ADI_Q2_10-Q_5.3.2014


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
 
Form 10-Q
 
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 3, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission File No. 1-7819
 
Analog Devices, Inc.
(Exact name of registrant as specified in its charter) 
 
Massachusetts
 
04-2348234
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
One Technology Way, Norwood, MA
 
02062-9106
(Address of principal executive offices)
 
(Zip Code)
(781) 329-4700
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  þ    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  þ    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
þ
  
Accelerated filer
 
¨
 
 
 
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES ¨    NO  þ
As of May 3, 2014 there were 314,145,403 shares of common stock of the registrant, $0.16 2/3 par value per share, outstanding.
 




PART I - FINANCIAL INFORMATION
 
ITEM 1.
Financial Statements

ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(thousands, except per share amounts)

 
Three Months Ended
 
Six Months Ended
 
May 3, 2014
 
May 4, 2013
 
May 3, 2014
 
May 4, 2013
Revenue
$
694,536

 
$
659,250

 
$
1,322,774

 
$
1,281,384

Cost of sales (1)
235,793

 
237,055

 
454,913

 
468,905

Gross margin
458,743

 
422,195

 
867,861

 
812,479

Operating expenses:
 
 
 
 
 
 
 
Research and development (1)
136,258

 
128,110

 
264,904

 
253,274

Selling, marketing, general and administrative (1)
102,085

 
102,703

 
200,263

 
200,263

Special charges

 

 
2,685

 
14,071

 
238,343

 
230,813

 
467,852

 
467,608

Operating income
220,400

 
191,382

 
400,009

 
344,871

Nonoperating expense (income):
 
 
 
 
 
 
 
Interest expense
6,874

 
6,357

 
13,445

 
12,771

Interest income
(3,401
)
 
(3,044
)
 
(6,685
)
 
(6,277
)
Other, net
(441
)
 
408

 
(10
)
 
607

 
3,032

 
3,721

 
6,750

 
7,101

Income before income taxes
217,368

 
187,661

 
393,259

 
337,770

Provision for income taxes
29,935

 
23,189

 
53,240

 
42,076

Net income
$
187,433

 
$
164,472

 
$
340,019

 
$
295,694

Shares used to compute earnings per share – basic
313,488

 
307,444

 
312,887

 
305,464

Shares used to compute earnings per share – diluted
318,347

 
313,368

 
318,182

 
311,822

Basic earnings per share
$
0.60

 
$
0.53

 
$
1.09

 
$
0.97

Diluted earnings per share
$
0.59

 
$
0.52

 
$
1.07

 
$
0.95

Dividends declared and paid per share
$
0.37

 
$
0.34

 
$
0.71

 
$
0.64

           (1) Includes stock-based compensation expense as follows:
 
 
 
 
 
 
 
           Cost of sales
$
1,417

 
$
1,517

 
$
2,974

 
$
3,184

           Research and development
$
4,278

 
$
5,044

 
$
9,137

 
$
10,644

           Selling, marketing, general and administrative
$
4,847

 
$
11,395

 
$
9,838

 
$
17,189

See accompanying notes.

1




ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(thousands)

 
Three Months Ended
 
Six Months Ended
 
May 3, 2014
 
May 4, 2013
 
May 3, 2014
 
May 4, 2013
Net income
$
187,433

 
$
164,472

 
$
340,019

 
$
295,694

Foreign currency translation adjustments
4,600

 
(2,486
)
 
3,860

 
(2,136
)
Change in unrealized holding gains (losses) (net of taxes of $98, $25, $65, and $21, respectively) on available for sale securities classified as short-term investments
639

 
(124
)
 
471

 
190

Change in unrealized gains (losses) (net of taxes of $239, $235, $90, and $293, respectively) on derivative instruments designated as cash flow hedges
2,646

 
(4,183
)
 
569

 
(645
)
Changes in pension plans including prior service cost, transition obligation, net actuarial loss and foreign currency translation adjustments, (net of taxes of $167, $205, $329, and $205 respectively)
(1,396
)
 
3,456

 
(802
)
 
(47
)
Other comprehensive income (loss)
6,489

 
(3,337
)
 
4,098

 
(2,638
)
Comprehensive income
$
193,922

 
$
161,135

 
$
344,117

 
$
293,056


See accompanying notes.


























2



ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(thousands, except per share amounts)
 
May 3, 2014
 
November 2, 2013
ASSETS
 

 
 

Current Assets
 
 
 
Cash and cash equivalents
$
402,790

 
$
392,089

Short-term investments
4,404,435

 
4,290,823

Accounts receivable, net
360,847

 
325,144

Inventories (1)
298,432

 
283,337

Deferred tax assets
119,347

 
136,299

Prepaid income tax
5,567

 
2,391

Prepaid expenses and other current assets
46,614

 
42,342

Total current assets
5,638,032

 
5,472,425

Property, Plant and Equipment, at Cost
 
 
 
Land and buildings
468,944

 
458,853

Machinery and equipment
1,798,147

 
1,733,850

Office equipment
48,466

 
49,321

Leasehold improvements
51,743

 
50,870

 
2,367,300

 
2,292,894

Less accumulated depreciation and amortization
1,821,815

 
1,784,723

Net property, plant and equipment
545,485

 
508,171

Other Assets
 
 
 
Deferred compensation plan investments
18,867

 
17,364

Other investments
11,213

 
3,816

Goodwill
287,341

 
284,112

Intangible assets, net
28,442

 
28,552

Deferred tax assets
22,954

 
26,226

Other assets
42,617

 
41,084

Total other assets
411,434

 
401,154

 
$
6,594,951

 
$
6,381,750

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
132,194

 
$
119,994

Deferred income on shipments to distributors, net
267,933

 
247,428

Income taxes payable
27,191

 
45,490

Accrued liabilities
143,884

 
157,600

Total current liabilities
571,202

 
570,512

Non-current liabilities
 
 
 
Long-term debt
872,515

 
872,241

Deferred income taxes
21,203

 
6,037

Deferred compensation plan liability
18,867

 
17,364

Other non-current liabilities
179,641

 
176,020

Total non-current liabilities
1,092,226

 
1,071,662

Commitments and contingencies


 


Shareholders’ Equity
 
 
 
Preferred stock, $1.00 par value, 471,934 shares authorized, none outstanding

 

Common stock, $0.16 2/3 par value, 1,200,000,000 shares authorized, 314,145,403 shares
issued and outstanding (311,045,084 on November 2, 2013)
52,359

 
51,842

Capital in excess of par value
781,011

 
711,879

Retained earnings
4,174,601

 
4,056,401

Accumulated other comprehensive loss
(76,448
)
 
(80,546
)
Total shareholders’ equity
4,931,523

 
4,739,576

 
$
6,594,951

 
$
6,381,750

(1)
Includes $1,982 and $2,273 related to stock-based compensation at May 3, 2014 and November 2, 2013, respectively.

See accompanying notes.

3






ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(thousands)
  
Six Months Ended
 
May 3, 2014
 
May 4, 2013
Cash flows from operating activities:
 
 
 
Net income
$
340,019

 
$
295,694

Adjustments to reconcile net income to net cash provided by operations:
 
 
 
Depreciation
54,794

 
55,233

Amortization of intangibles
110

 
110

Stock-based compensation expense
21,949

 
31,017

Excess tax benefit-stock options
(12,027
)
 
(8,808
)
Deferred income taxes
(1,925
)
 
(10,402
)
Other non-cash activity
2,817

 
(1,382
)
Changes in operating assets and liabilities
(9,840
)
 
48,693

Total adjustments
55,878

 
114,461

Net cash provided by operating activities
395,897

 
410,155

Cash flows from investing activities:
 
 
 
Purchases of short-term available-for-sale investments
(4,510,237
)
 
(3,856,909
)
Maturities of short-term available-for-sale investments
3,995,075

 
3,277,635

Sales of short-term available-for-sale investments
402,086

 
374,515

Additions to property, plant and equipment
(92,181
)
 
(44,448
)
Increase in other assets
(9,082
)
 
(2,526
)
Net cash used for investing activities
(214,339
)
 
(251,733
)
Cash flows from financing activities:
 
 
 
Term loan repayments

 
(60,108
)
Dividend payments to shareholders
(221,819
)
 
(195,094
)
Repurchase of common stock
(111,577
)
 
(21,520
)
Proceeds from employee stock plans
142,536

 
176,025

Contingent consideration payment
(1,773
)
 
(3,752
)
Increase in other financing activities
10,964

 
3,157

Excess tax benefit-stock options
12,027

 
8,808

Net cash used for financing activities
(169,642
)
 
(92,484
)
Effect of exchange rate changes on cash
(1,215
)
 
860

Net increase in cash and cash equivalents
10,701

 
66,798

Cash and cash equivalents at beginning of period
392,089

 
528,833

Cash and cash equivalents at end of period
$
402,790

 
$
595,631

See accompanying notes.

4



ANALOG DEVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED MAY 3, 2014
(all tabular amounts in thousands except per share amounts and percentages)

Note 1 – Basis of Presentation
In the opinion of management, the information furnished in the accompanying condensed consolidated financial statements reflects all normal recurring adjustments that are necessary to fairly state the results for these interim periods and should be read in conjunction with Analog Devices, Inc.’s (the Company) Annual Report on Form 10-K for the fiscal year ended November 2, 2013 and related notes. The results of operations for the interim periods shown in this report are not necessarily indicative of the results that may be expected for the fiscal year ending November 1, 2014 or any future period.
Certain amounts reported in previous periods have been reclassified to conform to the fiscal 2014 presentation. Such reclassified amounts are immaterial. The Company has a 52-53 week fiscal year that ends on the Saturday closest to the last day in October. Fiscal 2014 and fiscal 2013 are 52-week fiscal years.

