Analog Devices, Inc.
ANALOG DEVICES INC (Form: 10-Q, Received: 05/19/2015 16:21:25)


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549  
 
Form 10-Q
 
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 2, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File No. 1-7819
 
Analog Devices, Inc.
(Exact name of registrant as specified in its charter)  
 
Massachusetts
 
04-2348234
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
One Technology Way, Norwood, MA
 
02062-9106
(Address of principal executive offices)
 
(Zip Code)
(781) 329-4700
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES   þ     NO   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES   þ     NO   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
þ
  
Accelerated filer
 
¨
 
 
 
 
 
 
 
Non-accelerated filer
 
¨   (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨     NO   þ
As of May 2, 2015 there were 313,541,685 shares of common stock of the registrant, $0.16 2/3 par value per share, outstanding.
 




PART I - FINANCIAL INFORMATION
 
ITEM 1.
Financial Statements

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

 
Three Months Ended
 
Six Months Ended
 
May 2, 2015
 
May 3, 2014
 
May 2, 2015
 
May 3, 2014
Revenue
$
821,019

 
$
694,536

 
$
1,593,005

 
$
1,322,774

Cost of sales (1)
276,197

 
235,793

 
544,576

 
454,913

Gross margin
544,822

 
458,743

 
1,048,429

 
867,861

Operating expenses:
 
 
 
 
 
 
 
Research and development (1)
154,233

 
136,203

 
305,939

 
264,794

Selling, marketing, general and administrative (1)
117,371

 
102,085

 
237,542

 
200,263

Amortization of intangibles
24,210

 
55

 
48,006

 
110

Special charges

 

 

 
2,685

 
295,814

 
238,343

 
591,487

 
467,852

Operating income
249,008

 
220,400

 
456,942

 
400,009

Nonoperating expense (income):
 
 
 
 
 
 
 
Interest expense
6,880

 
6,874

 
13,536

 
13,445

Interest income
(2,009
)
 
(3,401
)
 
(4,053
)
 
(6,685
)
Other, net
(1,052
)
 
(441
)
 
1,500

 
(10
)
 
3,819

 
3,032

 
10,983

 
6,750

Income before income taxes
245,189

 
217,368

 
445,959

 
393,259

Provision for income taxes
39,851

 
29,935

 
61,864

 
53,240

Net income
$
205,338

 
$
187,433

 
$
384,095

 
$
340,019

Shares used to compute earnings per share – basic
312,660

 
313,488

 
311,967

 
312,887

Shares used to compute earnings per share – diluted
317,047

 
318,347

 
316,365

 
318,182

Basic earnings per share
$
0.66

 
$
0.60

 
$
1.23

 
$
1.09

Diluted earnings per share
$
0.65

 
$
0.59

 
$
1.21

 
$
1.07

Dividends declared and paid per share
$
0.40

 
$
0.37

 
$
0.77

 
$
0.71

           (1) Includes stock-based compensation expense as follows:
 
 
 
 
 
 
 
           Cost of sales
$
2,207

 
$
1,417

 
$
4,599

 
$
2,974

           Research and development
$
6,416

 
$
4,278

 
$
13,290

 
$
9,137

           Selling, marketing, general and administrative
$
7,478

 
$
4,847

 
$
18,583

 
$
9,838

See accompanying notes.

1




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

 
Three Months Ended
 
Six Months Ended
 
May 2, 2015
 
May 3, 2014
 
May 2, 2015
 
May 3, 2014
Net income
$
205,338

 
$
187,433

 
$
384,095

 
$
340,019

Foreign currency translation adjustments
1,389

 
4,600

 
(7,474
)
 
3,860

Change in fair value of available-for-sale securities classified as short-term investments (net of taxes of $92, $98, $120 and $65, respectively)
527

 
639

 
221

 
471

Change in fair value of derivative instruments designated as cash flow hedges (net of taxes of $7,071, $239, $7,821 and $90, respectively)
17,010

 
2,646

 
(14,816
)
 
569

Changes in pension plans including prior service cost, transition obligation, net actuarial loss and foreign currency translation adjustments, (net of taxes of $281, $167, $563 and $329 respectively)
2,640

 
(1,396
)
 
19,740

 
(802
)
Other comprehensive income (loss)
21,566

 
6,489

 
(2,329
)
 
4,098

Comprehensive income
$
226,904

 
$
193,922

 
$
381,766

 
$
344,117


See accompanying notes.









2



ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(thousands, except per share amounts)
 
May 2, 2015
 
November 1, 2014
ASSETS
 

 
 

Current Assets
 
 
 
Cash and cash equivalents
$
636,216

 
$
569,233

Short-term investments
2,438,562

 
2,297,235

Accounts receivable, net
408,510

 
396,605

Inventories (1)
394,494

 
367,927

Deferred tax assets
117,055

 
128,934

Prepaid income tax
1,707

 
6,633

Prepaid expenses and other current assets
49,217

 
45,319

Total current assets
4,045,761

 
3,811,886

Property, Plant and Equipment, at Cost
 
 
 
Land and buildings
548,386

 
495,738

Machinery and equipment
1,879,364

 
1,880,351

Office equipment
56,667

 
51,477

Leasehold improvements
51,626

 
50,782

 
2,536,043

 
2,478,348

Less accumulated depreciation and amortization
1,906,378

 
1,855,926

Net property, plant and equipment
629,665

 
622,422

Other Assets
 
 
 
Deferred compensation plan investments
22,163

 
21,110

Other investments
17,524

 
13,397

Goodwill
1,643,614

 
1,642,438

Intangible assets, net
621,277

 
671,402

Deferred tax assets
26,263

 
27,249

Other assets
42,208

 
49,786

Total other assets
2,373,049

 
2,425,382

 
$
7,048,475

 
$
6,859,690

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
156,300

 
$
138,967

Deferred income on shipments to distributors, net
295,428

 
278,435

Income taxes payable
32,626

 
62,770

Current portion of long-term debt
374,664

 

Accrued liabilities
209,201

 
228,884

Total current liabilities
1,068,219

 
709,056

Non-current liabilities
 
 
 
Long-term debt
498,399

 
872,789

Deferred income taxes
246,866

 
235,791

Deferred compensation plan liability
22,163

 
21,110

Other non-current liabilities
248,620

 
263,047

Total non-current liabilities
1,016,048

 
1,392,737

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, 313,541,685 shares issued and outstanding (311,204,926 on November 1, 2014)
52,258

 
51,869

Capital in excess of par value
707,180

 
643,058

Retained earnings
4,375,625

 
4,231,496

Accumulated other comprehensive loss
(170,855
)
 
(168,526
)
Total shareholders’ equity
4,964,208

 
4,757,897

 
$
7,048,475

 
$
6,859,690

(1)
Includes $3,066 and $3,291 related to stock-based compensation at May 2, 2015 and November 1, 2014 , respectively.

See accompanying notes.

