ADI_Q3_10-Q_8.3.2013


 
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 August 3, 2013
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 August 3, 2013 there were 310,692,734 shares of common stock of the registrant, $0.16 2/3 par value per share, outstanding.
 




PART I - FINANCIAL INFORMATION
 
ITEM 1.
Financial Statements

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

 
Three Months Ended
 
Nine Months Ended
 
August 3, 2013
 
August 4, 2012
 
August 3, 2013
 
August 4, 2012
Revenue
$
674,172

 
$
683,026

 
$
1,955,556

 
$
2,006,178

Cost of sales (1)
239,110

 
235,152

 
708,015

 
708,459

Gross margin
435,062

 
447,874

 
1,247,541

 
1,297,719

Operating expenses:
 
 
 
 
 
 
 
Research and development (1)
128,947

 
129,694

 
382,221

 
381,609

Selling, marketing, general and administrative (1)
97,773

 
99,873

 
298,036

 
298,910

Special charges

 
5,836

 
14,071

 
8,431

 
226,720

 
235,403

 
694,328

 
688,950

Operating income
208,342

 
212,471

 
553,213

 
608,769

Nonoperating (income) expense:
 
 
 
 
 
 
 
Interest expense
7,672

 
6,459

 
20,443

 
20,031

Interest income
(3,125
)
 
(3,506
)
 
(9,402
)
 
(10,821
)
Other, net
8,754

 
49

 
9,361

 
(1,450
)
 
13,301

 
3,002

 
20,402

 
7,760

Income before income taxes
195,041

 
209,469

 
532,811

 
601,009

Provision for income taxes
18,802

 
39,701

 
60,878

 
128,960

Net income
$
176,239

 
$
169,768

 
$
471,933

 
$
472,049

Shares used to compute earnings per share – basic
309,117

 
298,445

 
306,681

 
298,121

Shares used to compute earnings per share – diluted
315,307

 
305,359

 
312,983

 
305,604

Basic earnings per share
$
0.57

 
$
0.57

 
$
1.54

 
$
1.58

Diluted earnings per share
$
0.56

 
$
0.56

 
$
1.51

 
$
1.54

Dividends declared and paid per share
$
0.34

 
$
0.30

 
$
0.98

 
$
0.85

           (1) Includes stock-based compensation expense as follows:
 
 
 
 
 
 
 
           Cost of sales
$
1,672

 
$
1,871

 
$
4,856

 
$
5,349

           Research and development
$
5,536

 
$
5,999

 
$
16,180

 
$
17,046

           Selling, marketing, general and administrative
$
5,539

 
$
5,921

 
$
22,728

 
$
16,828

See accompanying notes.

1




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

 
Three Months Ended
 
Nine Months Ended
 
August 3, 2013
 
August 4, 2012
 
August 3, 2013
 
August 4, 2012
Net income
$
176,239

 
$
169,768

 
$
471,933

 
$
472,049

Foreign currency translation adjustments
(3,132
)
 
(2,045
)
 
(5,268
)
 
(5,686
)
Change in unrealized holding (losses) gains (net of taxes of $42, $319, $63 and $90, respectively) on securities classified as short-term investments
(35
)
 
1,334

 
155

 
447

Change in unrealized holding losses (net of taxes of $0, $0, $0 and $300, respectively) on securities classified as other investments

 

 

 
(558
)
Change in unrealized gains (losses) (net of taxes of $3,326, $344, $3,619 and $757, respectively) on derivative instruments designated as cash flow hedges
6,088

 
(2,062
)
 
5,443

 
(5,168
)
Changes in pension plans including prior service cost, transition obligation, net actuarial loss and foreign currency translation adjustments, net of taxes of ($98, $0, $303 and $0 respectively)
202

 
1,240

 
155

 
2,380

Other comprehensive income (loss)
3,123

 
(1,533
)
 
485

 
(8,585
)
Comprehensive income
$
179,362

 
$
168,235

 
$
472,418

 
$
463,464


See accompanying notes.


























2



ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(thousands, except per share amounts)

August 3, 2013
 
November 3, 2012
ASSETS
 

 
 

Current Assets
 
 
 
Cash and cash equivalents
$
460,068

 
$
528,833

Short-term investments
3,990,225

 
3,371,545

Accounts receivable, net
345,437

 
339,881

Inventories (1)
284,342

 
313,723

Deferred tax assets
104,430

 
90,335

Prepaid income tax
10,258

 
8,624

Prepaid expenses and other current assets
49,730

 
43,244

Total current assets
5,244,490

 
4,696,185

Property, Plant and Equipment, at Cost
 
 
 
Land and buildings
451,490

 
447,818

Machinery and equipment
1,710,865

 
1,681,661

Office equipment
49,234

 
50,042

Leasehold improvements
46,693

 
48,630

 
2,258,282

 
2,228,151

Less accumulated depreciation and amortization
1,765,861

 
1,727,284

Net property, plant and equipment
492,421

 
500,867

Other Assets
 
 
 
Deferred compensation plan investments
16,240

 
28,426

Other investments
3,816

 
1,816

Goodwill
280,591

 
283,833

Intangible assets, net
28,607

 
28,772

Deferred tax assets
30,614

 
43,531

Other assets
41,847

 
36,917

Total other assets
401,715

 
423,295

 
$
6,138,626

 
$
5,620,347

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
113,350

 
$
117,034

Deferred income on shipments to distributors, net
259,003

 
238,541

Income taxes payable
6,927

 
6,097

Current portion of long-term debt

 
14,500

Accrued liabilities
112,529

 
148,907

Total current liabilities
491,809

 
525,079

Non-current liabilities
 
 
 
Long-term debt
872,104

 
807,098

Deferred income taxes
19,460

 
1,130

Deferred compensation plan liability
16,240

 
28,426

Other non-current liabilities
95,777

 
93,255

Total non-current liabilities
1,003,581

 
929,909

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, 310,692,734 shares
issued and outstanding (301,389,176 on November 3, 2012)
51,783

 
50,233

Capital in excess of par value
694,577

 
390,651

Retained earnings
3,960,785

 
3,788,869

Accumulated other comprehensive loss
(63,909
)
 
(64,394
)
Total shareholders’ equity
4,643,236

 
4,165,359

 
$
6,138,626

 
$
5,620,347

(1)
Includes $2,126 and $2,517 related to stock-based compensation at August 3, 2013 and November 3, 2012, respectively.

See accompanying notes.

3






ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(thousands)
  
Nine Months Ended
 
August 3, 2013
 
August 4, 2012
Cash flows from operating activities:
 
 
 
Net income
$
471,933

 
$
472,049

Adjustments to reconcile net income to net cash provided by operations:
 
 
 
Depreciation
82,681

 
82,221

Amortization of intangibles
165

 
74

Stock-based compensation expense
43,764

 
39,223

Gain on sale of investments

 
(1,231
)
Loss on extinguishment of debt
10,205

 

Excess tax benefit-stock options
(15,073
)
 
(9,552
)
Deferred income taxes
(11,141
)
 
(4,105
)
Non-cash portion of special charge

 
219

Other non-cash activity
(1,072
)
 
(1,770
)
Changes in operating assets and liabilities
48,718

 
1,367

Total adjustments
158,247

 
106,446

Net cash provided by operating activities
630,180

 
578,495

Cash flows from investing activities:
 
 
 
Purchases of short-term available-for-sale investments
(5,980,735
)
 
(6,282,724
)
Maturities of short-term available-for-sale investments
4,771,441

 
4,829,822

Sales of short-term available-for-sale investments
590,827

 
337,905

Proceeds from the sale of investments

 
1,506

Additions to property, plant and equipment
(74,516
)
 
(94,665
)
Payments for acquisitions, net of cash acquired
(2,475
)
 
(24,158
)
Increase in other assets
(4,066
)
 
(915
)
Net cash used for investing activities
(699,524
)
 
(1,233,229
)
Cash flows from financing activities:
 
 
 
Early termination of swap agreements

 
18,520

Payment of senior unsecured notes
(392,790
)
 

Proceeds from long-term debt
493,880

 

Proceeds from derivative instruments
10,952

 

Term loan repayments
(60,108
)
 
(22,875
)
Dividend payments to shareholders
(300,017
)
 
(253,329
)
Repurchase of common stock
(17,720
)
 
(140,215
)
Proceeds from employee stock plans
261,878

 
111,202

Contingent consideration payment
(3,752
)
 
(1,991
)
Decrease in other financing activities
(7,486
)
 
(6,744
)
Excess tax benefit-stock options
15,073

 
9,552

Net cash used for financing activities
(90
)
 
(285,880
)
Effect of exchange rate changes on cash
669

 
(2,337
)
Net decrease in cash and cash equivalents
(68,765
)
 
(942,951
)
Cash and cash equivalents at beginning of period
528,833

 
1,405,100

Cash and cash equivalents at end of period
$
460,068

 
$
462,149

See accompanying notes.

