Analog Devices, Inc. Case Review <ul><li>Team #2 Members: </li></ul><ul><li>Joe Borocz </li></ul><ul><li>Theresa Kramer </...
Revenue Recognition   <ul><li>Revenue Recognition : </li></ul><ul><li>Function of matching principle </li></ul><ul><li>Ear...
Revenue Recognition  (continued) <ul><li>Relevance to Financial Statement Analysis : </li></ul><ul><li>Potential method to...
Revenue Recognition by Industry   <ul><li>Movie theater </li></ul><ul><li>Recorded-music store </li></ul><ul><li>Publishin...
The Ubiquitous Chip <ul><li>Integrated Circuit (IC): </li></ul><ul><ul><li>Tiny electronic circuit used to perform specifi...
The Ubiquitous Chip  (continued) <ul><li>Development </li></ul><ul><ul><li>Functionality, reliability increased while size...
Major Players <ul><li>Intel </li></ul><ul><li>AMD </li></ul><ul><li>Samsung </li></ul><ul><li>NEC </li></ul><ul><li>Toshib...
Supporting Cast Contract Manufacturers Equipment Manufacturers Distributors Software Design
Size and Cycle <ul><li>Semiconductor industry represents </li></ul><ul><li>15% of entire technology industry </li></ul><ul...
Y/Y Global Semiconductor Sales Growth <ul><li>World Semiconductor Trade Statistics* </li></ul><ul><li>November 1997 Throug...
Analog Devices, Inc. (ADI:NYSE) <ul><li>Founded 1965 in Norwood, Massachusetts </li></ul><ul><li>Approximately 7,500 emplo...
ADI Sales Channels <ul><li>Direct Sales Force </li></ul><ul><li>3rd Party Industrial Distributors </li></ul><ul><li>Indepe...
ADI Selected Income Statement Items
ADI  Year Over Year Growth
Impact of Change in Revenue Recognition   <ul><li>Income Statement Impact : </li></ul><ul><li>Cumulative effect  (after ta...
Impact of Change in Revenue Recognition <ul><li>Balance Sheet Impact : </li></ul><ul><li>Inventory 57 million </li></ul><u...
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ADI Presentation team project

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ADI Presentation team project

