What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-19 compared with 2021-02-17 · 90 added, 58 removed, 158 unchanged (48% of the section changed)

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Impact of COVID-19 on our Business

The pandemic caused by the novel strain of the coronavirus (COVID-19) has resulted in government authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place orders and shutdowns.

These measures have impacted and likely will continue to impact our workforce and operations, the operations of our customers and those of our respective vendors and suppliers.

The pandemic caused by the novel strain of the coronavirus (COVID-19) and the numerous measures implemented by government authorities in response, have impacted and likely will continue to impact our workforce and operations, the operations of our customers and those of our respective vendors and suppliers.

We have significant operations worldwide, including in the United States, the Philippines, Ireland, Singapore, Malaysia, China and India.

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While we are confident that our strategy and long-term contingency planning have positioned us well to weather the current uncertainty, we cannot at this time fully quantify or forecast the impact of COVID-19 on our business.

The degree to which COVID-19 impacts our business, financial condition and results of operations will depend on future developments, which are highly uncertain, and we cannot provide assurance as to the duration and scope of the pandemic, its severity, the actions to contain the virus or treat its impact, or how quickly and to what extent normal economic and operating conditions can resume.

The full extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations will depend on future developments, which are highly uncertain such as the continued duration and severity of the pandemic, the actions to contain the virus or treat its impact, or how quickly and to what extent normal economic and operating conditions can resume.

Proposed Acquisition of Maxim Integrated Products, Inc.

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(Maxim), an independent manufacturer of innovative analog and mixed-signal products and technologies.

Under the terms of the Merger Agreement, Maxim stockholders will receive, for each outstanding share of Maxim common stock, 0.630 of a share of our common stock.

The estimated merger consideration is approximately $27.0 billion based on the closing price of our common stock on February 12, 2021.

Following the approval of Maxim stockholders and our shareholders, as well as the expiration of the waiting-period applicable to U.S.

regulatory approval, the transaction is subject to customary closing

conditions, including receipt of certain non-U.S.

Under the terms of the Merger Agreement, Maxim stockholders will receive, for each outstanding share of Maxim common stock, 0.630 of a share of our common stock at the closing.

The estimated merger consideration is approximately $25.0 billion based on the closing price of our common stock on May 14, 2021.

The value of the merger consideration will fluctuate based upon changes in the price of our common stock and the number of shares of Maxim common stock, restricted stock awards and restricted stock unit awards outstanding on the closing date.

The transaction is subject to customary closing conditions, including receipt of certain remaining non-U.S.

regulatory approvals.

To date, required regulatory approvals have been obtained in all jurisdictions with the exception of China.

The Merger Agreement includes termination rights for us and Maxim.

We may be required to pay Maxim a regulatory termination fee of $830.0 million in cash if the Merger Agreement is terminated in certain circumstances involving the failure to obtain required regulatory approvals.

On October 8, 2020, the required shareholder approvals relating to the Merger Agreement were obtained from both our shareholders and Maxim's shareholders.

See Note 13, Acquisitions , in the Notes to the Condensed Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information.

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Three Months Ended

January 30, 2021 February 1, 2020 $ Change % Change

May 1, 2021 May 2, 2020 $ Change % Change

Revenue $ 1,661,407 $ 1,317,060 $ 344,347 26 %

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Diluted EPS $ 1.14 $ 0.72 $ 0.42 58 %

Six Months Ended

May 1, 2021 May 2, 2020 $ Change % Change

Revenue $ 3,219,865 $ 2,620,625 $ 599,240 23 %

Gross margin % 67.8 % 64.7 %

Net income $ 811,424 $ 471,570 $ 339,854 72 %

Net income as a % of revenue 25.2 % 18.0 %

Diluted EPS $ 2.18 $ 1.27 $ 0.91 72 %

Revenue Trends by End Market

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Three Months Ended

January 30, 2021 February 1, 2020

May 1, 2021 May 2, 2020

Revenue* Y/Y% Revenue % of

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Total revenue $ 1,661,407 100 % 26 % $ 1,317,060 100 %

