10-Q 1 adiq210-q4292017.htm 10-Q Document


 
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 April 29, 2017
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, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
þ
  
Accelerated filer
 
¨
 
 
 
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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 April 29, 2017 there were 367,011,463 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
 
April 29, 2017
 
April 30, 2016
 
April 29, 2017
 
April 30, 2016
Revenue
$
1,147,982

 
$
778,766

 
$
2,132,431

 
$
1,548,195

Cost of sales (1)
507,539

 
267,863

 
843,484

 
559,999

Gross margin
640,443

 
510,903

 
1,288,947

 
988,196

Operating expenses:
 
 
 
 
 
 
 
Research and development (1)
235,232

 
160,235

 
419,186

 
317,663

Selling, marketing, general and administrative (1)
190,686

 
112,186

 
321,345

 
219,648

Amortization of intangibles
68,690

 
17,419

 
86,850

 
34,777

Special charges

 
13,684

 
49,463

 
13,684

 
494,608

 
303,524

 
876,844

 
585,772

Operating income
145,835

 
207,379

 
412,103

 
402,424

Nonoperating expense (income):
 
 
 
 
 
 
 
Interest expense
71,636

 
18,455

 
114,250

 
31,517

Interest income
(12,421
)
 
(5,243
)
 
(22,421
)
 
(8,442
)
Other, net
(94
)
 
(743
)
 
251

 
2,262

 
59,121

 
12,469

 
92,080

 
25,337

Income before income taxes
86,714

 
194,910

 
320,023

 
377,087

(Benefit) provision for income taxes
(6,850
)
 
24,337

 
9,330

 
42,010

Net income
$
93,564

 
$
170,573

 
$
310,693

 
$
335,077

Shares used to compute earnings per share – basic
341,316

 
308,790

 
325,051

 
309,978

Shares used to compute earnings per share – diluted
345,654

 
312,250

 
329,365

 
313,521

Basic earnings per share
$
0.27

 
$
0.55

 
$
0.96

 
$
1.08

Diluted earnings per share
$
0.27

 
$
0.55

 
$
0.94

 
$
1.07

Dividends declared and paid per share
$
0.45

 
$
0.42

 
$
0.87

 
$
0.82

           (1) Includes stock-based compensation expense as follows:
 
 
 
 
 
 
 
           Cost of sales
$
2,566

 
$
1,986

 
$
4,510

 
$
4,078

           Research and development
$
11,910

 
$
6,646

 
$
18,931

 
$
13,350

           Selling, marketing, general and administrative
$
8,010

 
$
7,327

 
$
15,574

 
$
14,140

See accompanying notes.

1




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

 
Three Months Ended
 
Six Months Ended
 
April 29, 2017
 
April 30, 2016
 
April 29, 2017
 
April 30, 2016
Net income
$
93,564

 
$
170,573

 
$
310,693

 
$
335,077

Foreign currency translation adjustments
6,140

 
8,050

 
1,178

 
(64
)
Change in fair value of available-for-sale securities classified as short-term investments (net of taxes of $5, $42, $9 and $42, respectively)
(675
)
 
605

 
(456
)
 
530

Change in fair value of derivative instruments designated as cash flow hedges (net of taxes of $912, $1,495, $2,307 and $1,138, respectively)
4,481

 
7,880

 
6,566

 
6,300

Changes in pension plans including prior service cost, transition obligation, net actuarial loss and foreign currency translation adjustments (net of taxes of $103, $52, $205 and $102 respectively)
(359
)
 
(453
)
 
(180
)
 
360

Other comprehensive income
9,587

 
16,082

 
7,108

 
7,126

Comprehensive income
$
103,151

 
$
186,655

 
$
317,801

 
$
342,203


See accompanying notes.









2



ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(thousands, except share and per share amounts)
 
April 29, 2017
 
October 29, 2016
ASSETS
 

 
 

Current Assets
 
 
 
Cash and cash equivalents
$
5,697,743

 
$
921,132

Short-term investments
490,629

 
3,134,661

Accounts receivable
630,353

 
477,609

Inventories (1)
647,858

 
376,555

Prepaid income tax
9,490

 
6,405

Prepaid expenses and other current assets
59,394

 
58,501

Total current assets
7,535,467

 
4,974,863

Property, Plant and Equipment, at Cost
 
 
 
Land and buildings
784,394

 
564,329

Machinery and equipment
2,287,022

 
1,994,115

Office equipment
63,533

 
58,785

Leasehold improvements
66,266

 
59,649

 
3,201,215

 
2,676,878

Less accumulated depreciation and amortization
2,111,896

 
2,040,762

Net property, plant and equipment
1,089,319

 
636,116

Other Assets
 
 
 
Deferred compensation plan investments
27,323

 
26,152

Other investments
28,492

 
21,937

Goodwill
12,269,501

 
1,679,116

Intangible assets, net
5,587,862

 
549,368

Deferred tax assets
32,711

 
36,005

Other assets
52,008

 
46,721

Total other assets
17,997,897

 
2,359,299

 
$
26,622,683

 
$
7,970,278

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
190,245

 
$
171,439

Deferred income on shipments to distributors, net
377,792

 
351,538

Income taxes payable
60,563

 
4,100

Debt, current
4,321,169

 

Accrued liabilities
499,513

 
255,857

Total current liabilities
5,449,282

 
782,934

Non-current liabilities
 
 
 
Long-term debt
8,572,364

 
1,732,177

Deferred income taxes
2,431,410

 
109,931

Deferred compensation plan liability
27,323

 
26,152

Other non-current liabilities
175,709

 
153,466

Total non-current liabilities
11,206,806

 
2,021,726

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, 367,011,463 shares outstanding (308,170,560 on October 29, 2016)
61,170

 
51,363

Capital in excess of par value
5,144,636

 
402,270

Retained earnings
4,827,495

 
4,785,799

Accumulated other comprehensive loss
(66,706
)
 
(73,814
)
Total shareholders’ equity
9,966,595

 
5,165,618

 
$
26,622,683

 
$
7,970,278

(1)
Includes $3,007 and $2,486 related to stock-based compensation at April 29, 2017 and October 29, 2016, respectively.
See accompanying notes.


3




ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(thousands)

  
Six Months Ended
 
April 29, 2017
 
April 30, 2016
Cash flows from operating activities:
 
 
 
Net income
$
310,693

 
$
335,077

Adjustments to reconcile net income to net cash provided by operations:
 
 
 
Depreciation
83,151

 
66,692

Amortization of intangibles
108,717

 
36,787

Cost of goods sold for inventory acquired
121,113

 

Stock-based compensation expense
39,015

 
31,568

Loss on extinguishment of debt

 
3,290

Excess tax benefit-stock options
(25,953
)
 
(4,198
)
Deferred income taxes
(87,035
)
 
(7,178
)
Other non-cash activity
24,149

 
1,244

Changes in operating assets and liabilities
262,106

 
76,626

Total adjustments
525,263

 
204,831

Net cash provided by operating activities
835,956

 
539,908

Cash flows from investing activities:
 
 
 
Purchases of short-term available-for-sale investments
(705,448
)
 
(3,571,764
)
Maturities of short-term available-for-sale investments
3,091,873

 
2,932,226

Sales of short-term available-for-sale investments
357,388

 
150,266

Additions to property, plant and equipment
(75,266
)
 
(48,645
)
Payments for acquisitions, net of cash acquired
(9,687,533
)
 
(2,203
)
Changes in other assets
(12,063
)
 
(9,457
)
Net cash used for investing activities
(7,031,049
)
 
(549,577
)
Cash flows from financing activities:
 
 
 
Early termination of debt

 
(378,156
)
Payments of derivative instruments

 
(33,430
)
Proceeds from debt
11,156,164

 
1,235,331

Payments of deferred financing fees
(5,625
)
 

Proceeds from derivative instruments
3,904

 

Dividend payments to shareholders
(268,997
)
 
(254,583
)
Repurchase of common stock
(26,980
)
 
(345,627
)
Proceeds from employee stock plans
87,273

 
22,709

Changes in other financing activities
(16
)
 
(5,330
)
Excess tax benefit-stock options
25,953

 
4,198

Net cash provided by financing activities
10,971,676

 
245,112

Effect of exchange rate changes on cash
28

 
(134
)
Net increase in cash and cash equivalents
4,776,611

 
235,309

Cash and cash equivalents at beginning of period
921,132

 
884,353

Cash and cash equivalents at end of period
$
5,697,743

 
$
1,119,662

See accompanying notes.