Note 2 – Revenue Recognition
Revenue from product sales to customers is generally recognized when title passes, which for shipments to certain foreign countries is subsequent to product shipment. Title for these shipments ordinarily passes within a week of shipment. A reserve for sales returns and allowances for customers is recorded based on historical experience or specific identification of an event necessitating a reserve.
In all regions of the world, the Company defers revenue and the related cost of sales on shipments to distributors until the distributors resell the products to their customers. As a result, the Company’s revenue fully reflects end customer purchases and is not impacted by distributor inventory levels. Sales to distributors are made under agreements that allow distributors to receive price-adjustment credits, as discussed below, and to return qualifying products for credit, as determined by the Company, in order to reduce the amounts of slow-moving, discontinued or obsolete product from their inventory. These agreements limit such returns to a certain percentage of the value of the Company’s shipments to that distributor during the prior quarter. In addition, distributors are allowed to return unsold products if the Company terminates the relationship with the distributor.
Distributors are granted price-adjustment credits for sales to their customers when the distributor’s standard cost (i.e., the Company’s sales price to the distributor) does not provide the distributor with an appropriate margin on its sales to its customers. As distributors negotiate selling prices with their customers, the final sales price agreed upon with the customer will be influenced by many factors, including the particular product being sold, the quantity ordered, the particular customer, the geographic location of the distributor and the competitive landscape. As a result, the distributor may request and receive a price-adjustment credit from the Company to allow the distributor to earn an appropriate margin on the transaction.
Distributors are also granted price-adjustment credits in the event of a price decrease subsequent to the date the product was shipped and billed to the distributor. Generally, the Company will provide a credit equal to the difference between the price paid by the distributor (less any prior credits on such products) and the new price for the product multiplied by the quantity of the specific product in the distributor’s inventory at the time of the price decrease.
Given the uncertainties associated with the levels of price-adjustment credits to be granted to distributors, the sales price to the distributor is not fixed or determinable until the distributor resells the products to their customers. Therefore, the Company defers revenue recognition from sales to distributors until the distributors have sold the products to their customers.
Title to the inventory transfers to the distributor at the time of shipment or delivery to the distributor, and payment from the distributor is due in accordance with the Company’s standard payment terms. These payment terms are not contingent upon the distributors’ sale of the products to their customers. Upon title transfer to distributors, inventory is reduced for the cost of goods shipped, the margin (sales less cost of sales) is recorded as “deferred income on shipments to distributors, net” and an account receivable is recorded. Shipping costs are charged to cost of sales as incurred.

The deferred costs of sales to distributors have historically had very little risk of impairment due to the margins the Company earns on sales of its products and the relatively long life-cycle of the Company’s products. Product returns from distributors that are ultimately scrapped have historically been immaterial. In addition, price protection and price-adjustment credits granted to distributors historically have not exceeded the margins the Company earns on sales of its products. The Company continuously monitors the level and nature of product returns and is in frequent contact with the distributors to ensure reserves are established for all known material issues.

5



As of May 3, 2014 and November 2, 2013, the Company had gross deferred revenue of $334.0 million and $309.2 million, respectively, and gross deferred cost of sales of $66.1 million and $61.8 million, respectively. Deferred income on shipments to distributors increased in the first six months of fiscal 2014 primarily as a result of an increase in product shipments into the channel during the final month of the second quarter of fiscal 2014 in order to support anticipated sales demand.
The Company generally offers a twelve-month warranty for its products. The Company’s warranty policy provides for replacement of defective products. Specific accruals are recorded for known product warranty issues. Product warranty expenses during each of the three- and six-month periods ended May 3, 2014 and May 4, 2013 were not material.

Note 3 – Stock-Based Compensation

Stock-based compensation is measured at the grant date based on the grant-date fair value of the awards ultimately expected to vest, and is recognized as an expense on a straight-line basis over the vesting period, which is generally five years for stock options and three years for restricted stock units. In addition to restricted stock units with a service condition, we grant restricted stock units with both a market condition and a service condition (market-based restricted stock units). The number of shares of the Company's common stock to be issued upon vesting of market-based restricted stock units will range from 0% to 200% of the target amount, based on the comparison of the Company's total shareholder return (TSR) to the median TSR of a specified peer group over a three-year period. TSR is a measure of stock price appreciation plus any dividends paid during the performance period. Determining the amount of stock-based compensation to be recorded for stock options and market-based restricted stock units requires the Company to develop estimates to calculate the grant-date fair value of awards.

Grant-Date Fair Value — The Company uses the Black-Scholes valuation model to calculate the grant-date fair value of stock option awards and the Monte Carlo simulation model to calculate the grant-date fair value of market-based restricted stock units. The use of these valuation models requires the Company to make estimates and assumptions, such as expected volatility, expected term, risk-free interest rate, expected dividend yield and forfeiture rates. The grant-date fair value of restricted stock units with only a service condition represents the value of the Company’s common stock on the date of grant, reduced by the present value of dividends expected to be paid on the Company’s common stock prior to vesting.

Information pertaining to the Company’s stock option awards and the related estimated weighted-average assumptions to calculate the fair value of stock options using the Black-Scholes valuation model granted during the three- and six-month periods ended May 3, 2014 and May 4, 2013 are as follows:
  
Three Months Ended
 
Six Months Ended
Stock Options
May 3, 2014
 
May 4, 2013
 
May 3, 2014
 
May 4, 2013
Options granted (in thousands)
2,094

 
2,266

 
2,110

 
2,286

Weighted-average exercise price

$51.74

 

$46.47

 

$51.72

 

$46.41

Weighted-average grant-date fair value

$9.00

 

$7.36

 

$8.99

 

$7.35

Assumptions:
 
 
 
 
 
 
 
Weighted-average expected volatility
24.9
%
 
24.6
%
 
24.9
%
 
24.6
%
Weighted-average expected term (in years)
5.3

 
5.4

 
5.3

 
5.4

Weighted-average risk-free interest rate
1.7
%
 
1.0
%
 
1.7
%
 
1.0
%
Weighted-average expected dividend yield
2.9
%
 
2.9
%
 
2.9
%
 
2.9
%

The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the performance conditions stipulated in the award grant and calculates the fair market value for the market-based restricted stock units granted. The Monte Carlo simulation model also uses stock price volatility and other variables to estimate the probability of satisfying the performance conditions, including the possibility that the market condition may not be satisfied, and the resulting fair value of the award. Information pertaining to the Company’s market-based restricted stock units and the related estimated assumptions used to calculate the fair value of market-based restricted stock units granted during the three- and six-month periods ended May 3, 2014 using the Monte Carlo simulation model are as follows:

6



  
Three and Six Months Ended
Market-based Restricted Stock Units
May 3, 2014
Units granted (in thousands)
86

Grant-date fair value

$50.79

Assumptions:
 
Historical stock price volatility
23.2
%
Risk-free interest rate
0.8
%
Expected dividend yield
2.8
%
Market-based restricted stock units were not granted during the three- and six-month periods ended May 4, 2013.
Expected volatility — The Company is responsible for estimating volatility and has considered a number of factors, including third-party estimates. The Company currently believes that the exclusive use of implied volatility results in the best estimate of the grant-date fair value of employee stock options because it reflects the market’s current expectations of future volatility. In evaluating the appropriateness of exclusively relying on implied volatility, the Company concluded that: (1) options in the Company’s common stock are actively traded with sufficient volume on several exchanges; (2) the market prices of both the traded options and the underlying shares are measured at a similar point in time to each other and on a date close to the grant date of the employee share options; (3) the traded options have exercise prices that are both near-the-money and close to the exercise price of the employee share options; and (4) the remaining maturities of the traded options used to estimate volatility are at least one year.

Expected term — The Company uses historical employee exercise and option expiration data to estimate the expected term assumption for the Black-Scholes grant-date valuation. The Company believes that this historical data is currently the best estimate of the expected term of a new option, and that generally its employees exhibit similar exercise behavior.
Risk-free interest rate — The yield on zero-coupon U.S. Treasury securities for a period that is commensurate with the expected term assumption is used as the risk-free interest rate.
Expected dividend yield — Expected dividend yield is calculated by annualizing the cash dividend declared by the Company’s Board of Directors for the current quarter and dividing that result by the closing stock price on the date of grant. Until such time as the Company’s Board of Directors declares a cash dividend for an amount that is different from the current quarter’s cash dividend, the current dividend will be used in deriving this assumption. Cash dividends are not paid on options, restricted stock or restricted stock units.

Stock-Based Compensation Expense
The amount of stock-based compensation expense recognized during a period is based on the value of the awards that are ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term “forfeitures” is distinct from “cancellations” or “expirations” and represents only the unvested portion of the surrendered stock-based award. Based on an analysis of its historical forfeitures, the Company has applied an annual forfeiture rate of 4.4% to all unvested stock-based awards as of May 3, 2014. The rate of 4.4% represents the portion that is expected to be forfeited each year over the vesting period. This analysis will be re-evaluated quarterly and the forfeiture rate will be adjusted as necessary. Ultimately, the actual expense recognized over the vesting period will only be for those options that vest.
Additional paid-in-capital (APIC) Pool
The APIC pool represents the excess tax benefits related to share-based compensation that are available to absorb future tax deficiencies. If the amount of future tax deficiencies is greater than the available APIC pool, the Company records the excess as income tax expense in its condensed consolidated statements of income. During the three- and six-month periods ended May 3, 2014 and May 4, 2013, the Company had available APIC pool to absorb tax deficiencies recorded and as a result, these deficiencies did not affect its results of operations.
Stock-Based Compensation Activity
A summary of the activity under the Company’s stock option plans as of May 3, 2014 and changes during the three- and six-month periods then ended is presented below:

7



Activity during the Three Months Ended May 3, 2014
Options
Outstanding
(in thousands)
 
Weighted-
Average Exercise
Price Per Share
 
Weighted-
Average
Remaining
Contractual
Term in Years
 
Aggregate
Intrinsic
Value
Options outstanding February 1, 2014
16,362

 

$33.79

 
 
 
 
Options granted
2,094

 

$51.74

 
 
 
 
Options exercised
(2,038
)
 

$30.84

 
 
 
 
Options forfeited
(93
)
 

$41.02

 
 
 
 
Options expired
(1
)
 

$29.03

 
 
 
 
Options outstanding at May 3, 2014
16,324

 

$36.42

 
5.9
 

$245,430

Options exercisable at May 3, 2014
10,057

 

$31.09

 
4.2
 

$204,304

Options vested or expected to vest at May 3, 2014 (1)
15,750

 

$36.05

 
5.8
 

$242,568

 
(1)
In addition to the vested options, the Company expects a portion of the unvested options to vest at some point in the future. The number of options expected to vest is calculated by applying an estimated forfeiture rate to the unvested options.
 