4



ANALOG DEVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED AUGUST 3, 2013
(all tabular amounts in thousands except per share amounts and percentages)

Note 1 – Basis of Presentation
In the opinion of management, the information furnished in the accompanying condensed consolidated financial statements reflects all normal recurring adjustments that are necessary to fairly state the results for these interim periods and should be read in conjunction with Analog Devices, Inc.’s (the Company) Annual Report on Form 10-K for the fiscal year ended November 3, 2012 and related notes. The results of operations for the interim periods shown in this report are not necessarily indicative of the results that may be expected for the fiscal year ending November 2, 2013 or any future period.
Certain amounts reported in previous years have been reclassified to conform to the fiscal 2013 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 2013 is a 52-week fiscal year and fiscal 2012 was a 53-week fiscal year. The additional week in fiscal 2012 was included in the first quarter ended February 4, 2012. Therefore, the first nine months of fiscal 2012 included an additional week of operations as compared to the first nine months of fiscal 2013.

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

The deferred costs of sales to distributors have historically had very little risk of impairment due to the margins the Company earns on sales of its products and the relatively long life-cycle of the Company’s products. Product returns from distributors that are ultimately scrapped have historically been immaterial. In addition, price-protection and price-adjustment credits granted to distributors historically have not exceeded the margins the Company earns on sales of its products. The

5



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 August 3, 2013 and November 3, 2012, the Company had gross deferred revenue of $326.2 million and $299.0 million, respectively, and gross deferred cost of sales of $67.2 million and $60.5 million, respectively. Deferred income on shipments to distributors increased in the first nine months of fiscal 2013 primarily as a result of a mix shift in favor of higher margin products sold into the channel.
The Company generally offers a twelve-month warranty for its products. The Company’s warranty policy provides for replacement of defective products. Specific accruals are recorded for known product warranty issues. Product warranty expenses during each of the three- and nine-month periods ended August 3, 2013 and August 4, 2012 were not material.

Note 3 – Stock-Based Compensation

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

Grant-Date Fair Value — The Company uses the Black-Scholes valuation model to calculate the grant-date fair value of stock option awards. The use of valuation models requires the Company to make estimates and assumptions, such as expected volatility, expected term, risk-free interest rate, expected dividend yield and forfeiture rates. The grant-date fair value of restricted stock units represents the value of the Company’s common stock on the date of grant, reduced by the present value of dividends expected to be paid on the Company’s common stock prior to vesting.
Information pertaining to the Company’s stock option awards and the related estimated weighted-average assumptions to calculate the fair value of stock options granted during the three- and nine-month periods ended August 3, 2013 and August 4, 2012 are as follows:
  
Three Months Ended
 
Nine Months Ended
Stock Options
August 3, 2013
 
August 4, 2012
 
August 3, 2013
 
August 4, 2012
Options granted (in thousands)
103

 
36

 
2,389

 
2,263

Weighted-average exercise price

$45.97

 

$36.24

 

$46.39

 

$39.65

Weighted-average grant-date fair value

$7.85

 

$6.73

 

$7.37

 

$7.49

Assumptions:
 
 
 
 
 
 
 
Weighted-average expected volatility
25.8
%
 
30.2
%
 
24.6
%
 
28.6
%
Weighted-average expected term (in years)
5.4

 
5.3

 
5.4

 
5.3

Weighted-average risk-free interest rate
1.2
%
 
0.6
%
 
1.0
%
 
1.1
%
Weighted-average expected dividend yield
3.0
%
 
3.3
%
 
2.9
%
 
3.0
%
Expected volatility — The Company is responsible for estimating volatility and has considered a number of factors, including third-party estimates. The Company currently believes that the exclusive use of implied volatility results in the best estimate of the grant-date fair value of employee stock options because it reflects the market’s current expectations of future volatility. In evaluating the appropriateness of exclusively relying on implied volatility, the Company concluded that: (1) options in the Company’s common stock are actively traded with sufficient volume on several exchanges; (2) the market prices of both the traded options and the underlying shares are measured at a similar point in time to each other and on a date close to the grant date of the employee share options; (3) the traded options have exercise prices that are both near-the-money and close to the exercise price of the employee share options; and (4) the remaining maturities of the traded options used to estimate volatility are at least one year.

Expected term — The Company uses historical employee exercise and option expiration data to estimate the expected term assumption for the Black-Scholes grant-date valuation. The Company believes that this historical data is currently the best estimate of the expected term of a new option, and that generally its employees exhibit similar exercise behavior.
Risk-free interest rate — The yield on zero-coupon U.S. Treasury securities for a period that is commensurate with the expected term assumption is used as the risk-free interest rate.

6



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 4.4% to all unvested stock-based awards as of August 3, 2013. The rate of 4.4% represents the portion that is expected to be forfeited each year over the vesting period. This analysis will be re-evaluated quarterly and the forfeiture rate will be adjusted as necessary. Ultimately, the actual expense recognized over the vesting period will only be for those options that vest.
Additional paid-in-capital (APIC) Pool
The APIC pool represents the excess tax benefits related to share-based compensation that are available to absorb future tax deficiencies. If the amount of future tax deficiencies is greater than the available APIC pool, the Company records the excess as income tax expense in its condensed consolidated statements of income. During the three- and nine-month periods ended August 3, 2013, 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. During the three-month period ended August 4, 2012, the Company recorded excess tax benefits of $3.9 million. The Company applied these excess tax benefits to the income tax expense previously recorded during the three-month period ended February 4, 2012, resulting in no income tax expense related to share-based compensation for the nine-month period ended August 4, 2012.
Stock-Based Compensation Activity
A summary of the activity under the Company’s stock option plans as of August 3, 2013 and changes during the three- and nine-month periods then ended is presented below:
Activity during the Three Months Ended August 3, 2013
Options
Outstanding
(in thousands)
 
Weighted-
Average Exercise
Price Per Share
 
Weighted-
Average
Remaining
Contractual
Term in Years
 
Aggregate
Intrinsic
Value
Options outstanding May 4, 2013
22,586

 

$33.82

 
 
 
 
Options granted
103

 

$45.97

 
 
 
 
Options exercised
(2,416
)
 

$35.53

 
 
 
 
Options forfeited
(32
)
 

$35.91

 
 
 
 
Options expired
(10
)
 

$37.51

 
 
 
 
Options outstanding at August 3, 2013
20,231

 

$33.67

 
5.2
 

$327,755

Options exercisable at August 3, 2013
13,267

 

$31.35

 
3.6
 

$245,722

Options vested or expected to vest at August 3, 2013 (1)
19,706

 

$33.46

 
5.1
 

$323,467

 
(1)
In addition to the vested options, the Company expects a portion of the unvested options to vest at some point in the future. The number of options expected to vest is calculated by applying an estimated forfeiture rate to the unvested options.
Activity during the Nine Months Ended August 3, 2013
Options
Outstanding
(in thousands)
 
Weighted-
Average Exercise
Price Per Share
Options outstanding November 3, 2012
26,453

 

$31.73

Options granted
2,389

 

$46.39

Options exercised
(8,400
)
 

$31.17

Options forfeited
(178
)
 

$32.69

Options expired
(33
)
 

$41.00

Options outstanding at August 3, 2013
20,231

 

$33.67


7



During the three and nine months ended August 3, 2013, the total intrinsic value of options exercised (i.e. the difference between the market price at exercise and the price paid by the employee to exercise the options) was $29.3 million and $112.5 million, respectively, and the total amount of proceeds received by the Company from the exercise of these options was $85.9 million and $261.9 million, respectively.

