Analog Devices, Inc.
ANALOG DEVICES INC (Form: 10-Q, Received: 02/15/2017 08:42:13)


 
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 January 28, 2017
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 January 28, 2017 there were 309,206,677 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
 
January 28, 2017
 
January 30, 2016
Revenue
$
984,449

 
$
769,429

Cost of sales (1)
335,945

 
292,136

Gross margin
648,504

 
477,293

Operating expenses:
 
 
 
Research and development (1)
183,954

 
157,428

Selling, marketing, general and administrative (1)
130,659

 
107,462

Amortization of intangibles
18,160

 
17,358

Special charges
49,463

 

 
382,236

 
282,248

Operating income
266,268

 
195,045

Nonoperating expense (income):
 
 
 
Interest expense
42,614

 
13,062

Interest income
(10,000
)
 
(3,199
)
Other, net
345

 
3,005

 
32,959

 
12,868

Income before income taxes
233,309

 
182,177

Provision for income taxes
16,180

 
17,673

Net income
$
217,129

 
$
164,504

Shares used to compute earnings per share – basic
308,786

 
311,166

Shares used to compute earnings per share – diluted
313,076

 
314,793

Basic earnings per share
$
0.70

 
$
0.53

Diluted earnings per share
$
0.69

 
$
0.52

Dividends declared and paid per share
$
0.42

 
$
0.40

           (1) Includes stock-based compensation expense as follows:
 
 
 
           Cost of sales
$
1,944

 
$
2,092

           Research and development
$
7,021

 
$
6,704

           Selling, marketing, general and administrative
$
7,564

 
$
6,813

See accompanying notes.

1




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

 
Three Months Ended
 
January 28, 2017
 
January 30, 2016
Net income
$
217,129

 
$
164,504

Foreign currency translation adjustments
(4,962
)
 
(8,114
)
Change in fair value of available-for-sale securities classified as short-term investments (net of taxes of $4 and $0, respectively)
219

 
(75
)
Change in fair value of derivative instruments designated as cash flow hedges (net of taxes of $1,395 and $357, respectively)
2,085

 
(1,580
)
Changes in pension plans including prior service cost, transition obligation, net actuarial loss and foreign currency translation adjustments (net of taxes of $101 and $50 respectively)
179

 
813

Other comprehensive loss
(2,479
)
 
(8,956
)
Comprehensive income
$
214,650

 
$
155,548


See accompanying notes.









2



ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(thousands, except share and per share amounts)
 
January 28, 2017
 
October 29, 2016
ASSETS
 

 
 

Current Assets
 
 
 
Cash and cash equivalents
$
4,987,263

 
$
921,132

Short-term investments
1,329,803

 
3,134,661

Accounts receivable
472,511

 
477,609

Inventories (1)
365,586

 
376,555

Prepaid income tax
20,244

 
6,405

Prepaid expenses and other current assets
58,326

 
58,501

Total current assets
7,233,733

 
4,974,863

Property, Plant and Equipment, at Cost
 
 
 
Land and buildings
565,306

 
564,329

Machinery and equipment
2,017,102

 
1,994,115

Office equipment
58,934

 
58,785

Leasehold improvements
59,549

 
59,649

 
2,700,891

 
2,676,878

Less accumulated depreciation and amortization
2,071,967

 
2,040,762

Net property, plant and equipment
628,924

 
636,116

Other Assets
 
 
 
Deferred compensation plan investments
25,699

 
26,152

Other investments
22,991

 
21,937

Goodwill
1,677,399

 
1,679,116

Intangible assets, net
529,516

 
549,368

Deferred tax assets
34,166

 
36,005

Other assets
50,943

 
46,721

Total other assets
2,340,714

 
2,359,299

 
$
10,203,371

 
$
7,970,278

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
156,653

 
$
171,439

Deferred income on shipments to distributors, net
356,666

 
351,538

Income taxes payable
5,346

 
4,100

Accrued liabilities
292,961

 
255,857

Total current liabilities
811,626

 
782,934

Non-current liabilities
 
 
 
Long-term debt
3,805,400

 
1,732,177

Deferred income taxes
103,244

 
109,931

Deferred compensation plan liability
25,699

 
26,152

Other non-current liabilities
150,971

 
153,466

Total non-current liabilities
4,085,314

 
2,021,726

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, 309,206,677 shares issued and outstanding (308,170,560 on October 29, 2016)
51,535

 
51,363

Capital in excess of par value
457,944

 
402,270

Retained earnings
4,873,245

 
4,785,799

Accumulated other comprehensive loss
(76,293
)
 
(73,814
)
Total shareholders’ equity
5,306,431

 
5,165,618

 
$
10,203,371

 
$
7,970,278

(1)
Includes $2,553 and $2,486 related to stock-based compensation at January 28, 2017 and October 29, 2016 , respectively.
See accompanying notes.



3



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

   
Three Months Ended
 
January 28, 2017
 
January 30, 2016
Cash flows from operating activities:
 
 
 
Net income
$
217,129

 
$
164,504

Adjustments to reconcile net income to net cash provided by operations:
 
 
 
Depreciation
34,379

 
33,209

Amortization of intangibles
19,947

 
18,347

Stock-based compensation expense
16,529

 
15,609

Loss on extinguishment of debt

 
3,290

Excess tax benefit-stock options
(8,102
)
 
(986
)
Deferred income taxes
(7,055
)
 
(7,717
)
Other non-cash activity
13,071

 
744

Changes in operating assets and liabilities
28,594

 
(7,295
)
Total adjustments
97,363

 
55,201

Net cash provided by operating activities
314,492

 
219,705

Cash flows from investing activities:
 
 
 
Purchases of short-term available-for-sale investments
(326,908
)
 
(1,632,014
)
Maturities of short-term available-for-sale investments
1,844,380

 
1,409,538

Sales of short-term available-for-sale investments
287,601

 
47,950

Additions to property, plant and equipment
(28,337
)
 
(23,128
)
Payments for acquisitions, net of cash acquired
(1,036
)
 

Changes in other assets
(5,946
)
 
(6,711
)
Net cash provided by (used for) investing activities
1,769,754

 
(204,365
)
Cash flows from financing activities:
 
 
 
Early termination of debt

 
(378,156
)
Payments of derivative instruments

 
(33,430
)
Proceeds from debt
2,072,306

 
1,235,331

Payments of deferred financing fees
(5,625
)
 

Proceeds from derivative instruments
3,904

 

Dividend payments to shareholders
(129,683
)
 
(124,658
)
Repurchase of common stock
(3,106
)
 
(131,977
)
Proceeds from employee stock plans
34,432

 
6,229

Changes in other financing activities
2,221

 
(2,544
)
Excess tax benefit-stock options
8,102

 
986

Net cash provided by financing activities
1,982,551

 
571,781

Effect of exchange rate changes on cash
(666
)
 
(1,032
)
Net increase in cash and cash equivalents
4,066,131

 
586,089

Cash and cash equivalents at beginning of period
921,132

 
884,353

Cash and cash equivalents at end of period
$
4,987,263

 
$
1,470,442

See accompanying notes.

4



ANALOG DEVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JANUARY 28, 2017
(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 29, 2016 (fiscal 2016 ) 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 28, 2017 (fiscal 2017 ) or any future period.
Certain amounts reported in previous periods have been reclassified to conform to the fiscal 2017 presentation. Such reclassified amounts are immaterial.
The Company has a 52-53 week fiscal year that ends on the Saturday closest to the last day in October. Fiscal 2017 and fiscal 2016 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 14, 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 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

5



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.
Generally, 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 January 28, 2017 and October 29, 2016 , the Company had gross deferred revenue of  $438.4 million and $432.3 million , respectively, and gross deferred cost of sales of $81.7 million and $80.8 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-month period s ended January 28, 2017 and January 30, 2016 were not material .

