ANALOG DEVICES INC 10-Q

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations This information should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended October 29, 2022 (fiscal 2022). This Quarterly Report on Form 10-Q, including the following discussion, contains forward-looking statements regarding future events and our future results that are subject to the safe harbor created under the Private Securities Litigation Reform Act of 1995 and other safe harbors under the Securities Act of 1933 and the Securities Exchange Act of 1934. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “may,” “could” and “will,” and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections regarding our future financial performance or results; our anticipated growth and trends in our businesses; the effects of business, economic, political, legal, and regulatory impacts or conflicts upon our global operations ; changes in demand for semiconductors and the related changes in demand and supply for our products; manufacturing delays, product availability, and supply chain disruptions; our ability to recruit or retain our key personnel; our future liquidity, capital needs and capital expenditures; our development of technologies and processes and research and development investments; our future market position and expected competitive changes in the marketplace for our products; the anticipated result of litigation matters; our plans to pay dividends or repurchase stock; servicing our outstanding debt; our plans to borrow under our Revolving Credit Agreement and issue notes under our commercial paper program and the planned use of proceeds from such borrowing and issuing; our expected tax rate; the effect of changes in or the application of new or revised tax laws; expected cost savings; the effect of new accounting pronouncements; our plans to integrate or realize the benefits or synergies expected of acquired businesses and technologies; our continued initiatives to consolidate our footprint related to our business units; and other characterizations of future events or circumstances are forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors. Important factors that could cause actual results to differ materially from those in these forward-looking statements include the risk factors included in Part I, Item 1A, "Risk Factors" of our Annual Report on Form 10-K for fiscal 2022 and, if applicable, those included under Part II, Item 1A of this Quarterly Report on Form 10-Q. Results of Operations Overview (all tabular amounts in thousands except per share amounts and percentages) Three Months Ended April 29, 2023 April 30, 2022 $ Change % Change Revenue $ 3,262,930 $ 2,972,064 $ 290,866 10 % Gross margin % 65.7 % 65.4 % Net income $ 977,656 $ 783,273 $ 194,383 25 % Net income as a % of revenue 30.0 % 26.4 % Diluted EPS $ 1.92 $ 1.49 $ 0.43 29 % Six Months Ended April 29, 2023 April 30, 2022 $ Change % Change Revenue $ 6,512,560 $ 5,656,357 $ 856,203 15 % Gross margin % 65.5 % 59.2 % Net income $ 1,939,130 $ 1,063,350 $ 875,780 82 % Net income as a % of revenue 29.8 % 18.8 % Diluted EPS $ 3.80 $ 2.01 $ 1.79 89 % 15 Revenue Trends by End Market The following table summarizes revenue by end market. The categorization of revenue by end market is determined using a variety of data points including the technical characteristics of the product, the “sold to” customer information, the “ship to” customer information and the end customer product or application into which our product will be incorporated. As data systems for capturing and tracking this data and our methodology evolves and improves, 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 revenue within, each end market. Three Months Ended April 29, 2023 April 30, 2022 Revenue % of Revenue* Y/Y% Revenue % of Revenue* Industrial $ 1,744,567 53 % 16 % $ 1,502,731 51 % Automotive 784,775 24 % 24 % 633,255 21 % Communications 453,530 14 % (4) % 474,722 16 % Consumer 280,058 9 % (22) % 361,356 12 % Total revenue $ 3,262,930 100 % 10 % $ 2,972,064 100 % Six Months Ended April 29, 2023 April 30, 2022 Revenue % of Revenue* Y/Y% Revenue % of Revenue* Industrial $ 3,438,006 53 % 21 % $ 2,849,577 50 % Automotive 1,498,178 23 % 27 % 1,183,985 21 % Communications 941,735 14 % 6 % 887,663 16 % Consumer 634,641 10 % (14) % 735,132 13 % Total revenue $ 6,512,560 100 % 15 % $ 5,656,357 100 % * The sum of the individual percentages may not equal the total due to rounding. Revenue increased 10% and 15% in the three- and six-month periods ended April 29, 2023, respectively, as compared to the same periods of the prior fiscal year, primarily as a result of broad-based demand for our products sold into the Industrial and Automotive end