  1. 1. Analog Devices, Inc. Case Review <ul><li>Team #2 Members: </li></ul><ul><li>Joe Borocz </li></ul><ul><li>Theresa Kramer </li></ul><ul><li>Curtis Palmer </li></ul><ul><li>Jennifer Selman </li></ul><ul><li>Paul Turgeon </li></ul><ul><li>Michael Walsh </li></ul>
  2. 2. Revenue Recognition <ul><li>Revenue Recognition : </li></ul><ul><li>Function of matching principle </li></ul><ul><li>Earnings process is complete </li></ul><ul><ul><li>Sales/production effort substantially complete </li></ul></ul><ul><ul><li>Related expenses incurred </li></ul></ul><ul><ul><li>Amount of revenue is measurable </li></ul></ul><ul><ul><li>Collection of cash is reasonably assured </li></ul></ul><ul><li>Accounts affected </li></ul><ul><ul><li>Sales, cost of sales, and income tax expense </li></ul></ul><ul><ul><li>Accounts receivable, inventory, deferred revenue and income taxes payable </li></ul></ul>
  3. 3. Revenue Recognition (continued) <ul><li>Relevance to Financial Statement Analysis : </li></ul><ul><li>Potential method to manage earnings </li></ul><ul><li>Impacts quality of financial statements </li></ul><ul><li>Current environment – SEC focus </li></ul>
  4. 4. Revenue Recognition by Industry <ul><li>Movie theater </li></ul><ul><li>Recorded-music store </li></ul><ul><li>Publishing company </li></ul>Signing of contract Film is delivered by studio When the film is known to be “a hit” People pay for tickets Tickets are redeemed Store orders CD Manufacturer ships CD Store receives CD Customer pays for CD Customer takes receipt of CD Books are printed Books are shipped Bookstore’s customer pays for books Bookstore’s customer takes receipt of books Bookstore pays the publisher
  5. 5. The Ubiquitous Chip <ul><li>Integrated Circuit (IC): </li></ul><ul><ul><li>Tiny electronic circuit used to perform specific electronic functions </li></ul></ul><ul><ul><li>Built on a semiconductor substrate, usually single-crystal silicon </li></ul></ul><ul><ul><li>Hermetically sealed with leads extending from it for input, output, etc. </li></ul></ul><ul><ul><li>100s or 1,000s of ICs made on a centimeters-wide wafer called “chip” </li></ul></ul>
  6. 6. The Ubiquitous Chip (continued) <ul><li>Development </li></ul><ul><ul><li>Functionality, reliability increased while size, power use,cost decreased </li></ul></ul><ul><ul><li>Computer technology has been greatest benefactor: logic and arithmetic functions of small computers now performed on single VLSI (very large scale integration) chip, called “microprocessor” </li></ul></ul><ul><li>Application </li></ul><ul><ul><li>Personal calculators and computers, digital watches, video games </li></ul></ul><ul><ul><li>Improved and lowered costs of appliances, televisions, radios, hi-fi </li></ul></ul><ul><ul><li>Automotive diagnostics and pollution control, medicine, communications, etc. </li></ul></ul>
  7. 7. Major Players <ul><li>Intel </li></ul><ul><li>AMD </li></ul><ul><li>Samsung </li></ul><ul><li>NEC </li></ul><ul><li>Toshiba </li></ul><ul><li>Texas Instruments </li></ul><ul><li>Motorola (On Semiconductor) </li></ul><ul><li>STMicroelectronics </li></ul><ul><li>Philips </li></ul><ul><li>Infineon </li></ul><ul><li>ADI </li></ul>
  8. 8. Supporting Cast Contract Manufacturers Equipment Manufacturers Distributors Software Design
  9. 9. Size and Cycle <ul><li>Semiconductor industry represents </li></ul><ul><li>15% of entire technology industry </li></ul><ul><li>Global Semiconductor Sales </li></ul><ul><li>World Semiconductor Trade Statistics (WSTS): </li></ul><ul><li>2000 $183 Billion </li></ul><ul><li> (through November) </li></ul><ul><li>1999 $145 Billion </li></ul><ul><li>1998 $126 Billion </li></ul><ul><li>1997 $137 Billion </li></ul><ul><li>1996 $134 Billion </li></ul>Negative sales-growth cycle… Asian flu, global economic slowdown
  10. 10. Y/Y Global Semiconductor Sales Growth <ul><li>World Semiconductor Trade Statistics* </li></ul><ul><li>November 1997 Through October 1999 </li></ul>*2000 by WSTS and SIA (Semiconductor Industry Assoc.)
  11. 11. Analog Devices, Inc. (ADI:NYSE) <ul><li>Founded 1965 in Norwood, Massachusetts </li></ul><ul><li>Approximately 7,500 employees </li></ul><ul><li>Pioneer of analog integrated circuit (IC) market </li></ul><ul><li>Recently led development of digital signal processor (DSP) ICs </li></ul><ul><li>Motorola, Dell, Lucent, and Sony are largest customers </li></ul><ul><li>Products are components sold primarily to OEMs for: </li></ul><ul><ul><ul><li>#1 Communications Gear </li></ul></ul></ul><ul><ul><ul><li>#2 Computers and Peripherals </li></ul></ul></ul><ul><ul><ul><li>#3 Medical and Scientific Instruments </li></ul></ul></ul>
  12. 12. ADI Sales Channels <ul><li>Direct Sales Force </li></ul><ul><li>3rd Party Industrial Distributors </li></ul><ul><li>Independent Sales Representatives </li></ul><ul><li>42% of 97 sales through distributors </li></ul><ul><ul><li>(11/1/97 Form 10-K, filed 1/28/98) </li></ul></ul><ul><li>54% of 97 revenue from international sales </li></ul><ul><ul><li>(11/1/97 Form 10-K, filed 1/28/98) </li></ul></ul><ul><li>Revenue Recognition Policy </li></ul>
  13. 13. ADI Selected Income Statement Items
  14. 14. ADI Year Over Year Growth
  15. 15. Impact of Change in Revenue Recognition <ul><li>Income Statement Impact : </li></ul><ul><li>Cumulative effect (after tax) $(37) million </li></ul><ul><li>Taxes 20 million </li></ul><ul><li>Cumulative effect (pretax) $(57) million </li></ul><ul><li>Gross margin $(57) million 50% </li></ul><ul><li>Cost of sales (57) million 50 % </li></ul><ul><li>Sales $(114) million 100% </li></ul>
  16. 16. Impact of Change in Revenue Recognition <ul><li>Balance Sheet Impact : </li></ul><ul><li>Inventory 57 million </li></ul><ul><li>Deferred Taxes 20 million </li></ul><ul><li>Retained Earnings 37 million </li></ul><ul><li>Deferred revenue 114 million </li></ul><ul><li>  </li></ul><ul><li>Increased inventory, decreased deferred taxes payable, decreased retained earnings, and increased deferred revenue </li></ul>

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