During the three and nine months ended August 4, 2012, 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 $15.6 million and $64.9 million, respectively, and the total amount of proceeds received by the Company from the exercise of these options was $23.5 million and $111.2 million, respectively.
A summary of the Company’s restricted stock unit award activity as of August 3, 2013 and changes during the three- and nine-month periods then ended is presented below: 
Activity during the Three Months Ended August 3, 2013
Restricted
Stock Units
Outstanding
(in thousands)
 
Weighted-
Average Grant-
Date Fair Value
Per Share
Restricted stock units outstanding at May 4, 2013
2,506

 

$37.38

Units granted
31

 

$42.30

Restrictions lapsed
(22
)
 

$28.28

Forfeited
(14
)
 

$37.09

Restricted stock units outstanding at August 3, 2013
2,501

 

$37.53

Activity during the Nine Months Ended August 3, 2013
Restricted
Stock Units
Outstanding
(in thousands)
 
Weighted-
Average Grant-
Date Fair Value
Per Share
Restricted stock units outstanding at November 3, 2012
3,060

 

$33.01

Units granted
798

 

$42.35

Restrictions lapsed
(1,300
)
 

$29.98

Forfeited
(57
)
 

$35.10

Restricted stock units outstanding at August 3, 2013
2,501

 

$37.53


As of August 3, 2013, there was $95.1 million of total unrecognized compensation cost related to unvested share-based awards comprised of stock options and restricted stock units. That cost is expected to be recognized over a weighted-average period of 1.5 years. The total grant-date fair value of shares that vested during the three and nine months ended August 3, 2013 was approximately $0.9 million and $63.0 million, respectively. The total grant-date fair value of shares that vested during the three and nine months ended August 4, 2012 was approximately $0.6 million and $27.4 million, respectively.

Note 4 – Common Stock Repurchase
The Company’s common stock repurchase program has been in place since August 2004. In the aggregate, the Board of Directors has authorized the Company to repurchase $5.0 billion of the Company’s common stock under the program. Under the program, the Company may repurchase outstanding shares of its common stock from time to time in the open market and through privately negotiated transactions. Unless terminated earlier by resolution of the Company’s Board of Directors, the repurchase program will expire when the Company has repurchased all shares authorized under the program. As of August 3, 2013, the Company had repurchased a total of approximately 129.2 million shares of its common stock for approximately $4,439.0 million under this program. As of August 3, 2013, an additional $561.0 million remains available for repurchase of shares under the current authorized program. The repurchased shares are held as authorized but unissued shares of common stock. The Company also, from time to time, repurchases shares in settlement of employee tax withholding obligations due upon the vesting of restricted stock units, or in certain limited circumstances to satisfy the exercise price of options granted to the Company’s employees under the Company’s equity compensation plans. Any future common stock repurchases will be dependent upon several factors, including our financial performance, outlook, liquidity and the amount of cash the Company has available in the United States.



8



Note 5 – Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive loss at August 3, 2013 and November 3, 2012 consisted of the following, net of tax: 
 
August 3, 2013
 
November 3, 2012
Foreign currency translation adjustment
$
(4,286
)
 
$
982

Unrealized gains on available-for-sale securities
656

 
444

Unrealized losses on available-for-sale securities
(480
)
 
(423
)
Unrealized gains on derivative instruments
6,608

 
1,165

Pension plans
(66,407
)
 
(66,562
)
Total accumulated other comprehensive loss
$
(63,909
)
 
$
(64,394
)
The aggregate fair value of investments with unrealized losses as of August 3, 2013 and November 3, 2012 was $371.9 million and $1,214.1 million, respectively. 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. Because the Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at August 3, 2013.
Unrealized gains and losses on available-for-sale securities classified as short-term investments at August 3, 2013 and November 3, 2012 are as follows:
 
August 3, 2013
 
November 3, 2012
Unrealized gains on securities classified as short-term investments
$
829

 
$
581

Unrealized losses on securities classified as short-term investments
(549
)
 
(519
)
Net unrealized gains on securities classified as short-term investments
$
280

 
$
62

Realized gains or losses on investments are determined based on the specific identification basis and are recognized in nonoperating (income) expense. Gross realized gains of approximately $1.3 million and gross realized losses of approximately $0.1 million were recognized on sales of available-for-sale investments during the nine-month period ended August 4, 2012. There were no material net realized gains or losses from the sales of available-for-sale investments during any other of the fiscal periods presented.

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

The following table sets forth the computation of basic and diluted earnings per share:

9



 
Three Months Ended
 
Nine Months Ended
 
August 3, 2013
 
August 4, 2012
 
August 3, 2013
 
August 4, 2012
Net Income
$
176,239

 
$
169,768

 
$
471,933

 
$
472,049

Basic shares:
 
 
 
 
 
 
 
Weighted-average shares outstanding
309,117

 
298,445

 
306,681

 
298,121

Earnings per share basic:
$
0.57

 
$
0.57

 
$
1.54

 
$
1.58

Diluted shares:
 
 
 
 
 
 
 
Weighted-average shares outstanding
309,117

 
298,445

 
306,681

 
298,121

Assumed exercise of common stock equivalents
6,190

 
6,914

 
6,302

 
7,483

Weighted-average common and common equivalent shares
315,307

 
305,359

 
312,983

 
305,604

Earnings per share diluted:
$
0.56

 
$
0.56

 
$
1.51

 
$
1.54

Anti-dilutive shares related to:
 
 
 
 
 
 
 
Outstanding stock options
2,495

 
9,044

 
4,680

 
7,650


Note 7 – Special Charges
The Company monitors global macroeconomic conditions on an ongoing basis and continues to assess opportunities for improved operational effectiveness and efficiency, as well as a better alignment of expenses with revenues. As a result of these assessments, the Company has undertaken various restructuring actions over the past several years. These actions are described below.
The following tables display the special charges taken for ongoing actions and a roll-forward from November 3, 2012 to August 3, 2013 of the employee separation and exit cost accruals established related to these actions.
 
Reduction of Operating Costs
Statement of Income
2010
 
2011
 
2012
 
2013
Workforce reductions
$
10,908

 
$
2,239

 
$
7,966

 
$
14,071

Facility closure costs

 

 
186

 

Non-cash impairment charge
487

 

 
219

 

Other items
24

 

 
60

 

Total Charges
$
11,419

 
$
2,239

 
$
8,431

 
$
14,071

Accrued Restructuring
Reduction of Operating Costs
Balance at November 3, 2012
$
2,993

First quarter 2013 special charge
14,071

Severance payments
(4,276
)
Effect of foreign currency on accrual
36

Balance at February 2, 2013
12,824

Severance payments
(4,311
)
Effect of foreign currency on accrual
(19
)
Balance at May 4, 2013
8,494

Severance payments
(2,577
)
Effect of foreign currency on accrual
2

Balance at August 3, 2013
$
5,919


Reduction of Operating Costs
During fiscal 2010 through fiscal 2012, the Company recorded special charges of approximately $22.1 million. These special charges included: $21.1 million for severance and fringe benefit costs in accordance with its ongoing benefit plan or statutory requirements at foreign locations for 269 manufacturing, engineering and selling, marketing, general and administrative (SMG&A) employees; $0.2 million for lease obligation costs for facilities that the Company ceased using during the third quarter of fiscal 2012; $0.1 million for contract termination costs; $0.2 million for the write-off of property, plant and

10



equipment; and $0.5 million related to the impairment of intellectual property. The Company terminated the employment of all employees associated with these actions.
During the first quarter of fiscal 2013, the Company recorded a special charge of approximately $14.1 million for severance and fringe benefit costs in accordance with its ongoing benefit plan or statutory requirements at foreign locations for 137 manufacturing, engineering and SMG&A employees. The Company terminated the employment of all employees associated with this action.

Note 8 – Segment Information
The Company operates and tracks its results in one reportable segment based on the aggregation of five operating segments. The Company designs, develops, manufactures and markets a broad range of integrated circuits. The Chief Executive Officer has been identified as the Chief Operating Decision Maker.
Revenue Trends by End Market
The following table summarizes revenue by end market. The categorization of revenue by end market is determined using a variety of data points including the technical characteristics of the product, the “sold to” customer information, the “ship to” customer information and the end customer product or application into which the Company’s product will be incorporated. As data systems for capturing and tracking this data evolve and improve, the categorization of products by end market can vary over time. When this occurs, the Company reclassifies revenue by end market for prior periods. Such reclassifications typically do not materially change the sizing of, or the underlying trends of results within, each end market.
 
Three Months Ended
 
August 3, 2013
 
August 4, 2012
 
Revenue
 
% of
Revenue*
 
Y/Y%
 
Revenue
 
% of
Revenue
Industrial
$
314,196

 
47
%
 
(3
)%
 
$
323,621

 
47
%
Automotive
120,386

 
18
%
 
5
 %
 
114,876

 
17
%
Consumer
100,163

 
15
%
 
(6
)%
 
106,940

 
16
%
Communications
139,427

 
21
%
 
1
 %
 
137,589

 
20
%
Total revenue
$
674,172

 
100
%
 
(1
)%
 
$
683,026

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

 
Nine Months Ended
 
August 3, 2013
 
August 4, 2012
 
Revenue
 
% of
Revenue
 
Y/Y%
 
Revenue
 
% of
Revenue
Industrial
$
907,109

 
46
%
 
(3
)%
 
$
939,329

 
47
%
Automotive
350,471

 
18
%
 
(1
)%
 
353,579

 
18
%
Consumer
308,493

 
16
%
 
(6
)%
 
327,145

 
16
%
Communications
389,483

 
20
%
 
1
 %
 
386,125

 
19
%
Total revenue
$
1,955,556

 
100
%
 
(3
)%
 
$
2,006,178

 
100
%
  
Revenue Trends by Product Type
The following table summarizes revenue by product categories. The categorization of the Company’s products into broad categories is based on the characteristics of the individual products, the specification of the products and in some cases the specific uses that certain products have within applications. The categorization of products into categories is therefore subject to judgment in some cases and can vary over time. In instances where products move between product categories, the Company reclassifies the amounts in the product categories for all prior periods. Such reclassifications typically do not materially change the sizing of, or the underlying trends of results within, each product category.

