Document


 
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 4, 2018
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
þ
  
Accelerated filer
 
¨
 
 
 
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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 4, 2018 there were 371,669,966 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 4, 2018
 
July 29, 2017
 
August 4, 2018
 
July 29, 2017
Revenue
$
1,572,679

 
$
1,433,902

 
$
4,604,356

 
$
3,566,333

Cost of sales (1)
502,033

 
667,278

 
1,464,708

 
1,510,762

Gross margin
1,070,646

 
766,624

 
3,139,648

 
2,055,571

Operating expenses:
 
 
 
 
 
 
 
Research and development (1)
291,642

 
275,670

 
869,711

 
694,856

Selling, marketing, general and administrative (1)
171,487

 
183,980

 
520,541

 
505,325

Amortization of intangibles
107,409

 
112,153

 
321,557

 
199,003

Special charges
1,069

 

 
59,476

 
49,463

 
571,607

 
571,803

 
1,771,285

 
1,448,647

Operating income
499,039

 
194,821

 
1,368,363

 
606,924

Nonoperating expense (income):
 
 
 
 
 
 
 
Interest expense
61,665

 
73,073

 
194,487

 
187,323

Interest income
(2,588
)
 
(5,524
)
 
(6,592
)
 
(27,945
)
Other, net
(632
)
 
474

 
(527
)
 
725

 
58,445

 
68,023

 
187,368

 
160,103

Income before income taxes
440,594

 
126,798

 
1,180,995

 
446,821

Provision for income taxes
26,130

 
57,882

 
118,528

 
67,212

Net income
$
414,464

 
$
68,916

 
$
1,062,467

 
$
379,609

Shares used to compute earnings per common share – basic
371,315

 
367,315

 
370,211

 
339,139

Shares used to compute earnings per common share – diluted
375,815

 
371,159

 
374,880

 
343,286

Basic earnings per common share
$
1.11

 
$
0.18

 
$
2.86

 
$
1.12

Diluted earnings per common share
$
1.10

 
$
0.18

 
$
2.82

 
$
1.10

Dividends declared and paid per share
$
0.48

 
$
0.45

 
$
1.41

 
$
1.32

           (1) Includes stock-based compensation expense as follows:
 
 
 
 
 
 
 
           Cost of sales
$
5,734

 
$
4,375

 
$
13,775

 
$
8,885

           Research and development
$
18,018

 
$
15,781

 
$
59,764

 
$
34,712

           Selling, marketing, general and administrative
$
13,143

 
$
12,668

 
$
40,172

 
$
28,242

See accompanying notes.

1




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

 
Three Months Ended
 
Nine Months Ended
 
August 4, 2018
 
July 29, 2017
 
August 4, 2018
 
July 29, 2017
Net income
$
414,464

 
$
68,916

 
$
1,062,467

 
$
379,609

Foreign currency translation adjustments
(9,345
)
 
3,119

 
(2,593
)
 
4,297

Change in fair value of available-for-sale securities (net of taxes of $0, $21, $0 and $12, respectively)
2

 
30

 
5

 
(426
)
Change in fair value of derivative instruments designated as cash flow hedges (net of taxes of $847, $594, $476 and $2,901, respectively)
(4,378
)
 
5,172

 
(2,641
)
 
11,738

Changes in pension plans including prior service cost, transition obligation, net actuarial loss and foreign currency translation adjustments (net of taxes of $96, $108, $298 and $313 respectively)
1,266

 
(357
)
 
1,122

 
(537
)
Other comprehensive (loss) income
(12,455
)
 
7,964

 
(4,107
)
 
15,072

Comprehensive income
$
402,009

 
$
76,880

 
$
1,058,360

 
$
394,681


See accompanying notes.









2



ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(thousands, except share and per share amounts)
 
August 4, 2018
 
October 28, 2017
ASSETS
 

 
 

Current Assets
 
 
 
Cash and cash equivalents
$
772,575

 
$
1,047,838

Accounts receivable
710,753

 
688,953

Inventories (1)
563,645

 
550,816

Prepaid income tax
3,951

 
3,522

Prepaid expenses and other current assets
65,633

 
60,209

Total current assets
2,116,557

 
2,351,338

Property, Plant and Equipment, at Cost
 
 
 
Land and buildings
866,000

 
794,456

Machinery and equipment
2,431,750

 
2,368,215

Office equipment
72,235

 
66,493

Leasehold improvements
85,997

 
75,263

 
3,455,982

 
3,304,427

Less accumulated depreciation and amortization
2,347,991

 
2,197,123

Net property, plant and equipment
1,107,991

 
1,107,304

Other Assets
 
 
 
Deferred compensation plan investments
40,960

 
32,572

Other investments
28,540

 
24,838

Goodwill
12,254,161

 
12,217,455

Intangible assets, net
4,920,739

 
5,319,425

Deferred tax assets
24,818

 
32,322

Other assets
54,850

 
56,040

Total other assets
17,324,068

 
17,682,652

 
$
20,548,616

 
$
21,141,294

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
215,688

 
$
236,629

Deferred income on shipments to distributors, net
547,279

 
473,972

Income taxes payable
127,920

 
86,905

Debt, current
22,500

 
300,000

Accrued liabilities
425,496

 
498,826

Total current liabilities
1,338,883

 
1,596,332

Non-current liabilities
 
 
 
Long-term debt
6,532,746

 
7,551,084

Deferred income taxes
932,813

 
1,674,683

Deferred compensation plan liability
40,960

 
32,572

Income taxes payable
732,189

 
49,583

Other non-current liabilities
114,808

 
75,500

Total non-current liabilities
8,353,516

 
9,383,422

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, 371,669,966 shares outstanding (368,635,788 on October 28, 2017)
61,946

 
61,441

Capital in excess of par value
5,410,222

 
5,250,519

Retained earnings
5,449,515

 
4,910,939

Accumulated other comprehensive loss
(65,466
)
 
(61,359
)
Total shareholders’ equity
10,856,217

 
10,161,540

 
$
20,548,616

 
$
21,141,294

(1)
Includes $6,370 and $5,373 related to stock-based compensation at August 4, 2018 and October 28, 2017, respectively.
See accompanying notes.


3




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

  
Nine Months Ended
 
August 4, 2018
 
July 29, 2017
(as adjusted,
See Note 1)
Cash flows from operating activities:
 
 
 
Net income
$
1,062,467

 
$
379,609

Adjustments to reconcile net income to net cash provided by operations:
 
 
 
Depreciation
169,651

 
138,368

Amortization of intangibles
428,222

 
255,955

Cost of goods sold for inventory acquired

 
316,678

Stock-based compensation expense
113,711

 
71,839

Deferred income taxes
(736,233
)
 
(763,525
)
Other non-cash activity
12,395

 
(18,613
)
Changes in operating assets and liabilities
677,707

 
121,597

Total adjustments
665,453

 
122,299

Net cash provided by operating activities
1,727,920

 
501,908

Cash flows from investing activities:
 
 
 
Purchases of short-term available-for-sale investments

 
(705,485
)
Maturities of short-term available-for-sale investments

 
3,362,791

Sales of short-term available-for-sale investments

 
577,187

Additions to property, plant and equipment
(168,872
)
 
(138,883
)
Payments for acquisitions, net of cash acquired
(52,839
)
 
(9,687,463
)
Changes in other assets
(3,268
)
 
(13,125
)
Net cash used for investing activities
(224,979
)
 
(6,604,978
)
Cash flows from financing activities:
 
 
 
Proceeds from debt
743,778

 
11,156,164

Payments of deferred financing fees

 
(5,625
)
Proceeds from derivative instruments

 
3,904

Debt repayments
(2,050,000
)
 
(4,700,000
)
Dividend payments to shareholders
(523,891
)
 
(435,262
)
Repurchase of common stock
(41,861
)
 
(35,935
)
Proceeds from employee stock plans
88,358

 
105,244

Contingent consideration payment
(2,272
)
 

Changes in other financing activities
8,592

 
(7
)
Net cash (used for) provided by financing activities
(1,777,296
)
 
6,088,483

Effect of exchange rate changes on cash
(908
)
 
2,024

Net decrease in cash and cash equivalents
(275,263
)
 
(12,563
)
Cash and cash equivalents at beginning of period
1,047,838

 
921,132

Cash and cash equivalents at end of period
$
772,575

 
$
908,569

See accompanying notes.

4



ANALOG DEVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED AUGUST 4, 2018
(all tabular amounts in thousands except per share amounts and percentages)

Note 1 – Basis of Presentation
In the opinion of management, the information furnished in the accompanying condensed consolidated financial statements reflects all normal recurring adjustments that are necessary to fairly state the results for these interim periods and should be read in conjunction with Analog Devices, Inc.’s (the Company) Annual Report on Form 10-K for the fiscal year ended October 28, 2017 (fiscal 2017) 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 3, 2018 (fiscal 2018) or any future period.
On March 10, 2017 (Acquisition Date), the Company completed the acquisition of Linear Technology Corporation (Linear), a designer, manufacturer and marketer of high performance analog integrated circuits. The acquisition of Linear is referred to as the Acquisition. The condensed consolidated financial statements included in this Quarterly Report on Form 10-Q include the financial results of Linear prospectively from the Acquisition Date. See Note 13, Acquisitions, of these Notes to Condensed Consolidated Financial Statements for further information.
Certain amounts reported in previous periods have been reclassified to conform to the fiscal 2018 presentation. In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). As a result of the adoption of ASU 2016-09 in the first quarter of fiscal 2018, excess tax benefits from share-based payments are presented within operating activities in the Consolidated Statements of Cash Flows. The Company applied this change in presentation retrospectively and has adjusted the prior year presentation by removing the reclass of $30.2 million of excess tax benefit-stock options from net cash provided by operating activities to net cash provided by financing activities. All other 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 2018 is a 53-week fiscal year and fiscal 2017 was a 52-week fiscal year. The additional week in fiscal 2018 was included in the first quarter ended February 3, 2018. Therefore, the first nine months of fiscal 2018 included an additional week of operations as compared to the first nine months of fiscal 2017.

