Analog Devices, Inc.
ANALOG DEVICES INC (Form: 10-Q, Received: 02/18/2014 16:32:31)


 
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 February 1, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File No. 1-7819
 
Analog Devices, Inc.
(Exact name of registrant as specified in its charter)  
 
Massachusetts
 
04-2348234
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
One Technology Way, Norwood, MA
 
02062-9106
(Address of principal executive offices)
 
(Zip Code)
(781) 329-4700
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES   þ     NO   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES   þ     NO   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
þ
  
Accelerated filer
 
¨
 
 
 
 
 
 
 
Non-accelerated filer
 
¨   (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨     NO   þ
As of February 1, 2014 there were 312,527,904 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
 
February 1, 2014
 
February 2, 2013
Revenue
$
628,238

 
$
622,134

Cost of sales (1)
219,120

 
231,850

Gross margin
409,118

 
390,284

Operating expenses:
 
 
 
Research and development (1)
128,646

 
125,164

Selling, marketing, general and administrative (1)
98,178

 
97,560

Special charges
2,685

 
14,071

 
229,509

 
236,795

Operating income
179,609

 
153,489

Nonoperating expense (income):
 
 
 
Interest expense
6,571

 
6,414

Interest income
(3,284
)
 
(3,233
)
Other, net
431

 
199

 
3,718

 
3,380

Income before income taxes
175,891

 
150,109

Provision for income taxes
23,305

 
18,887

Net income
$
152,586

 
$
131,222

Shares used to compute earnings per share – basic
312,286

 
303,484

Shares used to compute earnings per share – diluted
318,017

 
310,275

Basic earnings per share
$
0.49

 
$
0.43

Diluted earnings per share
$
0.48

 
$
0.42

Dividends declared and paid per share
$
0.34

 
$
0.30

           (1) Includes stock-based compensation expense as follows:
 
 
 
           Cost of sales
$
1,557

 
$
1,667

           Research and development
$
4,859

 
$
5,600

           Selling, marketing, general and administrative
$
4,991

 
$
5,794

See accompanying notes.

1




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

 
Three Months Ended
 
February 1, 2014
 
February 2, 2013
Net income
$
152,586

 
$
131,222

Foreign currency translation adjustments
(740
)
 
350

Change in unrealized holding (losses) gains (net of taxes of $33 and $46, respectively) on securities classified as short-term investments
(168
)
 
314

Change in unrealized (losses) gains (net of taxes of $329 and $528, respectively) on derivative instruments designated as cash flow hedges
(2,077
)
 
3,538

Changes in pension plans including prior service cost, transition obligation, net actuarial loss and foreign currency translation adjustments, (net of taxes of $162 and $0 respectively)
594

 
(3,503
)
Other comprehensive (loss) income
(2,391
)
 
699

Comprehensive income
$
150,195

 
$
131,921


See accompanying notes.


























2



ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(thousands, except per share amounts)
 
February 1, 2014
 
November 2, 2013
ASSETS
 

 
 

Current Assets
 
 
 
Cash and cash equivalents
$
417,227

 
$
392,089

Short-term investments
4,283,882

 
4,290,823

Accounts receivable, net
328,787

 
325,144

Inventories (1)
289,935

 
283,337

Deferred tax assets
112,106

 
136,299

Prepaid income tax
2,363

 
2,391

Prepaid expenses and other current assets
36,659

 
42,342

Total current assets
5,470,959

 
5,472,425

Property, Plant and Equipment, at Cost
 
 
 
Land and buildings
464,771

 
458,853

Machinery and equipment
1,764,789

 
1,733,850

Office equipment
47,706

 
49,321

Leasehold improvements
52,270

 
50,870

 
2,329,536

 
2,292,894

Less accumulated depreciation and amortization
1,800,526

 
1,784,723

Net property, plant and equipment
529,010

 
508,171

Other Assets
 
 
 
Deferred compensation plan investments
18,047

 
17,364

Other investments
5,316

 
3,816

Goodwill
283,167

 
284,112

Intangible assets, net
28,497

 
28,552

Deferred tax assets
22,229

 
26,226

Other assets
42,243

 
41,084

Total other assets
399,499

 
401,154

 
$
6,399,468

 
$
6,381,750

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
124,619

 
$
119,994

Deferred income on shipments to distributors, net
245,236

 
247,428

Income taxes payable
10,678

 
45,490

Accrued liabilities
138,961

 
157,600

Total current liabilities
519,494

 
570,512

Non-current liabilities
 
 
 
Long-term debt
872,378

 
872,241

Deferred income taxes
17,506

 
6,037

Deferred compensation plan liability
18,047

 
17,364

Other non-current liabilities
176,408

 
176,020

Total non-current liabilities
1,084,339

 
1,071,662

Commitments and contingencies


 


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

 

Common stock, $0.16    2/3 par value, 1,200,000,000 shares authorized,   312,527,904   shares
issued and outstanding (311,045,084 on November 2, 2013)
52,089

 
51,842

Capital in excess of par value
723,520

 
711,879

Retained earnings
4,102,963

 
4,056,401

Accumulated other comprehensive loss
(82,937
)
 
(80,546
)
Total shareholders’ equity
4,795,635

 
4,739,576

 
$
6,399,468

 
$
6,381,750

(1)
Includes $2,196 and $2,273 related to stock-based compensation at February 1, 2014 and November 2, 2013 , respectively.

See accompanying notes.

3






ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(thousands)
   
Three Months Ended
 
February 1, 2014
 
February 2, 2013
Cash flows from operating activities:
 
 
 
Net income
$
152,586

 
$
131,222

Adjustments to reconcile net income to net cash provided by operations:
 
 
 
Depreciation
27,335

 
27,755

Amortization of intangibles
55

 
55

Stock-based compensation expense
11,407

 
13,061

Excess tax benefit-stock options
(7,604
)
 
(5,975
)
Deferred income taxes
(2,993
)
 
(9,635
)
Other non-cash activity
1,417

 
(1,362
)
Changes in operating assets and liabilities
(24,730
)
 
2,848

Total adjustments
4,887

 
26,747

Net cash provided by operating activities
157,473

 
157,969

Cash flows from investing activities:
 
 
 
Purchases of short-term available-for-sale investments
(2,234,996
)
 
(1,653,593
)
Maturities of short-term available-for-sale investments
2,029,319

 
1,551,147

Sales of short-term available-for-sale investments
212,819

 
283,164

Additions to property, plant and equipment
(48,123
)
 
(18,269
)
Increase in other assets
(3,342
)
 
(2,048
)
Net cash (used for) provided by investing activities
(44,323
)
 
160,401

Cash flows from financing activities:
 
 
 
Term loan repayments

 
(60,108
)
Dividend payments to shareholders
(106,024
)
 
(90,679
)
Repurchase of common stock
(88,963
)
 
(17,001
)
Proceeds from employee stock plans
79,600

 
113,770

Contingent consideration payment
(1,773
)
 
(3,752
)
Increase (decrease) in other financing activities
22,248

 
(1,027
)
Excess tax benefit-stock options
7,604

 
5,975

Net cash used for financing activities
(87,308
)
 
(52,822
)
Effect of exchange rate changes on cash
(704
)
 
1,416

Net increase in cash and cash equivalents
25,138

 
266,964

Cash and cash equivalents at beginning of period
392,089

 
528,833

Cash and cash equivalents at end of period
$
417,227

 
$
795,797

See accompanying notes.

4



ANALOG DEVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED FEBRUARY 1, 2014
(all tabular amounts in thousands except per share amounts and percentages)

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

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

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

5



As of February 1, 2014 and November 2, 2013 , the Company had gross deferred revenue of  $306.3 million and $309.2 million , respectively, and gross deferred cost of sales of $61.1 million and $61.8 million , respectively. Deferred income on shipments to distributors decreased in the first three months of fiscal 2014 primarily as a result of increased shipment volumes of lower margin products to end customers, partially offset by a stronger concentration of higher margin product shipments into the channel.
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-month periods ended February 1, 2014 and February 2, 2013 were not material .

