless equipment markets. Total IC sales, representing both standard linear and system-level ICs, constituted approximately 92% of total sales in fiscal 1995, continuing the long-term trend of IC sales becoming a larger portion of the Company's revenues. Sales of the Company's standard linear IC products, which make up the largest and most profitable part of the Company's business, increased approximately $137 million or nearly 30% in fiscal 1995. Standard linear IC sales also increased as a percentage of total sales, accounting for 64% of total sales in fiscal 1995 compared to 60% in fiscal 1994. The growth in sales of standard linear ICs was primarily driven by increased penetration of the Company's data converter and amplifier products in high-performance instrumentation and factory automation applications and greater use of standard linear IC products in new high-volume applications in the communications, computer and consumer markets including digital cellular handsets and base stations, video applications and imaging applications. As in fiscal 1994, the distributor channel continued to have a positive effect on the Company's standard linear IC product line in fiscal 1995; distribution has become the fastest growing channel for these products. Sales of system-level ICs, excluding those used in hard disk drives, increased approximately $70 million or 46% in fiscal 1995, as the Company achieved substantial bookings and revenue gains in its general-purpose digital signal processing products and mixed-signal ICs for application-specific system-on-a-chip solutions. The strongest end user market growth for the Company's system-level IC products was experienced in wireless communications applications, including digital mobile phones and base stations, and computer applications, including audio enhancement in multimedia PCs. As a percentage of total sales, system-level IC products, with the exception of hard disk drive products, increased to 24% of total sales compared to 20% in fiscal 1994. Sales of hard disk drive products in fiscal 1995 declined $37 million or 53% compared to fiscal 1994 due to a combination of scarcity of wafers and the rapid movement of this market to digital PRML channels. Sales of the Company's assembled products decreased approximately $2.5 million or 3% from fiscal 1994 to fiscal 1995 and as a percentage of total sales decreased from 11% to 8% over this same period. This sales decrease was comparatively less than in prior years as sales demand for newer multi-chip modules for the communications market began to offset the decline in older military hybrids. In fiscal 1995, sales to North American customers increased $68.3 million or 20% over fiscal 1994 to $412.2 million. Sales to customers outside North America, primarily Europe, Japan and Southeast Asia, increased $99.7 million or 23% to $529.3 million. The distributor channel was a major contributor to sales growth in North America as well as in Europe and Japan especially for standard linear IC products. North American sales through distribution increased approximately 40% over the prior year while worldwide sales through distribution increased approximately 55% from fiscal 1994 to fiscal 1995. On a worldwide basis, sales through distribution accounted for approximately 42% of total sales in fiscal 1995 compared to 33% in fiscal 1994. Sales to European customers increased $66.4 million or 34% to $264 million, with much of this growth resulting from the Company's increased penetration of applications in the communications market, particularly in handsets and basestations used in the GSM (Global System for Mobile Communications) digital cellular telephone system now widely deployed in Western Europe. Sales in Japan increased $32.1 million or 24% to $165.1 million largely as a result of increased sales of standard linear IC products for factory automation and other industrial market applications. A weaker average U.S. dollar exchange rate also contributed to some of the improvement in European and Japanese sales. Sales to customers in Southeast Asia of $100 million were essentially flat compared to fiscal 1994 due to the significant decline in hard disk drive sales. As a percentage of total 14
16 sales, North American and international sales accounted for 44% and 56%, respectively, unchanged from the comparable percentages in fiscal 1994. As a result of strong demand for its products, the Company was manufacturing capacity constrained throughout most of fiscal 1995. The Company is pursuing a multi-faceted manufacturing capacity expansion program to substantially increase the number of fabricated wafers available to it in fiscal 1996 and beyond. See "Liquidity and Capital Resources" below for a discussion of the Company's efforts to address its capacity issues. Gross margin increased to 50.7% of sales in fiscal 1995 compared to 49.0% of sales in fiscal 1994. The increase in gross margin was principally due to a higher proportion of standard linear IC products in the mix of products sold, which generally have higher gross margins than the Company's system-level IC products. The improvement in gross margin in fiscal 1995 was also attributable to greater capacity utilization, resulting in the absorption of fixed manufacturing costs over increased production volumes. Research and development expenses increased approximately 26% in fiscal 1995 to $134.3 million or 14.3% of sales. This increase was mainly due to higher spending in the development of new products and technologies targeted for the communications, computer and automotive markets, including initiatives in general-purpose digital signal processing such as the Company's SHARC product family, system-level ICs for computer audio and wireless communications applications, RF signal processing, surface micromachining technology, accelerometer products and continued development of innovative SLIC products and processes. The increase in R&D expenditures in fiscal 1995 was also attributable to increased staffing of design engineering personnel and the start up of two new design centers. The Company believes that technical leadership in the semiconductor industry is critical to its future success and is committed to maintaining a high level of research and development effort. Selling, marketing, general and administrative (SMG&A) expense growth in fiscal 1995 was held to 8.6%, as SMG&A increased from $170.3 million in fiscal 1994 to $184.9 million in fiscal 1995. SMG&A expenses continued to decline as a percentage of sales to 19.6% in fiscal 1995 compared to 22.0% in fiscal 1994 and 23.8% in fiscal 1993, consistent with the Company's goal of constraining SMG&A spending growth to a rate significantly below sales growth. The increase in SMG&A expenses in absolute dollars was primarily related to higher incentive expenses associated with improved revenue and profitability levels, and greater product advertising and related promotional costs in support of the Company's product lines and customer base. Operating income grew 55% to 16.8% of sales compared to 13.2% of sales in fiscal 1994. This performance gain reflected the combination of accelerated demand for the Company's products, improved gross margin and continuing commitment to growing expenses more slowly than sales. Nonoperating expenses decreased $6.6 million in fiscal 1995 due primarily to a $2.9 million decrease in interest expense and a $2.9 million increase in interest income. The reduction in interest expense from fiscal 1994 to fiscal 1995 was due in large part to the maturity of a $20 million term loan early in the first quarter of fiscal 1995 while the increase in interest income over this same period was attributable to a higher average level of cash investments and a higher weighted average investment rate in fiscal 1995 versus fiscal 1994. Interest expense in fiscal 1996 will increase from fiscal 1995 as a result of the issuance of $230,000,000 of 3- 1/2% Convertible Subordinated Notes in December 1995. The effective income tax rate increased to 25.2% in fiscal 1995 from 23.1% in fiscal 1994 due to earnings growth in higher tax rate jurisdictions including the U.S. The Company maintains a valuation allowance for deferred tax assets, which was $10.0 million at both October 28, 1995 and October 29, 1994, based on management's assessment that realization of such deferred tax assets was not assured for book and tax capital losses and book basis foreign tax credits. The growth in sales, improved operating performance and lower nonoperating expenses yielded a 60% rise in net income to $119.3 million or 12.7% of sales compared to $74.5 million or 9.6% of sales. Earnings per share in fiscal 1995 grew 56% to $1.00 from $0.64 in fiscal 1994. 15
17 The Company has not yet adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" which will require adoption in fiscal 1997. The Company is in the process of determining the effect of adoption of these statements on its consolidated financial statements and related disclosures. The impact of inflation on the Company's business during the past three years has not been significant. FISCAL 1994 COMPARED TO FISCAL 1993 Net sales of $773.5 million for fiscal 1994 increased 16% from net sales of $666.3 million for fiscal 1993. The sales increase was due principally to higher sales volumes of both standard linear IC and system-level IC products which together grew approximately 20% year-over-year to comprise approximately 89% of total sales for fiscal 1994. Standard linear IC sales rose approximately $66.5 million or approximately 17% to $467.5 million in fiscal 1994. This increase was primarily due to the combination of increased penetration of the distribution channel coupled with well accepted new product offerings. Sales of system-level IC products grew approximately $49.0 million or approximately 28% to $224.0 million in fiscal 1994. This growth was attributable largely to increased demand for applications in personal computers and wireless communications products, and the Company's broader participation in these growing markets. Sales of assembled products declined approximately 9% from fiscal 1993 to fiscal 1994 and as a percentage of total sales decreased from 14% to 11% over the same period. Sales to North American customers increased 18% over fiscal 1993 levels to $343.9 million with much of this increase coming from the distributor channel as sales through North American distributors increased 36% from the prior year. Sales to international customers grew 15% led by sales increases of approximately 27% and 35% in Japan and Southeast Asia, respectively. Sales growth in Japan was mainly attributable to increased demand for standard linear IC products, aided in part by the translation of yen-denominated sales to a weaker average U.S. dollar. The sales increase in Southeast Asia represented continued strength in sales of personal computer products. European sales of $197.9 million for fiscal 1994 were flat compared to the prior year due to weaker European industrial economies as compared to fiscal 1993. Sales growth in Europe resumed in the fourth quarter of fiscal 1994, growing again after weakness in the first nine months of the year as the European economy showed improvement, particularly Germany. As a percentage of total net sales, North American and international sales remained at 44% and 56%, respectively, which were comparable to fiscal 1993. Gross margin improved to 49.0% of sales for fiscal 1994 compared to 47.3% for fiscal 1993. This increase resulted principally from a significant improvement in gross margin for system-level IC products as variable manufacturing costs declined and fixed costs were allocated over greater production volumes. Gross margin for the Company's standard linear IC products remained at a high level and gross margin on all IC products, which include both standard linear and system-level ICs, was approximately 50% of sales. R&D expenses for fiscal 1994 increased 13.6% from fiscal 1993 as the Company continued to invest in new product development. As a percentage of sales, R&D expenses were 13.8% in fiscal 1994 compared to 14.1% in fiscal 1993. Selling, marketing, general and administrative (SMG&A) expenses grew 7.4% compared to fiscal 1993, increasing at a lower rate than sales. As a result, SMG&A as a percentage of sales decreased to 22.0% for fiscal 1994 from 23.8% for fiscal 1993. The increase in SMG&A expenses related mostly to increased strategic advertising and marketing expenses associated with many new product launches and additional incentive expense associated with the Company's improved performance. 16
18 In total, operating expenses were reduced to 35.8% of sales, down from 37.9% in fiscal 1993, consistent with the Company's emphasis on maintaining tight control over all costs in order to gain better operating leverage on increases in revenues. Operating income reached 13.2% of sales for fiscal 1994, an increase of nearly four percentage points from 9.4% of sales for fiscal 1993. This performance gain reflected the higher sales level, improvement in gross margin as a percentage of sales and slower rate of expense growth versus sales. Nonoperating expenses decreased $2.3 million, benefiting from increased interest income on a higher level of invested cash as net interest expense was reduced from $5.8 million in fiscal 1993 to $2.0 million in fiscal 1994. The effective income tax rate increased to 23% in fiscal 1994 from 20% in fiscal 1993 due to a shift in the mix of worldwide income. In the first quarter of fiscal 1994, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109"). The impact of adopting FAS 109 was not material to the Company's consolidated financial statements. A deferred tax asset valuation allowance of $14.3 million was established at October 31, 1993 based on management's assessment that realization of such deferred tax assets was not assured for book and tax capital losses, book basis foreign tax credits, and general business tax credits. The net change in the valuation allowance for the year ended October 29, 1994 was a decrease of $4.3 million primarily from the utilization of general business tax credits. The growth in sales, improved operating performance and lower nonoperating expenses resulted in a 68% rise in net income to $74.5 million or 9.6% of sales in fiscal 1994 compared to $44.5 million or 6.7% of sales in fiscal 1993. LIQUIDITY AND CAPITAL RESOURCES At October 28, 1995, the Company had $151.1 million of cash and cash equivalents and short-term investments compared to $181.8 million at October 29, 1994. The Company's operating activities generated net cash of $210.3 million, or 22.3% of sales, and $186.6 million, or 24.1% of sales, in fiscal 1995 and fiscal 1994, respectively. Investing activities used $238.7 million in fiscal 1995 and $166.8 million in fiscal 1994 while financing activities used $10.9 million in fiscal 1995 and generated $10.0 million in fiscal 1994. Working capital decreased to $271.6 million at the end of fiscal 1995 from $299.3 million at the end of fiscal 1994. This decrease was primarily due to lower cash, cash equivalents and short-term investments which were used in part to fund investing activities in fiscal 1995, and secondarily to increased accounts payable and accrued liabilities associated with an expanded scale of operations. The Company's primary source of funds in fiscal years 1995 and 1994 was net cash generated by operations. The $23.7 million increase in operating cash flows from $186.6 million in fiscal 1994 to $210.3 million fiscal 1995 was largely attributable to higher net income and an increase in accounts payable and accrued liabilities, changes which were offset in large part by growth in inventories and accounts receivable. The noncash effect of depreciation and amortization expense was $64.1 million and $61.3 million in fiscal 1995 and fiscal 1994, respectively. As a result of internal capacity expansion, depreciation expense is expected to be higher in fiscal 1996 as these additions begin to ramp up. Accounts receivable of $181.3 million at the end of fiscal 1995 increased $19.0 million or 11.7% from $162.3 million at the end of fiscal 1994. This increase compared favorably to the 27% increase in fourth quarter sales between the two years as the rise in sales was more than offset by improved collection of receivables. As a percentage of annualized fourth quarter sales, accounts receivable was reduced to 17.6% at the end of fiscal 1995 compared to 20.0% at the end of fiscal 1994. Inventories rose $13.2 million or 10.1% over the prior year to $144.0 million at the end of fiscal 1995. This increase was primarily due to a build in inventory levels needed to service increasing sales volumes. Year-end inventories as a percentage of annualized fourth quarter sales decreased from 16.1% in fiscal 1994 to 14.0% in fiscal 1995. In fiscal 1996, as additional manufacturing capacity becomes available, the Company intends to increase inventory levels in order to improve customer response times. 17