4



ANALOG DEVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED APRIL 29, 2017
(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 October 29, 2016 (fiscal 2016) 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 October 28, 2017 (fiscal 2017) or any future period.
Certain amounts reported in previous periods have been reclassified to conform to the fiscal 2017 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 2017 and fiscal 2016 are 52-week fiscal years.
Acquisition of Linear Technology Corporation
On March 10, 2017 (Acquisition Date), the Company completed the acquisition of Linear Technology Corporation (Linear), a designer, manufacturer and marketer of high performance analog integrated circuits. The total consideration paid to acquire Linear was approximately $15.8 billion, consisting of $11.1 billion in cash financed through existing cash on hand, net proceeds from bridge and term loan facilities and proceeds received from the issuance of senior unsecured notes, $4.6 billion from the issuance of the Company's common stock and $0.1 billion of consideration related to the replacement of outstanding equity awards held by Linear employees. The acquisition of Linear is referred to as the Acquisition. The condensed consolidated financial statements included in this Quarterly Report on Form 10-Q include the financial results of Linear prospectively from the Acquisition Date. See Note 13, Debt and Note 15, Acquisitions, of these Notes to Condensed Consolidated Financial Statements for further information.

Note 2 – Revenue Recognition
Revenue from product sales to customers is generally recognized when title passes, which is upon shipment in the U.S. and in certain foreign countries. Revenue from product sales to customers in other foreign countries is recognized subsequent to product shipment. Title for shipments to these other foreign countries ordinarily passes within a week of shipment. Accordingly, the Company defers the revenue recognized relating to these other foreign countries until title has passed. For multiple element arrangements, the Company allocates arrangement consideration among the elements based on the relative fair values of those elements as determined using vendor-specific objective evidence or third-party evidence. The Company uses its best estimate of selling price to allocate arrangement consideration between the deliverables in cases where neither vendor-specific objective evidence nor third-party evidence is available. A reserve for sales returns and allowances for customers is recorded based on historical experience or specific identification of an event necessitating a reserve.
Revenue from contracts with the United States government, government prime contractors and some commercial customers is generally recorded on a percentage of completion basis using either units delivered or costs incurred as the measurement basis for progress towards completion. The output measure is used to measure results directly and is generally the best measure of progress toward completion in circumstances in which a reliable measure of output can be established. Estimated revenue in excess of amounts billed is reported as unbilled receivables. Contract accounting requires judgment in estimating costs and assumptions related to technical issues and delivery schedule. Contract costs include material, subcontractor costs, labor and an allocation of indirect costs. The estimation of costs at completion of a contract is subject to numerous variables involving contract costs and estimates as to the length of time to complete the contract. Changes in contract performance, estimated gross margin, including the impact of final contract settlements, and estimated losses are recognized in the period in which the changes or losses are determined.
Revenue from product sales to certain international distributors are made under agreements that permit limited stock return privileges but not sales price rebates. Revenue on these sales is recognized upon shipment at which time title passes. 
 

5



The Company defers revenue and the related cost of sales on shipments to U.S. distributors and certain international 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 certain of these distributors are made under agreements that allow such 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, such distributors are allowed to return unsold products if the Company terminates the relationship with the distributor.
Certain 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.
Certain 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 certain 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 certain distributors until the distributors have sold the products to their customers.
Generally, 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.
As of April 29, 2017 and October 29, 2016, the Company had gross deferred revenue of $527.7 million and $432.3 million, respectively, and gross deferred cost of sales of $149.9 million and $80.8 million, respectively. As of April 29, 2017, approximately $64.8 million of the deferred revenue and deferred cost of sales related to the Acquisition.
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 April 29, 2017 and April 30, 2016 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/awards. In addition to restricted stock units with a service condition, the Company grants 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.


6



Linear Replacement Awards — In connection with the Acquisition, the Company issued equity awards, consisting of restricted stock awards and restricted stock units (replacement awards), to certain Linear employees in replacement of Linear equity awards. The replacement awards consisted of restricted stock awards and restricted stock units for approximately 2.8 million shares of the Company's common stock with a weighted average grant date fair value of $82.20. The terms and intrinsic value of these replacement awards are substantially the same as the converted Linear awards. The fair value of the replacement awards associated with services rendered through the Acquisition Date was recognized as a component of the total preliminary estimated acquisition consideration, and the remaining fair value of the replacement awards associated with post-Acquisition services will be recognized as an expense on a straight-line basis over the remaining vesting period.
Modification of Awards — The Company has from time to time modified the vesting terms of its equity awards to employees and directors. The modifications made to the Company’s equity awards in the first six months of fiscal 2017 or fiscal 2016 did not result in significant incremental compensation costs, either individually or in the aggregate.
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 April 29, 2017 and April 30, 2016 are as follows:
  
Three Months Ended
 
Six Months Ended
Stock Options
April 29, 2017
 
April 30, 2016
 
April 29, 2017
 
April 30, 2016
Options granted (in thousands)
1,362

 
1,679

 
1,376

 
1,715

Weighted-average exercise price

$83.35

 

$54.90

 

$83.19

 

$54.90

Weighted-average grant-date fair value

$17.27

 

$12.81

 

$17.21

 

$12.79

Assumptions:
 
 
 
 
 
 
 
Weighted-average expected volatility
26.4%

 
34.3
%
 
26.4
%
 
34.3
%
Weighted-average expected term (in years)
5.1

 
5.1

 
5.1

 
5.1

Weighted-average risk-free interest rate
2.1
%
 
1.4
%
 
2.1
%
 
1.4
%
Weighted-average expected dividend yield
2.2
%
 
3.1
%
 
2.2
%
 
3.1
%
The Company utilizes the Monte Carlo simulation valuation model to value market-based restricted stock units. 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 market-based restricted stock units and the related estimated assumptions used to calculate the fair value of the market-based restricted stock units granted during the three- and six-month periods ended April 29, 2017 and April 30, 2016 using the Monte Carlo simulation model are as follows:
 
Three and Six Months Ended
 
Three and Six Months Ended
Market-based Restricted Stock Units
April 29, 2017
 
April 30, 2016
Units granted (in thousands)
59

 
102

Grant-date fair value

$94.25

 

$58.95

Assumptions:
 
 
 