11



 
Three Months Ended
 
August 3, 2013
 
August 4, 2012
 
Revenue
 
% of
Revenue*
 
Y/Y%
 
Revenue
 
% of
Revenue*
Converters
$
306,347

 
45
%
 
2
 %
 
$
299,736

 
44
%
Amplifiers / Radio frequency
171,588

 
25
%
 
(5
)%
 
180,989

 
26
%
Other analog
92,278

 
14
%
 
(6
)%
 
98,075

 
14
%
Subtotal analog signal processing
570,213

 
85
%
 
(1
)%
 
578,800

 
85
%
Power management & reference
45,611

 
7
%
 
 %
 
45,403

 
7
%
Total analog products
$
615,824

 
91
%
 
(1
)%
 
$
624,203

 
91
%
Digital signal processing
58,348

 
9
%
 
(1
)%
 
58,823

 
9
%
Total revenue
$
674,172

 
100
%
 
(1
)%
 
$
683,026

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

 
Nine Months Ended
 
August 3, 2013
 
August 4, 2012
 
Revenue
 
% of
Revenue*
 
Y/Y%
 
Revenue
 
% of
Revenue
Converters
$
885,871

 
45
%
 
 %
 
$
885,528

 
44
%
Amplifiers / Radio frequency
494,234

 
25
%
 
(6
)%
 
523,156

 
26
%
Other analog
279,877

 
14
%
 
(2
)%
 
284,586

 
14
%
Subtotal analog signal processing
1,659,982

 
85
%
 
(2
)%
 
1,693,270

 
84
%
Power management & reference
128,694

 
7
%
 
(6
)%
 
136,328

 
7
%
Total analog products
$
1,788,676

 
91
%
 
(2
)%
 
$
1,829,598

 
91
%
Digital signal processing
166,880

 
9
%
 
(5
)%
 
176,580

 
9
%
Total revenue
$
1,955,556

 
100
%
 
(3
)%
 
$
2,006,178

 
100
%
* The sum of the individual percentages does not equal the total due to rounding.
Revenue Trends by Geographic Region
Revenue by geographic region, based on the primary location of the Company's customers’ design activity for its products, for the three- and nine-month periods ended August 3, 2013 and August 4, 2012 were as follows:
 
 
Three Months Ended
 
Nine Months Ended
Region
August 3, 2013
 
August 4, 2012
 
August 3, 2013
 
August 4, 2012
United States
$
202,687

 
$
202,080

 
$
613,139

 
$
590,155

Rest of North and South America
25,063

 
25,268

 
76,769

 
87,533

Europe
217,608

 
216,809

 
622,977

 
640,102

Japan
77,790

 
87,169

 
214,352

 
254,195

China
93,305

 
89,616

 
262,044

 
254,597

Rest of Asia
57,719

 
62,084

 
166,275

 
179,596

Total revenue
$
674,172

 
$
683,026

 
$
1,955,556

 
$
2,006,178

In the three- and nine-month periods ended August 3, 2013 and August 4, 2012, the predominant country comprising “Rest of North and South America” is Canada; the predominant countries comprising “Europe” are Germany, Sweden, France and the United Kingdom; and the predominant countries comprising “Rest of Asia” are Taiwan and South Korea.

Note 9 – Fair Value
The Company defines fair value as the price that would be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the

12



hierarchy upon the lowest level of input that is available and significant to the fair value measurement. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
Level 1 — Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 — Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability.
Level 3 — Level 3 inputs are unobservable inputs for the asset or liability in which there is little, if any, market activity for the asset or liability at the measurement date.
The tables below, set forth by level, the Company’s financial assets and liabilities, excluding accrued interest components that were accounted for at fair value on a recurring basis as of August 3, 2013 and November 3, 2012. 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 August 3, 2013 and November 3, 2012, the Company held $57.7 million and $38.9 million, respectively, of cash and held-to-maturity investments that were excluded from the tables below.
 
August 3, 2013
 
Fair Value measurement at
Reporting Date using:
 
 
 
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Other
Unobservable
Inputs
(Level 3)
 
Total
Assets
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
Institutional money market funds
$
113,010

 
$

 
$

 
$
113,010

Corporate obligations (1)

 
289,356

 

 
289,356

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

 
3,478,510

 

 
3,478,510

Floating rate notes, issued at par

 
177,336

 

 
177,336

Floating rate notes (1)

 
39,325

 

 
39,325

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

 
255,050

 

 
255,050

Floating rate notes (1)

 
40,004

 

 
40,004

Other assets:
 
 
 
 
 
 
 
Deferred compensation investments
16,302

 

 

 
16,302

Total assets measured at fair value
$
129,312

 
$
4,279,581

 
$

 
$
4,408,893

Liabilities
 
 
 
 
 
 
 
Contingent consideration
$

 
$

 
$
8,305

 
$
8,305

Forward foreign currency exchange contracts (2)

 
774

 

 
774

Total liabilities measured at fair value
$

 
$
774

 
$
8,305

 
$
9,079

 
(1)
The amortized cost of the Company’s investments classified as available-for-sale as of August 3, 2013 was $3,789.4 million.

13



(2)
The Company has a master netting arrangement by counterparty with respect to derivative contracts. As of August 3, 2013, contracts in an asset position of $3.0 million were netted against contracts in a liability position in the Company's condensed consolidated balance sheet.
 
November 3, 2012
 
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
$
143,876

 
$

 
$

 
$
143,876

Corporate obligations (1)

 
347,028

 

 
347,028

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

 
2,818,798

 

 
2,818,798

Floating rate notes, issued at par

 
280,065

 

 
280,065

Floating rate notes (1)

 
234,280

 

 
234,280

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

 
37,408

 

 
37,408

Other assets:
 
 
 
 
 
 
 
Forward foreign currency exchange contracts (2)

 
1,061

 

 
1,061

Deferred compensation investments
28,480

 

 

 
28,480

Total assets measured at fair value
$
172,356

 
$
3,718,640

 
$

 
$
3,890,996

Liabilities
 
 
 
 
 
 
 
Contingent consideration

 

 
12,219

 
12,219

Total liabilities measured at fair value
$

 
$

 
$
12,219

 
$
12,219

 
(1)
The amortized cost of the Company’s investments classified as available-for-sale as of November 3, 2012 was $3,327.5 million.
(2)
The Company has a master netting arrangement by counterparty with respect to derivative contracts. As of November 3, 2012, contracts in a liability position of $1.9 million were netted against contracts in an asset position in the Company's condensed consolidated balance sheet.
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.


14



Contingent consideration — The fair value of the contingent consideration was estimated utilizing the income approach and is based upon significant inputs not observable in the market. The income approach is based on two steps. The first step involves a projection of the cash flows that is based on the Company’s estimates of the timing and probability of achieving the defined milestones. The second step involves converting the cash flows into a present value equivalent through discounting. The discount rate reflects the Baa costs of debt plus the relevant risk associated with the asset and the time value of money.
The fair value measurement of the contingent consideration encompasses the following significant unobservable inputs: 
Unobservable Inputs
Range
Estimated contingent consideration payments
$9,000
Discount rate
8% - 10%
Timing of cash flows
1 - 26 months
Probability of achievement
100%
Changes in the fair value of the contingent consideration subsequent to the acquisition date that are primarily driven by assumptions pertaining to the achievement of the defined milestones will be recognized in operating income in the period of the estimated fair value change. Significant increases or decreases in any of the inputs in isolation may result in a fluctuation in the fair value measurement.
The following table summarizes the change in the fair value of the contingent consideration measured using significant unobservable inputs (Level 3) as of November 3, 2012 and August 3, 2013: 
 