19 Accounts payable and accrued liabilities increased $39.6 million or 29.4% compared to the balance at the end of fiscal 1994 due principally to increased expense activity related to the higher revenue level and increased capital expenditures in the fourth quarter of fiscal 1995 when compared to the year-earlier period. The increase in income taxes payable of 70.2% or $20.7 million was primarily attributable to increased profitability in fiscal 1995 as compared to fiscal 1994. The Company's principal investment activities during fiscal 1995 were in support of its manufacturing capacity expansion programs and included capital expenditures of $212.7 million and an investment of $14.0 million in a wafer fabrication company in Singapore. Capital expenditures in fiscal 1995 were significantly higher than in fiscal 1994 with a significant portion of these expenditures related to the construction of the Company's first six-inch wafer fabrication module which was completed in fiscal 1995 at the Company's Limerick, Ireland manufacturing site. This module is now undergoing test and qualification and is expected to begin supplying production wafers before the end of the first half of fiscal 1996. It will be used initially to fabricate mixed-signal VLSI products on a 0.6 micron digital CMOS process. The capital expenditures and start-up costs associated with this expansion will be supported in part by grants of up to 10.1 million Irish Pounds (approximately $16.4 million at October 28, 1995) from the Industrial Development Authority ("IDA") of Ireland. As of October 28, 1995, the Company had not received any grant monies under this agreement. During fiscal 1995, the Company also began upgrading its existing Wilmington, Massachusetts wafer fabrication facility from four- inch to six-inch wafer production. This additional capacity, which will also become available in the latter half of fiscal 1996, will be used primarily for high-speed linear products. In addition, the Company purchased an existing six-inch wafer fabrication module located close to its Santa Clara, California site. This facility is being upgraded and modernized to produce advanced linear technology ICs, and is expected to go into production in the latter half of fiscal 1996. In the fourth quarter of fiscal 1995, the Company also completed construction of a new engineering, marketing and administrative facility in Wilmington, Massachusetts and commenced an expansion of the Company's test and back end facilities in the Philippines. In fiscal 1995, the Company entered into a supply agreement with its primary wafer foundry, Taiwan Semiconductor Manufacturing Co., Ltd. ("TSMC"). Under this agreement, the Company will make a series of advance payments to TSMC aggregating $22.4 million, payable over a three-year period, in order to secure access to a minimum level of wafer capacity over the period from 1996 to 1999. The first of such payments pursuant to this agreement was made in June 1995 and remaining payments are due in June of each year through 1998. The advance payments will be repaid to the Company each year in the form of credits against the prices of wafers purchased by the Company when such wafer purchases exceed a defined minimum. In fiscal 1995, the Company made an equity investment of $14.0 million in Chartered Semiconductor Manufacturing Pte., Ltd. ("CSM") in Singapore and invested an additional $6.0 million in January 1996, in exchange for a less than 5% ownership interest. This investment is structured to provide access to CSM's new eight-inch 0.5 micron wafer fabrication facility through wafer supply and pricing commitments beginning in 1996. The investment in CSM is classified in the balance sheet line item, "Deferred Charges and Other Assets." In January 1996, the Company entered into an additional agreement with CSM, whereby the Company will provide a total deposit of approximately $20.0 million to be paid in several installments in 1996 and 1997. Under the terms of this agreement, the deposit will guarantee access to certain quantities of sub-micron wafers through fiscal 2000. If the Company does not purchase the minimum quantities under the agreement, the deposit will be forfeited for the value of the wafer shortfall up to the total amount of $20.0 million. At the end of the agreement term, the Company's deposit will be returned, net of any forfeitures. The Company currently plans to make capital expenditures of approximately $275 million in fiscal 1996, primarily in connection with the continued expansion of its manufacturing capacity. In addition, the Company is continuing to explore various options for increasing its manufacturing capacity, including joint ventures, acquisitions, equity investments in or loans to wafer suppliers and construction of additional facilities. 18
20 Cash used in the Company's financing activities was principally for the repayment of a $20.0 million term loan in the first quarter of fiscal 1995. Financing activities in fiscal 1995 also generated cash of $10.1 million from the issuance of common stock under stock purchase and stock option plans. At October 28, 1995, the Company's principal sources of liquidity included $69.3 million of cash and cash equivalents and $81.8 million of short-term investments. Short-term investments at the end of fiscal 1995 consisted of commercial paper, bankers' acceptances and Euro time deposits with maturities greater than three months and less than six months at the time of acquisition. The Company also has various lines of credit both in the U.S. and overseas, including a $60 million credit facility in the U.S. which expires in 1998, all of which were substantially unused at the end of fiscal 1995. At the end of fiscal 1995, the Company's debt-to-equity ratio was 13%. On December 18, 1995, the Company completed a public offering of $230,000,000 of five-year 3-1/2% Convertible Subordinated Notes due December 1, 2000 with semiannual interest payments on June 1 and December 1 of each year, commencing June 1, 1996. The Notes are convertible, at the option of the holder, into the Company's common stock at any time after 60 days following the date of original issuance, unless previously redeemed, at a conversion price of $27.913 per share, subject to adjustment in certain events. The net proceeds from the sale of the Notes were approximately $224,000,000 after payment of the underwriting discount and expenses of the offering which will be amortized over the term of the Notes. As of December 31, 1995, the Company's total long-term debt was $310,000,000, comprised of the $230,000,000 of 3-1/2% Convertible Subordinated Notes and $80,000,000 of 6 5/8% Notes. The Company believes that its existing sources of liquidity and cash expected to be generated from future operations, together with current and anticipated available long-term financing, will be sufficient to fund operations, capital expenditures and research and development efforts for the foreseeable future. LITIGATION As set forth in Item 3 - "Business-Legal Proceedings," the Company is engaged in an enforcement proceeding brought by the International Trade Commission ("ITC") related to previously settled patent infringement litigation with Texas Instruments, Inc. The Company is also engaged in antitrust litigation with Maxim Integrated Products, Inc. If it is determined that the Company has violated the ITC's cease and desist order of February 1992 (as modified in July 1993), the ITC could seek to impose penalties of up to $100,000 per day of violation from the date of the cease and desist order (February 1992) or a sum equal to twice the value of goods determined to be sold in violation of the order. The dismissal of Maxim's claims has been appealed. The Company believes it has meritorious defenses to Maxim's antitrust allegations and intends to vigorously defend the suit. Maxim asserted actual and consequential damages in the amount of $14.1 million and claimed restitution and punitive damages in an unspecified amount. Under applicable law, Maxim would receive three times the amount of any actual damages suffered as a result of any antitrust violation. If the dismissal is overturned on appeal and Maxim's claims are upheld in a subsequent trial on the merits, in addition to potential damage awards the Company may be required to modify its relationships with its distributors. Although the Company believes it should prevail in the matters described above, the Company is unable to determine their ultimate outcome or estimate the ultimate amount of liability, if any, at this time. An adverse resolution of these matters could have a material adverse effect on the Company's consolidated financial position or on its consolidated results of operations or cash flows in the period in which the matters are resolved. 19
21 FACTORS AFFECTING FUTURE RESULTS The Company's future operating results are difficult to predict and may be affected by a number of factors including the timing of new product announcements or introductions by the Company and its competitors, competitive pricing pressures, fluctuations in manufacturing yields, adequate availability of wafers and manufacturing capacity, changes in product mix and economic conditions in the United States and international markets. In addition, the semiconductor market has historically been cyclical and subject to significant economic downturns at various times. While the semiconductor industry in recent periods has experienced increased demand and production capacity constraints, it is uncertain how long these conditions will continue. As a result of these and other factors, there can be no assurance that the Company will not experience material fluctuations in future operating results on a quarterly or annual basis. The Company's success depends in part on its continued ability to develop and market new products. There can be no assurance that the Company will be able to develop and introduce new products in a timely manner or that such products, if developed, will achieve market acceptance. In addition, the Company's growth is dependent on its continued ability to penetrate new markets such as the communications, computer and automotive segments of the electronics market, where the Company has limited experience and competition is intense. There can be no assurance that the markets being served by the Company will continue to grow; that the Company's existing and new products will meet the requirements of such markets; that the Company's products will achieve customer acceptance in such markets; that competitors will not force prices to an unacceptably low level or take market share from the Company; or that the Company can achieve or maintain profits in these markets. Also, some of the customers in these markets are less well established which could subject the Company to increased credit risk. The semiconductor industry is intensely competitive. Certain of the Company's competitors have greater technical, marketing, manufacturing and financial resources than the Company. The Company's competitors also include emerging companies attempting to sell products to specialized markets such as those served by the Company. Competitors of the Company have, in some cases, developed and marketed products having similar design and functionality as the Company's products. There can be no assurance that the Company will be able to compete successfully in the future against existing or new competitors or that the Company's operating results will not be adversely affected by increased price competition. The Company's manufacturing facilities are operating at full capacity, and therefore the Company's business is currently constrained. While the Company is planning in fiscal 1996 to increase substantially its manufacturing capacity through both expansion of its production facilities and increased access to third-party foundries; there can be no assurance that the Company will complete the expansion of its production facilities or secure increased access to third party foundries in a timely manner; that the Company will not encounter unanticipated production problems at either its own facilities or at third-party foundries; or that the increased capacity will be sufficient to satisfy demand for its products. The Company relies, and plans to continue to rely, on third-party wafer fabricators to supply most of its wafers that can be manufactured using industry-standard digital processes, and such reliance involves several risks, including the absence of adequate guaranteed capacity and reduced control over delivery schedules, manufacturing yields and costs. Continued manufacturing capacity constraints could adversely affect the business of the Company's customers and cause them to seek alternative sources for the products currently obtained from the Company. In addition, the Company's capacity additions will result in a significant increase in operating expenses, and if revenue levels do not increase to offset these additional expense levels, the Company's future operating results could be adversely affected. The Company also believes that other semiconductor manufacturers are also expanding or planning to expand their production capacity over the next several years, and there can be no assurance that the expansion by the Company and its competitors will not lead to overcapacity in the Company's target markets, which could lead to price erosion that would adversely affect the Company's operating results. For fiscal 1995, 56% of the Company's revenues were derived from customers in international markets. The Company has manufacturing facilities in Ireland, the Philippines and Taiwan. The Company is therefore subject to the economic and political risks inherent in international operations, including expropriation, air transportation disruptions, currency controls and changes in currency exchange rates, tax and tariff rates and freight rates. Although the Company engages in certain hedging transactions to reduce its exposure to currency exchange rate fluctuations, there can be no assurance that the Company's competitive position will not be adversely affected by changes in the exchange rate of the U.S. dollar against other currencies. 20
