Market Overview

Analog Devices Reports Year-over-Year Revenue Growth at the High-End of Guidance, Strong Profit Conversion, and Substantial Debt Reduction in First Quarter 2018 Earnings

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ADI Guides to Double-Digit Year-over-Year Revenue Increase in Second
Quarter

Analog
Devices, Inc.
(Nasdaq: ADI),
today announced financial results for its 14-week first quarter of
fiscal year 2018, which ended February 3, 2018.

"We continue to see broad-based momentum across our B2B markets," said
Vincent Roche, President and CEO. "In our first quarter, revenue from
these markets once again increased double-digits year-over-year, led by
our industrial and wireless communications sectors."

"Looking ahead to the second quarter of fiscal 2018, we see continued
strength in our business and are expecting revenue to be in the range of
$1.43 billion to $1.51 billion; sequentially up on a 13-week basis and a
double-digit increase compared to the year ago quarter."

"We anticipate a continuation of market share gains thanks to our
comprehensive portfolio and tight alignment with our customers on the
innovations that will have the greatest impact on their businesses."

ADI also announced that the Board of Directors has declared a quarterly
cash dividend of $0.48 per outstanding share of common stock,
representing an annual dividend per share of $1.92. The dividend will be
paid on March 20, 2018 to all shareholders of record at the close of
business on March 9, 2018.

Supplemental schedules relating to our first quarter fiscal 2018
financial results are also available on our investor site at
investor.analog.com.

Results for the First Quarter of Fiscal Year
2018

  • Revenue totaled $1.52 billion, down 1% sequentially and up 54%
    year-over-year
  • GAAP gross margin of 68.2% of revenue; Non-GAAP gross margin of 71.0%
    of revenue
  • GAAP operating margin of 26.7% of revenue; Non-GAAP operating margin
    of 41.7% of revenue
  • GAAP diluted EPS of $0.71; Non-GAAP diluted EPS of $1.42

Please refer to the schedules provided for a summary of revenue and
earnings, selected balance sheet information, and the cash flow
statement for the first quarter of fiscal 2018, as well as the
immediately prior and year-ago quarters and year. Additional information
on revenue by end market is provided on Schedule D.

Outlook for the Second Quarter of Fiscal Year
2018

The following statements are based on current
expectations, and as indicated, are presented on a GAAP and non-GAAP
basis. These statements are forward-looking and actual results may
differ materially, as a result of, among other things, the important
factors discussed at the end of this release. These statements supersede
all prior statements regarding our business outlook set forth in prior
ADI news releases, and ADI disclaims any obligation to update these
forward-looking statements.

                   
      GAAP     Non-GAAP Adjustments     Non-GAAP
Revenue     $1.43B to $1.51B     -     $1.43B to $1.51B
Gross Margin     68.0% to 68.5%     $44 million (1)     71.0% to 71.5%
Operating Expenses     $555 million to $565 million     $125 million (2)     $430 million to $440 million
Operating Margin     Approx. 29% to 31%     $169 million (1), (2)     Approx. 41.0% to 42.5%
Interest & Other Expense     Approx. $60 million     -     Approx. $60 million
Tax Rate     Approx. 7% to 9%     $6 million to $10 million (3)     Approx. 6% to 8%
Earnings per Share*     $0.87 to $1.01     $0.43 (4)     $1.30 to $1.44

* The sum of the individual per share amounts may not equal the total
due to rounding.

(1) Excludes $44 million of costs comprised of the following:

  • $35 million of recurring amortization of purchased intangible assets
  • $8 million of recurring depreciation of step up value on purchased
    fixed assets
  • $1 million of recurring fair value adjustment associated with the
    replacement of share-based awards in ADI's acquisition of Linear
    Technology

(2) Excludes $125 million of costs comprised of the following:

  • $107 million of recurring amortization of purchased intangible assets
  • $8 million of recurring fair value adjustment associated with the
    replacement of share-based awards in ADI's acquisition of Linear
    Technology
  • $10 million of transaction and integration related costs associated
    with ADI's acquisition of Linear Technology

(3) Excludes the tax effects of the reconciling adjustments noted in the
two footnotes above.

