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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark One)
|
| |
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended August 3, 2019
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)
Securities registered pursuant to Section 12(b) of the Act: |
| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock $0.16 2/3 par value per share | ADI | Nasdaq Global Select Market |
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 ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 | | ☑ | | Accelerated filer | | ☐ |
| | | | | | |
Non-accelerated filer | | ☐ | | 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 ☑
As of August 3, 2019 there were 369,406,136 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) (in thousands, except per share amounts)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| August 3, 2019 | | August 4, 2018 (2) | | August 3, 2019 | | August 4, 2018 (2) |
Revenue | $ | 1,480,143 |
| | $ | 1,558,189 |
| | $ | 4,547,846 |
| | $ | 4,688,561 |
|
Cost of sales (1) | 482,332 |
| | 497,631 |
| | 1,476,287 |
| | 1,483,930 |
|
Gross margin | 997,811 |
| | 1,060,558 |
| | 3,071,559 |
| | 3,204,631 |
|
Operating expenses: | | | | | | | |
Research and development (1) | 280,102 |
| | 291,642 |
| | 853,330 |
| | 869,711 |
|
Selling, marketing, general and administrative (1) | 162,825 |
| | 171,487 |
| | 493,295 |
| | 520,541 |
|
Amortization of intangibles | 107,231 |
| | 107,409 |
| | 321,816 |
| | 321,557 |
|
Special charges | 927 |
| | 1,069 |
| | 30,871 |
| | 59,476 |
|
| 551,085 |
| | 571,607 |
| | 1,699,312 |
| | 1,771,285 |
|
Operating income | 446,726 |
| | 488,951 |
| | 1,372,247 |
| | 1,433,346 |
|
Nonoperating expense (income): | | | | | | | |
Interest expense | 59,871 |
| | 61,665 |
| | 178,300 |
| | 194,487 |
|
Interest income | (2,625 | ) | | (2,588 | ) | | (8,241 | ) | | (6,592 | ) |
Other, net | (78 | ) | | (632 | ) | | 4,287 |
| | (527 | ) |
| 57,168 |
| | 58,445 |
| | 174,346 |
| | 187,368 |
|
Income before income taxes | 389,558 |
| | 430,506 |
| | 1,197,901 |
| | 1,245,978 |
|
Provision for income taxes | 27,184 |
| | 21,949 |
| | 112,584 |
| | 143,853 |
|
Net income | $ | 362,374 |
|
| $ | 408,557 |
| | $ | 1,085,317 |
| | $ | 1,102,125 |
|
Shares used to compute earnings per common share – basic | 369,533 |
| | 371,315 |
| | 369,160 |
| | 370,211 |
|
Shares used to compute earnings per common share – diluted | 373,077 |
| | 375,815 |
| | 372,967 |
| | 374,880 |
|
Basic earnings per common share | $ | 0.98 |
| | $ | 1.10 |
| | $ | 2.93 |
| | $ | 2.97 |
|
Diluted earnings per common share | $ | 0.97 |
| | $ | 1.08 |
| | $ | 2.90 |
| | $ | 2.93 |
|
(1) Includes stock-based compensation expense as follows: | | | | | | | |
Cost of sales | $ | 5,247 |
| | $ | 5,734 |
| | $ | 15,720 |
| | $ | 13,775 |
|
Research and development | $ | 18,802 |
| | $ | 18,018 |
| | $ | 57,294 |
| | $ | 59,764 |
|
Selling, marketing, general and administrative | $ | 12,049 |
| | $ | 13,143 |
| | $ | 39,706 |
| | $ | 40,172 |
|
(2)Revenue from Contracts with Customers (ASU 2014-09). See Note 1, Basis of Presentation, in the Notes to Condensed Consolidated Financial Statements.
See accompanying notes.