Contingent
Consideration
Balance as of November 3, 2012
$
12,219

Payment made (1)
(4,000
)
Fair value adjustment (2)
86

Balance as of August 3, 2013
$
8,305

 
(1)
The payment is reflected in the Company's condensed consolidated statements of cash flows as cash used in financing activities related to the liability recognized at fair value as of the acquisition date and as cash provided by operating activities related to the fair value adjustments previously recognized in earnings.
(2)
Recorded in research and development expense in the Company's condensed consolidated statements of income.
Financial Instruments Not Recorded at Fair Value on a Recurring Basis
On June 30, 2009, the Company issued $375.0 million aggregate principal amount of 5.0% senior unsecured notes due July 1, 2014 (the 5.0% Notes) with semi-annual fixed interest payments due on January 1 and July 1 of each year, commencing January 1, 2010. On June 6, 2013, the Company redeemed the 5.0% notes. Based on quotes received from third-party banks, the fair value of the 5.0% Notes as of November 3, 2012 was $402.5 million and was classified as a Level 1 measurement according to the fair value hierarchy.
On April 4, 2011, the Company issued $375.0 million aggregate principal amount of 3.0% senior unsecured notes due April 15, 2016 (the 3.0% Notes) with semi-annual fixed interest payments due on April 15 and October 15 of each year, commencing October 15, 2011. Based on quotes received from third-party banks, the fair value of the 3.0% Notes as of August 3, 2013 and November 3, 2012 was $391.7 million and $402.3 million, respectively, and is classified as a Level 1 measurement according to the fair value hierarchy.
On June 3, 2013, the Company issued $500.0 million aggregate principal amount of 2.875% senior unsecured notes due June 1, 2023 (the 2023 Notes) with semi-annual fixed interest payments due on June 1 and December 1 of each year, commencing December 1, 2013. Based on quotes received from third-party banks, the fair value of the 2023 Notes as of August 3, 2013 was $468.3 million and is classified as a Level 1 measurement according to the fair value hierarchy.

Note 10 – Derivatives
Foreign Exchange Exposure Management — The Company enters into forward foreign currency exchange contracts to offset certain operational and balance sheet exposures from the impact of changes in foreign currency exchange rates. Such exposures result from the portion of the Company’s operations, assets and liabilities that are denominated in currencies other
than the U.S. dollar, primarily the Euro; other significant exposures include the Philippine Peso and the British Pound. These foreign currency exchange contracts are entered into to support transactions made in the normal course of business, and

15



accordingly, are not speculative in nature. The contracts are for periods consistent with the terms of the underlying transactions, generally one year or less. Hedges related to anticipated transactions are designated and documented at the inception of the respective hedges as cash flow hedges and are evaluated for effectiveness monthly. Derivative instruments are employed to eliminate or minimize certain foreign currency exposures that can be confidently identified and quantified. As the terms of the contract and the underlying transaction are matched at inception, forward contract effectiveness is calculated by comparing the change in fair value of the contract to the change in the forward value of the anticipated transaction, with the effective portion of the gain or loss on the derivative reported as a component of accumulated other comprehensive income (loss) (OCI) in shareholders’ equity and reclassified into earnings in the same period during which the hedged transaction affects earnings. Any residual change in fair value of the instruments, or ineffectiveness, is recognized immediately in other (income) expense. Additionally, the Company enters into forward foreign currency contracts that economically hedge the gains and losses generated by the re-measurement of certain recorded assets and liabilities in a non-functional currency. Changes in the fair value of these undesignated hedges are recognized in other (income) expense immediately as an offset to the changes in the fair value of the asset or liability being hedged. As of August 3, 2013 and November 3, 2012, the total notional amount of these undesignated hedges was $32.5 million and $31.5 million, respectively. The fair value of these hedging instruments in the Company’s condensed consolidated balance sheets as of August 3, 2013 and November 3, 2012 was immaterial.
Interest Rate Exposure Management — The Company's current and future debt may be subject to interest rate risk.  The Company utilizes interest rate derivatives to alter interest rate exposure in an attempt to reduce the effects of these changes. On April 24, 2013, the Company entered into a treasury rate lock agreement with Bank of America. This agreement allowed the Company to lock a 10-year US Treasury rate of 1.7845% through June 14, 2013 for its anticipated issuance of the 2023 Notes. The Company designated this agreement as a cash flow hedge. On June 3, 2013, the Company terminated the treasury rate lock simultaneously with the issuance of the 2023 Notes which resulted in a gain of approximately $11.0 million. This gain will be amortized into interest expense over the 10-year term of the 2023 Notes.
On June 30, 2009, the Company entered into interest rate swap transactions related to its outstanding 5.0% Notes where the Company swapped the notional amount of its $375.0 million of fixed rate debt at 5.0% into floating interest rate debt through July 1, 2014. The Company designated these swaps as fair value hedges. The fair value of the swaps at inception was zero and subsequent changes in the fair value of the interest rate swaps were reflected in the carrying value of the interest rate swaps on the balance sheet. The carrying value of the debt on the balance sheet was adjusted by an equal and offsetting amount. The amounts earned and owed under the swap agreements were accrued each period and were reported in interest expense. There was no ineffectiveness recognized in any of the periods presented. In the second quarter of fiscal 2012, the Company terminated the interest rate swap agreement. The Company received $19.8 million in cash proceeds from the swap termination, which included $1.3 million in accrued interest. The proceeds, net of interest received, are disclosed in cash flows from financing activities in the Company's condensed consolidated statements of cash flows. As a result of the termination, the carrying value of the 5.0% Notes was adjusted for the change in the fair value of the interest component of the debt up to the date of the termination of the swap in an amount equal to the fair value of the swap, and was amortized into earnings as a reduction of interest expense over the remaining life of the debt. During the third quarter of fiscal 2013, in conjunction with the redemption of the 5% Notes, the Company recognized the remaining $8.6 million in unamortized proceeds received from the termination of the interest rate swap as other, net expense.
The market risk associated with the Company’s derivative instruments results from currency exchange rate or interest rate movements that are expected to offset the market risk of the underlying transactions, assets and liabilities being hedged. The counterparties to the agreements relating to the Company’s derivative instruments consist of a number of major international financial institutions with high credit ratings. Based on the credit ratings of the Company’s counterparties as of August 3, 2013, 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 other comprehensive income (OCI). Changes in the fair value of cash flow hedges are recorded in OCI and reclassified into earnings when the underlying contract matures. Changes in the fair values of derivatives not qualifying for hedge accounting are reported in earnings as they occur.

16



The total notional amounts of forward foreign currency derivative instruments designated as hedging instruments of cash flow hedges denominated in Euros, British Pounds, Philippine Pesos and Japanese Yen as of August 3, 2013 and November 3, 2012 was $197.4 million and $151.8 million, respectively. The fair values of these hedging instruments in the Company’s condensed consolidated balance sheets as of August 3, 2013 and November 3, 2012 were as follows:
 
 
 
Fair Value At
 
Balance Sheet Location
 
August 3, 2013
 
November 3, 2012
Forward foreign currency exchange contracts
Prepaid expenses and other current assets
 
$

 
$
1,161

 
Accrued liabilities
 
$
721

 
$

The effect of forward foreign currency derivative instruments designated as cash flow hedges on the Company's condensed consolidated statements of income for the three- and nine-month periods ended August 3, 2013 and August 4, 2012 were as follows:
 
Three Months Ended
 
Nine Months Ended
 
August 3, 2013
 
August 4, 2012
 
August 3, 2013
 
August 4, 2012
(Loss) gain recognized in OCI on derivatives (net of taxes of $184, $862, $56 and $1,807, respectively)
$
(604
)
 
$
(5,161
)
 
$

 
$
(11,805
)
Loss (gain) reclassified from OCI into income (net of taxes of $60, $517, $205 and $1,049, respectively)
$
286

 
$
3,099

 
$
(1,556
)
 
$
6,637

The amounts reclassified into earnings before tax are recognized in cost of sales and operating expenses for the three- and nine-month periods ended August 3, 2013 and August 4, 2012 were as follows:
 
Three Months Ended
 
Nine Months Ended
 
August 3, 2013
 
August 4, 2012
 
August 3, 2013
 
August 4, 2012
Cost of sales
$
247

 
$
1,390

 
$
(1,171
)
 
$
2,912

Research and development
$
(23
)
 
$
978

 
$
(279
)
 
$
2,071

Selling, marketing, general and administrative
$
122

 
$
1,248

 
$
(311
)
 
$
2,703

 
All derivative gains and losses related to forward foreign currency derivative instruments included in OCI will be reclassified into earnings within the next 12 months. There was no ineffectiveness in the three- and nine-month periods ended August 3, 2013 and August 4, 2012.