 
 
 
Activity during the Six Months Ended May 3, 2014
Options
Outstanding
(in thousands)
 
Weighted-
Average Exercise
Price Per Share
Options outstanding November 2, 2013
18,992

 

$33.56

Options granted
2,110

 

$51.72

Options exercised
(4,545
)
 

$31.35

Options forfeited
(208
)
 

$40.89

Options expired
(25
)
 

$45.24

Options outstanding at May 3, 2014
16,324

 

$36.42


During the three and six months ended May 3, 2014, the total intrinsic value of options exercised (i.e., the difference between the market price at exercise and the price paid by the employee to exercise the options) was $42.9 million and $87.8 million, respectively, and the total amount of proceeds received by the Company from the exercise of these options was $62.9 million and $142.5 million, respectively.

During the three and six months ended May 4, 2013, the total intrinsic value of options exercised (i.e., the difference between the market price at exercise and the price paid by the employee to exercise the options) was $31.2 million and $83.2 million, respectively, and the total amount of proceeds received by the Company from the exercise of these options was $62.2 million and $176.0 million, respectively.

A summary of the Company’s restricted stock unit award activity as of May 3, 2014 and changes during the three- and six-month periods then ended is presented below: 
Activity during the Three Months Ended May 3, 2014
Restricted
Stock Units
Outstanding
(in thousands)
 
Weighted-
Average Grant-
Date Fair Value
Per Share
Restricted stock units outstanding at February 1, 2014
1,695

 

$39.00

Units granted
814

 

$47.78

Restrictions lapsed
(34
)
 

$37.20

Forfeited
(26
)
 

$38.98

Restricted stock units outstanding at May 3, 2014
2,449

 

$41.95


8



 
 
 
 
Activity during the Six Months Ended May 3, 2014
Restricted
Stock Units
Outstanding
(in thousands)
 
Weighted-
Average Grant-
Date Fair Value
Per Share
Restricted stock units outstanding at November 2, 2013
2,493

 

$37.62

Units granted
838

 

$47.75

Restrictions lapsed
(818
)
 

$34.96

Forfeited
(64
)
 

$38.69

Restricted stock units outstanding at May 3, 2014
2,449

 

$41.95


As of May 3, 2014, there was $115.9 million of total unrecognized compensation cost related to unvested share-based awards comprised of stock options, and restricted stock units. That cost is expected to be recognized over a weighted-average period of 1.6 years. The total grant-date fair value of shares that vested during the three and six months ended May 3, 2014 was approximately $12.7 million and $52.2 million, respectively. The total grant-date fair value of shares that vested during the three and six months ended May 4, 2013 was approximately $11.9 million and $62.1 million, respectively.

Note 4 – Common Stock Repurchase
The Company’s common stock repurchase program has been in place since August 2004. As of May 3, 2014, in the aggregate, the Board of Directors has authorized the Company to repurchase $5.6 billion of the Company’s common stock under the program. Under the program, the Company may repurchase outstanding shares of its common stock from time to time in the open market and through privately negotiated transactions. Unless terminated earlier by resolution of the Company’s Board of Directors, the repurchase program will expire when the Company has repurchased all shares authorized under the program. As of May 3, 2014, the Company had repurchased a total of approximately 132.1 million shares of its common stock for approximately $4,579.0 million under this program. As of May 3, 2014, an additional $991.0 million remains available for repurchase of shares under the current authorized program. The repurchased shares are held as authorized but unissued shares of common stock. The Company also, from time to time, repurchases shares in settlement of employee minimum tax withholding obligations due upon the vesting of restricted stock units, or in certain limited circumstances to satisfy the exercise price of options granted to the Company’s employees under the Company’s equity compensation plans. Any future common stock repurchases will be dependent upon several factors, including the Company's financial performance, outlook, liquidity and the amount of cash the Company has available in the United States.



9



Note 5 – Accumulated Other Comprehensive Income (Loss)
        
The following table provides the changes in accumulated other comprehensive income (loss), OCI, by component and the related tax effects during the first six months of fiscal 2014.
 
Foreign currency translation adjustment
 
Unrealized holding Gains on Available for Sale securities classified as short-term investments
 
Unrealized holding (losses) on securities classified as short-term investments
 
Unrealized holding Gains on Derivatives
 
Pension Plans
 
Total
November 2, 2013
$
483

 
$
953

 
$
(435
)
 
$
9,097

 
$
(90,644
)
 
$
(80,546
)
Other comprehensive income before reclassifications
3,860

 
293

 
243

 
1,993

 
(2,661
)
 
3,728

Amounts reclassified out of other comprehensive income

 

 

 
(1,514
)
 
2,188

 
674

Tax effects

 
(28
)
 
(37
)
 
90

 
(329
)
 
(304
)
Other comprehensive income
3,860

 
265

 
206

 
569

 
(802
)
 
4,098

May 3, 2014
$
4,343

 
$
1,218

 
$
(229
)
 
$
9,666

 
$
(91,446
)
 
$
(76,448
)


10




The amounts reclassified out of accumulated other comprehensive income into the consolidated condensed statement of income, with presentation location during each period were as follows:

 
 
Three Months Ended
 
Six Months Ended
 
 
 
 
May 3, 2014
 
May 3, 2014
 
 
Comprehensive Income Component
 
 
 
Location
Unrealized holding (losses) gains on derivatives
 
 
 
 
 
 
    Currency forwards
 
$
(207
)
 
$
105

 
Cost of sales
 
 
(384
)
 
(773
)
 
Research and development
 
 
(356
)
 
(298
)
 
Selling, marketing, general and administrative
     Treasury rate lock
 
(274
)
 
(548
)
 
Interest, expense
 
 
(1,221
)
 
(1,514
)
 
Total before tax
 
 
194

 
292

 
Tax
 
 
$
(1,027
)
 
(1,222
)
 
Net of tax
 
 

 
 
 
 
Amortization of pension components
 

 

 
 
     Transition obligation
 
$
5

 
$
10

 
a
     Prior service credit
 
(62
)
 
(122
)
 
a
     Actuarial losses
 
1,165

 
2,300

 
a
 
 
1,108

 
2,188


Total before tax
 
 
(167
)
 
(329
)
 
Tax
 
 
$
941

 
$
1,859

 
Net of tax
 
 
 
 
 
 
 
Total amounts reclassified out of accumulated other comprehensive income, net of tax
 
$
(86
)
 
$
637

 
 
______________
a) The amortization of pension components is included in the computation of net periodic pension cost. For further information see Note 13, Retirement Plans, contained in Item 8 of the Annual Report on Form 10-K for the fiscal year ended November 2, 2013.

The Company estimates $1.6 million of net derivative unrealized holding gains included in OCI will be reclassified into earnings within the next twelve months. There was no ineffectiveness in the three- and six-month periods ended May 3, 2014 and May 4, 2013.
Unrealized gains and losses on available-for-sale securities classified as short-term investments at May 3, 2014 and November 2, 2013 are as follows:
 
May 3, 2014
 
November 2, 2013
Unrealized gains on securities classified as short-term investments
$
1,430

 
$
1,137

Unrealized losses on securities classified as short-term investments
(268
)
 
(511
)
Net unrealized gains on securities classified as short-term investments
$
1,162

 
$
626

As of May 3, 2014, the Company held 140 investment securities, 26 of which were in an unrealized loss position with an aggregate fair value of $810.5 million. As of November 2, 2013, the Company held 137 investment securities, 31 of which were in an unrealized loss position with an aggregate fair value of $972.2 million. These unrealized losses were primarily related to corporate obligations that earn lower interest rates than current market rates. None of these investments have been in a loss position for more than twelve months. As the Company does not intend to sell these investments and it is unlikely that

11



the Company will be required to sell the investments before recovery of their amortized basis, which will be at maturity, the Company does not consider those investments to be other-than-temporarily impaired at May 3, 2014 and November 2, 2013.
Realized gains or losses on investments are determined based on the specific identification basis and are recognized in nonoperating (income) expense. There were no material net realized gains or losses from the sales of available-for-sale investments during any of the fiscal periods presented.

Note 6 – Earnings Per Share
Basic earnings per share is computed based only on the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect of potential future issuances of common stock relating to stock option programs and other potentially dilutive securities using the treasury stock method. In calculating diluted earnings per share, the dilutive effect of stock options is computed using the average market price for the respective period. In addition, the assumed proceeds under the treasury stock method include the average unrecognized compensation expense of stock options that are in-the-money and restricted stock units. This results in the “assumed” buyback of additional shares, thereby reducing the dilutive impact of in-the-money stock options. Potential shares related to certain of the Company’s outstanding stock options were excluded because they were anti-dilutive. Those potential shares, determined based on the weighted average exercise prices during the respective periods, related to the Company’s outstanding stock options could be dilutive in the future.
The following table sets forth the computation of basic and diluted earnings per share:
 
Three Months Ended
 
Six Months Ended
 
May 3, 2014
 
May 4, 2013
 
May 3, 2014
 
May 4, 2013
Net Income
$
187,433

 
$
164,472

 
$
340,019

 
$
295,694

Basic shares:
 
 
 
 
 
 
 
Weighted-average shares outstanding
313,488

 
307,444

 
312,887

 
305,464

Earnings per share basic:
$
0.60

 
$
0.53

 
$
1.09

 
$
0.97

Diluted shares:
 
 
 
 
 
 
 
Weighted-average shares outstanding
313,488

 
307,444

 
312,887

 
305,464

Assumed exercise of common stock equivalents
4,859

 
5,924

 
5,295

 
6,358

Weighted-average common and common equivalent shares
318,347

 
313,368

 
318,182

 
311,822

Earnings per share diluted:
$
0.59

 
$
0.52

 
$
1.07

 
$
0.95

Anti-dilutive shares related to:
 
 
 
 
 
 
 
Outstanding stock options
2,981

 
5,903

 
2,611

 
5,772


Note 7 – Special Charges
The Company monitors global macroeconomic conditions on an ongoing basis and continues to assess opportunities for improved operational effectiveness and efficiency, as well as a better alignment of expenses with revenues. As a result of these assessments, the Company has undertaken various restructuring actions over the past several years. These actions are described below.
The following tables display the special charges taken for ongoing actions and a roll-forward from November 2, 2013 to May 3, 2014 of the employee separation and exit cost accruals established related to these actions.
 
