Analog Devices, Inc.
ANALOG DEVICES INC (Form: 10-Q, Received: 08/17/2016 08:23:00)


 
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 July 30, 2016
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 July 30, 2016 there were 307,474,197 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
 
Nine Months Ended
 
July 30, 2016
 
August 1, 2015
 
July 30, 2016
 
August 1, 2015
Revenue
$
869,591

 
$
863,365

 
$
2,417,786

 
$
2,456,370

Cost of sales (1)
297,301

 
294,328

 
857,300

 
838,904

Gross margin
572,290

 
569,037

 
1,560,486

 
1,617,466

Operating expenses:
 
 
 
 
 
 
 
Research and development (1)
163,227

 
160,784

 
480,890

 
466,723

Selling, marketing, general and administrative (1)
122,909

 
120,030

 
342,557

 
357,572

Amortization of intangibles
17,447

 
22,954

 
52,224

 
70,960

Special charges

 

 
13,684

 

 
303,583

 
303,768

 
889,355

 
895,255

Operating income
268,707

 
265,269

 
671,131

 
722,211

Nonoperating expense (income):
 
 
 
 
 
 
 
Interest expense
18,476

 
6,755

 
49,993

 
20,291

Interest income
(5,665
)
 
(2,229
)
 
(14,107
)
 
(6,282
)
Other, net
(504
)
 
1,265

 
1,758

 
2,765

 
12,307

 
5,791

 
37,644

 
16,774

Income before income taxes
256,400

 
259,478

 
633,487

 
705,437

Provision for income taxes
25,970

 
43,000

 
67,980

 
104,864

Net income
$
230,430

 
$
216,478

 
$
565,507

 
$
600,573

Shares used to compute earnings per share – basic
307,135

 
313,877

 
309,030

 
312,604

Shares used to compute earnings per share – diluted
310,558

 
318,187

 
312,534

 
316,973

Basic earnings per share
$
0.75

 
$
0.69

 
$
1.83

 
$
1.92

Diluted earnings per share
$
0.74

 
$
0.68

 
$
1.81

 
$
1.89

Dividends declared and paid per share
$
0.42

 
$
0.40

 
$
1.24

 
$
1.17

           (1) Includes stock-based compensation expense as follows:
 
 
 
 
 
 
 
           Cost of sales
$
1,844

 
$
2,196

 
$
5,922

 
$
6,795

           Research and development
$
6,682

 
$
6,839

 
$
20,032

 
$
20,129

           Selling, marketing, general and administrative
$
8,093

 
$
7,329

 
$
22,233

 
$
25,912

See accompanying notes.

1




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

 
Three Months Ended
 
Nine Months Ended
 
July 30, 2016
 
August 1, 2015
 
July 30, 2016
 
August 1, 2015
Net income
$
230,430

 
$
216,478

 
$
565,507

 
$
600,573

Foreign currency translation adjustments
(2,859
)
 
(7,871
)
 
(2,923
)
 
(15,345
)
Change in fair value of available-for-sale securities classified as short-term investments (net of taxes of $7, $62, $49 and $58, respectively)
(307
)
 
(164
)
 
223

 
57

Change in fair value of derivative instruments designated as cash flow hedges (net of taxes of $371, $202, $767, and $7,619, respectively)
(3,545
)
 
2,832

 
2,755

 
(11,984
)
Changes in pension plans including prior service cost, transition obligation, net actuarial loss and foreign currency translation adjustments (net of taxes of $50, $275, $152, and $838 respectively)
880

 
3,297

 
1,240

 
23,037

Other comprehensive (loss) income
(5,831
)
 
(1,906
)
 
1,295

 
(4,235
)
Comprehensive income
$
224,599

 
$
214,572

 
$
566,802

 
$
596,338


See accompanying notes.









2



ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(thousands, except share and per share amounts)
 
July 30, 2016
 
October 31, 2015 (as adjusted Note 1)
ASSETS
 

 
 

Current Assets
 
 
 
Cash and cash equivalents
$
1,103,670

 
$
884,353

Short-term investments
2,699,764

 
2,144,575

Accounts receivable, net
452,944

 
466,527

Inventories (1)
392,303

 
412,314

Deferred tax assets

 
129,241

Prepaid income tax
25,156

 
1,941

Prepaid expenses and other current assets
54,051

 
40,597

Total current assets
4,727,888

 
4,079,548

Property, Plant and Equipment, at Cost
 
 
 
Land and buildings
561,894

 
559,660

Machinery and equipment
1,983,187

 
1,932,727

Office equipment
57,997

 
54,099

Leasehold improvements
60,154

 
55,609

 
2,663,232

 
2,602,095

Less accumulated depreciation and amortization
2,034,138

 
1,957,985

Net property, plant and equipment
629,094

 
644,110

Other Assets
 
 
 
Deferred compensation plan investments
26,178

 
23,753

Other investments
27,899

 
17,482

Goodwill
1,639,033

 
1,636,526

Intangible assets, net
529,035

 
583,517

Deferred tax assets
33,661

 
33,280

Other assets
72,265

 
40,561

Total other assets
2,328,071

 
2,335,119

 
$
7,685,053

 
$
7,058,777

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
160,416

 
$
174,247

Deferred income on shipments to distributors, net
327,444

 
300,087

Income taxes payable
2,396

 
15,062

Debt, current

 
374,594

Accrued liabilities
188,437

 
249,595

Total current liabilities
678,693

 
1,113,585

Non-current liabilities
 
 
 
Long-term debt
1,731,758

 
495,341

Deferred income taxes
133,412

 
227,376

Deferred compensation plan liability
26,178

 
23,753

Other non-current liabilities
131,679

 
125,763

Total non-current liabilities
2,023,027

 
872,233

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, 307,474,197 shares issued and outstanding (312,060,682 on October 31, 2015)
51,247

 
52,011

Capital in excess of par value
362,357

 
634,484

Retained earnings
4,619,285

 
4,437,315

Accumulated other comprehensive loss
(49,556
)
 
(50,851
)
Total shareholders’ equity
4,983,333

 
5,072,959

 
$
7,685,053

 
$
7,058,777

(1)
Includes $2,554 and $2,923 related to stock-based compensation at July 30, 2016 and October 31, 2015 , respectively.
See accompanying notes.