3






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

   
Six Months Ended
 
May 2, 2015
 
May 3, 2014
Cash flows from operating activities:
 
 
 
Net income
$
384,095

 
$
340,019

Adjustments to reconcile net income to net cash provided by operations:
 
 
 
Depreciation
63,809

 
54,794

Amortization of intangibles
49,893

 
110

Stock-based compensation expense
36,472

 
21,949

Excess tax benefit-stock options
(15,777
)
 
(12,027
)
Deferred income taxes
(9,396
)
 
(1,925
)
Other non-cash activity
5,575

 
2,817

Changes in operating assets and liabilities
(1,987
)
 
(9,840
)
Total adjustments
128,589

 
55,878

Net cash provided by operating activities
512,684

 
395,897

Cash flows from investing activities:
 
 
 
Purchases of short-term available-for-sale investments
(2,872,197
)
 
(4,510,237
)
Maturities of short-term available-for-sale investments
1,855,561

 
3,995,075

Sales of short-term available-for-sale investments
875,650

 
402,086

Additions to property, plant and equipment
(72,989
)
 
(92,181
)
Payments for acquisitions, net of cash acquired
(118
)
 

Increase in other assets
(8,197
)
 
(9,082
)
Net cash used for investing activities
(222,290
)
 
(214,339
)
Cash flows from financing activities:
 
 
 
Dividend payments to shareholders
(239,966
)
 
(221,819
)
Repurchase of common stock
(83,911
)
 
(111,577
)
Proceeds from employee stock plans
94,883

 
142,536

Contingent consideration payment

 
(1,773
)
Changes in other financing activities
(7,551
)
 
10,964

Excess tax benefit-stock options
15,777

 
12,027

Net cash used for financing activities
(220,768
)
 
(169,642
)
Effect of exchange rate changes on cash
(2,643
)
 
(1,215
)
Net increase in cash and cash equivalents
66,983

 
10,701

Cash and cash equivalents at beginning of period
569,233

 
392,089

Cash and cash equivalents at end of period
$
636,216

 
$
402,790

See accompanying notes.

4



ANALOG DEVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED MAY 2, 2015
(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 1, 2014 and related notes. The results of operations for the interim periods shown in this report are not necessarily indicative of the results that may be expected for the fiscal year ending October 31, 2015 or any future period.
On July 22, 2014, the Company completed its acquisition of Hittite Microwave Corporation (Hittite), a company that designed and developed high performance integrated circuits, modules, subsystems and instrumentation for radio frequency, microwave and millimeterwave applications. The total consideration paid to acquire Hittite was approximately $2.4 billion , financed through a combination of existing cash on hand and a 90-day term loan facility of $2.0 billion . The acquisition of Hittite is referred to as the Acquisition. See Note 16, Acquisitions, of these Notes to Condensed Consolidated Financial Statements for further discussion related to the Acquisition.
Certain amounts reported in previous periods have been reclassified to conform to the fiscal 2015 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 2015 and fiscal 2014 are 52 -week fiscal years.

Note 2 – Revenue Recognition
Revenue from product sales to customers is generally recognized when title passes, which is upon shipment in the U.S. and for certain foreign countries. For other foreign countries, title passes subsequent to product shipment, ordinarily within a week of shipment. Accordingly, the Company defers the revenue recognized relating to these other foreign countries until title has passed. For multiple element arrangements, the Company allocates arrangement consideration among the elements based on the relative fair values of those elements as determined using vendor-specific objective evidence or third-party evidence. The Company uses its best estimate of selling price to allocate arrangement consideration between the deliverables in cases where neither vendor-specific objective evidence nor third-party evidence is available. A reserve for sales returns and allowances for customers is recorded based on historical experience or specific identification of an event necessitating a reserve.
Revenue from contracts with the United States government, government prime contractors and some commercial customers is generally recorded on a percentage of completion basis using either units delivered or costs incurred as the measurement basis for progress towards completion. The output measure is used to measure results directly and is generally the best measure of progress toward completion in circumstances in which a reliable measure of output can be established. Estimated revenue in excess of amounts billed is reported as unbilled receivables. Contract accounting requires judgment in estimating costs and assumptions related to technical issues and delivery schedule. Contract costs include material, subcontract costs, labor and an allocation of indirect costs. The estimation of costs at completion of a contract is subject to numerous variables involving contract costs and estimates as to the length of time to complete the contract. Changes in contract performance, estimated gross margin, including the impact of final contract settlements, and estimated losses are recognized in the period in which the changes or losses are determined.
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.

5



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.
As of May 2, 2015 and November 1, 2014 , the Company had gross deferred revenue of  $365.4 million and $349.7 million , respectively, and gross deferred cost of sales of $70.0 million and $71.3 million , respectively. Deferred income on shipments to distributors increased in the first six months of fiscal 2015 primarily as a result of higher demand for products, as well as a mix shift in favor of higher margin products, attributable to the Acquisition, sold 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- and six-month periods ended May 2, 2015 and May 3, 2014 were not material .

Note 3 – Stock-Based Compensation

Stock-based compensation is measured at the grant date based on the grant-date fair value of the awards ultimately expected to vest, and is recognized as an expense on a straight-line basis over the vesting period, which is generally five years for stock options and three years for restricted stock units. In addition to restricted stock units with a service condition, the Company grants restricted stock units with both a market condition and a service condition (market-based restricted stock units). The number of shares of the Company's common stock to be issued upon vesting of market-based restricted stock units will range from 0% to 200% of the target amount, based on the comparison of the Company's total shareholder return (TSR) to the median TSR of a specified peer group over a three-year period. TSR is a measure of stock price appreciation plus any dividends paid during the performance period. Determining the amount of stock-based compensation to be recorded for stock options and market-based restricted stock units requires the Company to develop estimates to calculate the grant-date fair value of awards.
Modification of Awards — The Company has from time to time modified the vesting terms of its equity awards to employees and directors. The modifications made to the Company’s equity awards in the first six months of fiscal 2015 or 2014 did not result in significant incremental compensation costs, either individually or in the aggregate.
Grant-Date Fair Value — The Company uses the Black-Scholes valuation model to calculate the grant-date fair value of stock option awards and the Monte Carlo simulation model to calculate the grant-date fair value of market-based restricted stock units. The use of these valuation models requires the Company to make estimates and assumptions, such as expected volatility, expected term, risk-free interest rate, expected dividend yield and forfeiture rates. The grant-date fair value of restricted stock units with only a service condition represents the value of the Company’s common stock on the date of grant, reduced by the present value of dividends expected to be paid on the Company’s common stock prior to vesting.

Information pertaining to the Company’s stock option awards and the related estimated weighted-average assumptions to calculate the fair value of stock options using the Black-Scholes valuation model granted during the three- and six-month periods ended May 2, 2015 and May 3, 2014 are as follows:

6



   
Three Months Ended
 
Six Months Ended
Stock Options
May 2, 2015
 
May 3, 2014
 
May 2, 2015
 
May 3, 2014
Options granted (in thousands)
1,853

 
2,094

 
1,908

 
2,110

Weighted-average exercise price

$57.28

 

$51.74

 

$57.11

 

$51.72

Weighted-average grant-date fair value

$10.41

 

$9.00

 

$10.33

 

$8.99

Assumptions:
 
 
 
 
 
 
 
Weighted-average expected volatility
25.9%

 
24.9
%
 
25.8
%
 
24.9
%
Weighted-average expected term (in years)
5.3

 
5.3

 
5.3

 
5.3

Weighted-average risk-free interest rate
1.6
%
 
1.7
%
 
1.6
%
 
1.7
%
Weighted-average expected dividend yield
2.8
%
 
2.9
%
 
2.8
%
 
2.9
%
The Company utilizes the Monte Carlo simulation valuation model to value market-based restricted stock units. The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the performance conditions stipulated in the award grant and calculates the fair market value for the market-based restricted stock units granted. The Monte Carlo simulation model also uses stock price volatility and other variables to estimate the probability of satisfying the performance conditions, including the possibility that the market condition may not be satisfied, and the resulting fair value of the award. Information pertaining to the Company's market-based restricted stock units and the related estimated assumptions used to calculate the fair value of the market-based restricted stock units granted during the three- and six-month periods ended May 2, 2015 and May 3, 2014 using the Monte Carlo simulation model is as follows:
 
Three and Six Months Ended
Three and Six Months Ended
Market-based Restricted Stock Units
May 2, 2015
May 3, 2014
Units granted (in thousands)
75

86

Grant-date fair value

$55.67


$50.79

Assumptions:
 
 
Historical stock price volatility
20.0
%
23.2
%
Risk-free interest rate
1.1
%
0.8
%
Expected dividend yield
2.8
%
2.8
%
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. The Company utilizes historical volatility as an input variable of the Monte Carlo simulation to estimate the grant date fair value of market-based restricted stock units.  The market performance measure of these awards is based upon the interaction of multiple peer companies.  Given the Company is required to use consistent statistical properties in the Monte Carlo simulation and implied volatility is not available across the population, historical volatility must be used.