 
Reduction of Operating Costs
 
Statements of Income
 
2014
2013
2012
 
Workforce reductions
 
$
2,685

$
29,848

$
7,966

 
Facility closure costs
 


186

 
Non-cash impairment charge
 


219

 
Other items
 


60

 
Total Charges
 
$
2,685

$
29,848

$
8,431

 

12




Accrued Restructuring
Reduction of Operating Costs
Balance at November 2, 2013
$
19,955

First quarter 2014 special charge
2,685

Severance payments
(4,171
)
Effect of foreign currency on accrual
(4
)
Balance at February 1, 2014
18,465

Severance payments
(6,469
)
Effect of foreign currency on accrual
36

Balance at May 3, 2014
$
12,032


Reduction of Operating Costs
During fiscal 2012, the Company recorded special charges of approximately $8.4 million. These special charges included: $8.0 million for severance and fringe benefit costs in accordance with its ongoing benefit plan or statutory requirements at foreign locations for 95 manufacturing, engineering and selling, marketing, general and administrative (SMG&A) employees; $0.2 million for lease obligation costs for facilities that the Company ceased using during the third quarter of fiscal 2012; $0.1 million for contract termination costs; and $0.2 million for the write-off of property, plant and equipment. The Company terminated the employment of all employees associated with these actions.
During fiscal 2013, the Company recorded special charges of approximately $29.8 million for severance and fringe benefit costs in accordance with its ongoing benefit plan or statutory requirements at foreign locations for 235 engineering and SMG&A employees. As of May 3, 2014, the Company employed 19 of the 235 employees included in these cost reduction actions. These employees must continue to be employed by the Company until their employment is involuntarily terminated in order to receive the severance benefit.
During the first quarter of fiscal 2014, the Company recorded a special charge of approximately $2.7 million for severance and fringe benefit costs in accordance with its ongoing benefit plan or statutory requirements at foreign locations for 30 engineering and SMG&A employees. As of May 3, 2014, the Company employed 4 of the 30 employees included in this cost reduction action. These employees must continue to be employed by the Company until their employment is involuntarily terminated in order to receive the severance benefit.

Note 8 – Segment Information
The Company operates and tracks its results in one reportable segment based upon the aggregation of five operating segments. The Company designs, develops, manufactures and markets a broad range of integrated circuits. The Chief Executive Officer has been identified as the Chief Operating Decision Maker. The Company has determined that all of the Company's operating segments share the following similar economic characteristics, and therefore meet the criteria established for operating segments to be aggregated into one reportable segment, namely:
The primary source of revenue for each operating segment is the sale of integrated circuits.
The integrated circuits sold by each of the Company's operating segments are manufactured using similar semiconductor manufacturing processes and raw materials in either the Company’s own production facilities or by third-party wafer fabricators using proprietary processes.
The Company sells its products to tens of thousands of customers worldwide. Many of these customers use products spanning all operating segments in a wide range of applications.
The integrated circuits marketed by each of the Company's operating segments are sold globally through a direct sales force, third-party distributors, independent sales representatives and via our website to the same types of customers.
All of the Company's operating segments share a similar long-term financial model as they have similar economic characteristics. The causes for variation in operating and financial performance are the same among the Company's operating segments and include factors such as (i) life cycle and price and cost fluctuations, (ii) number of competitors, (iii) product differentiation and (iv) size of market opportunity. Additionally, each operating segment is subject to the overall cyclical nature of the semiconductor industry. Lastly, the number and composition of employees and the amounts and types of tools and materials required for production of products are similar for each operating segment.


13



Revenue Trends by End Market
The following table summarizes revenue by end market. The categorization of revenue by end market is determined using a variety of data points including the technical characteristics of the product, the “sold to” customer information, the “ship to” customer information and the end customer product or application into which the Company’s product will be incorporated. As data systems for capturing and tracking this data evolve and improve, the categorization of products by end market can vary over time. When this occurs, the Company reclassifies revenue by end market for prior periods. Such reclassifications typically do not materially change the sizing of, or the underlying trends of results within, each end market. The results below in the consumer end market are reflective of the sale of the Company's microphone product line in the fourth quarter of fiscal 2013.
 
Three Months Ended
 
May 3, 2014
 
May 4, 2013
 
Revenue
 
% of
Revenue
 
Y/Y%
 
Revenue
 
% of
Revenue
Industrial
$
326,530

 
47
%
 
5
 %
 
$
311,128

 
47
%
Automotive
135,488

 
20
%
 
10
 %
 
122,715

 
19
%
Consumer
77,705

 
11
%
 
(23
)%
 
101,233

 
15
%
Communications
154,813

 
22
%
 
25
 %
 
124,174

 
19
%
Total revenue
$
694,536

 
100
%
 
5
 %
 
$
659,250

 
100
%

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended
 
May 3, 2014
 
May 4, 2013
 
Revenue
 
% of
Revenue
 
Y/Y%
 
Revenue
 
% of
Revenue
Industrial
$
616,520

 
47
%
 
4
 %
 
$
592,455

 
46
%
Automotive
259,773

 
20
%
 
13
 %
 
230,532

 
18
%
Consumer
152,040

 
11
%
 
(27
)%
 
208,428

 
16
%
Communications
294,441

 
22
%
 
18
 %
 
249,969

 
20
%
Total revenue
$
1,322,774

 
100
%
 
3
 %
 
$
1,281,384

 
100
%
  
Revenue Trends by Product Type
The following table summarizes revenue by product categories. The categorization of the Company’s products into broad categories is based on the characteristics of the individual products, the specification of the products and in some cases the specific uses that certain products have within applications. The categorization of products into categories is therefore subject to judgment in some cases and can vary over time. In instances where products move between product categories, the Company reclassifies the amounts in the product categories for all prior periods. Such reclassifications typically do not materially change the sizing of, or the underlying trends of results within, each product category. The results below in the other analog product category market are reflective of the sale of the Company's microphone product line in the fourth quarter of fiscal 2013.
 
Three Months Ended
 
May 3, 2014
 
May 4, 2013
 
Revenue
 
% of
Revenue*
 
Y/Y%
 
Revenue
 
% of
Revenue*
Converters
$
317,915

 
46
%
 
8
 %
 
$
295,459

 
45
%
Amplifiers / Radio frequency
186,287

 
27
%
 
9
 %
 
170,793

 
26
%
Other analog
88,103

 
13
%
 
(5
)%
 
92,441

 
14
%
Subtotal analog signal processing
592,305

 
85
%
 
6
 %
 
558,693

 
85
%
Power management & reference
43,138

 
6
%
 
(1
)%
 
43,701

 
7
%
Total analog products
$
635,443

 
91
%
 
5
 %
 
$
602,394

 
91
%
Digital signal processing
59,093

 
9
%
 
4
 %
 
56,856

 
9
%
Total revenue
$
694,536

 
100
%
 
5
 %
 
$
659,250

 
100
%
* The sum of the individual percentages does not equal the total due to rounding.

14



 
 
 
 
 
 
 
 
 
 
 
Six Months Ended
 
May 3, 2014
 
May 4, 2013
 
Revenue
 
% of
Revenue*
 
Y/Y%
 
Revenue
 
% of
Revenue*
Converters
$
608,466

 
46
%
 
6
 %
 
$
573,399

 
45
%
Amplifiers / Radio frequency
351,001

 
27
%
 
7
 %
 
328,771

 
26
%
Other analog
167,522

 
13
%
 
(11
)%
 
187,599

 
15
%
Subtotal analog signal processing
1,126,989

 
85
%
 
3
 %
 
1,089,769

 
85
%
Power management & reference
81,848

 
6
%
 
(1
)%
 
83,083

 
6
%
Total analog products
$
1,208,837

 
91
%
 
3
 %
 
$
1,172,852

 
92
%
Digital signal processing
113,937

 
9
%
 
5
 %
 
108,532

 
8
%
Total revenue
$
1,322,774

 
100
%
 
3
 %
 
$
1,281,384

 
100
%
* The sum of the individual percentages does not equal the total due to rounding.

Revenue Trends by Geographic Region
Revenue by geographic region, based on the primary location of the Company's customers’ design activity for its products, for the three- and six-month periods ended May 3, 2014 and May 4, 2013 were as follows:
 
Three Months Ended
 
Six Months Ended
Region
May 3, 2014
 
May 4, 2013
 
May 3, 2014
 
May 4, 2013
United States
$
193,608

 
$
206,181

 
$
375,906

 
$
410,452

Rest of North and South America
25,431

 
28,194

 
44,867

 
51,706

Europe
232,299

 
216,071

 
432,986

 
405,369

Japan
74,591

 
71,874

 
145,682

 
136,562

China
109,583

 
83,970

 
210,067

 
168,739

Rest of Asia
59,024

 
52,960

 
113,266

 
108,556

Total revenue
$
694,536

 
$
659,250

 
$
1,322,774

 
$
1,281,384

In the three- and six-month periods ended May 3, 2014 and May 4, 2013, the predominant country comprising “Rest of North and South America” is Canada; the predominant countries comprising “Europe” are Germany, Sweden, France and the United Kingdom; and the predominant countries comprising “Rest of Asia” are South Korea and Taiwan.