3




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

   
Nine Months Ended
 
July 30, 2016
 
August 1, 2015
Cash flows from operating activities:
 
 
 
Net income
$
565,507

 
$
600,573

Adjustments to reconcile net income to net cash provided by operations:
 
 
 
Depreciation
100,424

 
97,459

Amortization of intangibles
55,703

 
73,791

Stock-based compensation expense
48,187

 
52,836

Loss on extinguishment of debt
3,290

 

Excess tax benefit-stock options
(7,180
)
 
(22,150
)
Deferred income taxes
5,072

 
(26,564
)
Other non-cash activity
2,371

 
9,402

Changes in operating assets and liabilities
20,537

 
(75,524
)
Total adjustments
228,404

 
109,250

Net cash provided by operating activities
793,911

 
709,823

Cash flows from investing activities:
 
 
 
Purchases of short-term available-for-sale investments
(5,855,930
)
 
(4,275,797
)
Maturities of short-term available-for-sale investments
5,010,942

 
2,939,035

Sales of short-term available-for-sale investments
290,071

 
1,091,648

Additions to property, plant and equipment
(86,173
)
 
(108,153
)
Payments for acquisitions, net of cash acquired
(2,203
)
 
(7,065
)
Increase in other assets
(18,048
)
 
(9,377
)
Net cash used for investing activities
(661,341
)
 
(369,709
)
Cash flows from financing activities:
 
 
 
Early termination of debt
(378,156
)
 

Payments of derivative instruments
(33,430
)
 

Proceeds from debt
1,235,331

 

Payments of deferred financing fees
(22,208
)
 

Dividend payments to shareholders
(383,537
)
 
(365,477
)
Repurchase of common stock
(368,649
)
 
(115,251
)
Proceeds from employee stock plans
39,342

 
114,871

Contingent consideration payment

 
(1,767
)
Changes in other financing activities
(7,423
)
 
(3,224
)
Excess tax benefit-stock options
7,180

 
22,150

Net cash provided by (used for) financing activities
88,450

 
(348,698
)
Effect of exchange rate changes on cash
(1,703
)
 
(3,152
)
Net increase (decrease) in cash and cash equivalents
219,317

 
(11,736
)
Cash and cash equivalents at beginning of period
884,353

 
569,233

Cash and cash equivalents at end of period
$
1,103,670

 
$
557,497

See accompanying notes.

4



ANALOG DEVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED JULY 30, 2016
(all tabular amounts in thousands except per share amounts and percentages)

Note 1 – Basis of Presentation
In the opinion of management, the information furnished in the accompanying condensed consolidated financial statements reflects all normal recurring adjustments that are necessary to fairly state the results for these interim periods and should be read in conjunction with Analog Devices, Inc.’s (the Company) Annual Report on Form 10-K for the fiscal year ended October 31, 2015 (fiscal 2015) 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 29, 2016 (fiscal 2016) or any future period.
Certain amounts reported in previous periods have been reclassified to conform to the fiscal 2016 presentation. As further discussed in Note 17, New Accounting Pronouncements , the Company adopted the Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2015-03, Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03) , in the first quarter of fiscal 2016. As shown in the table below, pursuant to the guidance in ASU 2015-03 the Company has reclassified unamortized debt issuance costs associated with its senior notes in the Condensed Consolidated Balance Sheet as of October 31, 2015 as follows (in thousands):
 
October 31, 2015
as presented
 
Reclassifications
 
October 31, 2015
as adjusted
Other assets
$
43,962

 
$
(3,401
)
 
$
40,561

Total other assets
$
2,338,520

 
$
(3,401
)
 
$
2,335,119

Total assets
$
7,062,178

 
$
(3,401
)
 
$
7,058,777

Current debt
$
374,839

 
$
(245
)
 
$
374,594

Current liabilities
$
1,113,830

 
$
(245
)
 
$
1,113,585

Long-term debt
$
498,497

 
$
(3,156
)
 
$
495,341

Total non-current liabilities
$
875,389

 
$
(3,156
)
 
$
872,233

Total liabilities and shareholders equity
$
7,062,178

 
$
(3,401
)
 
$
7,058,777

The Company has a 52-53 week fiscal year that ends on the Saturday closest to the last day in October. Fiscal 2016 and fiscal 2015 are 52 -week fiscal years.
Proposed acquisition of Linear Technology Corporation
On July 26, 2016, the Company entered into a definitive agreement (the “Merger Agreement”) to acquire Linear Technology Corporation (“Linear”), an independent manufacturer of high performance linear integrated circuits. See Note 15, Acquisitions, for additional information.

Note 2 – Revenue Recognition
Revenue from product sales to customers is generally recognized when title passes, which is upon shipment in the U.S. and in certain foreign countries. Revenue from product sales to customers in other foreign countries is recognized subsequent to product shipment. Title for shipments to these other foreign countries ordinarily passes within a week of shipment. Accordingly, the Company defers the revenue recognized relating to these other foreign countries until title has passed. For multiple element arrangements, the Company allocates arrangement consideration among the elements based on the relative fair values of those elements as determined using vendor-specific objective evidence or third-party evidence. The Company uses its best estimate of selling price to allocate arrangement consideration between the deliverables in cases where neither vendor-specific objective evidence nor third-party evidence is available. A reserve for sales returns and allowances for customers is recorded based on historical experience or specific identification of an event necessitating a reserve.
Revenue from contracts with the United States government, government prime contractors and some commercial customers is generally recorded on a percentage of completion basis using either units delivered or costs incurred as the measurement basis for progress towards completion. The output measure is used to measure results directly and is generally the best measure of progress toward completion in circumstances in which a reliable measure of output can be established. Estimated revenue in excess of amounts billed is reported as unbilled receivables. Contract accounting requires judgment in

5



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.
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 July 30, 2016 and October 31, 2015 , the Company had gross deferred revenue of  $413.7 million and $379.9 million , respectively, and gross deferred cost of sales of $86.3 million and $79.8 million , respectively.
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 nine-month period s ended July 30, 2016 and August 1, 2015 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

6



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 nine months of fiscal 2016 or fiscal 2015 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 nine-month period s ended July 30, 2016 and August 1, 2015 are as follows:
   
Three Months Ended
 
Nine Months Ended
Stock Options
July 30, 2016
 
August 1, 2015
 
July 30, 2016
 
August 1, 2015
Options granted (in thousands)
23

 
23

 
1,738

 
1,931

Weighted-average exercise price

$56.20

 

$63.39

 

$54.92

 

$57.18

Weighted-average grant-date fair value

$10.86

 

$11.52

 

$12.77

 

$10.35

Assumptions:
 
 
 
 
 
 
 
Weighted-average expected volatility
29.1%

 
25.0
%
 
34.2
%
 
25.8
%
Weighted-average expected term (in years)
5.1

 
5.3

 
5.1

 
5.3

Weighted-average risk-free interest rate
1.2
%
 
1.6
%
 
1.4
%
 
1.6
%
Weighted-average expected dividend yield
3.0
%
 
2.5
%
 
3.1
%
 
2.8
%
The Company utilizes the Monte Carlo simulation valuation model to value market-based restricted stock units. The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the performance conditions stipulated in the award grant and calculates the fair market value for the market-based restricted stock units granted. The Monte Carlo simulation model also uses stock price volatility and other variables to estimate the probability of satisfying the performance conditions, including the possibility that the market condition may not be satisfied, and the resulting fair value of the award. Information pertaining to the market-based restricted stock units and the related estimated assumptions used to calculate the fair value of the market-based restricted stock units granted during the nine-month period s ended July 30, 2016 and August 1, 2015 using the Monte Carlo simulation model are as follows:
 