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

7



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 4.7% to all unvested stock-based awards as of May 2, 2015 . The rate of 4.7% represents the portion that is expected to be forfeited over the vesting period. This analysis will be re-evaluated quarterly and the forfeiture rate will be adjusted as necessary. Ultimately, the actual expense recognized over the vesting period will only be for those options that vest.
Additional paid-in-capital (APIC) Pool
The APIC pool represents the excess tax benefits related to share-based compensation that are available to absorb future tax deficiencies. If the amount of future tax deficiencies is greater than the available APIC pool, the Company records the excess as income tax expense in its condensed consolidated statements of income. During the three- and six-month periods ended May 2, 2015 and May 3, 2014 , the Company had available APIC pool to absorb tax deficiencies recorded and as a result, these deficiencies did not affect its results of operations.
Stock-Based Compensation Activity
A summary of the activity under the Company’s stock option plans as of May 2, 2015 and changes during the three- and six-month periods then ended is presented below:
Activity during the Three Months Ended May 2, 2015
Options
Outstanding
(in thousands)
 
Weighted-
Average Exercise
Price Per Share
 
Weighted-
Average
Remaining
Contractual
Term in Years
 
Aggregate
Intrinsic
Value
Options outstanding at January 31, 2015
12,830

 

$37.72

 
 
 
 
Options granted
1,853

 

$57.28

 
 
 
 
Options exercised
(1,581
)
 

$33.06

 
 
 
 
Options forfeited
(22
)
 

$47.79

 
 
 
 
Options expired
(3
)
 

$39.81

 
 
 
 
Options outstanding at May 2, 2015
13,077

 

$41.04

 
6.4
 

$290,757

Options exercisable at May 2, 2015
7,201

 

$33.90

 
4.7
 

$211,483

Options vested or expected to vest at May 2, 2015 (1)
12,510

 

$40.56

 
6.3
 

$284,097

 
(1)
In addition to the vested options, the Company expects a portion of the unvested options to vest at some point in the future. The number of options expected to vest is calculated by applying an estimated forfeiture rate to the unvested options.

Activity during the Six Months Ended May 2, 2015
Options
Outstanding
(in thousands)
 
Weighted-
Average Exercise
Price Per Share
Options outstanding at November 1, 2014
14,184

 

$37.20

Options granted
1,908

 

$57.11

Options exercised
(2,914
)
 

$32.79

Options forfeited
(79
)
 

$45.30

Options expired
(22
)
 

$36.52

Options outstanding at May 2, 2015
13,077

 

$41.04


During the three and six months ended May 2, 2015 , the total intrinsic value of options exercised (i.e., the difference between the market price at exercise and the price paid by the employee to exercise the options) was $42.8 million and $72.9 million , respectively, and the total amount of proceeds received by the Company from the exercise of these options was $52.1 million and $94.9 million , respectively.

8




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

A summary of the Company’s restricted stock unit award activity as of May 2, 2015 and changes during the three- and six-month periods then ended is presented below:  
Activity during the Three Months Ended May 2, 2015
Restricted
Stock Units
Outstanding
(in thousands)
 
Weighted-
Average Grant-
Date Fair Value
Per Share
Restricted stock units outstanding at January 31, 2015
2,966

 

$43.37

Units granted
680

 

$53.02

Restrictions lapsed
(756
)
 

$37.57

Forfeited
(20
)
 

$46.33

Restricted stock units outstanding at May 2, 2015
2,870

 

$47.17


Activity during the Six Months Ended May 2, 2015
Restricted
Stock Units
Outstanding
(in thousands)
 
Weighted-
Average Grant-
Date Fair Value
Per Share
Restricted stock units outstanding at November 1, 2014
3,188

 

$43.46

Units granted
776

 

$51.91

Restrictions lapsed
(1,006
)
 

$39.27

Forfeited
(88
)
 

$45.13

Restricted stock units outstanding at May 2, 2015
2,870

 

$47.17


As of May 2, 2015 , there was $141.5 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 1.5 years . The total grant-date fair value of shares that vested during the three- and six-month periods ended May 2, 2015 was approximately $42.1 million and $58.8 million , respectively. The total grant-date fair value of shares that vested during the three- and six-month periods ended May 3, 2014 was approximately $12.7 million and $52.2 million , respectively.

Note 4 – Common Stock Repurchase
The Company’s common stock repurchase program has been in place since August 2004 . In the aggregate, the Board of Directors has authorized the Company to repurchase $5.6 billion of the Company’s common stock under the program. Under the program, the Company may repurchase outstanding shares of its common stock from time to time in the open market and through privately negotiated transactions. Unless terminated earlier by resolution of the Company’s Board of Directors, the repurchase program will expire when the Company has repurchased all shares authorized under the program. As of May 2, 2015 , the Company had repurchased a total of approximately 138.3 million shares of its common stock for approximately $4.9 billion under this program. As of May 2, 2015 , an additional $684.3 million remains available for repurchase of shares under the current authorized program. The repurchased shares are held as authorized but unissued shares of common stock. The Company also, from time to time, repurchases shares in settlement of employee minimum tax withholding obligations due upon the vesting of restricted stock units or the exercise of stock options. The withholding amount is based on the employee's minimum statutory withholding requirement. 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 six months of fiscal 2015 .

9



 
Foreign currency translation adjustment
 
Unrealized holding gains on available for sale securities classified as short-term investments
 
Unrealized holding (losses) on available for sale securities classified as short-term investments
 
Unrealized holding gains (losses) on derivatives
 
Pension plans
 
Total
November 1, 2014
$
(5,132
)
 
$
518

 
$
(306
)
 
$
659

 
$
(164,265
)
 
$
(168,526
)
Other comprehensive income (loss) before reclassifications
(7,474
)
 
149

 
192

 
(34,494
)
 
16,555

 
(25,072
)
Amounts reclassified out of other comprehensive income (loss)

 

 

 
11,857

 
3,748

 
15,605

Tax effects

 
(24
)
 
(96
)
 
7,821

 
(563
)
 
7,138

Other comprehensive income (loss)
(7,474
)
 
125

 
96

 
(14,816
)
 
19,740

 
(2,329
)
May 2, 2015
$
(12,606
)
 
$
643

 
$
(210
)
 
$
(14,157
)
 
$
(144,525
)
 
$
(170,855
)


10




The amounts reclassified out of accumulated other comprehensive income (loss) with presentation location during each period were as follows:

 
 
Three Months Ended
 
Six Months Ended
 
 
Comprehensive Income Component
 
May 2, 2015
 
May 3, 2014
 
May 2, 2015
 
May 3, 2014
 
Location
Unrealized holding (losses) gains on derivatives
 
 
 
 
 
 
 
 
 
 
    Currency forwards
 
$
2,980

 
$
(207
)
 
$
5,342

 
$
105

 
Cost of sales
 
 
1,841

 
(384
)
 
3,236

 
(773
)
 
Research and development
 
 
2,803

 
(356
)
 
5,293

 
(298
)
 
Selling, marketing, general and administrative
 
 

 

 
(1,466
)
 

 
(a)
     Treasury rate lock
 
(274
)
 
(274
)
 
(548
)
 
(548
)
 