Historical stock price volatility
26.0
%
 
25.1
%
Risk-free interest rate
1.6
%
 
1.1
%
Expected dividend yield
2.2
%
 
3.0
%
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

7



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. The Company utilizes historical volatility as an input variable of the Monte Carlo simulation to estimate the grant date fair value of market-based restricted stock units.  The market performance measure of these awards is based upon the interaction of multiple peer companies.  Given the Company is required to use consistent statistical properties in the Monte Carlo simulation and implied volatility is not available across the population, historical volatility must be used.
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 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 4.7% to all unvested stock-based awards as of April 29, 2017. 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 April 29, 2017 and April 30, 2016, the Company had a sufficient APIC pool to cover any tax deficiencies recorded and as a result, these deficiencies did not affect its results of operations.
Stock-Based Compensation Activity
A summary of the Company’s stock option activity as of April 29, 2017 and changes during the three- and six-month periods then ended is presented below:
Activity during the Three Months Ended April 29, 2017
Options
Outstanding
(in thousands)
 
Weighted-
Average Exercise
Price Per Share
 
Weighted-
Average
Remaining
Contractual
Term in Years
 
Aggregate
Intrinsic
Value
Options outstanding at January 28, 2017
10,704

 

$45.22

 
 
 
 
Options granted
1,362

 

$83.35

 
 
 
 
Options exercised
(1,300
)
 

$40.89

 
 
 
 
Options forfeited
(236
)
 

$53.93

 
 
 
 
Options outstanding at April 29, 2017
10,530

 

$50.49

 
6.4
 

$280,415

Options exercisable at April 29, 2017
6,016

 

$41.21

 
4.9
 

$210,535

Options vested or expected to vest at April 29, 2017 (1)
10,101

 

$49.82

 
6.3
 

$274,918

 

8



(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 April 29, 2017
Options
Outstanding
(in thousands)
 
Weighted-
Average Exercise
Price Per Share
Options outstanding at October 29, 2016
11,704

 

$44.43

Options granted
1,377

 

$83.19

Options exercised
(2,268
)
 

$38.69

Options forfeited
(277
)
 

$53.65

Options expired
(6
)
 

$33.19

Options outstanding at April 29, 2017
10,530

 

$50.49

During the three and six months ended April 29, 2017, 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 $53.5 million and $89.1 million, respectively, and the total amount of proceeds received by the Company from the exercise of these options was $52.8 million and $87.3 million, respectively.
During the three and six months ended April 30, 2016, 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 $9.7 million and $13.9 million, respectively, and the total amount of proceeds received by the Company from the exercise of these options was $16.5 million and $22.7 million, respectively.
A summary of the Company’s restricted stock unit/award activity as of April 29, 2017 and changes during the three- and six-month periods then ended is presented below: 
Activity during the Three Months Ended April 29, 2017
Restricted
Stock Units
Outstanding
(in thousands)
 
Weighted-
Average Grant-
Date Fair Value
Per Share
Restricted stock units/awards outstanding at January 28, 2017
2,570

 

$50.31

Units/Awards granted (a)
3,658

 

$80.28

Restrictions lapsed
(822
)
 

$52.26

Forfeited
(93
)
 

$53.13

Restricted stock units/awards outstanding at April 29, 2017
5,313

 

$70.59

(a) includes 2.8 million replacement awards granted to certain Linear employees to replace outstanding Linear equity awards.
Activity during the Six Months Ended April 29, 2017
Restricted
Stock Units
Outstanding
(in thousands)
 
Weighted-
Average Grant-
Date Fair Value
Per Share
Restricted stock units/awards outstanding at October 29, 2016
2,690

 

$50.11

Units/Awards granted (a)
3,663

 

$80.25

Restrictions lapsed
(930
)
 

$51.55

Forfeited
(110
)
 

$52.63

Restricted stock units/awards outstanding at April 29, 2017
5,313

 

$70.59

(a) includes 2.8 million replacement awards granted to certain Linear employees to replace outstanding Linear equity awards.
As of April 29, 2017, there was $509.9 million of total unrecognized compensation cost related to unvested stock-based awards comprised of stock options and restricted stock units. That cost is expected to be recognized over a weighted-average period of 1.9 years. The total grant-date fair value of shares that vested during the three- and six-month periods ended April 29, 2017 was approximately $61.8 million and $66.9 million, respectively. The total grant-date fair value of shares that vested during the three- and six-month periods ended April 30, 2016 was approximately $47.9 million and $57.3 million, respectively.



9



Note 4 – 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 2017.
 
Foreign currency translation adjustment
 
Unrealized holding gains on available for sale securities classified as short-term investments
 
Unrealized holding (losses) on available for sale securities classified as short-term investments
 
Unrealized holding gains (losses) on derivatives
 
Pension plans
 
Total
October 29, 2016
$
(24,063
)
 
$
800

 
$
(281
)
 
$
(18,884
)
 
$
(31,386
)
 
$
(73,814
)
Other comprehensive income (loss) before reclassifications
1,178

 
(751
)
 
286

 
1,629

 
(899
)
 
1,443

Amounts reclassified out of other comprehensive income (loss)

 

 

 
7,244

 
923

 
8,167

Tax effects

 
19

 
(10
)
 
(2,307
)
 
(204
)
 
(2,502
)
Other comprehensive income (loss)
1,178

 
(732
)
 
276

 
6,566

 
(180
)
 
7,108

April 29, 2017
$
(22,885
)
 
$
68

 
$
(5
)
 
$
(12,318
)
 
$
(31,566
)
 
$
(66,706
)


The amounts reclassified out of accumulated other comprehensive income (loss) with presentation location during each period were as follows:
 
 
Three Months Ended
 
Six Months Ended
 
 
Comprehensive Income Component
 
April 29, 2017
 
April 30, 2016
 
April 29, 2017
 
April 30, 2016
 
Location
Unrealized holding losses (gains) on derivatives
 
 
 
 
 
 
 
 
 
 
    Currency forwards
 
$
1,248

 
$
147

 
$
2,948

 
$
1,626

 
Cost of sales
 
 
494

 
27

 
1,508

 
690

 
Research and development
 
 
702

 
(448
)
 
1,795

 
346

 
Selling, marketing, general and administrative
     Interest rate derivatives
 
464

 
562

 
993

 
845

 
Interest expense
 
 
2,908

 
288

 
7,244

 
3,507

 
Total before tax
 
 
(534
)
 
(243
)
 
(1,389
)
 
(753
)
 
Tax
 
 
$
2,374

 
$
45

 
$
5,855

 
$
2,754

 
Net of tax
 
 

 
 
 
 
 
 
 
 
Amortization of pension components
 
 
 
 
 

 
 
 
 
     Transition obligation
 
$
3

 
$
4

 
$
6

 
$
8

 
(a)
     Prior service credit
 
(2
)
 

 
(4
)
 

 
(a)
     Actuarial losses
 
466

 
176

 
921

 
343

 
(a)
 
 
467

 
180

 
923


351

 
Total before tax
 
 
(103
)
 
(52
)
 
(204
)
 
(102
)
 
Tax
 
 
$
364

 
$
128

 
$
719

 
$
249

 
Net of tax
 
 
 
 
 
 
 
 
 
 
 
Total amounts reclassified out of accumulated other comprehensive income (loss), net of tax
 
$
2,738

 
$
173

 
$
6,574

 
$
3,003

 
 
______________

10



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 October 29, 2016.