Note 3 – Stock-Based Compensation
Stock-based compensation is measured at the grant date based on the grant-date fair value of the awards ultimately expected to vest, and is recognized as an expense on a straight-line basis over the vesting period, which is generally five years for stock options and three years for restricted stock units. In addition to restricted stock units with a service condition, the Company grants restricted stock units with both a market condition and a service condition (market-based restricted stock units). The number of shares of the Company's common stock to be issued upon vesting of market-based restricted stock units will range from 0% to 200% of the target amount, based on the comparison of the Company's total shareholder return (TSR) to the median TSR of a specified peer group over a three-year period. TSR is a measure of stock price appreciation plus any dividends paid during the performance period. Determining the amount of stock-based compensation to be recorded for stock options and market-based restricted stock units requires the Company to develop estimates to calculate the grant-date fair value of awards.
Modification of Awards — The Company has from time to time modified the vesting terms of its equity awards to employees and directors. The modifications made to the Company’s equity awards in the first three months of fiscal 2017 or fiscal 2016 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-month period s ended January 28, 2017 and January 30, 2016 are as follows:

6



   
Three Months Ended
Stock Options
January 28, 2017
 
January 30, 2016
Options granted (in thousands)
15

 
36

Weighted-average exercise price

$68.48

 

$54.88

Weighted-average grant-date fair value

$12.38

 

$12.16

Assumptions:
 
 
 
Weighted-average expected volatility
24.7%

 
31.3
%
Weighted-average expected term (in years)
5.1

 
5.3

Weighted-average risk-free interest rate
1.7
%
 
1.7
%
Weighted-average expected dividend yield
2.5
%
 
2.9
%
The Company utilizes the Monte Carlo simulation valuation model to value market-based restricted stock units. The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the performance conditions stipulated in the award grant and calculates the fair market value for the market-based restricted stock units granted. The Monte Carlo simulation model also uses stock price volatility and other variables to estimate the probability of satisfying the performance conditions, including the possibility that the market condition may not be satisfied, and the resulting fair value of the award. Market-based restricted stock units were not granted during the three-month period s ended January 28, 2017 and January 30, 2016 .
Expected volatility  — The Company is responsible for estimating volatility and has considered a number of factors, including third-party estimates. The Company currently believes that the exclusive use of implied volatility results in the best estimate of the grant-date fair value of employee stock options because it reflects the market’s current expectations of future volatility. In evaluating the appropriateness of exclusively relying on implied volatility, the Company concluded that: (1) options in the Company’s common stock are actively traded with sufficient volume on several exchanges; (2) the market prices of both the traded options and the underlying shares are measured at a similar point in time to each other and on a date close to the grant date of the employee share options; (3) the traded options have exercise prices that are both near-the-money and close to the exercise price of the employee share options; and (4) the remaining maturities of the traded options used to estimate volatility are at least one year. The Company utilizes historical volatility as an input variable of the Monte Carlo simulation to estimate the grant date fair value of market-based restricted stock units.  The market performance measure of these awards is based upon the interaction of multiple peer companies.  Given the Company is required to use consistent statistical properties in the Monte Carlo simulation and implied volatility is not available across the population, historical volatility must be used.
Expected term  — The Company uses historical employee exercise and option expiration data to estimate the expected term assumption for the Black-Scholes grant-date valuation. The Company believes that this historical data is currently the best estimate of the expected term of a new option, and that generally its employees exhibit similar exercise behavior.
Risk-free interest rate  — The yield on zero-coupon U.S. Treasury securities for a period that is commensurate with the expected term assumption is used as the risk-free interest rate.
Expected dividend yield  — Expected dividend yield is calculated by annualizing the cash dividend declared by the Company’s Board of Directors for the current quarter and dividing that result by the closing stock price on the date of grant. Until such time as the Company’s Board of Directors declares a cash dividend for an amount that is different from the current 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 January 28, 2017 . 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.


7



Additional paid-in-capital (APIC) Pool
The APIC pool represents the excess tax benefits related to share-based compensation that are available to absorb future tax deficiencies. If the amount of future tax deficiencies is greater than the available APIC pool, the Company records the excess as income tax expense in its condensed consolidated statements of income. During the three-month period s ended January 28, 2017 and January 30, 2016 , 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 January 28, 2017 and changes during the three-month period then ended is presented below:
Activity during the Three Months Ended January 28, 2017
Options
Outstanding
(in thousands)
 
Weighted-
Average Exercise
Price Per Share
 
Weighted-
Average
Remaining
Contractual
Term in Years
 
Aggregate
Intrinsic
Value
Options outstanding at October 29, 2016
11,704

 

$44.43

 
 
 
 
Options granted
15

 

$68.48

 
 
 
 
Options exercised
(968
)
 

$35.72

 
 
 
 
Options forfeited
(41
)
 

$52.03

 
 
 
 
Options expired
(6
)
 

$33.19

 
 
 
 
Options outstanding at January 28, 2017
10,704

 

$45.22

 
6.0
 

$339,372

Options exercisable at January 28, 2017
5,661

 

$38.47

 
4.5
 

$217,735

Options vested or expected to vest at January 28, 2017 (1)
10,379

 

$44.93

 
6.0
 

$332,152

 
(1)
In addition to the vested options, the Company expects a portion of the unvested options to vest at some point in the future. The number of options expected to vest is calculated by applying an estimated forfeiture rate to the unvested options.
During the three months ended January 28, 2017 , 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 $35.6 million , and the total amount of proceeds received by the Company from the exercise of these options was $34.4 million .
During the three months ended January 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 $4.3 million , and the total amount of proceeds received by the Company from the exercise of these options was $6.2 million .
A summary of the Company’s restricted stock unit award activity as of January 28, 2017 and changes during the three-month period then ended is presented below:  
Activity during the Three Months Ended January 28, 2017
Restricted
Stock Units
Outstanding
(in thousands)
 
Weighted-
Average Grant-
Date Fair Value
Per Share
Restricted stock units outstanding at October 29, 2016
2,690

 

$50.11

Units granted
5

 

$64.22

Restrictions lapsed
(108
)
 

$46.18

Forfeited
(17
)
 

$49.93

Restricted stock units outstanding at January 28, 2017
2,570

 

$50.31

As of January 28, 2017 , there was $95.4 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 1.3 years . The total grant-date fair value of shares that vested during the three-month period ended January 28, 2017 was approximately $5.1 million . The total grant-date fair value of shares that vested during the three-month period ended January 30, 2016 was approximately $9.3 million .



8



Note 4 – Accumulated Other Comprehensive Income (Loss)
        
The following table provides the changes in accumulated other comprehensive income (loss) (OCI) by component and the related tax effects during the first three months of fiscal 2017 .
 
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 29, 2016
$
(24,063
)
 
$
800

 
$
(281
)
 
$
(18,884
)
 
$
(31,386
)
 
$
(73,814
)
Other comprehensive income (loss) before reclassifications
(4,962
)
 
(4
)
 
219

 
(856
)
 
(176
)
 
(5,779
)
Amounts reclassified out of other comprehensive income (loss)

 

 

 
4,336

 
456

 
4,792

Tax effects

 
11

 
(7
)
 
(1,395
)
 
(101
)
 
(1,492
)
Other comprehensive income (loss)
(4,962
)
 
7

 
212

 
2,085

 
179

 
(2,479
)
January 28, 2017
$
(29,025
)
 
$
807

 
$
(69
)
 
$
(16,799
)
 
$
(31,207
)
 
$
(76,293
)


The amounts reclassified out of accumulated other comprehensive income (loss) with presentation location during each period were as follows:
 
 
Three Months Ended
 
 
Comprehensive Income Component
 
January 28, 2017
 
January 30, 2016
 
Location
Unrealized holding losses (gains) on derivatives
 
 
 
 
 
 
    Currency forwards
 
$
1,700

 
$
1,479

 
Cost of sales
 
 
1,014

 
663

 
Research and development
 
 
1,093

 
794

 
Selling, marketing, general and administrative
     Interest rate derivatives
 
529

 
283

 
Interest expense
 
 
4,336

 
3,219

 
Total before tax
 
 
(855
)
 
(510
)
 
Tax
 
 
$
3,481

 
$
2,709

 
Net of tax
 
 

 
 
 
 
Amortization of pension components
 
 
 
 
 
 
     Transition obligation
 
$
3

 
$
4

 
(a)
     Prior service credit
 
(2
)
 

 
(a)
     Actuarial losses
 
455

 
167

 
(a)
 
 
456

 
171

 
Total before tax
 
 
(101
)
 
(50
)
 
Tax
 
 
$
355

 
$
121

 
Net of tax
 
 
 
 
 
 
 
Total amounts reclassified out of accumulated other comprehensive income (loss), net of tax
 
$
3,836

 
$
2,830

 
 
______________
a) The amortization of pension components is included in the computation of net periodic pension cost. For further information see Note 13, Retirement Plans , contained in Item 8 of the Annual Report on Form 10-K for the fiscal year ended October 29, 2016 .


