Analog Devices Reports Second Quarter 2017 Results

Analog Devices, Inc., today announced financial results for its second quarter of fiscal year 2017, which ended April 29, 2017.

“The second quarter of 2017 was a period of significant success,” said Vincent Roche, President and CEO. “Business conditions during the quarter were strong, and our results were above the high end of our revised guidance range led by broad-based strength, particularly in the industrial end market. In addition, we closed the acquisition of Linear Technology Corporation and are on track with our integration activities. This acquisition creates a high-performance analog industry powerhouse, and I am confident that we are well on our way to creating tremendous value for our customers, employees, and shareholders.”

“Looking ahead to the July quarter, we continue to see signs of good business conditions and are planning for revenue in the third quarter of 2017, our first full quarter with Linear Technology, to be in the range of $1.34 billion to $1.42 billion on a GAAP basis, and $1.37 billion to $1.45 billion on a non-GAAP basis.”

ADI also announced that the Board of Directors has declared a quarterly cash dividend of $0.45 per outstanding share of common stock, representing an annual dividend per share of $1.80. The dividend will be paid on June 20, 2017 to all shareholders of record at the close of business on June 9, 2017.

Supplemental schedules relating to our second quarter fiscal 2017 results are also available on our investor site at investor.analog.com.

Results for the Second Quarter of Fiscal Year 2017

• GAAP revenue totaled $1.1 billion, with a contribution of $147.5 million from Linear Technology; Non-GAAP revenue totaled $1.2 billion, with a $208.3 million contribution from Linear Technology
• GAAP gross margin of 55.8% of revenue; Non-GAAP gross margin of 69.3% of revenue
• GAAP operating margin of 12.7% of revenue; Non-GAAP operating margin of 37.9% of revenue
• GAAP diluted EPS of $0.27; Non-GAAP diluted EPS of $1.03

Please refer to the schedules provided for a summary of revenue and earnings, selected balance sheet information, and the cash flow statement for the second quarter of fiscal year 2017, as well as the immediately prior and year-ago quarters. Additional information on revenue by end market is provided on Schedule D.

Outlook for the Third Quarter of Fiscal Year 2017

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.

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

(1) Non-GAAP revenue adds back $30 million of deferred revenues related to shipments of Linear Technology products by distributors to end customers that were received by the distributors prior to ADI’s acquisition of Linear Technology.

(2) Non-GAAP gross margin excludes $252 million of costs comprised of the following:

• $187 million of amortization of step up through cost of sales
• $35 million amortization of purchased intangible assets
• $21 million deferred revenues, net of related costs, for shipments of Linear Technology products by distributors to end customer that were received by distributors prior to ADI’s acquisition of Linear Technology
• $8 million depreciation of step up value on purchased fixed assets
• $1 million fair value adjustment associated with the replacement of share-based awards in ADI’s acquisition of Linear Technology

(3) Non-GAAP operating expenses exclude $128 million of costs comprised of the following:

• $112 million amortization of purchased intangible assets
• $11 million fair value adjustment associated with the replacement of share-based awards in ADI’s acquisition of Linear Technology
• $5 million of transaction related costs associated with the Company’s acquisition of Linear Technology

(4) Non-GAAP tax rate excludes the tax effects of the reconciling adjustments noted in the three footnotes above and $51 million of discrete items in the quarter.

(5) Non-GAAP earnings per share includes $1.04, which represents the net impact of the non-GAAP adjustments noted above on a per share basis consisting of:

• the deferred revenues, net of related costs, for shipments of Linear Technology products by distributors to end customers that were received by distributors prior to ADI’s acquisition of Linear Technology ($0.06)
• acquisition-related expenses including amortization of step up value of inventory and 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 ($0.94)
• acquisition-related transaction costs ($0.01)
• the effect on income tax of the prior items ($0.10)
• and the impact of discrete tax items ($0.14).

Conference Call Scheduled for Today, Wednesday, May 31, 2017 at 10:00 am ET

ADI will host a conference call to discuss second quarter fiscal 2017 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: 99084395, 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 provides 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 included in our Non-GAAP revenue, non-GAAP gross margin, and non-GAAP diluted earnings per share:

Acquisition-Related Deferred Revenue: Deferred revenue related to shipments of Linear Technology products by distributors to end customers that were received by the distributors prior to the Company’s acquisition of Linear Technology. Business combination accounting principles require the write down of deferred revenue in conjunction with the acquisition. We included these revenues in our non-GAAP measures because they relate to a specific transaction and are reflective of our ongoing financial performance.

The following items are 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 the fair value adjustment associated with the replacement of share-based awards in 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.

Acquisition-Related Transaction Costs: Costs incurred as a result of the Linear Technology acquisition, including legal, accounting and other professional fees directly related to the acquisition. 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.

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:

Restructuring-Related Expenses: 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 items are 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 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 $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 diluted earnings per share:

Tax-Related Items: Tax adjustments associated with the non-GAAP items discussed above as well as a discrete tax item related to the release of a state tax credit valuation allowance resulting from the Company’s acquisition of Linear Technology. 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.