The Company estimates $0.3 million of forward foreign currency derivative instruments included in OCI will be reclassified into earnings within the next twelve months. There was no ineffectiveness related to designated forward foreign currency derivative instruments in the three- and six-month periods ended April 29, 2017 and April 30, 2016.
Gross unrealized gains and losses on available-for-sale securities classified as short-term investments at April 29, 2017 and October 29, 2016 are as follows:
 
April 29, 2017
 
October 29, 2016
Unrealized gains on securities classified as short-term investments
$
95

 
$
846

Unrealized losses on securities classified as short-term investments
(8
)
 
(294
)
Net unrealized gains on securities classified as short-term investments
$
87

 
$
552

As of April 29, 2017, the Company held 69 investment securities, 43 of which were in an unrealized loss position with gross unrealized losses of $0.1 million and an aggregate fair value of $556.7 million. As of October 29, 2016, the Company held 100 investment securities, 25 of which were in an unrealized loss position with gross unrealized losses of $0.3 million and an aggregate fair value of $729.6 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 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 April 29, 2017 and October 29, 2016.
Realized gains or losses on investments are determined based on the specific identification basis and are recognized in nonoperating expense (income). 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 5 – 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 and restricted stock units 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 and restricted stock units were excluded because they were anti-dilutive. Those potential shares, determined based on the weighted average exercise prices during the respective periods, could be dilutive in the future. In connection with the Acquisition, the Company granted restricted stock awards to replace outstanding restricted stock awards of Linear employees. These restricted stock awards entitle recipients to voting and nonforfeitable dividend rights from the date of grant. These unvested stock-based compensation awards are considered participating securities and the two-class method is used for purposes of calculating earnings per share. Under the two-class method, a portion of net income is allocated to these participating securities and therefore is excluded from the calculation of earnings per share allocated to common stock, as shown in the table below.
The following table sets forth the computation of basic and diluted earnings per share:

11



 
Three Months Ended
 
Six Months Ended
 
April 29, 2017
 
April 30, 2016
 
April 29, 2017
 
April 30, 2016
Net Income
$
93,564

 
$
170,573

 
$
310,693

 
$
335,077

Less: income allocated to participating securities

 

 
82

 

Net income allocated to common stockholders
$
93,564

 
$
170,573

 
$
310,611

 
$
335,077

 
 
 
 
 
 
 
 
Basic shares:
 
 
 
 
 
 
 
Weighted-average shares outstanding
341,316

 
308,790

 
325,051

 
309,978

Earnings per share basic:
$
0.27

 
$
0.55

 
$
0.96

 
$
1.08

Diluted shares:
 
 
 
 
 
 
 
Weighted-average shares outstanding
341,316

 
308,790

 
325,051

 
309,978

Assumed exercise of common stock equivalents
4,338

 
3,460

 
4,314

 
3,543

Weighted-average common and common equivalent shares
345,654

 
312,250

 
329,365

 
313,521

Earnings per share diluted:
$
0.27

 
$
0.55

 
$
0.94

 
$
1.07

Anti-dilutive shares related to:
 
 
 
 
 
 
 
Outstanding stock options
1,580

 
4,131

 
823

 
3,364


Note 6 – 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 actions in fiscal 2017 and fiscal 2016 and a roll-forward from October 29, 2016 to April 29, 2017 of the employee separation and exit cost accruals established related to these actions.
 
Reduction of Operating Costs Action
Early Retirement Action
Total Special Charges
Statements of Income
 
 
 
Fiscal 2016 - Workforce reductions
$
13,684

$

13,684

Fiscal 2017 - Workforce reductions
$
8,126

$
41,337

$
49,463

Accrued Restructuring
Reduction of Operating Costs Action
Early Retirement Action
Balance at October 29, 2016
$
12,374

$

Fiscal 2017 - workforce reductions
8,126

41,337

Severance and other payments
(2,611
)
(199
)
Effect of foreign currency on accrual
(6
)

Balance at January 28, 2017
$
17,883

$
41,138

Severance and other payments
(3,987
)
(697
)
Effect of foreign currency on accrual
108


Balance at April 29, 2017
$
14,004

$
40,441


Early Retirement Offer Action
During the first quarter of fiscal 2017, the Company initiated an early retirement offer. This resulted in a special charge of approximately $41.3 million for severance, related benefits and other costs in accordance with this program for 225 manufacturing, engineering and selling, marketing, general and administrative (SMG&A) employees. As of April 29, 2017, the Company still employed 196 of the 225 employees included in these cost reduction actions. These employees must continue to be employed by the Company until their employment is terminated in order to receive the severance benefits.


12



Reduction of Operating Costs Action
During the second quarter of fiscal 2016, the Company recorded special charges of approximately $13.7 million for severance and fringe benefit costs in accordance with the Company's ongoing benefit plan for 123 manufacturing, engineering and SMG&A employees. As of April 29, 2017, the Company still employed 24 of the 123 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 benefits.
During the first quarter of fiscal 2017, the Company recorded special charges of approximately $8.1 million for severance and fringe benefit costs in accordance with the Company's ongoing benefit plan or statutory requirements at foreign locations for 177 manufacturing, engineering and SMG&A employees. As of April 29, 2017, the Company still employed 163 of the 177 employees included in this cost reduction action. These employees must continue to be employed by the Company until their employment is terminated in order to receive the severance benefits.

Note 7 – Segment Information
The Company operates and tracks its results in one reportable segment based on the aggregation of seven operating segments. As of the filing date of this Quarterly Report on Form 10-Q, the assignment of goodwill resulting from the Acquisition to the Company's reporting units has not been completed. The Company designs, develops, manufactures and markets a broad range of integrated circuits (ICs). The Chief Executive Officer has been identified as the Company's 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 ICs.
The ICs 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 ICs 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 the Company's 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 proportionately similar for each operating segment.
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 Company is in the process of integrating Linear's results into its systems and end market classifications. As a result, revenues of Linear from the Acquisition Date are presented separately in the table below.

13



 
Three Months Ended
 
April 29, 2017
 
April 30, 2016
 
Revenue
 
% of
Revenue*
 
Y/Y%
 
Revenue
 
% of
Revenue*
Industrial
$
462,913

 
46
%
 
20
%
 
$
384,706

 
49
%
Automotive
150,418

 
15
%
 
9
%
 
138,398

 
18
%
Consumer
205,444

 
21
%
 
156
%
 
80,385

 
10
%
Communications
181,744

 
18
%
 
4
%
 
175,277

 
23
%
Total revenue (excluding Linear revenue)
$
1,000,519

 
100
%
 
28
%
 
$
778,766

 
100
%
Linear revenue
147,463

 


 


 

 


Total revenue
$
1,147,982

 


 
47
%
 
$
778,766

 


____________
* Percentages are based on total revenue (excluding Linear revenue). The sum of the individual percentages may not equal the total due to rounding.
 