22 The semiconductor industry is characterized by frequent claims and litigation involving patent and other intellectual property rights. The Company has from time to time received, and may in the future receive, claims from third parties asserting that the Company's products or processes infringe their patents or other intellectual property rights. In the event a third party makes a valid intellectual property claim and a license is not available on commercially reasonable terms, the Company's operating results could be materially and adversely affected. Litigation may be necessary to enforce patents or other intellectual property rights of the Company or to defend the Company against claims of infringement, and such litigation can be costly and divert the attention of key personnel. See Item 3 - "Legal Proceedings" for information concerning pending litigation involving the Company. An adverse resolution of such litigation, may, in certain cases, have a material adverse effect on the Company's consolidated financial position or on its consolidated results of operations or cash flows in the period in which the litigation is resolved. Because of these and other factors, past financial performance should not be considered an indicator of future performance. Investors should not use historical trends to anticipate future results and should be aware that the trading price of the Company's common stock may be subject to wide fluctuations in response to quarter-to-quarter variations in operating results, general conditions in the semiconductor industry, changes in earnings estimates and recommendations by analysts or other events. 21
23 ANALOG DEVICES, INC. ANNUAL REPORT ON FORM 10-K YEAR ENDED OCTOBER 28, 1995 ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL INFORMATION 22
24 ANALOG DEVICES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS <TABLE> <CAPTION> PAGE ---- <S> <C> CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL INFORMATION INCLUDED IN ITEM 8: Report of Independent Auditors................................................................... 24 Consolidated Statements of Income for the years ended October 28, 1995, October 29, 1994 and October 30, 1993........................................................................... 25 Consolidated Balance Sheets as of October 28, 1995, October 29, 1994 and October 30, 1993........ 26 Consolidated Statements of Stockholders' Equity for the years ended October 28, 1995, October 29, 1994 and October 30, 1993.......................................................... 27 Consolidated Statements of Cash Flows for the years ended October 28, 1995, October 29, 1994 and October 30, 1993........................................................................... 28 Notes to Consolidated Financial Statements....................................................... 29 Supplementary Financial Information (Quarterly Financial Information/1995 and 1994 - Unaudited).................................... 47 </TABLE> 23
25 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Analog Devices, Inc. We have audited the accompanying consolidated balance sheets of Analog Devices, Inc. as of October 28, 1995, October 29, 1994 and October 30, 1993, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended October 28, 1995. Our audits also included the financial statement schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Analog Devices, Inc. at October 28, 1995, October 29, 1994 and October 30, 1993, and the consolidated results of its operations and its cash flows for each of the three years in the period ended October 28, 1995, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Boston, Massachusetts November 28, 1995 except for the fifth paragraph of Note 4, as to which the date is December 18, 1995 24
26 ANALOG DEVICES, INC. CONSOLIDATED STATEMENTS OF INCOME <TABLE> <CAPTION> Years ended October 28, 1995, October 29, 1994 and October 30, 1993 (thousands except per share amounts) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> REVENUE Net sales . . . . . . . . . . . . . . . . . . . . . . $941,546 $773,474 $666,319 COSTS AND Cost of sales . . . . . . . . . . . . . . . . . . . . 464,571 394,448 350,852 EXPENSES -------- -------- -------- Gross margin . . . . . . . . . . . . . . . . . . . . . 476,975 379,026 315,467 Operating expenses: Research and development . . . . . . . . . . . . . . 134,265 106,869 94,107 Selling, marketing, general and administrative . . . . . . . . . . . . . . . 184,943 170,341 158,675 319,208 277,210 252,782 Operating income . . . . . . . . . . . . . . . . . . . 157,767 101,816 62,685 Nonoperating (income) expenses: Interest expense . . . . . . . . . . . . . . . . . . 4,201 7,149 7,184 Interest income . . . . . . . . . . . . . . . . . . (8,103) (5,165) (1,417) Other . . . . . . . . . . . . . . . . . . . . . . . 2,234 2,921 1,393 (1,668) 4,905 7,160 EARNINGS Income before income taxes . . . . . . . . . . . . . . 159,435 96,911 55,525 Provision for (benefit from) income taxes: Payable currently . . . . . . . . . . . . . . . . . 52,414 30,720 13,342 Deferred (prepaid) . . . . . . . . . . . . . . . . . (12,249) (8,305) (2,274) 40,165 22,415 11,068 Net income . . . . . . . . . . . . . . . . . . . . . $119,270 $ 74,496 $ 44,457 ======== ======== ======== Shares used to compute earnings per share . . . . . . 119,039 115,907 113,543 ======== ======== ======== Earnings per share of common stock . . . . . . . . . . $1.00 $ .64 $ .39 ======== ======== ======== </TABLE> See accompanying notes. 25
27 ANALOG DEVICES, INC. CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> October 28, 1995, October 29, 1994 and October 30, 1993 (thousands except share amounts) ASSETS 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> CURRENT Cash and cash equivalents.................................. $ 69,303 $109,113 $ 80,668 ASSETS Short-term investments..................................... 81,810 72,652 - Accounts receivable less allowances of $4,439 ($6,403 in 1994 and $2,395 in 1993)...................... 181,327 162,337 145,663 Inventories................................................ 143,962 130,726 150,422 Prepaid income taxes....................................... 39,650 25,587 22,207 Prepaid expenses and other current assets.................. 9,966 5,042 4,240 ---------- -------- -------- Total current assets....................................... 526,018 505,457 403,200 ---------- -------- -------- PROPERTY, Land and buildings......................................... 139,718 111,857 81,110 PLANT AND Machinery and equipment.................................... 633,124 477,339 451,248 EQUIPMENT, Office equipment........................................... 41,260 36,613 33,170 AT COST Leasehold improvements..................................... 42,165 33,070 26,429 ---------- -------- -------- 856,267 658,879 591,957 Less accumulated depreciation and amortization............. 424,305 377,064 343,527 ---------- -------- -------- Net property, plant and equipment.......................... 431,962 281,815 248,430 ---------- -------- -------- OTHER Intangible assets, net..................................... 17,230 19,262 21,306 ASSETS Deferred charges and other assets.......................... 26,438 9,337 5,556 ---------- -------- -------- Total other assets......................................... 43,668 28,599 26,862 ---------- -------- -------- $1,001,648 $815,871 $678,492 ========== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY - ----------------------------------------------------------------------------------------------------------------- CURRENT Short-term borrowings, current portion of LIABILITIES long-term debt and capital lease obligations............. $ 2,359 $ 23,153 $ 2,341 Accounts payable........................................... 100,217 74,506 48,779 Deferred income on shipments to domestic distributors...... 27,588 18,881 16,417 Income taxes payable....................................... 50,086 29,425 15,405 Accrued liabilities........................................ 74,138 60,221 49,893 ---------- -------- -------- Total current liabilities.................................. 254,388 206,186 132,835 ---------- -------- -------- NONCURRENT Long-term debt and capital lease obligations, less LIABILITIES current portion.......................................... 80,000 80,061 100,297 Deferred income taxes...................................... 5,039 3,225 8,540 Other noncurrent liabilities............................... 6,255 4,484 4,802 ---------- -------- -------- Total noncurrent liabilities............................... 91,294 87,770 113,639 ---------- -------- -------- Commitments and Contingencies STOCKHOLDERS' Preferred stock, $1.00 par value, 500,000 shares EQUITY authorized, none outstanding............................. - - - Common stock, $.16 2/3 par value, 300,000,000 shares authorized, 114,583,932 shares issued (75,252,112 in 1994 and 50,924,637 in 1993).............. 19,098 12,542 8,488 Capital in excess of par value, net of deferred compen- sation of $3,181 ($4,757 in 1994 and $3,223 in 1993)..... 149,775 141,159 143,502 Retained earnings.......................................... 481,464 362,194 287,698 Cumulative translation adjustment.......................... 5,870 6,020 5,473 ---------- -------- -------- 656,207 521,915 445,161 Less 51,876 shares in treasury, at cost (none in 1994 and 1,727,396 in 1993)..................... 241 - 13,143 ---------- -------- -------- Total stockholders' equity................................. 655,966 521,915 432,018 ---------- -------- -------- $1,001,648 $815,871 $678,492 ========== ======== ======== </TABLE> See accompanying notes. 26
28 ANALOG DEVICES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY <TABLE> <CAPTION> Years ended October 28, 1995, COMMON STOCK CAPITAL IN CUMULATIVE TREASURY STOCK October 29, 1994 and October 30, 1993 ------------ EXCESS OF RETAINED TRANSLATION -------------- (thousands) SHARES AMOUNT PAR VALUE EARNINGS ADJUSTMENT SHARES AMOUNT - ---------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> Balance, October 31, 1992 50,192 $ 8,366 $133,714 $243,241 $4,772 (2,067) $(15,076) - ---------------------------------------------------------------------------------------------------------------------- ACTIVITY Net income - 1993 44,457 IN FISCAL Issuance of stock under 1993 stock plans and other, net of repurchases 733 122 8,072 340 1,933 Compensation recognized under Restricted Stock Plan 1,716 Currency translation adjustment 701 - ---------------------------------------------------------------------------------------------------------------------- Balance, October 30, 1993 50,925 8,488 143,502 287,698 5,473 (1,727) (13,143) - ---------------------------------------------------------------------------------------------------------------------- ACTIVITY Net income - 1994 74,496 IN FISCAL Issuance of stock under 1994 stock plans and other, net of repurchases 470 78 7,276 501 3,483 Compensation recognized under Restricted Stock Plan 1,851 Tax benefit on exercise of nonqualified stock options and dis- qualifying dispositions under stock plans 2,166 Three-for-two stock split 23,857 3,976 (13,636) 1,226 9,660 Currency translation adjustment 547 - ---------------------------------------------------------------------------------------------------------------------- Balance, October 29, 1994 75,252 12,542 141,159 362,194 6,020 - - - ---------------------------------------------------------------------------------------------------------------------- ACTIVITY Net income - 1995 119,270 IN FISCAL Issuance of stock under 1995 stock plans and other, net of repurchases 1,137 190 10,462 (35) (241) Compensation recognized under Restricted Stock Plan 1,672 Tax benefit on exercise of nonqualified stock options and dis- qualifying dispositions under stock plans 2,848 Three-for-two stock split 38,195 6,366 (6,366) (17) - Currency translation adjustment (150) - ---------------------------------------------------------------------------------------------------------------------- Balance, October 28, 1995 114,584 $19,098 $149,775 $481,464 $5,870 (52) $ (241) ====================================================================================================================== </TABLE> See accompanying notes. 27
29 ANALOG DEVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Years ended October 28, 1995, October 29, 1994 and October 30, 1993 (thousands) 1995 1994 1993 ================================================================================================================ <S> <C> <C> <C> OPERATIONS Cash flows from operations: Net income . . . . . . . . . . . . . . . . . . . . . . . $ 119,270 $ 74,496 $ 44,457 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization . . . . . . . . . . . . 64,098 61,284 59,813 Deferred income taxes . . . . . . . . . . . . . . . . 1,829 (5,398) (4,130) Other noncash expenses . . . . . . . . . . . . . . . 151 2,195 2,779 (Increase) in accounts receivable . . . . . . . . . . (18,263) (7,661) (35,598) (Increase) decrease in inventories . . . . . . . . . (14,402) 20,756 (6,268) (Increase) in prepaid income taxes . . . . . . . . . (14,189) (626) (1,718) (Increase) decrease in prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . (4,959) (598) 224 Increase in accounts payable, deferred income and accrued liabilities . . . . . . 51,332 28,939 16,617 Increase in income taxes payable . . . . . . . . . . 23,784 14,063 13,922 Increase (decrease) in other liabilities . . . . . . 1,599 (839) 803 --------- --------- ---------- Total adjustments . . . . . . . . . . . . . . . . . . . . 90,980 112,115 46,444 --------- --------- ---------- Net cash provided by operations . . . . . . . . . . . . . . . 210,250 186,611 90,901 --------- --------- ---------- INVESTMENTS Cash flows from investments: Additions to property, plant and equipment, net . . . . . (212,671) (90,856) (67,155) Purchase of short-term investments available for sale. . . (166,225) (72,652) - Maturities of short-term investments available for sale. . 162,067 - - Purchase of short-term investments held to maturity. . . . (7,200) - - Maturities of short-term investments held to maturity. . . 2,200 - - Increase in other assets . . . . . . . . . . . . . . . . . (16,878) (3,269) (1,406) --------- --------- ---------- Net cash used for investments . . . . . . . . . . . . . . . . (238,707) (166,777) (68,561) --------- --------- ---------- FINANCING Cash flows from financing activities: ACTIVITIES Payments on long-term debt . . . . . . . . . . . . . . . . (20,000) - (20,194) Proceeds from employee stock plans . . . . . . . . . . . . 10,126 9,821 9,995 Net increase (decrease) in variable rate borrowings. . . . (787) 485 (29,895) Payments on capital lease obligations . . . . . . . . . . (237) (335) (313) Proceeds from issuance of long-term debt . . . . . . . . . - - 80,000 --------- --------- ---------- Net cash (used for) provided by financing activities. . . . . (10,898) 9,971 39,593 --------- --------- ---------- Effect of exchange rate changes on cash . . . . . . . . . . . (455) (1,360) 1,005 --------- --------- ---------- Net increase (decrease) in cash and cash equivalents. . . . . (39,810) 28,445 62,938 Cash and cash equivalents at beginning of year . . . . . . . 109,113 80,668 17,730 --------- --------- ---------- Cash and cash equivalents at end of year . . . . . . . . . . $ 69,303 $ 109,113 $ 80,668 ========= ========= ========== SUPPLE- Cash paid during the year for: MENTAL Income taxes . . . . . . . . . . . . . . . . . . . . . . . $ 30,511 $ 12,965 $ 4,084 INFORMATION ========= ========= ========== Interest . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,685 $ 6,923 $ 6,771 ========= ========= ========== </TABLE> See accompanying notes. 28