Note 2 – Revenue Recognition
Revenue from product sales to customers is generally recognized when title passes, which is upon shipment in the U.S. and in certain foreign countries. Revenue from product sales to customers in other foreign countries is recognized subsequent to product shipment. Title for shipments to these other foreign countries ordinarily passes within a week of shipment. Accordingly, the Company defers the revenue recognized relating to these other foreign countries until title has passed. For multiple element arrangements, the Company allocates arrangement consideration among the elements based on the relative fair values of those elements as determined using vendor-specific objective evidence or third-party evidence. The Company uses its best estimate of selling price to allocate arrangement consideration between the deliverables in cases where neither vendor-specific objective evidence nor third-party evidence is available. A reserve for sales returns and allowances for customers is recorded based on historical experience or specific identification of an event necessitating a reserve.
Revenue from contracts with the United States government, government prime contractors and some commercial customers is generally recorded on a percentage of completion basis using either units delivered or costs incurred as the measurement basis for progress towards completion. The output measure is used to measure results directly and is generally the best measure of progress toward completion in circumstances in which a reliable measure of output can be established. Estimated revenue in excess of amounts billed is reported as unbilled receivables. Contract accounting requires judgment in estimating costs and assumptions related to technical issues and delivery schedule. Contract costs include material, subcontractor costs, labor and an allocation of indirect costs. The estimation of costs at completion of a contract is subject to numerous variables involving contract costs and estimates as to the length of time to complete the contract. Changes in contract performance, estimated gross margin, including the impact of final contract settlements, and estimated losses are recognized in the period in which the changes or losses are determined.
Product sales to certain international distributors are made under agreements that permit limited stock return privileges but not sales price rebates. Revenue on these sales is recognized upon shipment at which time title passes. 

5



The Company defers revenue and the related cost of sales on shipments to U.S. distributors and certain international 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 certain of these distributors are made under agreements that allow such 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, such distributors are allowed to return unsold products if the Company terminates the relationship with the distributor.
Certain 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.
Certain 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 certain 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 certain distributors until the distributors have sold the products to their customers.
Generally, title to the inventory transfers to the distributor at the time of shipment or delivery to the distributor, and payment from the distributor is due in accordance with the Company’s standard payment terms. These payment terms are not contingent upon the distributors’ sale of the products to their customers. Upon title transfer to distributors, inventory is reduced for the cost of goods shipped, the margin (sales less cost of sales) is recorded as “deferred income on shipments to distributors, net” and an account receivable is recorded. Shipping costs are charged to cost of sales as incurred.
The deferred costs of sales to distributors have historically had very little risk of impairment due to the margins the Company earns on sales of its products and the relatively long life-cycle of the Company’s products. Product returns from distributors that are ultimately scrapped have historically been immaterial. In addition, price protection and price-adjustment credits granted to distributors historically have not exceeded the margins the Company earns on sales of its products. The Company continuously monitors the level and nature of product returns and is in frequent contact with the distributors to ensure reserves are established for all known material issues.
As of August 4, 2018 and October 28, 2017, the Company had gross deferred revenue of $679.9 million and $589.5 million, respectively, and gross deferred cost of sales of $132.6 million and $115.5 million, respectively.
The Company generally offers a twelve-month warranty for its products. The Company’s warranty policy provides for replacement of defective products. Specific accruals are recorded for known product warranty issues. Product warranty expenses during each of the three- and nine-month periods ended August 4, 2018 and July 29, 2017 were not material.

Note 3 – Stock-Based Compensation
A summary of the Company’s stock option activity as of August 4, 2018 and changes during the three- and nine-month periods then ended is presented below:

6



Activity during the Three Months Ended August 4, 2018
Options
Outstanding
(in thousands)
 
Weighted-
Average Exercise
Price Per Share
 
Weighted-
Average
Remaining
Contractual
Term in Years
 
Aggregate
Intrinsic
Value
Options outstanding at May 5, 2018
8,174

 

$57.11

 
 
 
 
Options granted
12

 

$83.24

 
 
 
 
Options exercised
(532
)
 

$43.16

 
 
 
 
Options forfeited
(25
)
 

$65.42

 
 
 
 
Options outstanding at August 4, 2018
7,629

 

$58.10

 
6.3
 

$293,416

Options exercisable at August 4, 2018
4,233

 

$48.22

 
4.9
 

$204,635

Options vested or expected to vest at August 4, 2018 (1)
7,355

 

$57.48

 
6.2
 

$287,422

 
(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 4, 2018
Options
Outstanding
(in thousands)
 
Weighted-
Average Exercise
Price Per Share
Options outstanding at October 28, 2017
9,347

 

$52.47

Options granted
602

 

$90.98

Options exercised
(2,141
)
 

$41.56

Options forfeited
(172
)
 

$63.51

Options expired
(7
)
 

$30.58

Options outstanding at August 4, 2018
7,629

 

$58.10

During the three- and nine-month periods ended August 4, 2018, 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 $111.9 million, respectively, and the total amount of proceeds received by the Company from the exercise of these options was $22.8 million and $88.4 million, respectively.
During the three- and nine-month periods ended July 29, 2017, the total intrinsic value of options exercised (i.e., the difference between the market price at exercise and the price paid by the employee to exercise the options) was $19.9 million and $109.0 million, respectively, and the total amount of proceeds received by the Company from the exercise of these options was $18.0 million and $105.2 million, respectively.
A summary of the Company’s restricted stock unit/award activity as of August 4, 2018 and changes during the three- and nine-month periods then ended is presented below: 
Activity during the Three Months Ended August 4, 2018
Restricted
Stock Units/Awards
Outstanding
(in thousands)
 
Weighted-
Average Grant-
Date Fair Value
Per Share
Restricted stock units/awards outstanding at May 5, 2018
5,990

 

$77.38

Units/Awards granted
109

 

$95.93

Restrictions lapsed
(361
)
 

$80.16

Forfeited
(81
)
 

$79.70

Restricted stock units/awards outstanding at August 4, 2018
5,657

 

$77.53


7



Activity during the Nine Months Ended August 4, 2018
Restricted
Stock Units/Awards
Outstanding
(in thousands)
 
Weighted-
Average Grant-
Date Fair Value
Per Share
Restricted stock units/awards outstanding at October 28, 2017
5,680

 

$71.88

Units/Awards granted
1,640

 

$87.90

Restrictions lapsed
(1,322
)
 

$67.81

Forfeited
(341
)
 

$69.40

Restricted stock units/awards outstanding at August 4, 2018
5,657

 

$77.53

As of August 4, 2018, there was $396.1 million of total unrecognized compensation cost related to unvested stock-based awards comprised of stock options and restricted stock units/awards. That cost is expected to be recognized over a weighted-average period of 1.7 years. The total grant-date fair value of shares that vested during the three- and nine-month periods ended August 4, 2018 was approximately $28.2 million and $112.7 million, respectively. The total grant-date fair value of shares that vested during the three- and nine-month periods ended July 29, 2017 was approximately $28.3 million and $95.2 million, respectively.

Note 4 – Accumulated Other Comprehensive Income (Loss)
The following table provides the changes in accumulated other comprehensive income (loss) (OCI) by component and the related tax effects during the first nine months of fiscal 2018.
 
Foreign currency translation adjustment
 
Unrealized holding gains on available for sale securities
 
Unrealized holding (losses) on available for sale securities
 
Unrealized holding gains (losses) on derivatives
 
Pension plans
 
Total
October 28, 2017
$
(22,489
)
 
$
1

 
$
(1
)
 
$
(10,879
)
 
$
(27,991
)
 
$
(61,359
)
Other comprehensive income (loss) before reclassifications
(2,593
)
 
5

 

 
1,843

 
186

 
(559
)
Amounts reclassified out of other comprehensive income (loss)

 

 

 
(4,008
)
 
1,234

 
(2,774
)
Tax effects

 

 

 
(476
)
 
(298
)
 
(774
)
Other comprehensive income (loss)
(2,593
)
 
5

 

 
(2,641
)
 
1,122

 
(4,107
)
August 4, 2018
$
(25,082
)
 
$
6

 
$
(1
)
 
$
(13,520
)
 
$
(26,869
)
 
$
(65,466
)
The amounts reclassified out of accumulated OCI with presentation location during each period were as follows:

8



 
 
Three Months Ended
 
Nine Months Ended
 
 
Comprehensive Income Component
 
August 4, 2018
 
July 29, 2017
 
August 4, 2018
 
July 29, 2017
 
Location
Unrealized holding losses (gains) on derivatives
 
 
 
 
 
 
 
 
 
 
    Currency forwards
 
$
988

 
$
(106
)
 
$
(877
)
 
$
2,842

 
Cost of sales
 
 
514

 
(354
)
 
(1,269
)
 
1,154

 
Research and development
 
 
526

 
(195
)
 
(1,230
)
 
1,600

 
Selling, marketing, general and administrative
     Interest rate derivatives
 
(789
)
 
468

 
(632
)
 
1,461

 
Interest expense
 
 
1,239

 
(187
)
 
(4,008
)
 
7,057

 
Total before tax
 
 
(401
)
 
(80
)
 
74

 
(1,469
)
 
Tax
 
 
$
838

 
$
(267
)
 
$
(3,934
)
 
$
5,588

 
Net of tax
 
 