Six Months Ended

May 1, 2021 May 2, 2020

Revenue* Y/Y% Revenue % of

Industrial $ 1,828,140 57 % 30 % $ 1,405,224 54 %

Communications 557,786 17 % 8 % 517,872 20 %

Automotive 503,501 16 % 30 % 386,618 15 %

Consumer 330,438 10 % 6 % 310,911 12 %

Total revenue $ 3,219,865 100 % 23 % $ 2,620,625 100 %

* The sum of the individual percentages may not equal the total due to rounding.

Revenue increased in the three-month period ended January 30, 2021, as compared to the same period of the prior fiscal year, primarily as a result of higher demand for our products across all end markets.

Revenue increased in the three- and six-month periods ended May 1, 2021, as compared to the same periods of the prior fiscal year, primarily as a result of higher broad-based demand for our products sold into the Industrial and Automotive end markets, and to a lesser extent, sold into the Consumer end market.

Revenue in the Communications end market was relatively flat in the three-month period ended May 1, 2021 and increased in the six-month period ended May 1, 2021 due to the timing of infrastructure deployment cycles and the ramp up of these cycles in certain regions.

Revenue by Sales Channel

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Three Months Ended

January 30, 2021 February 1, 2020

May 1, 2021 May 2, 2020

Revenue % of Revenue* Revenue % of Revenue*

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Total revenue $ 1,661,407 100 % $ 1,317,060 100 %

Six Months Ended

May 1, 2021 May 2, 2020

Revenue % of Revenue* Revenue % of Revenue*

Distributors $ 2,039,314 63 % $ 1,497,949 57 %

Direct customers 1,136,011 35 % 1,077,382 41 %

Other 44,540 1 % 45,294 2 %

Total revenue $ 3,219,865 100 % $ 2,620,625 100 %

* The sum of the individual percentages may not equal the total due to rounding.

As indicated in the table above, the percentage of total revenue sold via each channel has remained relatively consistent in the periods presented, but can fluctuate from time to time based on end customer demand.

Three Months Ended

January 30, 2021 February 1, 2020 $ Change % Change

The percentage of total revenue sold via each channel can fluctuate from time to time based on end customer demand.

In the three- and six-month periods ended May 1, 2021, higher demand within our Industrial end market resulted in increased revenue through our distributor channel.

Three Months Ended Six Months Ended

May 1, 2021 May 2, 2020 $ Change % Change May 1, 2021 May 2, 2020 $ Change % Change

Gross margin $ 1,136,637 $ 846,674 $ 289,963 34 % 2,182,008 1,694,816 $ 487,192 29 %

Gross margin % 68.4 % 64.3 % 67.8% 64.7 %

Gross margin percentage increased by 200 basis points in the three-month period ended January 30, 2021, as compared to the same period of the prior fiscal year, primarily as a result of higher utilization of our factories due to increased customer demand.

Gross margin percentage increased by 410 and 310 basis points in the three- and six-month periods ended May 1, 2021, respectively, as compared to the same periods of the prior fiscal year, primarily as a result of higher utilization of our factories due to increased customer demand.

Research and Development (R&D)

Three Months Ended

January 30, 2021 February 1, 2020 $ Change % Change

Three Months Ended Six Months Ended

May 1, 2021 May 2, 2020 $ Change % Change May 1, 2021 May 2, 2020 $ Change % Change

R&D expenses $ 302,238 $ 252,413 $ 49,825 20 % $ 590,388 $ 509,486 $ 80,902 16 %

R&D expenses as a % of revenue 18 % 19 % 18 % 19 %

R&D expenses increased in the three-month period ended January 30, 2021, as compared to the same period of the prior fiscal year, primarily as a result of higher R&D employee-related variable compensation expense and salary and benefit expenses, partially offset by lower discretionary spending.