Note 3 – Stock-Based Compensation

Stock-based compensation is measured at the grant date based on the grant-date fair value of the awards ultimately expected to vest, and is recognized as an expense on a straight-line basis over the vesting period, which is generally five years for stock options and three years for restricted stock units. Determining the amount of stock-based compensation to be recorded requires the Company to develop estimates used in calculating the grant-date fair value of stock options.

Grant-Date Fair Value — The Company uses the Black-Scholes valuation model to calculate the grant-date fair value of stock option awards. The use of 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 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 granted during the three-month periods ended February 1, 2014 and February 2, 2013
are as follows:
   
Three Months Ended
Stock Options
February 1, 2014
 
February 2, 2013
Options granted (in thousands)
16

 
20

Weighted-average exercise price

$48.97

 

$39.98

Weighted-average grant-date fair value

$7.06

 

$5.87

Assumptions:
 
 
 
Weighted-average expected volatility
23.0
%
 
24.1
%
Weighted-average expected term (in years)
5.4

 
5.3

Weighted-average risk-free interest rate
1.6
%
 
0.7
%
Weighted-average expected dividend yield
2.7
%
 
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 estimate of the grant-date fair value of employee stock options because it reflects the market’s current expectations of future volatility. In evaluating the appropriateness of exclusively relying on implied volatility, the Company concluded that: (1) options in the Company’s common stock are actively traded with sufficient volume on several exchanges; (2) the market prices of both the traded options and the underlying shares are measured at a similar point in time to each other and on a date close to the grant date of the employee share options; (3) the traded options have exercise prices that are both near-the-money and close to the exercise price of the employee share options; and (4) the remaining maturities of the traded options used to estimate volatility are at least one year.

Expected term  — The Company uses historical employee exercise and option expiration data to estimate the expected term assumption for the Black-Scholes grant-date valuation. The Company believes that this historical data is currently the best estimate of the expected term of a new option, and that generally its employees exhibit similar exercise behavior.
Risk-free interest rate  — The yield on zero-coupon U.S. Treasury securities for a period that is commensurate with the expected term assumption is used as the risk-free interest rate.
Expected dividend yield  — Expected dividend yield is calculated by annualizing the cash dividend declared by the Company’s Board of Directors for the current quarter and dividing that result by the closing stock price on the date of grant.

6



Until such time as the Company’s Board of Directors declares a cash dividend for an amount that is different from the current quarter’s cash dividend, the current dividend will be used in deriving this assumption. Cash dividends are not paid on options, restricted stock or restricted stock units.
Stock-Based Compensation Expense
The amount of stock-based compensation expense recognized during a period is based on the value of the awards that are ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term “forfeitures” is distinct from “cancellations” or “expirations” and represents only the unvested portion of the surrendered stock-based award. Based on an analysis of its historical forfeitures, the Company has applied an annual forfeiture rate of 4.4% to all unvested stock-based awards as of February 1, 2014 . The rate of 4.4% represents the portion that is expected to be forfeited each year over the vesting period. This analysis will be re-evaluated quarterly and the forfeiture rate will be adjusted as necessary. Ultimately, the actual expense recognized over the vesting period will only be for those options that vest.
Additional paid-in-capital (APIC) Pool
The APIC pool represents the excess tax benefits related to share-based compensation that are available to absorb future tax deficiencies. If the amount of future tax deficiencies is greater than the available APIC pool, the Company records the excess as income tax expense in its condensed consolidated statements of income. During the three-month periods ended February 1, 2014 and February 2, 2013 , the Company had available APIC pool to absorb tax deficiencies recorded and as a result, these deficiencies did not affect its results of operations.
Stock-Based Compensation Activity
A summary of the activity under the Company’s stock option plans as of February 1, 2014 and changes during the three-month period then ended is presented below:
Activity during the Three Months Ended February 1, 2014
Options
Outstanding
(in thousands)
 
Weighted-
Average Exercise
Price Per Share
 
Weighted-
Average
Remaining
Contractual
Term in Years
 
Aggregate
Intrinsic
Value
Options outstanding November 2, 2013
18,992

 

$33.56

 
 
 
 
Options granted
16

 

$48.97

 
 
 
 
Options exercised
(2,507
)
 

$31.76

 
 
 
 
Options forfeited
(115
)
 

$40.79

 
 
 
 
Options expired
(24
)
 

$45.46

 
 
 
 
Options outstanding at February 1, 2014
16,362

 

$33.79

 
5.2
 

$236,988

Options exercisable at February 1, 2014
11,131

 

$30.04

 
3.8
 

$202,894

Options vested or expected to vest at February 1, 2014 (1)
15,976

 

$33.57

 
5.1
 

$234,806

 
(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.
 
 
 
 
During the three months ended February 1, 2014 , the total intrinsic value of options exercised (i.e., the difference between the market price at exercise and the price paid by the employee to exercise the options) was $44.9 million and the total amount of proceeds received by the Company from the exercise of these options was $79.6 million .

During the three months ended February 2, 2013 , the total intrinsic value of options exercised (i.e., the difference between the market price at exercise and the price paid by the employee to exercise the options) was $52.0 million and the total amount of proceeds received by the Company from the exercise of these options was $113.8 million .

A summary of the Company’s restricted stock unit award activity as of February 1, 2014 and changes during the three-month period then ended is presented below:  

7



Activity during the Three Months Ended February 1, 2014
Restricted
Stock Units
Outstanding
(in thousands)
 
Weighted-
Average Grant-
Date Fair Value
Per Share
Restricted stock units outstanding at November 2, 2013
2,493

 

$37.62

Units granted
24

 

$46.81

Restrictions lapsed
(784
)
 

$34.86

Forfeited
(38
)
 

$38.50

Restricted stock units outstanding at February 1, 2014
1,695

 

$39.00

 
 
 
 
As of February 1, 2014 , there was $70.3 million of total unrecognized compensation cost related to unvested share-based awards comprised of stock options and restricted stock units. That cost is expected to be recognized over a weighted-average period of 1.4 years . The total grant-date fair value of shares that vested during the three months ended February 1, 2014 and February 2, 2013 was approximately $39.5 million and $50.2 million , respectively.

Note 4 – Common Stock Repurchase
The Company’s common stock repurchase program has been in place since August 2004 . As of February 1, 2014, in the aggregate, the Board of Directors has authorized the Company to repurchase $5.0 billion of the Company’s common stock under the program. Under the program, the Company may repurchase outstanding shares of its common stock from time to time in the open market and through privately negotiated transactions. Unless terminated earlier by resolution of the Company’s Board of Directors, the repurchase program will expire when the Company has repurchased all shares authorized under the program. As of February 1, 2014 , the Company had repurchased a total of approximately 131.6 million shares of its common stock for approximately $4,556.6 million under this program. As of February 1, 2014 , an additional $443.4 million remains available for repurchase of shares under the current authorized program. The repurchased shares are held as authorized but unissued shares of common stock. The Company also, from time to time, repurchases shares in settlement of employee tax withholding obligations due upon the vesting of restricted stock units, or in certain limited circumstances to satisfy the exercise price of options granted to the Company’s employees under the Company’s equity compensation plans. Any future common stock repurchases will be dependent upon several factors, including the Company's financial performance, outlook, liquidity and the amount of cash the Company has available in the United States.

Note 5 – Accumulated Other Comprehensive Income (Loss)
        
The following table provides the changes in accumulated other comprehensive income (loss), OCI, by component and the related tax effects during the first three months of fiscal 2014.
 