markets, partially offset by a decrease in revenue in the Consumer end market primarily due to weakening market trends. The Communications end market also decreased in the three-month period ended April 29, 2023 as compared to the same period of the prior fiscal year due to the timing of infrastructure deployment cycles. Revenue by Sales Channel The following table summarizes revenue by sales channel. We sell our products globally through a direct sales force, third party distributors, independent sales representatives and via our website. Distributors are customers that buy products with the intention of reselling them. Direct customers are non-distributor customers and consist primarily of original equipment manufacturers. Other customers include the U.S. government, government prime contractors and certain commercial customers for which revenue is recorded over time. 16 Three Months Ended April 29, 2023 April 30, 2022 Revenue % of Revenue* Revenue % of Revenue* Channel Distributors $ 1,996,410 61 % $ 1,849,988 62 % Direct customers 1,224,786 38 % 1,091,710 37 % Other 41,734 1 % 30,366 1 % Total revenue $ 3,262,930 100 % $ 2,972,064 100 % Six Months Ended April 29, 2023 April 30, 2022 Revenue % of Revenue* Revenue % of Revenue* Channel Distributors $ 4,007,733 62 % $ 3,503,042 62 % Direct customers 2,420,320 37 % 2,094,891 37 % Other 84,507 1 % 58,424 1 % Total revenue $ 6,512,560 100 % $ 5,656,357 100 % * 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. Gross Margin Three Months Ended Six Months Ended April 29, 2023 April 30, 2022 $ Change % Change April 29, 2023 April 30, 2022 $ Change % Change Gross margin $ 2,144,546 $ 1,944,520 $ 200,026 10 % $ 4,268,887 $ 3,346,517 $ 922,370 28 % Gross margin % 65.7 % 65.4 % 65.5 % 59.2 % Gross margin percentage increased by 30 and 630 basis points in the three- and six-month periods ended April 29, 2023, respectively, as compared to the same period of the prior fiscal year. The increase in the three-month period ended April 29, 2023 primarily related to favorable product mix. The increase in the six-month period ended April 29, 2023 was primarily as a result of additional cost of goods sold of $271.4 million related to a nonrecurring fair value adjustment recorded to inventory in the six-month period ended April 30, 2022 as a result of the acquisition of Maxim Integrated Products, Inc. (Maxim). The remainder of the increase in the six-month period ended April 29, 2023 primarily related to favorable product mix and synergies related to the acquisition of Maxim. Research and Development (R&D) Three Months Ended Six Months Ended April 29, 2023 April 30, 2022 $ Change % Change April 29, 2023 April 30, 2022 $ Change % Change R&D expenses $ 415,754 $ 420,901 $ (5,147) (1) % $ 829,849 $ 847,681 $ (17,832) (2) % R&D expenses as a % of revenue 13 % 14 % 13 % 15 % 17 R&D expenses decreased both in the three- and six-month periods ended April 29, 2023, as compared to the same periods of the prior fiscal year. In the three-month period ended April 29, 2023, the decrease was primarily a result of lower R&D employee-related variable compensation expenses and lower salary and benefit expenses, partially offset by higher discretionary spending. In the six-month period ended April 29, 2023, the decrease was primarily a result of lower salary and benefit expenses and lower discretionary spending, partially offset by higher R&D employee-related variable compensation expenses. R&D expenses as a percentage of revenue will fluctuate from year-to-year depending on the amount of revenue and the success of new product development efforts, which we view as critical to our future growth. We expect to continue the development of innovative technologies and processes for new products. We believe that a continued commitment to R&D is essential to maintain product leadership with our existing products as well as to provide innovative new product offerings. Selling, Marketing, General and Administrative (SMG&A) Three Months Ended Six Months Ended April 29, 2023 April 30, 2022 $ Change % Change April 29, 2023 April 30, 2022 $ Change % Change SMG&A expenses $ 324,251 $ 305,308 $ 18,943 6 % $ 650,535 $ 602,673 $ 47,862 8 % SMG&A expenses as a % of revenue 10 % 10 % 10 % 11 % SMG&A expenses increased in both the three- and six-month periods ended April 29, 2023, as compared to the same period of the prior fiscal year, primarily as a result of higher salary and benefit expenses and discretionary spending, partially offset by lower acquisition-related transaction costs. The six-month period ended April 29, 2023 was also impacted by higher SMG&A employee-related variable compensation expenses. Amortization of Intangibles Three Months Ended Six Months