ANALOG DEVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (in thousands)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| August 3, 2019 | | August 4, 2018 (1) | | August 3, 2019 | | August 4, 2018 (1) |
Net income | $ | 362,374 |
| | $ | 408,557 |
| | $ | 1,085,317 |
| | $ | 1,102,125 |
|
Foreign currency translation adjustments | (4,021 | ) | | (9,345 | ) | | (4,133 | ) | | (2,593 | ) |
Change in fair value of available-for-sale securities | (5 | ) | | 2 |
| | 10 |
| | 5 |
|
Change in fair value of derivative instruments designated as cash flow hedges (net of taxes of $14,574, $847, $24,757 and $476, respectively) | (54,811 | ) | | (4,378 | ) | | (92,661 | ) | | (2,641 | ) |
Changes in pension plans including transition obligation, net actuarial loss and foreign currency translation adjustments (net of taxes of $60, $96, $186 and $298, respectively) | 1,185 |
| | 1,266 |
| | 1,551 |
| | 1,122 |
|
Other comprehensive loss | (57,652 | ) | | (12,455 | ) | | (95,233 | ) | | (4,107 | ) |
Comprehensive income | $ | 304,722 |
| | $ | 396,102 |
| | $ | 990,084 |
| | $ | 1,098,018 |
|
(1) Balances have been restated to reflect the full retrospective adoption of Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (ASU 2014-09). See Note 1, Basis of Presentation, in the Notes to Condensed Consolidated Financial Statements.
See accompanying notes.
ANALOG DEVICES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands, except share and per share amounts) |
| | | | | | | |
| August 3, 2019 | | November 3, 2018 (1) |
ASSETS | |
| | |
|
Current Assets | | | |
Cash and cash equivalents | $ | 612,164 |
| | $ | 816,591 |
|
Accounts receivable | 689,976 |
| | 639,717 |
|
Inventories (2) | 638,305 |
| | 586,760 |
|
Prepaid expenses and other current assets | 66,613 |
| | 69,058 |
|
Total current assets | 2,007,058 |
| | 2,112,126 |
|
Property, Plant and Equipment, at Cost | | | |
Land and buildings | 926,112 |
| | 873,186 |
|
Machinery and equipment | 2,594,832 |
| | 2,478,032 |
|
Office equipment | 84,487 |
| | 76,233 |
|
Leasehold improvements | 154,316 |
| | 100,374 |
|
| 3,759,747 |
| | 3,527,825 |
|
Less accumulated depreciation and amortization | 2,538,555 |
| | 2,373,497 |
|
Net property, plant and equipment | 1,221,192 |
| | 1,154,328 |
|
Other Assets | | | |
Deferred compensation plan investments | 45,778 |
| | 39,853 |
|
Other investments | 32,290 |
| | 28,730 |
|
Goodwill | 12,247,888 |
| | 12,252,604 |
|
Intangible assets, net | 4,346,377 |
| | 4,778,192 |
|
Deferred tax assets | 1,606,267 |
| | 9,665 |
|
Other assets | 59,800 |
| | 62,868 |
|
Total other assets | 18,338,400 |
| | 17,171,912 |
|
| $ | 21,566,650 |
| | $ | 20,438,366 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
Current Liabilities | | | |
Accounts payable | $ | 220,230 |
| | $ | 260,919 |
|
Income taxes payable | 173,917 |
| | 93,722 |
|
Debt, current | 411,434 |
| | 67,000 |
|
Accrued liabilities | 678,099 |
| | 630,107 |
|
Total current liabilities | 1,483,680 |
| | 1,051,748 |
|
Non-current liabilities | | | |
Long-term debt | 5,278,643 |
| | 6,265,674 |
|
Deferred income taxes | 2,171,029 |
| | 990,409 |
|
Deferred compensation plan liability | 45,778 |
| | 39,846 |
|
Income taxes payable | 649,228 |
| | 710,179 |
|
Other non-current liabilities | 148,055 |
| | 112,337 |
|
Total non-current liabilities | 8,292,733 |
| | 8,118,445 |
|
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, 369,406,136 shares outstanding (370,159,553 on November 3, 2018) | 61,569 |
| | 61,694 |
|
Capital in excess of par value | 5,060,586 |
| | 5,282,222 |
|
Retained earnings | 6,821,755 |
| | 5,982,697 |
|
Accumulated other comprehensive loss | (153,673 | ) | | (58,440 | ) |
Total shareholders’ equity | 11,790,237 |
| | 11,268,173 |
|
| $ | 21,566,650 |
| | $ | 20,438,366 |
|
| |
(1) | Balances have been restated to reflect the full retrospective adoption of Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (ASU 2014-09). See Note 1, Basis of Presentation, in the Notes to Condensed Consolidated Financial Statements. |
See accompanying notes.
ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(in thousands)
|
| | | | | | | | | | | | | | | | | | |
| Three Months Ended August 3, 2019 |
| | | | | Capital in | | | | Accumulated Other |
| Common Stock | | Excess of | | Retained | | Comprehensive |
| Shares | | Amount | | Par Value | | Earnings | | (Loss) Income |
BALANCE, MAY 4, 2019 | 369,761 |
| | $ | 61,628 |
| | $ | 5,117,202 |
| | $ | 6,659,449 |
| | $ | (96,021 | ) |
Net income | | | | | | | 362,374 |
| | |
Dividends declared and paid - $0.54 per share | | | | | | | (200,068 | ) | | |
Issuance of stock under stock plans and other | 667 |
| | 111 |
| | 19,117 |
| | | | |
Stock-based compensation expense | | | | | 36,098 |
| | | | |
Other comprehensive loss | | | | | | | | | (57,652 | ) |
Common stock repurchased | (1,022 | ) | | (170 | ) | | (111,831 | ) | | | | |
BALANCE, AUGUST 3, 2019 | 369,406 |
| | $ | 61,569 |
| | $ | 5,060,586 |
| | $ | 6,821,755 |
| | $ | (153,673 | ) |
| | | | | | | | | |
| Nine Months Ended August 3, 2019 |
| | | | | Capital in | | | | Accumulated Other |
| Common Stock | | Excess of | | Retained | | Comprehensive |
| Shares | | Amount | | Par Value | | Earnings | | (Loss) Income |
BALANCE, NOVEMBER 3, 2018 (1) | 370,160 |
| | $ | 61,694 |
| | $ | 5,282,222 |
| | $ | 5,982,697 |
| | $ | (58,440 | ) |
Effect of Accounting Standards Update 2016-16 (see Note 1) | | | | | | | 331,026 |
| | |
Net income | | | | | | | 1,085,317 |
| | |
Dividends declared and paid - $1.56 per share | | | | | | | (577,285 | ) | | |
Issuance of stock under stock plans and other | 3,807 |
| | 635 |
| | 105,500 |
| | | | |
Stock-based compensation expense | | | | | 112,720 |
| | | | |
Other comprehensive loss | | | | | | | | | (95,233 | ) |
Common stock repurchased | (4,561 | ) | | (760 | ) | | (439,856 | ) | | | | |
BALANCE, AUGUST 3, 2019 | 369,406 |
| | $ | 61,569 |
| | $ | 5,060,586 |
| | $ | 6,821,755 |
| | $ | (153,673 | ) |
| |
(1) | Balances have been restated to reflect the full retrospective adoption of Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (ASU 2014-09). See Note 1, Basis of Presentation, in the Notes to Condensed Consolidated Financial Statements. |
See accompanying notes.
ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(in thousands)
|
| | | | | | | | | | | | | | | | | | |
| Three Months Ended August 4, 2018 |
| | | | | Capital in | | | | Accumulated Other |
| Common Stock | | Excess of | | Retained | | Comprehensive |
| Shares | | Amount | | Par Value | | Earnings | | (Loss) Income |
BALANCE, MAY 5, 2018 (1) | 370,897 |
| | $ | 61,817 |
| | $ | 5,362,608 |
| | $ | 5,527,591 |
| | $ | (53,011 | ) |
Net income | | | | | | | 408,557 |
| | |
Dividends declared and paid - $0.48 per share | | | | | | | (178,890 | ) | | |
Issuance of stock under stock plans and other | 893 |
| | 149 |
| | 22,652 |
| | | | |
Stock-based compensation expense | | | | | 36,895 |
| | | | |
Other comprehensive loss | | | | | | | | | (12,455 | ) |
Common stock repurchased | (120 | ) | | (20 | ) | | (11,933 | ) | | | | |
BALANCE, AUGUST 4, 2018 | 371,670 |
| | $ | 61,946 |
| | $ | 5,410,222 |
| | $ | 5,757,258 |
| | $ | (65,466 | ) |
| | | | | | | | | |
| Nine Months Ended August 4, 2018 |
| | | | | Capital in | | | | Accumulated Other |
| Common Stock | | Excess of | | Retained | | Comprehensive |
| Shares | | Amount | | Par Value | | Earnings | | (Loss) Income |
BALANCE, OCTOBER 28, 2017 (1) | 368,636 |
| | $ | 61,441 |
| | $ | 5,250,519 |
| | $ | 5,179,024 |
| | $ | (61,359 | ) |
Net income | | | | | | | 1,102,125 |
| | |
Dividends declared and paid - $1.41 per share | | | | | | | (523,891 | ) | | |
Issuance of stock under stock plans and other | 3,468 |
| | 578 |
| | 87,780 |
| | | | |
Stock-based compensation expense | | | | | 113,711 |
| | | | |
Other comprehensive loss | | | | | | | | | (4,107 | ) |
Common stock repurchased | (434 | ) | | (73 | ) | | (41,788 | ) | | | | |
BALANCE, AUGUST 4, 2018 | 371,670 |
| | $ | 61,946 |
| | $ | 5,410,222 |
| | $ | 5,757,258 |
| | $ | (65,466 | ) |
| |
(1) | Balances have been restated to reflect the full retrospective adoption of Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (ASU 2014-09). See Note 1, Basis of Presentation, in the Notes to Condensed Consolidated Financial Statements. |
See accompanying notes.
ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
|
| | | | | | | |
| Nine Months Ended |
| August 3, 2019 | | August 4, 2018 (1) |
Cash flows from operating activities: | | | |
Net income | $ | 1,085,317 |
| | $ | 1,102,125 |
|
Adjustments to reconcile net income to net cash provided by operations: | | | |
Depreciation | 179,041 |
| | 169,651 |
|
Amortization of intangibles | 427,046 |
| | 428,222 |
|
Stock-based compensation expense | 112,720 |
| | 113,711 |
|
Non-cash portion of special charge | 4,367 |
| | — |
|
Deferred income taxes | (55,444 | ) | | (711,484 | ) |
Other non-cash activity | 26,701 |
| | 22,019 |
|
Changes in operating assets and liabilities | (184,552 | ) | | 603,676 |
|
Total adjustments | 509,879 |
| | 625,795 |
|
Net cash provided by operating activities | 1,595,196 |
| | 1,727,920 |
|
Cash flows from investing activities: | | | |
Additions to property, plant and equipment | (224,297 | ) | | (168,872 | ) |
Payments for acquisitions, net of cash acquired | — |
| | (52,839 | ) |
Changes in other assets | (5,132 | ) | | (3,268 | ) |
Net cash used for investing activities | (229,429 | ) | | (224,979 | ) |
Cash flows from financing activities: | | | |
Proceeds from debt | 1,250,000 |
| | 743,778 |
|
Early termination of debt | (1,250,000 | ) | | — |
|
Proceeds from revolver | 75,000 |
| | — |
|
Payments on revolver | (75,000 | ) | | — |
|
Debt repayments | (650,000 | ) | | (2,050,000 | ) |
Dividend payments to shareholders | (577,285 | ) | | (523,891 | ) |
Repurchase of common stock | (440,616 | ) | | (41,861 | ) |
Proceeds from employee stock plans | 106,135 |
| | 88,358 |
|
Changes in other financing activities | (7,918 | ) | | 6,320 |
|
Net cash used for financing activities | (1,569,684 | ) | | (1,777,296 | ) |
Effect of exchange rate changes on cash | (510 | ) | | (908 | ) |
Net decrease in cash and cash equivalents | (204,427 | ) | | (275,263 | ) |
Cash and cash equivalents at beginning of period | 816,591 |
| | 1,047,838 |
|
Cash and cash equivalents at end of period | $ | 612,164 |
| | $ | 772,575 |
|
(1) Balances have been restated to reflect the full retrospective adoption of Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (ASU 2014-09). See Note 1, Basis of Presentation, in the Notes to Condensed Consolidated Financial Statements.
See accompanying notes.