Foreign currency translation adjustment
 
Unrealized holding Gains on securities classified as short-term investments
 
Unrealized holding (losses) on securities classified as short-term investments
 
Unrealized holding Gains (losses) on Derivatives
 
Pension Plans
 
Total
November 3, 2013
$
483

 
$
953

 
$
(435
)
 
$
9,097

 
$
(90,644
)
 
$
(80,546
)
Other comprehensive income before reclassifications
(740
)
 
(111
)
 
(90
)
 
(2,113
)
 
(324
)
 
(3,378
)
Amounts reclassified out of other comprehensive income

 

 

 
(293
)
 
1,080

 
787

Tax effects

 
30

 
3

 
329

 
(162
)
 
200

Other comprehensive income
(740
)
 
(81
)
 
(87
)
 
(2,077
)
 
594

 
(2,391
)
February 1, 2014
$
(257
)
 
$
872

 
$
(522
)
 
$
7,020

 
$
(90,050
)
 
$
(82,937
)

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

8




 
 
Three Months Ended
 
 
 
 
February 1, 2014
 
 
Comprehensive Income Component
 
 
 
Location
Unrealized holding (losses) gains on derivatives
 
 
 
 
    Currency forwards
 
$
312

 
Cost of sales
 
 
(389
)
 
Research and development
 
 
58

 
Selling, marketing, general and administrative
     Treasury rate lock
 
(274
)
 
Interest, expense
 
 
(293
)
 
Total before tax
 
 
98

 
Tax
 
 
$
(195
)
 
Net of tax
 
 

 
 
Amortization of pension components
 

 
 
     Transition obligation
 
$
5

 
a
     Prior service credit
 
(60
)
 
a
     Actuarial losses
 
1,135

 
a
 
 
1,080


Total before tax
 
 
(162
)
 
Tax
 
 
$
918

 
Net of tax
 
 
 
 
 
Total amounts reclassified out of accumulated other comprehensive income, net of tax
 
$
723

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

The Company estimates $1.6 million of net derivative unrealized holding gains included in OCI will be reclassified into earnings within the next twelve months. There was no ineffectiveness in the three-month periods ended February 1, 2014 and February 2, 2013 .
Unrealized gains and losses on available-for-sale securities classified as short-term investments at February 1, 2014 and November 2, 2013 are as follows:
 
February 1, 2014
 
November 2, 2013
Unrealized gains on securities classified as short-term investments
$
1,026

 
$
1,137

Unrealized losses on securities classified as short-term investments
(601
)
 
(511
)
Net unrealized gains on securities classified as short-term investments
$
425

 
$
626

As of February 1, 2014 , the Company held 143 investment securities, 40 of which were in an unrealized loss position with an aggregate fair value of $1,281.6 million . As of November 2, 2013 , the Company held 137 investment securities, 31 of which were in an unrealized loss position with an aggregate fair value of $972.2 million . These unrealized losses were primarily related to corporate obligations that earn lower interest rates than current market rates. None of these investments have been in a loss position for more than twelve months. As the Company does not intend to sell these investments and it is unlikely that 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 February 1, 2014 and November 2, 2013 .

9



Realized gains or losses on investments are determined based on the specific identification basis and are recognized in nonoperating (income) expense. There were no material net realized gains or losses from the sales of available-for-sale investments during any of the fiscal periods presented.

Note 6 – Earnings Per Share
Basic earnings per share is computed based only on the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect of potential future issuances of common stock relating to stock option programs and other potentially dilutive securities using the treasury stock method. In calculating diluted earnings per share, the dilutive effect of stock options is computed using the average market price for the respective period. In addition, the assumed proceeds under the treasury stock method include the average unrecognized compensation expense of stock options that are in-the-money and restricted stock units. This results in the “assumed” buyback of additional shares, thereby reducing the dilutive impact of in-the-money stock options. Potential shares related to certain of the Company’s outstanding stock options were excluded because they were anti-dilutive. Those potential shares, determined based on the weighted average exercise prices during the respective periods, related to the Company’s outstanding stock options could be dilutive in the future.
The following table sets forth the computation of basic and diluted earnings per share:
 
Three Months Ended
 
 
February 1, 2014
 
February 2, 2013
 
Net Income
$
152,586

 
$
131,222

 
Basic shares:
 
 
 
 
Weighted-average shares outstanding
312,286

 
303,484

 
Earnings per share basic:
$
0.49

 
$
0.43

 
Diluted shares:
 
 
 
 
Weighted-average shares outstanding
312,286

 
303,484

 
Assumed exercise of common stock equivalents
5,731

 
6,791

 
Weighted-average common and common equivalent shares
318,017

 
310,275

 
Earnings per share diluted:
$
0.48

 
$
0.42

 
Anti-dilutive shares related to:
 
 
 
 
Outstanding stock options
2,242

 
5,641

 

Note 7 – Special Charges
The Company monitors global macroeconomic conditions on an ongoing basis and continues to assess opportunities for improved operational effectiveness and efficiency, as well as a better alignment of expenses with revenues. As a result of these assessments, the Company has undertaken various restructuring actions over the past several years. These actions are described below.
The following tables display the special charges taken for ongoing actions and a roll-forward from November 2, 2013 to February 1, 2014 of the employee separation and exit cost accruals established related to these actions.
 
 
Reduction of Operating Costs
Statement of Income
 
2012
 
2013
 
2014
Workforce reductions
 
$
7,966

 
$
29,848

 
$
2,685

Facility closure costs
 
186

 

 

Non-cash impairment charge
 
219

 

 

Other items
 
60

 

 

Total Charges
 
$
8,431

 
$
29,848

 
$
2,685



10



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

First quarter 2014 special charge
2,685

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


Reduction of Operating Costs
During fiscal 2012, the Company recorded special charges of approximately $8.4 million . These special charges included: $8.0 million for severance and fringe benefit costs in accordance with its ongoing benefit plan or statutory requirements at foreign locations for 95 manufacturing, engineering and selling, marketing, general and administrative (SMG&A) employees; $0.2 million for lease obligation costs for facilities that the Company ceased using during the third quarter of fiscal 2012; $0.1 million for contract termination costs; and $0.2 million for the write-off of property, plant and equipment. The Company terminated the employment of all employees associated with these actions.
During fiscal 2013, the Company recorded special charges of approximately $29.8 million for severance and fringe benefit costs in accordance with its ongoing benefit plan or statutory requirements at foreign locations for 235 engineering and SMG&A employees. As of February 1, 2014, the Company employed 35 of the 235 employees included in this cost reduction action. These employees must continue to be employed by the Company until their employment is involuntarily terminated in order to receive the severance benefit.
During the first quarter of fiscal 2014, the Company recorded a special charge of approximately $2.7 million for severance and fringe benefit costs in accordance with its ongoing benefit plan or statutory requirements at foreign locations for 30 engineering and SMG&A employees. As of February 1, 2014, the Company employed 12 of the 30 employees included in this cost reduction action. These employees must continue to be employed by the Company until their employment is involuntarily terminated in order to receive the severance benefit.

Note 8 – Segment Information
The Company operates and tracks its results in one reportable segment based on the aggregation of five operating segments. The Company designs, develops, manufactures and markets a broad range of integrated circuits. The Chief Executive Officer has been identified as the Chief Operating Decision Maker.
Revenue Trends by End Market
The following table summarizes revenue by end market. The categorization of revenue by end market is determined using a variety of data points including the technical characteristics of the product, the “sold to” customer information, the “ship to” customer information and the end customer product or application into which the Company’s product will be incorporated. As data systems for capturing and tracking this data evolve and improve, the categorization of products by end market can vary over time. When this occurs, the Company reclassifies revenue by end market for prior periods. Such reclassifications typically do not materially change the sizing of, or the underlying trends of results within, each end market. The results below in the consumer end market are reflective of the sale of the Company's microphone product line in the fourth quarter of fiscal 2013.
 
