Analog Devices today announced revenues of $480 million for the third quarter of fiscal 2001, which ended August 4. Revenues were 32% below the prior year's third quarter and 20% below the immediately prior quarter. Pro forma earnings per share were $0.17, compared to $0.43 reported for the year-ago quarter and $0.31 for the second quarter of fiscal 2001.
The quarter's diluted earnings per share under gener ally accepted accounting principles (GAAP) were $0.10. All remaining financial informa tion in the text of this release refers to pro forma results, which exclude invest ment gains, amortization of intangibles, acquisition-related expenses and special charges.
"Our third-quarter revenues and earnings per share were in line with the revised guidance we communicated on July 19," said Jerald G. Fishman, President and CEO. "Our analog product revenues, which accounted for more than 80% of the quarter's total revenues, declined 17% sequentially and are now 33% below the peak they reached in the first fiscal quarter of this year. Even so, we now expect that analog product revenues for the year will total just a few percentage points below last year's total. While this would clearly be aided by strong sales early in the year, we believe it would represent a strong performance, given that the semiconductor industry's total revenues could decline 30% or more this year.
"Our DSP revenues declined 32% sequentially in the third quarter and are now 62% below their peak. We expect that our DSP revenues could decline 33% for the year after growing over 100% last year. Our DSP product revenues have been particularly hard hit by the communications industry's widely reported woes.
"Revenues from OEM customers and from distribution customers both declined 20% sequentially," he continued. "Revenues from distribution are now down 30% from the peak, while OEM revenues are nearly 50% below their peak."
Commenting on Analog's third-quarter financial performance, Mr. Fishman said, "At 52.9% of sales, our gross margin ratio for the third quarter remained strong, despite reserving $23 million of inventory, a lower utilization rate in our internal wafer fabs and an increase in depreciation as a percentage of sales. This strong gross margin performance in the face of declining revenues resulted from the actions we've taken over the past six months to reduce manufacturing costs, including scheduled shutdowns among our manu facturing operations worldwide and reductions in workforce in many manufacturing locations. This effort was aided by the outsourcing of our most volatile products.
"Operating expenses declined 11% sequentially and are now 15% below their peak. Engineering expenses are down 9% from their peak. Sales, marketing and G&A expenses have been reduced 22% from their peak as we continued to aggressively manage expenses, which included eliminating bonuses, reducing pay for the highest-paid 25% of our employees and taking actions throughout the company to reduce discretionary expenses.
"The third quarter's operating margin came in at 16% of sales. Although this is well below the levels we achieved last year, we believe it is very respectable, given the magnitude of the revenue declines that we have experienced.
"We recorded a $26 million special charge for the third quarter associated with our worldwide cost-reduction programs," Mr. Fishman noted. "Approximately $22 million of this charge is related to manufacturing, including the consolidation of worldwide test operations and reductions in our manufacturing workforce at various locations around the world. The remaining portion is for SMG&A-related severance costs. We expect to have an additional special charge in the fourth quarter associated with the completion of these programs.
"Our balance sheet continued to strengthen during the third quarter. Cash increased sequentially by more than $160 million to nearly $2.7 billion, while inventories declined $40 million and accounts receivable were reduced by $74 million. Both inventories and accounts receivable remained under good control, with days in both cases remaining flat to last quarter despite the continuation of a very poor business environment."
Regarding the near term, Mr. Fishman said, "While this market makes it difficult to offer precise near-term guidance, there are signs we're approaching this cycle's trough. Our backlog cancellation rate has clearly abated, and our backlog now appears to be much more representative of real demand compared to what we've seen over the past several quarters. Also, orders for shipment within the quarter increased sequentially in the third quarter. Finally, we believe that current order rates for our products are below current consumption rates.
"Although visibility remains poor, our revenue plan for the fourth quarter remains unchanged from the guidance we offered in our July 19th third-quarter update. We still expect a 5 to 10% sequential decline in revenues to about $440 million. At this revenue level, we would expect a very modest sequential decline in our gross margin ratio to about 51 or 52% of sales. We believe operating expenses could again decline sequentially in the fourth quarter. This could result in a fourth-quarter operating margin of approximately 13 to 14% of sales and earnings per share in the range of $0.12 to $0.14."
Looking further out, Mr. Fishman said, "We continue to believe that the high-performance analog sector offers one of the semiconductor industry's very best long-term growth opportunities. The secular growth rate for this sector has increased as analog technology has become critical to the fastest growing applications in communications, PCs, high-end consumer products and industrial products. ADI is the industry's largest high-performance analog IC supplier by a wide margin, and in recent years this gap has increased as our analog growth rate has exceeded that of our competitors. Furthermore, we have the industry's best and largest analog design team.
"We believe our DSP business is poised for significant growth when the communications market recovers. Our DSP core product roadmap is very competitive and DSP's synergy with high-performance analog has been well documented. We also believe that our ability to combine high-performance analog and DSP to offer complete signal processing solutions on a single chip will increasingly be a strong DSP market differentiator for ADI and a key to the growth of our DSP business at above-market rates.
"Despite this year's market chaos," Mr. Fishman concluded, "ADI remains well positioned in the highest growth markets. Our new product programs are progressing well and we're winning design-ins at record rates. While the communications market has yet to recover from the excesses of the past two years, we believe that bandwidth, both wireless and broadband, will be the semiconductor industry's growth driver for many years to come. Our high- performance analog, DSP and MEMs technologies are aimed at the heart of this very large market opportunity. We believe that the consumer market will continue to represent a large, still early-stage opportunity for ADI. And PCs, although with a lower unit growth rate than in the past, will continue to offer opportunities for higher penetration of ADI's technology. Finally, the industrial market, with more than 50,000 ADI customers, should continue providing us stability and high margins throughout business cycles. All told, we believe we have done a credible job of managing the company through this difficult business cycle. We are ready to move back into a growth mode as soon as market conditions improve."
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