 
 
 
 
 
 
 
 
Amortization of pension components
 
 
 
 
 

 
 
 
 
     Transition obligation
 
$
3

 
$
3

 
$
7

 
$
9

 
(a)
     Prior service credit
 

 
(2
)
 
1

 
(6
)
 
(a)
     Actuarial losses
 
394

 
482

 
1,226

 
1,403

 
(a)
 
 
397

 
483

 
1,234


1,406

 
Total before tax
 
 
(96
)
 
(109
)
 
(298
)
 
(313
)
 
Tax
 
 
$
301

 
$
374

 
$
936

 
$
1,093

 
Net of tax
 
 
 
 
 
 
 
 
 
 
 
Total amounts reclassified out of accumulated other comprehensive income (loss), net of tax
 
$
1,139

 
$
107

 
$
(2,998
)
 
$
6,681

 
 
______________
(a) The amortization of pension components is included in the computation of net periodic pension cost. For further information see Note 13, Retirement Plans, contained in Item 8 of the Annual Report on Form 10-K for the fiscal year ended October 28, 2017.
The Company estimates $4.5 million, net of tax, of losses of forward foreign currency derivative instruments included in OCI will be reclassified into earnings within the next 12 months. There was no material ineffectiveness recorded within OCI related to designated forward foreign currency derivative instruments in the three- and nine-month periods ended August 4, 2018 and July 29, 2017.
As of August 4, 2018, the Company held 14 investment securities, 6 of which were in an unrealized loss position with immaterial gross unrealized losses and an aggregate fair value of $65.0 million. As of October 28, 2017, the Company held 18 investment securities, 8 of which were in an unrealized loss position with immaterial gross unrealized losses and an aggregate fair value of $143.9 million. These unrealized losses were primarily related to corporate obligations that earn lower interest rates than current market rates. None of these investments have been in a loss position for more than twelve months. As the Company does not intend to sell these investments and it is unlikely that the Company will be required to sell the investments before recovery of their amortized basis, which will be at maturity, the Company does not consider those investments to be other-than-temporarily impaired at August 4, 2018 and October 28, 2017.
Realized gains or losses on investments are determined based on the specific identification basis and are recognized in nonoperating expense (income). There were no material net realized gains or losses from the sales of available-for-sale investments during any of the fiscal periods presented.

Note 5 – Earnings Per Share
Basic earnings per share is computed based only on the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect of potential future issuances of common stock relating to stock option programs and other potentially dilutive securities using the treasury stock method. In calculating diluted earnings per share, the dilutive effect of

9



stock options and restricted stock units is computed using the average market price for the respective period. In addition, the assumed proceeds under the treasury stock method include the average unrecognized compensation expense of stock options that are in-the-money and restricted stock units. This results in the “assumed” buyback of additional shares, thereby reducing the dilutive impact of in-the-money stock options. Potential shares related to certain of the Company’s outstanding stock options and restricted stock units were excluded because they were anti-dilutive. Those potential shares, determined based on the weighted average exercise prices during the respective periods, could be dilutive in the future.
In connection with the Acquisition, the Company granted restricted stock awards to replace outstanding restricted stock awards of Linear employees. These restricted stock awards entitle recipients to voting and nonforfeitable dividend rights from the date of grant. These unvested stock-based compensation awards are considered participating securities and the two-class method is used for purposes of calculating earnings per share. Under the two-class method, a portion of net income is allocated to these participating securities and therefore is excluded from the calculation of earnings per share allocated to common stock, as shown in the table below. The difference between the income allocated to participating securities under the basic and diluted two-class methods is not material.
The following table sets forth the computation of basic and diluted earnings per share:
 
Three Months Ended
 
Nine Months Ended
 
August 4, 2018
 
July 29, 2017
 
August 4, 2018
 
July 29, 2017
Net Income
$
414,464

 
$
68,916

 
$
1,062,467

 
$
379,609

Less: income allocated to participating securities
1,526

 
981

 
4,439

 
981

Net income allocated to common stockholders
$
412,938

 
$
67,935

 
$
1,058,028

 
$
378,628

 
 
 
 
 
 
 
 
Basic shares:
 
 
 
 
 
 
 
Weighted-average shares outstanding
371,315

 
367,315

 
370,211

 
339,139

Earnings per common share basic:
$
1.11

 
$
0.18

 
$
2.86

 
$
1.12

Diluted shares:
 
 
 
 
 
 
 
Weighted-average shares outstanding
371,315

 
367,315

 
370,211

 
339,139

Assumed exercise of common stock equivalents
4,500

 
3,844

 
4,669

 
4,147

Weighted-average common and common equivalent shares
375,815

 
371,159

 
374,880

 
343,286

Earnings per common share diluted:
$
1.10

 
$
0.18

 
$
2.82

 
$
1.10

Anti-dilutive shares related to:
 
 
 
 
 
 
 
Outstanding share-based awards
810

 
1,758

 
1,424

 
1,135


Note 6 – Special Charges
The Company monitors global macroeconomic conditions on an ongoing basis and continues to assess opportunities for improved operational effectiveness and efficiency, as well as a better alignment of expenses with revenues. As a result of these assessments, the Company has undertaken various restructuring actions over the past several years. These actions are described below.
The following tables display the special charges taken for ongoing actions and a roll-forward from October 28, 2017 to August 4, 2018 of the employee separation and exit cost accruals established related to these actions.
 
Closure of Manufacturing Facilities
 
Reduction of Operating Costs Action
 
Early Retirement Action
 
Total Special Charges
Statements of Income
 
 
 
 
 
 
 
Fiscal 2016 - Workforce reductions
$

 
$
13,684

 
$

 
13,684

Fiscal 2017 - Workforce reductions
$

 
$
8,126

 
$
41,337

 
$
49,463

Fiscal 2018 - Workforce reductions
$
43,359

 
$
16,117

 
$

 
$
59,476



10



Accrued Restructuring
Closure of Manufacturing Facilities
 
Reduction of Operating Costs Action
 
Early Retirement Action
Balance at October 28, 2017
$

 
$
5,137

 
$
32,211

Fiscal 2018 special charges
41,201

 
16,117

 

Severance and other payments

 
(2,798
)
 
(6,461
)
Effect of foreign currency on accrual

 
66

 

Balance at February 3, 2018
$
41,201

 
$
18,522

 
$
25,750

Fiscal 2018 special charges
1,089

 

 

Severance and other payments

 
(8,316
)
 
(6,234
)
Effect of foreign currency on accrual

 
(21
)
 

Balance at May 5, 2018
$
42,290

 
$
10,185

 
$
19,516

Fiscal 2018 special charges
1,069

 

 

Severance and other payments

 
(3,399
)
 
(5,499
)
Effect of foreign currency on accrual

 
(6
)
 

Balance at August 4, 2018
$
43,359

 
$
6,780

 
$
14,017


Closure of Manufacturing Facilities
During the first quarter of fiscal 2018, the Company recorded a special charge of $41.2 million as a result of its decision to consolidate certain wafer and test facility operations acquired as part of the Acquisition. Over the next three to five years, the Company plans to close its Hillview wafer fabrication facility located in Milpitas, California and its Singapore test facility. The Company intends to transfer Hillview wafer fabrication production to its other internal facilities and to external foundries. In addition, the Company is planning to transition testing operations currently handled in its Singapore facility to its facilities in Penang, Malaysia and the Philippines, in addition to its outsourced assembly and test partners. The special charge was for severance and fringe benefit costs in accordance with the Company's ongoing benefit plan or statutory requirements at foreign locations for 1,249 manufacturing, engineering and selling, marketing, general and administrative (SMG&A) employees.
During the second and third quarters of fiscal 2018, the Company recorded special charges totaling $2.2 million in the aggregate related to one-time termination benefits for employees included in this action. These one-time termination benefits are being recognized over the future service period required for employees to earn these benefits. Employees included in this action must continue to be employed by the Company until their employment is terminated in order to receive the severance benefits. The accrual related to this action is included in other non-current liabilities in the condensed consolidated balance sheet as of August 4, 2018.

Reduction of Operating Costs Action
During the second quarter of the fiscal year ended October 29, 2016 (fiscal 2016), the Company recorded special charges of approximately $13.7 million for severance and fringe benefit costs in accordance with the Company's ongoing benefit plan for 123 manufacturing, engineering and SMG&A employees. As of August 4, 2018, the Company still employed 5 of the 123 employees included in this cost reduction action. These employees must continue to be employed by the Company until their employment is involuntarily terminated in order to receive the severance benefits.
During the first quarter of fiscal 2017, the Company recorded special charges of approximately $8.1 million for severance and fringe benefit costs in accordance with the Company's ongoing benefit plan or statutory requirements at foreign locations for 177 manufacturing, engineering and SMG&A employees. As of August 4, 2018, the Company still employed 2 of the 177 employees included in this cost reduction action. These employees must continue to be employed by the Company until their employment is terminated in order to receive the severance benefits.
During the first quarter of fiscal 2018, the Company recorded special charges of approximately $16.1 million for severance and fringe benefit costs in accordance with the Company's ongoing benefit plan or statutory requirements at foreign locations for 126 manufacturing, engineering and SMG&A employees. As of August 4, 2018, the Company still employed 7 of the 126 employees included in this cost reduction action. These employees must continue to be employed by the Company until their employment is terminated in order to receive the severance benefits.
The accrual related to these actions is included in accrued liabilities in the condensed consolidated balance sheet as of August 4, 2018.