30 ANALOG DEVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED OCTOBER 28, 1995, OCTOBER 29, 1994 AND OCTOBER 30, 1993 (ALL TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries. Upon consolidation, all significant intercompany accounts and transactions are eliminated. The Company's fiscal year ends on the Saturday closest to the last day in October. Fiscal years 1995, 1994 and 1993 were each 52-week years. Certain amounts reported in previous years have been reclassified to conform to the 1995 presentation. b. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Cash and cash equivalents are highly liquid investments with insignificant interest rate risk and maturities of three months or less at the time of acquisition. Investments with maturities between three and twelve months at time of acquisition are considered short- term investments. Short-term investments consist of debt securities such as commercial paper, time deposits, certificates of deposit and bankers acceptances. Effective October 30, 1994, the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (FAS 115), which creates certain classification categories for such investments, based on the nature of the securities and the intent and investment goals of the Company. FAS 115 has been adopted on a prospective basis, and the financial statements of prior years have not been restated. The cumulative effect of the change was not material. FAS 115 requires investments in debt and equity securities to be classified as "held-to-maturity," "available-for-sale," or "trading" at the time of purchase and for such designation to be reevaluated as of each balance sheet date. Held-to-maturity securities, which are carried at amortized cost, include only those securities the Company has the positive intent and ability to hold to maturity. Available-for-sale securities are carried at fair value with unrealized gains and losses, net of related tax, if any, reported as a separate component of stockholders' equity. Realized gains and losses, declines in value judged to be other than temporary, and interest income on all securities are included in earnings. At October 28, 1995, the Company did not own any securities classified as trading. While it is the intent of management to hold securities to maturity, unforeseen events, while not generally expected, could cause the Company to liquidate certain securities prior to maturity. Accordingly, those securities which could readily be sold back to the seller are classified as available-for-sale. Securities, such as bank time deposits, which by their nature are typically held-to- maturity are classified as such. The following is a summary of available-for-sale and held-to-maturity securities at October 28, 1995: <TABLE> <CAPTION> Available-for-Sale Held-to-Maturity ------------------ ---------------- Cost Cost - -------------------------------------------------------------------------------- <S> <C> <C> Cash equivalents: Commercial paper $ 27,727 $ - Euro time deposits - 31,300 Short-term investments: Commercial paper 73,874 - Bankers' acceptances 2,936 - Euro time deposits - 5,000 - -------------------------------------------------------------------------------- Total $104,537 $36,300 ================================================================================ </TABLE> 29
31 ANALOG DEVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Securities classified as available-for-sale and held-to-maturity at October 28, 1995 have contractual maturities of six months or less at time of acquisition. Because of the short term to maturity, and hence relative price insensitivity to changes in market interest rates, amortized cost approximates fair value for all of these securities. As such, no unrealized gains or losses were recorded at year end. There were no proceeds, gross realized gains or gross realized losses from sales of any securities during the year. c. INVENTORIES Inventories are valued at the lower of cost (first-in, first-out method) or market. Inventories at October 28, 1995, October 29, 1994 and October 30, 1993 were as follows: <TABLE> <CAPTION> 1995 1994 1993 - -------------------------------------------------------------------------------- <S> <C> <C> <C> Raw materials $ 22,327 $ 15,277 $ 18,645 Work in process 77,526 69,771 80,418 Finished goods 44,109 45,678 51,359 - -------------------------------------------------------------------------------- Total inventories $143,962 $130,726 $150,422 ================================================================================ </TABLE> A director of a raw material supplier was also a director of the Company through January 1995. Total purchases from this supplier approximated $11,038,000 through January 1995, $28,435,000 in 1994 and $37,990,000 in 1993. Accounts payable to this supplier at October 29, 1994 and October 30, 1993 approximated $1,090,000 and $3,639,000, respectively. Another director of the Company was also a director of a raw material supplier through June 1993. Total purchases from this supplier approximated $1,510,000 in 1993. The Company believes that the terms of these purchases were comparable to those available from other suppliers. d. PROPERTY, PLANT AND EQUIPMENT The straight-line method of depreciation is used for all classes of assets for financial statement purposes; both straight-line and accelerated methods are used for income tax purposes. Capitalized leases and leasehold improvements are amortized based upon the lesser of the term of the lease or the useful life of the asset. Depreciation and amortization are based on the following useful lives: <TABLE> <S> <C> Buildings & Building Equipment Up to 25 years Machinery & Equipment 3-10 years Office Equipment 3-8 years </TABLE> Total depreciation and amortization of property, plant and equipment was $62,066,000, $59,240,000 and $57,732,000 in 1995, 1994 and 1993, respectively. e. INTANGIBLE ASSETS Intangible assets at October 28, 1995 consist of goodwill, patents and other intangibles. Goodwill is being amortized on a straight- line basis over a fifteen-year period. Patents and other intangibles are being amortized on a straight-line basis over their estimated economic lives which range from seven to fifteen years. Amortization expense for all intangible assets was $2,032,000, $2,044,000 and $2,081,000 in 1995, 1994 and 1993, respectively. Accumulated amortization for all intangible assets was $10,668,000, $8,636,000 and $6,657,000 at October 28, 1995, October 29, 1994 and October 30, 1993, respectively. On a periodic basis, the Company estimates the future undiscounted cash flows of the businesses to which the intangible assets relate in order to ensure that the carrying value of such intangible assets has not been impaired. 30
32 ANALOG DEVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) f. GRANT ACCOUNTING The Company's manufacturing facility in Limerick, Ireland has received various grants from the Industrial Development Authority of the Republic of Ireland. These grants include capital, employment, and research and development grants. Capital grants for the acquisition of property and equipment are netted against the related capital expenditures and amortized as a credit to depreciation expense over the useful life of the related asset. Employment grants, which relate to employee hiring and training, and research and development grants are recognized in earnings in the period in which the related expenditures are incurred by the Company. g. TRANSLATION OF FOREIGN CURRENCIES The functional currency for the Company's foreign sales operations is the applicable local currency. Gains and losses resulting from translation of these foreign currencies into U.S. dollars are accumulated in a separate component of stockholders' equity. Transaction gains and losses are included in income currently, including those at the Company's principal foreign manufacturing operations where the functional currency is the U.S. dollar. Net foreign currency transaction gains or losses included in other expenses, net, were not material in fiscal 1995, 1994 and 1993. h. FOREIGN CURRENCY INSTRUMENTS AND INTEREST RATE AGREEMENTS The Company enters into forward foreign exchange contracts, foreign currency option contracts and currency swap agreements to offset certain operational and balance sheet exposures from changes in foreign currency exchange rates. Such exposures result from the portion of the Company's operations, assets and liabilities that are denominated in currencies other than the U.S. dollar, primarily Japanese yen and European currencies. These foreign exchange contract, option and swap transactions are entered into to support product sales, purchases and financing transactions made in the normal course of business, and accordingly, are not speculative in nature. Forward foreign exchange contracts are utilized to manage the risk associated with currency fluctuations on certain firm sales and purchase commitments denominated in foreign currencies and certain non-U.S. dollar denominated asset and liability positions. The Company's forward foreign exchange contracts are primarily denominated in Japanese yen and certain European currencies and are for periods consistent with the terms of the underlying transactions, generally one year or less. The forward foreign exchange contracts that relate to firm, foreign currency sales and purchase commitments are designated and effective as hedges of firm, identifiable foreign currency commitments, and accordingly, the gains and losses resulting from the impact of currency exchange rate movements on these contracts are not recognized in operations until the underlying hedged transactions are recognized. Upon recognition, such gains and losses are recorded in operations as an adjustment to the carrying amount of the underlying transactions in the period in which these transactions are recognized. Unrealized gains and losses resulting from the impact of currency exchange rate movements on forward foreign exchange contracts designated to offset certain non-U.S. dollar denominated assets and liabilities are recognized as other income or expense in the period in which the exchange rates change and offset the foreign currency gains and losses on the underlying exposures being hedged. The contract amounts of forward foreign exchange contracts outstanding were $181.7 million, $136.4 million and $107.9 million at October 28, 1995, October 29, 1994 and October 30, 1993, respectively. 31
33 ANALOG DEVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company also may periodically enter into foreign currency options contracts to offset certain probable anticipated, but not firmly committed, foreign currency transactions related to the sale of product during the ensuing nine months. When the dollar strengthens significantly against the foreign currencies, the decline in value of future currency cash flows is partially offset by the gains in value of the purchased currency options designated as hedges. Conversely, when the dollar weakens, the increase in value of future foreign currency cash flows is reduced only by the premium paid to acquire the options. The Company's foreign currency option contracts are primarily denominated in Japanese yen and generally have maturities which do not exceed six months. These foreign currency option contracts are designated and effective as hedges of anticipated foreign currency sales transactions, and accordingly, the premium cost and any realized gains associated with these contracts are deferred and included in the consolidated balance sheet as prepaid expenses and accrued liabilities, respectively, until such time as the underlying sales transactions are recognized. Upon recognition, such premium costs and any realized gains are recorded in sales as a component of the underlying sales transactions being hedged. The contract amounts of foreign currency option contracts outstanding were $26.9 million, $28.6 million and $29.0 million at October 28, 1995, October 29, 1994 and October 30, 1993, respectively. Deferred gains or losses attributable to foreign currency option contracts were not material at October 28, 1995. The Company uses currency swap agreements to hedge the value of its net investment in certain of its foreign subsidiaries. Realized and unrealized gains and losses on such agreements related to the net foreign investment being hedged are recognized in the cumulative translation adjustment component of stockholders' equity, with the related amounts due to or from counterparties included in accrued liabilities or other current assets. The contract amount of currency swap agreements outstanding, which were principally denominated in Japanese yen, was $10.0 million at both October 28, 1995 and October 29, 1994. Currency swap agreements outstanding at October 28, 1995 have maturities of one year and generally remain in effect until expiration. The Company enters into interest rate swap and cap agreements to manage its exposure to interest rate movements by effectively converting a portion of its debt and certain financing arrangements from fixed to variable rates. Maturity dates of interest rate swap and cap agreements generally match those of the underlying debt or financing arrangements. These agreements, which have maturities of up to twelve years involve the exchange of fixed rate payments for variable rate payments without the exchange of the underlying principal amounts. Variable rates are based on six-month U.S. dollar LIBOR and reset on a semiannual basis. The differential between fixed and variable rates to be paid or received is accrued as interest rates change in accordance with the agreements and recognized over the life of the agreements as an adjustment to interest expense. The notional principal amounts of interest rate swap and cap agreements outstanding were $50.3 million, $50.5 million and $40.0 million at October 28, 1995, October 29, 1994 and October 30, 1993. The cash requirements of the above-described financial instruments approximate their fair value. Cash flows associated with these financial instruments are classified consistent with the cash flows from the transactions being hedged. 32