9



The Company estimates $4.5 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-month period s ended January 28, 2017 and January 30, 2016 .
Gross unrealized gains and losses on available-for-sale securities classified as short-term investments at January 28, 2017 and October 29, 2016 are as follows:
 
January 28, 2017
 
October 29, 2016
Unrealized gains on securities classified as short-term investments
$
842

 
$
846

Unrealized losses on securities classified as short-term investments
(75
)
 
(294
)
Net unrealized gains on securities classified as short-term investments
$
767

 
$
552

As of January 28, 2017 , the Company held 104 investment securities, 19 of which were in an unrealized loss position with gross unrealized losses of $0.1 million and an aggregate fair value of $376.8 million . As of October 29, 2016 , the Company held 100 investment securities, 25 of which were in an unrealized loss position with gross unrealized losses of $0.3 million and an aggregate fair value of $729.6 million . These unrealized losses were primarily related to corporate obligations that earn lower interest rates than current market rates. None of these investments have been in a loss position for more than twelve months. As the Company does not intend to sell these investments and it is unlikely that the Company will be required to sell the investments before recovery of their amortized basis, which will be at maturity, the Company does not consider those investments to be other-than-temporarily impaired at January 28, 2017 and October 29, 2016 .
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 5 – 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 and restricted stock units 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 and restricted stock units 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
 
January 28, 2017
 
January 30, 2016
Net Income
$
217,129

 
$
164,504

Basic shares:
 
 
 
Weighted-average shares outstanding
308,786

 
311,166

Earnings per share basic:
$
0.70

 
$
0.53

Diluted shares:
 
 
 
Weighted-average shares outstanding
308,786

 
311,166

Assumed exercise of common stock equivalents
4,290

 
3,627

Weighted-average common and common equivalent shares
313,076

 
314,793

Earnings per share diluted:
$
0.69

 
$
0.52

Anti-dilutive shares related to:
 
 
 
Outstanding stock options
66

 
2,597


10



Note 6 – 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 actions in fiscal 2017 and fiscal 2016 and a roll-forward from October 29, 2016 to January 28, 2017 of the employee separation and exit cost accruals established related to these actions.
 
Reduction of Operating Costs Action
Early Retirement Action
Total Special Charges
Statements of Income
 
 
 
Fiscal 2016 - Workforce reductions
$
13,684

$

13,684

Fiscal 2017 - Workforce reductions
$
8,126

$
41,337

$
49,463

Accrued Restructuring
Reduction of Operating Costs Action
Early Retirement Action
Balance at October 29, 2016
$
12,374

$

Fiscal 2017 special charge
8,126

41,337

Severance and other payments
(2,611
)
(199
)
Effect of foreign currency on accrual
(6
)

Balance at January 28, 2017
$
17,883

$
41,138


Early Retirement Offer Action
During the first quarter of fiscal 2017, the Company initiated an early retirement offer. This resulted in a special charge of approximately $ 41.3 million for severance, related benefits and other costs in accordance with this program for  225  manufacturing, engineering and selling, marketing, general and administrative (SMG&A) employees. As of January 28, 2017 , the Company still employed all of the  225  employees included in these cost reduction actions. These employees must continue to be employed by the Company until their employment is terminated in order to receive the severance benefits.

Reduction of Operating Costs 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 January 28, 2017 , the Company still employed 31 of the 123 employees included in this cost reduction action. These employees must continue to be employed by the Company until their employment is involuntarily terminated in order to receive the severance benefits.
During the first quarter of fiscal 2017, the Company recorded special charges of approximately $ 8.1 million for severance and fringe benefit costs in accordance with the Company's ongoing benefit plan or statutory requirements at foreign locations for 177 manufacturing, engineering and SMG&A employees. As of January 28, 2017 , the Company still employed all of the 177 employees included in this cost reduction action. These employees must continue to be employed by the Company until their employment is terminated in order to receive the severance benefits.

Note 7 – Segment Information
The Company operates and tracks its results 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.

11



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.
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
 
January 28, 2017
 
January 30, 2016
 
Revenue
 
% of
Revenue
 
Y/Y%
 
Revenue
 
% of
Revenue*
Industrial
$
401,481

 
41
%
 
15
%
 
$
348,402

 
45
%
Automotive
138,585

 
14
%
 
10
%
 
126,355

 
16
%
Consumer
270,408

 
27
%
 
113
%
 
126,838

 
16
%
Communications
173,975

 
18
%
 
4
%
 
167,834

 
22
%
Total revenue
$
984,449

 
100
%
 
28
%
 
$
769,429

 
100
%
____________
* The sum of the individual percentages does not equal the total due to rounding.
Revenue Trends by Geographic Region
Revenue by geographic region, based on the primary location of the Company's customers’ design activity for its products, for the three-month period s ended January 28, 2017 and January 30, 2016 were as follows:
 
Three Months Ended
Region
January 28, 2017
 
January 30, 2016
United States
$
430,998

 
$
266,669

Rest of North and South America
22,957

 
20,712

Europe
226,335

 
216,716

Japan
88,891

 
70,222

China
152,983

 
138,723

Rest of Asia
62,285

 
56,387

Total revenue
$
984,449

 
$
769,429

In the three-month period s ended January 28, 2017 and January 30, 2016 , 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 8 – Fair Value
The Company defines fair value as the price that would be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement. The hierarchy gives the

12



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 January 28, 2017 and October 29, 2016 . 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 January 28, 2017 and October 29, 2016 , the Company held $487.6 million and $252.5 million , respectively, of cash and held-to-maturity investments that were excluded from the tables below.
 
January 28, 2017
 
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
$
2,282,633

 
$

 
$

 
$
2,282,633

Corporate obligations (1)

 
2,301,646

 

 
2,301,646

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

 
1,132,109

 

 
1,132,109

Floating rate notes (1)

 
113,044

 

 
113,044

Other assets:
 
 
 
 
 
 
 
Deferred compensation investments
29,447

 

 

 
29,447

Forward foreign currency exchange contracts (2)

 

 

 

Total assets measured at fair value
$
2,312,080

 
$
3,546,799

 
$

 
$
5,858,879

Liabilities
 
 
 
 
 
 
 
Contingent consideration

 

 
7,639

 
7,639

Forward foreign currency exchange contracts (2)

 
6,062

 

 
6,062

Total liabilities measured at fair value
$

 
$
6,062

 
$
7,639

 
$
13,701

 
(1)
The amortized cost of the Company’s investments classified as available-for-sale as of January 28, 2017 was $3.5 billion .
(2)
The Company has a master netting arrangement by counterparty with respect to derivative contracts. See Note 9, Derivatives, for more information related to the Company's master netting arrangements.

13



 
October 29, 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
$
277,595

 
$

 
$

 
$
277,595

Corporate obligations (1)

 
415,660

 

 
415,660

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

 
2,518,148

 

 
2,518,148

Floating rate notes, issued at par

 
29,989

 

 
29,989

Floating rate notes (1)

 
561,874

 

 
561,874

Other assets:
 
 
 
 
 
 
 
Deferred compensation investments
26,916

 

 

 
26,916

Total assets measured at fair value
$
304,511

 
$
3,525,671

 
$

 
$
3,830,182

Liabilities
 
 
 
 
 
 
 
Contingent consideration

 

 
7,555

 
7,555

Forward foreign currency exchange contracts (2)

 
5,231

 

 
5,231

Total liabilities measured at fair value
$

 
$
5,231

 
$
7,555

 
$
12,786

 
(1)
The amortized cost of the Company’s investments classified as available-for-sale as of October 29, 2016 was $3.5 billion .
(2)
The Company has a master netting arrangement by counterparty with respect to derivative contracts. See Note 9, 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.

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

14



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
$8,500
Discount rate
0% - 2%
Timing of cash flows
1 - 3 years
Probability of achievement
90% - 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 29, 2016 to January 28, 2017 :  
 
Contingent
Consideration
Balance as of October 29, 2016
$
7,555

Fair value adjustment (1)
84

Balance as of January 28, 2017
$
7,639

(1) Recorded in research and development expense in the Company's condensed consolidated statements of income.
Financial Instruments Not Recorded at Fair Value on a Recurring Basis
On 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 January 28, 2017 and October 29, 2016 was $491.4 million and $501.3 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 January 28, 2017 was $866.0 million and $436.4 million , respectively, and are classified as a Level 1 measurements according to the fair value hierarchy. The fair value of the 2025 Notes and 2045 Notes as of October 29, 2016 was $901.5 million and $425.1 million , respectively.
On December 5, 2016, the Company issued $400.0 million aggregate principal amount of 2.5% senior unsecured notes due December 5, 2021 (the 2021 Notes), $550.0 million aggregate principal amount of 3.125% senior unsecured notes due December 5, 2023 (the December 2023 Notes), $900.0 million aggregate principal amount of 3.5% senior unsecured notes due December 5, 2026 (the 2026 Notes) and $250.0 million aggregate principal amount of 4.5% senior unsecured notes due December 5, 2036 (the 2036 Notes) with semi-annual fixed interest payments due on June 5 and December 5 of each year, commencing June 5, 2017 . The fair value of the 2021 Notes, December 2023 Notes, 2026 Notes and 2036 Notes as of January 28, 2017 was $394.9 million , $543.1 million , $880.1 million and $246.1 million , respectively, and are classified as a Level 1 measurements according to the fair value hierarchy.