Ended April 29, 2023 April 30, 2022 $ Change % Change April 29, 2023 April 30, 2022 $ Change % Change Amortization expenses $ 253,021 $ 253,476 $ (455) — % $ 506,163 $ 506,843 $ (680) — % Amortization expenses as a % of revenue 8 % 9 % 8 % 9 % Amortization expenses were relatively flat in both the three- and six-month periods ended April 29, 2023, as compared to the same periods of the prior fiscal year. Special Charges, Net Three Months Ended Six Months Ended April 29, 2023 April 30, 2022 $ Change % Change April 29, 2023 April 30, 2022 $ Change % Change Special charges, net $ 23,136 $ 46,674 $ (23,538) (50) % $ 23,136 $ 106,402 $ (83,266) (78) % Special charges, net as a % of revenue 1 % 2 % — % 2 % Special charges, net decreased in both the three- and six-month periods ended April 29, 2023, as compared to the same periods of the prior fiscal year, primarily as a result of higher charges recorded in the first half of fiscal 2022 as part of the integration of Maxim and continued organizational initiatives to better align our global workforce with our long-term strategic plan. 18 Operating Income Three Months Ended Six Months Ended April 29, 2023 April 30, 2022 $ Change % Change April 29, 2023 April 30, 2022 $ Change % Change Operating income $ 1,128,384 $ 918,161 $ 210,223 23 % $ 2,259,204 $ 1,282,918 $ 976,286 76 % Operating income as a % of revenue 34.6 % 30.9 % 34.7 % 22.7 % The year-over-year increase in operating income in the three-month period ended April 29, 2023 was primarily the result of an increase in revenue of $290.9 million, which contributed to an increase in gross margin of $200.0 million, and decreases of $23.5 million in special charges, net and $5.1 million in R&D expenses, partially offset by an increase of $18.9 million in SMG&A expenses . The year-over-year increase in operating income in the six-month period ended April 29, 2023 was primarily the result of an increase in revenue of $856.2 million and an increase in gross margin percent, which contributed to an increase in gross margin of $922.4 million, and decreases of $83.3 million in special charges, net and $17.8 million in R&D expenses, partially offset by an increase of $47.9 million in SMG&A expenses . Nonoperating Expense (Income) Three Months Ended Six Months Ended April 29, 2023 April 30, 2022 $ Change April 29, 2023 April 30, 2022 $ Change Total nonoperating expense (income) $ 40,461 $ 38,916 $ 1,545 $ 97,808 $ 80,118 $ 17,690 The year-over-year increase in nonoperating expense (income) in the three-month period ended April 29, 2023 as compared to the same period of the prior year was the result of higher interest expense related to our debt obligations partially offset by higher interest income. The year-over-year increase in nonoperating expense (income) in the six-month period ended April 29, 2023 as compared to the same period of the prior year was the result of higher interest expense related to our debt obligations and lower net gains from other investments partially offset by higher interest income. Provision for Income Taxes Three Months Ended Six Months Ended April 29, 2023 April 30, 2022 $ Change April 29, 2023 April 30, 2022 $ Change Provision for income taxes $ 110,267 $ 95,972 $ 14,295 $ 222,266 $ 139,450 $ 82,816 Effective income tax rate 10.1 % 10.9 % 10.3 % 11.6 % The effective tax rates for both the three- and six-month periods ended April 29, 2023 and April 30, 2022 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- and six-month periods ended April 29, 2023 and April 30, 2022 was primarily generated in Ireland at a tax rate of 12.5%. The Company's effective tax rate for the three- and six-month periods ended April 29, 2023 also included the effects of the mandatory capitalization and amortization of research and development expenses which began in fiscal 2023 under the 2017 Tax Cuts and Jobs Act. The mandatory capitalization requirement decreased our effective tax rate primarily by increasing the foreign-derived intangible income deduction. See Note 12, 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. Net Income Three Months Ended Six Months Ended April 29, 2023 April 30, 2022 $ Change % Change April 29, 2023 April 30, 2022 $ Change % Change Net Income $ 977,656 $ 783,273 $ 194,383 25 % $ 1,939,130 $ 1,063,350 $ 875,780 82 % Net Income as a % of revenue 30.0 % 26.4 % 29.8 % 18.8 % Diluted EPS $ 1.92 $ 1.49 $ 3.80 $ 2.01 19 Net income increased in the three-month period ended April 29, 2023, as compared to the same period of the prior fiscal year, as a result of a $210.2 million increase in operating income, partially offset by a $14.3 million increase in provision for income taxes. Net income increased in the six-month period ended April 29, 2023, as