Nine Months Ended
 
Nine Months Ended
Market-based Restricted Stock Units
July 30, 2016
 
August 1, 2015
Units granted (in thousands)
102

 
75

Grant-date fair value

$58.95

 

$55.67

Assumptions:
 
 
 
Historical stock price volatility
25.1
%
 
20.0
%
Risk-free interest rate
1.1
%
 
1.1
%
Expected dividend yield
3.0
%
 
2.8
%
The Company did not grant market-based restricted stock units during the three-month periods ended July 30, 2016 or August 1, 2015 .
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

7



close to the grant date of the employee share options; (3) the traded options have exercise prices that are both near-the-money and close to the exercise price of the employee share options; and (4) the remaining maturities of the traded options used to estimate volatility are at least one year. The Company utilizes historical volatility as an input variable of the Monte Carlo simulation to estimate the grant date fair value of market-based restricted stock units.  The market performance measure of these awards is based upon the interaction of multiple peer companies.  Given the Company is required to use consistent statistical properties in the Monte Carlo simulation and implied volatility is not available across the population, historical volatility must be used.
Expected term  — The Company uses historical employee exercise and option expiration data to estimate the expected term assumption for the Black-Scholes grant-date valuation. The Company believes that this historical data is currently the best estimate of the expected term of a new option, and that generally its employees exhibit similar exercise behavior.
Risk-free interest rate  — The yield on zero-coupon U.S. Treasury securities for a period that is commensurate with the expected term assumption is used as the risk-free interest rate.
Expected dividend yield  — Expected dividend yield is calculated by annualizing the cash dividend declared by the Company’s Board of Directors for the current quarter and dividing that result by the closing stock price on the date of grant. Until such time as the Company’s Board of Directors declares a cash dividend for an amount that is different from the current quarter’s cash dividend, the current dividend will be used in deriving this assumption. Cash dividends are not paid on options, 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 July 30, 2016 . 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 nine-month period s ended July 30, 2016 and August 1, 2015 , the Company had a sufficient APIC pool to cover any tax deficiencies recorded and as a result, these deficiencies did not affect its results of operations.
Stock-Based Compensation Activity
A summary of the activity under the Company’s stock option plans as of July 30, 2016 and changes during the three- and nine-month period s then ended is presented below:
Activity during the Three Months Ended July 30, 2016
Options
Outstanding
(in thousands)
 
Weighted-
Average Exercise
Price Per Share
 
Weighted-
Average
Remaining
Contractual
Term in Years
 
Aggregate
Intrinsic
Value
Options outstanding at April 30, 2016
12,972

 

$43.49

 
 
 
 
Options granted
23

 

$56.20

 
 
 
 
Options exercised
(496
)
 

$33.56

 
 
 
 
Options forfeited
(52
)
 

$50.88

 
 
 
 
Options expired

 

$54.29

 
 
 
 
Options outstanding at July 30, 2016
12,447

 

$43.87

 
6.1
 

$248,416

Options exercisable at July 30, 2016
7,176

 

$37.49

 
4.6
 

$189,050

Options vested or expected to vest at July 30, 2016 (1)
12,000

 

$43.50

 
6.0
 

$244,009

 
(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.

8



Activity during the Nine Months Ended July 30, 2016
Options
Outstanding
(in thousands)
 
Weighted-
Average Exercise
Price Per Share
Options outstanding at October 31, 2015
12,181

 

$41.60

Options granted
1,738

 

$54.92

Options exercised
(1,137
)
 

$34.72

Options forfeited
(326
)
 

$49.89

Options expired
(9
)
 

$42.74

Options outstanding at July 30, 2016
12,447

 

$43.87

During the three and nine months ended July 30, 2016 , the total intrinsic value of options exercised (i.e., the difference between the market price at exercise and the price paid by the employee to exercise the options) was $13.0 million and $26.9 million , respectively, and the total amount of proceeds received by the Company from the exercise of these options was $16.6 million and $39.3 million , respectively.
During the three and nine months ended August 1, 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 $19.9 million and $92.9 million , respectively, and the total amount of proceeds received by the Company from the exercise of these options was $20.0 million and $114.9 million , respectively.
A summary of the Company’s restricted stock unit award activity as of July 30, 2016 and changes during the three- and nine-month period s then ended is presented below:  
Activity during the Three Months Ended July 30, 2016
Restricted
Stock Units
Outstanding
(in thousands)
 
Weighted-
Average Grant-
Date Fair Value
Per Share
Restricted stock units outstanding at April 30, 2016
2,753

 

$49.89

Units granted
20

 

$51.53

Restrictions lapsed
(34
)
 

$43.49

Forfeited
(21
)
 

$49.83

Restricted stock units outstanding at July 30, 2016
2,718

 

$49.98


Activity during the Nine Months Ended July 30, 2016
Restricted
Stock Units
Outstanding
(in thousands)
 
Weighted-
Average Grant-
Date Fair Value
Per Share
Restricted stock units outstanding at October 31, 2015
2,698

 

$47.59

Units granted
997

 

$51.41

Restrictions lapsed
(848
)
 

$44.12

Forfeited
(129
)
 

$49.26

Restricted stock units outstanding at July 30, 2016
2,718

 

$49.98

As of July 30, 2016 , there was $125.8 million of total unrecognized compensation cost related to unvested stock-based awards comprised of stock options and restricted stock units. That cost is expected to be recognized over a weighted-average period of 1.4 years . The total grant-date fair value of shares that vested during the three- and nine-month period s ended July 30, 2016 was approximately $1.7 million and $59.0 million , respectively. The total grant-date fair value of shares that vested during the three- and nine-month period s ended August 1, 2015 was approximately $1.9 million and $60.7 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 $6.2 billion of the Company’s common stock 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 July 30, 2016 , the Company had

9



repurchased a total of approximately 147.0 million shares of its common stock for approximately $5.4 billion under this program. As of July 30, 2016 , an additional $792.5 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. 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. As a result of the Company's planned acquisition of Linear Technology Corporation (see Note 15, Acquisitions ), the Company temporarily suspended the common stock repurchase plan in the third quarter of 2016.

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 nine months of fiscal 2016 .
 