Interest expense
 
 
7,350

 
(1,221
)
 
11,857

 
(1,514
)
 
Total before tax
 
 
(851
)
 
194

 
(1,397
)
 
292

 
Tax
 
 
$
6,499

 
$
(1,027
)
 
$
10,460

 
$
(1,222
)
 
Net of tax
 
 

 
 
 
 
 
 
 
 
Amortization of pension components
 
 
 
 
 

 
 
 
 
     Transition obligation
 
$
5

 
$
5

 
$
10

 
$
10

 
(b)
     Prior service credit
 
(62
)
 
(62
)
 
(124
)
 
(122
)
 
(b)
     Actuarial losses
 
1,924

 
1,165

 
3,862

 
2,300

 
(b)
 
 
1,867

 
1,108

 
3,748


2,188

 
Total before tax
 
 
(281
)
 
(167
)
 
(563
)
 
(329
)
 
Tax
 
 
$
1,586

 
$
941

 
$
3,185

 
$
1,859

 
Net of tax
 
 
 
 
 
 
 
 
 
 
 
Total amounts reclassified out of accumulated other comprehensive income (loss), net of tax
 
$
8,085

 
$
(86
)
 
$
13,645

 
$
637

 
 
______________
a) The gain related to a fixed asset purchase was reclassified out of accumulated other comprehensive income (loss) to fixed assets which will depreciate into earnings over its expected useful life.
b) 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 1, 2014 .

The Company estimates $7.1 million of net derivative unrealized holding losses included in OCI will be reclassified into earnings within the next twelve months. There was no ineffectiveness in the three- and six-month periods ended May 2, 2015 and May 3, 2014 .
Unrealized gains and losses on available-for-sale securities classified as short-term investments at May 2, 2015 and November 1, 2014 are as follows:
 
May 2, 2015
 
November 1, 2014
Unrealized gains on securities classified as short-term investments
$
690

 
$
541

Unrealized losses on securities classified as short-term investments
(215
)
 
(407
)
Net unrealized gains (losses) on securities classified as short-term investments
$
475

 
$
134

As of May 2, 2015 , the Company held 77 investment securities, 15 of which were in an unrealized loss position with gross unrealized loss of $0.2 million and an aggregate fair value of $562.4 million . As of November 1, 2014 , the Company held 66 investment securities, 18 of which were in an unrealized loss position with gross unrealized loss of $0.4 million and an aggregate fair value of $694.7 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

11



investments before recovery of their amortized basis, which will be at maturity, the Company does not consider those investments to be other-than-temporarily impaired at May 2, 2015 and November 1, 2014 .
Realized gains or losses on investments are determined based on the specific identification basis and are recognized in nonoperating expense (income). There were no material net realized gains or losses from the sales of available-for-sale investments during any of the fiscal periods presented.

Note 6 – Earnings Per Share
Basic earnings per share is computed based only on the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect of potential future issuances of common stock relating to stock option programs and other potentially dilutive securities using the treasury stock method. In calculating diluted earnings per share, the dilutive effect of stock options is computed using the average market price for the respective period. In addition, the assumed proceeds under the treasury stock method include the average unrecognized compensation expense of stock options that are in-the-money and restricted stock units. This results in the “assumed” buyback of additional shares, thereby reducing the dilutive impact of in-the-money stock options. Potential shares related to certain of the Company’s outstanding stock options were excluded because they were anti-dilutive. Those potential shares, determined based on the weighted average exercise prices during the respective periods, related to the Company’s outstanding stock options could be dilutive in the future.
The following table sets forth the computation of basic and diluted earnings per share:
 
Three Months Ended
 
Six Months Ended
 
May 2, 2015
 
May 3, 2014
 
May 2, 2015
 
May 3, 2014
Net Income
$
205,338

 
$
187,433

 
$
384,095

 
$
340,019

Basic shares:
 
 
 
 
 
 
 
Weighted-average shares outstanding
312,660

 
313,488

 
311,967

 
312,887

Earnings per share basic:
$
0.66

 
$
0.60

 
$
1.23

 
$
1.09

Diluted shares:
 
 
 
 
 
 
 
Weighted-average shares outstanding
312,660

 
313,488

 
311,967

 
312,887

Assumed exercise of common stock equivalents
4,387

 
4,859

 
4,398

 
5,295

Weighted-average common and common equivalent shares
317,047

 
318,347

 
316,365

 
318,182

Earnings per share diluted:
$
0.65

 
$
0.59

 
$
1.21

 
$
1.07

Anti-dilutive shares related to:
 
 
 
 
 
 
 
Outstanding stock options
1,879

 
2,981

 
2,042

 
2,611


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.
    








12



The following tables display the special charges taken for ongoing actions and a roll-forward from November 1, 2014 to May 2, 2015 of the employee separation and exit cost accruals established related to these actions.
 
Reduction of Operating Costs
Statements of Income
Fiscal 2014
Workforce reductions
$
37,873

Facility closure costs
459

Non-cash impairment charge
433

Change in estimates
(1,443
)
Total Charges
$
37,322

Accrued Restructuring
Reduction of Operating Costs
Balance at November 1, 2014
$
40,503

Facility closure costs
(366
)
Non-cash impairment charge
(433
)
Severance payments
(14,795
)
Effect of foreign currency on accrual
(447
)
Balance at January 31, 2015
$
24,462

Facility closure costs
(36
)
Severance payments
(9,155
)
Effect of foreign currency on accrual
(71
)
Balance at May 2, 2015
$
15,200


Reduction of Operating Costs
During fiscal 2014, the Company recorded special charges of approximately $37.3 million . These special charges included $37.9 million for severance and fringe benefit costs in accordance with the Company's ongoing benefit plan or statutory requirements at foreign locations for 341 manufacturing, engineering and selling, marketing, general and administrative (SMG&A) employees; $0.5 million for lease obligation costs for facilities that the Company ceased using during the fourth quarter of fiscal 2014; and $0.4 million for the impairment of assets that have no future use located at closed facilities. The Company reversed approximately $1.4 million of its severance accrual related to charges taken in fiscal 2013 primarily due to severance costs being lower than the Company's estimates. As of May 2, 2015 , the Company still employed 28 of the 341 employees included in these cost reduction actions. These employees must continue to be employed by the Company until their employment is involuntarily terminated in order to receive the severance benefit.

Note 8 – Segment Information
In the first quarter of 2015, the Company implemented organizational changes designed to accelerate the Company's growth by increasing the speed and impact of its technological innovation. The organizational changes combine the Company's market and technology teams to better position engineers with customers in order to address the evolving needs of the markets the Company serves. As a result of these organizational changes, the Company re-evaluated its reporting structure under the new organization and concluded that the Company continues to operate in one reportable segment based on the aggregation of six operating segments. The Company designs, develops, manufactures and markets a broad range of integrated circuits. The Chief Executive Officer has been identified as the Company's Chief Operating Decision Maker. The Company has determined that all of the Company's operating segments share the following similar economic characteristics, and therefore meet the criteria established for operating segments to be aggregated into one reportable segment, namely:
The primary source of revenue for each operating segment is the sale of integrated circuits.
The integrated circuits sold by each of the Company's operating segments are manufactured using similar semiconductor manufacturing processes and raw materials in either the Company’s own production facilities or by third-party wafer fabricators using proprietary processes.
The Company sells its products to tens of thousands of customers worldwide. Many of these customers use products spanning all operating segments in a wide range of applications.