compared to the same period of the prior fiscal year, as a result of a $976.3 million increase in operating income, partially offset by a $82.8 million increase in provision for income taxes. Liquidity and Capital Resources At April 29, 2023, our principal source of liquidity was $1,177.6 million of cash and cash equivalents, of which approximately $339.4 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. We do not expect current regulatory restrictions or taxes on repatriation to have a material adverse effect on our overall liquidity, financial condition or the results of operations. Our cash and cash equivalents consist of highly liquid investments with maturities of three months or less, including money market funds. We maintain these balances with high credit quality counterparties, continually monitor the amount of credit exposure to any one issuer and diversify our investments in order to minimize our credit risk. We believe that our existing sources of liquidity and cash expected to be generated from future operations, together with existing and anticipated available short- and long-term financing, will be sufficient to fund operations, capital expenditures, research and development efforts and dividend payments (if any) in the immediate future and for at least the next twelve months. Six Months Ended April 29, 2023 April 30, 2022 Net cash provided by operating activities $ 2,487,886 $ 2,078,220 Net cash provided by operations as a % of revenue 38 % 37 % Net cash used for investing activities $ (460,577) $ (216,902) Net cash used for financing activities $ (2,320,272) $ (2,085,454) The following changes contributed to the net change in cash and cash equivalents in the six-month period ended April 29, 2023 as compared to the same period in fiscal 2022. 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 six-month period ended April 29, 2023, as compared to the same period of the prior fiscal year, was the result of higher net income adjusted for noncash items offset by 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 six-month period ended April 29, 2023, as compared to the same period of the prior fiscal year, was primarily the result of an increase in cash used for capital expenditures. 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 six-month period ended April 29, 2023, as compared to the same period of the prior fiscal year, was primarily the result of higher common stock repurchases and lower debt repayments, partially offset by proceeds from the issuance of commercial paper notes. 20 Working Capital April 29, 2023 October 29, 2022 $ Change % Change Accounts receivable $ 1,616,256 $ 1,800,462 $ (184,206) (10) % Days sales outstanding* 45 50 Inventory $ 1,648,136 $ 1,399,914 $ 248,222 18 % Days cost of sales in inventory* 129 107 _______________________________________ * We use the average of the current quarter and prior quarter ending net accounts receivable and ending inventory balance in our calculation of days sales outstanding and days cost of sales in inventory, respectively. Cost of sales amounts used in the calculation of days cost of sales in inventory include accounting adjustments related to amortization of developed technology intangible assets acquired and depreciation related to the write-up of fixed assets to fair value as a result of the acquisition of Maxim. The decrease in accounts receivable in dollars was primarily the result of variations in the timing of collections and billings. 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 $2,646.4 million at April 29, 2023 as compared to $2,442.7 million at the end of fiscal 2022 due to an increase in commercial paper notes and income taxes payable, partially offset by lower accrued liabilities. Debt As of April 29, 2023, our debt obligations consisted of the following: Principal Amount Outstanding 2024 Notes, due October 2024 $ 500,000 2025 Notes, due April 2025 400,000 2026 Notes, due December 2026 900,000 2027 Notes, due June 2027 440,212 2028 Notes, due October 2028 750,000 2031 Notes, due October 2031 1,000,000 2032 Notes, due October 2032 300,000 2036 Notes, due December 2036 144,278 2041 Notes, due October 2041 750,000 2045 Notes, due December 2045 332,587 2051 Notes, due October 2051 1,000,000 Total debt $ 6,517,077 The indentures governing our outstanding notes contain covenants that may limit our ability to: incur, create, assume or guarantee any debt for borrowed money secured by a lien upon a principal property; enter into sale and lease-back transactions with respect to a principal property; and consolidate with or merge into, or transfer or lease all or substantially all of our assets to, any other party. As of April 29, 2023, we were in compliance with