R&D expenses increased in the three- and six-month periods ended May 1, 2021, as compared to the same periods of the prior fiscal year, primarily as a result of higher R&D employee-related variable compensation expense and salary and benefit expenses.

In the six-month period ended May 1, 2021, those increases were partially offset by lower discretionary spending.

R&D expenses as a percentage of revenue will fluctuate from year-to-year depending on the amount of revenue and the success of new product development efforts, which we view as critical to our future growth.

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Selling, Marketing, General and Administrative (SMG&A)

Three Months Ended

January 30, 2021 February 1, 2020 $ Change % Change

Three Months Ended Six Months Ended

May 1, 2021 May 2, 2020 $ Change % Change May 1, 2021 May 2, 2020 $ Change % Change

SMG&A expenses $ 206,612 $ 141,775 $ 64,837 46 % $ 391,887 $ 341,055 $ 50,832 15 %

SMG&A expenses as a % of revenue 12 % 11 % 12 % 13 %

SMG&A expenses decreased in the three-month period ended January 30, 2021, as compared to the same period of the prior fiscal year, primarily as a result of a $40.0 million charitable contribution to the Analog Devices Foundation made in the first quarter of fiscal 2020, partially offset by $15.2 million in acquisition-related transaction costs in connection with the proposed acquisition of Maxim as well as higher variable compensation expense in the first quarter of the fiscal year ending October 30, 2021 (fiscal 2021).

SMG&A expenses increased in the three-month period ended May 1, 2021, as compared to the same period of the prior fiscal year, primarily as a result of higher variable compensation expense, $23.0 million in acquisition-related transaction costs in connection with the proposed acquisition of Maxim and higher salary and benefit expenses.

SMG&A expenses increased in the six-month period ended May 1, 2021, as compared to the same period of the prior fiscal year, primarily as a result of higher variable compensation expense, $38.2 million in acquisition-related transaction costs in connection with the proposed acquisition of Maxim and higher salary and benefit expenses, partially offset by a $40.0 million charitable contribution to the Analog Devices Foundation made in the first quarter of fiscal 2020.

Operating Income

Three Months Ended

January 30, 2021 February 1, 2020 $ Change % Change

Three Months Ended Six Months Ended

May 1, 2021 May 2, 2020 $ Change % Change May 1, 2021 May 2, 2020 $ Change % Change

Operating income $ 519,690 $ 344,020 $ 175,670 51 % $ 983,550 $ 617,448 $ 366,102 59 %

Operating income as a % of revenue 31.3 % 26.1 % 30.5 % 23.6 %

The year-over-year increase in operating income in the three-month period ended January 30, 2021 was primarily the result of an increase in revenue of $254.9 million, which drove a higher gross margin of $197.2 million, and decreases of $14.0 million in SMG&A expenses and $10.7 million in special charges, partially offset by a $31.1 million increase in R&D expenses, as described above under the headings Revenue Trends by End Market, Gross Margin, Selling, Marketing, General and Administrative (SMG&A) and Research and Development (R&D).

The year-over-year increase in operating income in the three-month period ended May 1, 2021 was primarily the result of an increase in revenue of $344.3 million, which drove an increase in gross margin of $290.0 million, partially offset by increases of $64.8 million in SMG&A expenses and $49.8 million in R&D expenses, as described above under the headings Revenue Trends by End Market, Gross Margin, Selling, Marketing, General and Administrative (SMG&A) and Research and Development (R&D).

The year-over-year increase in operating income in the six-month period ended May 1, 2021 was primarily the result of an increase in revenue of $599.2 million, which drove an increase in gross margin of $487.2 million, and a decrease in special charges of $11.7 million, partially offset by an $80.9 million increase in R&D expenses and a $50.8 million increase in SMG&A expenses, as described above under the headings Revenue Trends by End Market, Gross Margin, Research and Development (R&D) and Selling, Marketing, General and Administrative (SMG&A).