Note 9 – Derivatives
Foreign Exchange Exposure Management  — The Company enters into forward foreign currency exchange contracts to offset certain operational and balance sheet exposures from the impact of changes in foreign currency exchange rates. Such exposures result from the portion of the Company’s operations, assets and liabilities that are denominated in currencies other than the U.S. dollar, primarily the Euro; other significant exposures include the Philippine Peso, the Japanese Yen and the British Pound. These foreign currency exchange contracts are entered into to support transactions made in the normal course of business, and accordingly, are not speculative in nature. The contracts are for periods consistent with the terms of the underlying transactions, generally one year or less . Hedges related to anticipated transactions are designated and documented at the inception of the respective hedges as cash flow hedges and are evaluated for effectiveness monthly. Derivative instruments are employed to eliminate or minimize certain foreign currency exposures that can be confidently identified and quantified. As

15



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 amount 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 January 28, 2017 and October 29, 2016 was $173.4 million and $179.5 million , respectively. The fair value of forward foreign currency derivative instruments designated as hedging instruments in the Company’s condensed consolidated balance sheets as of January 28, 2017 and October 29, 2016 was as follows:
 
 
 
Fair Value At
 
Balance Sheet Location
 
January 28, 2017
 
October 29, 2016
Forward foreign currency exchange contracts
Accrued liabilities
 
$
6,705

 
$
5,260

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 January 28, 2017 and October 29, 2016 , the total notional amount of these undesignated hedges was $69.5 million and $46.2 million , respectively. The fair value of these undesignated hedges in the Company’s condensed consolidated balance sheets as of January 28, 2017 and October 29, 2016 was immaterial .
All of the Company’s derivative financial instruments are eligible for 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 condensed consolidated balance sheet on a net basis. As of  January 28, 2017  and October 29, 2016 , 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 condensed consolidated balance sheet:
 
January 28, 2017
 
October 29, 2016
Gross amount of recognized liabilities
$
(7,186
)
 
$
(5,788
)
Gross amounts of recognized assets offset in the condensed consolidated balance sheet
1,124

 
557

Net liabilities presented in the condensed consolidated balance sheet
$
(6,062
)
 
$
(5,231
)
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.
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 January 28, 2017 and October 31, 2016, nonperformance is not perceived to be a significant risk. Furthermore, none of the Company’s derivatives are subject to collateral or other security arrangements and none contain provisions that are dependent on the Company’s credit ratings from any credit rating agency. While the contract or notional amounts of derivative financial instruments provide one measure of the volume of these transactions, they do not represent the amount of the Company’s exposure to credit risk. The amounts potentially subject to credit risk (arising from the possible inability of counterparties to meet the terms of their contracts) are generally limited to the amounts, if any, by which the counterparties’ obligations under the contracts exceed the obligations of the Company to the counterparties. As a result of the above considerations, the Company does not consider the risk of counterparty default to be significant.
The Company records the fair value of its derivative financial instruments in its condensed consolidated financial statements in other current assets, other assets or accrued liabilities, depending on their net position, regardless of the purpose or intent for holding the derivative contract. Changes in the fair value of the derivative financial instruments are either recognized periodically in earnings or in shareholders’ equity as a component of OCI. Changes in the fair value of cash flow hedges are recorded in OCI and reclassified into earnings when the underlying contract matures and, for interest rate exposure derivatives, over the term of the corresponding debt instrument. 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.

16



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 4, Accumulated Other Comprehensive Income (Loss) .

Note 10 – 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. For the Company's latest annual impairment assessment that occurred as of July 31, 2016, 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 quantitative 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 a weighting of the income and market approaches. Under the income approach, the Company uses a discounted cash flow methodology which requires management to make significant estimates and assumptions related to forecasted revenues, gross profit margins, operating income margins, working capital cash flow, perpetual growth rates, and long-term discount rates, among others. For the market approach, the Company uses the guideline public company method. Under this method the Company utilizes information from comparable publicly traded companies with similar operating and investment characteristics as the reporting units to create valuation multiples that are applied to the operating performance of the reporting unit being tested in order to obtain their respective fair values. In order to assess the reasonableness of the calculated reporting unit fair values, the Company reconciles the aggregate fair values of its reporting units (determined as described above) to its current market capitalization, allowing for a reasonable control premium. If the carrying amount of a reporting unit, calculated using the above approaches, 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 reporting unit. 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 2017 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 three months of fiscal 2017 :
 
Three Months Ended
 
January 28, 2017
Balance as of October 29, 2016
$
1,679,116

Goodwill adjustment related to acquisitions (1)
1,044

Foreign currency translation adjustment
(2,761
)
Balance as of January 28, 2017
$
1,677,399

(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 the estimated future undiscounted cash flows the assets are expected to generate over their remaining estimated useful 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 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. In-process research and development (IPR&D) assets are considered indefinite-lived intangible assets until completion or abandonment of the

17



associated research and development (R&D) efforts. Upon completion of the projects, the IPR&D assets are re-classed to technology-based intangible assets and amortized over their estimated useful lives.
As of January 28, 2017 and October 29, 2016 , the Company’s intangible assets consisted of the following:
 
January 28, 2017
 
October 29, 2016
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Customer relationships
$
649,153

 
$
177,015

 
$
649,159

 
$
158,979

Technology-based
38,726

 
11,744

 
38,731

 
9,958

Trade-name
600

 
135

 
600

 
60

Backlog
200

 
50

 
200

 

IPR&D
29,781

 

 
29,675

 

Total (1)(2)
$
718,460

 
$
188,944

 
$
718,365

 
$
168,997

___________
(1) Foreign intangible asset carrying amounts are affected by foreign currency translation.
(2) Increases in intangible assets relate to other acquisitions that were not material to the Company on either an individual or aggregate basis.
  
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-month period s ended January 28, 2017 and January 30, 2016 , amortization expense related to finite-lived intangible assets was $19.9 million and $18.3 million , respectively. The remaining amortization expense will be recognized over an estimated weighted average life of approximately 3.4 years.
The Company expects annual amortization expense for intangible assets to be:
Fiscal Year
Amortization Expense
Remainder of fiscal 2017

$59,846

2018

$78,475

2019

$75,286

2020

$75,047

2021

$74,627


Note 11 – 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
 
January 28, 2017
 
January 30, 2016
Service cost
$
1,648

 
$
1,379

Interest cost
884

 
938

Expected return on plan assets
(1,006
)
 
(981
)
Amortization of initial net obligation
3

 
4

Amortization of prior service cost
(2
)
 