ANALOG DEVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED AUGUST 3, 2019
(all tabular amounts in thousands except per share amounts and percentages)
Note 1 – Basis of Presentation
In the opinion of management, the information furnished in the accompanying condensed consolidated financial statements reflects all normal recurring adjustments that are necessary to fairly state the results for these interim periods and should be read in conjunction with Analog Devices, Inc.’s (the Company) Annual Report on Form 10-K for the fiscal year ended November 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 nine months of fiscal 2019 included one less week of operations as compared to the first nine 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 August 4, 2018 |
| As Reported | | Impact of Adoption | | As Adjusted |
Revenue | $ | 1,572,679 |
| | $ | (14,490 | ) | | $ | 1,558,189 |
|
Cost of sales | 502,033 |
| | (4,402 | ) | | 497,631 |
|
Gross margin | 1,070,646 |
| | (10,088 | ) | | 1,060,558 |
|
Operating expenses: | | | | | |
Research and development | 291,642 |
| | — |
| | 291,642 |
|
Selling, marketing, general and administrative | 171,487 |
| | — |
| | 171,487 |
|
Amortization of intangibles | 107,409 |
| | — |
| | 107,409 |
|
Special charges | 1,069 |
| | — |
| | 1,069 |
|
| 571,607 |
| | — |
| | 571,607 |
|
Operating income | 499,039 |
| | (10,088 | ) | | 488,951 |
|
Nonoperating expense (income): | | | | | |
Interest expense | 61,665 |
| | — |
| | 61,665 |
|
Interest income | (2,588 | ) | | — |
| | (2,588 | ) |
Other, net | (632 | ) | | — |
| | (632 | ) |
| 58,445 |
| | — |
| | 58,445 |
|
Income before income taxes | 440,594 |
| | (10,088 | ) | | 430,506 |
|
Provision for income taxes | 26,130 |
| | (4,181 | ) | | 21,949 |
|
Net income | $ | 414,464 |
| | $ | (5,907 | ) | | $ | 408,557 |
|
Shares used to compute earnings per common share – basic | 371,315 |
| | — |
| | 371,315 |
|
Shares used to compute earnings per common share – diluted | 375,815 |
| | — |
| | 375,815 |
|
Basic earnings per common share (1) | $ | 1.11 |
| | $ | (0.02 | ) | | $ | 1.10 |
|
Diluted earnings per common share (1) | $ | 1.10 |
| | $ | (0.02 | ) | | $ | 1.08 |
|
| | | | | |
(1) The sum of the per share amounts may not equal the total due to rounding. |
|
| | | | | | | | | | | |
Condensed Consolidated Statement of Income | Nine Months Ended August 4, 2018 |
| As Reported | | Impact of Adoption | | As Adjusted |
Revenue | $ | 4,604,356 |
| | $ | 84,205 |
| | $ | 4,688,561 |
|
Cost of sales | 1,464,708 |
| | 19,222 |
| | 1,483,930 |
|
Gross margin | 3,139,648 |
| | 64,983 |
| | 3,204,631 |
|
Operating expenses: | | | | | |
Research and development | 869,711 |
| | — |
| | 869,711 |
|
Selling, marketing, general and administrative | 520,541 |
| | — |
| | 520,541 |
|
Amortization of intangibles | 321,557 |
| | — |
| | 321,557 |
|
Special charges | 59,476 |
| | — |
| | 59,476 |
|
| 1,771,285 |
| | — |
| | 1,771,285 |
|
Operating income | 1,368,363 |
| | 64,983 |
| | 1,433,346 |
|
Nonoperating expense (income): | | | | | |
Interest expense | 194,487 |
| | — |
| | 194,487 |
|
Interest income | (6,592 | ) | | — |
| | (6,592 | ) |
Other, net | (527 | ) | | — |
| | (527 | ) |
| 187,368 |
| | — |
| | 187,368 |
|
Income before income taxes | 1,180,995 |
| | 64,983 |
| | 1,245,978 |
|
Provision for income taxes | 118,528 |
| | 25,325 |
| | 143,853 |
|
Net income | $ | 1,062,467 |
| | $ | 39,658 |
| | $ | 1,102,125 |
|
Shares used to compute earnings per common share – basic | 370,211 |
| | — |
| | 370,211 |
|
Shares used to compute earnings per common share – diluted | 374,880 |
| | — |
| | 374,880 |
|
Basic earnings per common share | $ | 2.86 |
| | $ | 0.11 |
| | $ | 2.97 |
|
Diluted earnings per common share | $ | 2.82 |
| | $ | 0.11 |
| | $ | 2.93 |
|
The impact on the Company's previously reported condensed consolidated balance sheet line items is as follows:
|
| | | | | | | | | | | |
| November 3, 2018 |
| As Reported | | Impact of Adoption | | As Adjusted |
Deferred tax assets | $ | 21,078 |
| | $ | (11,413 | ) | | $ | 9,665 |
|
Deferred income on shipments to distributors, net | $ | 487,417 |
| | $ | (487,417 | ) | | $ | — |
|
Accrued liabilities | $ | 497,080 |
| | $ | 133,027 |
| | $ | 630,107 |
|
Deferred income taxes | $ | 927,065 |
| | $ | 63,344 |
| | $ | 990,409 |
|
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 |
| Beginning Balance November 3, 2018 as Adjusted | | Impact of Adoption of ASU 2016-16 | | Balance November 4, 2018 |
Deferred tax assets | $ | 9,665 |
| | $ | 1,655,129 |
| | $ | 1,664,794 |
|
Deferred income taxes | $ | 990,409 |
| | $ | 1,324,103 |
| | $ | 2,314,512 |
|
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.