Note 11 – Goodwill and Intangible Assets
Goodwill
The Company evaluates goodwill for impairment annually, as well as whenever events or changes in circumstances suggest that the carrying value of goodwill may not be recoverable. The Company tests goodwill for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis on the first day of the fourth quarter (on or about August 4) or more frequently if indicators of impairment exist. For the Company’s latest annual impairment assessment that occurred on August 5, 2012, the Company identified its reporting units to be its five operating segments, which meet the aggregation criteria for one reportable segment. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. The Company determines the fair value of its reporting units using the income approach methodology of valuation that includes the discounted cash flow method, as well as other generally accepted valuation methodologies. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, the Company performs the second step of the goodwill impairment test to determine the amount of impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill. No impairment of goodwill resulted in any of the fiscal periods presented. The Company’s next annual impairment assessment will be performed as of the first day of the fourth quarter of fiscal 2013, unless indicators arise that would require the Company to reevaluate at an earlier date. The following table presents the changes in goodwill during the first nine months of fiscal 2013:

17



 
Nine Months Ended
 
August 3, 2013
Balance as of November 3, 2012
$
283,833

Foreign currency translation adjustment
(3,242
)
Balance as of August 3, 2013
$
280,591

Intangible Assets
The Company reviews finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of assets may not be recoverable. Recoverability of these assets is measured by comparison of their carrying value to future undiscounted cash flows the assets are expected to generate over their remaining economic lives. If such assets are considered to be impaired, the impairment to be recognized in earnings equals the amount by which the carrying value of the assets exceeds their fair value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique. As of August 3, 2013 and November 3, 2012, the Company’s finite-lived intangible assets consisted of the following which related to the acquisition of Multigig, Inc. (See Note 16, Acquisitions, below):
 
August 3, 2013
 
November 3, 2012
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Technology-based
$
1,100

 
$
293

 
$
1,100

 
$
128

For the three- and nine-month periods ended August 3, 2013, amortization expense related to finite-lived intangible assets was $0.1 million and $0.2 million, respectively. Amortization expense related to finite-lived intangible assets for each of the three- and nine-month periods ended August 4, 2012 was $0.1 million. The remaining amortization expense will be recognized over a weighted-average period of approximately 1.8 years.
The Company expects annual amortization expense for intangible assets to be:
Fiscal Year
Amortization Expense
Remainder of fiscal 2013

$55

2014

$220

2015

$220

2016

$220

2017

$92

Indefinite-lived intangible assets are tested for impairment on an annual basis on the first day of the fourth quarter (on or about August 4) or more frequently if indicators of impairment exist. The impairment test involves the comparison of the fair values of the intangible assets with their carrying values. No impairment of intangible assets resulted from the impairment tests in any of the fiscal periods presented.
Intangible assets, excluding in-process research and development (IPR&D), are amortized on a straight-line basis over their estimated useful lives or on an accelerated method of amortization that is expected to reflect the estimated pattern of economic use. IPR&D assets are considered indefinite-lived intangible assets until completion or abandonment of the associated R&D efforts. Upon completion of the projects, the IPR&D assets will be amortized over their estimated useful lives.

Indefinite-lived intangible assets consisted of $27.8 million of IPR&D as of August 3, 2013 and November 3, 2012.

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

18



 
Three Months Ended
 
Nine Months Ended
 
August 3, 2013
 
August 4, 2012
 
August 3, 2013
 
August 4, 2012
Service cost
$
2,796

 
$
1,938

 
$
8,472

 
$
5,926

Interest cost
3,100

 
2,648

 
9,351

 
8,185

Expected return on plan assets
(2,911
)
 
(2,547
)
 
(8,787
)
 
(7,857
)
Amortization of initial net obligation
5

 
5

 
15

 
15

Amortization of prior service cost
(59
)
 

 
(175
)
 

Amortization of net loss
744

 
89

 
2,235

 
269

Net periodic pension cost
$
3,675

 
$
2,133

 
$
11,111

 
$
6,538

Pension contributions of $4.4 million and $13.1 million were made by the Company during the three and nine months ended August 3, 2013, respectively. The Company presently anticipates contributing an additional $4.0 million to fund its defined benefit pension plans in fiscal year 2013 for a total of $17.1 million.

Note 13 – Revolving Credit Facility

As of August 3, 2013, the Company had $4,450.3 million of cash and cash equivalents and short-term investments, of which $1,322.3 million was held in the United States. The balance of the Company's cash and cash equivalents and short-term investments was held outside the United States in various foreign subsidiaries. As the Company intends to reinvest its foreign earnings indefinitely, this cash is not available to meet the Company's cash requirements in the United States, including cash dividends and common stock repurchases. During December 2012, the Company terminated its five-year, $165.0 million unsecured revolving credit facility with certain institutional lenders entered into in May 2008. On December 19, 2012, the Company entered into a five-year, $500.0 million senior unsecured revolving credit facility with certain institutional lenders (the Credit Agreement). To date, the Company has not borrowed under this credit facility but the Company may borrow in the future and use the proceeds for repayment of existing indebtedness, stock repurchases, acquisitions, capital expenditures, working capital and other lawful corporate purposes. Revolving loans under the Credit Agreement (other than swing line loans) bear interest, at the Company's option, at either a rate equal to (a) the Eurodollar Rate (as defined in the Credit Agreement) plus a margin based on the Company's debt rating or (b) the Base Rate (defined as the highest of (i) the Bank of America prime rate, (ii) the Federal Funds Rate (as defined in the Credit Agreement) plus .50% and (iii) one month Eurodollar Rate plus 1.00%) plus a margin based on the Company's debt rating. The terms of the facility impose restrictions on the Company’s ability to undertake certain transactions, to create certain liens on assets and to incur certain subsidiary indebtedness. In addition, the Credit Agreement contains a consolidated leverage ratio covenant of total consolidated funded debt to consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA) of not greater than 3.0 to 1.0. As of August 3, 2013, the Company was compliant with these covenants.

Note 14 – Debt
On June 30, 2009, the Company issued $375.0 million aggregate principal amount of 5.0% senior unsecured notes due July 1, 2014 (the 5.0% Notes) with semi-annual fixed interest payments due on January 1 and July 1 of each year, commencing January 1, 2010. The sale of the 5.0% Notes was made pursuant to the terms of an underwriting agreement, dated June 25, 2009, between the Company and Credit Suisse Securities (USA) LLC, as representative of the several underwriters named therein. The net proceeds of the offering were $370.4 million, after issuing at a discount and deducting expenses, underwriting discounts and commissions, which will be amortized over the term of the 5.0% Notes.
On June 30, 2009, the Company entered into interest rate swap transactions related to its outstanding 5.0% Notes where the Company swapped the notional amount of its $375.0 million of fixed rate debt at 5.0% into floating interest rate debt through July 1, 2014. The Company designated these swaps as fair value hedges. The changes in the fair value of the interest rate swaps were reflected in the carrying value of the interest rate swaps in other assets on the balance sheet. The carrying value of the debt on the balance sheet was adjusted by an equal and offsetting amount. In fiscal 2012, the Company terminated the interest rate swap agreement. The Company received $19.8 million in cash proceeds from the swap termination, which included $1.3 million in accrued interest. The proceeds, net of interest received, are disclosed in cash flows from financing activities in the Company's condensed consolidated statements of cash flows. As a result of the termination, the carrying value of the 5.0% Notes was adjusted for the change in the fair value of the interest component of the debt up to the date of the termination of the swap in an amount equal to the fair value of the swap, and was amortized into earnings as a reduction of interest expense over the remaining life of the debt. During the third quarter of fiscal 2013, in conjunction with the redemption of the 5% Notes, the Company recognized the remaining unamortized proceeds received from the termination of the interest rate swap as other, net expense, within non-operating (income) expense.