Six Months Ended
 
April 29, 2017
 
April 30, 2016
 
Revenue
 
% of
Revenue*
 
Y/Y%
 
Revenue
 
% of
Revenue*
Industrial
$
865,499

 
44
%
 
18
%
 
$
733,635

 
47
%
Automotive
289,182

 
15
%
 
9
%
 
265,046

 
17
%
Consumer
475,590

 
24
%
 
130
%
 
207,143

 
13
%
Communications
354,697

 
18
%
 
4
%
 
342,371

 
22
%
Total revenue (excluding Linear revenue)
$
1,984,968

 
100
%
 
28
%
 
$
1,548,195

 
100
%
Linear revenue
147,463

 


 


 

 


Total revenue
$
2,132,431

 


 
38
%
 
$
1,548,195

 


____________
* Percentages are based on total revenue (excluding Linear revenue). The sum of the individual percentages may not equal the total due to rounding.
Revenue Trends by Geographic Region
Revenue by geographic region, based on the primary end customer location, for the three- and six-month periods ended April 29, 2017 and April 30, 2016 were as follows:
 
Three Months Ended
 
Six Months Ended
Region
April 29, 2017
 
April 30, 2016
 
April 29, 2017
 
April 30, 2016
United States
$
422,328

 
$
245,283

 
$
853,326

 
$
511,952

Rest of North and South America
27,630

 
21,423

 
50,587

 
42,135

Europe
293,178

 
245,160

 
519,513

 
461,876

Japan
96,289

 
69,963

 
185,180

 
140,185

China
198,209

 
140,940

 
351,192

 
279,663

Rest of Asia
110,348

 
55,997

 
172,633

 
112,384

Total revenue
$
1,147,982

 
$
778,766

 
$
2,132,431

 
$
1,548,195

In the three- and six-month periods ended April 29, 2017 and April 30, 2016, 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 8 – 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

14



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, presents the Company’s financial assets and liabilities, excluding accrued interest components that are accounted for at fair value on a recurring basis as of April 29, 2017 and October 29, 2016. 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 April 29, 2017 and October 29, 2016, the Company held $1,921.8 million and $252.5 million, respectively, of cash and held-to-maturity investments that were excluded from the tables below.
 
April 29, 2017
 
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
$
2,697,263

 
$

 
$

 
$
2,697,263

Corporate obligations (1)

 
1,238,710

 

 
1,238,710

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

 
253,359

 

 
253,359

Investments in municipal bonds, obligations of U.S. government-sponsored enterprises and commercial paper

 
64,071

 

 
64,071

Securities with greater than one year to maturity:
 
 
 
 
 
 
 
Investments in municipal bonds, obligations of U.S. government-sponsored enterprises and commercial paper

 
13,199

 

 
13,199

 
 
 
 
 
 
 
 
Other assets:
 
 
 
 
 
 
 
Deferred compensation investments
30,612

 

 

 
30,612

Forward foreign currency exchange contracts (2)

 

 

 

Total assets measured at fair value
$
2,727,875

 
$
1,569,339

 
$

 
$
4,297,214

Liabilities
 
 
 
 
 
 
 
Contingent consideration

 

 
9,722

 
9,722

Forward foreign currency exchange contracts (2)

 
895

 

 
895

Total liabilities measured at fair value
$

 
$
895

 
$
9,722

 
$
10,617

 
(1)
The amortized cost of the Company’s investments classified as available-for-sale as of April 29, 2017 was $1.3 billion.

15



(2)
The Company has a master netting arrangement by counterparty with respect to derivative contracts. See Note 9, Derivatives, of these Notes to Condensed Consolidated Financial Statements for more information related to the Company's master netting arrangements.
 
October 29, 2016
 
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
$
277,595

 
$

 
$

 
$
277,595

Corporate obligations (1)

 
415,660

 

 
415,660

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

 
2,518,148

 

 
2,518,148

Floating rate notes, issued at par

 
29,989

 

 
29,989

Floating rate notes (1)

 
561,874

 

 
561,874

Other assets:
 
 
 
 
 
 
 
Deferred compensation investments
26,916

 

 

 
26,916

Total assets measured at fair value
$
304,511

 
$
3,525,671

 
$

 
$
3,830,182

Liabilities
 
 
 
 
 
 
 
Contingent consideration

 

 
7,555

 
7,555

Forward foreign currency exchange contracts (2)

 
5,231

 

 
5,231

Total liabilities measured at fair value
$

 
$
5,231

 
$
7,555

 
$
12,786

 
(1)
The amortized cost of the Company’s investments classified as available-for-sale as of October 29, 2016 was $3.5 billion.
(2)
The Company has a master netting arrangement by counterparty with respect to derivative contracts. See Note 9, Derivatives, of these Notes to Condensed Consolidated Financial Statements 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. The fair value of these instruments is based upon valuation models using current market information such as strike price, spot rate, maturity date and volatility.


16



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.
The fair value measurement of the contingent consideration encompasses the following significant unobservable inputs: 
Unobservable Inputs
Range
Estimated contingent consideration payments
$10,500
Discount rate
0% - 2%
Timing of cash flows
1 - 3 years
Probability of achievement
90% - 100%
Changes in the fair value of the contingent consideration are 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) from October 29, 2016 to April 29, 2017: 
 
Contingent
Consideration
Balance as of October 29, 2016
$
7,555

Contingent consideration liability recorded (1)
2,000

Fair value adjustment (2)
167

Balance as of April 29, 2017
$
9,722

(1) Represents liability related to acquisitions that were not material to the Company on either an individual or aggregate basis.
(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 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. The fair value of the 2023 Notes as of April 29, 2017 and October 29, 2016 was $496.3 million and $501.3 million, respectively, and is classified as a Level 1 measurement according to the fair value hierarchy.
On December 14, 2015, the Company issued $850.0 million aggregate principal amount of 3.9% senior unsecured notes due December 15, 2025 (the 2025 Notes) and $400.0 million aggregate principal amount of 5.3% senior unsecured notes due December 15, 2045 (the 2045 Notes) with semi-annual fixed interest payments due on June 15 and December 15 of each year, commencing June 15, 2016. The fair value of the 2025 Notes and 2045 Notes as of April 29, 2017 was $878.3 million and $447.7 million, respectively, and are classified as a Level 1 measurements according to the fair value hierarchy. The fair value of the 2025 Notes and 2045 Notes as of October 29, 2016 was $901.5 million and $425.1 million, respectively.
On December 5, 2016, the Company issued $400.0 million aggregate principal amount of 2.5% senior unsecured notes due December 5, 2021 (the 2021 Notes), $550.0 million aggregate principal amount of 3.125% senior unsecured notes due December 5, 2023 (the December 2023 Notes), $900.0 million aggregate principal amount of 3.5% senior unsecured notes due December 5, 2026 (the 2026 Notes) and $250.0 million aggregate principal amount of 4.5% senior unsecured notes due December 5, 2036 (the 2036 Notes) with semi-annual fixed interest payments due on June 5 and December 5 of each year, commencing June 5, 2017. The fair value of the 2021 Notes, December 2023 Notes, 2026 Notes and 2036 Notes as of April 29, 2017 was $399.5 million, $553.1 million, $900.0 million and $252.3 million, respectively, and are classified as a Level 1 measurements according to the fair value hierarchy.
On the Acquisition Date, the Company entered into a 90-day Bridge Credit Agreement which provides for unsecured loans in an aggregate principal amount of up to $4.1 billion and borrowed under a term loan agreement consisting of a 3-year unsecured term loan in the principal amount of $2.5 billion, due March 10, 2020 and a 5-year unsecured term loan in the principal amount of $2.5 billion, due March 10, 2022. The carrying amounts of the loans approximate fair value. The loans are classified as a Level 2 measurements according to the fair value hierarchy.