Amortization of net loss
455

 
167

Net periodic pension cost
$
1,982

 
$
1,507



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Note 12 – Debt
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 had obtained a 364 -day senior unsecured bridge facility in an aggregate principal amount of up to $7.5 billion ( 364 -day Bridge) and a 90 -day senior unsecured bridge facility in an aggregate principal amount of up to $4.1 billion . The bridge financing commitments expire on April 26, 2017, but may be extended until October 26, 2017 under certain conditions. As discussed below, as a result of entering into the term loan facility and the issuance of $2.1 billion senior unsecured notes, the 364 -day Bridge financing was terminated. In total, the Company expects to incur fees for the bridge financing commitments of approximately $36.7 million , of which $28.7 million was recorded as debt issuance costs in the third quarter of fiscal 2016 and is being amortized into interest expense over the term of the bridge financing commitments. As a result of entering into the term loan facility and senior unsecured notes described below, $13.7 million and $7.2 million of unamortized bridge fees relating to the 364 -day Bridge were accelerated and amortized into interest expense in the fourth quarter of fiscal 2016 and first quarter of fiscal 2017, respectively.
On September 23, 2016, the Company entered into a term loan facility consisting of a 3 -year unsecured term loan facility in the principal amount of $2.5 billion and a 5 -year unsecured term loan facility in the principal amount of $2.5 billion established pursuant to a credit agreement with the Company as the borrower and JP Morgan Chase Bank, N.A. as administrative agent and other banks identified therein as lenders (Term Loan Agreement). The term loan facility replaced $5.0 billion of the 364 -day Bridge. The closing date and availability of the initial borrowings under the Term Loan Agreement are conditioned upon the consummation of the acquisition of Linear. The commitments are automatically terminated on the earlier of the making of the loans to the Company on the closing date of the acquisition of Linear or October 26, 2017. The Company has agreed to pay a ticking fee based on the Company’s debt rating from time to time, accruing beginning 60 days following the effectiveness of the Term Loan Agreement and continuing until the earlier of the termination of the commitments or the closing date of the acquisition of Linear.
On December 5, 2016 , the Company issued $400.0 million aggregate principal amount of 2.5% senior unsecured notes due December 5, 2021 (the 2021 Notes), $550.0 million aggregate principal amount of 3.125% senior unsecured notes due December 5, 2023 (the December 2023 Notes), $900.0 million aggregate principal amount of 3.5% senior unsecured notes due December 5, 2026 (the 2026 Notes) and $250.0 million aggregate principal amount of 4.5% senior unsecured notes due December 5, 2036 (the 2036 Notes, and together with the 2021 Notes, the December 2023 Notes and the 2026 Notes, the Notes) with semi-annual fixed interest payments due on June 5 and December 5 of each year, commencing June 5, 2017 . The Notes were sold in an underwritten public offering pursuant to the terms of an underwriting agreement, dated as of November 30, 2016, among the Company and J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit Suisse Securities (USA) LLC and MUFG Securities Americas Inc., as representatives of the several underwriters named therein. The net proceeds of the offering were $2.1 billion , after discount and issuance costs. Debt discount and issuance costs will be amortized through interest expense over the term of the Notes. The Notes were issued pursuant to an indenture, as supplemented by a supplemental indenture, and the indenture and supplemental indenture contain certain covenants, events of default and other customary provisions. As of January 28, 2017 , the Company was compliant with these covenants. The Notes are subordinated to any future secured debt and to the other liabilities of the Company's subsidiaries. The issuance of the Notes replaced the remaining $2.5 billion of the 364 -day Bridge. If (1) the Company’s pending acquisition of Linear is not consummated or the Merger Agreement is terminated on or prior to April 26, 2017, which may be extended under certain circumstances to October 26, 2017, or (2) the Company notifies the trustee in writing or otherwise announces that it will not pursue the consummation of the acquisition, then the 2021 Notes, the December 2023 Notes and the 2036 Notes will be subject to a special mandatory redemption at a price equal to 101% of the aggregate principal amount of each such series of notes plus accrued and unpaid interest, if any, to the special mandatory redemption date. The 2026 Notes will not be subject to the special mandatory redemption.
In addition, the Company expects to incur approximately $4.0 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 fiscal 2016 and is being amortized into interest expense over the term of the associated financing arrangements and of which $ 1.2 million was expensed in the first quarter of fiscal 2017. Additional fees will be incurred in connection with the Term Loan Agreement and when the remaining bridge financing commitments are drawn.

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The Company’s debt consisted of the following as of January 28, 2017 and October 29, 2016 :
 
January 28, 2017
 
October 29, 2016
 
Principal
 
Unamortized discount and debt issuance costs
 
Principal
 
Unamortized discount and debt issuance costs
2021 Notes, due December 2021
400,000

 
4,432

 

 

2023 Notes, due June 2023
500,000

 
3,895

 
500,000

 
4,047

2023 Notes, due December 2023
550,000

 
6,042

 

 

2025 Notes, due December 2025
850,000

 
7,816

 
850,000

 
8,034

2026 Notes, due December 2026
900,000

 
12,594

 

 

2036 Notes, due December 2036
250,000

 
4,129

 

 

2045 Notes, due December 2045
400,000

 
5,692

 
400,000

 
5,742

   Total Long-Term Debt
$
3,850,000

 
$
44,600

 
$
1,750,000

 
$
17,823


Note 13 – 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 January 28, 2017 and October 29, 2016 were as follows:
 
January 28, 2017
 
October 29, 2016
Raw materials
$
20,446

 
$
20,263

Work in process
228,516

 
232,196

Finished goods
116,624

 
124,096

Total inventories
$
365,586

 
$
376,555


Note 14 – 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, approximately $9.0 billion from the bridge and term loan facilities and the remainder from proceeds received from the Company's issuance of the Notes.
On October 18, 2016, Linear stockholders approved the Merger Agreement. The Company has received antitrust clearance in the United States, Germany, Japan, Israel, Korea and Romania. The Company currently expects the transaction to be completed by the end of the second quarter of fiscal 2017, subject to receipt of the remaining required regulatory clearances and the satisfaction or waiver of the other conditions contained in the Merger Agreement. 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 connection with the planned acquisition, the Company has obtained bridge financing commitments, entered into the Term Loan Agreement and issued $2.1 billion of Notes. See Note 12, Debt, of these Notes to Condensed Consolidated Financial Statements for further information on these financing commitments. 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. During the

20



first quarter of fiscal 2017, the Company incurred approximately $8.0 million of transaction-related costs recorded within SMG&A expenses in the Company's Condensed Consolidated Statement of Income.

Note 15 – 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. A favorable ruling was rendered by the U.S. Tax Court on November 22, 2016. The Company recorded a $36.5 million reserve for this potential liability in the fourth quarter of fiscal 2013 and has retained it as of January 28, 2017 since the ultimate outcome depends on whether the Internal Revenue Service will appeal the U.S. Tax Court’s decision.
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 16 – New Accounting Pronouncements
Standards Implemented
Business combinations
In September 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments (ASU 2015-16). The update requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The update also requires that the acquirer record, in the financial statements of the period in which adjustments to provisional amounts are determined, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The new standard is effective prospectively for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years, with early adoption permitted. The Company adopted ASU 2015-16 in the first quarter of fiscal 2017. The impact of the adoption will be dependent any future measurement period adjustments for acquisitions.
Intangibles-Goodwill and other
In April 2015, the FASB issued ASU 2015-05,  Intangibles - Goodwill and Other - Internal Use Software (Subtopic 350-40) - Customer's Accounting for Fees Paid in a Cloud Computing Arrangement (ASU 2015-05), which provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. Consequently, all software licenses within the scope of Subtopic 350-40 will be accounted for consistent with other licenses of intangible assets. The guidance in ASU 2015-05 is effective for fiscal years beginning after December 15, 2015 and early adoption is permitted. The adoption of ASU 2015-05 in the first quarter of fiscal 2017 did not impact the Company's financial position or results of operations.
Compensation - Retirement Benefits
In April 2015, the FASB issued ASU 2015-04, Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets (ASU 2015-04) , which provides a practical expedient for entities with a fiscal year-end that does not coincide with a month-end, that permits the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end and apply that practical expedient consistently from year to year.

21



Entities are required to disclose the accounting policy election and the date used to measure defined benefit plan assets and obligations. ASU 2015-04 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early application is permitted. Amendments should be applied prospectively. The adoption of ASU 2015-04 in the first quarter of fiscal 2017 did not impact the Company’s financial position or results of operations.
Consolidation
In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis (ASU 2015-02). ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. ASU 2015-02 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. A reporting entity may apply the amendments in this guidance using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. A reporting entity also may apply the amendments retrospectively. The adoption of ASU 2015-02 in the first quarter of fiscal 2017 did not impact the Company’s financial position or results of operations.
Stock Compensation
I n June 2014, the FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (ASU 2014-12) , which requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU 2014-12 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted. The adoption of ASU 2014-12 in the first quarter of fiscal 2017 did not impact the Company's financial position or results of operations.
Standards to Be Implemented
Intangibles - Goodwill and Other
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350) (ASU 2017-04). ASU 2017-04 simplifies the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The amendment requires an entity to perform its annual, or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. A goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The amendment should be applied on a prospective basis. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. ASU 2017-04 is effective for the Company in the first quarter of the fiscal year ending October 30, 2021 (fiscal 2021). The Company is currently evaluating the adoption date and the impact, if any, adoption will have on its financial position and results of operations.
Business combinations
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business (ASU 2017-01). ASU 2017-07 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company will adopt ASU 2016-06 in the first quarter of the fiscal year ending November 2, 2019 (fiscal 2019). The impact of the adoption on the Company's financial position and results of operations will be dependent any future acquisitions or disposals.
Income Taxes
In October 2016, the FASB issued ASU 2016-16,  Income Taxes (Topic 740) (ASU 2016-16) . ASU 2016-16 will require an entity to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. ASU 2016-16 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted as of the beginning of an annual reporting period for which financial statements have not been issued or made available for issuance. ASU-2016-16 is effective for the Company in the first quarter of fiscal 2019. The Company is currently evaluating the adoption date and the impact, if any, adoption will have on its financial position and results of operations.