Three Months Ended
 
February 1, 2014
 
February 2, 2013
 
Revenue
 
% of
Revenue
 
Y/Y%
 
Revenue
 
% of
Revenue*
Industrial
$
290,365

 
46
%
 
3
 %
 
$
281,209

 
45
%
Automotive
124,157

 
20
%
 
15
 %
 
107,760

 
17
%
Consumer
74,119

 
12
%
 
(31
)%
 
107,356

 
17
%
Communications
139,597

 
22
%
 
11
 %
 
125,809

 
20
%
Total revenue
$
628,238

 
100
%
 
1
 %
 
$
622,134

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

11



Revenue Trends by Product Type
The following table summarizes revenue by product categories. The categorization of the Company’s products into broad categories is based on the characteristics of the individual products, the specification of the products and in some cases the specific uses that certain products have within applications. The categorization of products into categories is therefore subject to judgment in some cases and can vary over time. In instances where products move between product categories, the Company reclassifies the amounts in the product categories for all prior periods. Such reclassifications typically do not materially change the sizing of, or the underlying trends of results within, each product category. The results below in the other analog product category market are reflective of the sale of the Company's microphone product line in the fourth quarter of fiscal 2013.
 
Three Months Ended
 
February 1, 2014
 
February 2, 2013
 
Revenue
 
% of
Revenue
 
Y/Y%
 
Revenue
 
% of
Revenue*
Converters
$
290,551

 
46
%
 
5
 %
 
$
277,940

 
45
%
Amplifiers / Radio frequency
164,714

 
26
%
 
4
 %
 
157,978

 
25
%
Other analog
79,419

 
13
%
 
(17
)%
 
95,158

 
15
%
Subtotal analog signal processing
534,684

 
85
%
 
1
 %
 
531,076

 
85
%
Power management & reference
38,710

 
6
%
 
(2
)%
 
39,382

 
6
%
Total analog products
$
573,394

 
91
%
 
1
 %
 
$
570,458

 
92
%
Digital signal processing
54,844

 
9
%
 
6
 %
 
51,676

 
8
%
Total revenue
$
628,238

 
100
%
 
1
 %
 
$
622,134

 
100
%
* The sum of the individual percentages does not equal the total due to rounding.
 
 
 
 
 
 
 
 
 
 
Revenue Trends by Geographic Region
Revenue by geographic region, based on the primary location of the Company's customers’ design activity for its products, for the three-month periods ended February 1, 2014 and February 2, 2013 were as follows:
 
Three Months Ended
Region
February 1, 2014
 
February 2, 2013
United States
$
182,298

 
$
204,271

Rest of North and South America
19,436

 
23,512

Europe
200,687

 
189,298

Japan
71,091

 
64,688

China
100,484

 
84,769

Rest of Asia
54,242

 
55,596

Total revenue
$
628,238

 
$
622,134

In the three-month periods ended February 1, 2014 and February 2, 2013 , the predominant country comprising “Rest of North and South America” is Canada; the predominant countries comprising “Europe” are Germany, Sweden, France and the United Kingdom; and the predominant countries comprising “Rest of Asia” are Taiwan and South Korea.

Note 9 – Fair Value
The Company defines fair value as the price that would be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
Level 1  — Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2  — Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability.

12



Level 3  — Level 3 inputs are unobservable inputs for the asset or liability in which there is little, if any, market activity for the asset or liability at the measurement date.
The tables below, set forth by level the Company’s financial assets and liabilities, excluding accrued interest components that were accounted for at fair value on a recurring basis as of February 1, 2014 and November 2, 2013 . The tables exclude cash on hand and assets and liabilities that are measured at historical cost or any basis other than fair value. As of February 1, 2014 and November 2, 2013 , the Company held $38.6 million and $45.6 million , respectively, of cash and held-to-maturity investments that were excluded from the tables below.
 
February 1, 2014
 
Fair Value measurement at
Reporting Date using:
 
 
 
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Other
Unobservable
Inputs
(Level 3)
 
Total
Assets
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
Institutional money market funds
$
77,726

 
$

 
$

 
$
77,726

Corporate obligations (1)

 
300,862

 

 
300,862

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

 
3,798,468

 

 
3,798,468

Floating rate notes, issued at par

 
282,549

 

 
282,549

Floating rate notes (1)

 
62,761

 

 
62,761

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

 
140,104

 

 
140,104

Other assets:
 
 
 
 
 
 
 
Deferred compensation investments
18,514

 

 

 
18,514

Total assets measured at fair value
$
96,240

 
$
4,584,744

 
$

 
$
4,680,984

Liabilities
 
 
 
 
 
 
 
Contingent consideration
$

 
$

 
$
4,682

 
$
4,682

Forward foreign currency exchange contracts (2)

 
467

 

 
467

Total liabilities measured at fair value
$

 
$
467

 
$
4,682

 
$
5,149

 
(1)
The amortized cost of the Company’s investments classified as available-for-sale as of February 1, 2014 was $3,886.4 million .
(2)
The Company has a master netting arrangement by counterparty with respect to derivative contracts. See Note 10, Derivatives, for more information related to the Company's master netting arrangements.

13



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

 
$

 
$

 
$
186,896

Corporate obligations (1)

 
159,556

 

 
159,556

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

 
3,764,213

 

 
3,764,213

Floating rate notes, issued at par

 
207,521

 

 
207,521

Floating rate notes (1)

 
113,886

 

 
113,886

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

 
205,203

 

 
205,203

Other assets:
 
 
 
 
 
 
 
Forward foreign currency exchange contracts (2)

 
2,267

 

 
2,267

Deferred compensation investments
17,431

 

 

 
17,431

Total assets measured at fair value
$
204,327

 
$
4,452,646

 
$

 
$
4,656,973

Liabilities
 
 
 
 
 
 
 
Contingent consideration

 

 
6,479

 
6,479

Total liabilities measured at fair value
$

 
$

 
$
6,479

 
$
6,479

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

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

14



The fair value measurement of the contingent consideration encompasses the following significant unobservable inputs:  
Unobservable Inputs
Range
Estimated contingent consideration payments
$5,000
Discount rate
8% - 10%
Timing of cash flows
1 - 20 months
Probability of achievement
100%
Changes in the fair value of the contingent consideration subsequent to the acquisition date that are primarily driven by assumptions pertaining to the achievement of the defined milestones will be recognized in operating income in the period of the estimated fair value change. Significant increases or decreases in any of the inputs in isolation may result in a fluctuation in the fair value measurement.
The following table summarizes the change in the fair value of the contingent consideration measured using significant unobservable inputs (Level 3) as of November 2, 2013 and February 1, 2014 :  
 
Contingent
Consideration
Balance as of November 2, 2013
$
6,479

Payment made (1)
(2,000
)
Fair value adjustment (2)
203

Balance as of February 1, 2014
$
4,682

 
(1)
The payment is reflected in the Company's condensed consolidated statements of cash flows as cash used in financing activities related to the liability recognized at fair value as of the acquisition date and as cash provided by operating activities related to the fair value adjustments previously recognized in earnings.
(2)
Recorded in research and development expense in the Company's condensed consolidated statements of income.
Financial Instruments Not Recorded at Fair Value on a Recurring Basis
On April 4, 2011 , the Company issued $375.0 million aggregate principal amount of 3.0%  senior unsecured notes due April 15, 2016 (the 2016 Notes) with semi-annual fixed interest payments due on April 15 and October 15 of each year, commencing October 15, 2011 . Based on quotes received from third-party banks, the fair value of the 2016 Notes as of February 1, 2014 and November 2, 2013 was $391.5 million and $392.8 million , respectively, and is classified as a Level 1 measurement according to the fair value hierarchy.
On June 3, 2013 , the Company issued $500.0 million aggregate principal amount of 2.875%  senior unsecured notes due June 1, 2023 (the 2023 Notes) with semi-annual fixed interest payments due on June 1 and December 1 of each year, commencing December 1, 2013 . Based on quotes received from third-party banks, the fair value of the 2023 Notes as of February 1, 2014 and November 2, 2013 was $463.0 million and $466.0 million , respectively, and is classified as a Level 1 measurement according to the fair value hierarchy.