19



During the third quarter of fiscal 2013, the Company redeemed its outstanding 5.0% Notes. The redemption price was 104.744% of the principal amount of the 5.0% Notes. The Company applied the provisions of Accounting Standards Codification (ASC) Subtopic 470-50, Modifications and Extinguishments (ASC 470-50) in order to determine if the terms of the debt were substantially different and, as a result, whether to apply modification or extinguishment accounting. The Company concluded that the debt transaction qualified as a debt extinguishment and as a result recognized a net loss on debt extinguishment of approximately $10.2 million recorded in other, net expense within non-operating (income) expense. This loss was comprised of the make-whole premium of $17.8 million paid to bondholders on the 5.0% Notes in accordance with the terms of the notes, the recognition of the remaining $8.6 million of unamortized proceeds received from the termination of the interest rate swap associated with the debt, and the write off of approximately $1.0 million of debt issuance and discount costs that remained to be amortized. The write off of the remaining unamortized portion of debt issuance costs, discount and swap proceeds are reflected in the Company's condensed consolidated statements of cash flows within operating activities, and the make-whole premium is reflected within financing activities.
On December 22, 2010, Analog Devices Holdings B.V., a wholly owned subsidiary of the Company, entered into a credit agreement with Bank of America, N.A., London Branch as administrative agent. The borrower’s obligations were guaranteed by the Company. The credit agreement provided for a term loan facility of $145.0 million, which was set to mature on December 22, 2013. During the first quarter of fiscal 2013, the Company repaid the remaining outstanding principal balance on the loan of $60.1 million and the credit agreement was terminated. The terms of the agreement provided for a three year principal amortization schedule with $3.6 million payable quarterly every March, June, September and December with the balance payable upon the maturity date. During fiscal 2011 and fiscal 2012, the Company made additional principal payments of $17.5 million and $42.0 million, respectively. The loan bore interest at a fluctuating rate for each period equal to the LIBOR rate corresponding with the tenor of the interest period plus a spread of 1.25%. The terms of this facility included limitations on subsidiary indebtedness and on liens against the assets of the Company and its subsidiaries, and also included financial covenants that required the Company to maintain a minimum interest coverage ratio and not exceed a maximum leverage ratio.
On April 4, 2011, the Company issued $375.0 million aggregate principal amount of 3.0% senior unsecured notes due April 15, 2016 (the 3.0% Notes) with semi-annual fixed interest payments due on April 15 and October 15 of each year, commencing October 15, 2011. The sale of the 3.0% Notes was made pursuant to the terms of an underwriting agreement, dated March 30, 2011, between the Company and Credit Suisse Securities (USA) LLC and Merrill Lynch, Pierce, Fenner and Smith Incorporated, as representative of the several underwriters named therein. The net proceeds of the offering were $370.5 million, after issuing at a discount and deducting expenses, underwriting discounts and commissions, which will be amortized over the term of the 3.0% Notes. The indenture governing the 3.0% Notes contains covenants that may limit the Company’s ability to: incur, create, assume or guarantee any debt for borrowed money secured by a lien upon a principal property; enter into sale and lease-back transactions with respect to a principal property; and consolidate with or merge into, or transfer or lease all or substantially all of its assets to, any other party. As of August 3, 2013, the Company was compliant with these covenants. The 3.0% Notes are subordinated to any future secured debt and to the other liabilities of the Company’s subsidiaries.
On June 3, 2013, the Company issued $500.0 million aggregate principal amount of 2.875% senior unsecured notes due June 1, 2023 (the 2023 Notes) with semi-annual fixed interest payments due on June 1 and December 1 of each year, commencing December 1, 2013. Prior to issuing the 2023 Notes, on April 24, 2013, the Company entered into a treasury rate lock agreement with Bank of America. This agreement allowed the Company to lock a 10-year US Treasury rate of 1.7845% through June 14, 2013 for its anticipated issuance of the 2023 Notes. Upon issuing the 2023 Notes, the Company simultaneously terminated the treasury rate lock agreement resulting in a gain of approximately $11.0 million. This gain will be amortized into interest expense over the 10-year term of the 2023 Notes. The sale of the 2023 Notes was made pursuant to the terms of an underwriting agreement, dated as of May 22, 2013, among the Company and J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Credit Suisse Securities (USA) LLC, as the representatives of the several underwriters named therein. The net proceeds of the offering were $493.9 million, after discount and issuance costs. Debt discount and issuance costs will be amortized through interest expense over the term of the 2023 Notes. The indenture governing the 2023 Notes contains covenants that may limit the Company's ability to: incur, create, assume or guarantee any debt for borrowed money secured by a lien upon a principal property; enter into sale and lease-back transactions with respect to a principal property; and consolidate with or merge into, or transfer or lease all or substantially all of its assets to, any other party. As of August 3, 2013, the Company was compliant with these covenants. The notes are subordinated to any future secured debt and to the other liabilities of the Company's subsidiaries.
The Company’s principal payments related to its debt obligations are due as follows: $375.0 million in fiscal 2016 and $500.0 million in fiscal 2023.



20



Note 15 – Inventories
Inventories at August 3, 2013 and November 3, 2012 were as follows:
 
August 3, 2013
 
November 3, 2012
Raw materials
$
20,817

 
$
28,111

Work in process
177,476

 
185,773

Finished goods
86,049

 
99,839

Total inventories
$
284,342

 
$
313,723


Note 16 – Acquisitions
On March 30, 2012, the Company acquired privately-held Multigig, Inc. (Multigig) of San Jose, California. The acquisition of Multigig is expected to enhance the Company’s clocking capabilities in stand-alone and embedded applications and strengthen the Company’s high speed signal processing solutions. The acquisition-date fair value of the consideration transferred totaled $26.8 million, which consisted of $24.2 million in initial cash payments at closing and an additional $2.6 million subject to an indemnification holdback that was payable within 15 months of the transaction date. During the third quarter of fiscal 2012, the Company reduced this holdback amount by $0.1 million as a result of indemnification claims. During the third quarter of fiscal 2013, the Company paid the remaining $2.5 million due under the holdback. The Company’s assessment of fair value of the tangible and intangible assets acquired and liabilities assumed was based on their estimated fair values at the date of acquisition, resulting in the recognition of $15.6 million of IPR&D, $1.1 million of developed technology, $7.0 million of goodwill and $3.1 million of net deferred tax assets. The goodwill recognized is attributable to future technologies that have yet to be determined as well as the assembled workforce of Multigig. Future technologies do not meet the criteria for recognition separately from goodwill because they are a part of future development and growth of the business. None of the goodwill is expected to be deductible for tax purposes. During the fourth quarter of fiscal 2012, the Company finalized its purchase accounting for Multigig, which resulted in adjustments of $0.4 million to deferred taxes and goodwill. In addition, the Company will be obligated to pay royalties to the Multigig employees on revenue recognized from the sale of certain Multigig products through the earlier of 5 years or the aggregate maximum payment of $1.0 million. Royalty payments to Multigig employees require post-acquisition services to be rendered and, as such, the Company will record these amounts as compensation expense in the related periods. As of August 3, 2013, no royalty payments have been made. The Company recognized $0.5 million of acquisition-related costs that were expensed in fiscal 2012, which were included in operating expenses in the Company's condensed consolidated statement of income.
On June 9, 2011, the Company acquired privately-held Lyric Semiconductor, Inc. (Lyric) of Cambridge, Massachusetts. The acquisition of Lyric gives the Company the potential to achieve significant improvement in power efficiency in mixed signal processing. The acquisition-date fair value of the consideration transferred totaled $27.8 million, which consisted of $14.0 million in initial cash payments at closing and contingent consideration of up to $13.8 million. The contingent consideration arrangement requires additional cash payments to the former equity holders of Lyric upon the achievement of certain technological and product development milestones payable during the period from June 2011 through June 2016. The Company estimated the fair value of the contingent consideration arrangement utilizing the income approach. Changes in the fair value of the contingent consideration subsequent to the acquisition date primarily driven by assumptions pertaining to the achievement of the defined milestones will be recognized in operating income in the period of the estimated fair value change. As of August 3, 2013, the Company had paid $6.0 million in contingent consideration. These payments are reflected in the Company's condensed consolidated statements of cash flows as cash used in financing activities related to the liability recognized at fair value as of the acquisition date and cash provided by operating activities related to the fair value adjustments previously recognized in earnings. The Company’s assessment of fair value of the tangible and intangible assets acquired and liabilities assumed was based on their estimated fair values at the date of acquisition, resulting in the recognition of $12.2 million of IPR&D, $18.9 million of goodwill and $3.3 million of net deferred tax liabilities. The goodwill recognized is attributable to future technologies that have yet to be determined as well as the assembled workforce of Lyric. Future technologies do not meet the criteria for recognition separately from goodwill because they are a part of future development and growth of the business. None of the goodwill is expected to be deductible for tax purposes. The fair value of the remaining contingent consideration was approximately $8.3 million as of August 3, 2013, of which $4.8 million is included in accrued liabilities and $3.5 million is included in other non-current liabilities in the Company's condensed consolidated balance sheet. In addition, the Company will be obligated to pay royalties to the former equity holders of Lyric on revenue recognized from the sale of Lyric products and licenses through the earlier of 20 years or the accrual of a maximum of $25.0 million. Royalty payments to Lyric employees require post-acquisition services to be rendered and, as such, the Company will record these amounts as compensation expense in the related periods. As of August 3, 2013, no royalty payments have been made. The Company recognized $0.2 million of acquisition-related costs that were expensed in fiscal 2011, which were included in operating expenses in the Company's condensed consolidated statement of income.