11



Early Retirement Offer Action
During the first quarter of fiscal 2017, the Company initiated an early retirement offer. This resulted in a special charge of approximately $41.3 million for severance, related benefits and other costs in accordance with this program for 225 manufacturing, engineering and SMG&A employees. As of August 4, 2018, the Company still employed 2 of the 225 employees included in these cost reduction actions. These employees must continue to be employed by the Company until their employment is terminated in order to receive the severance benefits. The accrual related to this action is included in accrued liabilities in the condensed consolidated balance sheet as of August 4, 2018.

Note 7 – Segment Information
In the first quarter of fiscal 2018, the Company completed organizational changes designed to integrate the operations of Linear into the Company’s organizational structure and to reflect the evolution of the Company's markets. As a result of these organizational changes, the Company re-evaluated its reporting structure under the new organization and concluded that the Company continues to operate in one reportable segment based on the aggregation of eight operating segments. The Company designs, develops, manufactures and markets a broad range of integrated circuits (ICs). The Chief Executive Officer has been identified as the Company's Chief Operating Decision Maker. The Company has determined that all of the Company's operating segments share the following similar economic characteristics, and therefore meet the criteria established for operating segments to be aggregated into one reportable segment, namely:
The primary source of revenue for each operating segment is the sale of ICs.
The ICs sold by each of the Company's operating segments are manufactured using similar semiconductor manufacturing processes and raw materials in either the Company’s own production facilities or by third-party wafer fabricators using proprietary processes.
The Company sells its products to tens of thousands of customers worldwide. Many of these customers use products spanning all operating segments in a wide range of applications.
The ICs marketed by each of the Company's operating segments are sold globally through a direct sales force, third-party distributors, independent sales representatives and via the Company's website to the same types of customers.
All of the Company's operating segments share similar economic characteristics, including long-term gross margins. The causes for variation in operating and financial performance are the same among the Company's operating segments and include factors such as (i) life cycle and price and cost fluctuations, (ii) number of competitors, (iii) product differentiation and (iv) size of market opportunity. Additionally, each operating segment is subject to the overall cyclical nature of the semiconductor industry. Lastly, the number and composition of employees and the amounts and types of tools and materials required for production of products are proportionately similar for each operating segment.
Revenue Trends by End Market
The following table summarizes revenue by end market for the three- and nine-month periods ended August 4, 2018 and July 29, 2017. 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 4, 2018
 
July 29, 2017
 
Revenue
 
% of
Revenue
 
Y/Y%
 
Revenue
 
% of
Revenue
Industrial
$
793,322

 
50
%
 
14
 %
 
$
693,257

 
48
%
Automotive
246,865

 
16
%
 
6
 %
 
232,505

 
16
%
Consumer
208,589

 
13
%
 
(17
)%
 
252,313

 
18
%
Communications
323,903

 
21
%
 
27
 %
 
255,827

 
18
%
Total revenue
$
1,572,679

 
100
%
 
10
 %
 
$
1,433,902

 
100
%


12



 
Nine Months Ended
 
August 4, 2018
 
July 29, 2017
 
Revenue
 
% of
Revenue*
 
Y/Y%
 
Revenue
 
% of
Revenue*
Industrial
$
2,320,637

 
50
%
 
43
 %
 
$
1,626,634

 
46
%
Automotive
739,361

 
16
%
 
32
 %
 
561,591

 
16
%
Consumer
646,520

 
14
%
 
(12
)%
 
733,298

 
21
%
Communications
897,838

 
19
%
 
39
 %
 
644,810

 
18
%
Total revenue
$
4,604,356

 
100
%
 
29
 %
 
$
3,566,333

 
100
%
* The sum of the individual percentages may not equal the total due to rounding.
Revenue Trends by Geographic Region
Revenue by geographic region, based on the primary end customer location, for the three- and nine-month periods ended August 4, 2018 and July 29, 2017 were as follows:
 
Three Months Ended
 
Nine Months Ended
Region
August 4, 2018
 
July 29, 2017
 
August 4, 2018
 
July 29, 2017
United States
$
524,953

 
$
530,335

 
$
1,566,986

 
$
1,383,661

Rest of North and South America
26,606

 
25,961

 
77,300

 
76,548

Europe
375,228

 
346,436

 
1,098,027

 
865,949

Japan
172,823

 
153,188

 
537,051

 
338,368

China
325,387

 
239,701

 
875,976

 
590,893

Rest of Asia
147,682

 
138,281

 
449,016

 
310,914

Total revenue
$
1,572,679

 
$
1,433,902

 
$
4,604,356

 
$
3,566,333

In the three- and nine-month periods ended August 4, 2018 and July 29, 2017, the predominant country comprising “Rest of North and South America” is Canada; the predominant countries comprising “Europe” are Germany, the Netherlands and Sweden; and the predominant countries comprising “Rest of Asia” are South Korea and Taiwan.

Note 8 – Fair Value
The Company defines fair value as the price that would be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
Level 1 — Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 — Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability.
Level 3 — Level 3 inputs are unobservable inputs for the asset or liability in which there is little, if any, market activity for the asset or liability at the measurement date.
The tables below, set forth by level, presents the Company’s financial assets and liabilities, excluding accrued interest components that are accounted for at fair value on a recurring basis as of August 4, 2018 and October 28, 2017. 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 4, 2018 and October 28, 2017, the Company held $375.1 million and $296.2 million, respectively, of cash and held-to-maturity investments that were excluded from the tables below.

13



 
August 4, 2018
 
Fair Value measurement at
Reporting Date using:
 
 
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Total
Assets
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
Government and institutional money market funds
$
202,061

 
$

 
$
202,061

Corporate obligations (1)

 
195,452

 
195,452

Other assets:
 
 
 
 
 
Deferred compensation investments
42,279

 

 
42,279

Interest rate derivatives

 
3,101

 
3,101

Total assets measured at fair value
$
244,340

 
$
198,553

 
$
442,893

Liabilities
 
 
 
 
 
Forward foreign currency exchange contracts (2)

 
6,411

 
6,411

Total liabilities measured at fair value
$

 
$
6,411

 
$
6,411

 
(1)
The amortized cost of the Company’s investments classified as available-for-sale as of August 4, 2018 was $195.5 million.
(2)
The Company has master netting arrangements by counterparty with respect to derivative contracts. See Note 9, Derivatives, of these Notes to Condensed Consolidated Financial Statements for more information related to the Company's master netting arrangements.
 
October 28, 2017
 
Fair Value measurement at
Reporting Date using:
 
 
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Total
Assets
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
Government and institutional money market funds
$
512,882

 
$

 
$
512,882

Corporate obligations (1)

 
238,796

 
238,796

Other assets:
 
 
 
 
 
Deferred compensation investments
33,510

 

 
33,510

Interest rate derivatives

 
2,966

 
2,966

Total assets measured at fair value
$
546,392

 
$
241,762

 
$
788,154

Liabilities
 
 
 
 
 
Forward foreign currency exchange contracts (2)

 
1,527

 
1,527

Total liabilities measured at fair value
$

 
$
1,527

 
$
1,527

 
(1)
The amortized cost of the Company’s investments classified as available-for-sale as of October 28, 2017 was $238.9 million.
(2)
The Company has master netting arrangements by counterparty with respect to derivative contracts. See Note 9, Derivatives, of these Notes to Condensed Consolidated Financial Statements for more information related to the Company's master netting arrangements.


14



In addition to the above, the Company has recognized contingent consideration payable at fair value (Level 3 measurement) of $7.6 million and $7.8 million as of August 4, 2018 and October 28, 2017, respectively. The changes in fair value in those periods were not material.
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
Cash equivalents and short-term investments — These investments are adjusted to fair value based on quoted market prices or are determined using a yield curve model based on current market rates.
Deferred compensation plan investments — The fair value of these mutual fund, money market fund and equity investments are based on quoted market prices.
Forward foreign currency exchange contracts — The estimated fair value of forward foreign currency exchange contracts, which includes derivatives that are accounted for as cash flow hedges and those that are not designated as cash flow hedges, is based on the estimated amount the Company would receive if it sold these agreements at the reporting date taking into consideration current interest rates as well as the creditworthiness of the counterparty for assets and the Company’s creditworthiness for liabilities. The fair value of these instruments is based upon valuation models using current market information such as strike price, spot rate, maturity date and volatility.
Interest rate derivatives The fair value of the interest rate derivatives is estimated using a discounted cash flow analysis based on the contractual terms of the derivative.
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.
Financial Instruments Not Recorded at Fair Value on a Recurring Basis
The table below presents the estimated fair value of certain financial instruments not recorded at fair value on a recurring basis. The carrying amounts of the term loans approximate fair value. The term loans are classified as Level 2 measurements according to the fair value hierarchy. The fair values of the senior unsecured notes are obtained from broker prices and are classified as Level 1 measurements according to the fair value hierarchy.
 