34 ANALOG DEVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Derivative financial instruments involve, to a varying degree, elements of market and credit risk not recognized in the consolidated financial statements. The market risk associated with these instruments resulting from currency exchange rate or interest rate movements is expected to offset the market risk of the underlying transactions, assets and liabilities being hedged. The counterparties to the agreements relating to the Company's foreign exchange and interest rate instruments consist of a number of major high credit quality international financial institutions. The Company does not believe that there is significant risk of nonperformance by these counterparties because the Company continually monitors the credit ratings of such counterparties, and limits the financial exposure and the amount of agreements entered into with any one financial institution. 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 the Company's 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 the obligations of the Company to the counterparties. i. CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of investments and trade accounts receivable. The Company maintains cash, cash equivalents and short-term investments with high credit quality financial institutions and monitors the amount of credit exposure to any one financial institution. The Company sells its products to distributors and original equipment manufacturers involved in a variety of industries including industrial automation, instrumentation, military/aerospace, and to an increasing degree, communications, computers and peripherals, and high-performance consumer electronics. The Company has adopted credit policies and standards to accommodate growth into these markets. The Company believes that any risk of accounting loss with respect to trade accounts receivable is limited due to the diversity of its products, end customers and geographic sales areas. The Company performs continuing credit evaluations of its customers financial condition and although the Company generally does not require collateral, letters of credit may be required from its customers in certain circumstances. Due to the Company's credit evaluation and collection process, bad debt losses have been insignificant. 33
35 ANALOG DEVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) j. FAIR VALUES OF FINANCIAL INSTRUMENTS The following estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. <TABLE> <CAPTION> OCTOBER 28, 1995 OCTOBER 29, 1994 OCTOBER 30, 1993 ---------------- ---------------- ---------------- CARRYING FAIR CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE - ------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> Assets: Cash and cash equivalents $ 69,303 $ 69,303 $ 109,113 $109,113 $ 80,668 $ 80,668 Short-term investments 81,810 81,810 72,652 72,652 - - Liabilities: Short-term borrowings (2,299) (2,299) (2,917) (2,917) (2,006) (2,006) Long-term debt, including current portion (80,000) (80,130) (100,000) (93,800) (100,000) (102,400) Foreign Currency Instruments and Interest Rate Agreements: Interest rate swap and cap agreements (30) (175) 5 (3,065) 98 89 Forward foreign currency exchange contracts 7,798 9,089 (1,458) 641 727 25 Foreign currency option contracts 388 1,645 308 41 460 468 Currency swap agreements 413 485 (853) (840) - - - ------------------------------------------------------------------------------------------------------ </TABLE> The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash, cash equivalents and short-term investments -The carrying amounts of these items are a reasonable estimate of their fair value due to the short term to maturity and readily available market for these types of investments. Short-term borrowings-The carrying amounts of these variable-rate borrowings approximate fair value due to the short period of time to maturity. Long-term debt-The fair value of long-term debt is estimated based on current interest rates available to the Company for debt instruments with similar terms, degree of risk and remaining maturities. Interest rate swap and cap agreements-The fair value of interest rate swap and cap agreements are obtained from dealer quotes. These values represent the estimated amount the Company would receive or pay to terminate the agreements taking into consideration current interest rates. Forward foreign currency exchange contacts-The estimated fair value of forward foreign currency exchange contracts is based on the estimated amount at which they could be settled based on market exchange rates. Foreign currency option contracts and currency swap agreements-The fair values of foreign currency option contracts and currency swap agreements are obtained from dealer quotes. These values represent the estimated net amount the Company would receive or pay to terminate the agreements. 34
36 ANALOG DEVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) k. REVENUE RECOGNITION Revenue from product sales to end users is recognized upon shipment. A portion of the Company's sales are made to domestic distributors under agreements allowing for price protection and certain rights of return on merchandise unsold by the distributors. Because of the uncertainty associated with pricing concessions and future returns, the Company defers recognition of such sales and related gross margin until the merchandise is sold by the distributors. For sales to international distributors, the Company recognizes the sale upon shipment to the distributor, but provides specific reserves for possible returns and allowances. l. INCOME TAXES In February 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109). FAS 109 requires a change from the deferred method of accounting for income taxes under APB Opinion 11 to the asset and liability method of accounting for income taxes. Under the asset and liability method of FAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under FAS 109, the effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. Deferred tax asset valuation allowances are recorded to offset deferred tax assets if it is more likely than not that some or all of the deferred tax asset will not be realized. The Company established a valuation allowance, primarily for financial and tax capital losses, based on the assessment that realization of such character of income is not assured. Effective October 31, 1993 the Company adopted FAS 109. The adoption of FAS 109 was not material to the consolidated financial statements. As permitted by FAS 109, prior years' financial statements have not been restated. Pursuant to the deferred method under APB Opinion 11, which was applied at October 30, 1993 and in prior fiscal years, deferred income taxes are recognized for income and expense items that are reported in different years for financial reporting purposes and income tax purposes using the tax rate applicable for the year of calculation. Under the deferred method, deferred taxes are not adjusted for subsequent changes in tax rates. m. STOCK SPLIT On November 28, 1995, the Company's Board of Directors authorized a three-for-two stock split effected in the form of a 50% stock dividend distributed on January 3, 1996 to stockholders of record December 12, 1995. The split was accomplished through the issuance of common stock. All references to share and per share amounts in this report have been restated to reflect the split. n. EARNINGS PER SHARE OF COMMON STOCK Primary earnings per common share are computed based on the weighted average number of common shares outstanding during the year, adjusted for incremental shares assumed issued for dilutive common stock equivalents. Fully diluted earnings per share do not differ materially from primary earnings per share. o. NEW ACCOUNTING STANDARDS The Company has not yet adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" which will require adoption in fiscal 1997. The Company is in the process of determining the effect of adoption of these statements on its consolidated financial statements and related disclosures. 35
37 ANALOG DEVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 2. INDUSTRY AND GEOGRAPHIC SEGMENT INFORMATION INDUSTRY The Company operates predominantly in one industry segment: the design, manufacture and marketing of a broad line of high- performance linear, mixed-signal and digital integrated circuits that address a wide range of real-world signal processing applications. GEOGRAPHIC INFORMATION The Company operates in three major geographic areas. Information on the Company's geographic operations is set forth in the table below. The predominant countries comprising European operations are England, France, Germany and Ireland. The predominant country comprising Asian operations is Japan. For segment reporting purposes, sales generated by North American operations in the table include export sales of $97,446,000, $96,700,000 and $71,542,000 in 1995, 1994 and 1993, respectively. Transfers between geographic areas are based on market comparables and are consistent with prevailing tax regulations. Operating income reflects the allocation of corporate expenses of $23,190,000, $19,718,000 and $17,174,000 in 1995, 1994 and 1993, respectively, to the appropriate geographic area based upon their beneficial and causal relationship to each area. Corporate identifiable assets consist of cash equivalents, short-term investments and intangible assets. <TABLE> <CAPTION> GEOGRAPHIC SEGMENT INFORMATION 1995 1994 1993 - -------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> SALES North America, including export . . . . $ 509,625 $440,609 $363,671 Europe . . . . . . . . . . . . . . . . . 264,401 198,000 196,310 Asia . . . . . . . . . . . . . . . . . . 167,520 134,865 106,338 ---------- -------- -------- Total sales . . . . . . . . . . . . . $ 941,546 $773,474 $666,319 ========== ======== ======== TRANSFERS North America, including export . . . . 286,021 $192,442 $161,081 BETWEEN Europe . . . . . . . . . . . . . . . . . 141,925 110,801 94,948 AREAS Asia . . . . . . . . . . . . . . . . . . 30,180 19,603 12,569 ---------- -------- -------- Total transfers between areas . . . . $ 458,126 $322,846 $268,598 ========== ======== ======== OPERATING North America, including export . . . . 92,640 $ 52,706 $ 26,546 INCOME Europe . . . . . . . . . . . . . . . . . 63,627 47,170 35,205 Asia . . . . . . . . . . . . . . . . . . 1,500 1,940 934 ---------- -------- -------- Total operating income . . . . . . . . $ 157,767 $101,816 $ 62,685 ========== ======== ======== IDENTIFIABLE North America, including export . . . . $ 440,660 $354,881 $367,347 ASSETS Europe . . . . . . . . . . . . . . . . . 294,094 176,755 147,979 Asia . . . . . . . . . . . . . . . . . . 108,827 95,988 78,215 Corporate . . . . . . . . . . . . . . . 158,067 188,247 84,951 ---------- -------- -------- Total assets . . . . . . . . . . . . . $1,001,648 $815,871 $678,492 ========== ======== ======== </TABLE> 36
38 ANALOG DEVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 3. ACCRUED LIABILITIES Accrued liabilities at October 28, 1995, October 29, 1994 and October 30, 1993 consisted of the following: <TABLE> <CAPTION> 1995 1994 1993 - -------------------------------------------------------------------------------- <S> <C> <C> <C> Accrued compensation and benefits $47,785 $33,908 $31,652 Other 26,353 26,313 18,241 - -------------------------------------------------------------------------------- Total accrued liabilities $74,138 $60,221 $49,893 ================================================================================ </TABLE> 4. DEBT AND CREDIT FACILITIES 6 5/8% NOTES On March 11, 1993, the Company completed a public offering of $80 million of seven-year 6 5/8% Notes due March 1, 2000 with semiannual interest payments on March 1 and September 1. The net proceeds of the offering were approximately $79 million after payment of the underwriting discounts and expenses of the offering which were deferred and are being amortized to interest expense over the term of the Notes. Simultaneous with the sale of the Notes, the Company entered into an interest rate swap and cap agreement for the term of the Notes having a notional principal amount of $40 million whereby the effective net interest rate on $40 million of the Notes will be the six-month LIBOR rate (up to a maximum of 7%) plus 1.4%. For the year ended October 28, 1995, the net effective interest rate on $40 million of the Notes was 7.8% after giving effect to the interest rate swap agreement. REVOLVING CREDIT AGREEMENT AND LINES OF CREDIT The Company has a revolving credit agreement with several banks which commits them to lend up to $60,000,000. The terms of the credit agreement provide that interest on U.S. dollar borrowings may not exceed the greater of the prime rate or the federal funds rate plus .50%. Under this agreement, the Company also has the option to borrow both U.S. dollars and foreign currencies at interest rates tied to various money market instruments, customarily below the prime rate. Under the credit agreement, the Company is currently required to pay fees of .05 of 1% per annum on the unused portion of the lending commitment and .15 of 1% per annum on the total amount of the committed facility. All borrowings under the credit agreement are due no later than September 8, 1998. Borrowing from banks not participating in the agreement is permitted as long as the Company maintains certain required financial ratios. The credit agreement requires the Company to maintain stated minimum net worth and current ratio levels, plus a stated maximum ratio of total liabilities to net worth. In addition, the credit agreement restricts the aggregate of all cash dividend payments declared or made subsequent to January 30, 1993 to an amount not exceeding $29,734,000 plus 50% of the consolidated net income of the Company for the period from January 31, 1993 through the end of the Company's then most recent fiscal quarter. At October 28, 1995 this amount was equal to $144,782,000. At October 28, 1995, the Company was in compliance with all covenants under the credit agreement. There are no compensating balance requirements under the credit agreement. In addition to the credit agreement, the Company also has various unsecured, uncommitted money market lines of credit with its credit agreement and other banks which provide for short-term borrowings. 37
39 ANALOG DEVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The weighted average interest rate of U.S. dollar borrowings under the credit agreement and the uncommitted money market lines of credit was 4.0% during 1993. There were no variable rate U.S. dollar borrowings under the credit agreement or the uncommitted money market lines of credit during 1995 and 1994 nor were there any such borrowings outstanding at October 28, 1995, October 29, 1994 or October 30, 1993. The weighted average interest rates of foreign currency borrowings under foreign lines of credit were 7.2%, 8.7% and 10.9% during 1995, 1994 and 1993, respectively. The weighted average interest rates of foreign currency borrowings were 6.2%, 7.4% and 11.8% at October 28, 1995, October 29, 1994 and October 30, 1993, respectively. There were $2.3 million of foreign currency borrowings outstanding at October 28, 1995, which were at prevailing money market rates for the respective currencies. Borrowings under the Company's credit agreement and lines of credit are generally due within six months. Long-term debt, including current maturities, at October 28, 1995, October 29, 1994 and October 30, 1993 consisted of the following: <TABLE> <CAPTION> 1995 1994 1993 - -------------------------------------------------------------------------------- <S> <C> <C> <C> 6 5/8% Notes due 2000 $80,000 $ 80,000 $ 80,000 7.18% term loan - 20,000 20,000 - -------------------------------------------------------------------------------- 80,000 100,000 100,000 Less current portion of long-term debt - 20,000 - - -------------------------------------------------------------------------------- Long-term debt $80,000 $ 80,000 $100,000 ================================================================================ </TABLE> On December 18, 1995, the Company completed a public offering of $230,000,000 of five-year 3-1/2% Convertible Subordinated Notes due December 1, 2000 with semiannual interest payments on June 1 and December 1 of each year, commencing June 1, 1996. The Notes are convertible, at the option of the holder, into the Company's common stock at any time after 60 days following the date of original issuance, unless previously redeemed, at a conversion price of $27.913 per share, subject to adjustment in certain events. The net proceeds of the offering were approximately $224 million after payment of the underwriting discount and expenses of the offering which will be amortized over the term of the Notes. As of December 31, 1995, the Company's total long-term debt was $310,000,000 comprised of the $230,000,000 of 3-1/2% Convertible Subordinated Notes and $80,000,000 of 6 5/8% Notes. Aggregate principal payments on long-term debt and short-term borrowings for the following fiscal years, after consideration of the $230.0 million of 3-1/2% Convertible Subordinated Notes, are: 1996-$2.3 million; 2000-$80.0 million; and 2001-$230.0 million. 38
