Basis of Presentation

In the opinion of management, the information furnished in the accompanying condensed consolidated financial statements reflects all normal recurring adjustments that are necessary to fairly state the results for these interim periods and should be read in conjunction with Analog Devices, Inc.’s (the Company) Annual Report on Form 10-K for the fiscal year ended November 3, 2018 (fiscal 2018) and related notes. The results of operations for the interim periods shown in this report are not necessarily indicative of the results that may be expected for the fiscal year ending November 2, 2019 (fiscal 2019) or any future period.

The Company has a 52-53 week fiscal year that ends on the Saturday closest to the last day in October. Fiscal 2019 is a 52-week fiscal year and fiscal 2018 was a 53-week fiscal year. The additional week in fiscal 2018 was included in the first quarter ended February 3, 2018. Therefore, the first three months of fiscal 2019 included one less week of operations as compared to the first three months of fiscal 2018. Certain amounts reported in previous periods have been reclassified to conform to the fiscal 2019 presentation.

As further discussed in Note 2, Revenue Recognition and Note 13, New Accounting Pronouncements, the Company adopted the Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (ASU 2014-09), in the first quarter of fiscal 2019. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period showing, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized as of the date of initial application. The Company adopted ASU 2014-09 using the full retrospective method and applied the practical expedient, in which the Company is not required to disclose the amount of consideration allocated to any remaining performance obligations or an explanation of when the Company expects to recognize that amount as revenue for all reporting periods presented before the date of the initial application.

As a result of the adoption of ASU 2014-09, the Company changed its accounting policy for revenue recognition and recognizes revenue from product sales to its customers and distributors when title passes, which is generally upon shipment. Prior to the adoption of ASU 2014-09, revenue and the related cost of sales on shipments to certain distributors were deferred until the distributor resold the products to their end customers. See Note 2, Revenue Recognition, in these Notes to Condensed Consolidated Financial Statements for the details of the Company’s revenue recognition policies. The adoption of ASU 2014-09 impacted the Company’s condensed consolidated statements of income and balance sheets but did not impact its condensed consolidated statements of cash flows, with the exceptions of net income and reclassifications within adjustments to reconcile net income to cash provided by operations and did not impact the condensed consolidated statement of shareholders' equity, with the exceptions of retained earnings and net income. As shown in the tables below, pursuant to the guidance in ASU 2014-09, the Company restated its historical financial results to be consistent with the standard. Accordingly, the amounts for all periods presented in this Form 10-Q reflect the impact of ASU 2014-09.



Condensed Consolidated Statement of Income	Three Months Ended February 3, 2018
(thousands, except per share amounts)	As Reported			Impact of Adoption		As Adjusted
Revenue	$	1,518,624		$	48,246	$	1,566,870
Cost of sales	483,434			11,753		495,187
Gross margin	1,035,190			36,493		1,071,683
Operating expenses:
Research and development	288,597			—		288,597
Selling, marketing, general and administrative	176,908			—		176,908
Amortization of intangibles	107,019			—		107,019
Special charges	57,318			—		57,318
	629,842			—		629,842
Operating income	405,348			36,493		441,841
Nonoperating expense (income):
Interest expense	68,030			—		68,030
Interest income	(2,092		)	—		(2,092		)
Other, net	556			—		556
	66,494			—		66,494
Income before income taxes	338,854			36,493		375,347
Provision for income taxes	70,682			11,425		82,107
Net income	$	268,172		$	25,068	$	293,240
Shares used to compute earnings per common share – basic	369,093			—		369,093
Shares used to compute earnings per common share – diluted	374,189			—		374,189
Basic earnings per common share	$	0.72		$	0.07	$	0.79
Diluted earnings per common share	$	0.71		$	0.07	$	0.78

The impact on the Company's previously reported condensed consolidated balance sheet line items is as follows:



	November 3, 2018
(thousands)	As Reported		Impact of Adoption			As Adjusted
Deferred tax assets	$	21,078	$	(19,353	)	$	1,725
Deferred income on shipments to distributors, net	$	487,417	$	(487,417	)	$	—
Accrued liabilities	$	497,080	$	133,027		$	630,107
Deferred income taxes	$	927,065	$	55,404		$	982,469
Retained earnings	$	5,703,064	$	279,633		$	5,982,697

In addition, in the first quarter of fiscal 2019, the Company adopted ASU 2016-16, Income Taxes (Topic 740) (ASU 2016-16) using the modified retrospective method with a cumulative-effect adjustment directly to retained earnings. ASU 2016-16 requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The adoption of ASU 2016-16 resulted in the following cumulative-effect increase in the Company's deferred tax assets, deferred tax liabilities and retained earnings as follows:



	November 4, 2018
(thousands)	Beginning Balance November 3, 2018 as Adjusted		Impact of Adoption of ASU 2016-16		Balance November 4, 2018
Deferred tax assets	$	1,725	$	1,655,129	$	1,656,854
Deferred income taxes	$	982,469	$	1,324,103	$	2,306,572
Retained earnings	$	5,982,697	$	331,026	$	6,313,723

See Note 13, New Accounting Pronouncements, and Note 12, Income Taxes, in these Notes to Condensed Consolidated Financial Statements for more information on the adoption of ASU 2016-16.