Note 9 – Fair Value
The Company defines fair value as the price that would be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
Level 1 — Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 — Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability.
Level 3 — Level 3 inputs are unobservable inputs for the asset or liability in which there is little, if any, market activity for the asset or liability at the measurement date.
The tables below, set forth by level the Company’s financial assets and liabilities, excluding accrued interest components, that are accounted for at fair value on a recurring basis as of May 3, 2014 and November 2, 2013. The tables exclude cash on hand and assets and liabilities that are measured at historical cost or any basis other than fair value. As of May 3, 2014 and November 2, 2013, the Company held $33.7 million and $45.6 million, respectively, of cash that was excluded from the tables below.

15



 
May 3, 2014
 
Fair Value measurement at
Reporting Date using:
 
 
 
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Other
Unobservable
Inputs
(Level 3)
 
Total
Assets
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
Institutional money market funds
$
151,005

 
$

 
$

 
$
151,005

Corporate obligations (1)

 
218,049

 

 
218,049

Short - term investments:
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
Securities with one year or less to maturity:
 
 
 
 
 
 
 
Corporate obligations (1)

 
3,879,027

 

 
3,879,027

Floating rate notes, issued at par

 
395,391

 

 
395,391

Floating rate notes (1)

 
89,997

 

 
89,997

Securities with greater than one year to maturity:
 
 
 
 
 
 
 
Floating rate notes, issued at par

 
40,020

 

 
40,020

Other assets:
 
 
 
 
 
 
 
Deferred compensation investments
19,235

 

 

 
19,235

Forward foreign currency exchange contracts (2)

 
2,955

 

 
2,955

Total assets measured at fair value
$
170,240

 
$
4,625,439

 
$

 
$
4,795,679

Liabilities
 
 
 
 
 
 
 
Contingent consideration
$

 
$

 
$
4,833

 
$
4,833

Total liabilities measured at fair value
$

 
$

 
$
4,833

 
$
4,833

 
(1)
The amortized cost of the Company’s investments classified as available-for-sale as of May 3, 2014 was $3,796.9 million.
(2)
The Company has a master netting arrangement by counterparty with respect to derivative contracts. See Note 10, Derivatives, for more information related to the Company's master netting arrangements.

16



 
November 2, 2013
 
Fair Value measurement at
Reporting Date using:
 
 
 
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Other
Unobservable
Inputs
(Level 3)
 
Total
Assets
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
Institutional money market funds
$
186,896

 
$

 
$

 
$
186,896

Corporate obligations (1)

 
159,556

 

 
159,556

Short - term investments:
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
Securities with one year or less to maturity:
 
 
 
 
 
 
 
Corporate obligations (1)

 
3,764,213

 

 
3,764,213

Floating rate notes, issued at par

 
207,521

 

 
207,521

Floating rate notes (1)

 
113,886

 

 
113,886

Securities with greater than one year to maturity:
 
 
 
 
 
 
 
Floating rate notes, issued at par

 
205,203

 

 
205,203

Other assets:
 
 
 
 
 
 
 
Forward foreign currency exchange contracts (2)

 
2,267

 

 
2,267

Deferred compensation investments
17,431

 

 

 
17,431

Total assets measured at fair value
$
204,327

 
$
4,452,646

 
$

 
$
4,656,973

Liabilities
 
 
 
 
 
 
 
Contingent consideration

 

 
6,479

 
6,479

Total liabilities measured at fair value
$

 
$

 
$
6,479

 
$
6,479

 
(1)
The amortized cost of the Company’s investments classified as available-for-sale as of November 2, 2013 was $3,824.0 million.
(2)
The Company has a master netting arrangement by counterparty with respect to derivative contracts. See Note 10, Derivatives, for more information related to the Company's master netting arrangements.
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
Cash equivalents and short-term investments — These investments are adjusted to fair value based on quoted market prices or are determined using a yield curve model based on current market rates.
Deferred compensation plan investments — The fair value of these mutual fund, money market fund and equity investments are based on quoted market prices.
Forward foreign currency exchange contracts — The estimated fair value of forward foreign currency exchange contracts, which includes derivatives that are accounted for as cash flow hedges and those that are not designated as cash flow hedges, is based on the estimated amount the Company would receive if it sold these agreements at the reporting date taking into consideration current interest rates as well as the creditworthiness of the counterparty for assets and the Company’s creditworthiness for liabilities.

Contingent consideration — The fair value of the contingent consideration was estimated utilizing the income approach and is based upon significant inputs not observable in the market. The income approach is based on two steps. The first step involves a projection of the cash flows that is based on the Company’s estimates of the timing and probability of achieving the defined milestones. The second step involves converting the cash flows into a present value equivalent through discounting. The discount rate reflects the Baa costs of debt plus the relevant risk associated with the asset and the time value of money.

17



The fair value measurement of the contingent consideration encompasses the following significant unobservable inputs: 
Unobservable Inputs
Range
Estimated contingent consideration payments
$5,000
Discount rate
7% - 10%
Timing of cash flows
1 - 17 months
Probability of achievement
100%
Changes in the fair value of the contingent consideration subsequent to the acquisition date that are primarily driven by assumptions pertaining to the achievement of the defined milestones will be recognized in operating income in the period of the estimated fair value change. Significant increases or decreases in any of the inputs in isolation may result in a fluctuation in the fair value measurement.
The following table summarizes the change in the fair value of the contingent consideration measured using significant unobservable inputs (Level 3) for the six months ended May 3, 2014: 
 
Contingent
Consideration
Balance as of November 2, 2013
$
6,479

Payment made (1)
(2,000
)
Fair value adjustment (2)
354

Balance as of May 3, 2014
$
4,833

 
(1)
The payment is reflected in the Company's condensed consolidated statements of cash flows as cash used in financing activities related to the liability recognized at fair value as of the acquisition date and as cash provided by operating activities related to the fair value adjustments previously recognized in earnings.
(2)
Recorded in research and development expense in the Company's condensed consolidated statements of income.
Financial Instruments Not Recorded at Fair Value on a Recurring Basis
On April 4, 2011, the Company issued $375.0 million aggregate principal amount of 3.0% senior unsecured notes due April 15, 2016 (the 2016 Notes) with semi-annual fixed interest payments due on April 15 and October 15 of each year, commencing October 15, 2011. Based on quotes received from third-party banks, the fair value of the 2016 Notes as of May 3, 2014 and November 2, 2013 was $389.3 million and $392.8 million, respectively, and is classified as a Level 1 measurement according to the fair value hierarchy.
On June 3, 2013, the Company issued $500.0 million aggregate principal amount of 2.875% senior unsecured notes due June 1, 2023 (the 2023 Notes) with semi-annual fixed interest payments due on June 1 and December 1 of each year, commencing December 1, 2013. Based on quotes received from third-party banks, the fair value of the 2023 Notes as of May 3, 2014 and November 2, 2013 was $476.0 million and $466.0 million, respectively, and is classified as a Level 1 measurement according to the fair value hierarchy.

Note 10 – Derivatives
Foreign Exchange Exposure Management — The Company enters into forward foreign currency exchange contracts to offset certain operational and balance sheet exposures from the impact of changes in foreign currency exchange rates. Such exposures result from the portion of the Company’s operations, assets and liabilities that are denominated in currencies other
than the U.S. dollar, primarily the Euro; other significant exposures include the Philippine Peso, the Japanese Yen and the British Pound. These foreign currency exchange contracts are entered into to support transactions made in the normal course of business, and accordingly, are not speculative in nature. The contracts are for periods consistent with the terms of the underlying transactions, generally one year or less. Hedges related to anticipated transactions are designated and documented at the inception of the respective hedges as cash flow hedges and are evaluated for effectiveness monthly. Derivative instruments are employed to eliminate or minimize certain foreign currency exposures that can be confidently identified and quantified. As the terms of the contract and the underlying transaction are matched at inception, forward contract effectiveness is calculated by comparing the change in fair value of the contract to the change in the forward value of the anticipated transaction, with the effective portion of the gain or loss on the derivative reported as a component of accumulated OCI in shareholders’ equity and reclassified into earnings in the same period during which the hedged transaction affects earnings. Any residual change in fair value of the instruments, or ineffectiveness, is recognized immediately in other (income) expense. Additionally, the Company enters into forward foreign currency contracts that economically hedge the gains and losses generated by the re-measurement of