40 ANALOG DEVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. LEASE COMMITMENTS The Company leases certain of its facilities and equipment under various operating and capital leases which expire at various dates through 2010. The lease agreements frequently include renewal and purchase provisions and require the Company to pay taxes, insurance and maintenance costs. Total rental expense under operating leases was $11,243,000, $9,985,000 and $8,853,000 in 1995, 1994 and 1993, respectively. The following is a schedule of future minimum lease payments under capital leases and rental payments required under long-term operating leases at October 28, 1995: <TABLE> <CAPTION> OPERATING CAPITAL FISCAL YEARS LEASES LEASES - ------------------------------------------------------------------------------ <S> <C> <C> 1996 $ 8,494 $ 77 1997 6,835 - 1998 4,952 - 1999 4,740 - 2000 4,023 - Later Years 16,979 - - ------------------------------------------------------------------------------ Total $46,023 $ 77 ======= Less amount representing interest (17) --- Present value of minimum lease payments $ 60 ==== </TABLE> Net property, plant and equipment includes the following for capital leases: <TABLE> <CAPTION> 1995 1994 1993 - ------------------------------------------------------------------------------ <S> <C> <C> <C> Land and buildings $ 1,828 $ 1,828 $ 1,828 Machinery and equipment 829 829 829 - ------------------------------------------------------------------------------ 2,657 2,657 2,657 Less accumulated amortization (2,639) (2,468) (2,231) - ------------------------------------------------------------------------------ Net capital leases $ 18 $ 189 $ 426 ============================================================================== </TABLE> 6. COMMITMENTS AND CONTINGENCIES LITIGATION The Company was a defendant in two lawsuits brought in Texas by Texas Instruments, Inc. ("TI"), alleging patent infringement, including patent infringement arising from certain plastic encapsulation processes, and seeking an injunction and unspecified damages against the Company. The alleged infringement of one of these patents is also the subject matter of a proceeding brought by TI against the Company before the International Trade Commission ("ITC"). On January 10, 1994, the ITC brought an enforcement proceeding against the Company alleging that the Company had violated the ITC's cease and desist order of February 1992 (as modified in July 1993), which prohibited the Company's importation of certain plastic encapsulated circuits, and seeking substantial penalties against the Company for these alleged violations. If it is determined that the Company has violated the cease and desist order, the ITC could seek to impose penalties of up to $100,000 per day of violation from the date of the cease and desist order (February 1992) or a sum equal to twice the value of the goods determined to be sold in violation of the order. In addition, in June 1992, the Company commenced a lawsuit against TI in Massachusetts alleging certain TI digital signal processors infringed one of the Company's patents. 39
41 ANALOG DEVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Effective April 1, 1995, the Company and TI settled both Texas lawsuits and the Massachusetts lawsuit principally by means of a royalty-free cross license of certain of the Company's and TI's patents. On April 25, 1995, the Company filed with the ITC a motion to terminate the ITC enforcement proceeding on the grounds that further action by the ITC is unnecessary in light of the Company's settlement with TI. On May 8 1995, an Administrative Law Judge issued a recommended determination to the ITC to grant the Company's motion to terminate the ITC proceeding. The investigative office of the ITC has opposed the motion, claiming that, notwithstanding the Company's settlement with TI, the Company's alleged violation of the ITC's cease and desist order warrants the imposition of substantial penalties. The Company's motion is pending before the ITC. The Company is a defendant in a lawsuit brought by Maxim Integrated Products, Inc. ("Maxim") in the United States District Court for the Northern District of California seeking an injunction against, and claiming damages for, alleged antitrust violations and unfair competition in connection with distribution arrangements between the Company and certain distributors. Maxim alleged that certain distributors ceased doing business with Maxim as a result of the distribution arrangements between the distributors and the Company, resulting in improper restrictions to Maxim's access to channels by which it distributes its products. Maxim asserted actual and consequential damages in the amount of $14.1 million and claimed restitution and punitive damages in an unspecified amount. Under applicable law, Maxim would receive three times the amount of any actual damages suffered as a result of any antitrust violation. On September 7, 1994, Maxim's claim was dismissed for lack of evidence. Maxim has appealed this ruling and oral argument of the appeal was held in January 1996. Although the Company believes it should prevail in the matters described in the previous three paragraphs, the Company is unable to determine their ultimate outcome or estimate the ultimate amount of liability, if any, at this time. An adverse resolution of these matters could have a material adverse effect on the Company's consolidated financial position or on its consolidated results of operations or cash flows in the period in which the matters are resolved. In addition, from time to time as a normal incidence of the nature of the Company's business, various claims, charges and litigation are asserted or commenced against the Company arising from or related to contractual matters, patents, personal injury, environmental matters and product liability. Such litigation includes patent infringement actions brought against the Company by Sextant Avionique, S.A. ("Sextant") in Paris, France, which claims that the Company's accelerometer infringes certain Sextant patents and seeks to enjoin such infringement. While there can be no assurance that the Company will prevail in all of these matters, the Company does not believe that these matters will have a material adverse effect on the Company's consolidated financial position or consolidated results of operations. However, an adverse resolution could have an adverse effect on the Company's consolidated results of operations in the quarter in which these matters are resolved. IRISH GRANTS During fiscal 1995, the Company's manufacturing facility in Limerick, Ireland entered into a grant agreement with Ireland's Industrial Development Authority ("IDA") under which the Company will receive grant monies of up to 10.1 million Irish Pounds (approximately $16.4 million at October 28, 1995) for capital and start-up costs associated with the wafer fabrication expansion at this facility. As of October 28, 1995, the Company had not received any grant monies under this agreement. The Company's Irish facility has previously received operating and capital grants from the IDA; a liability to repay up to $13.1 million of the grants received by the Company would arise in the unlikely event the Company should discontinue its Irish operations prior to the commitment periods noted in the grant agreements which expire at various dates through 1999. 40
42 ANALOG DEVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) WAFER SUPPLY AGREEMENTS In May 1995, the Company entered into a wafer supply agreement with its primary foundry, Taiwan Semiconductor Manufacturing Co., Ltd. ("TSMC"). The terms of this agreement provide for a series of advance payments to TSMC aggregating $22.4 million, payable over a three-year period, to be used by TSMC in the expansion of their wafer fabrication facility in Taiwan. In return, the Company will be provided access to a minimum level of wafer capacity over the period from 1996 to 1999. The first payment to TSMC was made in June 1995. The remaining payments under the agreement are due in June 1996, June 1997 and June 1998. The advance payments will be repaid to the Company each year in the form of credits against the prices of wafers purchased by the Company when such wafer purchases exceed a defined minimum. In March 1995, the Company entered into an agreement with an external wafer foundry, Chartered Semiconductor Manufacturing Pte., Ltd. ("CSM"), which provides for an equity investment of approximately $20.0 million to be applied primarily towards the construction of a new CSM eight-inch, 0.5 micron wafer fabrication facility in Singapore. In consideration for its investment, the Company receives a minority equity position of less than 5% in CSM and will receive guaranteed foundry capacity and pricing commitments for sub-micron wafers manufactured at CSM's new facility beginning in 1996. The Company invested $14.0 million in fiscal 1995 in connection with this agreement. The Company's investment in CSM is included in the balance sheet caption, "Deferred Charges and Other Assets." OTHER Under the terms of the lease agreement related to the Company's headquarters facility in Norwood, Massachusetts, the Company has agreed to assume the note related to the property in the case of default by the lessor. Assumption of the note, which was $10.3 million at October 28, 1995, would entitle the Company to a first lien on the property. In addition, the Company may be subject to an incremental rent payment if the Company were to either default on the lease or not exercise its option to extend the lease at the end of the current fifteen-year term. This payment would be the present value of the balance of the lessor's debt related to the property in excess of $6.5 million at the end of the current lease term. As of October 28, 1995, the Company's unrecorded financial risk of loss under this agreement was $2.0 million in the unlikely event of default. 7. STOCKHOLDERS' EQUITY COMMON STOCK In March 1995, the stockholders approved an amendment to the Company's Articles of Organization to increase the authorized number of shares of common stock from 150,000,000 to 300,000,000. In December 1995, the Board of Directors authorized an amendment to the Company's Articles of Organization to increase the authorized number of shares of common stock from 300,000,000 to 450,000,000 subject to stockholder approval in March 1996. STOCK PLANS The 1988 Stock Option Plan provides for the issuance of nonstatutory and incentive stock options to purchase up to 15,525,000 shares of common stock. Under this plan, options may be granted to key employees of the Company and its subsidiaries at a price not less than 100% of the fair market value of the underlying stock on the date of grant. The Company's 1980 Stock Option Plan was terminated upon adoption of the 1988 Stock Option Plan; however, options to purchase common stock remain outstanding under this plan. In December 1995, the Board of Directors authorized an increase in the number of shares of common stock available for issuance under the 1988 Stock Option Plan from 15,525,000 to 22,425,000 subject to stockholder approval in March 1996. While the Company may grant options to employees which become exercisable at different times or within different periods, the Company has generally granted options to employees which are exercisable on a cumulative basis in annual installments of 33 1/3% each on the third, fourth and fifth anniversaries of the date of grant. 41
43 ANALOG DEVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Under the 1994 Director Stock Option Plan, each nonemployee director is granted annually for four years a nonstatutory option to purchase 7,875 shares of common stock at an exercise price equal to the fair market value on the date of grant. A total of 300,000 shares of common stock may be issued under this plan. These options are exercisable on a cumulative basis in annual installments of 33 1/3% each on the first, second and third anniversaries of the date of grant. The Company also has options outstanding under the 1992 Director Option Plan and the 1989 Director Stock Option Plan. Options granted under these plans are exercisable on a cumulative basis in annual installments of 33 1/3% each on the third, fourth and fifth anniversaries of the date of grant. Transactions under the Company's stock option plans are summarized in the table below: <TABLE> <CAPTION> OPTIONS OUTSTANDING SHARES ---------------------------- AVAILABLE OPTION PRICE AGGREGATE STOCK OPTION ACTIVITY FOR GRANT NUMBER PER SHARE PRICE ===================================================================================================================== <S> <C> <C> <C> <C> Balance, October 31, 1992 447 9,478 $ 2.61 to $ 8.17 $38,317 - --------------------------------------------------------------------------------------------------------------------- Additional shares authorized for 1988 Stock Option Plan 7,875 - - - Shares authorized for 1992 Director Option Plan 225 - - - Options granted (261) 261 $ 4.39 to $10.72 1,669 Options exercised - (1,599) $ 2.61 to $ 7.00 (7,695) Options canceled (1) 495 (576) $ 2.61 to $ 7.00 (2,224) Shares canceled upon termination of 1989 Director Stock Option Plan (68) - - - - --------------------------------------------------------------------------------------------------------------------- Balance, October 30, 1993 8,713 7,564 $ 2.61 to $10.72 30,067 - --------------------------------------------------------------------------------------------------------------------- Options granted (3,091) 3,091 $ 9.39 to $13.33 30,482 Options exercised - (1,024) $ 2.61 to $ 8.17 (4,250) Options canceled (1) 185 (186) $ 2.61 to $11.44 (844) - --------------------------------------------------------------------------------------------------------------------- Balance, October 29, 1994 5,807 9,445 $ 2.61 to $13.33 55,455 - --------------------------------------------------------------------------------------------------------------------- Shares authorized for 1994 Director Stock Option Plan 300 - - - Options granted (2,662) 2,662 $13.67 to $23.42 36,887 Options exercised - (1,062) $ 2.61 to $ 7.00 (3,960) Options canceled (1) 371 (393) $ 2.61 to $13.67 (2,989) Shares canceled upon termination of 1992 Director Option Plan (68) - - - - --------------------------------------------------------------------------------------------------------------------- Balance, October 28, 1995 3,748 10,652 $ 2.61 to $23.42 $85,393 ===================================================================================================================== Options exercisable at October 28, 1995 2,984 $ 2.61 to $13.67 $11,212 ===================================================================================================================== </TABLE> (1) Options canceled which were originally issued from the 1988 Stock Option Plan are available for subsequent grants. The remaining options canceled in 1995, 1994 and 1993 were issued from the 1980 Stock Option and 1992 Director Option Plans under which no further options will be granted. The Company has a stock purchase plan that allows eligible employees to purchase, through payroll deductions, shares of the Company's common stock at 85% of the fair market value at specified dates. Employees purchased 626,800 shares in 1995 (785,700 and 1,131,800 in 1994 and 1993, respectively) for $6.9 million ($6.0 million and $4.2 million in 1994 and 1993, respectively). At October 28, 1995, 1,505,700 common shares remained available for issuance under the stock purchase plan. 42