(4) Includes $0.43, which represents the net impact of the non-GAAP
adjustments noted above on a per share basis consisting of:

  • acquisition-related expenses including amortization of purchased
    intangible assets, depreciation of step up value on purchased fixed
    assets, and the fair value adjustment associated with the replacement
    of share-based awards in ADI's acquisition of Linear Technology ($0.42)
  • acquisition-related transaction costs ($0.03)
  • the effect on income tax of the prior items (-$0.02)

Conference Call Scheduled for Today, Wednesday, February 28, 2018 at
10:00 am ET

ADI will host a conference call to discuss first
quarter fiscal 2018 results and short-term outlook today, beginning at
10:00 am ET. Investors may join via webcast, accessible at investor.analog.com,
or by telephone (call 706-634-7193 ten minutes before the call begins
and provide the password "ADI").

A replay will be available two hours after the completion of the call.
The replay may be accessed for up to two weeks by dialing 855-859-2056
(replay only) and providing the conference ID: 5777769, or by visiting investor.analog.com.

Non-GAAP Financial Information
This
release includes non-GAAP financial measures that are not in accordance
with, nor an alternative to, generally accepted accounting principles
and may be different from non-GAAP measures used by other companies. In
addition, these non-GAAP measures are not based on any comprehensive set
of accounting rules or principles.

Schedules E and F of this press release provide the reconciliation of
the Company's historical non-GAAP measures to their most comparable GAAP
measures.

Management uses non-GAAP measures internally to evaluate the Company's
operating performance from continuing operations against past periods
and to budget and allocate resources in future periods. These non-GAAP
measures also assist management in evaluating the Company's core
business and trends across different reporting periods on a consistent
basis. Management also uses these non-GAAP measures as the primary
performance measurement when communicating with analysts and investors
regarding the Company's earnings results and outlook and believes that
the presentation of these non-GAAP measures is useful to investors
because it provides investors with the operating results that management
uses to manage the Company and enables investors and analysts to
evaluate the Company's core business. Management also believes that the
non-GAAP liquidity measure free cash flow is useful both internally and
to investors because it provides information about the amount of cash
generated after capital expenditures that is then available to repay
debt obligations, make investments and fund acquisitions, and for
certain other activities.

The following item is excluded from our non-GAAP gross margin,
non-GAAP operating expenses, non-GAAP operating income, non-GAAP
operating margin, and non-GAAP diluted earnings per share:

Acquisition-Related Expenses: Expenses incurred as a result of
current and prior period acquisitions and primarily include expenses
associated with the fair value adjustments to inventory, property, plant
and equipment and amortization of acquisition related intangibles, which
include acquired intangibles such as purchased technology and customer
relationships. Expenses also include severance payments, equity award
accelerations and the fair value adjustment associated with the
replacement of share-based awards related to the Linear Technology
acquisition. We excluded these costs from our non-GAAP measures because
they relate to specific transactions and are not reflective of our
ongoing financial performance.

The following items are excluded from our non-GAAP operating
expenses, non-GAAP operating income, non-GAAP operating margin, and
non-GAAP diluted earnings per share:

Acquisition-Related Transaction Costs: Costs directly related to
the Linear Technology acquisition, including legal, accounting and other
professional fees, as well as integration-related costs. We excluded
these costs from our non-GAAP measures because they relate to a specific
transaction and are not reflective of our ongoing financial performance.

Restructuring-Related Expense: These expenses are incurred in
connection with facility closures, consolidation of manufacturing
facilities, severance, and other cost reduction efforts. We excluded
these expenses from our non-GAAP measures because apart from ongoing
expense savings as a result of such items, these expenses and the
related tax effects have no direct correlation to the operation of our
business in the future.

The following item is excluded from our non-GAAP other expense and
non-GAAP diluted earnings per share:

Amortization of Deferred Financing Costs: In the third quarter of
fiscal 2016, in connection with the Linear Technology acquisition, the
Company obtained bridge financing commitments and incurred financing
fees which were to be amortized into interest expense over the term of
the bridge financing commitments. In the first quarter of fiscal 2017,
the Company replaced a portion of the bridge financing commitments with
proceeds from the issuance of $2.1 billion of senior unsecured notes. As
a result, the Company accelerated $7.2 million of the unamortized bridge
financing commitment fees into interest expense. We excluded these costs
from our non-GAAP measures because they are not reflective of our
ongoing financial performance.