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

15



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 February 1, 2014 and November 2, 2013 , the total notional amount of these undesignated hedges was $37.4 million and $33.4 million , respectively. The fair value of these undesignated hedges in the Company’s condensed consolidated balance sheets as of February 1, 2014 and November 2, 2013 was immaterial .
Interest Rate Exposure Management  — The Company's current and future debt may be subject to interest rate risk.  The Company utilizes interest rate derivatives to alter interest rate exposure in an attempt to reduce the effects of these changes. On April 24, 2013, the Company entered into a treasury rate lock agreement with Bank of America. This agreement allowed the Company to lock a 10-year US Treasury rate of 1.7845% through June 14, 2013 for its anticipated issuance of the 2023 Notes. The Company designated this agreement as a cash flow hedge. On June 3, 2013 , the Company terminated the treasury rate lock simultaneously with the issuance of the 2023 Notes which resulted in a gain of approximately $11.0 million . This gain is being amortized into interest expense over the 10-year term of the 2023 Notes. See Note 5, Accumulated Other Comprehensive Income (Loss) , for more information relating to the amortization of the treasury rate lock into interest expense.
On June 30, 2009 , the Company entered into interest rate swap transactions related to its outstanding 2014 Notes where the Company swapped the notional amount of its $375.0 million of fixed rate debt at 5.0% into floating interest rate debt through July 1, 2014 . The Company designated these swaps as fair value hedges. The fair value of the swaps at inception was zero and subsequent changes in the fair value of the interest rate swaps were reflected in the carrying value of the interest rate swaps on the balance sheet. The carrying value of the debt on the balance sheet was adjusted by an equal and offsetting amount. The amounts earned and owed under the swap agreements were accrued each period and were reported in interest expense. There was no ineffectiveness recognized in any of the periods presented. In the second quarter of fiscal 2012, the Company terminated the interest rate swap agreement. The Company received $19.8 million in cash proceeds from the swap termination, which included $1.3 million in accrued interest. As a result of the termination, the carrying value of the 2014 Notes was adjusted for the change in the fair value of the interest component of the debt up to the date of the termination of the swap in an amount equal to the fair value of the swap, and was amortized into earnings as a reduction of interest expense over the remaining life of the debt. During the third quarter of fiscal 2013, in conjunction with the redemption of the 2014 Notes, the Company recognized the remaining $8.6 million in unamortized proceeds received from the termination of the interest rate swap as other, net expense.
The market risk associated with the Company’s derivative instruments results from currency exchange rate or interest rate movements that are expected to offset the market risk of the underlying transactions, assets and liabilities being hedged. The counterparties to the agreements relating to the Company’s derivative instruments consist of a number of major international financial institutions with high credit ratings. Based on the credit ratings of the Company’s counterparties as of February 1, 2014 , nonperformance is not perceived to be a significant risk. Furthermore, none of the Company’s derivatives are subject to collateral or other security arrangements and none contain provisions that are dependent on the Company’s credit ratings from any credit rating agency. While the contract or notional amounts of derivative financial instruments provide one measure of the volume of these transactions, they do not represent the amount of the Company’s exposure to credit risk. The amounts potentially subject to credit risk (arising from the possible inability of counterparties to meet the terms of their contracts) are generally limited to the amounts, if any, by which the counterparties’ obligations under the contracts exceed the obligations of the Company to the counterparties. As a result of the above considerations, the Company does not consider the risk of counterparty default to be significant.

The Company records the fair value of its derivative financial instruments in its condensed consolidated financial statements in other current assets, other assets or accrued liabilities, depending on their net position, regardless of the purpose or intent for holding the derivative contract. Changes in the fair value of the derivative financial instruments are either recognized periodically in earnings or in shareholders’ equity as a component of OCI. Changes in the fair value of cash flow hedges are recorded in OCI and reclassified into earnings when the underlying contract matures. Changes in the fair values of derivatives not qualifying for hedge accounting or the ineffective portion of designated hedges are reported in earnings as they occur.
The total notional amounts of forward foreign currency derivative instruments designated as hedging instruments of cash flow hedges denominated in Euros, British Pounds, Philippine Pesos and Japanese Yen as of February 1, 2014 and November 2, 2013 was $194.6 million and $196.9 million , respectively. The fair values of these hedging instruments in the Company’s condensed consolidated balance sheets as of February 1, 2014 and November 2, 2013 were as follows:

16



 
 
 
Fair Value At
 
Balance Sheet Location
 
February 1, 2014
 
November 2, 2013
Forward foreign currency exchange contracts
Prepaid expenses and other current assets
 
$

 
$
2,377

 
Accrued liabilities
 
$
464

 
$


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

All of the Company’s derivative financial instruments are subject to master netting arrangements that allow the Company and its counterparties to net settle amounts owed to each other. Derivative assets and liabilities that can be net settled under these arrangements have been presented in the Company's consolidated balance sheet on a net basis. As of February 1, 2014 and November 2, 2013, none of the master netting arrangements involved collateral. The following table presents the gross amounts of the Company's derivative assets and liabilities and the net amounts recorded in our consolidated balance sheet:
 
 
 
February 1, 2014
 
November 2, 2013
Gross amount of recognized (liabilities) assets
$
(3,221
)
 
$
4,217

Gross amounts offset in the consolidated balance sheet
2,754

 
(1,950
)
Net amount presented in the consolidated balance sheet (liabilities) assets
$
(467
)
 
$
2,267


Note 11 – Goodwill and Intangible Assets
Goodwill
The Company evaluates goodwill for impairment annually, as well as whenever events or changes in circumstances suggest that the carrying value of goodwill may not be recoverable. The Company tests goodwill for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis on the first day of the fourth quarter (on or about August 3 ) or more frequently if indicators of impairment exist. For the Company’s latest annual impairment assessment that occurred on August 4, 2013 , the Company identified its reporting units to be its five operating segments, which meet the aggregation criteria for one reportable segment. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. The Company determines the fair value of its reporting units using the income approach methodology of valuation that includes the discounted cash flow method, as well as other generally accepted valuation methodologies. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, the Company performs the second step of the goodwill impairment test to determine the amount of impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill. No impairment of goodwill resulted in any of the fiscal periods presented. The Company’s next annual impairment assessment will be performed as of the first day of the fourth quarter of fiscal 2014 , unless indicators arise that would require the Company to reevaluate at an earlier date. The following table presents the changes in goodwill during the first three months of fiscal 2014 :
 
Three Months Ended
 
February 1, 2014
Balance as of November 2, 2013
$
284,112

Foreign currency translation adjustment
(945
)
Balance as of February 1, 2014
$
283,167

Intangible Assets
The Company reviews finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of assets may not be recoverable. Recoverability of these assets is measured by comparison of their carrying value to future undiscounted cash flows the assets are expected to generate over their remaining economic lives. If such assets are considered to be impaired, the impairment to be recognized in earnings equals the amount by which the carrying value of the assets exceeds their fair value determined by either a quoted market price, if any, or a value determined by utilizing

17



a discounted cash flow technique. As of February 1, 2014 and November 2, 2013 , the Company’s finite-lived intangible assets consisted of the following which related to the acquisition of Multigig, Inc. (See Note 16, Acquisitions ):
 
February 1, 2014
 
November 2, 2013
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Technology-based
$
1,100

 
$
403

 
$
1,100

 
$
348

For the three-month periods ended February 1, 2014 and February 2, 2013 , amortization expense related to finite-lived intangible assets was $0.1 million and $0.1 million , respectively. The remaining amortization expense will be recognized over a period of approximately 3.3 years.
The Company expects annual amortization expense for intangible assets to be:
Fiscal Year
Amortization Expense
Remainder of fiscal 2014

$165

2015

$220

2016

$220

2017

$92

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

Indefinite-lived intangible assets consisted of $27.8 million of IPR&D as of February 1, 2014 and November 2, 2013 .