44 ANALOG DEVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Under the 1991 Restricted Stock Plan, a maximum of 1,575,000 shares of common stock may be awarded by the Company to key employees for nominal consideration. This plan succeeded the Company's 1978 Restricted Stock Plan which provided for the issuance of up to 5,529,600 shares of common stock. Shares awarded from both plans are restricted as to transfer, usually for a period of five years and, under certain conditions, may be subject to repurchase by the Company at the original purchase price per share. Shares awarded under the Company's restricted stock plans, net of cancellations, for 1995, 1994 and 1993 were 15,000, 353,250 and 31,500, respectively. The fair market value of the shares at the date of award was accounted for as deferred compensation and is being amortized over the restricted period. During 1995, 1994 and 1993, $1,672,000, $1,851,000 and $1,716,000, respectively, of such compensation was charged to expense. At October 28, 1995, there were 444,000 shares of common stock available for issuance under the 1991 Restricted Stock Plan. In December 1995, the Board of Directors authorized an increase in the number of shares of common stock available for issuance under the 1991 Restricted Stock Plan from 1,575,000 to 2,025,000 subject to stockholder approval in March 1996. WARRANTS In 1990, the Company issued warrants for the purchase of 2,250,000 shares of common stock. Each warrant entitles the holder to purchase one share of the Company's common stock at an exercise price of $5.33 per share, subject to certain adjustments, anytime prior to the expiration of the warrants on August 7, 1997. At October 28, 1995, all of the warrants were outstanding. As of October 28, 1995, a total of 18,603,000 common shares were reserved for issuance under the Company's stock plans and warrant agreement. PREFERRED STOCK The Company has 500,000 authorized shares of $1.00 par value Preferred Stock. The Board of Directors is authorized to fix designations, relative rights, preferences and limitations on the preferred stock at the time of issuance. The Company had previously authorized 35,000 shares of such Preferred Stock as Series A Convertible Preferred Stock, of which 28,066 shares were sold in prior years. As of June 14, 1990, all of these shares had been fully converted to common stock. COMMON STOCK PURCHASE RIGHTS In 1988, the Board of Directors adopted a Stockholder Rights Plan which was amended in 1989. Pursuant to the Stockholder Rights Plan, each share of common stock has an associated right. Under certain circumstances, each right entitles the holder to purchase from the Company one share of common stock at an exercise price of $26.67 per share, subject to adjustment. The rights are not exercisable and cannot be transferred separately from the common stock until ten days after a person acquires 20% or more or makes a tender offer for 30% or more of the Company's common stock. If, after the rights become exercisable, (i) any person becomes the owner of 20% or more of the Company's common stock, or (ii) the Company is the surviving entity in a merger with a 20% or more stockholder, or (iii) a 20% or more stockholder engages in certain "self-dealing" transactions with the Company, each right not owned by such person will entitle its holder to purchase, at the right's exercise price, common stock having a value of two times the exercise price of the right. In addition, if the Company is either (i) acquired in a merger or other business combination in which the Company is not the surviving entity, or (ii) sells or transfers 50% or more of its assets or earning power to another party, each right will entitle its holder to purchase, upon exercise, common stock of the acquiring Company having a value equal to two times the exercise price of the right. 43
45 ANALOG DEVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The rights have certain anti-takeover effects, in that they would cause substantial dilution to a person or group that attempts to acquire a significant interest in the Company on terms not approved by the Board of Directors. The rights expire on February 12, 1998 but may be redeemed by the Company for $.0089 per right at any time prior to the tenth day following a person's acquisition of 20% or more of the Company's common stock. So long as the rights are not separately transferable, the Company will issue one right with each new share of common stock issued. 8. RETIREMENT PLANS The Company and its subsidiaries have various savings and retirement plans covering substantially all employees. The Company maintains a defined contribution plan for the benefit of its eligible United States employees. This plan provides for Company contributions of up to 5% of each participant's total eligible compensation. In addition, the Company contributes an amount equal to each participant's contribution, if any, up to a maximum of 2% of each participant's total eligible compensation. The Company also has various defined benefit pension and other retirement plans for certain foreign employees that are consistent with local statutes and practices. The total expense related to all of the Company's retirement plans in 1995, 1994 and 1993 was $14.0 million, $12.6 million and $11.9 million, respectively, which primarily consists of costs related to the domestic defined contribution plan. Also included in total expense is pension expense related to foreign defined benefit plans of $2.5 million for 1995, $2.5 million for 1994 and $3.0 million for 1993. Summary data related to these foreign plans at October 28, 1995 is as follows: accumulated benefit obligation, substantially vested, of $22.2 million; projected benefit obligation of $35.2 million; plan assets at fair value of $32.4 million; discount rates ranging from 4% to 15%; compensation increase rates ranging from 3% to 12% and expected rate of return on assets ranging from 5% to 15%. In fiscal 1995, the Company adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" (FAS 112). FAS 112 requires that postemployment benefits, primarily salary continuation and insurance continuation, be accrued for at the time the benefit is earned by the employee. Adoption of FAS 112 did not have a material impact on the Company's consolidated financial statements. 9. INCOME TAXES As discussed in Note 1(l), the Company adopted FAS 109 as of October 31, 1993. The reconciliation of income tax computed at the U.S. federal statutory rates to income tax expense is as follows: <TABLE> <CAPTION> LIABILITY METHOD DEFERRED METHOD --------------------- --------------- 1995 1994 1993 - ------------------------------------------------------------------------------------------- <S> <C> <C> <C> U.S. federal statutory tax rate 35.0% 35.0% 34.8% Income tax provision reconciliation: Tax at statutory rate $ 55,803 $33,919 $19,322 Irish income subject to lower tax rate (13,436) (7,299) (7,951) Change in valuation allowance - (4,265) - State income taxes, net of federal benefit 1,833 1,076 437 Research and development tax credits (325) (1,074) 347 Foreign Sales Corporation (3,200) (731) - Amortization of goodwill 503 503 500 Net foreign tax in excess of (less than) U.S. federal statutory tax rate (1,076) 247 (203) Foreign tax credits (utilized) unutilized - - (1,444) Other, net 63 39 60 - ------------------------------------------------------------------------------------------- Total income tax provision $ 40,165 $22,415 $11,068 =========================================================================================== </TABLE> 44
46 ANALOG DEVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) For financial reporting purposes, income before income taxes includes the following components: <TABLE> <CAPTION> 1995 1994 1993 - -------------------------------------------------------------------------------- <S> <C> <C> <C> Pretax income: Domestic $ 76,230 $35,621 $ 8,228 Foreign 83,205 61,290 47,297 - -------------------------------------------------------------------------------- $159,435 $96,911 $55,525 ================================================================================ </TABLE> The components of the provision for income taxes are as follows: <TABLE> <CAPTION> 1995 1994 1993 - -------------------------------------------------------------------------------- <S> <C> <C> <C> Current: Federal $32,860 $18,479 $ 3,884 Foreign 16,734 10,576 8,788 State 2,820 1,665 670 - -------------------------------------------------------------------------------- Total current $52,414 $30,720 $13,342 ================================================================================ Deferred (prepaid): Federal $(10,887) $(7,601) $(2,313) Foreign (1,362) (704) 39 - -------------------------------------------------------------------------------- Total deferred (prepaid) $(12,249) $(8,305) $(2,274) ================================================================================ </TABLE> The Company's practice is to reinvest indefinitely the earnings of certain international subsidiaries. Accordingly, no U.S. income taxes have been provided for approximately $277,308,000 of unremitted earnings of international subsidiaries. For the Company's fiscal years ended October 28, 1995 and October 29, 1994 deferred income taxes reflect the tax effects of differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. A deferred tax asset must be recognized for the tax benefit of deductible temporary differences, net operating losses, net capital losses and tax credit carryovers. A valuation allowance is recognized if it is "more likely than not" that some or all of the deferred tax asset will not be realized. The Company maintains a valuation allowance for deferred tax assets, which was $10.0 million at both October 28, 1995 and October 29, 1994. The Company believes that the realization of deferred tax assets was not assured for book and tax capital losses and book basis foreign tax credits. For tax purposes, the Company has a capital loss carryforward of approximately $6,453,000 expiring through the year 2000, principally in 1997. 45
47 ANALOG DEVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The significant components of the Company's deferred tax assets and liabilities for the fiscal years ended October 28, 1995 and October 29, 1994 are as follows: <TABLE> <CAPTION> 1995 1994 - ------------------------------------------------------------------------------------ <S> <C> <C> Deferred tax assets: Inventory reserves $ 18,309 $ 12,261 Capital loss carryover 8,513 8,513 Deferred income on shipments to domestic distributors 7,898 5,254 Reserves for employee benefits 3,780 2,890 Restricted stock 2,031 2,123 Alternative Minimum Tax carryover - 1,764 Intercompany profits in foreign inventories 5,335 1,709 Reserve for bad debts 1,171 1,650 Foreign tax credits 2,301 1,522 Other 6,351 3,314 - ------------------------------------------------------------------------------------ Total gross deferred tax assets 55,689 41,000 Valuation allowance for deferred tax assets (10,035) (10,035) - ------------------------------------------------------------------------------------ Total deferred tax assets $ 45,654 $ 30,965 - ------------------------------------------------------------------------------------ Deferred tax liabilities: Depreciation $(11,043) $ (8,603) - ------------------------------------------------------------------------------------ Total gross deferred liabilities $(11,043) $ (8,603) - ------------------------------------------------------------------------------------ Net deferred tax assets $ 34,611 $ 22,362 ==================================================================================== </TABLE> The components of the provision for deferred income taxes for the fiscal year ended October 30, 1993 are as follows: <TABLE> <CAPTION> 1993 - ------------------------------------------------------------------------------------ <S> <C> Components of deferred (prepaid) tax provision (benefit): Tax depreciation in excess of (less than) book depreciation $(2,064) General business tax credits 1,814 Inventory reserves 878 Deferred income on shipments to domestic distributors (716) Restricted stock 583 Net decrease (increase) in intercompany profits in foreign inventories (431) Foreign tax credits (429) Reserves for employee benefits (154) Restructuring reserves - Other, net (1,755) - ------------------------------------------------------------------------------------ Total provision for deferred (prepaid) income taxes $(2,274) ==================================================================================== </TABLE> 46