The following items are excluded from our non-GAAP provision for
income taxes and non-GAAP diluted earnings per share:

Tax-Related Items: Tax adjustments associated with the non-GAAP
items discussed above. In the fourth quarter of 2017, the Company
recorded a $10 million tax expense associated with a prior period tax
liability. In the first quarter of fiscal 2018, in relation to the
provisional impact of the Tax Cuts and Jobs Act of 2017, the Company
recorded a provisional discrete tax charge of $687 million related to
the mandatory deemed repatriation tax on foreign earnings and recorded a
provisional discrete tax benefit of $640 million from remeasuring its US
tax liabilities at the lower 21% statutory tax rate. We excluded these
tax-related items from our non-GAAP measures because they are not
associated with the tax expense on our current operating results.

These non-GAAP measures have material limitations in that they do not
reflect all of the amounts associated with the Company's results of
operations as determined in accordance with GAAP and should not be
considered in isolation from, or as a substitute for, the Company's
financial results presented in accordance with GAAP. In addition, the
Company's non-GAAP measures may not be comparable to the non-GAAP
measures reported by other companies. The Company's use of non-GAAP
measures, and the underlying methodology when including or excluding
certain items, is not necessarily an indication of the results of
operations that may be expected in the future, or that the Company will
not, in fact, record such items in future periods.

About Analog Devices
Analog Devices (NASDAQ:ADI) is the
leading global high-performance analog technology company dedicated to
solving the toughest engineering challenges. We enable our customers to
interpret the world around us by intelligently bridging the physical and
digital with unmatched technologies that sense, measure, power, connect
and interpret. Visit http://www.analog.com.

Forward Looking Statements
This press release contains
forward-looking statements, which address a variety of subjects
including, for example, our statements regarding expected revenue,
earnings per share, gross margin, operating expenses, interest and other
expense, tax rate, and other financial results, expected market share
gains, operating leverage, production and inventory levels, expected
market trends, and
expected customer demand and order rates for
our products and expected benefits and synergies of the acquisition of
Linear Technology Corporation ("Linear Technology"), including expected
growth rates of the combined companies, expected product offerings,
product development, marketing position and technical advances resulting
from the transaction. Statements that are not historical facts,
including statements about our beliefs, plans and expectations, are
forward-looking statements. Such statements are based on our current
expectations and are subject to a number of factors and uncertainties,
which could cause actual results to differ materially from those
described in the forward-looking statements. The following important
factors and uncertainties, among others, could cause actual results to
differ materially from those described in these forward-looking
statements: any faltering in global economic conditions or the stability
of credit and financial markets, erosion of consumer confidence and
declines in customer spending, unavailability of raw materials,
services, supplies or manufacturing capacity, changes in geographic,
product or customer mix; changes in our estimates of our expected tax
rate based on current tax law, including current interpretations of the
Tax Cuts and Jobs Act of 2017; higher than expected or unexpected costs
associated with or relating to the acquisition of Linear Technology and
the integration of the businesses; the risk that expected benefits,
synergies and growth prospects of the acquisition may not be fully
achieved in a timely manner, or at all; the risk that Linear
Technology's business may not be successfully integrated with Analog
Devices'; the risk that we will be unable to retain and hire key
personnel; and the risk that disruption resulting from the acquisition
may adversely affect our
business and relationships with our
customers, suppliers or employees. For additional information about
factors that could cause actual results to differ materially from those
described in the forward-looking statements, please refer to our filings
with the Securities and Exchange Commission ("SEC"), including the risk
factors contained in our most recent Quarterly Report on Form 10-Q and
Annual Report on Form 10-K. Forward-looking statements represent
management's current expectations and are inherently uncertain. Except
as required by law, we do not undertake any obligation to update
forward-looking statements made by us to reflect subsequent events or
circumstances.

Analog Devices and the Analog Devices logo are registered trademarks or
trademarks of Analog Devices, Inc. All other trademarks mentioned in
this document are the property of their respective owners.