Nonoperating Expense (Income)

Three Months Ended

January 30, 2021 February 1, 2020 $ Change

Three Months Ended Six Months Ended

May 1, 2021 May 2, 2020 $ Change May 1, 2021 May 2, 2020 $ Change

Total nonoperating expense (income) $ 43,705 $ 48,959 $ (5,254) $ 70,947 $ 96,170 $ (25,223)

The year-over-year decrease in nonoperating expense in the three-month period ended January 30, 2021 was primarily the result of a $16.2 million gain recorded in other investments in the first quarter of fiscal 2021.

The year-over-year decrease in nonoperating expense in the three-month period ended May 1, 2021 was primarily the result of a decrease in interest expense related to our debt obligations.

The year-over-year decrease in nonoperating expense in the six-month period ended May 1, 2021 was primarily the result of a $16.2 million gain recorded in other investments in the first quarter of fiscal 2021 and a decrease in interest expense related to our debt obligations.

Provision for Income Taxes

Three Months Ended

January 30, 2021 February 1, 2020 $ Change

Three Months Ended Six Months Ended

May 1, 2021 May 2, 2020 $ Change May 1, 2021 May 2, 2020 $ Change

Provision for income taxes $ 53,080 $ 27,365 $ 25,715 $ 101,179 $ 49,708 $ 51,471

Effective income tax rate 11.2 % 9.3 % 11.1 % 9.5 %

The effective tax rates for the three-month periods ended January 30, 2021 and February 1, 2020 were below the U.S.

The effective tax rates for the three- and six-month periods ended May 1, 2021 and May 2, 2020 were below the U.S.

statutory tax rate of 21% due to lower statutory tax rates applicable to our operations in the foreign jurisdictions in which we earn income.

Our pretax income for the three-month periods ended January 30, 2021 and February 1, 2020 was primarily generated in Ireland at a tax rate of 12.5%.

Our pretax income for the three- and six-month periods ended May 1, 2021 and May 2, 2020 was primarily generated in Ireland at a tax rate of 12.5%.

See Note 11, Income Taxes , in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion.

Three Months Ended

January 30, 2021 February 1, 2020 $ Change % Change

Three Months Ended Six Months Ended

May 1, 2021 May 2, 2020 $ Change % Change May 1, 2021 May 2, 2020 $ Change % Change

Net Income $ 422,905 $ 267,696 $ 155,209 58 % $ 811,424 $ 471,570 $ 339,854 72 %

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Diluted EPS $ 1.14 $ 0.72 $ 2.18 $ 1.27

Net income increased in the three-month period ended January 30, 2021, as compared to the same period of the prior fiscal year, as a result of a $190.4 million increase in operating income and a $20.0 million decrease in nonoperating expense (income), partially offset by a $25.8 million increase in provision for income taxes.

Net income increased in the three-month period ended May 1, 2021, as compared to the same period of the prior fiscal year, as a result of a $175.7 million increase in operating income and a $5.3 million decrease in nonoperating expense, partially offset by a $25.7 million increase in provision for income taxes.

Net income increased in the six-month period ended May 1, 2021, as compared to the same period of the prior fiscal year, as a result of a $366.1 million increase in operating income and a $25.2 million decrease in nonoperating expense, partially offset by a $51.5 million increase in provision for income taxes.

Liquidity and Capital Resources

At January 30, 2021, our principal source of liquidity was $1,048.1 million of cash and cash equivalents, of which approximately $245.8 million was held in the United States and the balance of our cash and cash equivalents was held outside the United States in various foreign subsidiaries.

At May 1, 2021, our principal source of liquidity was $1,305.2 million of cash and cash equivalents, of which approximately $498.4 million was held in the United States and the balance of our cash and cash equivalents was held outside the United States in various foreign subsidiaries.