Note 2 – Revenue Recognition
Revenue Recognition Policy: In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, to achieve a consistent application of revenue recognition, resulting in a single revenue model to be applied by reporting companies under U.S. generally accepted accounting principles. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the providing entity expects to be entitled in exchange for those goods or services. As a result of the adoption of ASU 2014-09, at the beginning of the first quarter of fiscal 2019, the Company revised its revenue recognition policy. The Company now recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. Under ASU 2014-09, the Company recognizes revenue when all of the following criteria are met: (1) the Company has entered into a binding agreement, (2) the performance obligations have been identified, (3) the transaction price to the customer has been determined, (4) the transaction price has been allocated to the performance obligations in the contract, and (5) the performance obligations have been satisfied. The majority of the Company's shipping terms permit the Company to recognize revenue at point of shipment or delivery. Certain shipping terms require the goods to be through customs or be received by the customer before title passes. In those instances, the Company defers the revenue recognized until title has passed. Shipping costs are charged to selling, marketing, general and administrative expense as incurred. Sales taxes are excluded from revenue.
Revenue from contracts with the United States government, government prime contractors and certain commercial customers is recorded over time using either units delivered or costs incurred as the measurement basis for progress toward completion. These measures are 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, subcontract 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.
Performance Obligations: Substantially all of the Company’s contracts with customers contain a single performance obligation, the sale of mixed-signal integrated circuit (IC) products. Such sales represent a single performance obligation because the sale is one type of good or includes multiple goods that are neither capable of being distinct nor separable from the other promises in the contract. This performance obligation is satisfied when control of the product is transferred to the customer, which occurs upon shipment or delivery. Unsatisfied performance obligations primarily represent contracts for products with future delivery dates and with an original expected duration of one year or less. As allowed under ASU 2014-09, the Company has opted to not disclose the amount of unsatisfied performance obligations as these contracts have original expected durations of less than one year. 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.
Transaction Price: The transaction price reflects the Company’s expectations about the consideration it will be entitled to receive from the customer and may include fixed or variable amounts. Fixed consideration primarily includes sales to direct customers and sales to distributors in which both the sale to the distributor and the sale to the end customer occur within the same reporting period. Variable consideration includes sales in which the amount of consideration that the Company will receive is unknown as of the end of a reporting period. Such consideration primarily includes sales made to distributors under agreements that allow certain rights of return, referred to as stock rotation, and credits issued to the distributor due to price protection. Stock rotation allows distributors limited levels of returns in order to reduce the amounts of slow-moving, discontinued or obsolete product from their inventory. Price protection represents price discounts granted to certain distributors to allow the distributor to earn an appropriate margin on sales negotiated with certain customers and in the event of a price decrease subsequent to the date the product was shipped and billed to the distributor. A refund liability for distributor credits covering variable consideration are made based on the Company's estimate of historical experience rates as well as considering economic conditions and contractual terms. To date, actual distributor claims activity has been materially consistent with the provisions the Company has made based on its historical estimates.
Contract Balances: Accounts receivable represents the Company’s unconditional right to receive consideration from its customers. Payments are typically due within 30 to 45 days of invoicing and do not include a significant financing component. To date, there have been no material impairment losses on accounts receivable. There were no material contract assets or contract liabilities recorded on the condensed consolidated balance sheet in any of the periods presented.