22



Statement of Cash Flows
In August 2016, the FASB issued ASU 2016-15,  Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15). ASU 2016-15 provides guidance on several specific cash flow issues, including debt prepayment or extinguishment costs, settlement of certain debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of certain insurance claims and distributions received from equity method investees. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted in any interim or annual period. ASU-2016-15 is effective for the Company in the first quarter of fiscal 2019. The Company is currently evaluating the adoption date and the impact, if any, adoption will have on its statement of cash flows.
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. ASU-2016-07 is effective for the Company in the first quarter of the fiscal year ending November 3, 2018 (fiscal 2018). The Company is currently evaluating the adoption date and 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 ASU 2016-06 is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. ASU 2016-06 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. ASU 2016-06 is effective for the Company in the first quarter of fiscal 2019. The Company is currently evaluating the adoption date and 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. ASU 2016-02 is effective for the Company in the first quarter of the fiscal year ending October 31, 2020 (fiscal 2020). The Company is currently evaluating the adoption date and the impact 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. ASU 2016-13 is effective for the Company in the first quarter of fiscal 2020. The Company is currently evaluating the adoption date and the impact, if any, adoption will have on its financial position and results of operations.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01). ASU 2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; eliminates

23



the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU 2016-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. ASU 2016-01 is effective in the first quarter of fiscal 2019. The Company is currently evaluating the adoption date and the impact adoption will have on its financial position and results of operations.
Inventory
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330) - Simplifying the Measurement of Inventory (ASU 2015-11) , which simplifies the subsequent measurement of inventories by replacing the lower of cost or market test with a lower of cost and net realizable value test. The guidance applies only to inventories for which cost is determined by methods other than last-in first-out (LIFO) and the retail inventory method. The guidance in ASU 2015-11 is effective for fiscal years beginning after December 15, 2016 and early adoption is permitted. ASU 2015-11 is effective for the Company in the first quarter of fiscal 2018. The Company is currently evaluating the adoption date and the impact, if any, adoption will have on its financial position and results of operations.
Presentation of Financial Statements
In August 2014, the FASB issued ASU 2014-15,  Presentation of Financial Statements - Going Concern (Subtopic 205-40)  (ASU 2014-15), which provides guidance about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The update requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the update (1) provides a definition of the term "substantial doubt", (2) requires an evaluation every reporting period including interim periods, (3) provides principles for considering the mitigating effect of management’s plans, (4) requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) requires an express statement and other disclosures when substantial doubt is not alleviated, and (6) requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). ASU 2014-15 is effective for annual reporting periods ending after December 15, 2016, and for annual periods and interim periods thereafter. Early adoption is permitted. ASU 2014-15 is effective for the Company for its annual period ending October 28, 2017. The Company does not expect the adoption to have a material impact on the Company's consolidated financial statements.
Stock Compensation
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ( ASU 2016-09). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years, and interim periods within those annual periods, beginning after December 15, 2016 and allows for prospective, retrospective or modified retrospective adoption, depending on the area covered in the update, with early adoption permitted. ASU 2016-09 is effective for the Company in the first quarter of fiscal 2018. The Company is currently evaluating the adoption date and the impact, if any, adoption will have on its financial position and results of operations.
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, the guidance requires improved disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has issued several amendments and updates to the new revenue standard, including guidance related to when an entity should recognize revenue gross as a principal or net as an agent and how an entity should identify performance obligations.  As amended, ASU 2014-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, which is the Company's first quarter of fiscal 2019. Early adoption is permitted for all entities only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. We have developed a project plan for the implementation of the guidance

24



including a review of all revenue streams to identify any differences in the timing, measurement or presentation of revenue recognition. While the Company is still in the process of completing its evaluation of the standard, it currently believes the most significant impact will be related to the timing of recognition of sales to distributors. As described in Note 2, Revenue Recognition , of these Notes to the Condensed Consolidated Financial Statements, the Company currently defers revenue and the related cost of sales on shipments to distributors until the distributors resell the products to their customers. Upon adoption of ASU 2014-09, the Company will no longer be permitted to defer revenue until sale by the distributor to the end customer, but rather, will be required to estimate the effects of returns and allowances provided to distributors and record revenue at the time of sale to the distributor. The Company is continuing to evaluate the future impact and method of adoption of ASU 2014-09 and related amendments on its consolidated financial statements and related disclosures. The Company is considering early adoption of the new standard using the full retrospective method in the fiscal year ending November 3, 2018. The method of adoption and the Company's ability to early adopt the standard is dependent on system readiness and the completion of analysis necessary to meet the requirements under ASU 2014-09.

Note 17 – Subsequent Events
On February 13, 2017 , the Board of Directors of the Company declared a cash dividend of $0.45 per outstanding share of common stock. The dividend will be paid on March 7, 2017 to all shareholders of record at the close of business on February 24, 2017 .


25



ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This information should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended October 29, 2016 .
This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements regarding future events and our future results that are subject to the safe harbor created under the Private Securities Litigation Reform Act of 1995 and other safe harbors under the Securities Act of 1933 and the Securities Exchange Act of 1934. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “may,” “could” and “will,” and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections regarding our future financial performance; our anticipated growth and trends in our businesses; the proposed acquisition of Linear Technology Corporation and financing for the proposed transaction; our future liquidity, capital needs and capital expenditures; our future market position and expected competitive changes in the marketplace for our products; our ability to pay dividends or repurchase stock; our ability to service our outstanding debt; our expected tax rate; the effect of new accounting pronouncements; our ability to successfully integrate acquired businesses and technologies; and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are inherently subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified in Part II, Item 1A. “Risk Factors” and elsewhere herein. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements, including to reflect events or circumstances occurring after the date of the filing of this report, except to the extent required by law.

Results of Operations
(all tabular amounts in thousands except per share amounts and percentages)
Overview
 
Three Months Ended
 
January 28, 2017
 
January 30, 2016
 
$ Change
 
% Change
Revenue
$
984,449

 
$
769,429

 
$
215,020

 
28
%
Gross margin %
65.9
%
 
62.0
%
 
 
 
 
Net income
$
217,129

 
$
164,504

 
$
52,625

 
32
%
Net income as a % of revenue
22.1
%
 
21.4
%
 
 
 
 
Diluted EPS
$
0.69

 
$
0.52

 
$
0.17

 
33
%
Proposed Acquisition of Linear Technology Corporation
On July 26, 2016, we entered into a definitive agreement (the Merger Agreement) to acquire Linear Technology Corporation (Linear), an independent manufacturer of high performance linear integrated circuits. Under the terms of the Merger Agreement, Linear stockholders will receive, for each outstanding share of Linear common stock, $46.00 in cash and 0.2321 of a share of our common stock at the closing. Based on the number of outstanding shares of Linear common stock as of July 26, 2016 and our 5-day volume weighted average price as of July 21, 2016, the value of the total consideration to be paid by us is estimated to be approximately $14.8 billion. On October 18, 2016, Linear stockholders approved the Merger Agreement. We have received antitrust clearance in the United States, Germany, Japan, Israel, Korea and Romania. We currently expect the transaction to be completed by the end of the second quarter of our fiscal year ended October 28, 2017 (fiscal 2017), subject to receipt of the remaining required regulatory clearances and the satisfaction or waiver of the other conditions contained in the Merger Agreement.
We intend to fund the acquisition with the issuance of approximately 58.0 million new shares of our common stock, approximately $9.0 billion from bridge and term loan facilities and the remainder from proceeds received from our issuance of senior unsecured notes in the first quarter of fiscal 2017. See Note 12, Debt and Note 14, Acquisitions, in the Notes to the Condensed Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information.

26



Revenue Trends by End Market
The following table summarizes revenue by end market. The categorization of revenue by end market is determined using a variety of data points including the technical characteristics of the product, the “sold to” customer information, the “ship to” customer information and the end customer product or application into which our product will be incorporated. As data systems for capturing and tracking this data evolve and improve, the categorization of products by end market can vary over time. When this occurs, we reclassify revenue by end market for prior periods. Such reclassifications typically do not materially change the sizing of, or the underlying trends of results within, each end market.
 