18



certain recorded assets and liabilities in a non-functional currency. Changes in the fair value of these undesignated hedges are recognized in other (income) expense immediately as an offset to the changes in the fair value of the asset or liability being hedged. As of May 3, 2014 and November 2, 2013, the total notional amount of these undesignated hedges was $40.0 million and $33.4 million, respectively. The fair value of these undesignated hedges in the Company’s condensed consolidated balance sheets as of May 3, 2014 and November 2, 2013 was immaterial.
Interest Rate Exposure Management — The Company's current and future debt may be subject to interest rate risk.  The Company utilizes interest rate derivatives to alter interest rate exposure in an attempt to reduce the effects of these changes. On April 24, 2013, the Company entered into a treasury rate lock agreement with Bank of America. This agreement allowed the Company to lock a 10-year US Treasury rate of 1.7845% through June 14, 2013 for its anticipated issuance of the 2023 Notes. The Company designated this agreement as a cash flow hedge. On June 3, 2013, the Company terminated the treasury rate lock simultaneously with the issuance of the 2023 Notes which resulted in a gain of approximately $11.0 million. This gain is being amortized into interest expense over the 10-year term of the 2023 Notes. See Note 5, Accumulated Other Comprehensive Income (Loss), for more information relating to the amortization of the treasury rate lock into interest expense.
On June 30, 2009, the Company entered into interest rate swap transactions related to its outstanding $375 million aggregate principal amount of 5.0% senior unsecured notes due July 1, 2014 (the 2014 Notes) where the Company swapped the notional amount of its $375.0 million of fixed rate debt at 5.0% into floating interest rate debt through July 1, 2014. The Company designated these swaps as fair value hedges. The fair value of the swaps at inception was zero and subsequent changes in the fair value of the interest rate swaps were reflected in the carrying value of the interest rate swaps on the balance sheet. The carrying value of the debt on the balance sheet was adjusted by an equal and offsetting amount. The amounts earned and owed under the swap agreements were accrued each period and were reported in interest expense. There was no ineffectiveness recognized in any of the periods presented. In the second quarter of fiscal 2012, the Company terminated the interest rate swap agreement. The Company received $19.8 million in cash proceeds from the swap termination, which included $1.3 million in accrued interest. As a result of the termination, the carrying value of the 2014 Notes was adjusted for the change in the fair value of the interest component of the debt up to the date of the termination of the swap in an amount equal to the fair value of the swap, and was amortized into earnings as a reduction of interest expense over the remaining life of the debt. During the third quarter of fiscal 2013, in conjunction with the redemption of the 2014 Notes, the Company recognized the remaining $8.6 million in unamortized proceeds received from the termination of the interest rate swap as other, net expense.
The market risk associated with the Company’s derivative instruments results from currency exchange rate or interest rate movements that are expected to offset the market risk of the underlying transactions, assets and liabilities being hedged. The counterparties to the agreements relating to the Company’s derivative instruments consist of a number of major international financial institutions with high credit ratings. Based on the credit ratings of the Company’s counterparties as of May 3, 2014, nonperformance is not perceived to be a significant risk. Furthermore, none of the Company’s derivatives are subject to collateral or other security arrangements and none contain provisions that are dependent on the Company’s credit ratings from any credit rating agency. While the contract or notional amounts of derivative financial instruments provide one measure of the volume of these transactions, they do not represent the amount of the Company’s exposure to credit risk. The amounts potentially subject to credit risk (arising from the possible inability of counterparties to meet the terms of their contracts) are generally limited to the amounts, if any, by which the counterparties’ obligations under the contracts exceed the obligations of the Company to the counterparties. As a result of the above considerations, the Company does not consider the risk of counterparty default to be significant.

The Company records the fair value of its derivative financial instruments in its condensed consolidated financial statements in other current assets, other assets or accrued liabilities, depending on their net position, regardless of the purpose or intent for holding the derivative contract. Changes in the fair value of the derivative financial instruments are either recognized periodically in earnings or in shareholders’ equity as a component of OCI. Changes in the fair value of cash flow hedges are recorded in OCI and reclassified into earnings when the underlying contract matures. Changes in the fair values of derivatives not qualifying for hedge accounting or the ineffective portion of designated hedges are reported in earnings as they occur.
The total notional amounts of forward foreign currency derivative instruments designated as hedging instruments of cash flow hedges denominated in Euros, British Pounds, Philippine Pesos and Japanese Yen as of May 3, 2014 and November 2, 2013 was $186.1 million and $196.9 million, respectively. The fair values of forward foreign currency derivative instruments designated as hedging instruments in the Company’s condensed consolidated balance sheets as of May 3, 2014 and November 2, 2013 were as follows:

19



 
 
 
Fair Value At
 
Balance Sheet Location
 
May 3, 2014
 
November 2, 2013
Forward foreign currency exchange contracts
Prepaid expenses and other current assets
 
$
2,937

 
$
2,377


For information on the unrealized holding gains (losses) on derivatives included in and reclassified out of accumulated other comprehensive income into the condensed consolidated statement of income related to forward foreign currency exchange contracts, see Note 5, Accumulated Other Comprehensive Income (Loss).

All of the Company’s derivative financial instruments are subject to master netting arrangements that allow the Company and its counterparties to net settle amounts owed to each other. Derivative assets and liabilities that can be net settled under these arrangements have been presented in the Company's consolidated balance sheet on a net basis. As of May 3, 2014 and November 2, 2013, none of the master netting arrangements involved collateral. The following table presents the gross amounts of the Company's derivative assets and liabilities and the net amounts recorded in our consolidated balance sheet:
 
 
 
May 3, 2014
 
November 2, 2013
Gross amount of recognized assets
$
3,938

 
$
4,217

Gross amounts offset in the consolidated balance sheet
(1,054
)
 
(1,950
)
Net amount presented in the consolidated balance sheet assets
$
2,884

 
$
2,267


Note 11 – Goodwill and Intangible Assets
Goodwill
The Company evaluates goodwill for impairment annually, as well as whenever events or changes in circumstances suggest that the carrying value of goodwill may not be recoverable. The Company tests goodwill for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis on the first day of the fourth quarter (on or about August 3) or more frequently if indicators of impairment exist. For the Company’s latest annual impairment assessment that occurred on August 4, 2013, the Company identified its reporting units to be its five operating segments. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. The Company determines the fair value of its reporting units using the income approach methodology of valuation that includes the discounted cash flow method, as well as other generally accepted valuation methodologies. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, the Company performs the second step of the goodwill impairment test to determine the amount of impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill. No impairment of goodwill resulted in any of the fiscal periods presented. The following table presents the changes in goodwill during the first six months of fiscal 2014:
 
Six Months Ended
 
May 3, 2014
Balance as of November 2, 2013
$
284,112

Foreign currency translation adjustment
3,229

Balance as of May 3, 2014
$
287,341

Intangible Assets
The Company reviews finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of assets may not be recoverable. Recoverability of these assets is measured by comparison of their carrying value to future undiscounted cash flows the assets are expected to generate over their remaining economic lives. If such assets are considered to be impaired, the impairment to be recognized in earnings equals the amount by which the carrying value of the assets exceeds their fair value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique. As of May 3, 2014 and November 2, 2013, the Company’s finite-lived intangible assets consisted of the following which related to the acquisition of Multigig, Inc. (See Note 16, Acquisitions):

20



 
May 3, 2014
 
November 2, 2013
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Technology-based
$
1,100

 
$
458

 
$
1,100

 
$
348

For each of the three- and six-month periods ended May 3, 2014 and May 4, 2013, amortization expense related to finite-lived intangible assets was $0.1 million. The remaining amortization expense will be recognized over a period of approximately 3.0 years.
The Company expects annual amortization expense for intangible assets to be:
Fiscal Year
Amortization Expense
Remainder of fiscal 2014

$110

2015

$220

2016

$220

2017

$92

Indefinite-lived intangible assets are tested for impairment on an annual basis on the first day of the fourth quarter (on or about August 3) or more frequently if indicators of impairment exist. No impairment of intangible assets resulted from the impairment tests in any of the fiscal periods presented.
Intangible assets, excluding in-process research and development (IPR&D), are amortized on a straight-line basis over their estimated useful lives or on an accelerated method of amortization that is expected to reflect the estimated pattern of economic use. IPR&D assets are considered indefinite-lived intangible assets until completion or abandonment of the associated research and development efforts. Upon completion of the projects, the IPR&D assets will be amortized over their estimated useful lives.

Indefinite-lived intangible assets consisted of $27.8 million of IPR&D as of May 3, 2014 and November 2, 2013.

Note 12 – Pension Plans
The Company has various defined benefit pension and other retirement plans for certain non-U.S. employees that are consistent with local statutory requirements and practices. The Company’s funding policy for its foreign defined benefit pension plans is consistent with the local requirements of each country. The plans’ assets consist primarily of U.S. and non-U.S. equity securities, bonds, property and cash.
Net periodic pension cost of non-U.S. plans is presented in the following table:
 
Three Months Ended
 
Six Months Ended
 
May 3, 2014
 
May 4, 2013
 
May 3, 2014
 
May 4, 2013
Service cost
$
3,436

 
$
2,820

 
$
6,834

 
$
5,676

Interest cost
3,577

 
3,114

 
7,107

 
6,251

Expected return on plan assets
(3,463
)
 
(2,924
)
 
(6,879
)
 
(5,876
)
Amortization of initial net obligation
5

 
5

 
10

 
10

Amortization of prior service cost
(61
)
 
(58
)
 
(122
)
 
(116
)
Amortization of net loss
1,159

 
743

 
2,302

 
1,491

Net periodic pension cost
$
4,653

 
$
3,700

 
$
9,252

 
$
7,436

Pension contributions of $4.3 million and $8.9 million were made by the Company during the three and six months ended May 3, 2014. The Company presently anticipates contributing an additional $8.8 million to fund its defined benefit pension plans in fiscal year 2014 for a total of $17.7 million.



21



Note 13 – Revolving Credit Facility

As of May 3, 2014, the Company had $4,807.2 million of cash and cash equivalents and short-term investments, of which $1,287.2 million was held in the United States. The balance of the Company's cash and cash equivalents and short-term investments was held outside the United States in various foreign subsidiaries. As the Company intends to reinvest its foreign earnings indefinitely, this cash is not available to meet the Company's cash requirements in the United States, including cash dividends and common stock repurchases. During December 2012, the Company terminated its five-year, $165.0 million unsecured revolving credit facility with certain institutional lenders entered into in May 2008. On December 19, 2012, the Company entered into a five-year, $500.0 million senior unsecured revolving credit facility with certain institutional lenders (the Credit Agreement). To date, the Company has not borrowed under this credit facility but the Company may borrow in the future and use the proceeds for repayment of existing indebtedness, stock repurchases, acquisitions, capital expenditures, working capital and other lawful corporate purposes. Revolving loans under the Credit Agreement (other than swing line loans) bear interest, at the Company's option, at either a rate equal to (a) the Eurodollar Rate (as defined in the Credit Agreement) plus a margin based on the Company's debt rating or (b) the Base Rate (defined as the highest of (i) the Bank of America prime rate, (ii) the Federal Funds Rate (as defined in the Credit Agreement) plus .50% and (iii) one month Eurodollar Rate plus 1.00%) plus a margin based on the Company's debt rating. The terms of the facility impose restrictions on the Company’s ability to undertake certain transactions, to create certain liens on assets and to incur certain subsidiary indebtedness. In addition, the Credit Agreement contains a consolidated leverage ratio covenant of total consolidated funded debt to consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA) of not greater than 3.0 to 1.0. As of May 3, 2014, the Company was compliant with these covenants.