Foreign currency translation adjustment
 
Unrealized holding gains on available for sale securities classified as short-term investments
 
Unrealized holding (losses) on available for sale securities classified as short-term investments
 
Unrealized holding gains (losses) on derivatives
 
Pension plans
 
Total
October 31, 2015
$
(18,057
)
 
$
216

 
$
(544
)
 
$
(17,692
)
 
$
(14,774
)
 
$
(50,851
)
Other comprehensive income (loss) before reclassifications
(2,923
)
 
139

 
133

 
(109
)
 
869

 
(1,891
)
Amounts reclassified out of other comprehensive income (loss)

 

 

 
3,631

 
523

 
4,154

Tax effects

 
(24
)
 
(25
)
 
(767
)
 
(152
)
 
(968
)
Other comprehensive income (loss)
(2,923
)
 
115

 
108

 
2,755

 
1,240

 
1,295

July 30, 2016
$
(20,980
)
 
$
331

 
$
(436
)
 
$
(14,937
)
 
$
(13,534
)
 
$
(49,556
)


10




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

 
 
Three Months Ended
 
Nine Months Ended
 
 
Comprehensive Income Component
 
July 30, 2016
 
August 1, 2015
 
July 30, 2016
 
August 1, 2015
 
Location
Unrealized holding losses (gains) on derivatives
 
 
 
 
 
 
 
 
 
 
    Currency forwards
 
$
46

 
$
2,384

 
$
1,672

 
$
7,726

 
Cost of sales
 
 
93

 
1,350

 
783

 
4,586

 
Research and development
 
 
(577
)
 
2,153

 
(231
)
 
7,446

 
Selling, marketing, general and administrative
 
 

 

 

 
(1,466
)
 
(a)
     Treasury rate lock
 
(274
)
 
(274
)
 
(822
)
 
(822
)
 
Interest expense
     Swap rate lock
 
836

 

 
2,229

 

 
Interest expense
 
 
124

 
5,613

 
3,631

 
17,470

 
Total before tax
 
 
(141
)
 
(444
)
 
(807
)
 
(1,842
)
 
Tax
 
 
$
(17
)
 
$
5,169

 
$
2,824

 
$
15,628

 
Net of tax
 
 

 
 
 
 
 
 
 
 
Amortization of pension components
 
 
 
 
 

 
 
 
 
     Transition obligation
 
$
4

 
$
5

 
$
12

 
$
15

 
(b)
     Prior service credit
 

 
(61
)
 

 
(185
)
 
(b)
     Actuarial losses
 
168

 
1,899

 
511

 
5,761

 
(b)
 
 
172

 
1,843

 
523


5,591

 
Total before tax
 
 
(50
)
 
(275
)
 
(152
)
 
(838
)
 
Tax
 
 
$
122

 
$
1,568

 
$
371

 
$
4,753

 
Net of tax
 
 
 
 
 
 
 
 
 
 
 
Total amounts reclassified out of accumulated other comprehensive income (loss), net of tax
 
$
105

 
$
6,737

 
$
3,195

 
$
20,381

 
 
______________
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 October 31, 2015 .

The Company estimates $0.2 million of forward foreign currency derivative instruments included in OCI will be reclassified into earnings within the next twelve months. There was no ineffectiveness related to designated forward foreign currency derivative instruments in the three- and nine-month period s ended July 30, 2016 and August 1, 2015 .
Gross unrealized gains and losses on available-for-sale securities classified as short-term investments at July 30, 2016 and October 31, 2015 are as follows:
 
July 30, 2016
 
October 31, 2015
Unrealized gains on securities classified as short-term investments
$
372

 
$
233

Unrealized losses on securities classified as short-term investments
(451
)
 
(584
)
Net unrealized losses on securities classified as short-term investments
$
(79
)
 
$
(351
)
As of July 30, 2016 , the Company held 92 investment securities, 32 of which were in an unrealized loss position with gross unrealized losses of $0.5 million and an aggregate fair value of $1.2 billion . As of October 31, 2015 , the Company held 76 investment securities, 23 of which were in an unrealized loss position with gross unrealized losses of $0.6 million and an aggregate fair value of $823.4 million . These unrealized losses were primarily related to corporate obligations that earn lower

11



interest rates than current market rates. None of these investments have been in a loss position for more than twelve months. As the Company does not intend to sell these investments and it is unlikely that the Company will be required to sell the investments before recovery of their amortized basis, which will be at maturity, the Company does not consider those investments to be other-than-temporarily impaired at July 30, 2016 and October 31, 2015 .
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
 
Nine Months Ended
 
July 30, 2016
 
August 1, 2015
 
July 30, 2016
 
August 1, 2015
Net Income
$
230,430

 
$
216,478

 
$
565,507

 
$
600,573

Basic shares:
 
 
 
 
 
 
 
Weighted-average shares outstanding
307,135

 
313,877

 
309,030

 
312,604

Earnings per share basic:
$
0.75

 
$
0.69

 
$
1.83

 
$
1.92

Diluted shares:
 
 
 
 
 
 
 
Weighted-average shares outstanding
307,135

 
313,877

 
309,030

 
312,604

Assumed exercise of common stock equivalents
3,423

 
4,310

 
3,504

 
4,369

Weighted-average common and common equivalent shares
310,558

 
318,187

 
312,534

 
316,973

Earnings per share diluted:
$
0.74

 
$
0.68

 
$
1.81

 
$
1.89

Anti-dilutive shares related to:
 
 
 
 
 
 
 
Outstanding stock options
3,498

 
1,772

 
3,409

 
1,952

                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
Note 7 – Special Charges
The Company monitors global macroeconomic conditions on an ongoing basis and continues to assess opportunities for improved operational effectiveness and efficiency, as well as a better alignment of expenses with revenues. As a result of these assessments, the Company has undertaken various restructuring actions over the past several years. These actions are described below.
The following tables display the special charges taken for ongoing actions in fiscal 2016 and a roll-forward from October 31, 2015 to July 30, 2016 of the employee separation and exit cost accruals established related to these actions.
 
Reduction of Operating Costs Action
Statements of Income
Fiscal 2016
Workforce reductions
$
13,684

Total Special Charges
$
13,684


12



Accrued Restructuring
Reduction of Operating Costs Action
Balance at October 31, 2015
$
5,877

Severance payments
(1,984
)
Effect of foreign currency on accrual
1

Balance at January 30, 2016
$
3,894

Second quarter 2016 special charge
13,684

Severance payments
(2,177
)
Effect of foreign currency on accrual
8

Balance at April 30, 2016
$
15,409

Severance payments
(1,541
)
Effect of foreign currency on accrual
(6
)
Balance at July 30, 2016
$
13,862