Three Months Ended
 
January 28, 2017
 
January 30, 2016
 
Revenue
 
% of
Revenue
 
Y/Y%
 
Revenue
 
% of
Revenue*
Industrial
$
401,481

 
41
%
 
15
%
 
$
348,402

 
45
%
Automotive
138,585

 
14
%
 
10
%
 
126,355

 
16
%
Consumer
270,408

 
27
%
 
113
%
 
126,838

 
16
%
Communications
173,975

 
18
%
 
4
%
 
167,834

 
22
%
Total revenue
$
984,449

 
100
%
 
28
%
 
$
769,429

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

Industrial end market revenue increased in the three-month period ended January 28, 2017, as compared to the same period of the prior fiscal year, primarily as a result of a broad increase in demand in this end market, with particular strength in the instrumentation and automation sectors. Automotive end market revenue increased in the three-month period ended January 28, 2017, as compared to the same period of the prior fiscal year, primarily as a result of a broad-based increase in demand for our products. Consumer end market revenue increased in the three month period ended January 28, 2017, as compared to the same period of the prior fiscal year, primarily as a result of an increased demand for products used in portable consumer applications. Communications end market revenue increased in the three-month period ended January 28, 2017, as compared to the same period of the prior fiscal year, primarily as a result of increased demand for optical networking products.
Revenue Trends by Geographic Region
Revenue by geographic region, based upon the primary location of our customers’ design activity for our products, for the three-month period s ended January 28, 2017 and January 30, 2016 were as follows:
 
 
Three Months Ended
Region
January 28, 2017
 
January 30, 2016
 
$ Change
 
% Change
United States
$
430,998

 
$
266,669

 
$
164,329

 
62
%
Rest of North and South America
22,957

 
20,712

 
2,245

 
11
%
Europe
226,335

 
216,716

 
9,619

 
4
%
Japan
88,891

 
70,222

 
18,669

 
27
%
China
152,983

 
138,723

 
14,260

 
10
%
Rest of Asia
62,285

 
56,387

 
5,898

 
10
%
Total revenue
$
984,449

 
$
769,429

 
$
215,020

 
28
%

In the three-month period s ended January 28, 2017 and January 30, 2016 , 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.
On a regional basis, the sales increase in the United States in the three-month period ended January 28, 2017 , as compared to the same period of the prior fiscal year, was primarily a result of an increase in demand of our products sold into the consumer end market. The sales increase in Europe in the three-month period ended January 28, 2017 , as compared to the same period of the prior fiscal year, was a result of an increase in demand of our products sold into the industrial and automotive end markets. The sales increase in Japan in the three-month period ended January 28, 2017 , as compared to the same period of the prior fiscal year, was primarily a result of an increase in demand of our products sold into the industrial and consumer end markets. The sales increase in China in the three-month period ended January 28, 2017 , as compared to the same period of the prior fiscal year, was primarily a result of an increase in demand of our products sold into the industrial and

27



automotive end markets. The sales increase in the Rest of Asia in the three-month period ended January 28, 2017 , as compared to the same period of the prior fiscal year, was primarily a result of an increase in demand of our products sold into the industrial and communication end markets.
Gross Margin
 
Three Months Ended
 
January 28, 2017
 
January 30, 2016
 
$ Change
 
% Change
Gross margin
$
648,504

 
$
477,293

 
$
171,211

 
36
%
Gross margin %
65.9
%
 
62.0
%
 
 
 
 
Gross margin percentage increased by 390 basis points in the three-month period ended January 28, 2017 , as compared to the same period of the prior fiscal year, primarily due to increased utilization in our manufacturing facilities and lower inventory reserves, partially offset by a decrease in margins due to product mix.
Research and Development (R&D)  
 
Three Months Ended
 
January 28, 2017
 
January 30, 2016
 
$ Change
 
% Change
R&D expenses
$
183,954

 
$
157,428

 
$
26,526

 
17
%
R&D expenses as a % of revenue
18.7
%
 
20.5
%
 
 
 
 
R&D expenses increased in the three-month period ended January 28, 2017 , as compared to the same period of the prior fiscal year, primarily as a result of increases in variable compensation expense linked to our overall profitability and revenue growth and R&D employee and related benefit expenses.
R&D expenses as a percentage of revenue will fluctuate from year-to-year depending on the amount of revenue and the success of new product development efforts, which we view as critical to our future growth. We have hundreds of R&D projects underway, none of which we believe are material on an individual basis. We expect to continue the development of innovative technologies and processes for new products. We believe that a continued commitment to R&D is essential to maintain product leadership with our existing products as well as to provide innovative new product offerings. Therefore, we expect to continue to make significant R&D investments in the future.
Selling, Marketing, General and Administrative (SMG&A)
 
Three Months Ended
 
January 28, 2017
 
January 30, 2016
 
$ Change
 
% Change
SMG&A expenses
$
130,659

 
$
107,462

 
$
23,197

 
22
%
SMG&A expenses as a % of revenue
13.3
%
 
14.0
%
 
 
 
 
SMG&A expenses increased in the three-month period ended January 28, 2017 , as compared to the same period of the prior fiscal year, primarily as a result of increases in variable compensation expense linked to our overall profitability and revenue growth, acquisition related costs resulting from the proposed acquisition of Linear, and SMG&A employee and related benefit expenses.
Amortization of Intangibles
 
Three Months Ended
 
January 28, 2017
 
January 30, 2016
 
$ Change
 
% Change
Amortization expenses
$
18,160

 
$
17,358

 
$
802

 
5
%
Amortization expenses as a % of revenue
1.8
%
 
2.3
%
 
 
 
 
Amortization expenses increased in the three-month period ended January 28, 2017 , as compared to the same period of the prior fiscal year, as a result of the purchase of intangible assets as part of acquisitions that we completed in fiscal 2016.



28



Special Charges

Early Retirement Offer Action
During the first quarter of fiscal 2017, we initiated an early retirement offer. This resulted in a special charge of approximately $ 41.3 million for severance, related benefits, and other costs in accordance with this program for  225  manufacturing, engineering and SMG&A employees. As of January 28, 2017, we still employed all of the  225  employees included in this cost reduction action. These employees must continue to be employed by the Company until their employment is terminated in order to receive the severance benefits. We expect this action will result in estimated annual salary, variable compensation and employee benefit savings of approximately $28.4 million once fully implemented.

Reduction of Operating Costs Action
During the first quarter of fiscal 2017, we recorded special charges of approximately $ 8.1 million for severance and fringe benefit costs in accordance with our ongoing benefit plan or statutory requirements at foreign locations for 177 manufacturing, engineering and SMG&A employees. As of January 28, 2017 , we still employed all of the 177 employees included in this cost reduction action. These employees must continue to be employed by us until their employment is terminated in order to receive the severance benefits. We expect this action will result in estimated annual salary, variable compensation and employee benefit savings of approximately $5.0 million once fully implemented.
Operating Income
 
Three Months Ended
 
January 28, 2017
 
January 30, 2016
 
$ Change
 
% Change
Operating income
$
266,268

 
$
195,045

 
$
71,223

 
37
%
Operating income as a % of revenue
27.0
%
 
25.3
%
 
 
 
 
The year-over-year increase in operating income in the three-month period ended January 28, 2017 was primarily the result of a $171.2 million increase in gross margin, partially offset by a $49.5 million increase in special charges, a $26.5 million increase in R&D expenses and a $23.2 million increase in SMG&A expenses as more fully described above under the headings Special Charges, Research and Development (R&D) and Selling, Marketing, General and Administrative (SMG&A).
Nonoperating Expense (Income)
 
Three Months Ended
 
January 28, 2017
 
January 30, 2016
 
$ Change
Interest expense
$
42,614

 
$
13,062

 
$
29,552

Interest income
(10,000
)
 
(3,199
)
 