Note 14 – Debt
On June 30, 2009, the Company issued $375.0 million aggregate principal amount of 5.0% senior unsecured notes due July 1, 2014 (the 2014 Notes) with semi-annual fixed interest payments due on January 1 and July 1 of each year, commencing January 1, 2010. The sale of the 2014 Notes was made pursuant to the terms of an underwriting agreement, dated June 25, 2009, between the Company and Credit Suisse Securities (USA) LLC, as representative of the several underwriters named therein. The net proceeds of the offering were $370.4 million, after issuing at a discount and deducting expenses, underwriting discounts and commissions, which were amortized over the term of the 2014 Notes.
On June 30, 2009, the Company entered into interest rate swap transactions related to its outstanding 2014 Notes where the Company swapped the notional amount of its $375.0 million of fixed rate debt at 5.0% into floating interest rate debt through July 1, 2014. The Company designated these swaps as fair value hedges. The changes in the fair value of the interest rate swaps were reflected in the carrying value of the interest rate swaps in other assets on the balance sheet. The carrying value of the debt on the balance sheet was adjusted by an equal and offsetting amount. In fiscal 2012, the Company terminated the interest rate swap agreement. The Company received $19.8 million in cash proceeds from the swap termination, which included $1.3 million in accrued interest. The proceeds, net of interest received, are disclosed in cash flows from financing activities in the Company's condensed consolidated statements of cash flows. As a result of the termination, the carrying value of the 2014 Notes was adjusted for the change in the fair value of the interest component of the debt up to the date of the termination of the swap in an amount equal to the fair value of the swap, and was amortized into earnings as a reduction of interest expense over the remaining life of the debt. During the third quarter of fiscal 2013, in conjunction with the redemption of the 2014 Notes, the Company recognized the remaining $8.6 million unamortized proceeds received from the termination of the interest rate swap as other, net expense, within non-operating (income) expense.
During the third quarter of fiscal 2013, the Company redeemed its outstanding 2014 Notes. The redemption price was 104.744% of the principal amount of the 2014 Notes. The Company applied the provisions of Accounting Standards Codification (ASC) Subtopic 470-50, Modifications and Extinguishments (ASC 470-50) in order to determine if the terms of the debt were substantially different and, as a result, whether to apply modification or extinguishment accounting. The Company concluded that the debt transaction qualified as a debt extinguishment and, as a result, recognized a net loss on debt extinguishment of approximately $10.2 million recorded in other, net expense within non-operating (income) expense. This loss was comprised of the make-whole premium of $17.8 million paid to bondholders on the 2014 Notes in accordance with the terms of the notes, the recognition of the remaining $8.6 million of unamortized proceeds received from the termination of the interest rate swap associated with the debt, and the write off of approximately $1.0 million of debt issuance and discount costs that remained to be amortized. The write off of the remaining unamortized portion of debt issuance costs, discount and swap proceeds were reflected in the Company's condensed consolidated statements of cash flows within operating activities, and the make-whole premium is reflected within financing activities.
On December 22, 2010, Analog Devices Holdings B.V., a wholly owned subsidiary of the Company, entered into a credit agreement with Bank of America, N.A., London Branch as administrative agent. The borrower’s obligations were guaranteed by the Company. The credit agreement provided for a term loan facility of $145.0 million, which was set to mature on

22



December 22, 2013. During the first quarter of fiscal 2013, the Company repaid the remaining outstanding principal balance on the loan of $60.1 million and the credit agreement was terminated. The terms of the agreement provided for a three year principal amortization schedule with $3.6 million payable quarterly every March, June, September and December with the balance payable upon the maturity date. During fiscal 2011 and fiscal 2012, the Company made additional principal payments of $17.5 million and $42.0 million, respectively. The loan bore interest at a fluctuating rate for each period equal to the LIBOR rate corresponding with the tenor of the interest period plus a spread of 1.25%. The terms of this facility included limitations on subsidiary indebtedness and on liens against the assets of the Company and its subsidiaries, and also included financial covenants that required the Company to maintain a minimum interest coverage ratio and not exceed a maximum leverage ratio.
On April 4, 2011, the Company issued $375.0 million aggregate principal amount of 3.0% senior unsecured notes due April 15, 2016 (the 2016 Notes) with semi-annual fixed interest payments due on April 15 and October 15 of each year, commencing October 15, 2011. The sale of the 2016 Notes was made pursuant to the terms of an underwriting agreement, dated March 30, 2011, between the Company and Credit Suisse Securities (USA) LLC and Merrill Lynch, Pierce, Fenner and Smith Incorporated, as representative of the several underwriters named therein. The net proceeds of the offering were $370.5 million, after issuing at a discount and deducting expenses, underwriting discounts and commissions, which will be amortized over the term of the 2016 Notes. The indenture governing the 2016 Notes contains covenants that may limit the Company’s ability to: incur, create, assume or guarantee any debt for borrowed money secured by a lien upon a principal property; enter into sale and lease-back transactions with respect to a principal property; and consolidate with or merge into, or transfer or lease all or substantially all of its assets to, any other party. As of May 3, 2014, the Company was compliant with these covenants. The 2016 Notes are subordinated to any future secured debt and to the other liabilities of the Company’s subsidiaries.
On June 3, 2013, the Company issued $500.0 million aggregate principal amount of 2.875% senior unsecured notes due June 1, 2023 (the 2023 Notes) with semi-annual fixed interest payments due on June 1 and December 1 of each year, commencing December 1, 2013. Prior to issuing the 2023 Notes, on April 24, 2013, the Company entered into a treasury rate lock agreement with Bank of America. This agreement allowed the Company to lock a 10-year US Treasury rate of 1.7845% through June 14, 2013 for its anticipated issuance of the 2023 Notes. Upon issuing the 2023 Notes, the Company simultaneously terminated the treasury rate lock agreement resulting in a gain of approximately $11.0 million. This gain will be amortized into interest expense over the 10-year term of the 2023 Notes. The sale of the 2023 Notes was made pursuant to the terms of an underwriting agreement, dated as of May 22, 2013, among the Company and J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Credit Suisse Securities (USA) LLC, as the representatives of the several underwriters named therein. The net proceeds of the offering were $493.9 million, after discount and issuance costs. Debt discount and issuance costs will be amortized through interest expense over the term of the 2023 Notes. The indenture governing the 2023 Notes contains covenants that may limit the Company's ability to: incur, create, assume or guarantee any debt for borrowed money secured by a lien upon a principal property; enter into sale and lease-back transactions with respect to a principal property; and consolidate with or merge into, or transfer or lease all or substantially all of its assets to, any other party. As of May 3, 2014, the Company was compliant with these covenants. The notes are subordinated to any future secured debt and to the other liabilities of the Company's subsidiaries.
The Company’s principal payments related to its debt obligations are due as follows: $375.0 million in fiscal 2016 and $500.0 million in fiscal 2023.

Note 15 – Inventories
Inventories at May 3, 2014 and November 2, 2013 were as follows:
 
May 3, 2014
 
November 2, 2013
Raw materials
$
19,838

 
$
19,641

Work in process
187,225

 
175,155

Finished goods
91,369

 
88,541

Total inventories
$
298,432

 
$
283,337


Note 16 – Acquisitions
On March 30, 2012, the Company acquired privately-held Multigig, Inc. (Multigig) of San Jose, California. The acquisition of Multigig is expected to enhance the Company’s clocking capabilities in stand-alone and embedded applications and strengthen the Company’s high speed signal processing solutions. The acquisition-date fair value of the consideration transferred totaled $26.8 million, which consisted of $24.2 million in initial cash payments at closing and an additional $2.6 million subject to an indemnification holdback that was payable within 15 months of the transaction date. During the third

23



quarter of fiscal 2012, the Company reduced this holdback amount by $0.1 million as a result of indemnification claims. During the third quarter of fiscal 2013, the Company paid the remaining $2.5 million due under the holdback. The Company’s assessment of fair value of the tangible and intangible assets acquired and liabilities assumed was based on their estimated fair values at the date of acquisition, resulting in the recognition of $15.6 million of IPR&D, $1.1 million of developed technology, $7.0 million of goodwill and $3.1 million of net deferred tax assets. The goodwill recognized is attributable to future technologies that have yet to be determined as well as the assembled workforce of Multigig. Future technologies do not meet the criteria for recognition separately from goodwill because they are a part of future development and growth of the business. None of the goodwill is expected to be deductible for tax purposes. During the fourth quarter of fiscal 2012, the Company finalized its purchase accounting for Multigig, which resulted in adjustments of $0.4 million to deferred taxes and goodwill. In addition, the Company will be obligated to pay royalties to the Multigig employees on revenue recognized from the sale of certain Multigig products through the earlier of 5 years or the aggregate maximum payment of $1.0 million. Royalty payments to Multigig employees require post-acquisition services to be rendered and, as such, the Company will record these amounts as compensation expense in the related periods. As of May 3, 2014, no royalty payments have been made. The Company recognized $0.5 million of acquisition-related costs that were expensed in fiscal 2012, which were included in operating expenses in the Company's condensed consolidated statement of income.
On June 9, 2011, the Company acquired privately-held Lyric Semiconductor, Inc. (Lyric) of Cambridge, Massachusetts. The acquisition of Lyric gives the Company the potential to achieve significant improvement in power efficiency in mixed signal processing. The acquisition-date fair value of the consideration transferred totaled $27.8 million, which consisted of $14.0 million in initial cash payments at closing and contingent consideration of up to $13.8 million. The contingent consideration arrangement requires additional cash payments to the former equity holders of Lyric upon the achievement of certain technological and product development milestones payable during the period from June 2011 through June 2016. The Company estimated the fair value of the contingent consideration arrangement utilizing the income approach. Changes in the fair value of the contingent consideration subsequent to the acquisition date primarily driven by assumptions pertaining to the achievement of the defined milestones will be recognized in operating income in the period of the estimated fair value change. As of May 3, 2014, the Company had paid $10.0 million in contingent consideration. These payments are reflected in the Company's condensed consolidated statements of cash flows as cash used in financing activities related to the liability recognized at fair value as of the acquisition date and cash provided by operating activities related to the fair value adjustments previously recognized in earnings. The Company’s assessment of fair value of the tangible and intangible assets acquired and liabilities assumed was based on their estimated fair values at the date of acquisition, resulting in the recognition of $12.2 million of IPR&D, $18.9 million of goodwill and $3.3 million of net deferred tax liabilities. The goodwill recognized is attributable to future technologies that have yet to be determined as well as the assembled workforce of Lyric. Future technologies do not meet the criteria for recognition separately from goodwill because they are a part of future development and growth of the business. None of the goodwill is expected to be deductible for tax purposes. The fair value of the remaining contingent consideration was approximately $4.8 million as of May 3, 2014, of which $4.0 million is included in accrued liabilities and $0.8 million is included in other non-current liabilities in the Company's condensed consolidated balance sheet. In addition, the Company will be obligated to pay royalties to the former equity holders of Lyric on revenue recognized from the sale of Lyric products and licenses through the earlier of 20 years, or the accrual of a maximum of $25.0 million. Royalty payments to Lyric employees require post-acquisition services to be rendered and, as such, the Company will record these amounts as compensation expense in the related periods. As of May 3, 2014, no royalty payments have been made. The Company recognized $0.2 million of acquisition-related costs that were expensed in fiscal 2011, which were included in operating expenses in the Company's condensed consolidated statement of income.