13



The integrated circuits marketed by each of the Company's operating segments are sold globally through a direct sales force, third-party distributors, independent sales representatives and via our website to the same types of customers.
All of the Company's operating segments share a similar long-term financial model as they have similar economic characteristics. The causes for variation in operating and financial performance are the same among the Company's operating segments and include factors such as (i) life cycle and price and cost fluctuations, (ii) number of competitors, (iii) product differentiation and (iv) size of market opportunity. Additionally, each operating segment is subject to the overall cyclical nature of the semiconductor industry. Lastly, the number and composition of employees and the amounts and types of tools and materials required for production of products are similar for each operating segment.
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.
 
Three Months Ended
 
May 2, 2015
 
May 3, 2014
 
Revenue
 
% of
Revenue
 
Y/Y%
 
Revenue
 
% of
Revenue
Industrial
$
390,712

 
48
%
 
20
%
 
$
325,950

 
47
%
Automotive
139,707

 
17
%
 
3
%
 
135,998

 
20
%
Consumer
109,032

 
13
%
 
40
%
 
77,644

 
11
%
Communications
181,568

 
22
%
 
17
%
 
154,944

 
22
%
Total revenue
$
821,019

 
100
%
 
18
%
 
$
694,536

 
100
%

 
Six Months Ended
 
May 2, 2015
 
May 3, 2014
 
Revenue
 
% of
Revenue*
 
Y/Y%
 
Revenue
 
% of
Revenue*
Industrial
$
742,415

 
47
%
 
21
%
 
$
614,771

 
46
%
Automotive
263,747

 
17
%
 
1
%
 
260,666

 
20
%
Consumer
204,141

 
13
%
 
34
%
 
152,057

 
11
%
Communications
382,702

 
24
%
 
30
%
 
295,280

 
22
%
Total revenue
$
1,593,005

 
100
%
 
20
%
 
$
1,322,774

 
100
%
____________
* The sum of the individual percentages does not equal the total due to rounding.
Revenue Trends by Geographic Region
Revenue by geographic region, based on the primary location of the Company's customers’ design activity for its products, for the three- and six-month periods ended May 2, 2015 and May 3, 2014 were as follows:
 
Three Months Ended
 
Six Months Ended
Region
May 2, 2015
 
May 3, 2014
 
May 2, 2015
 
May 3, 2014
United States
$
276,193

 
$
193,608

 
$
510,840

 
$
375,906

Rest of North and South America
22,200

 
25,431

 
45,360

 
44,867

Europe
251,402

 
232,299

 
489,983

 
432,986

Japan
82,238

 
74,591

 
164,906

 
145,682

China
126,449

 
109,583

 
257,168

 
210,067

Rest of Asia
62,537

 
59,024

 
124,748

 
113,266

Total revenue
$
821,019

 
$
694,536

 
$
1,593,005

 
$
1,322,774


14



In the three- and six-month periods ended May 2, 2015 and May 3, 2014 , the predominant country comprising “Rest of North and South America” is Canada; the predominant countries comprising “Europe” are Germany, Sweden, France and the United Kingdom; and the predominant countries comprising “Rest of Asia” are South Korea and Taiwan.

Note 9 – Fair Value
The Company defines fair value as the price that would be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
Level 1  — Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2  — Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability.
Level 3  — Level 3 inputs are unobservable inputs for the asset or liability in which there is little, if any, market activity for the asset or liability at the measurement date.
The tables below set forth by level the Company’s financial assets and liabilities, excluding accrued interest components, that are accounted for at fair value on a recurring basis as of May 2, 2015 and November 1, 2014 . The tables exclude cash on hand and assets and liabilities that are measured at historical cost or any basis other than fair value. As of May 2, 2015 and November 1, 2014 , the Company held $109.2 million and $121.3 million , respectively, of cash and held-to-maturity investments that were excluded from the tables below.

15



 
May 2, 2015
 
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
$
188,633

 
$

 
$

 
$
188,633

Corporate obligations (1)

 
338,377

 

 
338,377

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

 
2,233,377

 

 
2,233,377

Floating rate notes, issued at par

 
40,073

 

 
40,073

Floating rate notes (1)

 
65,203

 

 
65,203

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

 
99,909

 

 
99,909

Other assets:
 
 
 
 
 
 
 
Deferred compensation investments
22,573

 

 

 
22,573

Total assets measured at fair value
$
211,206

 
$
2,776,939

 
$

 
$
2,988,145

Liabilities
 
 
 
 
 
 
 
Forward foreign currency exchange contracts (2)

 
10,415

 

 
10,415

Contingent consideration

 

 
4,741

 
4,741

Interest rate swap agreements

 
19,733

 

 
19,733

Total liabilities measured at fair value
$

 
$
30,148

 
$
4,741

 
$
34,889

 
(1)
The amortized cost of the Company’s investments classified as available-for-sale as of May 2, 2015 was $2.4 billion .
(2)
The Company has a master netting arrangement by counterparty with respect to derivative contracts. See Note 10, Derivatives, for more information related to the Company's master netting arrangements.

16



 
November 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
$
178,067

 
$

 
$

 
$
178,067

Corporate obligations (1)

 
269,901

 

 
269,901

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

 
2,122,120

 

 
2,122,120

Floating rate notes, issued at par

 
85,061

 

 
85,061

Floating rate notes (1)

 
50,010

 

 
50,010

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

 
40,044

 

 
40,044

Other assets:
 
 
 
 
 
 
 
Deferred compensation investments
21,393

 

 

 
21,393

Interest rate swap agreements

 
1,723

 

 
1,723

Total assets measured at fair value
$
199,460

 
$
2,568,859

 
$

 
$
2,768,319

Liabilities
 
 
 
 
 
 
 
Contingent consideration

 

 
4,806

 
4,806

Forward foreign currency exchange contracts (2)

 
10,093

 

 
10,093

Total liabilities measured at fair value
$

 
$
10,093

 
$
4,806

 
$
14,899

 
(1)
The amortized cost of the Company’s investments classified as available-for-sale as of November 1, 2014 was $2.3 billion .
(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. The fair value of these instruments is based upon valuation models using current market information such as strike price, spot rate, maturity date and volatility.

Interest rate swap agreements — The fair value of interest rate swap agreements is based on the quoted market price for the same or similar financial instruments.


17



Contingent consideration — The fair value of the contingent consideration was estimated utilizing the income approach and is based upon significant inputs not observable in the market. The income approach is based on two steps. The first step involves a projection of the cash flows that is based on the Company’s estimates of the timing and probability of achieving the defined milestones. The second step involves converting the cash flows into a present value equivalent through discounting. The discount rate reflects the Baa costs of debt plus the relevant risk associated with the asset and the time value of money.
The fair value measurement of the contingent consideration encompasses the following significant unobservable inputs:  
Unobservable Inputs
Range
Estimated contingent consideration payments
$5,000
Discount rate
0% - 10%
Timing of cash flows
1 year
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) from November 1, 2014 to May 2, 2015 :  
 
Contingent
Consideration
Balance as of November 1, 2014
$
4,806

Fair value adjustment (1)
67

Effect of foreign currency
(132
)
Balance as of May 2, 2015
$
4,741

 
(1) Recorded in research and development expense in the Company's condensed consolidated statements of income.
Financial Instruments Not Recorded at Fair Value on a Recurring Basis
On April 4, 2011 , the Company issued $375.0 million aggregate principal amount of 3.0%  senior unsecured notes due April 15, 2016 (the 2016 Notes) with semi-annual fixed interest payments due on April 15 and October 15 of each year, commencing October 15, 2011 . Based on quotes received from third-party banks, the fair value of the 2016 Notes as of May 2, 2015 and November 1, 2014 was $383.0 million and $386.3 million , respectively, and is classified as a Level 1 measurement according to the fair value hierarchy.
On June 3, 2013 , the Company issued $500.0 million aggregate principal amount of 2.875%  senior unsecured notes due June 1, 2023 (the 2023 Notes) with semi-annual fixed interest payments due on June 1 and December 1 of each year, commencing December 1, 2013 . Based on quotes received from third-party banks, the fair value of the 2023 Notes as of May 2, 2015 and November 1, 2014 was $495.3 million and $483.5 million , respectively, and is classified as a Level 1 measurement according to the fair value hierarchy.