Reduction of Operating Costs Action
During the fiscal year ended November 1, 2014 (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 the fiscal year ended November 2, 2013 (fiscal 2013) primarily due to severance costs being lower than the Company's estimates. The Company terminated the employment of all employees associated with this action.
During the second quarter of fiscal 2016, the Company recorded special charges of approximately $ 13.7 million for severance and fringe benefit costs in accordance with the Company's ongoing benefit plan for 123 manufacturing, engineering and SMG&A employees. As of July 30, 2016 , the Company still employed 90 of the 123 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 fiscal 2016, the Company implemented an organizational change designed to accelerate the Company's capability as a solutions provider to the rapidly evolving market for applications referred to as the Internet of Things. As a result of this organizational change, the Company re-evaluated its reporting structure and concluded that the Company continues to operate in one reportable segment based on the aggregation of seven operating segments. The Company designs, develops, manufactures and markets a broad range of integrated circuits (ICs). The Chief Executive Officer has been identified as the Company's Chief Operating Decision Maker. The Company has determined that all of the Company's operating segments share the following similar economic characteristics, and therefore meet the criteria established for operating segments to be aggregated into one reportable segment, namely:
The primary source of revenue for each operating segment is the sale of ICs.
The ICs sold by each of the Company's operating segments are manufactured using similar semiconductor manufacturing processes and raw materials in either the Company’s own production facilities or by third-party wafer fabricators using proprietary processes.
The Company sells its products to tens of thousands of customers worldwide. Many of these customers use products spanning all operating segments in a wide range of applications.
The ICs marketed by each of the Company's operating segments are sold globally through a direct sales force, third-party distributors, independent sales representatives and via the Company's website to the same types of customers.
All of the Company's operating segments share a similar long-term financial model as they have similar economic characteristics. The causes for variation in operating and financial performance are the same among the Company's operating segments and include factors such as (i) life cycle and price and cost fluctuations, (ii) number of competitors, (iii) product differentiation and (iv) size of market opportunity. Additionally, each operating segment is subject to the overall cyclical nature of the semiconductor industry. Lastly, the number and composition of employees and the amounts and types of tools and materials required for production of products are similar for each operating segment.

13



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
 
July 30, 2016
 
August 1, 2015
 
Revenue
 
% of
Revenue*
 
Y/Y%
 
Revenue
 
% of
Revenue
Industrial
$
374,735

 
43
%
 
(3
)%
 
$
384,473

 
45
%
Automotive
134,617

 
15
%
 
3
 %
 
130,228

 
15
%
Consumer
186,101

 
21
%
 
(10
)%
 
206,656

 
24
%
Communications
174,138

 
20
%
 
23
 %
 
142,008

 
16
%
Total revenue
$
869,591

 
100
%
 
1
 %
 
$
863,365

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

 
Nine Months Ended
 
July 30, 2016
 
August 1, 2015
 
Revenue
 
% of
Revenue
 
Y/Y%
 
Revenue
 
% of
Revenue
Industrial
$
1,107,853

 
46
%
 
(2
)%
 
$
1,128,116

 
46
%
Automotive
399,129

 
17
%
 
1
 %
 
393,696

 
16
%
Consumer
393,518

 
16
%
 
(5
)%
 
412,102

 
17
%
Communications
517,286

 
21
%
 
(1
)%
 
522,456

 
21
%
Total revenue
$
2,417,786

 
100
%
 
(2
)%
 
$
2,456,370

 
100
%

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 nine-month period s ended July 30, 2016 and August 1, 2015 were as follows:
 
Three Months Ended
 
Nine Months Ended
Region
July 30, 2016
 
August 1, 2015
 
July 30, 2016
 
August 1, 2015
United States
$
334,455

 
$
359,682

 
$
846,407

 
$
870,522

Rest of North and South America
22,677

 
20,186

 
64,812

 
65,546

Europe
232,324

 
221,270

 
694,200

 
711,253

Japan
73,753

 
80,489

 
213,938

 
245,395

China
146,069

 
126,188

 
425,732

 
383,356

Rest of Asia
60,313

 
55,550

 
172,697

 
180,298

Total revenue
$
869,591

 
$
863,365

 
$
2,417,786

 
$
2,456,370

In the three- and nine-month period s ended July 30, 2016 and August 1, 2015 , 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

14



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, presents the Company’s financial assets and liabilities, excluding accrued interest components that are accounted for at fair value on a recurring basis as of July 30, 2016 and October 31, 2015 . 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 July 30, 2016 and October 31, 2015 , the Company held $58.8 million and $76.4 million , respectively, of cash and held-to-maturity investments that were excluded from the tables below.
 
July 30, 2016
 
Fair Value measurement at
Reporting Date using:
 
 
 
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Other
Unobservable
Inputs
(Level 3)
 
Total
Assets
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
Institutional money market funds
$
224,363

 
$

 
$

 
$
224,363

Corporate obligations (1)

 
820,481

 

 
820,481

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

 
2,192,194

 

 
2,192,194

Floating rate notes, issued at par

 
30,003

 

 
30,003

Floating rate notes (1)

 
477,567

 

 
477,567

Other assets:
 
 
 
 
 
 
 
Deferred compensation investments
26,892

 

 

 
26,892

Forward foreign currency exchange contracts (2)

 
633

 

 
633

Total assets measured at fair value
$
251,255

 
$
3,520,878

 
$

 
$
3,772,133

Liabilities
 
 
 
 
 
 
 
Contingent consideration

 

 
4,093

 
4,093

Total liabilities measured at fair value
$

 
$

 
$
4,093

 
$
4,093

 
(1)
The amortized cost of the Company’s investments classified as available-for-sale as of July 30, 2016 was $3.3 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.

15



 
October 31, 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
$
198,853

 
$

 
$

 
$
198,853

Corporate obligations (1)

 
609,082

 

 
609,082

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

 
1,899,374

 

 
1,899,374

Floating rate notes, issued at par

 
99,648

 

 
99,648

Floating rate notes (1)

 
145,553

 

 
145,553

Other assets:
 
 
 
 
 
 
 
Deferred compensation investments
24,124

 

 

 
24,124

Total assets measured at fair value
$
222,977

 
$
2,753,657

 
$

 
$
2,976,634

Liabilities
 
 
 
 
 
 
 
Contingent consideration

 

 
2,843

 
2,843

Forward foreign currency exchange contracts (2)

 
3,083

 

 
3,083

Interest rate swap agreements

 
32,737

 

 
32,737

Total liabilities measured at fair value
$

 
$
35,820

 
$
2,843

 
$
38,663

 
(1)
The amortized cost of the Company’s investments classified as available-for-sale as of October 31, 2015 was $2.6 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.


16



Contingent consideration — The fair value of the contingent consideration was estimated utilizing the income approach and is based upon significant inputs not observable in the market. The income approach is based on two steps. The first step involves a projection of the cash flows that is based on the Company’s estimates of the timing and probability of achieving the defined milestones. The second step involves converting the cash flows into a present value equivalent through discounting. The discount rate reflects the Baa costs of debt plus the relevant risk associated with the asset and the time value of money.
The fair value measurement of the contingent consideration encompasses the following significant unobservable inputs:  
Unobservable Inputs
Range
Estimated contingent consideration payments
$4,500
Discount rate
0% - 10%
Timing of cash flows
1 - 3 years
Probability of achievement
100%
Changes in the fair value of the contingent consideration are recognized in operating income in the period of the estimated fair value change. Significant increases or decreases in any of the inputs in isolation may result in a fluctuation in the fair value measurement.
The following table summarizes the change in the fair value of the contingent consideration measured using significant unobservable inputs (Level 3) from October 31, 2015 to July 30, 2016 :  
 
Contingent
Consideration
Balance as of October 31, 2015
$
2,843

Contingent consideration liability recorded (1)
1,500

Fair value adjustment (2)
(46
)
Effect of foreign currency
(204
)
Balance as of July 30, 2016
$
4,093