these covenants. Commercial Paper Program On April 14, 2023, we established a commercial paper program under which we may issue short-term, unsecured commercial paper notes in an amount up to a maximum aggregate face amount of $2.5 billion outstanding at any time, with maturities up to 397 days from the date of issuance. As of April 29, 2023, we had $253.6 million of outstanding borrowings under the commercial paper program recorded in the Condensed Consolidated Balance Sheet. We intend to use the net proceeds of the commercial paper program for general corporate purposes, including without limitation, repayment of indebtedness, stock repurchases, acquisitions, capital expenditures and working capital. 21 Revolving Credit Facility Our Third Amended and Restated Revolving Credit Agreement, dated as of June 23, 2021 and as amended (Revolving Credit Agreement), provides for a five year unsecured revolving credit facility in an aggregate principal amount not to exceed $2.5 billion (subject to certain terms and conditions). We may borrow under this revolving credit facility in the future and use the proceeds for repayment of existing indebtedness, stock repurchases, acquisitions, capital expenditures, working capital and other lawful corporate purposes. The terms of the Revolving Credit Agreement impose restrictions on our ability to undertake certain transactions, to create certain liens on assets and to incur certain subsidiary indebtedness. 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 April 29, 2023, we were in compliance with these covenants. Stock Repurchase Program In the aggregate, our Board of Directors has authorized us to repurchase $16.7 billion of our common stock under our common stock repurchase program. 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 April 29, 2023, an additional $3.2 billion remains available for repurchase under the current authorized program. The repurchased shares are held as authorized but unissued shares of common stock. We also repurchase shares in settlement of employee tax withholding obligations due upon the vesting of restricted stock units/awards or the exercise of stock options as well as for our employee stock purchase plan. Future repurchases of common stock will be dependent upon our financial position, results of operations, outlook, liquidity, and other factors we deem relevant. Capital Expenditures Net additions to property, plant and equipment were $460.5 million in the first six months of fiscal 2023. We expect capital expenditures for fiscal 2023 to be between approximately 7% to 9% of revenue, which is above our historical levels primarily due to our plans to expand internal manufacturing capacity. These capital expenditures will be funded with a combination of cash on hand and cash expected to be generated from future operations, together with existing and anticipated available short- and long-term financing. Dividends On May 23, 2023, our Board of Directors declared a cash dividend of $0.86 per outstanding share of common stock. The dividend will be paid on June 14, 2023 to all shareholders of record at the close of business on June 5, 2023 and is expected to total approximately $431.2 million. We currently expect quarterly dividends to continue in future periods. The payment of any future quarterly dividends, or a future increase in the quarterly dividend amount, will be at the discretion of the Board and will be dependent upon our financial position, results of operations, outlook, liquidity, and other factors deemed relevant by the Board. Contractual Obligations There have not been any material changes during the six-month period ended April 29, 2023 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 29, 2022. New Accounting Pronouncements From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board that are adopted by us as of the specified effective date. Unless otherwise discussed, management believes that the impact of recently issued standards will not have a material impact on our future financial condition and results of operations. See Note 13, New Accounting Pronouncements, in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a description of recently issued and adopted accounting pronouncements, including the dates of adoption and impact on our historical financial condition and results of operations. Critical Accounting Policies and Estimates There were no material changes in the six-month period ended April 29, 2023 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 29, 2022. 22 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk There were no material changes in the six-month period ended April 29, 2023 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 29, 2022 .