18



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 certain recorded assets and liabilities in a non-functional currency. Changes in the fair value of these undesignated hedges are recognized in other (income) expense immediately as an offset to the changes in the fair value of the asset or liability being hedged. As of May 2, 2015 and November 1, 2014 , the total notional amount of these undesignated hedges was $41.9 million and $45.2 million , respectively. The fair value of these undesignated hedges in the Company’s condensed consolidated balance sheets as of May 2, 2015 and November 1, 2014 was immaterial .
The total notional amounts of forward foreign currency derivative instruments designated as hedging instruments of cash flow hedges denominated in Euros, British Pounds, Philippine Pesos and Japanese Yen as of May 2, 2015 and November 1, 2014 was $178.4 million and $183.5 million , respectively. The fair values of forward foreign currency derivative instruments designated as hedging instruments in the Company’s condensed consolidated balance sheets as of May 2, 2015 and November 1, 2014 were as follows:
 
 
 
Fair Value At
 
Balance Sheet Location
 
May 2, 2015
 
November 1, 2014
Forward foreign currency exchange contracts
Accrued liabilities
 
$
10,402

 
$
10,584

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 October 28, 2014 , the Company entered into forward starting interest rate swap transactions to hedge its exposure to the variability in future cash flows due to changes in interest rates for debt issuances expected to occur in the future. Amounts reported in OCI related to these derivatives will be reclassified from OCI to earnings as interest expense is incurred on the forecasted hedged fixed-rate debt, adjusting interest expense to reflect the fixed-rate entered into by the forward starting swaps. These cash flow instruments hedge forecasted interest payments to be made through 2025. These forward starting swaps will be terminated on the day the hedged forecasted debt issuances occur, but no later than December 1, 2015 , if the hedged forecasted debt issuances do not occur. The total notional value of these hedges as of May 2, 2015 and November 1, 2014 was $500.0 million . The fair value of these hedges was $19.7 million as of May 2, 2015 , included in accrued liabilities, and $1.7 million as of November 1, 2014 , included in other assets, in the Company's condensed consolidated balance sheet.
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.
The market risk associated with the Company’s derivative instruments results from currency exchange rate or interest rate movements that are expected to offset the market risk of the underlying transactions, assets and liabilities being hedged. The counterparties to the agreements relating to the Company’s derivative instruments consist of a number of major international financial institutions with high credit ratings. Based on the credit ratings of the Company’s counterparties as of May 2, 2015 , 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

19



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.

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

All of the Company’s derivative financial instruments are subject to master netting arrangements that allow the Company and its counterparties to net settle amounts owed to each other. Derivative assets and liabilities that can be net settled under these arrangements have been presented in the Company's consolidated balance sheet on a net basis. As of  May 2, 2015  and November 1, 2014 , none of the master netting arrangements involved collateral. The following table presents the gross amounts of the Company's derivative assets and liabilities and the net amounts recorded in our consolidated balance sheet:
 
 
 
May 2, 2015
 
November 1, 2014
Gross amount of recognized liabilities
$
(11,119
)
 
$
(10,736
)
Gross amounts recognized assets offset in the consolidated balance sheet
704

 
643

Net liabilities presented in the consolidated balance sheet
$
(10,415
)
 
$
(10,093
)

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 1 ) or more frequently if indicators of impairment exist. In the first quarter of 2015, the Company implemented organizational changes designed to accelerate the Company's growth by increasing the speed and impact of its technological innovation. The organizational changes combine the Company's market and technology teams to address the evolving needs of the markets and customers the Company serves. The Company performed an impairment analysis immediately prior to and subsequent to the reorganization and evaluated goodwill for impairment as of the date of reorganization. The Company identified its reporting units to be its six operating segments. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. The Company determines the fair value of its reporting units using the income approach methodology of valuation that includes the discounted cash flow method, as well as other generally accepted valuation methodologies. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, the Company performs the second step of the goodwill impairment test to determine the amount of impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit with the carrying value of that reporting unit. Based on this analysis, no impairment was identified. The Company's next annual impairment assessment will be performed as of the first day of the fourth quarter of fiscal 2015 unless indicators arise that would require the Company to re-evaluate at an earlier date. The following table presents the changes in goodwill during the first six months of fiscal 2015 :

20



 
Six Months Ended
 
May 2, 2015
Balance as of November 1, 2014
$
1,642,438

Goodwill adjustment related to acquisition of Hittite (Note 16)
3,757

Goodwill adjustment related to acquisition of Metroic Limited (1)
118

Foreign currency translation adjustment
(2,699
)
Balance as of May 2, 2015
$
1,643,614

(1) Represents changes to goodwill as a result of finalizing working capital adjustments related to this acquisition.
Intangible Assets
The Company reviews finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of assets may not be recoverable. Recoverability of these assets is determined by comparison of their carrying value to future undiscounted cash flows the assets are expected to generate over their remaining economic lives. If such assets are considered to be impaired, the impairment to be recognized in earnings equals the amount by which the carrying value of the assets exceeds their fair value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique. As of May 2, 2015 and November 1, 2014 , the Company’s finite-lived intangible assets consisted of the following:
 
May 2, 2015
 
November 1, 2014
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Customer relationships
$
624,900

 
$
54,196

 
$
624,900

 
$
19,473

Technology-based
16,200

 
4,047

 
16,200

 
1,627

Backlog
25,500

 
19,904

 
25,500

 
7,154

Total
$
666,600

 
$
78,147

 
$
666,600

 
$
28,254

For the three- and six-month periods ended May 2, 2015 , amortization expense related to finite-lived intangible assets was $25.2 million and $49.9 million , respectively. For each of the three- and six-month periods ended May 3, 2014 , amortization expense related to finite-lived intangible assets was $0.1 million . The remaining amortization expense will be recognized over an estimated weighted average life of approximately 4.1 years.
The Company expects annual amortization expense for intangible assets to be:
Fiscal Year
Amortization Expense
Remainder of fiscal 2015

$42,200

2016

$73,208

2017

$73,208

2018

$72,149

2019

$69,433

2020

$69,433

Indefinite-lived intangible assets are tested for impairment on an annual basis on the first day of the fourth quarter (on or about August 1 ) or more frequently if indicators of impairment exist. The impairment test involves the comparison of the fair values of the intangible assets with their carrying amount. No impairment of intangible assets resulted from the impairment tests in any of the fiscal years 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 (R&D) efforts. Upon completion of the projects, the IPR&D assets will be amortized over their estimated useful lives.

Indefinite-lived intangible assets consisted of $32.8 million and $33.1 million of IPR&D as of May 2, 2015 and November 1, 2014 , respectively.


21



Note 12 – Pension Plans
The Company has various defined benefit pension and other retirement plans for certain non-U.S. employees that are consistent with local statutory requirements and practices. The Company’s funding policy for its foreign defined benefit pension plans is consistent with the local requirements of each country. The plans’ assets consist primarily of U.S. and non-U.S. equity securities, bonds, property and cash.
Net periodic pension cost of non-U.S. plans is presented in the following table:
 
Three Months Ended
 
Six Months Ended
 
May 2, 2015
 
May 3, 2014
 
May 2, 2015
 
May 3, 2014
Service cost
$
4,056

 
$
3,436

 
$
8,880

 
$
6,834

Interest cost
3,008

 
3,577

 
6,590

 
7,107

Expected return on plan assets
(3,504
)
 
(3,463
)
 
(7,669
)
 
(6,879
)
Amortization of initial net obligation
5

 
5

 
10

 
10

Amortization of prior service cost
(62
)
 
(62
)
 
(124
)
 
(122
)
Amortization of net loss
1,924

 
1,165

 
3,862

 
2,300

Net periodic pension cost
$
5,427

 
$
4,658

 
$
11,549

 
$
9,250

Pension contributions of $3.4 million and $7.9 million were made by the Company during the three- and six-month periods ended May 2, 2015 , respectively. The Company presently anticipates contributing an additional $5.9 million to fund its defined benefit pension plans in fiscal year 2015 for a total of $13.8 million .

