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Analog Devices’ factory utilization falls to lowest since 2009

SAN FRANCISCO—Executives from Analog Devices Inc. (ADI) said Tuesday (Nov. 27) that the company's manufacturing capacity utilization rate has fallen to its lowest level since 2009 as cautious customers continue to reduce inventories amid macroeconomic sluggishness.

Jerald Fishman, ADI's CEO, told analysts following the company's fiscal fourth quarter financial report that the company began cutting capacity utilization during the quarter and plans to continue doing so in the current quarter. The company plans to cut capacity utilization to just over 50 percent, down from 67 percent last quarter, in order to avoid inventory buildup, Fishman said.

“While operating our factories well below capacity will certainly reduce our gross margins in the short term, it will provide significant upside leverage—as it has in the past—when revenue growth resumes,” Fishman said.

ADI reported mixed results for the quarter—which closed Nov. 3—with sales largely below analysts' expectations. The company also provided a sales target for the current quarter that came up short of analysts' forecasts.

CJ Muse, an analyst with Barclays Capital Inc., said ADI's move to cut capacity utilization to stave off inventory build would position the company for a snapback in gross margins once demand recovers. ADI's gross margins fell to 62 percent in the fiscal fourth quarter, lower than consensus analysts' expectations of about 65 percent.

“We have been highlighting that while downstream tech inventories remain lean, semis inventory levels in general remain at more elevated levels,” Muse said, in a note to clients circulated Wednesday.

Barclays maintains a rating of “equal rate” (equivalent to “hold”) and a price target of $40 on ADI's stock. ADI's stock traded at just over $40 in afternoon trading Wednesday, down slightly from Tuesday's closing price.

Fishman said ADI had implemented cost-reduction initiatives, including moving resources to the most strategically relevant programs and a planned corporate-wide shutdown over the holiday season.

ADI (Norwood, Mass.) reported sales of $695 million for its fiscal fourth quarter, up 2 percent compared to the previous quarter but down 3 percent compared with the fourth quarter of fiscal 2011. The company reported a net income for the quarter of $179.1 million, or 60 cents per share, up 6 percent compared with the fiscal third quarter but down 2 percent compared with the year-ago quarter.

For fiscal 2012, ADI reported sales of $2.7 billion, down 10 percent from fiscal 2011. The company reported a net income for the year of $651.2 million, or $2.18 per share, down 25 percent from fiscal 2011.

ADI said it expects sales to decline 6 to 12 percent sequentially in the current quarter to between $611.6 million and $653.3 million.

Fishman said the most significant decline in fiscal first quarter sales is expected to come from the company's consumer business segment, where its typical first quarter sales decline is being exacerbated by customers' excess inventories.

“Today, it's still a very challenging environment in virtually every reason in the world,” Fishman said.

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