Analog Devices Reports Strong Fourth Quarter Results, Achieving Record Revenue and EPS; Full-Year Fiscal 2018 Revenue Surpasses $6 Billion

Analog Devices, Inc., a leading global high-performance analog technology company, today announced financial results for its fourth quarter and fiscal year 2018, which ended November 3, 2018.

“We delivered very strong financial results in our fourth quarter, achieving record revenue and earnings per share to cap off a successful year,” said Vincent Roche, President and CEO. “Revenue growth was once again led by strength in our B2B markets, with particular strength in the industrial and communications sectors. Our portfolio of innovative solutions, customer-centric approach, and disciplined operational execution drove high profitability and strong cash generation, allowing us to return more than $360 million to shareholders in the quarter.”

“Our diverse business model, combined with a comprehensive, market-leading portfolio that is strategically pointed at secular growth trends across our B2B markets, enables us to navigate the current macro climate. I am pleased that we continue to execute exceptionally well thanks in large part to the thousands of talented people across ADI who are dedicated to delivering quality and value for our customers every day.”

The ADI Board of Directors has also declared a quarterly cash dividend of $0.48 per outstanding share of common stock. The dividend will be paid on December 10, 2018 to all shareholders of record at the close of business on November 29, 2018.

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

Results for the Fourth Quarter of Fiscal Year 2018

• Revenue totaled $1.6 billion, up 2% sequentially and up 4% year-over-year
• GAAP gross margin of 68.5% of revenue; Non-GAAP gross margin of 71.2% of revenue
• GAAP operating margin of 32.2% of revenue; Non-GAAP operating margin of 43.0% of revenue
• GAAP diluted EPS of $1.15; Non-GAAP diluted EPS of $1.55

Results for the Fiscal Year 2018

• Revenue totaled $6.2 billion, up 21% year-over-year on a GAAP basis and 19% on a non-GAAP basis
• GAAP gross margin of 68.3% of revenue; Non-GAAP gross margin of 71.2% of revenue
• GAAP operating margin of 30.3% of revenue; Non-GAAP operating margin of 42.4% of revenue
• GAAP diluted EPS of $3.97; Non-GAAP diluted EPS of $5.94

Please refer to the schedules provided for a summary of revenue and earnings, selected balance sheet information, and the cash flow statement for the fourth quarter of fiscal 2018, 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 First Quarter of Fiscal Year 2019

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

• $35 million of recurring amortization of purchased intangible assets
• $7 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
• $1 million of retention-related expenses

(2) Excludes $115 million of costs comprised of the following:

• $108 million of recurring amortization of purchased intangible assets
• $6 million of recurring fair value adjustment associated with the replacement of share-based awards in ADI’s acquisition of Linear Technology
• $1 million of restructuring-related expenses

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

(4) Includes $0.36, 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)
• the effect on income tax of the prior items (-$0.06)

Conference Call Scheduled for Today, Tuesday, November 20, 2018 at 10:00 am ET

ADI will host a conference call to discuss fourth quarter and full year 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: 4671569, 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 included in our non-GAAP revenue, non-GAAP gross margin, non-GAAP operating income, non-GAAP operating margin, and non-GAAP diluted earnings per share:

Acquisition-Related Deferred Revenues: 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 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.

Accelerated Stock-Based Compensation Expense: In the fourth quarter of fiscal 2018, the Company recorded $3.4 million of stock-based compensation expense for one of its former executive officers due to the accelerated vesting of restricted stock units and stock options resulting from a reduction in the requisite service period for each in accordance with the terms of the applicable agreements. This stock-based compensation expense and the related tax effect 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 first quarter of fiscal 2017, the Company replaced a portion of the bridge financing commitments obtained in connection with the Linear Technology acquisition 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. Discrete tax items including tax expense or benefit related to prior periods; tax benefits related to the release of a tax reserves for an expired tax years; the release of reserves associated with a favorable ruling on petitions with the U.S. Tax Court; tax expense or benefit from changes to state tax valuation allowances; tax expense associated with the remittance of cash held outside of the United States related to the post-acquisition integration of Linear Technology and tax expense related to the impact of the Tax Cuts and Jobs Act of 2017. 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.

The following item is excluded from our calculation of adjusted free cash flow for fiscal 2017:

One Time Tax Payment: In the third quarter of fiscal 2017, the Company paid $750 million in income taxes associated with the acquisition of Linear Technology. These payments were principally related to pre-acquisition liabilities but also included $98 million associated with the remittance of cash held outside of the United States related to the post-acquisition integration of Linear Technology. We excluded these payments from our adjusted free cash flow measure because they relate to a specific transaction and are not reflective of our ongoing financial performance.

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.