August 4, 2018
 
October 28, 2017
 
Principal Amount Outstanding
 
Fair Value
 
Principal Amount Outstanding
 
Fair Value
3-Year term loan
$
650,000

 
650,000

 
1,950,000

 
1,950,000

5-Year term loan
1,350,000

 
1,350,000

 
2,100,000

 
2,100,000

2020 Notes, due March 2020
300,000

 
298,249

 

 

2021 Notes, due January 2021
450,000

 
445,787

 

 

2021 Notes, due December 2021
400,000

 
387,341

 
400,000

 
399,530

2023 Notes, due June 2023
500,000

 
483,362

 
500,000

 
498,582

2023 Notes, due December 2023
550,000

 
533,412

 
550,000

 
554,411

2025 Notes, due December 2025
850,000

 
839,784

 
850,000

 
884,861

2026 Notes, due December 2026
900,000

 
857,858

 
900,000

 
902,769

2036 Notes, due December 2036
250,000

 
243,616

 
250,000

 
259,442

2045 Notes, due December 2045
400,000

 
424,573

 
400,000

 
460,588

Total Debt
$
6,600,000

 
$
6,513,982

 
$
7,900,000

 
$
8,010,183


Note 9 – Derivatives
Foreign Exchange Exposure Management — The Company enters into forward foreign currency exchange contracts to offset certain operational and balance sheet exposures from the impact of changes in foreign currency exchange rates. Such exposures result from the portion of the Company’s operations, assets and liabilities that are denominated in currencies other

15



than the U.S. dollar, primarily the Euro; other significant exposures include the Philippine Peso, the Japanese Yen and the British Pound. These foreign currency exchange contracts are entered into to support transactions made in the normal course of business, and accordingly, are not speculative in nature. The contracts are for periods consistent with the terms of the underlying transactions, generally one year or less. Hedges related to anticipated transactions are designated and documented at the inception of the respective hedges as cash flow hedges and are qualitatively evaluated for effectiveness quarterly. 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 gain or loss on the derivative reported as a component of accumulated OCI in shareholders’ equity and reclassified into earnings in the same period during which the hedged transaction affects earnings.
The total notional amount of forward foreign currency derivative instruments designated as hedging instruments of cash flow hedges denominated in Euros, British Pounds, Philippine Pesos and Japanese Yen as of August 4, 2018 and October 28, 2017 was $195.3 million and $194.3 million, respectively. The fair value of forward foreign currency derivative instruments designated as hedging instruments in the Company’s condensed consolidated balance sheets as of August 4, 2018 and October 28, 2017 was as follows:
 
 
 
Fair Value At
 
Balance Sheet Location
 
August 4, 2018
 
October 28, 2017
Forward foreign currency exchange contracts
Prepaid expenses and other current assets
 
$

 
$
257

Forward foreign currency exchange contracts
Accrued liabilities
 
$
6,404

 
$

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 4, 2018 and October 28, 2017, the total notional amount of these undesignated hedges was $63.1 million and $100.4 million, respectively. The fair value of these hedging instruments in the Company’s condensed consolidated balance sheet was immaterial as of August 4, 2018 and was a liability of $1.8 million as of October 28, 2017.
All of the Company’s derivative financial instruments are eligible for netting arrangements that allow the Company and its counterparties to net settle amounts owed to each other. Derivative assets and liabilities that can be net settled under these arrangements have been presented in the Company's condensed consolidated balance sheet on a net basis. As of August 4, 2018 and October 28, 2017, none of the master netting arrangements involved collateral. The following table presents the gross amounts of the Company's derivative assets and liabilities and the net amounts recorded in the Company's condensed consolidated balance sheet:
 
August 4, 2018
 
October 28, 2017
Gross amount of recognized liabilities
$
(6,853
)
 
$
(5,039
)
Gross amounts of recognized assets offset in the condensed consolidated balance sheet
442

 
3,512

Net liabilities presented in the condensed consolidated balance sheet
$
(6,411
)
 
$
(1,527
)
Interest Rate Exposure Management — The Company's current and future debt may be subject to interest rate risk. The Company utilizes interest rate derivatives to alter interest rate exposure in an attempt to reduce the effects of these changes.
The market risk associated with the Company’s derivative instruments results from currency exchange rate or interest rate movements that are expected to offset the market risk of the underlying transactions, assets and liabilities being hedged. The counterparties to the agreements relating to the Company’s derivative instruments consist of a number of major international financial institutions with high credit ratings. Based on the credit ratings of the Company’s counterparties as of August 4, 2018 and October 28, 2017, 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.

16



The Company records the fair value of its derivative financial instruments in its condensed consolidated financial statements in other current assets, other assets or accrued liabilities, depending on their net position, regardless of the purpose or intent for holding the derivative contract. Changes in the fair value of the derivative financial instruments are either recognized periodically in earnings or in shareholders’ equity as a component of OCI. Changes in the fair value of cash flow hedges are recorded in OCI and reclassified into earnings when the underlying contract matures and, for interest rate exposure derivatives, over the term of the corresponding debt instrument. Changes in the fair values of derivatives not qualifying for hedge accounting are reported in earnings as they occur.
For information on the unrealized holding gains (losses) on derivatives included in and reclassified out of accumulated other comprehensive income into the condensed consolidated statement of income related to forward foreign currency exchange contracts, see Note 4, Accumulated Other Comprehensive Income (Loss) of these Notes to Condensed Consolidated Financial Statements for further information.

Note 10 – Goodwill and Intangible Assets
Goodwill
The Company evaluates goodwill for impairment annually, utilizing either the qualitative or quantitative method, 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, which we have determined is consistent with our operating segments, 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 or the Company reorganizes its reporting units. In the first quarter of fiscal 2018, the Company completed organizational changes designed to integrate the operations of Linear into the Company’s organizational structure and to reflect the evolution of the Company's markets. The Company performed an impairment analysis utilizing the quantitative method immediately prior to and subsequent to the reorganization and evaluated goodwill for impairment as of the date of reorganization. When utilizing the quantitative method, the goodwill impairment test requires an entity to compare the fair value of a reporting unit with its carrying amount. The Company determines the fair value of its reporting units using a weighting of the income and market approaches. Under the income approach, the Company uses a discounted cash flow methodology which requires management to make significant estimates and assumptions related to forecasted revenues, gross profit margins, operating income margins, working capital cash flow, perpetual growth rates, and long-term discount rates, among others. For the market approach, the Company uses the guideline public company method. Under this method, the Company utilizes information from comparable publicly traded companies with similar operating and investment characteristics as the reporting units, to create valuation multiples that are applied to the operating performance of the reporting unit being tested, in order to estimate their respective fair values. In order to assess the reasonableness of the calculated reporting unit fair values, the Company reconciles the aggregate estimated fair values of its reporting units determined to its current market capitalization, allowing for a reasonable control premium. If the carrying amount of a reporting unit, calculated using the above approaches, exceeds the reporting unit’s fair value, an impairment loss is recognized for the amount of the carrying value that exceeds the amount of the reporting unit's fair value, not to exceed the total amount of goodwill allocated to the reporting unit. Additionally, the Company considers income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. There was no impairment of goodwill in any period presented. The Company's next annual impairment assessment will be performed as of the first day of the fourth quarter of fiscal 2018. The following table presents the changes in goodwill during the first nine months of fiscal 2018:
 
Nine Months Ended
 
August 4, 2018
Balance as of October 28, 2017
$
12,217,455

Goodwill related to acquisition of Linear (Note 13)
1,647

Goodwill related to other acquisitions (1)
36,558

Foreign currency translation adjustment
(1,499
)
Balance as of August 4, 2018
$
12,254,161

(1) Represents goodwill related to acquisitions that were not material to the Company on either an individual or aggregate basis.
Intangible Assets
The Company reviews finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of assets may not be recoverable. If required, recoverability of these assets is determined by comparison of their carrying value to the estimated future undiscounted cash flows the assets are expected to generate over their remaining estimated useful lives. If such assets are considered to be impaired, the impairment to be recognized in earnings equals the

17



amount by which the carrying value of the assets exceeds their estimated fair value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique.
Indefinite-lived intangible assets are tested for impairment on an annual basis on the first day of the fourth quarter (on or about August 4) or more frequently if indicators of impairment exist. The impairment test involves a qualitative assessment on the indefinite-lived intangible assets to determine whether it is more likely-than not that the indefinite-lived intangible asset is impaired. If it is determined that the fair value of the indefinite-lived intangible asset is less than the carrying value, the Company would recognize into earnings the amount by which the carrying value of the assets exceeds the estimated fair value. No impairment of intangible assets resulted from the impairment tests in any of the periods presented.
Definite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives or on an accelerated method of amortization that is expected to reflect the estimated pattern of economic use. In-process research and development (IPR&D) assets are considered indefinite-lived intangible assets until completion or abandonment of the associated research and development (R&D) efforts. Upon completion of the projects, the IPR&D assets are reclassified to technology-based intangible assets and amortized over their estimated useful lives.
As of August 4, 2018 and October 28, 2017, the Company’s intangible assets consisted of the following:
 
August 4, 2018
 
October 28, 2017
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Customer relationships
$
4,697,825

 
$
762,636

 
$
4,683,461

 
$
449,369

Technology-based
1,114,240

 
208,400

 
1,097,025

 
101,920

Trade-name
74,043

 
15,101

 
72,800

 
6,906

IPR&D
20,768

 

 
24,334

 

Total (1)(2)
$
5,906,876

 
$
986,137

 
$
5,877,620

 
$
558,195

___________
(1) Foreign intangible asset carrying amounts are affected by foreign currency translation.
(2) Increases in intangible assets primarily relate to acquisitions that were not material to the Company on either an individual or aggregate basis.
  