17




Note 9 – 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.
The total notional amount 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 April 29, 2017 and October 29, 2016 was $172.4 million and $179.5 million, respectively. The fair value of forward foreign currency derivative instruments designated as hedging instruments in the Company’s condensed consolidated balance sheets as of April 29, 2017 and October 29, 2016 was as follows:
 
 
 
Fair Value At
 
Balance Sheet Location
 
April 29, 2017
 
October 29, 2016
Forward foreign currency exchange contracts
Accrued liabilities
 
$
1,064

 
$
5,260

Additionally, the Company enters into forward foreign currency contracts that economically hedge the gains and losses generated by the re-measurement of 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 April 29, 2017 and October 29, 2016, the total notional amount of these undesignated hedges was $89.6 million and $46.2 million, respectively. The fair value of these undesignated hedges in the Company’s condensed consolidated balance sheets as of April 29, 2017 and October 29, 2016 was immaterial.
All of the Company’s derivative financial instruments are eligible for 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 condensed consolidated balance sheet on a net basis. As of April 29, 2017 and October 29, 2016, 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 the Company's condensed consolidated balance sheet:
 
April 29, 2017
 
October 29, 2016
Gross amount of recognized liabilities
$
(3,044
)
 
$
(5,788
)
Gross amounts of recognized assets offset in the condensed consolidated balance sheet
2,149

 
557

Net liabilities presented in the condensed consolidated balance sheet
$
(895
)
 
$
(5,231
)
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.
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 April 29, 2017 and October 31, 2016, 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

18



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 and, for interest rate exposure derivatives, over the term of the corresponding debt instrument. 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.
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 4, Accumulated Other Comprehensive Income (Loss) of these Notes to Condensed Consolidated Financial Statements for further information.

Note 10 – 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 1) or more frequently if indicators of impairment exist. For the Company's latest annual impairment assessment that occurred as of July 31, 2016, the Company identified its reporting units to be its seven operating segments. As of the filing date of this Quarterly Report on Form 10-Q, the assignment of goodwill resulting from the Acquisition to the Company's reporting units has not been completed. The performance of the test involves a two-step process. The first step of the quantitative 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 a weighting of the income and market approaches. Under the income approach, the Company uses a discounted cash flow methodology which requires management to make significant estimates and assumptions related to forecasted revenues, gross profit margins, operating income margins, working capital cash flow, perpetual growth rates, and long-term discount rates, among others. For the market approach, the Company uses the guideline public company method. Under this method the Company utilizes information from comparable publicly traded companies with similar operating and investment characteristics as the reporting units to create valuation multiples that are applied to the operating performance of the reporting unit being tested in order to obtain their respective fair values. In order to assess the reasonableness of the calculated reporting unit fair values, the Company reconciles the aggregate fair values of its reporting units (determined as described above) to its current market capitalization, allowing for a reasonable control premium. If the carrying amount of a reporting unit, calculated using the above approaches, 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 reporting unit. There was no impairment of goodwill in any period presented. The Company's next annual impairment assessment will be performed as of the first day of the fourth quarter of fiscal 2017 unless indicators arise that would require the Company to re-evaluate at an earlier date. The following table presents the changes in goodwill during the first six months of fiscal 2017:
 
Six Months Ended
 
April 29, 2017
Balance as of October 29, 2016
$
1,679,116

Goodwill related to acquisition of Linear (Note 15)
10,584,333

Goodwill related to other acquisitions (1)
4,884

Foreign currency translation adjustment
1,168

Balance as of April 29, 2017
$
12,269,501

(1) Represents goodwill related to acquisitions that were not material to the Company on either an individual or aggregate basis.
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 determined by comparison of their

19



carrying value to the estimated future undiscounted cash flows the assets are expected to generate over their remaining estimated useful 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.
Indefinite-lived intangible assets are tested for impairment on an annual basis on the first day of the fourth quarter (on or about August 1) or more frequently if indicators of impairment exist. The impairment test involves a qualitative assessment on the indefinite-lived intangible assets to determine whether it is more likely-than not that the indefinite-lived intangible asset is impaired. If it is determined that the fair value of the indefinite-lived intangible asset is less than the carrying value, the Company would recognize into earnings the amount by which the carrying value of the assets exceeds the fair value. No impairment of intangible assets resulted from the impairment tests in any of the fiscal periods presented.
Definite-lived intangible assets, 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. In-process research and development (IPR&D) assets are considered indefinite-lived intangible assets until completion or abandonment of the associated research and development (R&D) efforts. Upon completion of the projects, the IPR&D assets are reclassified to technology-based intangible assets and amortized over their estimated useful lives.
As of April 29, 2017 and October 29, 2016, the Company’s intangible assets consisted of the following:
 
April 29, 2017
 
October 29, 2016
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Customer relationships
$
4,671,255

 
$
244,270

 
$
649,159

 
$
158,979

Technology-based
1,097,030

 
31,746

 
38,731

 
9,958

Trade-name
72,800

 
1,598

 
600

 
60

Backlog
200

 
100

 
200

 

IPR&D
24,291

 

 
29,675

 

Total (1)(2)
$
5,865,576

 
$
277,714

 
$
718,365

 
$
168,997

___________
(1) Foreign intangible asset carrying amounts are affected by foreign currency translation.
(2) Increases in intangible assets primarily relate to the Acquisition and other acquisitions. See Note 15, Acquisitions, of these Notes to Condensed Consolidated Financial Statements for further information.
  
Intangible assets, along with the related accumulated amortization, are removed from the table above at the end of the fiscal year they become fully amortized.
For the three- and six-month periods ended April 29, 2017, amortization expense related to finite-lived intangible assets was $88.8 million and $108.7 million, respectively. For the three- and six-month periods ended April 30, 2016, amortization expense related to finite-lived intangible assets was $18.4 million and $36.8 million, respectively. The remaining amortization expense will be recognized over an estimated weighted average life of approximately 5.1 years.
The Company expects annual amortization expense for intangible assets to be:
Fiscal Year
Amortization Expense
Remainder of fiscal 2017

$294,478

2018

$587,637

2019

$584,448

2020

$584,210

2021

$583,789


Note 11 – 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:

20



 
Three Months Ended
 
Six Months Ended
 
April 29, 2017
 
April 30, 2016
 
April 29, 2017
 
April 30, 2016
Service cost
$
1,658

 
$
1,394

 
$
3,306

 
$
2,773

Interest cost
890

 
933

 
1,774

 
1,871

Expected return on plan assets
(1,017
)
 
(959
)
 
(2,023
)
 
(1,940
)
Amortization of initial net obligation
3

 
4

 
6

 
8

Amortization of prior service cost
(2
)
 

 
(4
)
 

Amortization of net loss
466

 
176

 
921

 
343

Net periodic pension cost
$
1,998

 
$
1,548

 
$
3,980

 
$
3,055


Note 12 – Revolving Credit Facility
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). On July 10, 2015, the Credit Agreement was amended and restated to increase the available borrowings to $750.0 million and extend the term to July 10, 2020. On September 23, 2016, in connection with the planned acquisition of Linear, the Company amended and restated the Credit Agreement. On the Acquisition Date, the aggregate amount of commitments under the revolving credit facility increased to $1.0 billion and the maximum covenant level was temporarily revised. To date, the Company has not borrowed under this revolving credit facility but 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 0.50% or (iii) one month Eurodollar Rate plus 1%). The Credit Agreement imposes 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 EBITDA (earnings before interest, taxes, depreciation, and amortization) of not greater than 5.0 to 1.0. As of April 29, 2017, the Company was compliant with these covenants.