Note 3 – Stock-Based Compensation and Shareholders' Equity
A summary of the Company’s stock option activity as of August 3, 2019 and changes during the three- and nine-month periods then ended is presented below:
|
| | | | | | | | | | | | |
Activity During The Three Months Ended August 3, 2019 | Options Outstanding (in thousands) | | Weighted- Average Exercise Price Per Share | | Weighted- Average Remaining Contractual Term in Years | | Aggregate Intrinsic Value |
Options outstanding at May 4, 2019 | 5,822 |
| |
| $64.99 |
| | | | |
Options granted | 14 |
| |
| $108.06 |
| | | | |
Options exercised | (360 | ) | |
| $54.07 |
| | | | |
Options forfeited | (85 | ) | |
| $85.29 |
| | | | |
Options outstanding at August 3, 2019 | 5,391 |
| |
| $65.51 |
| | 6.1 | |
| $254,294 |
|
Options exercisable at August 3, 2019 | 3,117 |
| |
| $55.04 |
| | 5.0 | |
| $179,685 |
|
Options vested or expected to vest at August 3, 2019 (1) | 5,227 |
| |
| $64.90 |
| | 6.1 | |
| $249,744 |
|
| |
(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 Nine Months Ended August 3, 2019 | Options Outstanding (in thousands) | | Weighted- Average Exercise Price Per Share |
Options outstanding at November 3, 2018 | 7,297 |
| |
| $58.42 |
|
Options granted | 454 |
| |
| $107.11 |
|
Options exercised | (2,168 | ) | |
| $49.38 |
|
Options forfeited | (187 | ) | |
| $78.03 |
|
Options expired | (5 | ) | |
| $21.97 |
|
Options outstanding at August 3, 2019 | 5,391 |
| |
| $65.51 |
|
During the three- and nine-month periods ended August 3, 2019, 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 $21.0 million and $120.7 million, respectively, and the total amount of proceeds received by the Company from the exercise of these options was $19.2 million and $106.1 million, respectively.
During the three- and nine-month periods ended August 4, 2018, 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 $29.3 million and $111.9 million, respectively, and the total amount of proceeds received by the Company from the exercise of these options was $22.8 million and $88.4 million, respectively.
A summary of the Company’s restricted stock unit/award activity as of August 3, 2019 and changes during the three- and nine-month periods then ended is presented below:
|
| | | | | | |
Activity During The Three Months Ended August 3, 2019 | Restricted Stock Units/Awards Outstanding (in thousands) | | Weighted- Average Grant- Date Fair Value Per Share |
Restricted stock units/awards outstanding at May 4, 2019 | 4,978 |
| |
| $85.49 |
|
Units/Awards granted | 96 |
| |
| $95.68 |
|
Restrictions lapsed | (304 | ) | |
| $79.38 |
|
Forfeited | (90 | ) | |
| $81.62 |
|
Restricted stock units/awards outstanding at August 3, 2019 | 4,680 |
| |
| $86.17 |
|
| | | |
Activity During The Nine Months Ended August 3, 2019 | Restricted Stock Units/Awards Outstanding (in thousands) | | Weighted- Average Grant- Date Fair Value Per Share |
Restricted stock units/awards outstanding at November 3, 2018 | 5,289 |
| |
| $77.54 |
|
Units/Awards granted | 1,296 |
| |
| $97.88 |
|
Restrictions lapsed | (1,635 | ) | |
| $68.49 |
|
Forfeited | (270 | ) | |
| $79.55 |
|
Restricted stock units/awards outstanding at August 3, 2019 | 4,680 |
| |
| $86.17 |
|
As of August 3, 2019, there was $358.4 million of total unrecognized compensation cost related to unvested stock-based awards comprised of stock options and restricted stock units/awards. That cost is expected to be recognized over a weighted-average period of 1.54 years. The total grant-date fair value of shares that vested during the three- and nine-month periods ended August 3, 2019 was approximately $24.6 million and $131.0 million, respectively. The total grant-date fair value of shares that vested during the three- and nine-month periods ended August 4, 2018 was approximately $28.2 million and $112.7 million, respectively.
Common Stock Repurchases
As of August 3, 2019, the Company had repurchased a total of approximately 152.9 million shares of its common stock for approximately $5.9 billion under the Company's share repurchase program. As of August 3, 2019, an additional $2.2 billion remains available for repurchase of shares under the current authorized program.
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 nine months of fiscal 2019.
|
| | | | | | | | | | | | | | | | | | | |
| Foreign currency translation adjustment | | Unrealized holding gains (losses) on available for sale securities | | Unrealized holding gains (losses) on derivatives | | Pension plans | | Total |
November 3, 2018 | $ | (28,711 | ) | | $ | (10 | ) | | $ | (14,355 | ) | | $ | (15,364 | ) | | $ | (58,440 | ) |
Other comprehensive income (loss) before reclassifications | (4,133 | ) | | 10 |
| |