We manage our worldwide cash requirements by, among other things, reviewing available funds held by our foreign subsidiaries and the cost effectiveness by which those funds can be accessed in the United States.

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We believe that our existing sources of liquidity and cash expected to be generated from future operations, together with existing and anticipated available long-term financing, will be sufficient to fund operations, capital expenditures, research and development efforts, transaction costs associated with our proposed merger with Maxim and dividend payments (if any) in the immediate future and for at least the next twelve months.

Three Months Ended

January 30, 2021 February 1, 2020

Six Months Ended

May 1, 2021 May 2, 2020

Net cash provided by operating activities $ 1,164,303 $ 778,689

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Net cash used for financing activities $ (783,408) $ (525,282)

The following changes contributed to the net change in cash and cash equivalents in the three-month period ended January 30, 2021 as compared to the same period in fiscal 2020.

The following changes contributed to the net change in cash and cash equivalents in the six-month period ended May 1, 2021 as compared to the same period in fiscal 2020.

Operating Activities

Cash provided by operating activities is net income adjusted for certain non-cash items and changes in operating assets and liabilities.

The increase in cash provided by operating activities during the three-month period ended January 30, 2021, as compared to the same period of the prior fiscal year, was primarily the result of higher net income adjusted for non-cash items, partially offset by changes in working capital.

The increase in cash provided by operating activities during the six-month period ended May 1, 2021, as compared to the same period of the prior fiscal year, was primarily the result of higher net income adjusted for non-cash items and changes in working capital.

Investing Activities

Investing cash flows generally consist of capital expenditures and cash used for acquisitions.

The increase in cash used for investing activities during the three-month period ended January 30, 2021, as compared to the same period of the prior fiscal year, was primarily the result of cash payments for an asset acquisition and higher capital additions, partially offset by proceeds from other investments.

The increase in cash used for investing activities during the six-month period ended May 1, 2021, as compared to the same period of the prior fiscal year, was primarily the result of cash payments for an asset acquisition and an increase in cash used for capital expenditures, partially offset by proceeds from other investments.

Financing Activities

Financing cash flows generally consist of payments of dividends to stockholders, repurchases of common stock, issuance and repayment of debt and proceeds from the sale of shares of common stock pursuant to employee equity incentive plans.

The increase in cash used for financing activities during the three-month period ended January 30, 2021, as compared to the same period of the prior fiscal year, was primarily the result of increases in common stock repurchases and dividend payments to shareholders.

The increase in cash used for financing activities during the six-month period ended May 1, 2021, as compared to the same period of the prior fiscal year, was primarily the result of increases in common stock repurchases and dividend payments to shareholders.

The comparable period of fiscal 2020 also included proceeds from our bond issuance as well as debt repayments, which did not repeat in fiscal 2021.

Working Capital

January 30, 2021 October 31, 2020 $ Change % Change

May 1, 2021 October 31, 2020 $ Change % Change

Accounts receivable $ 814,135 $ 737,536 $ 76,599 10 %

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* We use the average of the current quarter and prior quarter ending accounts receivable and ending inventory balances in our calculation of days sales outstanding and days cost of sales in inventory, respectively.

The increase in accounts receivable in dollars was primarily the result of variations in the timing of collections and billings.

Inventory in dollars increased, primarily as a result of our efforts to balance manufacturing production, demand and inventory levels.

The increase in accounts receivable in dollars was primarily the result of variations in the timing of collections and billings and increased revenue levels.

Inventory increased, primarily as a result of our efforts to balance manufacturing production, demand and inventory levels.

Our inventory levels are impacted by our need to support forecasted sales demand and variations between those forecasts and actual demand.

Current liabilities increased to approximately $1,676.8 million at January 30, 2021 from approximately $1,365.0 million at the end of fiscal 2020.

The increase was primarily due to an increase in the current portion of our debt, partially offset by decreases in accrued liabilities and income taxes payable.