Note 13 – Revolving Credit Facility

On December 19, 2012 , the Company entered into a five -year, $500.0 million senior unsecured revolving credit facility with certain institutional lenders (the Credit Agreement). In June 2014, the Company amended this credit facility to temporarily increase the amount of allowed subsidiary indebtedness related to the financing of the Acquisition. 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% or (iii) one month Eurodollar Rate plus 1.00%) plus a margin based on the Company's debt rating. The terms of the facility impose restrictions on the Company’s ability to undertake certain transactions, to create certain liens on assets and to incur certain subsidiary indebtedness. In addition, the Credit Agreement contains a consolidated leverage ratio covenant of total consolidated funded debt to consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA) of not greater than 3.0 to 1.0 . As of May 2, 2015 , the Company was compliant with these covenants .

Note 14 – Debt
On April 4, 2011 , the Company issued $375.0 million aggregate principal amount of 3.0%  senior unsecured notes due April 15, 2016 (the 2016 Notes) with semi-annual fixed interest payments due on April 15 and October 15 of each year, commencing October 15, 2011 . The sale of the 2016 Notes was made pursuant to the terms of an underwriting agreement, dated March 30, 2011 , between the Company and Credit Suisse Securities (USA) LLC and Merrill Lynch, Pierce, Fenner and Smith Incorporated, as representative of the several underwriters named therein. The net proceeds of the offering were $370.5 million , after issuing at a discount and deducting expenses, underwriting discounts and commissions, which will be amortized over the term of the 2016 Notes. The indenture governing the 2016 Notes contains covenants that may limit the Company’s ability to: incur, create, assume or guarantee any debt for borrowed money secured by a lien upon a principal property; enter into sale and lease-back transactions with respect to a principal property; and consolidate with or merge into, or transfer or lease all or substantially all of its assets to, any other party. As of May 2, 2015 , 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

22



lock agreement with Bank of America. This agreement allowed the Company to lock a 10-year US Treasury rate of 1.7845% through June 14, 2013 for its anticipated issuance of the 2023 Notes. Upon issuing the 2023 Notes, the Company simultaneously terminated the treasury rate lock agreement resulting in a gain of approximately $11.0 million . This gain will be amortized into interest expense over the 10-year term of the 2023 Notes. The sale of the 2023 Notes was made pursuant to the terms of an underwriting agreement, dated as of May 22, 2013 , among the Company and J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Credit Suisse Securities (USA) LLC, as the representatives of the several underwriters named therein. The net proceeds of the offering were $493.9 million , after discount and issuance costs. Debt discount and issuance costs will be amortized through interest expense over the term of the 2023 Notes. The indenture governing the 2023 Notes contains covenants that may limit the Company's ability to: incur, create, assume or guarantee any debt for borrowed money secured by a lien upon a principal property; enter into sale and lease-back transactions with respect to a principal property; and consolidate with or merge into, or transfer or lease all or substantially all of its assets to, any other party. As of May 2, 2015 , 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.
On July 22, 2014, the Company entered into a 90-day term loan facility in an aggregate principal amount of $2.0 billion with Credit Suisse AG, as Administrative Agent, and each lender from time to time party thereto (the Term Loan Agreement) to finance the Acquisition. The outstanding balance due under the Term Loan Agreement was repaid on August 29, 2014 . Loans under the Term Loan Agreement bore interest at the Eurodollar Rate (as defined in the Term Loan Agreement) plus 1.00% (1.16% as of August 2, 2014). Payments of the principal amounts of revolving loans under the Term Loan Agreement were due no later than October 20, 2014 and did not require interim amortization. Expenses incurred related to the debt were amortized over the 90-day term. The Term Loan Agreement contained customary representations and warranties and affirmative and negative covenants, including, among others, limitations on liens, indebtedness of subsidiaries, mergers and other fundamental changes, sales and other dispositions of property or assets and transactions with affiliates. The Term Loan Agreement contained 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.
The Company’s principal payments related to its debt obligations are as follows: $375.0 million in fiscal 2016 and $500.0 million in fiscal 2023 .

Note 15 – Inventories
Inventories are valued at the lower of cost (first-in, first-out method) or market. The valuation of inventory requires the Company to estimate obsolete or excess inventory as well as inventory that is not of saleable quality. The Company employs a variety of methodologies to determine the net realizable value of its inventory. While a portion of the calculation to record inventory at its net realizable value is based on the age of the inventory and lower of cost or market calculations, a key factor in estimating obsolete or excess inventory requires the Company to estimate the future demand for its products. If actual demand is less than the Company’s estimates, impairment charges, which are recorded to cost of sales, may need to be recorded in future periods. Inventory in excess of saleable amounts is not valued, and the remaining inventory is valued at the lower of cost or market. Approximately $3.0 million of raw materials have been classified as non-current and are presented within the condensed consolidated balance sheet as other assets as the Company does not expect this inventory to be sold within one year. This inventory was purchased as part of a planned transition from a principal foundry supplier and was acquired by the Company through the Acquisition. The larger than normal purchase was made to maintain an adequate supply of the raw material for customers, which has a natural life of five to ten years.
Inventories at May 2, 2015 and November 1, 2014 were as follows:
 
May 2, 2015
 
November 1, 2014
Raw materials
$
47,982

 
$
47,267

Work in process
230,622

 
216,765

Finished goods
115,890

 
103,895

Total inventories
$
394,494

 
$
367,927

Non-current inventories
$
2,981

 
$
8,793



23



Note 16 – Acquisitions

Hittite Microwave Corporation

On July 22, 2014 , the Company completed its acquisition of Hittite Microwave Corporation (Hittite), a company that designed and developed high performance integrated circuits, modules, subsystems and instrumentation for radio frequency, microwave and millimeterwave applications. The total consideration paid to acquire Hittite was approximately $2.4 billion , financed through a combination of existing cash on hand and a 90-day term loan facility of $2.0 billion . The Acquisition is expected to expand the Company’s technology position in high performance signal processing solutions and drive growth in key markets. The Company completed the Acquisition through a cash tender offer (the Offer) by BBAC Corp., a wholly-owned subsidiary of the Company, for all of the outstanding shares of common stock, par value $0.01 per share, of Hittite at a purchase price of $78.00 per share, net to the seller in cash, without interest, less any applicable withholding taxes. After completion of the Offer, BBAC Corp. merged with and into Hittite, with Hittite continuing as the surviving corporation and a wholly-owned subsidiary of the Company.
During the first six months of fiscal 2015, the Company recorded an acquisition accounting adjustment of $3.8 million to deferred income taxes and goodwill. The Acquisition accounting is not complete and additional information that existed at the acquisition date may become known to the Company during the remainder of the measurement period. As of the filing date of this Quarterly Report on Form 10-Q, the Company is still in the process of valuing the assets acquired of Hittite's business, including inventory and deferred income taxes.
The following unaudited pro forma consolidated financial information presents the Company's combined results of operations after giving effect to the Acquisition and assumes that the Acquisition, which closed on July 22, 2014, was completed on November 4, 2012 (the first day of the Company's 2013 fiscal year). The pro forma consolidated financial information has been calculated after applying the Company's accounting policies and includes adjustments for amortization expense of acquired intangible assets and the consequential tax effects.
These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the operating results of the Company that would have been achieved had the Acquisition actually taken place on November 4, 2012. In addition, these results are not intended to be a projection of future results and do not reflect events that may occur after the Acquisition, including but not limited to revenue enhancements, cost savings or operating synergies that the combined Company may achieve as a result of the Acquisition.