21



Note 13 – Debt
On July 26, 2016, the Company entered into a definitive agreement to acquire Linear. In connection with the Acquisition, the Company announced that it had obtained commitment financing in the form of a 364-day senior unsecured bridge facility in an aggregate principal amount of up to $7.5 billion (364-day Bridge Commitment) and a 90-day senior unsecured bridge facility in an aggregate principal amount of up to $4.1 billion (90-day Bridge Commitment). As discussed below, as a result of entering into the term loan facility and the issuance of $2.1 billion senior unsecured notes, the 364-day Bridge Commitment was terminated and $13.7 million and $7.2 million of unamortized bridge fees relating to the 364-day Bridge Commitment were accelerated and amortized into interest expense in the fourth quarter of fiscal 2016 and first quarter of fiscal 2017, respectively. Total fees incurred by the Company for the 364-day Bridge Commitment were approximately $27.5 million.
On the Acquisition Date, the Company entered into a 90-day Bridge Credit Agreement (the “Bridge Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent, and several banks and other financial institutions as lenders. The Bridge Credit Agreement provides for unsecured loans in an aggregate principal amount of up to $4.1 billion. The loans will bear interest at a rate per annum equal to the Eurodollar Rate plus a margin based on the Company’s debt ratings from time to time of between 0.75% and 1.63%. Repayments of loans under the Bridge Credit Agreement are due no later than June 8, 2017. The Company may prepay loans under the Bridge Credit Agreement in whole or in part at any time, without premium or penalty, subject to reimbursement of certain costs in the case of borrowings that bear interest at the Eurodollar Rate. As a result of entering into the Bridge Credit Agreement, the Company incurred a funding fee equal to 0.15% of the aggregate principal amount of the loans funded under the Bridge Credit Agreement, or $6.1 million, which was recorded in the second quarter of fiscal 2017 and is being amortized into interest expense over the term of the loan. Total fees incurred by the Company for the 90-day Bridge Commitment and Bridge Credit Agreement were approximately $15.0 million. Subsequent to the close of the second quarter of fiscal 2017, the Company repaid all of the $4.1 billion of outstanding loans under the Bridge Credit Agreement. See Note 18, Subsequent Events, of these Notes to Condensed Consolidated Financial Statements for further information.
On September 23, 2016, the Company entered into a term loan facility consisting of a 3-year unsecured term loan facility in the principal amount of $2.5 billion and a 5-year unsecured term loan facility in the principal amount of $2.5 billion established pursuant to a credit agreement with JP Morgan Chase Bank, N.A. as administrative agent and other banks identified therein as lenders (Term Loan Agreement). The Term Loan Agreement replaced $5.0 billion of the 364-day Bridge Commitment. On the Acquisition Date, the Company borrowed under the Term Loan Agreement, consisting of a 3-year unsecured term loan in the principal amount of $2.5 billion, due March 10, 2020 and a 5-year unsecured term loan in the principal amount of $2.5 billion, due March 10, 2022. The 5-year term loan requires repayment in quarterly installments on the last business day of each March, June, September and December with the first required payment due June 2017. Prepayments of principal on the term loans can be made at anytime without penalty. The term loans will bear interest at a rate per annum equal to the Eurodollar Rate plus a margin based on the Company’s debt ratings from time to time of between 0.75% and 1.63% in the case of the 3-year term loan facility, and a margin of between 0.88% and 1.75% in the case of the 5-year term loan facility. As a result of entering into the Term Loan Agreement and drawing on the available borrowings, the Company incurred fees of approximately $9.7 million. The Company recorded these costs in the second quarter of fiscal 2017 as deferred financing costs and will amortize them on a straight-line basis through interest expense over the expected 3- and 5-year terms of the term loan facility. The Company also paid ticking fees based on the Company’s debt rating accruing beginning 60 days following the effectiveness of the Term Loan Agreement through the Acquisition Date. Total fees incurred by the Company for the term loan facilities were approximately $11.5 million. Subsequent to the close of the second quarter of fiscal 2017, the Company repaid $100.0 million of principal on its 3-year unsecured term loan facility and repaid $100.0 million of principal on its 5-year unsecured term loan facility. See Note 18, Subsequent Events, of these Notes to Condensed Consolidated Financial Statements for further information.
On December 5, 2016, the Company issued $400.0 million aggregate principal amount of 2.5% senior unsecured notes due December 5, 2021 (the 2021 Notes), $550.0 million aggregate principal amount of 3.125% senior unsecured notes due December 5, 2023 (the December 2023 Notes), $900.0 million aggregate principal amount of 3.5% senior unsecured notes due December 5, 2026 (the 2026 Notes) and $250.0 million aggregate principal amount of 4.5% senior unsecured notes due December 5, 2036 (the 2036 Notes, and together with the 2021 Notes, the December 2023 Notes and the 2026 Notes, the Notes) with semi-annual fixed interest payments due on June 5 and December 5 of each year, commencing June 5, 2017. The Notes were issued in an underwritten public offering pursuant to the terms of an underwriting agreement, dated as of November 30, 2016, among the Company and J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit Suisse Securities (USA) LLC and MUFG Securities Americas Inc., as representatives of the several underwriters named therein. The net proceeds of the offering were $2.1 billion, after discount and issuance costs. Debt discount and issuance costs will be amortized through interest expense over the term of the Notes. The Notes were issued pursuant to an indenture, as supplemented by a supplemental indenture, and the indenture and supplemental indenture contain certain covenants, events of default and other customary provisions. As of April 29, 2017, the Company was compliant with these covenants. The Notes

22



will rank without preference or priority among themselves and equally in right of payment with all other existing and future senior unsecured debt and senior in right of payment to all of the Company's future subordinated debt. The issuance of the Notes replaced the remaining $2.5 billion of the 364-day Bridge Commitment.
The Company’s debt consisted of the following as of April 29, 2017 and October 29, 2016:
 
April 29, 2017
 
October 29, 2016
 
Principal
 
Unamortized discount and debt issuance costs
 
Principal
 
Unamortized discount and debt issuance costs
3-Year term loan
2,400,000

 
3,970

 

 

5-Year term loan
2,375,000

 
5,272

 

 

2021 Notes, due December 2021
400,000

 
4,211

 

 

2023 Notes, due June 2023
500,000

 
3,740

 
500,000

 
4,047

2023 Notes, due December 2023
550,000

 
5,831

 

 

2025 Notes, due December 2025
850,000

 
7,593

 
850,000

 
8,034

2026 Notes, due December 2026
900,000

 
12,292

 

 

2036 Notes, due December 2036
250,000

 
4,084

 

 

2045 Notes, due December 2045
400,000

 
5,643

 
400,000

 
5,742

   Total Long-Term Debt
$
8,625,000

 
$
52,636

 
$
1,750,000

 
$
17,823

Bridge credit agreement
4,100,000

 
3,831

 

 

3-Year term loan, current
100,000

 

 

 

5-Year term loan, current
125,000

 

 

 

   Total Current Debt
$
4,325,000

 
$
3,831

 
$

 
$

Total Debt
$
12,950,000

 
$
56,467

 
$
1,750,000

 
$
17,823


Note 14 – Inventories
Inventories are valued at the lower of cost (first-in, first-out method) or market. The valuation of inventory requires the Company to estimate obsolete or excess inventory as well as inventory that is not of saleable quality. The Company employs a variety of methodologies to determine the net realizable value of its inventory. While a portion of the calculation to record inventory at its net realizable value is based on the age of the inventory and lower of cost or market calculations, a key factor in estimating obsolete or excess inventory requires the Company to estimate the future demand for its products. If actual demand is less than the Company’s estimates, impairment charges, which are recorded to cost of sales, may need to be recorded in future periods. Inventory in excess of saleable amounts is not valued, and the remaining inventory is valued at the lower of cost or market.
Inventories at April 29, 2017 and October 29, 2016 were as follows:
 
April 29, 2017
 
October 29, 2016
Raw materials
$
30,557

 
$
20,263

Work in process
448,296

 
232,196

Finished goods
169,005

 
124,096

Total inventories
$
647,858

 
$
376,555


Note 15 – Acquisitions
Linear Technology Corporation

On the Acquisition Date, the Company completed its acquisition of all of the voting interests of Linear, an independent manufacturer of high performance analog integrated circuits. Under the terms of the Merger Agreement, Linear stockholders, received, for each outstanding share of Linear common stock, $46.00 in cash and 0.2321 of a share of the Company's common stock at the closing. The combination creates the premier analog technology company with the industry’s most comprehensive suite of high-performance analog offerings. The results of operations of Linear from the Acquisition Date are included in the Company’s consolidated statements of income for the three and six months ended April 29, 2017. The amount of revenue

23



attributable to Linear included in the Company's consolidated statements of income for the three and six months ended April 29, 2017 was $147.5 million.