As of January 30, 2021, our debt obligations consisted of the following:

Current liabilities increased to approximately $2,776.8 million at May 1, 2021 from approximately $1,365.0 million at the end of fiscal 2020.

The increase was primarily due to increases in the current portion of our debt, accounts payable and accrued liabilities, partially offset by a decrease in income taxes payable.

As of May 1, 2021, our debt obligations consisted of the following:

Principal Amount Outstanding

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and consolidate with or merge into, or transfer or lease all or substantially all of our assets to, any other party.

As of January 30, 2021, we were in compliance with these covenants.

As of May 1, 2021, we were in compliance with these covenants.

Revolving Credit Facility

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In addition, the Revolving Credit Agreement contains a consolidated leverage ratio covenant of total consolidated funded debt to consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA) of not greater than 3.5 to 1.0.

As of January 30, 2021, we were in compliance with these covenants.

As of May 1, 2021, we were in compliance with these covenants.

Stock Repurchase Program

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Unless terminated earlier by resolution of our Board of Directors, the repurchase program will expire when we have repurchased all shares authorized under the program.

As of January 30, 2021, an additional $1.7 billion remains available for repurchase under the current authorized program.

As of May 1, 2021, an additional $1.6 billion remains available for repurchase under the current authorized program.

The repurchased shares are held as authorized but unissued shares of common stock.

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Capital Expenditures

Net additions to property, plant and equipment were $67.4 million in the first three months of fiscal 2021 and were funded with a combination of cash on hand and cash generated from operations.

We expect capital expenditures for fiscal 2021 to be slightly above 4% of fiscal 2021 revenue.

Net additions to property, plant and equipment were $126.6 million in the first six months of fiscal 2021 and were funded with a combination of cash on hand and cash generated from operations.

We expect capital expenditures for fiscal 2021 to be between 4% and 5% of fiscal 2021 revenue.

We expect these capital expenditures will be funded with a combination of cash on hand and cash generated from operations.

On February 16, 2021, our Board of Directors declared a cash dividend of $0.69 per outstanding share of common stock.

The dividend will be paid on March 9, 2021 to all shareholders of record at the close of business on February 26, 2021 and is expected to total approximately $254.5 million.

On May 18, 2021, our Board of Directors declared a cash dividend of $0.69 per outstanding share of common stock.

The dividend will be paid on June 8, 2021 to all shareholders of record at the close of business on May 28, 2021 and is expected to total approximately $254.5 million.

We currently expect quarterly dividends to continue in future periods.

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Contractual Obligations

There have not been any material changes during the three-month period ended January 30, 2021 to the amounts presented in the table summarizing our contractual obligations included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2020.

There have not been any material changes during the six-month period ended May 1, 2021 to the amounts presented in the table summarizing our contractual obligations included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2020.

New Accounting Pronouncements

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Critical Accounting Policies and Estimates

Except for the accounting policies for credit losses and income taxes that were updated as a result of adopting ASU 2016-13 and ASU 2019-12, respectively, there were no other changes in the three-month period ended January 30, 2021 to the information provided under the heading “Critical Accounting Policies and Estimates” in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year ended October 31, 2020.

Except for the accounting policies for credit losses and income taxes that were updated as a result of adopting ASU 2016-13 and ASU 2019-12, respectively, there were no other changes in the six-month period ended May 1, 2021 to the information provided under the heading “Critical Accounting Policies and Estimates” in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year ended October 31, 2020.

Quantitative and Qualitative Disclosures About Market Risk

There were no material changes in the three-month period ended January 30, 2021 to the information provided under Item 7A.

There were no material changes in the six-month period ended May 1, 2021 to the information provided under Item 7A.

“Quantitative and Qualitative Disclosures about Market Risk,” set forth in our Annual Report on Form 10-K for the fiscal year ended October 31, 2020 .

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis