NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended
November 3, 2018
,
October 28, 2017
and
October 29, 2016
(all tabular amounts in thousands except per share amounts)
|
|
1.
|
Description of Business
|
Analog Devices, Inc. (Analog Devices or the Company) is a leading global high-performance analog technology company. Since the Company's inception in 1965, it has focused on solving its customers’ toughest signal processing engineering challenges and playing a fundamental role in efficiently converting, conditioning, and processing real-world phenomena such as temperature, pressure, sound, light, speed, and motion into electrical signals to be used in a wide array of electronic applications. The Company produces innovative products and technologies that accurately and securely sense, measure, connect, interpret and power, allowing its customers to intelligently bridge the physical and digital domains.
The Company designs, manufactures, and markets a broad portfolio of solutions, including integrated circuits (ICs), algorithms, software, and subsystems, that leverage high-performance analog, mixed-signal, and digital signal processing technologies. The Company's fusion of cutting-edge sensors, data converters, amplifiers and linear products, radio frequency (RF) ICs, power management products, and other signal processing products with deep industry expertise allows it to create robust technology platforms that meet a broad spectrum of customer and market needs. As new generations of applications evolve - such as autonomous vehicles, 5G networks, intelligent factories, and smart healthcare devices - the demand for Analog Devices’ high-performance analog signal processing and digital signal processing (DSP) products and technologies is increasing.
2. Summary of Significant Accounting Policies
a.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and all of its subsidiaries. Upon consolidation, all intercompany accounts and transactions are eliminated. Certain amounts reported in previous years have been reclassified to conform to the presentation for the fiscal year ended
November 3, 2018
(
fiscal 2018
). 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 prior year presentation by removing the reclass of
$41.8 million
and
$10.5 million
of excess tax benefit-equity based awards from net cash provided by operating activities to net cash provided by financing activities in the fiscal year ended October 28, 2017 (fiscal 2017) and in the fiscal year ended October 29, 2016 (fiscal 2016), respectively. All other reclassified amounts are immaterial.
The Company’s fiscal year is the 52-week or 53-week period ending on the Saturday closest to the last day in October. Fiscal
2018
is a
53
-week fiscal year. Fiscal
2017
and fiscal
2016
were
52
-week periods. The additional week in fiscal 2018 was included in the first quarter ended February 3, 2018. Therefore, fiscal 2018 included an additional week of operations as compared to fiscal 2017 and fiscal 2016.
On March 10, 2017 (Acquisition Date), the Company completed the acquisition of all of the voting interests of Linear Technology Corporation (Linear), an independent manufacturer of high performance analog integrated circuits. The total consideration paid to acquire Linear was approximately
$15.8 billion
, consisting of
$11.1 billion
in cash financed through existing cash on hand, net proceeds from bridge and term loan facilities and proceeds received from the issuance of senior unsecured notes,
$4.6 billion
from the issuance of the Company's common stock and
$0.1 billion
of consideration related to the replacement of outstanding equity awards held by Linear employees. The acquisition of Linear is referred to as the Acquisition. The consolidated financial statements included in this Annual Report on Form 10-K include the financial results of Linear prospectively from the Acquisition Date.
See Note 6,
Acquisitions
, of these notes to Consolidated Financial Statements for further discussion related to the Acquisition.
|
|
b.
|
Cash, Cash Equivalents and Short-term Investments
|
Cash and cash equivalents are highly liquid investments with insignificant interest rate risk and maturities of ninety days or less at the time of acquisition. Cash, cash equivalents and short-term investments consist primarily of government and institutional money market funds, corporate obligations such as commercial paper and floating rate notes, bonds and bank time deposits.
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company classifies its investments in readily marketable debt and equity securities as “held-to-maturity,” “available-for-sale” or “trading” at the time of purchase. There were no transfers between investment classifications in any of the fiscal years presented. Held-to-maturity securities, which are carried at amortized cost, include only those securities the Company has the positive intent and ability to hold to maturity. Securities such as bank time deposits, which by their nature are typically held to maturity, are classified as such. The Company’s other readily marketable cash equivalents and short-term investments are classified as available-for-sale. Available-for-sale securities are carried at fair value with unrealized gains and losses, net of related tax, reported in accumulated other comprehensive (loss) income. Adjustments to the fair value of investments classified as available-for-sale are recorded as an increase or decrease in accumulated other comprehensive (loss) income, unless the adjustment is considered an other-than-temporary impairment, in which case the adjustment is recorded as a charge in the statement of income.
The Company’s deferred compensation plan investments are classified as trading. See Note 2j,
Fair Value
and Note 11,
Retirement Plans,
of these Notes to Consolidated Financial Statements
for additional information on these investments. There were no cash equivalents or short-term investments classified as trading at
November 3, 2018
or
October 28, 2017
.
The Company periodically evaluates its investments for impairment. There were no other-than-temporary impairments of short-term investments in any of the fiscal years presented.
Realized gains or losses on investments are determined based on the specific identification basis and are recognized in nonoperating (income) expense. There were no material net realized gains or losses from the sales of available-for-sale investments during any of the fiscal periods presented.
As of
November 3, 2018
, the Company held
15
investment securities,
15
of which were in an unrealized loss position with immaterial gross unrealized losses and an aggregate fair value of
$205.0 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
November 3, 2018
and
October 28, 2017
.
The components of the Company’s cash and cash equivalents and short-term investments as of
November 3, 2018
and
October 28, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Cash and cash equivalents:
|
|
|
|
|
|
Cash
|
$
|
147,629
|
|
|
$
|
226,160
|
|
Available-for-sale
|
598,962
|
|
|
751,678
|
|
Held-to-maturity
|
70,000
|
|
|
70,000
|
|
Total cash and cash equivalents
|
$
|
816,591
|
|
|
$
|
1,047,838
|
|
See Note 2j,
Fair Value,
of these Notes to Consolidated Financial Statements for additional information on the Company’s cash equivalents and short-term investments.
|
|
c.
|
Supplemental Cash Flow Statement Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Cash paid during the fiscal year for:
|
|
|
|
|
|
|
|
|
Income taxes
|
$
|
211,473
|
|
|
$
|
868,492
|
|
|
$
|
77,918
|
|
Interest
|
$
|
233,436
|
|
|
$
|
183,117
|
|
|
$
|
41,701
|
|
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
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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
November 3, 2018
and
October 28, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Raw materials
|
$
|
30,511
|
|
|
$
|
35,436
|
|
Work in process
|
375,908
|
|
|
376,476
|
|
Finished goods
|
180,341
|
|
|
138,904
|
|
Total inventories
|
$
|
586,760
|
|
|
$
|
550,816
|
|
|
|
e.
|
Property, Plant and Equipment
|
Property, plant and equipment is recorded at cost, less allowances for depreciation. The straight-line method of depreciation is used for all classes of assets for financial statement purposes while both straight-line and accelerated methods are used for income tax purposes. Leasehold improvements are depreciated over the lesser of the term of the lease or the useful life of the asset. Repairs and maintenance charges are expensed as incurred. Depreciation is based on the following ranges of estimated useful lives:
|
|
|
Buildings
|
Up to 30 years
|
Machinery & equipment
|
3-10 years
|
Office equipment
|
3-10 years
|
Leasehold improvements
|
7-20 years
|
Depreciation expense for property, plant and equipment was
$228.5 million
,
$194.7 million
and
$134.5 million
in fiscal
2018
,
2017
and
2016
, respectively.
The Company reviews property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. Recoverability of these assets is determined by comparison of their carrying amount to the future undiscounted cash flows the assets are expected to generate over their remaining economic lives. If such assets are considered to be impaired, the impairment to be recognized in earnings equals the amount by which the carrying value of the assets exceeds their fair value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique. If such assets are not impaired, but their useful lives have decreased, the remaining net book value is depreciated over the revised useful life. The Company has not recorded any material impairment charges related to our property, plant and equipment in fiscal
2018
, fiscal
2017
or fiscal
2016
.
|
|
f.
|
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 the Company has determined is consistent with our operating segments, on an annual basis on the first day of the fourth quarter (on or about August 5) or more frequently if indicators of impairment exist or the Company reorganizes its reporting units. The Company has the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its net book value. If the Company elects not to use this option, or it determines that it is more likely than not that the fair value of a reporting unit is less than its net book value, then the Company performs the quantitative goodwill impairment test.
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. Based on the quantitative test performed on the reorganization date, no impairment was identified.
In the Company's latest annual impairment evaluation that occurred as of August 5, 2018, the Company used the qualitative method of assessing goodwill for all
eight
of its identified reporting units. For each of the reporting units, the
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Company determined that it was not more likely than not that the fair values were less than their net book values. In making this determination, the Company considered several factors, including the following:
|
|
–
|
the amount by which the fair values of each reporting unit exceeded their carrying values as of the date of the most recent quantitative impairment analysis, which indicated there would need to be substantial negative developments in the markets in which these reporting units operate in order for there to be potential impairment;
|
|
|
–
|
the carrying values of these reporting units as of August 5, 2018 compared to the previously calculated fair values as of the date of the most recent quantitative impairment analysis;
|
|
|
–
|
the Company's current forecasts as compared to the forecasts included in the most recent quantitative impairment analysis;
|
|
|
–
|
public information from competitors and other industry information to determine if there were any significant adverse trends in our competitors' businesses, such as significant declines in market capitalization or significant goodwill impairment charges that could be an indication that the goodwill of our reporting units was potentially impaired;
|
|
|
–
|
changes in the value of major U.S. stock indices that could suggest declines in overall market stability that could impact the valuation of our reporting units;
|
|
|
–
|
changes in our market capitalization and overall enterprise valuation to determine if there were any significant decreases that could be an indication that the valuation of our reporting units had significantly decreased; and
|
|
|
–
|
whether there had been any significant increases to the weighted-average cost of capital (WACC) rates for each reporting unit, which could materially lower our prior valuation conclusions under a discounted cash flow approach.
|
In prior periods, the Company did not elect to use the qualitative option for assessing goodwill and instead proceeded directly to the quantitative goodwill impairment analysis. The first step of 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 estimate 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 of the fiscal years presented. The Company’s next annual impairment assessment will be performed as of the first day of the fourth quarter of the fiscal year ending November 2, 2019 (fiscal
2019
) unless indicators arise that would require the Company to reevaluate at an earlier date. The following table presents the changes in goodwill during fiscal
2018
and fiscal
2017
:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Balance at beginning of year
|
$
|
12,217,455
|
|
|
$
|
1,679,116
|
|
Acquisition of Linear (Note 6)
|
1,647
|
|
|
10,532,272
|
|
Goodwill adjustment related to other acquisitions (1)
|
36,558
|
|
|
4,198
|
|
Foreign currency translation adjustment
|
(3,056
|
)
|
|
1,869
|
|
Balance at end of year
|
$
|
12,252,604
|
|
|
$
|
12,217,455
|
|
(1) Represents goodwill related to other 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
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 5) 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 fiscal years 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
November 3, 2018
and
October 28, 2017
, the Company’s intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 3, 2018
|
|
October 28, 2017
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
Customer relationships
|
$
|
4,697,716
|
|
|
$
|
867,207
|
|
|
$
|
4,683,461
|
|
|
$
|
449,369
|
|
Technology-based
|
1,114,080
|
|
|
243,350
|
|
|
1,097,025
|
|
|
101,920
|
|
Trade-name
|
74,031
|
|
|
17,846
|
|
|
72,800
|
|
|
6,906
|
|
IPR&D
|
20,768
|
|
|
—
|
|
|
24,334
|
|
|
—
|
|
Total (1) (2)
|
$
|
5,906,595
|
|
|
$
|
1,128,403
|
|
|
$
|
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.
Amortization expense related to finite-lived intangible assets was
$570.5 million
,
$389.4 million
and
$75.3 million
in fiscal
2018
,
2017
and
2016
, respectively. The remaining amortization expense will be recognized over a weighted average life of approximately
4.6 years
.
The Company expects annual amortization expense for intangible assets as follows:
|
|
|
|
|
Fiscal Year
|
Amortization Expense
|
2019
|
$
|
569,314
|
|
2020
|
$
|
568,665
|
|
2021
|
$
|
568,005
|
|
2022
|
$
|
565,075
|
|
2023
|
$
|
541,877
|
|
Certain of the Company’s foreign subsidiaries have received grants from governmental agencies. These grants include capital, employment and research and development grants. Capital grants for the acquisition of property and equipment are netted against the related capital expenditures and amortized as a credit to depreciation expense over the estimated useful life of the related asset. Employment grants, which relate to employee hiring and training, and research and development grants are recognized in earnings in the period in which the related expenditures are incurred by the Company. The amounts recognized were not material in fiscal
2018
, fiscal
2017
or fiscal
2016
.
|
|
h.
|
Translation of Foreign Currencies
|
The functional currency for the Company’s foreign sales and research and development operations is the applicable local currency. Gains and losses resulting from translation of these foreign currencies into U.S. dollars are recorded in accumulated other comprehensive (loss) income. Transaction gains and losses and re-measurement of foreign currency denominated assets
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
and liabilities are included in income currently, including those at the Company’s principal foreign manufacturing operations where the functional currency is the U.S. dollar. Foreign currency transaction gains or losses included in other, net, were not material in fiscal
2018
,
2017
or
2016
.
|
|
i.
|
Derivative Instruments and Hedging Agreements
|
Foreign Exchange Exposure Management
— The Company enters into forward foreign currency exchange contracts to offset certain operational and balance sheet exposures from the impact of changes in foreign currency exchange rates. Such exposures result from the portion of the Company’s operations, assets and liabilities that are denominated in currencies other than the U.S. dollar, primarily the Euro; other significant exposures include the British Pound, Philippine Peso and the Japanese Yen. 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 other comprehensive (loss) income (OCI) in shareholders’ equity and reclassified into earnings in the same line item on the consolidated statement of income as the impact of the hedged transaction in the same period during which the hedged transaction affects earnings.
The total notional amounts of forward foreign currency derivative instruments designated as hedging instruments of cash flow hedges denominated in Euros, British Pounds, Philippine Pesos and Japanese Yen as of
November 3, 2018
and
October 28, 2017
was
$194.4 million
and
$194.3 million
, respectively. The fair values of forward foreign currency derivative instruments designated as hedging instruments in the Company’s consolidated balance sheets as of
November 3, 2018
and
October 28, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value At
|
|
Balance Sheet Location
|
|
November 3, 2018
|
|
October 28, 2017
|
Forward foreign currency exchange contracts
|
Prepaid expenses and other current assets
|
|
$
|
—
|
|
|
$
|
257
|
|
Forward foreign currency exchange contracts
|
Accrued liabilities
|
|
$
|
6,934
|
|
|
$
|
—
|
|
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
November 3, 2018
and
October 28, 2017
, the total notional amount of these undesignated hedges was
$40.6 million
and
$100.4 million
, respectively. The fair value of these hedging instruments in the Company’s consolidated balance sheets was immaterial as of
November 3, 2018
and was a liability of
$1.8 million
as of
October 28, 2017
.
The Company estimates that
$4.7 million
, net of tax, of losses on forward foreign currency derivative instruments included in OCI will be reclassified into earnings within the next 12 months.
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 consolidated balance sheet on a net basis. As of
November 3, 2018
and
October 28, 2017
, none of the netting arrangements involved collateral. The following table presents the gross amounts of the Company's derivative assets and liabilities and the net amounts recorded in the Company's consolidated balance sheet as of
November 3, 2018
and
October 28, 2017
:
|
|
|
|
|
|
|
|
|
|
November 3, 2018
|
|
October 28, 2017
|
Gross amount of recognized liabilities
|
$
|
(8,054
|
)
|
|
$
|
(5,039
|
)
|
Gross amounts of recognized assets offset in the consolidated balance sheet
|
904
|
|
|
3,512
|
|
Net liabilities presented in the consolidated balance sheet
|
$
|
(7,150
|
)
|
|
$
|
(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.
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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
November 3, 2018
and
October 28, 2017
, nonperformance is not perceived to be a material risk. Furthermore, none of the Company’s derivatives are subject to collateral or other security arrangements and none contain provisions that are dependent on the Company’s credit ratings from any credit rating agency. While the contract or notional amounts of derivative financial instruments provide one measure of the volume of these transactions, they do not represent the amount of the Company’s exposure to credit risk. The amounts potentially subject to credit risk (arising from the possible inability of counterparties to meet the terms of their contracts) are generally limited to the amounts, if any, by which the counterparties’ obligations under the contracts exceed the obligations of the Company to the counterparties. As a result of the above considerations, the Company does not consider the risk of counterparty default to be significant.
The Company records the fair value of its derivative financial instruments in its consolidated financial statements in other current assets, other assets, accrued liabilities and other non-current 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 in the same line item on the consolidated statement of income as the impact of the hedged transaction when the underlying contract matures. 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 consolidated statement of income related to forward foreign currency exchange contracts, see Note 2o,
Accumulated Other Comprehensive (Loss) Income
of these Notes to Consolidated Financial Statements.
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 were accounted for at fair value on a recurring basis as of
November 3, 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
November 3, 2018
and
October 28, 2017
, the Company held
$217.6 million
and
$296.2 million
, respectively, of cash and held-to-maturity investments that were excluded from the tables below.
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 3, 2018
|
|
Fair Value measurement at
Reporting Date using:
|
|
|
|
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Other
Unobservable
Inputs
(Level 3)
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
Government and institutional money market funds
|
$
|
394,076
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
394,076
|
|
Corporate obligations (1)
|
—
|
|
|
204,886
|
|
|
—
|
|
|
204,886
|
|
Other assets:
|
|
|
|
|
|
|
|
Deferred compensation investments
|
41,001
|
|
|
—
|
|
|
—
|
|
|
41,001
|
|
Interest rate derivatives
|
—
|
|
|
1,436
|
|
|
—
|
|
|
1,436
|
|
Total assets measured at fair value
|
$
|
435,077
|
|
|
$
|
206,322
|
|
|
$
|
—
|
|
|
$
|
641,399
|
|
Liabilities
|
|
|
|
|
|
|
|
Forward foreign currency exchange contracts (2)
|
—
|
|
|
7,150
|
|
|
—
|
|
|
7,150
|
|
Total liabilities measured at fair value
|
$
|
—
|
|
|
$
|
7,150
|
|
|
$
|
—
|
|
|
$
|
7,150
|
|
|
|
(1)
|
The amortized cost of the Company’s investments classified as available-for-sale as of
November 3, 2018
was
$205.0 million
.
|
|
|
(2)
|
The Company has netting arrangements by counterparty with respect to derivative contracts. See Note 2i,
Derivative Instruments and Hedging Agreements
, of these Notes to Consolidated Financial Statements for more information related to the Company's master netting arrangements.
|
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
Significant
Other
Unobservable
Inputs
(Level 3)
|
|
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 2i,
Derivative Instruments and Hedging Agreements
, of these Notes to Consolidated Financial Statements for more information related to the Company's master netting arrangements.
|
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
Cash equivalents
— 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.
Interest rate derivatives
— The fair value of interest rate derivatives is estimated using a discounted cash flow analysis based on the contractual terms of the derivatives.
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.
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 debt are obtained from broker prices and are classified as Level 1 measurements according to the fair value hierarchy. See Note 14,
Debt
, of these Notes to Consolidated Financial Statements for further discussion related to outstanding debt.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 3, 2018
|
|
October 28, 2017
|
|
Principal Amount Outstanding
|
|
Fair Value
|
|
Principal Amount Outstanding
|
|
Fair Value
|
3-Year term loan
|
$
|
425,000
|
|
|
425,000
|
|
|
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
|
|
|
298,147
|
|
|
—
|
|
|
—
|
|
2021 Notes, due January 2021
|
450,000
|
|
|
444,568
|
|
|
—
|
|
|
—
|
|
2021 Notes, due December 2021
|
400,000
|
|
|
386,375
|
|
|
400,000
|
|
|
399,530
|
|
2023 Notes, due June 2023
|
500,000
|
|
|
479,189
|
|
|
500,000
|
|
|
498,582
|
|
2023 Notes, due December 2023
|
550,000
|
|
|
529,120
|
|
|
550,000
|
|
|
554,411
|
|
2025 Notes, due December 2025
|
850,000
|
|
|
829,611
|
|
|
850,000
|
|
|
884,861
|
|
2026 Notes, due December 2026
|
900,000
|
|
|
848,027
|
|
|
900,000
|
|
|
902,769
|
|
2036 Notes, due December 2036
|
250,000
|
|
|
232,627
|
|
|
250,000
|
|
|
259,442
|
|
2045 Notes, due December 2045
|
400,000
|
|
|
407,984
|
|
|
400,000
|
|
|
460,588
|
|
Total Debt
|
$
|
6,375,000
|
|
|
$
|
6,230,648
|
|
|
$
|
7,900,000
|
|
|
$
|
8,010,183
|
|
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Such estimates relate to the useful lives of fixed assets, identified intangible assets, allowances for doubtful accounts and customer returns, the net realizable value of inventory, potential reserves relating to litigation matters, accrued liabilities, accrued taxes, deferred tax valuation allowances, assumptions pertaining to share-based payments, and fair value of acquired assets and liabilities, including inventory, property, plant and equipment and acquired intangibles, and other reserves. Actual results could differ from those estimates and such differences may be material to the financial statements.
|
|
l.
|
Concentrations of Risk
|
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of investments and trade accounts receivable.
The Company maintains cash, cash equivalents and short-term and long-term investments with high credit quality counterparties, continuously monitors the amount of credit exposure to any one issuer and diversifies its investments in order to minimize its credit risk.
The Company sells its products to distributors and original equipment manufacturers involved in a variety of industries including industrial process automation, instrumentation, defense/aerospace, automotive, communications, computers and computer peripherals and consumer electronics. The Company has adopted credit policies and standards to accommodate growth in these markets. The Company performs continuing credit evaluations of its customers’ financial condition and although the Company generally does not require collateral, the Company may require letters of credit from customers in certain circumstances. The Company provides reserves for estimated amounts of accounts receivable that may not be collected.
During fiscal 2018, no sales to an individual customer accounted for more than 10% of revenue. In fiscal
2017
and fiscal
2016
, the Company's largest single end customer represented approximately
14%
and
12%
of total revenue, respectively.
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
m.
|
Concentration of Other Risks
|
The semiconductor industry is characterized by rapid technological change, competitive pricing pressures and cyclical market patterns. The Company’s financial results are affected by a wide variety of factors, including general economic conditions worldwide, economic conditions specific to the semiconductor industry, the timely implementation of new manufacturing technologies, the ability to safeguard patents and intellectual property in a rapidly evolving market and reliance on assembly and test subcontractors, third-party wafer fabricators and independent distributors. In addition, the semiconductor market has historically been cyclical and subject to significant economic downturns at various times. The Company is exposed to the risk of obsolescence of its inventory depending on the mix of future business. Additionally, a large portion of the Company’s purchases of external wafer and foundry services are from a limited number of suppliers, such as Taiwan Semiconductor Manufacturing Company (TSMC), Global Foundries, Vanguard, and others. If these suppliers or any of the Company’s other key suppliers are unable or unwilling to manufacture and deliver sufficient quantities of components, on the time schedule and of the quality that the Company requires, the Company may be forced to engage additional or replacement suppliers, which could result in significant expenses and disruptions or delays in manufacturing, product development and shipment of product to the Company’s customers. Although the Company has experienced shortages of components, materials and external foundry services from time to time, these items have generally been available to the Company as needed.
Revenue from product sales to customers is generally recognized when title passes, which is generally upon shipment in the U.S. and in certain foreign countries. Revenue from product sales to customers in other foreign countries is generally 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.
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
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 such 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
November 3, 2018
and
October 28, 2017
, the Company had gross deferred revenue of
$603.8 million
and
$589.5 million
, respectively, and gross deferred cost of sales of
$116.4 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 fiscal
2018
, fiscal
2017
and fiscal
2016
were
not material
.
|
|
o.
|
Accumulated Other Comprehensive (Loss) Income
|
Accumulated other comprehensive (loss) income includes certain transactions that have generally been reported in the consolidated statement of shareholders’ equity. The components of accumulated other comprehensive loss at
November 3, 2018
and
October 28, 2017
consisted of the following, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
Unrealized holding gains on available for sale securities
|
|
Unrealized holding (losses) on available for sale securities
|
|
Unrealized holding Gains on Derivatives
|
|
Pension Plans
|
|
Total
|
October 28, 2017
|
$
|
(22,489
|
)
|
|
$
|
1
|
|
|
$
|
(1
|
)
|
|
$
|
(10,879
|
)
|
|
$
|
(27,991
|
)
|
|
$
|
(61,359
|
)
|
Other comprehensive income before reclassifications
|
(6,222
|
)
|
|
(2
|
)
|
|
(8
|
)
|
|
(1,447
|
)
|
|
13,358
|
|
|
5,679
|
|
Amounts reclassified out of other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,707
|
)
|
|
1,632
|
|
|
(75
|
)
|
Tax effects
|
—
|
|
|
—
|
|
|
—
|
|
|
(322
|
)
|
|
(2,363
|
)
|
|
(2,685
|
)
|
Other comprehensive income
|
(6,222
|
)
|
|
(2
|
)
|
|
(8
|
)
|
|
(3,476
|
)
|
|
12,627
|
|
|
2,919
|
|
November 3, 2018
|
$
|
(28,711
|
)
|
|
$
|
(1
|
)
|
|
$
|
(9
|
)
|
|
$
|
(14,355
|
)
|
|
$
|
(15,364
|
)
|
|
$
|
(58,440
|
)
|
The amounts reclassified out of accumulated other comprehensive loss into the consolidated statement of income, with presentation location during each period were as follows:
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
|
Comprehensive Income Component
|
|
|
|
|
|
Location
|
Unrealized holding (losses) gains on derivatives
|
|
|
|
|
|
|
Currency forwards
|
|
$
|
396
|
|
|
$
|
2,188
|
|
|
Cost of sales
|
|
|
(462
|
)
|
|
330
|
|
|
Research and development
|
|
|
(317
|
)
|
|
927
|
|
|
Selling, marketing, general and administrative
|
Interest rate derivatives
|
|
(1,324
|
)
|
|
2,080
|
|
|
Interest expense
|
|
|
(1,707
|
)
|
|
5,525
|
|
|
Total before tax
|
|
|
94
|
|
|
(1,326
|
)
|
|
Tax
|
|
|
$
|
(1,613
|
)
|
|
$
|
4,199
|
|
|
Net of tax
|
|
|
|
|
|
|
|
Amortization of pension components
|
|
|
|
|
|
|
Transition obligation
|
|
$
|
10
|
|
|
$
|
14
|
|
|
(a)
|
Prior service credit and curtailment recognition
|
|
1
|
|
|
(9
|
)
|
|
(a)
|
Actuarial losses and settlement recognition
|
|
1,621
|
|
|
1,865
|
|
|
(a)
|
|
|
1,632
|
|
|
1,870
|
|
|
Total before tax
|
|
|
(395
|
)
|
|
(400
|
)
|
|
Tax
|
|
|
$
|
1,237
|
|
|
$
|
1,470
|
|
|
Net of tax
|
|
|
|
|
|
|
|
Total amounts reclassified out of accumulated other comprehensive income, net of tax
|
|
$
|
(376
|
)
|
|
$
|
5,669
|
|
|
|
______________
a) The amortization of pension components is included in the computation of net periodic pension cost. See Note 11,
Retirement Plans,
of these Notes to Consolidated Financial Statements for further information
.
Advertising costs are expensed as incurred. Advertising expense was approximately
$10.4 million
in fiscal
2018
,
$11.7 million
in fiscal
2017
and
$5.6 million
in fiscal
2016
.
Deferred tax assets and liabilities are determined based on the differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted income tax rates and laws that are expected to be in effect when the temporary differences are expected to reverse. A valuation allowance is recorded when it is more likely than not that some or all of the deferred tax assets will not be realized. The calculation of the tax liabilities involves dealing with uncertainties in the application of complex tax regulations. If it is more likely than not that the tax position will not be sustained on audit, an uncertain tax position is recorded. The Company re-evaluates these uncertain tax positions on a quarterly basis. See Note 12,
Income Taxes
, of these Notes to Consolidated Financial Statements for further information related to income taxes.
|
|
r.
|
Earnings Per Share of Common Stock
|
Basic earnings per share is computed based only on the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect of potential future issuances of common stock relating to stock option programs and other potentially dilutive securities using the treasury stock method. In calculating diluted earnings per share, the dilutive effect of stock options and restricted stock units is computed using the average market price for the respective period. In addition, the assumed proceeds under the treasury stock method include the average unrecognized compensation expense of stock options that are in-the-money and restricted stock units. This results in the “assumed” buyback of additional shares, thereby reducing the dilutive impact of in-the-money stock options. Potential shares related to certain of the Company’s outstanding stock options and restricted stock units were excluded because they were anti-dilutive. Those potential shares, determined based on the weighted average exercise prices during the respective periods, 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
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Net Income
|
$
|
1,495,432
|
|
|
$
|
727,259
|
|
|
$
|
861,664
|
|
Less: income allocated to participating securities
|
5,909
|
|
|
2,243
|
|
|
—
|
|
Net income allocated to common shareholders
|
1,489,523
|
|
|
725,016
|
|
|
861,664
|
|
|
|
|
|
|
|
Basic shares:
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
370,430
|
|
|
346,371
|
|
|
308,736
|
|
Earnings per common share basic
|
$
|
4.02
|
|
|
$
|
2.09
|
|
|
$
|
2.79
|
|
|
|
|
|
|
|
Diluted shares:
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
370,430
|
|
|
346,371
|
|
|
308,736
|
|
Assumed exercise of common stock equivalents
|
4,508
|
|
|
4,113
|
|
|
3,572
|
|
Weighted-average common and common equivalent shares
|
374,938
|
|
|
350,484
|
|
|
312,308
|
|
Earnings per common share diluted
|
$
|
3.97
|
|
|
$
|
2.07
|
|
|
$
|
2.76
|
|
Anti-dilutive shares related to:
|
|
|
|
|
|
|
|
|
Outstanding stock options
|
1,649
|
|
|
1,527
|
|
|
3,077
|
|
|
|
s.
|
Stock-Based Compensation
|
Stock-based compensation is measured at the grant date based on the grant-date fair value of the awards ultimately expected to vest and is recognized as an expense on a straight-line basis over the vesting period, which is generally
four years
for stock options and restricted stock units, or in annual installments of
25%
on each of the first, second, third and fourth anniversaries of the date of grant in fiscal 2018. For grants issued prior to 2018, the vesting period was generally
five
years for stock options, or in annual installments of
20%
on each of the first, second, third, fourth and fifth anniversaries of the date of grant and in one installment on the
third anniversary
of the date of grant for restricted stock units/awards. Determining the amount of stock-based compensation to be recorded for stock options requires the Company to develop estimates used in calculating the grant-date fair value of awards. The Company uses the Black-Scholes valuation model to calculate the grant-date fair value of stock option awards. The use of valuation models requires the Company to make estimates and assumptions, such as expected volatility, expected term, risk-free interest rate, expected dividend yield and forfeiture rates. The grant-date fair value of restricted stock units with only a service condition represents the value of the Company's common stock on the date of grant, reduced by the present value of dividends expected to be paid on the Company's common stock prior to vesting. See Note 3,
Stock-Based Compensation and Shareholders' Equity,
of these Notes to Consolidated Financial Statements for additional information relating to stock-based compensation.
|
|
t.
|
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.
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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
$26.2 million
in fiscal 2018 from its share-based payments within income tax expense in its 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 prior year presentation by removing the reclass of
$41.8 million
and
$10.5 million
of excess tax benefit-stock options from net cash provided by operating activities to net cash provided by financing activities in fiscal 2017 and in fiscal 2016, respectively. 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.
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 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
Retirement Benefits
In August 2018, the FASB issued ASU 2018-14,
Compensation-Retirement Benefits-Defined Benefit Plans-General (Topic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans
(ASU 2018-14),
which modifies the disclosure requirements for defined benefit pension plans and other post-retirement plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020, with early adoption permitted. ASU 2018-14 is effective for the Company in the first quarter of fiscal 2021. The Company is currently evaluating the adoption date. The adoption of ASU 2018-14 will modify the Company's disclosures for defined benefit plans and other post-retirement plans but is not expected to impact its financial position or results of operations.
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 Cuts and Jobs Act of 2017 from accumulated other comprehensive income to retained earnings. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, with
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
early adoption permitted. ASU 2018-02 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.
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 impact of the adoption of this standard will have on its consolidated financial statements but expects to recognize its previously deferred tax related to intra-entity transfers upon adoption, through a material cumulative-effect adjustment to retained earnings.
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 adoption of ASU 2016-15 will not have a material impact on the Company's financial position and results of operations.
Leases
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
(ASU 2016-02). ASU 2016-02 requires a lessee to recognize most leases on the balance sheet but recognize expenses on the income statement in a manner similar to current practice. The update states that a lessee will recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying assets for the lease term. Leases will continue to be classified as either financing or operating, with classification affecting the recognition, measurement and presentation of expenses and cash flows arising from a lease. 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 existed 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 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,
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 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 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 impact 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 is approaching the final stage of its project plan for the implementation of the guidance. 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 amendments, and retrospectively adjusting financial information for prior fiscal years. The most significant impact of adopting the new standard 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 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.
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
3. Stock-Based Compensation and Shareholders’ Equity
Equity Compensation Plans
The Company grants, or has granted, stock options and other stock and stock-based awards under the Company's Amended and Restated 2006 Stock Incentive Plan (2006 Plan). This plan was originally approved by shareholders on March 14, 2006, and shareholders subsequently approved the amended and restated 2006 Plan in March 2014. The 2006 Plan provides for the grant of up to
34 million
shares of the Company’s common stock, plus such number of additional shares that were subject to outstanding options under the Company’s previous equity compensation plans that have not been issued because the applicable option award subsequently terminates or expires without being exercised. The 2006 Plan provides for the grant of incentive stock options intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended, non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards. Employees, officers, directors, consultants and advisors of the Company and its subsidiaries are eligible to be granted awards under the 2006 Plan. No award may be made under the 2006 Plan after March 12, 2021, but awards previously granted may extend beyond that date. The Company will not grant further equity awards under any previous equity compensation plans. In connection with the Acquisition, the Company assumed the Linear Technology Corporation Amended and Restated 2005 Equity Incentive Plan (the 2005 Plan) and the Linear Technology Corporation Amended and Restated 2010 Equity Incentive Plan (now referred to as the Analog Devices, Inc. Amended and Restated 2010 Equity Incentive Plan) (the 2010 Plan). The Company will not grant further equity awards under the 2005 Plan but may grant stock options and other stock and stock-based awards under the 2010 Plan.
While the Company may grant options to employees that become exercisable at different times or within different periods, in fiscal 2018, the Company generally granted to employees options that vest over
four
years and become exercisable in annual installments of
25%
on each of the first, second, third and fourth anniversaries of the date of grant. For grants issued prior to fiscal 2018 the options granted to employees generally vested over
five years
and became exercisable in annual installments of
20%
on each of the first, second, third, fourth and fifth anniversaries of the date of grant. The maximum contractual term of all options is
ten years
.
In addition, in fiscal 2018, the Company granted to employees restricted stock units that generally vest over
four
years in annual installments of
25%
on each of the first, second, third and fourth anniversaries of the date of grant. For grants issued prior to fiscal 2018 restricted stock units generally vested in one installment on the third anniversary of the date of grant.
As of
November 3, 2018
, a total of
11.4 million
and
1.6 million
common shares were available for future grant under the 2006 Plan and 2010 Plan, respectively, and
25.5 million
common shares were reserved for issuance under the 2006 Plan, 2010 Plan and the Company's previous equity compensation plans.
Stock-based compensation is measured at the grant date based on the grant-date fair value of the awards ultimately expected to vest and is recognized as an expense on a straight-line basis over the vesting period. Determining the amount of stock-based compensation to be recorded requires the Company to develop estimates used in calculating the grant-date fair value of stock options.
Linear Replacement Awards
In connection with the Acquisition, the Company issued equity awards, consisting of restricted stock awards and restricted stock units (replacement awards), to certain Linear employees in replacement of Linear equity awards. The replacement awards consisted of restricted stock awards and restricted stock units for approximately
2.8 million
shares of the Company's common stock with a weighted average grant date fair value of
$82.20
. The terms and intrinsic value of these replacement awards are substantially the same as the converted Linear awards. The fair value of the replacement awards associated with services rendered through the Acquisition Date was recognized as a component of the total acquisition consideration, and the remaining fair value of the replacement awards associated with post-Acquisition services will be recognized as an expense on a straight-line basis over the remaining vesting period.
Modification of Awards
The Company has, from time to time, modified the terms of its equity awards to employees and directors. The modifications made to the Company’s equity awards in fiscal
2018
, fiscal
2017
and fiscal
2016
did not result in significant incremental compensation costs, either individually or in the aggregate.
Grant-Date Fair Value
The Company uses the Black-Scholes valuation model to calculate the grant-date fair value of stock option awards. The use of valuation models requires the Company to make estimates and assumptions, such as expected volatility, expected term,
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
risk-free interest rate, expected dividend yield and forfeiture rates. The grant-date fair value of restricted stock units with a service condition represents the value of the Company's common stock on the date of grant, reduced by the present value of dividends expected to be paid on the Company's common stock prior to vesting.
Information pertaining to the Company’s stock option awards and the related estimated weighted-average assumptions to calculate the fair value of stock options using the Black-Scholes valuation model granted in fiscal 2018, fiscal 2017 and fiscal 2016 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
2018
|
|
2017
|
|
2016
|
Options granted (in thousands)
|
603
|
|
|
1,480
|
|
|
1,814
|
|
Weighted-average exercise price
|
|
$90.98
|
|
|
|
$82.99
|
|
|
|
$55.19
|
|
Weighted-average grant-date fair value
|
|
$20.82
|
|
|
|
$17.12
|
|
|
|
$12.67
|
|
Assumptions:
|
|
|
|
|
|
Weighted-average expected volatility
|
27.7
|
%
|
|
26.4
|
%
|
|
34.0
|
%
|
Weighted-average expected term (in years)
|
5.0
|
|
|
5.1
|
|
|
5.1
|
|
Weighted-average risk-free interest rate
|
2.6
|
%
|
|
2.1
|
%
|
|
1.4
|
%
|
Weighted-average expected dividend yield
|
2.1
|
%
|
|
2.2
|
%
|
|
3.0
|
%
|
Expected volatility
— The Company is responsible for estimating volatility and has considered a number of factors, including third-party estimates. The Company currently believes that the exclusive use of implied volatility results in the best estimate of the grant-date fair value of employee stock options because it reflects the market’s current expectations of future volatility. In evaluating the appropriateness of exclusively relying on implied volatility, the Company concluded that: (1) options in the Company’s common stock are actively traded with sufficient volume on several exchanges; (2) the market prices of both the traded options and the underlying shares are measured at a similar point in time to each other and on a date close to the grant date of the employee share options; (3) the traded options have exercise prices that are both near-the-money and close to the exercise price of the employee share options; and (4) the remaining maturities of the traded options used to estimate volatility are at least
one
year.
Expected term
— The Company uses historical employee exercise and option expiration data to estimate the expected term assumption for the Black-Scholes grant-date valuation. The Company believes that this historical data is currently the best estimate of the expected term of a new option, and that generally its employees exhibit similar exercise behavior.
Risk-free interest rate
— The yield on zero-coupon U.S. Treasury securities for a period that is commensurate with the expected term assumption is used as the risk-free interest rate.
Expected dividend yield
— Expected dividend yield is calculated by annualizing the cash dividend declared by the Company’s Board of Directors for the current quarter and dividing that result by the closing stock price on the date of grant. Until such time as the Company’s Board of Directors declares a cash dividend for an amount that is different from the current quarter’s cash dividend, the current dividend will be used in deriving this assumption. Cash dividends are not paid on options, restricted stock or restricted stock units. 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.
Stock-Based Compensation Expense
The amount of stock-based compensation expense recognized during a period is based on the value of the awards that are ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term “forfeitures” is distinct from “cancellations” or “expirations” and represents only the unvested portion of the surrendered stock-based award. Based on an analysis of its historical forfeitures, the Company has applied an annual forfeiture rate of
5.0%
to all unvested stock-based awards as of
November 3, 2018
. This analysis will be re-evaluated quarterly and the forfeiture rate will be adjusted as necessary. Ultimately, the actual expense recognized over the vesting period will only be for those awards that vest.
Additional paid-in-capital (APIC) Pool
The Company adopted ASU 2016-09 during fiscal 2018. ASU 2016-09 eliminated the APIC pool and requires that excess tax benefits and tax deficiencies be recorded in the income statement when awards are settled. As a result of this adoption the Company recorded total excess tax benefits of
$26.2 million
in fiscal 2018 from its share-based payments within income tax expense in its consolidated statements of income.
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
For fiscal 2017 and fiscal 2016, the APIC pool represented the excess tax benefits related to share-based compensation that were available to absorb future tax deficiencies. If the amount of future tax deficiencies was greater than the available APIC pool, the Company recorded the excess as income tax expense in its consolidated statements of income. For fiscal
2017
and fiscal
2016
, the Company had a sufficient APIC pool to cover any tax deficiencies recorded and as a result, these deficiencies did not affect its results of operations.
Stock-Based Compensation Activity
A summary of the activity under the Company’s stock option plans as of
November 3, 2018
and changes during the fiscal year then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding
(in thousands)
|
|
Weighted-
Average Exercise
Price Per Share
|
|
Weighted-
Average
Remaining
Contractual
Term in Years
|
|
Aggregate
Intrinsic
Value
|
Options outstanding at October 28, 2017
|
9,347
|
|
|
|
$52.27
|
|
|
|
|
|
Options granted
|
603
|
|
|
|
$90.98
|
|
|
|
|
|
Options exercised
|
(2,382
|
)
|
|
|
$41.85
|
|
|
|
|
|
Options forfeited
|
(264
|
)
|
|
|
$65.20
|
|
|
|
|
|
Options expired
|
(7
|
)
|
|
|
$30.58
|
|
|
|
|
|
Options outstanding at November 3, 2018
|
7,297
|
|
|
|
$58.42
|
|
|
6.0
|
|
|
$212,151
|
|
Options exercisable at November 3, 2018
|
4,089
|
|
|
|
$48.93
|
|
|
4.8
|
|
|
$156,474
|
|
Options vested or expected to vest at November 3, 2018 (1)
|
7,076
|
|
|
|
$57.89
|
|
|
6.0
|
|
|
$209,396
|
|
|
|
(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.
|
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) during fiscal
2018
, fiscal
2017
and fiscal
2016
was
$123.8 million
,
$144.6 million
and
$46.6 million
, respectively, and the total amount of proceeds received by the Company from exercise of these options during fiscal
2018
, fiscal
2017
and fiscal
2016
was
$99.0 million
,
$133.3 million
and
$61.5 million
, respectively.
A summary of the Company’s restricted stock unit award activity as of
November 3, 2018
and changes during the fiscal year then ended is presented below:
|
|
|
|
|
|
|
|
|
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
|
1,668
|
|
|
|
$87.88
|
|
Restrictions lapsed
|
(1,616
|
)
|
|
|
$69.90
|
|
Forfeited
|
(443
|
)
|
|
|
$70.61
|
|
Restricted stock units/awards outstanding at November 3, 2018
|
5,289
|
|
|
|
$77.54
|
|
As of
November 3, 2018
, there was
$350.7 million
of total unrecognized compensation cost related to unvested share-based awards comprised of stock options and restricted stock units. That cost is expected to be recognized over a weighted-average period of
1.6
years. The total grant-date fair value of shares that vested during fiscal
2018
, fiscal
2017
and fiscal
2016
was approximately
$136.1 million
,
$114.8 million
and
$62.8 million
, respectively.
Common Stock Repurchases
The Company’s share repurchase program has been in place since
August 2004
. In the aggregate, the Board of Directors has authorized the Company to repurchase
$8.2 billion
of the Company’s common stock under the program, which includes the
$2.0 billion
authorization approved by the Board of Directors on August 21, 2018. The Company may repurchase outstanding shares of its common stock from time to time in the open market and through privately negotiated transactions. Unless terminated earlier by resolution of the Company’s Board of Directors, the repurchase program will expire when the Company has repurchased all shares authorized under the program.
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In connection with the Acquisition, the Company temporarily suspended the share repurchase program. On August 21, 2018, the Company reinstated the share repurchase program and as of
November 3, 2018
, the Company had repurchased a total of approximately
148.9 million
shares of its common stock for approximately
$5.6 billion
under this program. An additional
$2.6 billion
remains available for repurchase of shares under the current authorized program. The repurchased shares are held as authorized but unissued shares of common stock.
The Company also, from time to time, repurchases shares in settlement of employee tax withholding obligations due upon the vesting of restricted stock units/awards or the exercise of stock options. The withholding amount is based on the employee's minimum statutory withholding requirement. Any future common stock repurchases will be dependent upon several factors, including the Company's financial performance, outlook, liquidity and the amount of cash the Company has available in the United States.
Preferred Stock
The Company has
471,934
authorized shares of
$1.00
par value preferred stock,
none
of which is issued or outstanding. The Board of Directors is authorized to fix designations, relative rights, preferences and limitations on the preferred stock at the time of issuance.
|
|
4.
|
Industry, Segment and Geographic Information
|
The Company operates and tracks its results 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 our website to the same types of customers.
All of the Company's operating segments share a similar long-term financial model as they have similar economic characteristics. The causes for variation in operating and financial performance are the same among the Company's operating segments and include factors such as (i) life cycle and price and cost fluctuations, (ii) number of competitors, (iii) product differentiation and (iv) size of market opportunity. Additionally, each operating segment is subject to the overall cyclical nature of the semiconductor industry. Lastly, the number and composition of employees and the amounts and types of tools and materials required for production of products are proportionally similar for each operating segment.
Revenue Trends by End Market
The following table summarizes revenue by end market. The categorization of revenue by end market is determined using a variety of data points including the technical characteristics of the product, the “sold to” customer information, the “ship to” customer information and the end customer product or application into which the Company’s product will be incorporated. As data systems for capturing and tracking this data evolve and improve, the categorization of products by end market can vary over time. When this occurs, the Company reclassifies revenue by end market for prior periods. Such reclassifications typically do not materially change the sizing of, or the underlying trends of results within, each end market.
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Revenue
|
|
% of
Total
Product
Revenue
|
|
Revenue
|
|
% of
Total
Product
Revenue
|
|
Revenue
|
|
% of
Total
Product
Revenue*
|
Industrial
|
$
|
3,102,508
|
|
|
50
|
%
|
|
$
|
2,342,404
|
|
|
46
|
%
|
|
$
|
1,478,452
|
|
|
43
|
%
|
Automotive
|
988,741
|
|
|
16
|
%
|
|
803,211
|
|
|
16
|
%
|
|
558,631
|
|
|
16
|
%
|
Consumer
|
856,778
|
|
|
14
|
%
|
|
1,044,697
|
|
|
20
|
%
|
|
688,176
|
|
|
20
|
%
|
Communications
|
1,252,915
|
|
|
20
|
%
|
|
917,191
|
|
|
18
|
%
|
|
696,150
|
|
|
20
|
%
|
Total Revenue
|
$
|
6,200,942
|
|
|
100
|
%
|
|
$
|
5,107,503
|
|
|
100
|
%
|
|
$
|
3,421,409
|
|
|
100
|
%
|
* The sum of the individual percentages may not equal the total due to rounding.
Geographic Information
Revenue by geographic region is based upon the primary end customer location for the Company's products. In fiscal
2018
, fiscal
2017
and fiscal
2016
, the predominant countries comprising “Rest of North and South America” are Canada and Mexico; the predominant countries comprising “Europe” are Germany, Sweden, France and the United Kingdom; and the predominant countries comprising “Rest of Asia” are South Korea and Taiwan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Revenue
|
|
|
|
|
|
|
|
|
United States
|
$
|
2,105,662
|
|
|
$
|
1,999,041
|
|
|
$
|
1,299,629
|
|
Rest of North and South America
|
103,401
|
|
|
103,077
|
|
|
95,957
|
|
Europe
|
1,471,689
|
|
|
1,211,435
|
|
|
924,849
|
|
Japan
|
716,276
|
|
|
506,114
|
|
|
291,649
|
|
China
|
1,210,042
|
|
|
842,532
|
|
|
575,690
|
|
Rest of Asia
|
593,872
|
|
|
445,304
|
|
|
233,635
|
|
Subtotal all foreign countries
|
4,095,280
|
|
|
3,108,462
|
|
|
2,121,780
|
|
Total revenue
|
$
|
6,200,942
|
|
|
$
|
5,107,503
|
|
|
$
|
3,421,409
|
|
Property, plant and equipment
|
|
|
|
|
|
|
|
|
United States
|
$
|
505,646
|
|
|
$
|
504,968
|
|
|
$
|
236,625
|
|
Ireland
|
202,611
|
|
|
188,728
|
|
|
174,952
|
|
Philippines
|
260,355
|
|
|
228,629
|
|
|
194,587
|
|
Singapore
|
80,383
|
|
|
77,015
|
|
|
—
|
|
Malaysia
|
57,514
|
|
|
71,756
|
|
|
—
|
|
All other countries
|
47,819
|
|
|
36,208
|
|
|
29,952
|
|
Subtotal all foreign countries
|
648,682
|
|
|
602,336
|
|
|
399,491
|
|
Total property, plant and equipment
|
$
|
1,154,328
|
|
|
$
|
1,107,304
|
|
|
$
|
636,116
|
|
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 table displays a roll-forward from
October 31, 2015
to
November 3, 2018
of the employee separation and exit cost accruals established related to these actions.
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Restructuring
|
Closure of Manufacturing Facilities
|
|
Reduction of
Operating
Costs Action
|
|
Early Retirement Action
|
Balance at October 31, 2015
|
$
|
—
|
|
|
$
|
5,877
|
|
|
$
|
—
|
|
Fiscal 2016 special charges
|
—
|
|
|
13,684
|
|
|
—
|
|
Severance payments
|
—
|
|
|
(7,184
|
)
|
|
—
|
|
Effect of foreign currency on accrual
|
—
|
|
|
(3
|
)
|
|
—
|
|
Balance at October 29, 2016
|
$
|
—
|
|
|
$
|
12,374
|
|
|
$
|
—
|
|
Fiscal 2017 special charges
|
—
|
|
|
8,126
|
|
|
41,337
|
|
Severance payments
|
—
|
|
|
(15,764
|
)
|
|
(9,126
|
)
|
Effect of foreign currency on accrual
|
—
|
|
|
401
|
|
|
—
|
|
Balance at October 28, 2017
|
$
|
—
|
|
|
$
|
5,137
|
|
|
$
|
32,211
|
|
Fiscal 2018 special charges
|
44,452
|
|
|
16,866
|
|
|
—
|
|
Severance payments
|
—
|
|
|
(16,785
|
)
|
|
(22,314
|
)
|
Effect of foreign currency on accrual
|
(1,478
|
)
|
|
37
|
|
|
—
|
|
Balance at November 3, 2018
|
$
|
42,974
|
|
|
$
|
5,255
|
|
|
$
|
9,897
|
|
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
two
to
four
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, third and fourth quarters of fiscal 2018, the Company recorded special charges totaling
$3.3 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 by the Company 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 November 3, 2018.
Reduction of Operating Costs Actions
During fiscal 2018, the Company recorded special charges of approximately
$16.9 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.
During 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.
During 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.
The Company terminated the employment of all employees associated with the reduction of operating cost actions.
Early Retirement Offer Action
During fiscal 2017, the Company initiated an early retirement offer. This resulted in a special charge of approximately
$41.3 million
for severance, related benefits and other costs in accordance with this program for
225
manufacturing, engineering and selling, marketing, general and administrative (SMG&A) employees. The Company terminated the employment of all employees associated with this action.
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Linear Technology Corporation
On the Acquisition Date, the Company completed its acquisition of all of the voting interests of Linear, an independent manufacturer of high performance analog integrated circuits. Under the terms of the agreement pursuant to which the Company acquired Linear (Merger Agreement), Linear stockholders received, for each outstanding share of Linear common stock,
$46.00
in cash and
0.2321
of a share of the Company's common stock at the closing. The Company believes 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 consolidated statements of income, consolidated balance sheet, consolidated statement of cash flows and shareholders’ equity for fiscal 2017. The amount of revenue attributable to Linear included in the Company's consolidated statements of income for fiscal 2017 was
$913.2 million
.
The Acquisition Date fair value of the consideration transferred in the Acquisition consisted of the following:
|
|
|
|
|
(in thousands)
|
|
Cash consideration (a)
|
$
|
11,092,047
|
|
Issuance of common stock (b)
|
4,593,655
|
|
Fair value of replacement share-based and cash awards (c)
|
70,954
|
|
Total estimated purchase consideration
|
$
|
15,756,656
|
|
_______________
(a)The cash consideration was funded utilizing cash on hand, the net proceeds from bridge credit and term loan facilities and the proceeds received from the Company's issuance of the Notes (as defined in Note 14,
Debt
, of these Notes to Consolidated Financial Statements). This reflects the cash portion of the purchase consideration paid to Linear stockholders of approximately
$11.1 billion
, as well as
$16.3 million
for the cash-settled portion of consideration paid to holders of restricted stock and restricted stock awards that automatically vested at the effective time of the Acquisition pursuant to pre-existing change-of-control agreements.
(b) The fair value is based on the issuance of approximately
55.9 million
shares of the Company's common stock with a per-share value of
$82.20
(the closing price of the Company's common stock on The Nasdaq Global Select Market on the Acquisition Date).
(c) In connection with the Acquisition, the Company issued equity and cash awards to certain Linear employees to replace Linear equity awards. This amount represents the portion of the fair value of the replacement equity and cash awards associated with services rendered though the Acquisition Date and have been included as a component of the total estimated purchase consideration.
During fiscal 2018, the Company completed the acquisition accounting for the Acquisition. The following is a summary of the amounts recognized in accounting for the Acquisition:
|
|
|
|
|
(in thousands)
|
|
Cash and cash equivalents
|
$
|
1,466,445
|
|
Marketable securities
|
100,246
|
|
Accounts receivable (a)
|
143,542
|
|
Inventories
|
461,695
|
|
Prepaid expenses and other assets
|
14,782
|
|
Property, plant and equipment
|
462,285
|
|
Intangible assets (Note 2f)
|
5,157,300
|
|
Goodwill (Note 2f)
|
10,533,919
|
|
Total assets
|
18,340,214
|
|
Assumed liabilities
|
190,925
|
|
Deferred tax liabilities
|
2,392,633
|
|
Total estimated purchase consideration
|
$
|
15,756,656
|
|
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
____________
|
|
(a)
|
The fair value of accounts receivable was
$143.5 million
, with the gross contractual amount being
$145.2 million
, of which the Company estimates that
$1.7 million
is uncollectible.
|
The acquired intangible assets consisted of the following, which are being 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.
|
|
|
|
|
|
|
|
Fair Value
(in thousands)
|
|
Weighted Average Useful Lives
(in Years)
|
Technology-based
|
$
|
1,046,100
|
|
|
8
|
Trade name
|
72,200
|
|
|
7
|
Customer relationships
|
4,039,000
|
|
|
12
|
Total amortizable intangible assets
|
$
|
5,157,300
|
|
|
11
|
The goodwill recognized is attributable to synergies which are expected to enhance and expand the Company’s overall product portfolio and opportunities in new and existing markets, future technologies that have yet to be determined and Linear's assembled workforce. Future technologies did not meet the criteria for recognition separately from goodwill because they are part of future development and growth of the business.
There were no significant contingent obligations assumed as part of the Acquisition.
The Company recognized
$47.5 million
of transaction-related costs, including legal, accounting and other related fees that were expensed in fiscal 2017. These costs are included in the consolidated statements of income within SMG&A expenses.
The following unaudited pro forma consolidated financial information combines the unaudited results of the Company for the year ended October 28, 2017 and the unaudited results of Linear for the year ended October 28, 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.
|
|
|
|
|
|
|
|
|
(thousands, except per share data)
|
Pro Forma Twelve Months Ended
|
|
October 28, 2017
|
|
October 29, 2016
|
Revenue
|
$
|
5,702,841
|
|
|
$
|
4,842,658
|
|
Net income
|
$
|
1,061,684
|
|
|
$
|
360,880
|
|
Basic net income per common share
|
$
|
2.88
|
|
|
$
|
0.99
|
|
Diluted net income per common share
|
$
|
2.84
|
|
|
$
|
0.97
|
|
Other Acquisitions
The Company has not provided pro forma results of operations for any other acquisitions completed in fiscal
2018
, fiscal
2017
or fiscal
2016
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.
Other investments consist of interests in venture capital funds and other long-term investments. Investments are accounted for using the equity or cost method of accounting, depending on the nature of the investment, as appropriate. Realized gains and losses from equity method investments are reflected in nonoperating (income) expense based upon the
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Company's ownership share of the investee's financial results. Realized gains or losses on cost-method investments are determined based on the specific identification basis and are recognized in nonoperating (income) expense.
During fiscal 2017 and fiscal 2016, the Company recognized other-than-temporary impairments of
$5.0 million
and
$6.0 million
, respectively, recorded in the condensed consolidated statement of income in other, net, within non-operating (income) expense, related to cost method investments that the Company determined were impaired. There were no other-than-temporary impairments recognized in any other of the fiscal periods presented.
There were no material net realized or unrealized gains or losses from other investments during fiscal
2018
, fiscal
2017
and fiscal
2016
.
Accrued liabilities at
November 3, 2018
and
October 28, 2017
consisted of the following:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Accrued compensation and benefits
|
$
|
254,932
|
|
|
$
|
271,321
|
|
Accrued interest (Note 14)
|
64,974
|
|
|
59,400
|
|
Accrued restructuring (Note 5)
|
15,153
|
|
|
37,348
|
|
Other
|
162,021
|
|
|
130,757
|
|
Total accrued liabilities
|
$
|
497,080
|
|
|
$
|
498,826
|
|
The Company leases certain facilities, equipment and software under various operating leases that expire at various dates through 2057
. The lease agreements frequently include renewal and escalation clauses and require the Company to pay taxes, insurance and maintenance costs. Total rental expense under operating leases was approximately
$84.9 million
in fiscal
2018
,
$58.8 million
in fiscal
2017
and
$58.5 million
in fiscal
2016
.
The following is a schedule of future minimum rental payments required under long-term operating leases at
November 3, 2018
:
|
|
|
|
|
|
|
|
Operating
|
Fiscal Years
|
|
Leases
|
2019
|
|
$
|
39,293
|
|
2020
|
|
49,069
|
|
2021
|
|
37,135
|
|
2022
|
|
32,395
|
|
2023
|
|
30,871
|
|
Later Years
|
|
201,489
|
|
Total
|
|
$
|
390,252
|
|
|
|
10.
|
Commitments and Contingencies
|
From time to time, in the ordinary course of the Company’s business, various claims, charges and litigation are asserted or commenced against the Company arising from, or related to, contractual matters, patents, trademarks, personal injury, environmental matters, product liability, insurance coverage and personnel and employment disputes. As to such claims and litigation, the Company can give no assurance that it will prevail. The Company does not believe that any current legal matters will have a material adverse effect on the Company’s financial position, results of operations or cash flows.
The Company and its subsidiaries have various savings and retirement plans covering substantially all employees.
Defined Contribution Plans
The Company maintains a defined contribution plan for the benefit of its eligible U.S. employees. This plan provides for Company contributions of up to
5%
of each participant’s total eligible compensation. In addition, the Company contributes an
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
amount equal to each participant’s pre-tax contribution, if any, up to a maximum of
3%
of each participant’s total eligible compensation. The total expense related to the defined contribution plans for U.S. employees was
$41.4 million
in fiscal
2018
,
$35.8 million
in fiscal
2017
and
$28.3 million
in fiscal
2016
.
Non-Qualified Deferred Compensation Plan
The Deferred Compensation Plan (DCP) allows certain members of management and other highly-compensated employees and non-employee directors to defer receipt of all or any portion of their compensation. The DCP was established to provide participants with the opportunity to defer receiving all or a portion of their compensation, which includes salary, bonus, commissions and director fees. Under the DCP, the Company provides all participants (other than non-employee directors) with Company contributions equal to
8%
of eligible deferred contributions. The DCP is a non-qualified plan that is maintained in a rabbi trust. The fair value of the investments held in the rabbi trust are presented separately as deferred compensation plan investments, with the current portion of the investment included in prepaid expenses and other current assets in the consolidated balance sheet. See Note 2j.
, Fair Value,
for further information on these investments. The deferred compensation obligation represents DCP participant accumulated deferrals and earnings thereon since the inception of the DCP net of withdrawals. The deferred compensation obligation is presented separately as Deferred compensation plan liability, with the current portion of the obligation in accrued liabilities in the consolidated balance sheet. The Company’s liability under the DCP is an unsecured general obligation of the Company.