(1) Represents contingent consideration related to acquisitions that were not material to the Company on either an individual or aggregate basis.
(2) Recorded in research and development expense in the Company's condensed consolidated statements of income.
Financial Instruments Not Recorded at Fair Value on a Recurring Basis
On 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 . In December 2015, the Company redeemed the 2016 Notes. The fair value of the 2016 Notes as of October 31, 2015 was $378.6 million , and was 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 . The fair value of the 2023 Notes as of July 30, 2016 and October 31, 2015 was $500.5 million and $480.9 million , respectively, and is classified as a Level 1 measurement according to the fair value hierarchy.
On December 14, 2015, the Company issued $850.0 million aggregate principal amount of 3.9% senior unsecured notes due December 15, 2025 (the 2025 Notes) and $400.0 million aggregate principal amount of 5.3% senior unsecured notes due December 15, 2045 (the 2045 Notes) with semi-annual fixed interest payments due on June 15 and December 15 of each year, commencing June 15, 2016 . The fair value of the 2025 Notes and 2045 Notes as of July 30, 2016 was $904.4 million and $437.9 million , respectively, and are classified as a Level 1 measurements according to the fair value hierarchy.

Note 10 – Derivatives
Foreign Exchange Exposure Management  — The Company enters into forward foreign currency exchange contracts to offset certain operational and balance sheet exposures from the impact of changes in foreign currency exchange rates. Such exposures result from the portion of the Company’s operations, assets and liabilities that are denominated in currencies other than the U.S. dollar, primarily the Euro; other significant exposures include the Philippine Peso, the Japanese Yen and the British Pound. These foreign currency exchange contracts are entered into to support transactions made in the normal course of business, and accordingly, are not speculative in nature. The contracts are for periods consistent with the terms of the underlying transactions, generally one year or less . Hedges related to anticipated transactions are designated and documented at

17



the inception of the respective hedges as cash flow hedges and are evaluated for effectiveness monthly. Derivative instruments are employed to eliminate or minimize certain foreign currency exposures that can be confidently identified and quantified. As the terms of the contract and the underlying transaction are matched at inception, forward contract effectiveness is calculated by comparing the change in fair value of the contract to the change in the forward value of the anticipated transaction, with the effective portion of the gain or loss on the derivative reported as a component of accumulated OCI in shareholders’ equity and reclassified into earnings in the same period during which the hedged transaction affects earnings. Any residual change in fair value of the instruments, or ineffectiveness, is recognized immediately in other (income) expense.
The total notional 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 July 30, 2016 and October 31, 2015 was $181.3 million and $163.9 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 July 30, 2016 and October 31, 2015 were as follows:
 
 
 
Fair Value At
 
Balance Sheet Location
 
July 30, 2016
 
October 31, 2015
Forward foreign currency exchange contracts
Prepaid expenses and other current assets
 
$
662

 
$

 
Accrued liabilities
 
$

 
$
3,091

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 July 30, 2016 and October 31, 2015 , the total notional amount of these undesignated hedges was $37.2 million and $57.9 million , respectively. The fair value of these undesignated hedges in the Company’s condensed consolidated balance sheets as of July 30, 2016 and October 31, 2015 was immaterial .
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  July 30, 2016  and October 31, 2015 , none of the master netting arrangements involved collateral. The following table presents the gross amounts of the Company's derivative assets and liabilities and the net amounts recorded in the Company's consolidated balance sheet:
 
July 30, 2016
 
October 31, 2015
Gross amount of recognized assets (liabilities)
$
2,704

 
$
(3,896
)
Gross amounts of recognized (liabilities) assets offset in the consolidated balance sheet
(2,071
)
 
813

Net assets (liabilities) presented in the consolidated balance sheet
$
633

 
$
(3,083
)
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 the first $500 million of debt issuances expected to occur in the future. On December 1, 2015, these forward starting swaps were terminated resulting in a loss of $33.4 million . Subsequently on December 14, 2015, the Company issued the 2025 Notes and 2045 Notes. The loss was recorded in OCI and will be reclassified out of OCI to interest expense on a straight line basis over the 10-year term of the 2025 Notes.
On April 24, 2013 , the Company entered into a treasury rate lock agreement with Bank of America. This agreement allowed the Company to lock a 10-year US Treasury rate of 1.7845% through June 14, 2013 for its anticipated issuance of the 2023 Notes. 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.
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 July 30, 2016 and October 31, 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

18



instruments provide one measure of the volume of these transactions, they do not represent the amount of the Company’s exposure to credit risk. The amounts potentially subject to credit risk (arising from the possible inability of counterparties to meet the terms of their contracts) are generally limited to the amounts, if any, by which the counterparties’ obligations under the contracts exceed the obligations of the Company to the counterparties. As a result of the above considerations, the Company does not consider the risk of counterparty default to be significant.
The Company records the fair value of its derivative financial instruments in its condensed consolidated financial statements in other current assets, other assets or accrued liabilities, depending on their net position, regardless of the purpose or intent for holding the derivative contract. Changes in the fair value of the derivative financial instruments are either recognized periodically in earnings or in shareholders’ equity as a component of OCI. Changes in the fair value of cash flow hedges are recorded in OCI and reclassified into earnings when the underlying contract matures. Changes in the fair values of derivatives not qualifying for hedge accounting or the ineffective portion of designated hedges are reported in earnings as they occur.
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) .

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 fiscal 2016, the Company implemented organizational changes designed to accelerate the Company's capability as a solutions provider to the rapidly evolving market for applications referred to as the Internet of Things. 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 seven 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. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, the Company performs the second step of the goodwill impairment test to determine the amount of impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit's goodwill with the carrying value of that goodwill. There was no impairment of goodwill in any period presented. The Company's next annual impairment assessment will be performed as of the first day of the fourth quarter of fiscal 2016 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 nine months of fiscal 2016 :
 
Nine Months Ended
 
July 30, 2016
Balance as of October 31, 2015
$
1,636,526

Goodwill adjustment related to acquisitions (1)
2,396

Foreign currency translation adjustment
111

Balance as of July 30, 2016
$
1,639,033

(1) Represents goodwill related to acquisitions that were not material to the Company on either an individual or aggregate basis.
Intangible Assets
The Company reviews finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of assets may not be recoverable. Recoverability of these assets is determined by comparison of their 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.
Indefinite-lived intangible assets are tested for impairment on an annual basis on the first day of the fourth quarter (on or about August 1 ) or more frequently if indicators of impairment exist. The impairment test involves a qualitative assessment on

19



the indefinite-lived intangible assets to determine whether it is more likely-than not that the indefinite-lived intangible asset is impaired. If it is determined that the fair value of the indefinite-lived intangible asset is less than the carrying value, the Company would recognize into earnings the amount by which the carrying value of the assets exceeds the fair value. No impairment of intangible assets resulted from the impairment tests in any of the fiscal periods presented.
Definite-lived intangible assets, are amortized on a straight-line basis over their estimated useful lives or on an accelerated method of amortization that is expected to reflect the estimated pattern of economic use. 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.
As of July 30, 2016 and October 31, 2015 , the Company’s intangible assets consisted of the following:
 