(ADI-WEB)

Analog Devices, First Quarter, Fiscal 2018
 

Schedule A

Revenue and Earnings Summary (Unaudited)
(In thousands, except per-share amounts)
   
Three Months Ended
1Q 18     4Q 17     1Q 17
      Feb. 3,
2018
    Oct. 28,
2017
    Jan. 28,
2017
Revenue $ 1,518,624 $ 1,541,170 $ 984,449
Year-to-year change 54.3 % 53.6 % 27.9 %
Quarter-to-quarter change (1.5 )% 7.5 % (1.9 )%
Cost of sales (1)     483,434       535,145       335,945  
Gross margin 1,035,190 1,006,025 648,504
Gross margin percentage 68.2 % 65.3 % 65.9 %
Year-to-year change (basis points) 230 (110 ) 390
Quarter-to-quarter change (basis points)     290       1,180       (50 )
Operating expenses:
R&D (1) 288,597 273,746 183,954
Selling, marketing and G&A (1) 176,908 185,721 130,659
Amortization of intangibles 107,019 98,348 18,160
Special charges     57,318             49,463  
Total operating expenses 629,842 557,815 382,236
Total operating expenses percentage 41.5 % 36.2 % 38.8 %
Year-to-year change (basis points) 270 530 210
Quarter-to-quarter change (basis points)     530       (370 )     790  
Operating income 405,348 448,210 266,268
Operating income percentage 26.7 % 29.1 % 27.0 %
Year-to-year change (basis points) (30 ) (650 ) 170
Quarter-to-quarter change (basis points)     (240 )     1,550       (860 )
Other expense     66,494       66,546       32,959  
Income before income tax 338,854 381,664 233,309
Provision for income taxes 70,682 34,014 16,180
Tax rate percentage     20.9 %     8.9 %     6.9 %
Net income (2)     $ 268,172       $ 347,650       $ 217,129  
 
Shares used for EPS - basic 369,093 368,043 308,786
Shares used for EPS - diluted 374,189 372,053 313,076
 
Earnings per common share - basic $ 0.72 $ 0.94 $ 0.70
Earnings per common share - diluted $ 0.71 $ 0.93 $ 0.69
 
Dividends paid per share     $ 0.45       $ 0.45       $ 0.42  
 
(1) Includes stock-based compensation expense as follows:
Cost of sales $ 4,221 $ 3,684 $ 1,944
R&D $ 19,728 $ 16,546 $ 7,021
Selling, marketing and G&A $ 13,953 $ 12,119 $ 7,564
(2) Under the two-class method, earnings per share is calculated
using net earnings allocable to common shares, which is derived by
reducing net income by the income allocable to participating
securities. Net income allocable to common shares used in the basic
and diluted earnings per share calculation was $266,929 and $345,886
for the three months ended February 3, 2018 and October 28, 2017.
There was no net income allocated to participating securities in the
three months ended January 28, 2017.
 

Analog Devices, First Quarter, Fiscal 2018
 

Schedule B

Selected Balance Sheet Information (Unaudited)
(In thousands)

 

    1Q 18     4Q 17     1Q 17
      Feb. 3,
2018
    Oct. 28,
2017
    Jan. 28,
2017
Cash & short-term investments $ 827,550 $ 1,047,838 $ 6,317,066
Accounts receivable, net 709,761 688,953 472,511
Inventories (1) 559,720 550,816 365,586
Other current assets     80,715       63,731       78,570
Total current assets 2,177,746 2,351,338 7,233,733
PP&E, net 1,115,417 1,107,304 628,924
Investments 65,093 57,410 48,690
Goodwill 12,224,141 12,217,455 1,677,399
Intangible assets, net 5,182,355 5,319,425 529,516
Other     88,563       88,362       85,109
Total assets     $ 20,853,315       $ 21,141,294       $ 10,203,371
 
Deferred income on shipments to distributors, net $ 529,532 $ 473,972 $ 356,666
Other current liabilities 657,016 822,360 454,960
Debt, current 50,000 300,000
Long-term debt 7,384,856 7,551,084 3,805,400
Deferred income taxes 981,866 1,674,683 103,244
Other non-current liabilities (2) 902,266 157,655 176,670
Shareholders' equity     10,347,779       10,161,540       5,306,431
Total liabilities & equity     $ 20,853,315       $ 21,141,294       $ 10,203,371

(1) Includes $5,270, $5,373, and $2,553 related to stock-based
compensation in 1Q18, 4Q17, and 1Q17, respectively.
(2) 1Q18
includes $691 million related to the one-time transition tax
related to the Tax Cuts and Jobs Act of 2017.