(6,801
)
Other, net
345

 
3,005

 
(2,660
)
Total nonoperating expense
$
32,959

 
$
12,868

 
$
20,091

The year-over-year increase in nonoperating expense in the three-month period ended January 28, 2017 was primarily the result of an increase in interest expense as a result of the issuance of $2.1 billion of senior unsecured notes in the first quarter of fiscal 2017 and $1.3 billion of senior unsecured notes in the first quarter of fiscal 2016 and as a result of fees related to financing commitments entered into in anticipation of the proposed acquisition of Linear. See Note 12, Debt, of the Notes to our Condensed Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on the debt issuances and commitments related to the proposed acquisition of Linear. The increase in nonoperating expense as a result of the increase in interest expense in the three-month period ended January 28, 2017, as compared to the same period of the prior fiscal year, was partially offset by an increase in interest income due to higher interest rates earned on our investments and the investment of higher cash balances in the three-month period ended January 28, 2017 as compared to the same period of the prior fiscal year.
Provision for Income Taxes
 
Three Months Ended
 
January 28, 2017
 
January 30, 2016
 
$ Change
Provision for income taxes
$
16,180

 
$
17,673

 
$
(1,493
)
Effective income tax rate
6.9
%
 
9.7
%
 
 

29



Our effective tax rate reflects the applicable tax rate in effect in the various tax jurisdictions around the world where our income is earned.
The tax rate for all periods presented was below the U.S. federal statutory tax rate of 35%, primarily due to lower statutory tax rates applicable to our operations in the foreign jurisdictions in which we earn income. Non-U.S. jurisdictions accounted for approximately 80.2% of our total revenues for the three-month period ended January 28, 2017 , resulting in a material portion of our pretax income being earned and taxed outside the U.S., primarily in Bermuda and Ireland, at rates ranging from 0% to 35%. The impact on our provision for income taxes of income earned in foreign jurisdictions being taxed at rates different than the U.S. statutory rate was a benefit of approximately $84.1 million and a foreign effective tax rate of approximately 4.8% in the three-month period ended January 28, 2017 , compared to a benefit of approximately $53.4 million and a foreign effective tax rate of approximately 6.4% in the three-month period ended January 30, 2016 . A reduction in the ratio of domestic taxable income to worldwide taxable income effectively lowers the overall tax rate, due to the fact that the tax rates in the majority of foreign jurisdictions where we earn income are significantly lower than the U.S. statutory rate. In addition, our effective income tax rate can be impacted each year by discrete factors or events. Our effective tax rate for the three-month period ended January 28, 2017 included no material discrete items. Our effective tax rate for the three-month period ended January 30, 2016 included a tax benefit of $7.5 million from the reinstatement of the U.S. federal research and development tax credit in December 2015 retroactive to January 1, 2015.
Net Income
 
Three Months Ended
 
January 28, 2017
 
January 30, 2016
 
$ Change
 
% Change
Net Income
$
217,129

 
$
164,504

 
$
52,625

 
32
%
Net Income as a % of revenue
22.1
%
 
21.4
%
 
 
 
 
Diluted EPS
$
0.69

 
$
0.52

 
 
 
 
Net income increased in the three-month period ended January 28, 2017 , as compared to the same period of the prior fiscal year as a result of a $71.2 million increase in operating income, partially offset by a $20.1 million increase in nonoperating expense.

Liquidity and Capital Resources
At January 28, 2017 , our principal source of liquidity was $6.3 billion of cash and cash equivalents and short-term investments, of which approximately $2.7 billion was held in the United States. The balance of our cash and cash equivalents and short-term investments was held outside the United States in various foreign subsidiaries. As we intend to reinvest substantially all of our foreign earnings indefinitely, this cash held outside the United States is not available to meet certain aspects of our cash requirements in the United States, including cash dividends, principal and interest payments, and common stock repurchases. If these funds are needed for U.S. operations or can no longer be permanently reinvested outside the United States, we would be required to accrue and pay U.S. taxes to repatriate these funds. Our cash and cash equivalents consist of highly liquid investments with maturities of three months or less at the time of acquisition, including money market funds, and our short-term investments consist primarily of corporate obligations, such as commercial paper and floating rate notes, bonds and bank time deposits. We maintain these balances with high credit quality counterparties, continually monitor the amount of credit exposure to any one issuer and diversify our investments in order to minimize our credit risk.
In connection with our proposed acquisition of Linear, we obtained bridge financing commitments, entered into a term loan facility consisting of a 3-year unsecured term loan facility in the principal amount of $2.5 billion and a 5-year unsecured term loan facility in the principal amount of $2.5 billion, and issued $2.1 billion of senior unsecured notes. We expect to finance cash component of the consideration of the proposed acquisition using approximately $9.0 billion from the bridge and term loan facilities and the remainder from proceeds received from the issuance of the senior unsecured notes. In addition, we amended and restated our existing revolving credit facility to allow for the increase in the amount of commitments to $1.0 billion from $750.0 million, subject to closing the acquisition of Linear and the satisfaction of certain other conditions. During the period prior to closing, we expect to incur fees and expenses related to the financing arrangements and the acquisition. See Note 12, Debt, of the Notes to our Condensed Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information.
We believe that our existing sources of liquidity and cash expected to be generated from future operations, together with existing and anticipated available long-term financing, will be sufficient to fund operations, capital expenditures, research and development efforts and dividend payments (if any) in the immediate future and for at least the next twelve months.

30



 
Three Months Ended
 
January 28, 2017
 
January 30, 2016
Net cash provided by operating activities
$
314,492

 
$
219,705

Net cash provided by operations as a % of revenue
31.9
%
 
28.6
%
Net cash provided by (used for) investing activities
$
1,769,754

 
$
(204,365
)
Net cash provided by financing activities
$
1,982,551

 
$
571,781

At January 28, 2017 , cash and cash equivalents totaled $5.0 billion . The following changes contributed to the net increase in cash and cash equivalents in the three-month period ended January 28, 2017 as compared to the same period in fiscal 2016 .
Operating Activities
Cash provided by operating activities is net income adjusted for certain non-cash items and changes in assets and liabilities.
The increase in cash provided by operating activities during the three-month period ended January 28, 2017 , as compared to the same period of the prior fiscal year, was primarily due to higher net income adjusted for non-cash items and changes in working capital. Changes in working capital included a decrease in inventory and an increase in accrued liabilities more fully described below under the heading Working Capital.
Investing Activities
Investing cash flows consist primarily of capital expenditures, investment purchases, maturities and sales of available-for-sale securities, as well as cash used for acquisitions.
The increase in cash provided by investing activities during the three-month period ended January 28, 2017 , as compared to the same period of the prior fiscal year, was primarily the result of an increase in net proceeds received from the sale and maturity of available-for-sale securities.
Financing Activities
Financing cash flows consist primarily of payments of dividends to stockholders, repurchases of common stock, issuance and repayment of long-term debt, and proceeds from the sale of shares of common stock pursuant to employee equity incentive plans.
The increase in cash provided by financing activities during the three-month period ended January 28, 2017 , as compared to the same period of the prior fiscal year, was primarily due to an increase in net proceeds of $837.0 million received from the issuance of senior unsecured notes, a decrease in payments of $378.2 million related to the redemption of our senior unsecured notes in fiscal 2016, and a decrease in stock repurchases of $128.9 million due to the temporary suspension of our share repurchase program as a result of our proposed acquisition of Linear.
Working Capital
 
January 28, 2017
 
October 29, 2016
 
$ Change
 
% Change
Accounts receivable, net
$
472,511

 
$
477,609

 
$
(5,098
)
 
(1
)%
Days sales outstanding*
44

 
42

 
 
 
 
Inventory
$
365,586

 
$
376,555

 
$
(10,969
)
 
(3
)%
Days cost of sales in inventory*
101

 
104

 
 
 
 
* We use the average of the current quarter and prior quarter ending net accounts receivable and ending inventory balance in our calculation of days sales outstanding and days cost of sales in inventory, respectively.
The decrease in accounts receivable in dollars was primarily the result of lower product shipments in the first quarter of fiscal 2017 as compared to the fourth quarter of fiscal 2016 . Days sales outstanding increased as a result of a decrease in revenue of 2% while average accounts receivable increased 2% for the same period.
The decrease in inventory in dollars was a result of our efforts to balance manufacturing production, demand and inventory levels. Our inventory levels are impacted by our need to support forecasted sales demand and variations between

31



those forecasts and actual demand. Days cost of sales in inventory decreased as a result of cost of sales remaining flat while average inventory decreased 3% for the same period.
Current liabilities increased to $811.6 million at January 28, 2017 from $782.9 million at the end of fiscal 2016 . The increase was primarily the result of an increase in accrued liabilities due to an increase in accrued variable compensation and an increase in deferred income on shipments to distributors as more fully described below. These increases were partially offset by a decrease in accounts payable as a result of a decrease in transaction-related and integration costs associated with the proposed acquisition of Linear.
As of January 28, 2017