21



The Company has not provided pro forma results of operations for Multigig and Lyric herein as these acquisitions were not considered material to the Company on either an individual or an aggregate basis. The Company included the results of operations of each acquisition in its condensed consolidated statement of income from the date of each acquisition.

Note 17 – Income Taxes
The Company has provided for potential tax liabilities due in the various jurisdictions in which the Company operates. Judgment is required in determining the worldwide income tax expense provision. In the ordinary course of global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of cost reimbursement arrangements among related entities. Although the Company believes its estimates are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in the historical income tax provisions and accruals. Such differences could have a material impact on the Company’s income tax provision and operating results in the period in which such determination is made.
The Company's effective tax rate reflects the applicable tax rate in effect in the various tax jurisdictions around the world where its income is earned. The Company's effective tax rate for the first nine months of fiscal 2013 reflects income earned in lower tax rate jurisdictions established through an international tax restructuring effective January 1, 2013. In addition, the Company's effective tax rate includes a tax benefit of $6.3 million from the reinstatement of the U.S. federal research and development tax credit in January 2013 retroactive to January 1, 2012, a tax benefit of $4.4 million from this credit for the current fiscal year and a tax benefit recorded as a result of the reversal of certain prior period tax liabilities of $6.6 million which combined resulted in lowering the Company's effective tax rate by approximately 3%.
The Company has filed a petition with the Tax Court for one open matter for fiscal years 2006 and 2007 that pertains to Section 965 of the Internal Revenue Code related to the beneficial tax treatment of dividends paid from foreign owned companies under The American Jobs Creation Act. The potential liability for this adjustment is $36.5 million. The Company has concluded, based on discussions with its tax advisors that this item is not likely to result in any additional tax liability. Therefore, the Company has not recorded any additional tax liability for this issue.
The Company’s U.S. federal tax returns prior to fiscal year 2010 are no longer subject to examination.
The Company’s tax returns in Ireland prior to fiscal year 2009 are no longer subject to examination.
Unrealized Tax Benefits
The following table summarizes the changes in the total amounts of unrealized tax benefits for the nine months ended August 3, 2013.
 
Unrealized Tax Benefits
Balance, November 3, 2012
$
7,103

Additions for tax positions related to current year
628

Additions for tax positions related to prior years
3,412

Reductions due to lapse of applicable statute of limitations
(1,495
)
Balance, August 3, 2013
$
9,648

    
Note 18 – New Accounting Pronouncements
Standards Implemented
Comprehensive Income
In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-05, Presentation of Comprehensive Income (ASU No. 2011-05). ASU No. 2011-05 amended Accounting Standards Codification (ASC) 220, Comprehensive Income, to converge the presentation of comprehensive income between U.S. GAAP and IFRS. ASU No. 2011-05 requires that all non-owner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements and requires reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statements where the components of net income and the components of other comprehensive income are presented. ASU No. 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement in changes of stockholders equity. ASU No. 2011-05 was effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, which was the Company’s first quarter of fiscal year 2013. The adoption of ASU No. 2011-05 in the first quarter of fiscal 2013 affected the presentation of comprehensive income but did not impact the Company’s financial condition or results of operations.

22




Standards to be Implemented
Balance Sheet
In December 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities (ASU No. 2011-11). ASU No. 2011-11 amended ASC 210, Balance Sheet, to converge the presentation of offsetting assets and liabilities between U.S. GAAP and IFRS. ASU No. 2011-11 requires that entities disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. ASU No. 2011-11 is effective for fiscal years, and interim periods within those years, beginning after January 1, 2013, which is the Company’s fiscal year 2014. Subsequently, in January 2013, the FASB issued ASU No. 2013-01, Clarifying the Scope of Disclosures about offsetting Assets and Liabilities, which clarifies that the scope of ASU No. 2011-11 applies to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreement. The adoption of ASU No. 2011-11 and ASU No. 2013-01 will require additional disclosures related to offsetting assets and liabilities but will not impact the Company's financial condition or results of operations.
Comprehensive Income
In January 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income (ASU No. 2013-02), which seek to improve the reporting of reclassifications out of accumulated other comprehensive income by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. The amendments in ASU No. 2013-02 supersede the presentation requirements for reclassifications out of accumulated other comprehensive income in ASU No. 2011-05, Presentation of Comprehensive Income, and ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. ASU No. 2013-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2012, which is the Company's first quarter of fiscal year 2014. The adoption of ASU No. 2013-02 in the first quarter of fiscal 2014 will affect the presentation of comprehensive income but will not impact the Company's financial condition or results of operations.
Income Taxes
In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (ASU No. 2013-11). ASU No. 2013-11 requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward, with certain exceptions. ASU No. 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013, which is the Company's first quarter of fiscal year 2015. The adoption of ASU No. 2013-11 in the first quarter of fiscal 2015 will affect the presentation of our unrecognized tax benefits but will not impact the Company's financial condition or results of operations.

Note 19 – Subsequent Event
On August 19, 2013, the Board of Directors of the Company declared a cash dividend of $0.34 per outstanding share of common stock. The dividend will be paid on September 11, 2013 to all shareholders of record at the close of business on August 30, 2013.



23



ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This information should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in Item 1 of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended November 3, 2012.
This Management's Discussion and Analysis of Financial Condition and Results of Operations, including in particular the section entitled “Outlook,” contains forward-looking statements regarding future events and our future results that are subject to the safe harbor created under the Private Securities Litigation Reform Act of 1995 and other safe harbors under the Securities Act of 1933 and the Securities Exchange Act of 1934. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may” and "will," and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections regarding our future financial performance; our anticipated growth and trends in our businesses; our future capital needs and capital expenditures; our future market position and expected competitive changes in the marketplace for our products; our ability to pay dividends or repurchase stock; our ability to service our outstanding debt; our expected tax rate; the effect of new accounting pronouncements; and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified in Part II, Item 1A. "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements except to the extent required by law.

Results of Operations
(all tabular amounts in thousands except per share amounts and percentages)
Overview
 
Three Months Ended
 
August 3, 2013
 
August 4, 2012
 
$ Change
 
% Change
Revenue
$
674,172

 
$
683,026

 
$
(8,854
)
 
(1
)%
Gross margin %
64.5
%
 
65.6
%
 
 
 
 
Net income
$
176,239

 
$
169,768

 
$
6,471

 
4
 %
Net income as a % of revenue
26.1
%
 
24.9
%
 
 
 
 
Diluted EPS
$
0.56

 
$
0.56

 
$

 
 %
 
Nine Months Ended
 
August 3, 2013
 
August 4, 2012
 
$ Change
 
% Change
Revenue
$
1,955,556

 
$
2,006,178

 
$
(50,622
)
 
(3
)%
Gross margin %
63.8
%
 
64.7
%
 
 
 
 
Net income
$
471,933

 
$
472,049

 
$
(116
)
 
 %
Net income as a % of revenue
24.1
%
 
23.5
%
 
 
 
 
Diluted EPS
$
1.51

 
$
1.54

 
$
(0.03
)
 
(2
)%
Fiscal 2013 is a 52-week year and fiscal 2012 was a 53-week year. The additional week in fiscal 2012 was included in the first quarter ended February 4, 2012. Therefore, the first nine months of fiscal 2012 included an additional week of operations as compared to the first nine months of fiscal 2013.
The year-to-year revenue changes by end market and product type are more fully outlined below under Revenue Trends by End Market and Revenue Trends by Product Type.
During the first nine months of fiscal 2013, our revenue decreased 3% compared to the first nine months of fiscal 2012. Our diluted earnings per share in the first nine months of fiscal 2013 was $1.51 compared to $1.54 in the first nine months of fiscal 2012. Cash flow from operations in the first nine months of fiscal 2013 was $630.2 million, or 32% of revenue. The year-to-year decrease in revenue was attributable to one less week of operations in the first nine months of fiscal 2013 as compared

24



to the first nine months of fiscal 2012 and continued weakness in the global economic environment. We believe that our variable cost structure and continued efforts to manage production, inventory levels and expenses helped to mitigate the effect that these lower sales levels had on our earnings.
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
 
August 3, 2013
 
August 4, 2012
 
Revenue
 
% of
Revenue*
 
Y/Y%
 
Revenue
 
% of
Revenue
Industrial
$
314,196

 
47
%
 
(3
)%
 
$
323,621

 
47
%
Automotive
120,386

 
18
%
 
5
 %
 
114,876

 
17
%
Consumer
100,163

 
15
%
 
(6
)%
 
106,940

 
16
%
Communications
139,427

 
21
%
 
1
 %
 
137,589

 
20
%
Total revenue
$
674,172

 
100
%
 
(1
)%