 

Analog Devices, First Quarter, Fiscal 2018
 

Schedule C

Cash Flow Statement (Unaudited)
(In thousands)
   
Three Months Ended
1Q 18     4Q 17     1Q 17
Feb. 3,
2018
    Oct. 28,
2017
    Jan. 28,
2017
Cash flows from operating activities:
Net Income $ 268,172 $ 347,650 $ 217,129
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation 56,415 56,298 34,379
Amortization of intangibles 142,050 133,438 19,947
Stock-based compensation expense 37,902 32,349 16,529
Cost of goods sold for inventory acquired 42,040
Other non-cash activity 6,762 7,748 13,071
Deferred income taxes (691,496 ) (62,344 ) (7,055 )
Changes in operating assets and liabilities     568,883       150,173       28,594  
Total adjustments     120,516       359,702       105,465  
Net cash provided by operating activities     388,688       707,352       322,594  
Percent of revenue     25.6 %     45.9 %     32.8 %
 
Cash flows from investing activities:
Purchases of short-term available-for-sale investments (326,908 )
Maturities of short-term available-for-sale investments 1 1,844,380
Sales of short-term available-for-sale investments 287,601
Additions to property, plant and equipment (63,222 ) (65,215 ) (28,337 )
Payments for acquisitions, net of cash acquired (1,036 )
Change in other assets     (1,278 )     (2,717 )     (5,946 )
Net cash (used for) provided by investing activities     (64,500 )     (67,931 )     1,769,754  
 
Cash flows from financing activities:
Proceeds from derivative instruments 3,904
Proceeds from debt 2,072,306
Debt repayments (420,000 ) (350,000 )
Payments for deferred financing fees (5,625 )
Dividend payments to shareholders (166,719 ) (166,857 ) (129,683 )
Repurchase of common stock (7,930 ) (10,598 ) (3,106 )
Proceeds from employee stock plans 37,812 28,058 34,432
Contingent consideration payment (1,764 )
Change in other financing activities     8,811       (517 )     2,221  
Net cash (used for) provided by financing activities     (548,026 )     (501,678 )     1,974,449  
Effect of exchange rate changes on cash     3,550       1,526       (666 )
 
Net (decrease) increase in cash and cash equivalents (220,288 ) 139,269 4,066,131
Cash and cash equivalents at beginning of period     1,047,838       908,569       921,132  
Cash and cash equivalents at end of period     $ 827,550       $ 1,047,838       $ 4,987,263  
 

Analog Devices, First Quarter, Fiscal 2018
 

Schedule D

Revenue Trends by End Market (Unaudited)

(In thousands)

 

The categorization of revenue by end market is determined using a
variety of data points including the technical characteristics of
the product, the "sold to" customer information, the "ship to"
customer information and the end customer product or application
into which our product will be incorporated. As data systems for
capturing and tracking this data evolve and improve, the
categorization of products by end market can vary over time. When
this occurs we reclassify revenue by end market for prior periods.
Such reclassifications typically do not materially change the
sizing of, or the underlying trends of results within, each end
market.

     
Three Months Ended
Feb. 3,
2018
    Oct. 28,
2017
    Jan. 28,
2017
Revenue     % *     Q/Q %     Y/Y % Revenue Revenue
Industrial $ 743,623     49%     4%     87% $ 715,146 $ 396,784
Automotive 252,170 17% 5% 76% 240,026 142,962
Consumer 238,506 16% (24)% (12)% 312,826 270,293
Communications 284,325   19% 4% 63% 273,172   174,410
Total Revenue $ 1,518,624   100% (1)% 54% $ 1,541,170   $ 984,449
____________
* The sum of the individual percentages does not equal the total due
to rounding.
 

Analog Devices, First Quarter, Fiscal 2018
 

Schedule E

Reconciliation of Non-GAAP to GAAP Revenue and Earnings Measures
(In thousands, except per-share amounts)
(Unaudited)
See "Non-GAAP Financial Information" in this press release for a
description of the items excluded from our non-GAAP measures.
     