Intangible assets, along with the related accumulated amortization, are removed from the table above at the end of the fiscal year they become fully amortized.
For the three- and nine-month periods ended August 4, 2018, amortization expense related to finite-lived intangible assets was $143.2 million and $428.2 million, respectively. For the three- and nine-month periods ended July 29, 2017, amortization expense related to finite-lived intangible assets was $147.2 million and $256.0 million, respectively. The remaining amortization expense will be recognized over an estimated weighted average life of approximately 4.7 years.
The Company expects annual amortization expense for intangible assets to be:
Fiscal Year
Amortization Expense
Remainder of fiscal 2018

$142,402

2019

$569,314

2020

$568,665

2021

$568,005

2022

$565,075


Note 11 – Debt
On March 12, 2018, in an underwritten public offering, the Company issued $300.0 million aggregate principal amount of 2.850% senior unsecured notes due March 12, 2020 (the 2020 Notes) and $450.0 million aggregate principal amount of 2.950% senior unsecured notes due January 12, 2021 (the January 2021 Notes and, together with the 2020 Notes, the Notes). Interest on the 2020 Notes is payable on March 12 and September 12 of each year, beginning on September 12, 2018. Interest on the January 2021 Notes is payable on January 12 and July 12 of each year, beginning on July 12, 2018. The net proceeds of the offering were $743.8 million, after discount and issuance costs, which were used to repay a portion of the Company’s outstanding 5-year unsecured term loan. Debt discount and issuance costs will be amortized through interest expense over the term of the Notes. At any time prior to the applicable maturity date of the Notes, the Company may, at its option, redeem some or all of the applicable series of Notes by paying a make-whole premium, plus accrued and unpaid interest, if any, to the date of

18



redemption. The Notes are unsecured and rank equally in right of payment with all of the Company’s other unsecured senior indebtedness. The Notes were issued pursuant to an indenture, as supplemented by a supplemental indenture, and the indenture and supplemental indenture contain certain covenants, events of default and other customary provisions. As of August 4, 2018, the Company was in compliance with these covenants.
On November 10, 2017, the Company paid $300.0 million of principal on its 3-year unsecured term loan using cash on hand as of October 28, 2017. This amount was not contractually due under the terms of the loan. As such, this amount was classified as current in the condensed consolidated balance sheet as of October 28, 2017. During the nine-month period ended August 4, 2018, the Company made additional principal payments of $1.0 billion on its 3-year unsecured term loan and $750.0 million on its 5-year unsecured term loan. These amounts were not contractually due under the terms of the loans. As of August 4, 2018, $22.5 million of principal on the 3-year unsecured term loan was classified as current debt as the Company intends to utilize cash on hand as of August 4, 2018 to repay this amount of debt within the next twelve months.

Note 12 – Inventories
Inventories are valued at the lower of cost (first-in, first-out method) or market. The valuation of inventory requires the Company to estimate obsolete or excess inventory as well as inventory that is not of saleable quality. The Company employs a variety of methodologies to determine the net realizable value of its inventory. While a portion of the calculation to record inventory at its net realizable value is based on the age of the inventory and lower of cost or market calculations, a key factor in estimating obsolete or excess inventory requires the Company to estimate the future demand for its products. If actual demand is less than the Company’s estimates, impairment charges, which are recorded to cost of sales, may need to be recorded in future periods. Inventory in excess of saleable amounts is not valued, and the remaining inventory is valued at the lower of cost or market.
Inventories at August 4, 2018 and October 28, 2017 were as follows:
 
August 4, 2018
 
October 28, 2017
Raw materials
$
35,777

 
$
35,436

Work in process
373,217

 
376,476

Finished goods
154,651

 
138,904

Total inventories
$
563,645

 
$
550,816


Note 13 – Acquisitions
Linear Technology Corporation
On March 10, 2017 (Acquisition Date), the Company completed its acquisition of all of the voting interests of Linear, an independent manufacturer of high performance analog integrated circuits. The total consideration paid to acquire Linear, which consisted of cash, common stock of the Company and share-based compensation awards, was approximately $15.8 billion. The Company believes that the combination creates the premier analog technology company with the industry’s most comprehensive suite of high-performance analog offerings. The results of operations of Linear from the Acquisition Date are included in the Company’s condensed consolidated statements of income, condensed consolidated balance sheet, and condensed consolidated statement of cash flows for the three- and nine-month periods ended August 4, 2018 and July 29, 2017.
During the first quarter of fiscal 2018, the Company recorded acquisition accounting adjustments of $1.6 million to goodwill comprised of $4.7 million to intangible assets, $2.7 million to accounts receivable, $2.4 million to assumed liabilities and $1.1 million to deferred tax liabilities. The Acquisition accounting was completed during the second quarter of fiscal 2018.
The following unaudited pro forma consolidated financial information combines the unaudited results of the Company for the three- and nine-month periods ended July 29, 2017 and the unaudited results of Linear for the three- and nine-month periods ended July 29, 2017 and assumes that the Acquisition, which closed on March 10, 2017, was completed on November 1, 2015 (the first day of fiscal 2016). The pro forma consolidated financial information has been calculated after applying the Company’s accounting policies and includes adjustments for amortization expense of acquired intangible assets, transaction-related costs, a step-up in the value of acquired inventory and property, plant and equipment, compensation expense for ongoing share-based compensation arrangements replaced and interest expense for the debt incurred to fund the Acquisition, together with the consequential tax effects. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the operating results of the Company that would have been achieved had the Acquisition actually taken place on November 1, 2015. In addition, these results are not intended to be a projection of future results and do not reflect events that may occur after the Acquisition, including but not limited to revenue enhancements, cost savings or operating synergies that the combined Company may achieve as a result of the Acquisition.

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 (thousands, except per share data)
 
Pro Forma Three Months Ended
Pro Forma Nine Months Ended
 
 
July 29, 2017
July 29, 2017
Revenue
 
$
1,452,684

$
4,161,671

Net income
 
$
291,855

$
657,250

Basic net income per common share
 
$
0.79

$
1.79

Diluted net income per common share
 
$
0.78

$
1.77

Other Acquisitions
The Company has not provided pro forma results of operations for any other acquisitions completed in the three- and nine-month periods ended August 4, 2018 or July 29, 2017 herein as they were not material to the Company on either an individual or an aggregate basis. The Company included the results of operations of each acquisition in its consolidated statement of income from the date of each acquisition.

Note 14 – 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 provision. In the ordinary course of global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of cost reimbursement arrangements among related entities. Although the Company believes its estimates are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in the historical income tax provisions and accruals. Such differences could have a material impact on the Company’s income tax provision and operating results in the period in which such determination is made.
The Company’s effective tax rate reflects the applicable tax rate in effect in the various tax jurisdictions around the world where the Company's income is earned. The Company's effective tax rate is generally lower than the U.S. federal statutory rate, primarily due to lower statutory tax rates applicable to the Company's operations in jurisdictions in which the Company earns a portion of its income.
The Tax Cuts and Jobs Act of 2017 (Tax Legislation), enacted on December 22, 2017, contains significant changes to U.S. tax law, including lowering the U.S. corporate income tax rate to 21.0%, implementing a territorial tax system, and imposing a one-time tax on deemed repatriated earnings of foreign subsidiaries. As of August 4, 2018, the Company has not completed its accounting for the tax effects of the enactment of the Tax Legislation. However, as described below, the Company has made reasonable estimates of the effects on its existing deferred tax balances and the one-time transition tax in the first nine months of fiscal 2018.
The Tax Legislation reduced the U.S. statutory tax rate from 35.0% to 21.0%, effective January 1, 2018, which results in a blended statutory income tax rate for the Company of 23.4% for fiscal 2018. For the fiscal year ending November 2, 2019 (fiscal 2019), the Company’s U.S. statutory income tax rate will be 21.0%.
In the first quarter of fiscal year 2018, the Company recorded a $639.7 million discrete tax benefit for the re-measurement of deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21.0%. There was no material change to this provisional estimate in the third quarter of fiscal year 2018. This provisional benefit is subject to revision based on further analysis and interpretation of the Tax Legislation and to the extent that future results differ from currently available projections.
The Tax Legislation also implements a territorial tax system. As part of transitioning to the territorial tax system, the Tax Legislation includes a one-time transition tax based on our total post-1986 undistributed foreign earnings and profits that were previously deferred from U.S. income tax. In the first quarter of fiscal year 2018, the Company recorded a provisional tax expense amount for the one-time transition tax of $687.1 million, which is comprised of the $751.1 million transition tax liability less a deferred tax liability of $64.0 million that was recorded in prior years. There was no material change to this provisional estimate in the third quarter of fiscal year 2018. This provisional estimate may be impacted by a number of additional considerations, including, but not limited to, the issuance of final tax regulations, the Company's ongoing analysis of the Tax Legislation, the Company's earnings and profits subject to the one-time transition tax, and estimated earnings and profits and foreign tax credit pools for fiscal 2018 as well as the amount of earnings and profits held in cash or other specified assets. The Company intends to elect to pay this transition tax starting in fiscal 2019 without incurring interest over a period of eight years. As a result, $60.1 million of the transition tax is classified as current taxes payable and $691.0 million is classified as non-current taxes payable.