July 30, 2016
 
October 31, 2015
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Customer relationships
$
625,976

 
$
141,138

 
$
624,900

 
$
88,913

Technology-based
15,848

 
7,743

 
15,100

 
4,834

IPR&D
36,660

 
568

 
37,264

 

Total (1)
$
678,484

 
$
149,449

 
$
677,264

 
$
93,747

___________
(1) Foreign intangible asset carrying amounts are affected by foreign currency translation.
  
Intangible assets, along with the related accumulated amortization, are removed from the table above at the end of the fiscal year they become fully amortized.
For the three- and nine-month period s ended July 30, 2016 , amortization expense related to finite-lived intangible assets was $18.9 million and $55.7 million , respectively. For the three- and nine-month period s ended August 1, 2015 , amortization expense related to finite-lived intangible assets was $23.9 million and $73.8 million , respectively. The remaining amortization expense will be recognized over an estimated weighted average life of approximately 3.6 years.
The Company expects annual amortization expense for intangible assets to be:
Fiscal Year
Amortization Expense
Remainder of fiscal 2016

$18,914

2017

$75,654

2018

$74,595

2019

$71,646

2020

$71,407


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
 
Nine Months Ended
 
July 30, 2016
 
August 1, 2015
 
July 30, 2016
 
August 1, 2015
Service cost
$
1,390

 
$
4,095

 
$
4,163

 
$
12,975

Interest cost
921

 
3,046

 
2,792

 
9,636

Expected return on plan assets
(940
)
 
(3,553
)
 
(2,880
)
 
(11,222
)
Amortization of initial net obligation
4

 
5

 
12

 
15

Amortization of prior service cost

 
(61
)
 

 
(185
)
Amortization of net loss
168

 
1,899

 
511

 
5,761

Net periodic pension cost
$
1,543

 
$
5,431

 
$
4,598

 
$
16,980


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Note 13 – 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. On December 18, 2015 , the Company redeemed the 2016 Notes. The redemption price was 100.79% of the principal amount for the 2016 Notes. In accordance with the applicable guidance, the Company concluded that the debt transaction qualified as a debt extinguishment and recognized a net loss of approximately $3.3 million recorded in the condensed consolidated statement of income in other, net, within non-operating (income) expense. This loss was comprised of the make-whole premium of $3.0 million paid to holders of the 2016 Notes in accordance with the terms of the notes and approximately $0.3 million of debt issuance and discount costs that remained to be amortized. The write-off of the debt issuance costs and discount are reflected in the Company’s consolidated statement of cash flows within operating activities and the make-whole premium is reflected within financing activities.
On June 3, 2013 , the Company issued $500.0 million aggregate principal amount of 2.875% senior unsecured notes due June 1, 2023 (the 2023 Notes) with semi-annual fixed interest payments due on June 1 and December 1 of each year, commencing December 1, 2013 . The 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 July 30, 2016 , the Company was compliant with these covenants . The 2023 Notes are subordinated to any future secured debt and to the other liabilities of the Company's subsidiaries.
On December 14, 2015 , the Company issued $850.0 million aggregate principal amount of 3.9% senior unsecured notes due December 15, 2025 (the 2025 Notes) and $400.0 million aggregate principal amount of 5.3% senior unsecured notes due December 15, 2045 (the 2045 Notes) with semi-annual fixed interest payments due on June 15 and December 15 of each year, commencing June 15, 2016 . The sale of the 2025 and 2045 Notes was made pursuant to the terms of an underwriting agreement, dated as of December 3, 2015 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 $1.2 billion , after discount and issuance costs. Debt discount and issuance costs will be amortized through interest expense over the term of the 2025 Notes and 2045 Notes. The indenture governing the 2025 Notes and 2045 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 July 30, 2016 , the Company was compliant with these covenants . The 2025 Notes and 2045 Notes are subordinated to any future secured debt and to the other liabilities of the Company's subsidiaries.
On July 26, 2016, the Company entered into a definitive agreement to acquire Linear. In connection with the proposed acquisition, the Company announced that it obtained bridge financing commitments and expects to issue both short- and long- term loans and bonds totaling approximately $11.6 billion in the aggregate, to finance the proposed acquisition. The Company also expects to increase its existing revolving credit facility to $1.0 billion as well as modify the related consolidated leverage ratio covenant. With respect to the financing arrangements, the Company will incur certain commitment fees during 2016 and 2017 in advance of closing of the proposed acquisition. The bridge financing commitments expire on April 26, 2017, and may be extended until October 26, 2017 under certain conditions. The Company expects to incur fees for the bridge financing commitments of approximately $37.8 million , of which $28.7 million was recorded as debt issuance costs in the third quarter of fiscal 2016 and will be amortized into interest expense over the term of the bridge financing commitments. In addition, the Company expects to incur approximately $5.1 million in customary fees, including ticking fees, related to the future financing arrangements as well as its revolving credit facility, of which approximately $0.7 million was recorded as debt issuance costs in the third quarter of fiscal 2016 and will be amortized into interest expense over the term of the associated financing arrangements. Additional fees will be incurred when the bridge financing commitments are drawn and in connection with the permanent financing.


21



The Company’s debt consisted of the following as of July 30, 2016 and October 31, 2015 :
 
July 30, 2016
 
October 31, 2015
 
Principal
 
Unamortized discount and debt issuance costs
 
Principal
 
Unamortized discount and debt issuance costs
2016 Notes
$

 
$

 
$
375,000

 
$
406

2023 Notes
500,000

 
4,199

 
500,000

 
4,659

2025 Notes
850,000

 
8,253

 

 

2045 Notes
400,000

 
5,790

 

 

   Total
$
1,750,000

 
$
18,242

 
$
875,000

 
$
5,065

Debt, current
$

 
$

 
$
375,000

 
$
406

Long-term debt
$
1,750,000

 
$
18,242

 
$
500,000

 
$
4,659


Note 14 – Inventories
Inventories are valued at the lower of cost (first-in, first-out method) or market. The valuation of inventory requires the Company to estimate obsolete or excess inventory as well as inventory that is not of saleable quality. The Company employs a variety of methodologies to determine the net realizable value of its inventory. While a portion of the calculation to record inventory at its net realizable value is based on the age of the inventory and lower of cost or market calculations, a key factor in estimating obsolete or excess inventory requires the Company to estimate the future demand for its products. If actual demand is less than the Company’s estimates, impairment charges, which are recorded to cost of sales, may need to be recorded in future periods. Inventory in excess of saleable amounts is not valued, and the remaining inventory is valued at the lower of cost or market.
Inventories at July 30, 2016 and October 31, 2015 were as follows:
 