48 ANALOG DEVICES, INC. SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED) Quarterly financial information for fiscal 1995 and fiscal 1994 (thousands of dollars except as noted): <TABLE> <CAPTION> 4Q95 3Q95 2Q95 1Q95 4Q94 3Q94 2Q94 1Q94 ====================================================================================================================== <S> <C> <C> <C> <C> <C> <C> <C> <C> Net sales 257,194 246,301 230,046 208,005 203,301 197,058 192,027 181,088 - ---------------------------------------------------------------------------------------------------------------------- Cost of sales 126,591 121,183 113,652 103,145 101,457 99,890 98,508 94,593 Gross margin 130,603 125,118 116,394 104,860 101,844 97,168 93,519 86,495 % of sales 51% 51% 51% 50% 50% 49% 49% 48% - ---------------------------------------------------------------------------------------------------------------------- Operating expenses: Research and development 35,714 35,035 33,266 30,250 29,048 27,205 26,360 24,256 Selling, marketing, general and administrative 48,306 47,374 45,592 43,671 43,807 43,333 42,204 40,997 - ---------------------------------------------------------------------------------------------------------------------- Total operating expenses 84,020 82,409 78,858 73,921 72,855 70,538 68,564 65,253 % of sales 33% 33% 34% 36% 36% 36% 36% 36% - ---------------------------------------------------------------------------------------------------------------------- Operating income 46,583 42,709 37,536 30,939 28,989 26,630 24,955 21,242 % of sales 18% 17% 16% 15% 14% 14% 13% 12% - ---------------------------------------------------------------------------------------------------------------------- Nonoperating expenses (income): Interest expense 959 938 1,022 1,282 1,694 1,796 1,829 1,830 Interest income (2,200) (1,721) (1,991) (2,191) (2,106) (1,535) (931) (593) Other 208 562 732 732 884 644 828 565 - ---------------------------------------------------------------------------------------------------------------------- Total nonoperating expenses (income) (1,033) (221) (237) (177) 472 905 1,726 1,802 - ---------------------------------------------------------------------------------------------------------------------- Income before income taxes 47,616 42,930 37,773 31,116 28,517 25,725 23,229 19,440 % of sales 19% 17% 16% 15% 14% 13% 12% 11% - ---------------------------------------------------------------------------------------------------------------------- Provision for income taxes 12,482 11,149 9,066 7,468 6,844 6,046 5,345 4,180 - ---------------------------------------------------------------------------------------------------------------------- Net income 35,134 31,781 28,707 23,648 21,673 19,679 17,884 15,260 % of sales 14% 13% 12% 11% 11% 10% 9% 8% Per share .29 .27 .24 .20 .19 .17 .15 .13 - ---------------------------------------------------------------------------------------------------------------------- Shares used to compute earnings per share (in thousands) 120,365 119,777 118,368 117,647 117,113 116,228 115,607 114,683 - ---------------------------------------------------------------------------------------------------------------------- </TABLE> 47
49 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The response to this item is contained in part under the caption "EXECUTIVE OFFICERS OF THE COMPANY" in Part I hereof, and the remainder is contained in the Company's Proxy Statement for the Annual Meeting of Stockholders to be held on March 12, 1996 (the "1996 Proxy Statement") under the caption "Election of Directors" and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The response to this item is contained in the Company's 1996 Proxy Statement under the captions "Directors' Compensation," "Executive Compensation," "Severance and Other Agreements," "Approval of Amendment to 1988 Stock Option Plan" and "Approval of Amendment to 1991 Restricted Stock Plan," and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The response to this item is contained in the Company's 1996 Proxy Statement under the caption "Security Ownership of Certain Beneficial Owners and Management" and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The response to this item is contained in the Company's 1996 Proxy Statement under the caption "Transactions with Directors," and is incorporated herein by reference. 48
50 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS The following consolidated financial statements are included in Item 8: - Consolidated Statements of Income for the years ended October 28, 1995, October 29, 1994 and October 30, 1993 - Consolidated Balance Sheets as of October 28, 1995, October 29, 1994 and October 30, 1993 - Consolidated Statements of Stockholders' Equity for the years ended October 28, 1995, October 29, 1994 and October 30, 1993 - Consolidated Statements of Cash Flows for the years ended October 28, 1995, October 29, 1994 and October 30, 1993 (a) 2. FINANCIAL STATEMENT SCHEDULES The following consolidated financial statement schedules are included in Item 14(d): Schedule II - Valuation and Qualifying Accounts All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the notes thereto. (a) 3. LISTING OF EXHIBITS <TABLE> <CAPTION> EXHIBIT NO. DESCRIPTION ------- ----------- <S> <C> <C> 3-1 Restated Articles of Organization of Analog Devices, Inc., as amended, filed as an exhibit to the Company's Form 10-Q for the fiscal quarter ended April 29, 1995 and incorporated herein by reference. 3-2 By-laws of Analog Devices, Inc. as amended, filed as an exhibit to the Company's Form 10-K for the fiscal year ended October 31, 1992 and incorporated herein by reference. 4-1 Rights Agreement, as amended, between Analog Devices, Inc. and The First National Bank of Boston, as Rights Agent, filed as an exhibit to a Form 8 filed on June 27, 1989 amending the Registration Statement on Form 8-A relating to Common Stock Purchase Rights, and incorporated herein by reference. 4-2 Indenture dated as of March 1, 1993 between Analog Devices, Inc. and The First National Bank of Boston, filed as an exhibit to the Company's Form 10-K for the fiscal year ended October 29, 1994 and incorporated herein by reference. 4-3 Indenture dated as of December 18, 1995 between Analog Devices, Inc. and State Street Bank and Trust Company, as Trustee, filed herewith. * 4-4 Analog Devices, Inc. Deferred Compensation Plan, filed as an exhibit to a Form S-8 filed on December 8, 1995 and incorporated herein by reference. * 10-1 Bonus Plan of Analog Devices, Inc., filed as an exhibit to the Company's Form 10-K for the fiscal year ended October 29, 1994 and incorporated herein by reference. </TABLE> 49
51 <TABLE> <CAPTION> EXHIBIT NO. DESCRIPTION ------- ----------- <S> <C> <C> * 10-2 1978 Restricted Stock Plan of Analog Devices, Inc., as amended, filed as an exhibit to the Company's Form 10-K for the fiscal year ended November 3, 1990 and incorporated herein by reference. * 10-3 1991 Restricted Stock Plan of Analog Devices, Inc., filed as an exhibit to the Company's Form 10-K for the fiscal year ended November 2, 1991 and incorporated herein by reference. * 10-4 1980 Stock Option Plan of Analog Devices, Inc., as amended, filed as an exhibit to the Company's Form 10-K for the fiscal year ended October 29, 1988 and incorporated herein by reference. * 10-5 1988 Stock Option Plan of Analog Devices, Inc., as amended, filed as an exhibit to the Company's Form 10-K for the fiscal year ended October 31, 1992 and incorporated herein by reference. * 10-6 1989 Director Stock Option Plan of Analog Devices, Inc., as amended, filed as an exhibit to the Company's Form 10-K for the fiscal year ended November 2, 1991 and incorporated herein by reference. * 10-7 1992 Director Option Plan of Analog Devices, Inc., filed as an exhibit to the Company's Form 10-K for the fiscal year ended October 31, 1992 and incorporated herein by reference. * 10-8 1994 Director Stock Option Plan of Analog Devices, Inc., filed as an exhibit to the Company's Form 10-K for the fiscal year ended October 29, 1994 and incorporated herein by reference. 10-9 Lease agreement dated February 13, 1970 between Analog Devices, Inc. and the trustees of Campanelli Investment Trust, relating to the premises at 30 Perwal Street, Westwood, Massachusetts, filed as an exhibit to the Company's Form 10-K for the fiscal year ended October 29, 1994 and incorporated herein by reference. 10-10 Amended and restated lease agreement dated May 1, 1992 between Analog Devices, Inc. and the trustees of Everett Street Trust relating to the premises at 3 Technology Way, Norwood, Massachusetts, filed as an exhibit to the Company's Form 10-K for the fiscal year ended October 31, 1992 and incorporated herein by reference. 10-11 Guaranty dated as of May 1, 1994 between Analog Devices, Inc. and Metropolitan Life Insurance Company relating to the premises at 3 Technology Way, Norwood, Massachusetts, filed as an exhibit to the Company's Form 10-Q for the fiscal quarter ended April 30, 1994 and incorporated herein by reference. 10-12 Letter Agreement dated as of May 18, 1994 between Analog Devices, Inc. and Metropolitan Life Insurance Company relating to the premises at 3 Technology Way, Norwood, Massachusetts, filed as an exhibit to the Company's Form 10-Q for the fiscal quarter ended April 30, 1994 and incorporated herein by reference. 10-13 Reimbursement Agreement dated May 18, 1992 between Analog Devices, Inc. and the trustees of Everett Street Trust, filed as an exhibit to the Company's Form 10-K for the fiscal year ended October 31, 1992 and incorporated herein by reference. 10-14 Lease agreement dated August 8, 1990 between Precision Monolithics, Inc. and Bourns, Inc. relating to the premises at 1525 Comstock Road, Santa Clara, California, filed as an exhibit to the Company's Form 10-K for the fiscal year ended November 3, 1990 and incorporated herein by reference. 10-15 Lease agreement dated August 8, 1990, as amended, between Precision Monolithics, Inc. and Bourns, Inc. relating to the premises at 1500 Space Park Drive, Santa Clara, California, filed as an exhibit to the Company's Form 10-K for the fiscal year ended November 3, 1990 and incorporated herein by reference. </TABLE> 50
52 <TABLE> <CAPTION> EXHIBIT NO. DESCRIPTION ------- ----------- <S> <C> 10-16 Credit Agreement dated as of March 12, 1993 among Analog Devices, Inc. and Morgan Guaranty Trust Company of New York, Bank of America National Trust and Savings Association, Continental Bank, N.A., The First National Bank of Boston and Morgan Guaranty Trust Company of New York, as Agent, filed as an exhibit to the Company's Form 10-Q for the fiscal quarter ended May 1, 1993 and incorporated herein by reference. 10-17 Amendment No. 1 dated as of May 18, 1993 to the Company's Credit Agreement dated March 12, 1993, filed as an exhibit to the Company's Form 10-Q for the fiscal quarter ended July 31, 1993 and incorporated herein by reference. 10-18 Amendment No. 2 dated as of September 8, 1994 to the Company's Credit Agreement dated March 12, 1993, filed as an exhibit to the Company's Form 10-K for the fiscal year ended October 29, 1994 and incorporated herein by reference. 10-19 Term loan agreement dated as of November 12, 1991 between Analog Devices, Inc. and The First National Bank of Boston, filed as an exhibit to the Company's Form 10-K for the fiscal year ended November 2, 1991 and incorporated herein by reference. * 10-20 Form of Employee Retention Agreement, as amended, filed as an exhibit to the Company's Form 10-K for the fiscal year ended October 31, 1992 and incorporated herein by reference. * 10-21 Employee Change in Control Severance Policy of Analog Devices, Inc., as amended, filed as an exhibit to the Company's 10-K for the fiscal year ended October 30, 1993 and incorporated herein by reference. * 10-22 Senior Management Change in Control Severance Policy of Analog Devices, Inc., as amended, filed as an exhibit to the Company's 10-K for the fiscal year ended October 30, 1993 and incorporated herein by reference. 10-23 Warrant Agreement dated as of August 8, 1990 between Analog Devices, Inc. and Bourns, Inc., filed as an exhibit to the Company's Form 10-K for the fiscal year ended November 3, 1990 and incorporated herein by reference. * 10-24 Description of Consulting Agreement between Analog Devices, Inc. and John L. Doyle, filed as an exhibit to the Company's Form 10-K for the fiscal year ended November 2, 1991 and incorporated herein by reference. * 10-25 Letter agreement between Analog Devices, Inc. and Jerald G. Fishman dated December 15, 1994 relating to acceleration of stock options and restricted stock awards upon termination of employment, filed as an exhibit to the Company's Form 10-K for the fiscal year ended October 29, 1994 and incorporated herein by reference. ** 10-26 Option Agreement dated as of May 16, 1995 between Analog Devices B.V. and Taiwan Semiconductor Manufacturing Company, Ltd., filed as an exhibit to the Company's Form 10-Q for the fiscal quarter ended July 29, 1995 and incorporated herein by reference. ** 10-27 Wafer Production Agreement dated as of May 16, 1995 between Taiwan Semiconductor Manufacturing Company, Ltd. and Analog Devices B.V., filed as an exhibit to the Company's Form 10-Q for the fiscal quarter ended July 29, 1995 and incorporated herein by reference 10-28 Lease Agreement dated June 16, 1995 between Analog Devices, Inc. and Ferrari Brothers, relating to the premises at 610 Weddell Drive, Sunnyvale, California, filed herewith. </TABLE> 51
53 <TABLE> <CAPTION> EXHIBIT NO. DESCRIPTION ------- ----------- <S> <C> 21 Subsidiaries of the Company, filed herewith. 23 Consent of Ernst & Young, filed herewith. 27 Financial Data Schedule </TABLE> * Management contracts and compensatory plan or arrangements required to be filed as an Exhibit pursuant to Item 14(c) of Form 10-K. ** Confidential treatment has been granted as to certain portions of these Exhibits. (b) REPORTS ON FORM 8-K The Company filed no reports on Form 8-K with the Securities and Exchange Commission during the fiscal quarter ended October 28, 1995. 52
54 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ANALOG DEVICES, INC. (Registrant) By: /s/ Ray Stata By: /s/ Joseph E. McDonough ----------------------------- ------------------------------- Ray Stata Joseph E. McDonough Chairman of the Board and Vice President-Finance Chief Executive Officer and Chief Financial Officer (Principal Executive Officer) (Principal Financial and Accounting Officer) Date: January 25, 1996 Date: January 25, 1996 ---------------------------- ------------------------------ Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. <TABLE> <CAPTION> NAME TITLE DATE ---- ----- ---- <S> <C> <C> /s/ Ray Stata Chairman of the Board and January 25, 1996 - -------------------------- Chief Executive Officer ---------------- Ray Stata /s/ Jerald G. Fishman President, January 25, 1996 - -------------------------- Chief Operating Officer ---------------- Jerald G. Fishman and Director /s/ John L. Doyle Director January 25, 1996 - -------------------------- ---------------- John L. Doyle /s/ Samuel H. Fuller Director January 25, 1996 - -------------------------- ---------------- Samuel H. Fuller /s/ Philip L. Lowe Director January 25, 1996 - -------------------------- ---------------- Philip L. Lowe /s/ Gordon C. McKeague Director January 25, 1996 - -------------------------- ---------------- Gordon C. McKeague /s/ Joel Moses Director January 25, 1996 - -------------------------- ---------------- Joel Moses /s/ Lester C. Thurow Director January 25, 1996 - -------------------------- ---------------- Lester C. Thurow </TABLE> 53
55 ANALOG DEVICES, INC. ANNUAL REPORT ON FORM 10-K YEAR ENDED OCTOBER 28, 1995 ITEM 14(D) FINANCIAL STATEMENT SCHEDULE 54
56 ANALOG DEVICES, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED OCTOBER 28, 1995, OCTOBER 29, 1994 AND OCTOBER 30, 1993 (THOUSANDS) <TABLE> <CAPTION> BALANCE AT ADDITION BALANCE AT BEGINNING OF CHARGED TO END OF DESCRIPTION PERIOD EXPENSE DEDUCTIONS PERIOD - ----------- ------ ------- ---------- ------ <S> <C> <C> <C> <C> INVENTORY RESERVE: Year ended October 30, 1993 $ 2,814 $ - $ 1,017 $ 1,797 ======== ======== ======== ========= Year ended October 29, 1994 $ 1,797 $ 1,281 $ - $ 3,078 ======== ======== ======== ========= Year ended October 28, 1995 $ 3,078 $ 1,399 $ - $ 4,477 ======== ======== ======== ========= ALLOWANCE FOR DOUBTFUL ACCOUNTS: Year ended October 30, 1993 $ 2,138 $ 466 $ 209 $ 2,395 ======== ======== ======== ========= Year ended October 29, 1994 $ 2,395 $ 4,477 $ 469 $ 6,403 ======== ======== ======== ========= Year ended October 28, 1995 $ 6,403 $ 435 $ 2,399 $ 4,439 ======== ======== ======== ========= </TABLE> 55