Note 17 – Income Taxes
The Company has provided for potential tax liabilities due in the various jurisdictions in which the Company operates. Judgment is required in determining the worldwide income tax expense provision. In the ordinary course of global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of cost reimbursement arrangements among related entities. Although the Company believes its estimates are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in the historical income tax provisions and accruals. Such differences could have a material impact on the Company’s income tax provision and operating results in the period in which such determination is made.
The Company’s effective tax rate reflects the applicable tax rate in effect in the various tax jurisdictions around the world where our income is earned. The Company's effective tax rate for all periods presented is lower than the U.S. federal statutory rate of 35%, primarily due to lower statutory tax rates applicable to the Company's operations in jurisdictions in which the Company earns income.  
The Company has filed a petition with the U.S. Tax Court for one open matter for fiscal years 2006 and 2007. The matter that pertains to Section 965 of the Internal Revenue Code related to the beneficial tax treatment of dividends paid from foreign

24



owned companies under The American Jobs Creation Act. The potential liability for this adjustment is $36.5 million. On September 18, 2013, in a matter not involving the Company, the U.S. Tax Court held that accounts receivable created under Rev. Proc. 99-32 may constitute indebtedness for purposes of Section 965 (b)(3) of the Internal Revenue Code and that the IRS was not precluded from reducing the beneficial dividend received deduction because of the increase in related-party indebtedness (BMC Software Inc. v Commissioner, 141 T.C. No. 5 2013). After analyzing the Tax Court’s decision, the Company has determined that its tax position with respect to Section 965(b)(3) of the Internal Revenue Code no longer meets the more likely than not standard of recognition for accounting purposes. Accordingly, the Company recorded a $36.5 million reserve for this matter in the fourth quarter of fiscal 2013.
None of the Company's U.S. federal tax returns for years prior to fiscal year 2010 are subject to examination.
None of the Company's Ireland tax returns for years prior to fiscal year 2009 are subject to examination.
Unrealized Tax Benefits
The following table summarizes the changes in the total amounts of unrealized tax benefits for the six months ended May 3, 2014.
 
Unrealized Tax Benefits
Balance, November 2, 2013
$
68,139

Additions for tax positions related to current year
1,260

Reductions for tax positions related to prior years
(545
)
Balance, May 3, 2014
$
68,854

    
Note 18 – New Accounting Pronouncements
Standards Implemented
Comprehensive Income
In January 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income (ASU No. 2013-02), which seek to improve the reporting of reclassifications out of accumulated other comprehensive income by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. The amendments in ASU No. 2013-02 supersede the presentation requirements for reclassifications out of accumulated other comprehensive income in ASU No. 2011-05, Presentation of Comprehensive Income, and ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The adoption of ASU No. 2013-02 in the first quarter of fiscal 2014 required additional disclosures related to comprehensive income but did not impact the Company's financial condition or results of operations.
Balance Sheet
In December 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities (ASU No. 2011-11). ASU No. 2011-11 amended ASC 210, Balance Sheet, to converge the presentation of offsetting assets and liabilities between U.S. GAAP and IFRS. ASU No. 2011-11 requires that entities disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The Company adopted ASU No. 2011-11 in the first quarter of fiscal year 2014. Subsequently, in January 2013, the FASB issued ASU No. 2013-01, Clarifying the Scope of Disclosures about offsetting Assets and Liabilities, which clarifies that the scope of ASU No. 2011-11 applies to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreement. The adoption of ASU No. 2011-11 and ASU No. 2013-01 in the first quarter of fiscal 2014 required additional disclosures related to offsetting assets and liabilities but did not impact the Company's financial condition or results of operations.

25



Standards to be Implemented
Discontinued Operations
In April 2014, the FASB issued ASU No. 2014-08 (ASU 2014-08), Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which raises the threshold for disposals to qualify as discontinued operations. Under the new guidance, a disposal representing a strategic shift that has (or will have) a major effect on an entity’s financial results or a business activity classified as held for sale, should be reported as discontinued operations. ASU 2014-08 also expands the disclosure requirements for discontinued operations and adds new disclosures for individually significant dispositions that do not qualify as discontinued operations. ASU 2014-08 is effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2014, which is the Company's first quarter of fiscal year 2016. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in the financial statements previously issued or available for issuance. The adoption of ASU 2014-08 in the first quarter of fiscal 2016 is not expected to have a material impact on the Company's financial condition or results of operations.
Income Taxes
In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (ASU No. 2013-11). ASU No. 2013-11 requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward, with certain exceptions. ASU No. 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013, which is the Company's first quarter of fiscal year 2015. Early adoption is permitted. The adoption of ASU No. 2013-11 in the first quarter of fiscal 2015 will affect the presentation of the Company's unrecognized tax benefits but will not impact the Company's financial condition or results of operations.

Note 19 – Subsequent Events
On May 19, 2014, the Board of Directors of the Company declared a cash dividend of $0.37 per outstanding share of common stock. The dividend will be paid on June 10, 2014 to all shareholders of record at the close of business on May 30, 2014.



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ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This information should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in Item 1 of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended November 2, 2013.
This Management's Discussion and Analysis of Financial Condition and Results of Operations, including in particular the section entitled “Outlook,” contains forward-looking statements regarding future events and our future results that are subject to the safe harbor created under the Private Securities Litigation Reform Act of 1995 and other safe harbors under the Securities Act of 1933 and the Securities Exchange Act of 1934. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “may,” “could” and “will,” and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections regarding our future financial performance; our anticipated growth and trends in our businesses; our future capital needs and capital expenditures; our future market position and expected competitive changes in the marketplace for our products; our ability to pay dividends or repurchase stock; our ability to service our outstanding debt; our expected tax rate; the effect of new accounting pronouncements; and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are inherently subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified in Part II, Item 1A. “Risk Factors” and elsewhere herein. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements, including to reflect events or circumstances occurring after the date of the filing of this report, except to the extent required by law.

Results of Operations
(all tabular amounts in thousands except per share amounts and percentages)
Overview
 
Three Months Ended
 
May 3, 2014
 
May 4, 2013
 
$ Change
 
% Change
Revenue
$
694,536

 
$
659,250

 
$
35,286

 
5
%
Gross margin %
66.1
%
 
64.0
%
 
 
 
 
Net income
$
187,433

 
$
164,472

 
$
22,961

 
14
%
Net income as a % of revenue
27.0
%
 
24.9
%
 
 
 
 
Diluted EPS
$
0.59

 
$
0.52

 
$
0.07

 
13
%
 
 
 
 
 
 
 
 
 
Six Months Ended
 
May 3, 2014
 
May 4, 2013
 
$ Change
 
% Change
Revenue
$
1,322,774

 
$
1,281,384

 
$
41,390

 
3
%
Gross margin %
65.6
%
 
63.4
%
 
 
 
 
Net income
$
340,019

 
$
295,694

 
$
44,325

 
15
%
Net income as a % of revenue
25.7
%
 
23.1
%
 
 
 
 
Diluted EPS
$
1.07

 
$
0.95

 
$
0.12

 
13
%
The year-to-year revenue changes by end market and product type are more fully outlined below under Revenue Trends by End Market and Revenue Trends by Product Type.
Revenue Trends by End Market
The following table summarizes revenue by end market. The categorization of revenue by end market is determined using a variety of data points including the technical characteristics of the product, the “sold to” customer information, the “ship to” customer information and the end customer product or application into which our product will be incorporated. As data systems for capturing and tracking this data evolve and improve, the categorization of products by end market can vary over time. When

27



this occurs, we reclassify revenue by end market for prior periods. Such reclassifications typically do not materially change the sizing of, or the underlying trends of results within, each end market.
 
Three Months Ended
 
May 3, 2014
 
May 4, 2013
 
Revenue
 
% of
Revenue
 
Y/Y%
 
Revenue
 
% of
Revenue
Industrial
$
326,530

 
47
%
 
5
 %
 
$
311,128

 
47
%
Automotive
135,488

 
20
%
 
10
 %
 
122,715

 
19
%
Consumer
77,705

 
11
%
 
(23
)%
 
101,233

 
15
%
Communications
154,813

 
22
%
 
25
 %
 
124,174

 
19
%
Total revenue
$
694,536

 
100
%
 
5
 %
 
$
659,250

&