The Acquisition Date fair value of the consideration transferred in the Acquisition consisted of the following:
(in thousands)
 
Cash consideration (a)
$
11,092,047

Issuance of common stock (b)
4,593,655

Fair value of replacement share-based and cash awards (c)
70,954

Total estimated purchase consideration
$
15,756,656

_______________
(a)The cash consideration was funded utilizing cash on hand, the net proceeds from the bridge and term loan agreements and the proceeds received from the Company's issuance of the Notes. This reflects the cash portion of the purchase consideration paid to Linear stockholders of approximately $11.1 billion, as well as $16.3 million for the cash-settled portion of consideration paid to holders of restricted stock and restricted stock awards that automatically vested at the effective time of the Acquisition pursuant to pre-existing change-of-control agreements.
(b) The fair value is based on the issuance of approximately 55.9 million shares of the Company's common stock with a per-share value of $82.20 (the closing price of the Company's common stock on The NASDAQ Global Select Market on the Acquisition Date).
(c) In connection with the Acquisition, the Company issued equity and cash awards to certain Linear employees to replace Linear equity awards. The amount represents the portion of the fair value of the replacement equity and cash awards associated with services rendered though the Acquisition Date and have been included as a component of the total estimated purchase consideration.

The preliminary fair values of assets acquired and liabilities assumed as of the Acquisition Date is set forth in the table below. The excess of the purchase price over the aggregate fair value of identifiable net assets acquired was recorded as goodwill. None of the goodwill is expected to be deductible for tax purposes. These preliminary fair values were determined through established and generally accepted valuation techniques and are subject to change during the measurement period as valuations are finalized. As a result, the Acquisition accounting is not complete and additional information that existed at the Acquisition Date may become known to the Company during the remainder of the measurement period. As of the filing date of this Quarterly Report on Form 10-Q, the Company is still in the process of valuing Linear's assets, including inventory, fixed assets, deferred taxes, intangible assets, and liabilities, including deferred revenue.

(in thousands)
 
Cash and cash equivalents
$
1,411,550

Marketable securities
100,246

Accounts receivable (a)
154,175

Inventories
437,907

Prepaid expenses and other assets
14,782

Property, plant and equipment
461,565

Intangible assets (Note 10)
5,140,400

Goodwill (Note 10)
10,584,333

Total assets
$
18,304,958

Assumed liabilities
138,452

Deferred tax liabilities
2,409,850

Total estimated purchase price
$
15,756,656

____________
(a)
The fair value of accounts receivable was $154.2 million, with the gross contractual amount being $155.9 million, of which the Company estimates that $1.7 million is uncollectible.

The amortizable intangible assets acquired consisted of the following, which are being 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.

24



 
Fair Value
 (in thousands)
Weighted Average Useful Lives
 (in Years)
 
 
 
Technology-based
$
1,046,100

8
Trade name
72,200

7
Customer relationships
4,022,100

11
    Total amortizable intangible assets
$
5,140,400

10

The goodwill recognized is attributable to synergies which are expected to enhance and expand the Company’s overall product portfolio and opportunities in new and existing markets, future technologies that have yet to be determined and Linear's assembled workforce. Future technologies do not meet the criteria for recognition separately from goodwill because they are part of future development and growth of the business. As of the filing date of this Quarterly Report on Form 10-Q, the assignment of goodwill resulting from the Acquisition to the Company's reporting units has not been completed.

There were no significant contingencies assumed as part of the Acquisition.

The Company recognized $38.8 million and $46.8 million of transaction-related costs, including legal, accounting and other related fees that were expensed in the three- and six-month periods ended April 29, 2017, respectively. These costs are included in the condensed consolidated statements of income in operating expenses within SMG&A expenses. The Company may incur additional transaction-related costs within the next twelve months related to the Acquisition that will be expensed as incurred.

The following unaudited pro forma consolidated financial information combines the unaudited results of the Company for the three and six months ended April 29, 2017 and the unaudited results of Linear for the three and six months ended January 28, 2017 and assumes that the Acquisition, which closed on March 10, 2017, was completed on November 1, 2015 (the first day of the Company’s 2016 fiscal year). The pro forma consolidated financial information has been calculated after applying the Company’s accounting policies and includes adjustments for amortization expense of acquired intangible assets, transaction-related costs, a step-up in the value of acquired inventory and property, plant and equipment, compensation expense for ongoing share-based compensation arrangements replaced and interest expense for the debt incurred to fund the Acquisition, together with the consequential tax effects. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the operating results of the Company that would have been achieved had the Acquisition actually taken place on November 1, 2015. In addition, these results are not intended to be a projection of future results and do not reflect events that may occur after the Acquisition, including but not limited to revenue enhancements, cost savings or operating synergies that the combined Company may achieve as a result of the Acquisition.
 (thousands, except per share data)
Pro Forma Three Months Ended
 
April 29, 2017
 
April 30, 2016
Revenue
$
1,366,946

 
$
1,137,468

Net income
$
119,134

 
$
58,695

Basic net income per common share
$
0.33

 
$
0.16

Diluted net income per common share
$
0.32

 
$
0.16

 (thousands, except per share data)
Pro Forma Six Months Ended
 
April 29, 2017
 
April 30, 2016
Revenue
$
2,729,393

 
$
2,218,047

Net income
$
351,625

 
$
(136,034
)
Basic net income per common share
$
0.96

 
$
(0.37
)
Diluted net income per common share
$
0.95

 
$
(0.37
)
Other Acquisitions
The Company has not provided pro forma results of operations for any other acquisitions completed in the three- or six-month periods ended April 29, 2017 or April 30, 2016 herein as they were not material to the Company on either an individual or

25



an aggregate basis. The Company included the results of operations of each acquisition in its consolidated statement of income from the date of each acquisition.

Note 16 – 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 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 the Company's 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 a portion of its income.  
The Company has filed a petition with the U.S. Tax Court for one open matter for fiscal years 2006 and 2007 that pertains to Section 965 of the Internal Revenue Code related to the beneficial tax treatment of dividends paid from foreign owned companies under The American Jobs Creation Act. A favorable ruling was rendered by the U.S. Tax Court on November 22, 2016. The Company recorded a $36.5 million reserve for this potential liability in the fourth quarter of fiscal 2013 and has retained it as of as of April 29, 2017 since the ultimate outcome depends on whether the Internal Revenue Service (IRS) will appeal the U.S. Tax Court’s decision.
All of the Company's U.S. federal tax returns prior to fiscal year 2013 are no longer subject to examination.
All of the Company's Ireland tax returns prior to fiscal year 2012 are no longer 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 April 29, 2017.
 
Unrealized Tax Benefits
Balance, October 29, 2016
$
68,535<