Note 12 – Pension Plans
The Company has various defined benefit pension and other retirement plans for certain non-U.S. employees that are consistent with local statutory requirements and practices. The Company’s funding policy for its foreign defined benefit pension plans is consistent with the local requirements of each country. The plans’ assets consist primarily of U.S. and non-U.S. equity securities, bonds, property and cash.
Net periodic pension cost of non-U.S. plans is presented in the following table:
 
Three Months Ended
 
February 1, 2014
 
February 2, 2013
Service cost
$
3,398

 
$
2,856

Interest cost
3,530

 
3,137

Expected return on plan assets
(3,416
)
 
(2,952
)
Amortization of initial net obligation
5

 
5

Amortization of prior service cost
(61
)
 
(58
)
Amortization of net loss
1,143

 
748

Net periodic pension cost
$
4,599

 
$
3,736

Pension contributions of $4.6 million were made by the Company during the three months ended February 1, 2014 . The Company presently anticipates contributing an additional $12.9 million to fund its defined benefit pension plans in fiscal year 2014 for a total of $17.5 million .



18



Note 13 – Revolving Credit Facility

As of February 1, 2014 , the Company had $4,701.1 million of cash and cash equivalents and short-term investments, of which $1,244.1 million was held in the United States. The balance of the Company's cash and cash equivalents and short-term investments was held outside the United States in various foreign subsidiaries. As the Company intends to reinvest its foreign earnings indefinitely, this cash is not available to meet the Company's cash requirements in the United States, including cash dividends and common stock repurchases. During December 2012 , the Company terminated its five-year , $165.0 million unsecured revolving credit facility with certain institutional lenders entered into in May 2008 . On December 19, 2012 , the Company entered into a five-year , $500.0 million senior unsecured revolving credit facility with certain institutional lenders (the Credit Agreement). To date, the Company has not borrowed under this credit facility but the Company may borrow in the future and use the proceeds for repayment of existing indebtedness, stock repurchases, acquisitions, capital expenditures, working capital and other lawful corporate purposes. Revolving loans under the Credit Agreement (other than swing line loans) bear interest, at the Company's option, at either a rate equal to (a) the Eurodollar Rate (as defined in the Credit Agreement) plus a margin based on the Company's debt rating or (b) the Base Rate (defined as the highest of (i) the Bank of America prime rate, (ii) the Federal Funds Rate (as defined in the Credit Agreement) plus .50% and (iii) one month Eurodollar Rate plus 1.00%) plus a margin based on the Company's debt rating. The terms of the facility impose restrictions on the Company’s ability to undertake certain transactions, to create certain liens on assets and to incur certain subsidiary indebtedness. In addition, the Credit Agreement contains a consolidated leverage ratio covenant of total consolidated funded debt to consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA) of not greater than 3.0 to 1.0 . As of February 1, 2014 , the Company was compliant with these covenants .

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

19



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

Note 15 – Inventories
Inventories at February 1, 2014 and November 2, 2013 were as follows:
 
February 1, 2014
 
November 2, 2013
Raw materials
$
19,625

 
$
19,641

Work in process
182,361

 
175,155

Finished goods
87,949

 
88,541

Total inventories
$
289,935

 
$
283,337


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

20



quarter of fiscal 2012, the Company reduced this holdback amount by $0.1 million as a result of indemnification claims. During the third quarter of fiscal 2013, the Company paid the remaining $2.5 million due under the holdback. The Company’s assessment of fair value of the tangible and intangible assets acquired and liabilities assumed was based on their estimated fair values at the date of acquisition, resulting in the recognition of $15.6 million of IPR&D, $1.1 million of developed technology, $7.0 million of goodwill and $3.1 million of net deferred tax assets. The goodwill recognized is attributable to future technologies that have yet to be determined as well as the assembled workforce of Multigig. Future technologies do not meet the criteria for recognition separately from goodwill because they are a part of future development and growth of the business. None of the goodwill is expected to be deductible for tax purposes. During the fourth quarter of fiscal 2012, the Company finalized its purchase accounting for Multigig, which resulted in adjustments of $0.4 million to deferred taxes and goodwill. In addition, the Company will be obligated to pay royalties to the Multigig employees on revenue recognized from the sale of certain Multigig products through the earlier of 5 years or the aggregate maximum payment of $1.0 million . Royalty payments to Multigig employees require post-acquisition services to be rendered and, as such, the Company will record these amounts as compensation expense in the related periods. As of February 1, 2014 , no royalty payments have been made. The Company recognized $0.5 million of acquisition-related costs that were expensed in fiscal 2012, which were included in operating expenses in the Company's condensed consolidated statement of income.
On June 9, 2011 , the Company acquired privately-held Lyric Semiconductor, Inc. (Lyric) of Cambridge, Massachusetts. The acquisition of Lyric gives the Company the potential to achieve significant improvement in power efficiency in mixed signal processing. The acquisition-date fair value of the consideration transferred totaled $27.8 million , which consisted of $14.0 million in initial cash payments at closing and contingent consideration of up to $13.8 million . The contingent consideration arrangement requires additional cash payments to the former equity holders of Lyric upon the achievement of certain technological and product development milestones payable during the period from June 2011 through June 2016 . The Company estimated the fair value of the contingent consideration arrangement utilizing the income approach. Changes in the fair value of the contingent consideration subsequent to the acquisition date primarily driven by assumptions pertaining to the achievement of the defined milestones will be recognized in operating income in the period of the estimated fair value change. As of February 1, 2014 , the Company had paid $10.0 million in contingent consideration. These payments are reflected in the Company's condensed consolidated statements of cash flows as cash used in financing activities related to the liability recognized at fair value as of the acquisition date and cash provided by operating activities related to the fair value adjustments previously recognized in earnings. The Company’s assessment of fair value of the tangible and intangible assets acquired and liabilities assumed was based on their estimated fair values at the date of acquisition, resulting in the recognition of $12.2 million of IPR&D, $18.9 million of goodwill and $3.3 million of net deferred tax liabilities. The goodwill recognized is attributable to future technologies that have yet to be determined as well as the assembled workforce of Lyric. Future technologies do not meet the criteria for recognition separately from goodwill because they are a part of future development and growth of the business. None of the goodwill is expected to be deductible for tax purposes. The fair value of the remaining contingent consideration was approximately $4.7 million as of February 1, 2014 , of which $3.8 million is included in accrued liabilities and $0.9 million is included in other non-current liabilities in the Company's condensed consolidated balance sheet. In addition, the Company will be obligated to pay royalties to the former equity holders of Lyric on revenue recognized from the sale of Lyric products and licenses through the earlier of 20 years or the accrual of a maximum of $25.0 million . Royalty payments to Lyric employees require post-acquisition services to be rendered and, as such, the Company will record these amounts as compensation expense in the related periods. As of February 1, 2014 , no royalty payments have been made. The Company recognized $0.2 million of acquisition-related costs that were expensed in fiscal 2011, which were included in operating expenses in the Company's condensed consolidated statement of income.

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

21



companies under The American Jobs Creation Act. The potential liability for this adjustment is $36.5 million . On September 18, 2013, in a matter not involving the Company, the U.S. Tax Court held that accounts receivable created under Rev. Proc. 99-32 may constitute indebtedness for purposes of Section 965 (b)(3) of the Internal Revenue Code and that the IRS was not precluded from reducing the beneficial dividend received deduction because of the increase in related-party indebtedness (BMC Software Inc. v Commissioner, 141 T.C. No. 5 2013). After analyzing the Tax Court’s decision, the Company has determined that its tax position with respect to Section 965(b)(3) of the Internal Revenue Code no longer meets the more likely than not standard of recognition for accounting purposes. Accordingly, the Company recorded a $36.5 million reserve for this matter in the fourth quarter of fiscal 2013.
None of the Company's U.S. federal tax returns for years prior to fiscal year 2010 are subject to examination.
None of the Company's Ireland tax returns for years prior to fiscal year 2009 are subject to examination.
Unrealized Tax Benefits
The following table summarizes the changes in the total amounts of unrealized tax benefits for the three months ended February 1, 2014 .
 