 (thousands, except per share data)
Three Months Ended
 
Six Months Ended
 
May 3, 2014
 
May 3, 2014
Revenue
$
768,969

 
$
1,465,858

Net income
$
194,065

 
$
350,737


Note 17 – Income Taxes
The Company has provided for potential tax liabilities due in the various jurisdictions in which the Company operates. Judgment is required in determining the worldwide income tax expense provision. In the ordinary course of global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of cost reimbursement arrangements among related entities. Although the Company believes its estimates are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in the historical income tax provisions and accruals. Such differences could have a material impact on the Company’s income tax provision and operating results in the period in which such determination is made.
The Company’s effective tax rate reflects the applicable tax rate in effect in the various tax jurisdictions around the world where our income is earned. The Company's effective tax rate for all periods presented is lower than the U.S. federal statutory rate of 35% , primarily due to lower statutory tax rates applicable to the Company's operations in jurisdictions in which the Company earns a portion of its income.  
The Company has filed a petition with the U.S. Tax Court for one open matter for fiscal years 2006 and 2007 that pertains to Section 965 of the Internal Revenue Code related to the beneficial tax treatment of dividends paid from foreign owned companies under The American Jobs Creation Act. The Company recorded a $36.5 million reserve for this potential liability in the fourth quarter of fiscal 2013.
All of the Company's U.S. federal tax returns prior to fiscal year 2011 are no longer subject to examination.

24



All of the Company's Ireland tax returns prior to fiscal year 2010 are no longer subject to examination.
Unrealized Tax Benefits
The following table summarizes the changes in the total amounts of unrealized tax benefits for the six months ended May 2, 2015 .
 
Unrealized Tax Benefits
Balance as of November 1, 2014
$
65,464

Additions for tax positions related to current year
215

Additions for tax positions related to prior years
4,074

Reductions for tax positions related to settlements with taxing authorities
(1,186
)
Reductions due to lapse of applicable statute of limitations
(766
)
Balance as of May 2, 2015
$
67,801


Note 18 – New Accounting Pronouncements
Standards Implemented
Income Taxes
In July 2013, the Financial Accounting Standards Board (FASB) issued ASU No. 2013-11 (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 requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward, with certain exceptions. ASU No. 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013, which is the Company's first quarter of fiscal year 2015. Early adoption is permitted. The adoption of ASU No. 2013-11 in the first quarter of fiscal 2015 did not impact the Company's financial condition or results of operations.
Standards to be Implemented
Compensation - Retirement Benefits
In April, 2015, the FASB issued ASU No. 2015-04 (ASU 2015-04), Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets, which provides a practical expedient for entities with a fiscal year-end that does not coincide with a month-end, that permits the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end and apply that practical expedient consistently from year to year. Entities are required to disclose the accounting policy election and the date used to measure defined benefit plan assets and obligations. ASU 2015-04 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early application is permitted. Amendments should be applied prospectively. The adoption of ASU 2015-04 in the first quarter of fiscal 2017 is not expected to have a material impact on the Company’s financial condition or results of operations.
Interest - Imputation of Interest
In April, 2015, the FASB issued ASU No. 2015-03 (ASU 2015-03), Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. An entity should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. The adoption of ASU 2015-03 in the first quarter of fiscal 2017 is not expected to have a material impact on the Company’s financial condition or results of operations.
Consolidation
In February, 2015, the FASB issued ASU No. 2015-02 (ASU 2015-02), Amendments to the Consolidation Analysis. ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. ASU 2015-02 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. A reporting entity may apply the amendments in this guidance

25



using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. A reporting entity also may apply the amendments retrospectively. The adoption of ASU 2015-02 in the first quarter of fiscal 2017 is not expected to have a material impact on the Company’s financial condition or results of operations.
Stock Compensation
I n June 2014, the FASB issued ASU No. 2014-12 (ASU 2014-12), Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period , which requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU 2014-12 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, which is the Company’s first quarter of fiscal year 2017. Early adoption is permitted. The adoption of ASU 2014-12 in the first quarter of fiscal 2017 is not expected to have a material impact on the Company's financial condition or results of operations.
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, the guidance requires improved disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. H owever, in early April 2015, the FASB voted to propose to defer the effective date of the new revenue recognition standard by one year, as a result, public entities would apply the new revenue standard to annual reporting periods beginning after December 31, 2017. This proposal is still being evaluated and final determination of the effective date is expected by the end of 2015. Early application is not permitted. The guidance allows for the amendment to be applied either retrospectively to each prior reporting period presented or retrospectively as a cumulative-effect adjustment as of the date of adoption. The Company is in the process of evaluating the impact of adoption on its consolidated financial statements.
Discontinued Operations
In April 2014, the FASB issued ASU No. 2014-08 (ASU 2014-08), Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity , which raises the threshold for disposals to qualify as discontinued operations. Under the new guidance, a disposal representing a strategic shift that has (or will have) a major effect on an entity’s financial results or a business activity classified as held for sale, should be reported as discontinued operations. ASU 2014-08 also expands the disclosure requirements for discontinued operations and adds new disclosures for individually significant dispositions that do not qualify as discontinued operations. ASU 2014-08 is effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2014, which is the Company's first quarter of fiscal year 2016. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in the financial statements previously issued or available for issuance. As of May 2, 2015 , there have been no disposals or classifications as held for sale that would be subject to ASU 2014-08. As such, the Company will consider the adoption of this standard upon the earlier of a disposal or classification as held for sale.

Note 19 – Subsequent Events
On May 18, 2015 , the Board of Directors of the Company declared a cash dividend of $0.40 per outstanding share of common stock. The dividend will be paid on June 9, 2015 to all shareholders of record at the close of business on May 29, 2015 .



26



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 1, 2014 .
This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements regarding future events and our future results that are subject to the safe harbor created under the Private Securities Litigation Reform Act of 1995 and other safe harbors under the Securities Act of 1933 and the Securities Exchange Act of 1934. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “may,” “could” and “will,” and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections regarding our future financial performance; our anticipated growth and trends in our businesses; our future capital needs and capital expenditures; our future market position and expected competitive changes in the marketplace for our products; our ability to pay dividends or repurchase stock; our ability to service our outstanding debt; our expected tax rate; the effect of new accounting pronouncements; our ability to successfully integrate acquired businesses and technologies; and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are inherently subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified in Part II, Item 1A. “Risk Factors” and elsewhere herein. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements, including to reflect events or circumstances occurring after the date of the filing of this report, except to the extent required by law.

Results of Operations
(all tabular amounts in thousands except per share amounts and percentages)
Overview
 
Three Months Ended
 
May 2, 2015
 
May 3, 2014
 
$ Change
 
% Change
Revenue
$
821,019

 
$
694,536

 
$
126,483

 
18
%
Gross margin %
66.4
%
 
66.1
%
 
 
 
 
Net income
$
205,338

 
$
187,433

 
$
17,905

 
10
%
Net income as a % of revenue
25.0
%
 
27.0
%
 
 
 
 
Diluted EPS
$
0.65

 
$
0.59

 
$
0.06

 
10
%

 
Six Months Ended
 
May 2, 2015
 
May 3, 2014
 
$ Change
 
% Change