July 30, 2016
 
October 31, 2015
Raw materials
$
18,495

 
$
21,825

Work in process
256,006

 
261,520

Finished goods
117,802

 
128,969

Total inventories
$
392,303

 
$
412,314


Note 15 – Acquisitions
Proposed acquisition of Linear Technology Corporation
On July 26, 2016, the Company entered into the Merger Agreement to acquire Linear. Under the terms of the agreement, Linear stockholders will receive, for each outstanding share of Linear common stock,  $46.00  in cash and  0.2321  of a share of the Company’s common stock at the closing. Based on the number of outstanding shares of Linear common stock as of July 26, 2016 and the Company's 5-day volume weighted average price as of July 21, 2016, the value of the total consideration to be paid by the Company is estimated to be approximately  $14.8 billion , to be funded with the issuance of approximately 58.0 million new shares of the Company’s common stock and approximately $11.6 billion of new short- and long-term loans and bonds.
The transaction is subject to customary closing conditions, including antitrust regulatory clearances and approval by Linear stockholders. The Merger Agreement includes termination rights for both the Company and Linear. Under certain circumstances, including if the proposed merger is terminated due to a failure to obtain the required regulatory clearances, the Company may be required to pay Linear a termination fee of  $700.0 million . In addition, Linear may be required to pay the Company a termination fee of $490.0 million under certain circumstances, including if Linear terminates the Merger Agreement to accept a superior proposal.
In connection with the planned acquisition, Analog has obtained bridge financing commitments (see Note 13, Debt) . These sources of financing together with the issuance of the new shares of the Company's common stock are expected to be sufficient to finance the acquisition. As a result of the planned acquisition, the Company has temporarily suspended its share repurchase program (see Note 4,  Common Stock Repurchase ). As of the third quarter of fiscal 2016, the Company has incurred

22



$8.3 million of transaction-related costs recorded within Selling, Marketing, General and Administrative expenses in the Company's Condensed Consolidated Statement of Income.

Note 16 – Income Taxes
The Company has provided for potential tax liabilities due in the various jurisdictions in which the Company operates. Judgment is required in determining the worldwide income tax 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 the Company's income is earned. The Company's effective tax rate for all periods presented is lower than the U.S. federal statutory rate of 35% , primarily due to lower statutory tax rates applicable to the Company's operations in jurisdictions in which the Company earns a portion of its income.  
The Company has filed a petition with the U.S. Tax Court for one open matter for fiscal years 2006 and 2007 that pertains to Section 965 of the Internal Revenue Code related to the beneficial tax treatment of dividends paid from foreign owned companies under The American Jobs Creation Act. 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 2013 are no longer subject to examination.
All of the Company's Ireland tax returns prior to fiscal year 2012 are no longer subject to examination.

Note 17 – New Accounting Pronouncements
Standards Implemented
Interest - Imputation of Interest
In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-03 , Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03), 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. In August 2015, the FASB issued ASU 2015-15,  Interest-Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements-Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting (ASU 2015-15). ASU 2015-15 provides additional guidance to ASU 2015-03, which did not address presentation or subsequent measurement of debt issuance costs associated with line-of-credit-arrangements. ASU 2015-15 noted that the staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit-arrangement, regardless of whether there are any outstanding borrowings on the line-of credit arrangement. The Company elected to early adopt these updates as of January 30, 2016 and debt issuance costs related to a recognized debt liability are presented in the consolidated balance sheet as a direct deduction from the carrying amount of that debt liability. Debt issuance costs related to the Company's revolving credit facility continue to be presented as an asset and are being amortized ratably over the term of the revolving credit facility. The update was adopted because management believes it provides a more meaningful presentation of its financial position. This change in accounting principle has been applied on a retrospective basis and the consolidated balance sheet as of October 31, 2015 has been adjusted to reflect the period specific effects of applying the new guidance. The retrospective application of this change in accounting principle on the consolidated balance sheet as of October 31, 2015 reclassified debt issuance costs of $3.4 million which were previously presented as a long-term asset within other assets, as a reduction to the carrying value of the senior notes by the same amount. The adoption did not have an impact on the Company's condensed consolidated statement of operations in any period.
Income Taxes
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (ASU 2015-17), which simplifies the presentation of deferred income taxes and requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The guidance in ASU 2015-17 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company elected to early adopt this update as of January 30, 2016 on a prospective basis. The adoption of ASU 2015-17 resulted in a reclassification of the Company's current deferred tax asset to the non-current deferred income taxes in the Company's

23



condensed consolidated balance sheet as of January 30, 2016. The adoption did not have an impact on the Company's condensed consolidated statement of operations in any period. No prior periods were retrospectively adjusted.
Discontinued Operations
In April 2014, the FASB issued 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 (ASU 2014-08), 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. As of July 30, 2016 , there have been no disposals or classifications as held for sale that would be subject to ASU 2014-08.
Standards to be Implemented
Equity Method Investments
In March 2016, the FASB issued ASU 2016-07, Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting (ASU 2016-07). ASU 2016-07 eliminates the requirement that when an investment, initially accounted for under a method other than the equity method of accounting, subsequently qualifies for use of the equity method, an investor must retrospectively apply the equity method in prior periods in which it held the investment. This requires an investor to determine the fair value of the investee’s underlying assets and liabilities retrospectively at each investment date and revise all prior periods as if the equity method had always been applied. The new guidance requires the investor to apply the equity method prospectively from the date the investment qualifies for the equity method. The investor will add the carrying value of the existing investment to the cost of the additional investment to determine the initial cost basis of the equity method investment. ASU 2016-07 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted in any interim or annual period. The Company will adopt ASU-2016-07 in the first quarter of the fiscal year ending November 3, 2018 (fiscal 2018) and is currently evaluating the impact, if any, adoption will have on its financial position and results of operations.
Derivatives and Hedging
In March 2016, the FASB issued ASU 2016-06,  Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments  (ASU 2016-06). ASU 2016-06 clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in ASU 2016-06 is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. The amendments in ASU 2016-06 are effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The Company will adopt ASU 2016-06 in the first quarter of the fiscal year ending November 2, 2019 (fiscal 2019) and is currently evaluating the impact, if any, adoption will have on its financial position and results of operations.
Leases
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (ASU 2016-02). ASU 2016-02 requires a lessee to recognize most leases on the balance sheet but recognize expenses on the income statement in a manner similar to current practice. The update states that a lessee will recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying assets for the lease term. Leases will continue to be classified as either financing or operating, with classification affecting the recognition, measurement and presentation of expenses and cash flows arising from a lease. ASU 2016-02 is effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company will adopt ASU 2016-02 in the first quarter of the fiscal year ending October 31, 2020 (fiscal 2020) and is currently evaluating the impact, if any, adoption will have on its financial position and results of operations.
Financial Instruments
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 requires a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years. The Company will adopt ASU 2016-13 in the first quarter of fiscal 2020 and is currently evaluating the impact, if any, adoption will have on its financial position and results of operations.

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