Unrealized Tax Benefits
Balance, November 2, 2013
$
68,139

Additions for tax positions related to current year
1,260

Reductions for tax positions related to prior years
(545
)
Balance, February 1, 2014
$
68,854

    
Note 18 – New Accounting Pronouncements
Standards Implemented
Comprehensive Income
In January 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income (ASU No. 2013-02), which seek to improve the reporting of reclassifications out of accumulated other comprehensive income by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. The amendments in ASU No. 2013-02 supersede the presentation requirements for reclassifications out of accumulated other comprehensive income in ASU No. 2011-05, Presentation of Comprehensive Income , and ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 . ASU No. 2013-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2012, which is the Company's first quarter of fiscal year 2014. The adoption of ASU No. 2013-02 in the first quarter of fiscal 2014 required additional disclosures related to comprehensive income but did not impact the Company's financial condition or results of operations.
Balance Sheet
In December 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities (ASU No. 2011-11). ASU No. 2011-11 amended ASC 210, Balance Sheet, to converge the presentation of offsetting assets and liabilities between U.S. GAAP and IFRS. ASU No. 2011-11 requires that entities disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. ASU No. 2011-11 is effective for fiscal years, and interim periods within those years, beginning after January 1, 2013, which is the Company’s fiscal year 2014. Subsequently, in January 2013, the FASB issued ASU No. 2013-01, Clarifying the Scope of Disclosures about offsetting Assets and Liabilities , which clarifies that the scope of ASU No. 2011-11 applies to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreement. The adoption of ASU No. 2011-11 and ASU No. 2013-01 in the first quarter of fiscal 2014 required additional disclosures related to offsetting assets and liabilities but did not impact the Company's financial condition or results of operations.

22



Standards to be Implemented
Income Taxes
In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (ASU No. 2013-11). ASU No. 2013-11 requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward, with certain exceptions. ASU No. 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013, which is the Company's first quarter of fiscal year 2015. The adoption of ASU No. 2013-11 in the first quarter of fiscal 2015 will affect the presentation of the Company's unrecognized tax benefits but will not impact the Company's financial condition or results of operations.

Note 19 – Subsequent Events
On February 17, 2014 , the Board of Directors of the Company declared a cash dividend of $0.37 per outstanding share of common stock. The dividend will be paid on March 11, 2014 to all shareholders of record at the close of business on February 28, 2014 .
Also on February 17, 2014 , the Board of Directors of the Company approved an increase to the Company's stock repurchase program authorization to $1.0 billion . Under the program, the Company may repurchase outstanding shares of common stock from time to time in the open market or through privately negotiated transactions.




23



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

Results of Operations
(all tabular amounts in thousands except per share amounts and percentages)
Overview
 
Three Months Ended
 
February 1, 2014
 
February 2, 2013
 
$ Change
 
% Change
Revenue
$
628,238

 
$
622,134

 
$
6,104

 
1
%
Gross margin %
65.1
%
 
62.7
%
 
 
 
 
Net income
$
152,586

 
$
131,222

 
$
21,364

 
16
%
Net income as a % of revenue
24.3
%
 
21.1
%
 
 
 
 
Diluted EPS
$
0.48

 
$
0.42

 
$
0.06

 
14
%
 
 
 
 
 
 
 
 
The year-to-year revenue changes by end market and product type are more fully outlined below under Revenue Trends by End Market and Revenue Trends by Product Type .
Revenue Trends by End Market
The following table summarizes revenue by end market. The categorization of revenue by end market is determined using a variety of data points including the technical characteristics of the product, the “sold to” customer information, the “ship to” customer information and the end customer product or application into which our product will be incorporated. As data systems for capturing and tracking this data evolve and improve, the categorization of products by end market can vary over time. When this occurs, we reclassify revenue by end market for prior periods. Such reclassifications typically do not materially change the sizing of, or the underlying trends of results within, each end market.

24



 
Three Months Ended
 
February 1, 2014
 
February 2, 2013
 
Revenue
 
% of
Revenue
 
Y/Y%
 
Revenue
 
% of
Revenue*
Industrial
$
290,365

 
46
%
 
3
 %
 
$
281,209

 
45
%
Automotive
124,157

 
20
%
 
15
 %
 
107,760

 
17
%
Consumer
74,119

 
12
%
 
(31
)%
 
107,356

 
17
%
Communications
139,597

 
22
%
 
11
 %
 
125,809

 
20
%
Total revenue
$
628,238

 
100
%
 
1
 %
 
$
622,134

 
100
%
* The sum of the individual percentages does not equal the total due to rounding.
 
 
 
 
 
 
 
 
 
 
The year-to-year decrease in revenue in the consumer end market was primarily the result of the sale of our microphone product line in the fourth quarter of fiscal 2013. Automotive end market revenue increased in the three-month period ended February 1, 2014 as compared to the three-month period ended February 2, 2013 primarily as a result of increasing electronic content in vehicles and higher demand for new vehicles. Communications end market revenue increased in the three-month period ended February 1, 2014 as compared to the three-month period ended February 2, 2013 primarily as a result of increased wireless base station deployment activity in China.
Revenue Trends by Product Type
The following table summarizes revenue by product categories. The categorization of our products into broad categories is based on the characteristics of the individual products, the specification of the products and in some cases the specific uses that certain products have within applications. The categorization of products into categories is therefore subject to judgment in some cases and can vary over time. In instances where products move between product categories, we reclassify the amounts in the product categories for all prior periods. Such reclassifications typically do not materially change the sizing of, or the underlying trends of results within, each product category.
 
Three Months Ended
 
February 1, 2014
 
February 2, 2013
 
Revenue
 
% of
Revenue
 
Y/Y%
 
Revenue
 
% of
Revenue*
Converters
$
290,551

 
46
%
 
5
 %
 
$
277,940

 
45
%
Amplifiers / Radio frequency
164,714

 
26
%
 
4
 %
 
157,978

 
25
%
Other analog
79,419

 
13
%
 
(17
)%
 
95,158

 
15
%
Subtotal analog signal processing
534,684

 
85
%
 
1
 %
 
531,076

 
85
%
Power management & reference
38,710

 
6
%
 
(2
)%
 
39,382

 
6
%
Total analog products
$
573,394

 
91
%
 
1
 %
 
$
570,458

 
92
%
Digital signal processing
54,844

 
9
%
 
6
 %
 
51,676

 
8
%
Total revenue
$
628,238

 
100
%
 
1
 %
 
$
622,134

 
100
%
* The sum of the individual percentages does not equal the total due to rounding.
 
 
 
 
 
 
 
 
 
 
The year-to-year increase in total revenue was primarily the result of improving demand across most product type categories, which was offset by declines in the other analog product category primarily as a result of the sale of our microphone product line in the fourth quarter of fiscal 2013.

25



Revenue Trends by Geographic Region
Revenue by geographic region, based upon the primary location of our customers’ design activity for our products for the three-month periods ended February 1, 2014 and February 2, 2013 were as follows:
 
 
Three Months Ended
Region
February 1, 2014
 
February 2, 2013
 
$ Change
 
% Change
United States
$
182,298

 
$
204,271

 
$
(21,973
)
 
(11
)%
Rest of North and South America
19,436

 
23,512

 
(4,076
)
 
(17
)%
Europe
200,687

 
189,298

 
11,389

 
6
 %
Japan
71,091

 
64,688

 
6,403

 
10
 %
China
100,484

 
84,769

 
15,715

 
19
 %
Rest of Asia
54,242

 
55,596

 
(1,354
)
 
(2
)%
Total revenue
$
628,238

 
$
622,134

 
$
6,104

 
1
 %
 
 
 
 
 
 
 
 
In the three-month periods ended February 1, 2014 and February 2, 2013, the predominant country comprising “Rest of North and South America” is Canada; the predominant countries comprising “Europe” are Germany, Sweden, France and the United Kingdom; and the predominant countries comprising “Rest of Asia” are Taiwan and South Korea.
On a regional basis, the year-to-year sales decline in North America was primarily the result of lower demand for products used in consumer applications. The year-over-year sales increase in China was primarily the result of an increase in demand in the communications and industrial end markets. The year-over-year sales increase in Japan was primarily the result of an increase in demand in the automotive and industrial end markets.
Gross Margin
 