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For the nine months ended August 4, 2018, the Company recorded a total of $24.2 million in discrete benefits for excess tax benefits from share-based payments, pursuant to ASU 2016-09, which became effective for fiscal 2018. This consists of a $6.0 million discrete benefit arising in the third quarter of fiscal 2018 in addition to the $10.0 million and $8.2 million discrete benefits arising in the first quarter and second quarter of fiscal 2018, respectively.
Additionally, the Tax Legislation subjects a U.S. shareholder to tax on global intangible low-taxed income (GILTI) earned by certain foreign subsidiaries for tax years starting on or after January 1, 2018. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. The Company is still evaluating the effects of the GILTI provisions and has not yet determined its accounting policy relating to deferred taxes and as such, no tax impacts are included in the Company's financial statements for the nine-month period ended August 4, 2018.
The Company historically asserted its intent to reinvest substantially all of its foreign earnings in foreign operations indefinitely. The Company is still in the process of analyzing the impact that the Tax Legislation has on its indefinite reinvestment assertion. Accordingly, no additional income taxes or withholding taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any outside basis difference inherent in these entities.
On December 22, 2017, the Securities and Exchange Commission issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118) directing taxpayers to consider the impact of the Tax Legislation as “provisional” when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. Also in March 2018, the FASB issued ASU 2018-05, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, to add various SEC paragraphs pursuant to the issuance of SAB 118, to Accounting Standards Codification topic 740, Income Taxes (ASC 740). In accordance with SAB 118, the amount reported for the tax benefit from re-measuring the Company’s net deferred tax liabilities to the lower 21.0% statutory rate and the amount reported for the additional U.S. income tax resulting from the one-time mandatory deemed repatriation including the ongoing evaluation of the impact on the Company’s indefinite reinvestment assertions regarding undistributed earnings and profits, represents the Company's best estimate as it continues to accumulate and process data to finalize its underlying calculations and to review further guidance that regulators are expected to issue.  The Company is also analyzing other provisions of the Tax Legislation to determine if they will impact the Company's effective rate for fiscal 2018 or in the future.  The Company will continue to refine its adjustments through the permissible measurement period, which is not to extend beyond one year after the enactment date.
Many provisions in the Tax Legislation may have U.S. state and local income tax implications. While some states automatically adopt federal tax law changes, others may conform their laws on a specific date or may choose to decouple from the new federal tax law provisions. As such, the Company has not sufficiently analyzed the impact of the new Tax Legislation on its state and local income taxes, and therefore did not record a provisional amount, but instead continues to apply ASC 740, based on the provisions of the tax law that were in effect immediately prior to the Tax Legislation being enacted. The Company expects to complete its analysis of the effects on state and local income taxes on or before December 22, 2018 as allowed by SAB 118.
All of the Company’s U.S. federal tax returns prior to fiscal year 2014 are no longer subject to examination. All of the Company’s Ireland tax returns prior to fiscal year 2012 are no longer subject to examination.
The Company has numerous audits ongoing at any time throughout the world, including an Internal Revenue Service income tax audit for Linear’s pre-acquisition fiscal year 2015, various U.S. state and local tax audits, and transfer pricing audits in Spain, the Philippines and Ireland. As the statute of limitations for Ireland's transfer pricing audit expires in the quarter ended November 3, 2018, the Company expects to receive formal correspondence from Ireland within the next several weeks.
Although the Company believes its estimates of income taxes payable are reasonable, no assurance can be given that the Company will prevail in the matters raised or that the outcome of one or all of these matters will not be different than that which is reflected in the historical income tax provisions and accruals. The Company believes such differences would not have a material impact on the Company’s financial condition.
Unrealized Tax Benefits
The following table summarizes the changes in the total amounts of unrealized tax benefits for the nine-month period ended August 4, 2018.

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Unrealized Tax Benefits
Balance, October 28, 2017
$
37,857

Additions for tax positions related to current year
304

Reductions for tax positions related to prior years
(295
)
Reductions due to lapse of applicable statute of limitations
(7,520
)
Balance, August 4, 2018
$
30,346


Note 15 – New Accounting Pronouncements
Standards Implemented
Derivatives and Hedging
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12), which amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted. ASU 2017-12 is effective for the Company in the first quarter of the fiscal year ending October 31, 2020 (fiscal 2020). The Company early adopted ASU 2017-12 in the third quarter of fiscal 2018. The adoption of ASU 2017-12 did not impact the Company's financial position or results of operations.
Stock Compensation
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years, and interim periods within those annual periods, beginning after December 15, 2016 and allows for prospective, retrospective or modified retrospective adoption, depending on the area covered in the update, with early adoption permitted. The Company adopted ASU 2016-09 in the first quarter of fiscal 2018. The Company recorded total excess tax benefits of $24.2 million in the nine-month period ended August 4, 2018 from its share-based payments within income tax expense in its condensed consolidated statements of income. These excess tax benefits are presented within operating activities in the condensed consolidated statements of cash flows. The Company applied this change in presentation retrospectively and has adjusted the prior year presentation by removing the reclass of $30.2 million of excess tax benefit-stock options from net cash provided by operating activities to net cash provided by financing activities. The Company elected not to change its policy on accounting for forfeitures and continues to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period. The adoption of ASU 2016-09 also changed the calculation of fully diluted shares outstanding. The excess tax benefits have been excluded from the calculation of assumed proceeds in the Company's calculation of diluted weighted shares under the new standard. Upon adoption of the new standard, the Company's diluted weighted shares outstanding increased by approximately 1.0 million shares.
Equity Method Investments
In March 2016, the FASB issued ASU 2016-07, Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting (ASU 2016-07). ASU 2016-07 eliminates the requirement that when an investment, initially accounted for under a method other than the equity method of accounting, subsequently qualifies for use of the equity method, an investor must retrospectively apply the equity method in prior periods in which it held the investment. This requires an investor to determine the fair value of the investee’s underlying assets and liabilities retrospectively at each investment date and revise all prior periods as if the equity method had always been applied. The new guidance requires the investor to apply the equity method prospectively from the date the investment qualifies for the equity method. The investor will add the carrying value of the existing investment to the cost of the additional investment to determine the initial cost basis of the equity method investment. ASU 2016-07 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, and early adoption is permitted. The Company adopted ASU 2016-07 in the first quarter of fiscal 2018. The adoption of ASU 2016-07 in the first quarter of fiscal 2018 did not impact the Company's financial position or results of operations.
Inventory
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330) - Simplifying the Measurement of Inventory (ASU 2015-11), which simplifies the subsequent measurement of inventories by replacing the lower of cost or market test with a

22



lower of cost and net realizable value test. The guidance applies only to inventories for which cost is determined by methods other than last-in first-out and the retail inventory method. The guidance in ASU 2015-11 is effective for fiscal years beginning after December 15, 2016 and early adoption is permitted. The Company adopted ASU 2015-11 in the first quarter of fiscal 2018. The adoption of ASU 2015-11 in the first quarter of fiscal 2018 did not impact the Company's financial position or results of operations.
Standards to Be Implemented
Comprehensive Income
In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-01). ASU 2018-01 allows for reclassification of stranded tax effects resulting from the Tax Legislation from accumulated other comprehensive income to retained earnings. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the adoption date and the impact, if any, adoption will have on its financial position and results of operations.
Business Combinations
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business (ASU 2017-01). ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company will adopt ASU 2017-01 in the first quarter of fiscal 2019. The impact of the adoption on the Company's financial position and results of operations will be dependent upon any future acquisitions or disposals.
Income Taxes
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740) (ASU 2016-16). ASU 2016-16 will require an entity to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. ASU 2016-16 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted as of the beginning of an annual reporting period for which financial statements have not been issued or made available for issuance. The Company will adopt ASU 2016-16 in the first quarter of fiscal 2019. The Company is currently evaluating the adoption date and the impact, if any, adoption will have on its financial position and results of operations.
Statement of Cash Flows
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15). ASU 2016-15 provides guidance on several specific cash flow issues, including debt prepayment or extinguishment costs, settlement of certain debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of certain insurance claims and distributions received from equity method investees. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted in any interim or annual period. The Company will adopt ASU 2016-15 in the first quarter of fiscal 2019. The Company is currently evaluating the adoption date but does not expect the adoption of ASU 2016-15 will have a material impact on its consolidated financial statements.
Leases
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (ASU 2016-02). ASU 2016-02 requires a lessee to recognize most leases on the balance sheet but recognize expenses on the income statement in a manner similar to current practice. The update states that a lessee will recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying assets for the lease term. Leases will continue to be classified as either financing or operating, with classification affecting the recognition, measurement and presentation of expenses and cash flows arising from a lease. In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842 (ASU 2018-01). ASU 2018-01 permits an entity to elect an optional transition practical expedient to not evaluate land easements that exist or expired before the entity’s adoption of Topic 842 and that were not previously accounted for as leases under Topic 840. In July 2018, the FASB issued ASU 2018-11, Leases – Targeted Improvements (Topic 842) (ASU 2018-11), which provides for an additional transition method that allows companies to apply the new lease standard at the adoption date, eliminating the requirement to apply the standard to the earliest period presented in the financial statements.
ASU 2016-02, ASU 2018-01 and ASU 2018-11 are effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. ASU 2016-02 and ASU 2018-01 are effective for the

23



Company in the first quarter of fiscal 2020. The Company is currently evaluating the adoption date and the impact adoption will have on its financial position and results of operations.
Financial Instruments
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 requires a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years. ASU 2016-13 is effective for the Company in the first quarter of fiscal 2020. The Company is currently evaluating the adoption date and the impact, if any, adoption will have on its financial position and results of operations.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01). ASU 2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements; and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU 2016-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. ASU 2016-01 is effective for the Company in the first quarter of fiscal 2019. The Company is currently evaluating the impact adoption will have on its financial position and results of operations.
Stock Compensation
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07). ASU 2018-07 expands the scope of Topic 718 to include all share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year, with early adoption permitted. ASU 2018-07 is effective for the Company in the first quarter of fiscal 2019. The Company is currently evaluating the adoption date and the impact, if any, adoption will have on its financial position and results of operations.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting (ASU 2017-09). The new guidance clarifies when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. ASU 2017-09 is effective for fiscal years, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. ASU 2017-09 is effective for the Company in the first quarter of fiscal 2019. The Company is currently evaluating the adoption date and the impact, if any, adoption will have on its financial position and results of operations.
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, the guidance requires improved disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has issued several amendments and updates to the new revenue standard, including guidance related to when an entity should recognize revenue gross as a principal or net as an agent and how an entity should identify performance obligations.  As amended, ASU 2014-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, which is the Company's first quarter of fiscal 2019. The Company has developed a project plan for the implementation of the guidance, including a review of all revenue streams to identify any differences in the timing, measurement or presentation of revenue recognition. The Company has reviewed its revenue streams, including those from the Acquisition, and is nearing completion in assessing all potential impacts of the standard on its consolidated financial statements and related disclosures, including any impacts from recently issued

24



amendments, and retrospectively adjusting financial information for prior fiscal years.  While the Company is still in the process of completing its evaluation of the standard, it currently believes the most significant impact will be related to the timing of recognition of sales to certain distributors. As described in Note 2, Revenue Recognition, of these Notes to the condensed consolidated financial statements, the Company currently defers revenue and the related cost of sales on shipments to certain distributors until the distributors resell the products to their customers. Upon adoption of ASU 2014-09, the Company will no longer be permitted to defer revenue until sale by the distributor to the end customer, but rather, will be required to estimate the effects of returns and allowances provided to distributors and record revenue at the time of sale to the distributor. The Company will adopt ASU 2014-09, using the full retrospective method, upon its effective date for the Company which is the Company’s first quarter of fiscal 2019.