Three Months Ended
1Q 18     4Q 17     1Q 17
Feb. 3,
2018
Oct. 28,
2017
Jan. 28,
2017
 
GAAP Gross Margin $ 1,035,190 $ 1,006,025 $ 648,504
Gross Margin Percentage 68.2 % 65.3 % 65.9 %
Acquisition-Related Expenses 43,776   85,974   2,178  
Non-GAAP Gross Margin $ 1,078,966   $ 1,091,999   $ 650,682  
Gross Margin Percentage 71.0 % 70.9 % 66.1 %
 
GAAP Operating Expenses $ 629,842 $ 557,815 $ 382,236
Percent of Revenue 41.5 % 36.2 % 38.8 %
Acquisition-Related Expenses (117,978 ) (107,736 ) (18,232 )
Acquisition-Related Transaction Costs (8,736 ) (15,108 ) (8,011 )
Restructuring-Related Expense (57,318 )   (49,463 )
Non-GAAP Operating Expenses $ 445,810   $ 434,971   $ 306,530  
Percent of Non-GAAP Revenue 29.4 % 28.2 % 31.1 %
 
GAAP Operating Income/Margin $ 405,348 $ 448,210 $ 266,268
Percent of Revenue 26.7 % 29.1 % 27.0 %
Acquisition-Related Expenses 161,754 193,710 20,410
Acquisition-Related Transaction Costs 8,736 15,108 8,011
Restructuring-Related Expense 57,318     49,463  
Non-GAAP Operating Income/Margin $ 633,156   $ 657,028   $ 344,152  
Percent of Non-GAAP Revenue 41.7 % 42.6 % 35.0 %
 
GAAP Other Expense (Income) $ 66,494 $ 66,546 $ 32,959
Percent of Revenue 4.4 % 4.3 % 3.3 %
Amortization of Deferred Financing Costs     (7,214 )
Non-GAAP Other Expense $ 66,494   $ 66,546   $ 25,745  
Percent of Non-GAAP Revenue 4.4 % 4.3 % 2.6 %
 
GAAP Provision for Income Taxes $ 70,682 $ 34,014 $ 16,180
Tax rate % 20.9 % 8.9 % 6.9 %
Income Tax on Non-Discrete Tax Items Above 11,981 28,619 9,452
Income Tax of Prior Period Tax Liabilities (10,148 )
Income Tax One-Time Transitional Tax (687,061 )
Income Tax on Deferred Tax Recalibration 639,698      
Non-GAAP Provision for Income Taxes $ 35,300   $ 52,485   $ 25,632  
Non-GAAP Tax rate % 6.2 % 8.9 % 8.1 %

GAAP Diluted EPS     $ 0.71     $ 0.93     $ 0.69
Acquisition-Related Expenses 0.43 0.52 0.07
Acquisition-Related Transaction Costs 0.02 0.04 0.03
Restructuring-Related Expense 0.15 0.16
Amortization of Deferred Financing Costs 0.02
Income Tax Effect of Above Items (0.03 ) (0.08 ) (0.03 )
Impact of Adjustments of Prior Period Tax Liabilities 0.03
Impact of Toll Tax 1.84
Impact of Deferred Tax Recalibration (1.71 )            
Non-GAAP Diluted EPS (1) $ 1.42       $ 1.45       $ 0.94  

(1) The sum of the individual per share amounts may not equal the
total due to rounding.

 
Analog Devices, First Quarter, Fiscal 2018
 

Schedule F

Reconciliation of Free Cash Flow to Net Cash Flows Provided by
Operating Activities
(Unaudited)
(In thousands)
     
Three Months Ended
1Q 18     4Q 17     1Q 17
Feb. 3,
2018
    Oct. 28,
2017
    Jan. 28,
2017
Net cash provided by operating activities $ 388,688 $ 707,352 $ 322,594
% of Revenue 25.6 % 45.9 % 32.8 %
Capital expenditures (63,222 )     (65,215 )     (28,337 )
Free cash flow $ 325,466       $ 642,137       $ 294,257  
% of Revenue 21.4 % 41.7 % 29.9 %

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