Three Months Ended
 
February 1, 2014
 
February 2, 2013
 
$ Change
 
% Change
Gross margin
$
409,118

 
$
390,284

 
$
18,834

 
5
%
Gross margin %
65.1
%
 
62.7
%
 
 
 
 
Gross margin percentage increased by 240 basis points in the three months ended February 1, 2014 , as compared to the same period of fiscal 2013, primarily as a result of improved factory utilization levels in our manufacturing facilities.
Research and Development (R&D)  
 
Three Months Ended
 
February 1, 2014
 
February 2, 2013
 
$ Change
 
% Change
R&D expenses
$
128,646

 
$
125,164

 
$
3,482

 
3
%
R&D expenses as a % of revenue
20.5
%
 
20.1
%
 
 
 
 
R&D expenses increased 3% year-over-year primarily as a result of increases in operational spending for engineering supplies and consultants and, to a lesser extent, R&D employee salary and benefit expenses and variable compensation expense linked to our overall profitability and revenue growth.
R&D expenses as a percentage of revenue will fluctuate from year-to-year depending on the amount of revenue and the success of new product development efforts, which we view as critical to our future growth. We have hundreds of R&D projects underway, none of which we believe are material on an individual basis. We expect to continue the development of innovative technologies and processes for new products. We believe that a continued commitment to R&D is essential to maintain product leadership with our existing products as well as to provide innovative new product offerings, and therefore, we expect to continue to make significant R&D investments in the future.

26



Selling, Marketing, General and Administrative (SMG&A)
 
Three Months Ended
 
February 1, 2014
 
February 2, 2013
 
$ Change
 
% Change
SMG&A expenses
$
98,178

 
$
97,560

 
$
618

 
1
%
SMG&A expenses as a % of revenue
15.6
%
 
15.7
%
 
 
 
 
SMG&A expenses increased slightly year-over-year as increases in operational spending were partially offset by decreases in SMG&A employee salary and benefit expenses and variable compensation expense linked to our overall profitability and revenue growth.
Special Charges – Reduction of Operating Costs
We monitor global macroeconomic conditions on an ongoing basis, and continue 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, we have undertaken various restructuring actions over the past several years. These reductions relating to ongoing actions are described below.
During fiscal 2012, we recorded special charges of approximately $8.4 million . These special charges included: $8.0 million for severance and fringe benefit costs in accordance with our ongoing benefit plan or statutory requirements at foreign locations for 95 manufacturing, engineering and SMG&A employees; $0.2 million for lease obligation costs for facilities that we ceased using during the third quarter of fiscal 2012; $0.1 million for contract termination costs; and $0.2 million for the write-off of property, plant and equipment. These actions resulted in annual cost savings of approximately $12.0 million . We have terminated the employment of all employees associated with these actions.
During fiscal 2013, we recorded special charges of approximately $29.8 million for severance and fringe benefit costs in accordance with our ongoing benefit plan or statutory requirements at foreign locations for 235 engineering and SMG&A employees. As of February 1, 2014, we employed 35 of the 235 employees included in this cost reduction action. These employees must continue to be employed by us until their employment is involuntarily terminated in order to receive the severance benefit. We estimate these actions will result in annual cost savings of approximately $32.6 million, once fully implemented, which we expect will be used to make additional investments in products that we expect will drive revenue growth in the future.
During the first quarter of fiscal 2014, we recorded a special charge of approximately $2.7 million for severance and fringe benefit costs in accordance with our ongoing benefit plan or statutory requirements at foreign locations for 30 engineering and SMG&A employees. As of February 1, 2014, we employed 12 of the 30 employees included in this cost reduction action. These employees must continue to be employed by us until their employment is involuntarily terminated in order to receive the severance benefit. We estimate this action will result in annual cost savings of approximately $4.5 million, once fully implemented.

Operating Income
 
Three Months Ended
 
February 1, 2014
 
February 2, 2013
 
$ Change
 
% Change
Operating income
$
179,609

 
$
153,489

 
$
26,120

 
17
%
Operating income as a % of revenue
28.6
%
 
24.7
%
 
 
 
 
The year-over-year increase in operating income in the three months ended February 1, 2014 was primarily the result of an increase in revenue of $6.1 million , a 240 basis point increase in gross margin percentage and a decrease in special charges of $11.4 million as more fully described above under the heading Special Charges—Reduction of Operating Costs.

27



Provision for Income Taxes
 
Three Months Ended
 
February 1, 2014
 
February 2, 2013
 
$ Change
Provision for income taxes
$
23,305

 
$
18,887

 
$
4,418

Effective income tax rate
13.2
%
 
12.6
%
 
 
Our effective tax rate reflects the applicable tax rate in effect in the various tax jurisdictions around the world where our income is earned.
The increase in our effective tax rate for the first quarter of fiscal 2014 compared to the first quarter of fiscal 2013 was primarily due to the inclusion in the three months ended February 2, 2013 of a benefit from the reinstatement of the U.S. federal research and development tax credit in January 2013 retroactive to January 1, 2012, partially offset by an increase in income earned in lower tax rate jurisdictions.
We expect our effective tax rate to be approximately 13% for the remainder of fiscal 2014.
Net Income
 
Three Months Ended
 
February 1, 2014
 
February 2, 2013
 
$ Change
 
% Change
Net Income
$
152,586

 
$
131,222

 
$
21,364

 
16
%
Net Income as a % of revenue
24.3
%
 
21.1
%
 
 
 
 
Diluted EPS

$0.48

 

$0.42

 
 
 
 
Net income increased 16% in the three months ended February 1, 2014 as compared to the same period of fiscal 2013 as the $26.1 million increase in operating income was partially offset by a higher provision for income taxes in the first quarter of fiscal 2014.
Outlook
The following statements are based on current expectations. These statements are forward-looking and our actual results may differ materially as a result of, among other things, the important factors contained in Part II, Item 1A. "Risk Factors" in this Quarterly Report on Form 10-Q. Unless specifically mentioned, these statements do not give effect to the potential impact of any mergers, acquisitions, divestitures, or business combinations that may be announced or closed after the date of filing this report. These statements supersede all prior statements regarding our business outlook made by us and we disclaim any obligation to update these forward-looking statements.
We are planning for revenue in the second quarter of fiscal 2014 to be in the range of approximately $660 million to $680 million. Our plan is for gross margin for the second quarter of fiscal 2014 to increase between 50 and 100 basis points and for operating expenses to increase by approximately 2% from the first quarter of fiscal 2014. We expect our effective tax rate to be approximately 13%. As a result, we are planning for diluted earnings per share to be in the range of $0.54 to $0.58 in the second quarter of fiscal 2014.

Liquidity and Capital Resources
At February 1, 2014 , our principal source of liquidity was $4,701.1 million of cash and cash equivalents and short-term investments, of which approximately $1,244.1 million was held in the United States. The balance of our cash and cash equivalents and short-term investments was held outside the United States in various foreign subsidiaries. As we intend to
reinvest our foreign earnings indefinitely, this cash held outside the United States is not available to meet our cash requirements in the United States, including cash dividends and common stock repurchases. Our cash and cash equivalents consist of highly liquid investments with maturities of three months or less at the time of acquisition and our short-term investments consist primarily of corporate obligations, such as commercial paper and floating rate notes, bonds and bank time deposits. We maintain these balances with high credit quality counterparties, continually monitor the amount of credit exposure to any one issuer and diversify our investments in order to minimize our credit risk.

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We believe that our existing sources of liquidity and cash expected to be generated from future operations, together with existing and anticipated available long-term financing, will be sufficient to fund operations, capital expenditures, research and development efforts, dividend payments (if any) and repurchases of our stock (if any) under our stock repurchase program in the immediate future and for at least the next twelve months.
 
Three Months Ended
 
February 1, 2014
 
February 2, 2013
Net cash provided by operating activities

$157,473