Note 16 – Subsequent Events
On August 21, 2018, the Board of Directors of the Company declared a cash dividend of $0.48 per outstanding share of common stock. The dividend will be paid on September 12, 2018 to all shareholders of record at the close of business on August 31, 2018.
Also on August 21, 2018, the Company reinstated its share repurchase program, and its Board of Directors approved an increase to the current authorization for the stock repurchase program by an additional $2.0 billion to $8.2 billion in the aggregate. Under the program, the Company may repurchase outstanding shares of common stock from time to time in the open market or through privately negotiated transactions.

25



ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This information should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended October 28, 2017 (fiscal 2017).
This Quarterly Report on Form 10-Q, including the following discussion, contains forward-looking statements regarding future events and our future results that are subject to the safe harbor created under the Private Securities Litigation Reform Act of 1995 and other safe harbors under the Securities Act of 1933 and the Securities Exchange Act of 1934. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “may,” “could” and “will,” and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections regarding our future financial performance; our anticipated growth and trends in our businesses; our future liquidity, capital needs and capital expenditures; our future market position and expected competitive changes in the marketplace for our products; our ability to pay dividends or repurchase stock; our ability to service our outstanding debt; our expected tax rate; the effect of changes in or the application of new or revised tax laws, including the Tax Cuts and Jobs Act of 2017 (Tax Legislation); the effect of new accounting pronouncements; our ability to successfully integrate acquired businesses and technologies, including the integration of the acquired business, operations and employees of Linear Technology Corporation; and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are inherently subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified in Part II, Item 1A. “Risk Factors” and elsewhere herein. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements, including to reflect events or circumstances occurring after the date of the filing of this report, except to the extent required by law.

Results of Operations
(all tabular amounts in thousands except per share amounts and percentages)
Overview
 
Three Months Ended
 
August 4, 2018
 
July 29, 2017
 
$ Change
 
% Change
Revenue
$
1,572,679

 
$
1,433,902

 
$
138,777

 
10
%
Gross margin %
68.1
%
 
53.5
%
 
 
 
 
Net income
$
414,464

 
$
68,916

 
$
345,548

 
501
%
Net income as a % of revenue
26.4
%
 
4.8
%
 
 
 
 
Diluted EPS
$
1.10

 
$
0.18

 
$
0.92

 
511
%
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
August 4, 2018
 
July 29, 2017
 
$ Change
 
% Change
Revenue
$
4,604,356

 
$
3,566,333

 
$
1,038,023

 
29
%
Gross margin %
68.2
%
 
57.6
%
 
 
 
 
Net income
$
1,062,467

 
$
379,609

 
$
682,858

 
180
%
Net income as a % of revenue
23.1
%
 
10.6
%
 
 
 
 
Diluted EPS
$
2.82

 
$
1.10

 
$
1.72

 
156
%
The fiscal year ending November 3, 2018 (fiscal 2018) is a 53-week year and the fiscal year ended October 28, 2017 (fiscal 2017) was a 52-week year. The additional week in fiscal 2018 was included in the first quarter ended February 3, 2018. Therefore, the first nine months of fiscal 2018 included an additional week of operations as compared to the first nine months of fiscal 2017.



26



Acquisition of Linear Technology Corporation
On March 10, 2017 (Acquisition Date), we completed the acquisition of Linear Technology Corporation (Linear), a designer, manufacturer and marketer of high performance analog integrated circuits. The total consideration paid to acquire Linear was approximately $15.8 billion. The acquisition of Linear is referred to as the Acquisition. The condensed consolidated financial statements included in this Quarterly Report on Form 10-Q include the financial results of Linear prospectively from the Acquisition Date. See Note 13, Acquisitions, in the Notes to Condensed Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information.
Revenue Trends by End Market
The following tables summarize revenue by end market for the three- and nine-month periods ended August 4, 2018 and July 29, 2017. 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 4, 2018
 
July 29, 2017
 
Revenue
 
% of
Revenue
 
Y/Y%
 
Revenue
 
% of
Revenue
Industrial
$
793,322

 
50
%
 
14
 %
 
$
693,257

 
48
%
Automotive
246,865

 
16
%
 
6
 %
 
232,505

 
16
%
Consumer
208,589

 
13
%
 
(17
)%
 
252,313

 
18
%
Communications
323,903

 
21
%
 
27
 %
 
255,827

 
18
%
Total revenue
$
1,572,679

 
100
%
 
10
 %
 
$
1,433,902

 
100
%
 
 
Nine Months Ended
 
August 4, 2018
 
July 29, 2017
 
Revenue
 
% of
Revenue*
 
Y/Y%
 
Revenue
 
% of
Revenue*
Industrial
$
2,320,637

 
50
%
 
43
 %
 
$
1,626,634

 
46
%
Automotive
739,361

 
16
%
 
32
 %
 
561,591

 
16
%
Consumer
646,520

 
14
%
 
(12
)%
 
733,298

 
21
%
Communications
897,838

 
19
%
 
39
 %
 
644,810

 
18
%
Total revenue
$
4,604,356

 
100
%
 
29
 %
 
$
3,566,333

 
100
%
* The sum of the individual percentages may not equal the total due to rounding.
Industrial - Industrial end market revenue increased in the three-month period ended August 4, 2018, as compared to the same period of the prior fiscal year, primarily as a result of a broad-based increase in demand for our products in this end market.
The Industrial end market included $691.4 million of revenue in the nine-month period ended August 4, 2018, as compared to $277.5 million of revenue in the nine-month period ended July 29, 2017, as a result of the Acquisition. Industrial end market revenue increased in the nine-month period ended August 4, 2018, as compared to the same period of the prior fiscal year, primarily as a result of the Acquisition, a broad-based increase in demand for our products in this end market and an additional week of operations in the first nine months of fiscal 2018 as compared to the first nine months of fiscal 2017. 
Automotive - Automotive end market revenue increased in the three-month period ended August 4, 2018, as compared to the same period of the prior fiscal year, primarily as a result of a broad-based increase in demand for our products in this end market.
The Automotive end market included $250.2 million of revenue in the nine-month period ended August 4, 2018, as compared to $113.4 million of revenue in the nine-month period ended July 29, 2017, as a result of the Acquisition. Automotive end market revenue increased in the nine-month period ended August 4, 2018, as compared to the same period of the prior

27



fiscal year, primarily as a result of the Acquisition, a broad-based increase in demand for our products in this end market and an additional week of operations in the first nine months of fiscal 2018 as compared to the first nine months of fiscal 2017. 
Consumer - Consumer end market revenue decreased in the three-month period ended August 4, 2018, as compared to the same period of the prior fiscal year, primarily as a result of a decreased demand for products used in portable consumer applications.
Consumer end market revenue decreased in the nine-month period ended August 4, 2018, as compared to the same period of the prior fiscal year, primarily as a result of a decreased demand for products used in portable consumer applications, partially offset by an increase in revenue due to the Acquisition, which was not significant, and an additional week of operations in the first nine months of fiscal 2018 as compared to the first nine months of fiscal 2017. 
Communications - Communications end market revenue increased in the three-month period ended August 4, 2018, as compared to the same period of the prior fiscal year as a result of a broad-based increase in demand for our products sold into this end market.
The Communications end market included $258.9 million of revenue in the nine-month period ended August 4, 2018, as compared to $73.7 million of revenue in the nine-month period ended July 29, 2017, as a result of the Acquisition. Communications end market revenue increased in the nine-month period ended August 4, 2018, as compared to the same period of the prior fiscal year, primarily as a result of the Acquisition, a broad-based increase in demand for our products in this end market and an additional week of operations in the first nine months of fiscal 2018 as compared to the first nine months of fiscal 2017.
Revenue Trends by Geographic Region
Revenue by geographic region, based on the primary end customer location, for the three- and nine-month periods ended August 4, 2018 and July 29, 2017 were as follows:
 
Three Months Ended
Region
August 4, 2018
 
July 29, 2017
 
$ Change
 
% Change
United States
$
524,953

 
$
530,335

 
$
(5,382
)
 
(1
)%
Rest of North and South America
26,606

 
25,961

 
645

 
2
 %
Europe
375,228

 
346,436

 
28,792

 
8
 %
Japan
172,823

 
153,188

 
19,635

 
13
 %
China
325,387

 
239,701

 
85,686

 
36
 %
Rest of Asia
147,682

 
138,281

 
9,401

 
7
 %
Total revenue
$
1,572,679

 
$
1,433,902

 
$
138,777

 
10
 %
 
Nine Months Ended
Region
August 4, 2018
 
July 29, 2017
 
$ Change
 
% Change
United States
$
1,566,986

 
$
1,383,661

 
$
183,325

 
13
%
Rest of North and South America
77,300

 
76,548

 
752

 
1
%
Europe
1,098,027

 
865,949

 
232,078

 
27
%
Japan
537,051

 
338,368

 
198,683

 
59
%
China
875,976

 
590,893

 
285,083

 
48
%
Rest of Asia
449,016

 
310,914

 
138,102

 
44
%
Total revenue
$