Defined Benefit Pension Plans
The Company also has various defined benefit pension and other retirement plans for certain non-U.S. employees that are consistent with local statutory requirements and practices. The total expense related to the various defined benefit pension, contribution and other retirement plans for certain non-U.S. employees was
$36.3 million
in fiscal
2018
,
$33.0 million
in fiscal
2017
and
$26.9 million
in fiscal
2016
.
The Company’s funding policy for its foreign defined benefit pension plans is consistent with the local requirements of each country. The plans’ assets consist primarily of U.S. and non-U.S. equity securities, bonds, property and cash.
The Company has elected to measure defined benefit plan assets and obligations as of October 31, which is the month-end that is closest to its fiscal year-ends, which were
November 3, 2018
for fiscal
2018
and
October 28, 2017
for fiscal
2017
.
Components of Net Periodic Benefit Cost
Net annual periodic pension cost of non-U.S. plans for fiscal
2018
, fiscal
2017
and fiscal
2016
is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Service cost
|
$
|
6,891
|
|
|
$
|
6,688
|
|
|
$
|
5,520
|
|
Interest cost
|
3,984
|
|
|
3,581
|
|
|
3,675
|
|
Expected return on plan assets
|
(4,559
|
)
|
|
(4,086
|
)
|
|
(3,764
|
)
|
Amortization of prior service cost
|
10
|
|
|
14
|
|
|
—
|
|
Amortization of transition obligation
|
1
|
|
|
(9
|
)
|
|
17
|
|
Recognized actuarial loss
|
1,621
|
|
|
1,865
|
|
|
679
|
|
Subtotal
|
$
|
7,948
|
|
|
$
|
8,053
|
|
|
$
|
6,127
|
|
Settlement impact
|
—
|
|
|
—
|
|
|
151
|
|
Net periodic pension cost
|
$
|
7,948
|
|
|
$
|
8,053
|
|
|
$
|
6,278
|
|
Benefit Obligations and Plan Assets
Obligation and asset data of the Company’s non-U.S. plans at
November 3, 2018
and
October 28, 2017
is presented in the following table:
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Change in Benefit Obligation
|
|
|
|
|
|
Benefit obligation at beginning of year
|
$
|
139,516
|
|
|
$
|
129,711
|
|
Service cost
|
6,891
|
|
|
6,688
|
|
Interest cost
|
3,984
|
|
|
3,581
|
|
Plan amendments
|
—
|
|
|
176
|
|
Actuarial gain
|
(20,406
|
)
|
|
(2,615
|
)
|
Benefits paid
|
(4,301
|
)
|
|
(2,663
|
)
|
Exchange rate adjustment
|
(2,146
|
)
|
|
4,638
|
|
Benefit obligation at end of year
|
$
|
123,538
|
|
|
$
|
139,516
|
|
Change in Plan Assets
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
$
|
79,616
|
|
|
$
|
69,823
|
|
Actual return on plan assets
|
(2,626
|
)
|
|
5,420
|
|
Employer contributions
|
13,793
|
|
|
4,995
|
|
Benefits paid
|
(4,301
|
)
|
|
(2,663
|
)
|
Exchange rate adjustment
|
(1,827
|
)
|
|
2,041
|
|
Fair value of plan assets at end of year
|
$
|
84,655
|
|
|
$
|
79,616
|
|
Reconciliation of Funded Status
|
|
|
|
|
|
Funded status
|
$
|
(38,883
|
)
|
|
$
|
(59,900
|
)
|
Amounts Recognized in the Balance Sheet
|
|
|
|
|
|
Non-current assets
|
$
|
6,569
|
|
|
$
|
—
|
|
Current liabilities
|
(767
|
)
|
|
(733
|
)
|
Non-current liabilities
|
(44,685
|
)
|
|
(59,167
|
)
|
Net amount recognized
|
$
|
(38,883
|
)
|
|
$
|
(59,900
|
)
|
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Reconciliation of Amounts Recognized in the Statement of Financial Position
|
|
|
|
|
|
Initial net obligation
|
$
|
—
|
|
|
$
|
(10
|
)
|
Prior service credit
|
(44
|
)
|
|
(45
|
)
|
Net loss
|
(20,800
|
)
|
|
(35,779
|
)
|
Accumulated other comprehensive loss
|
(20,844
|
)
|
|
(35,834
|
)
|
Accumulated contributions less than net periodic benefit cost
|
(18,039
|
)
|
|
(24,066
|
)
|
Net amount recognized
|
$
|
(38,883
|
)
|
|
$
|
(59,900
|
)
|
Changes Recognized in Other Comprehensive Income
|
|
|
|
|
|
Changes in plan assets and benefit obligations recognized in other comprehensive income
|
|
|
|
|
|
Prior service cost
|
$
|
—
|
|
|
$
|
176
|
|
Net loss arising during the year (includes curtailment gains not recognized as a component of net periodic cost)
|
$
|
(13,220
|
)
|
|
$
|
(3,949
|
)
|
Effect of exchange rates on amounts included in accumulated other comprehensive income (loss)
|
(138
|
)
|
|
1,952
|
|
Amounts recognized as a component of net periodic benefit cost
|
|
|
|
|
|
Amortization, settlement or curtailment recognition of net transition obligation
|
(10
|
)
|
|
(14
|
)
|
Amortization or curtailment recognition of prior service credit (cost)
|
(1
|
)
|
|
9
|
|
Amortization or settlement recognition of net loss
|
(1,621
|
)
|
|
(1,865
|
)
|
Total recognized in other comprehensive loss
|
$
|
(14,990
|
)
|
|
$
|
(3,691
|
)
|
Total recognized in net periodic cost and other comprehensive loss
|
$
|
(7,042
|
)
|
|
$
|
4,362
|
|
Estimated amounts that will be amortized from accumulated other comprehensive (loss) income over the next fiscal year
|
|
|
|
|
|
Initial net obligation
|
$
|
—
|
|
|
$
|
(10
|
)
|
Prior service credit
|
(2
|
)
|
|
(2
|
)
|
Net loss
|
(1,015
|
)
|
|
(1,582
|
)
|
Total
|
$
|
(1,017
|
)
|
|
$
|
(1,594
|
)
|
The accumulated benefit obligation for non-U.S. pension plans was
$105.8 million
and
$116.7 million
at
November 3, 2018
and
October 28, 2017
, respectively.
Information relating to the Company’s non-U.S. plans with projected benefit obligations in excess of plan assets and accumulated benefit obligations in excess of plan assets at
November 3, 2018
and
October 28, 2017
is presented in the following table:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Plans with projected benefit obligations in excess of plan assets:
|
|
|
|
|
|
Projected benefit obligation
|
$
|
46,626
|
|
|
$
|
139,516
|
|
Fair value of plan assets
|
$
|
1,174
|
|
|
$
|
79,616
|
|
Plans with accumulated benefit obligations in excess of plan assets:
|
|
|
|
|
|
Projected benefit obligation
|
$
|
46,626
|
|
|
$
|
109,261
|
|
Accumulated benefit obligation
|
$
|
41,701
|
|
|
$
|
103,470
|
|
Fair value of plan assets
|
$
|
1,174
|
|
|
$
|
53,747
|
|
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Assumptions
The range of assumptions used for the non-U.S. defined benefit plans reflects the different economic environments within the various countries as well as the differences in the attributes of the participants. As of October 29, 2016, the Company changed the method utilized to estimate the service cost and interest cost components of net periodic benefit cost for certain of its defined benefit pension plans. Prior to October 29, 2016, the Company estimated the service cost and interest cost components of net periodic benefit costs using a single weighted average discount rate. Beginning October 29, 2016, the Company uses a spot rate approach to estimate the service and interest cost components of net periodic benefit cost for certain of its defined benefit pension plans as the Company believes this approach calculates a better estimate. The change did not, and is not expected to, materially affect the Company's Consolidated Statement of Income.
The projected benefit obligation was determined using the following weighted-average assumptions:
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Discount rate
|
3.53
|
%
|
|
3.02
|
%
|
Rate of increase in compensation levels
|
3.26
|
%
|
|
3.18
|
%
|
Net annual periodic pension cost was determined using the following weighted average assumptions:
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Discount rate
|
3.02
|
%
|
|
2.92
|
%
|
Expected long-term return on plan assets
|
5.54
|
%
|
|
5.58
|
%
|
Rate of increase in compensation levels
|
3.18
|
%
|
|
3.36
|
%
|
The expected long-term rate of return on assets is a weighted-average of the long-term rates of return selected for the various countries where the Company has funded pension plans. The expected long-term rate of return on assets assumption is selected based on the facts and circumstances that exist as of the measurement date and the specific portfolio mix of plan assets. Management, in conjunction with its actuaries, reviewed anticipated future long-term performance of individual asset categories and considered the asset allocation strategy adopted by the Company and/or the trustees of the plans. While the review considered recent fund performance and historical returns, the assumption is primarily a long-term prospective rate.
The Company’s investment strategy is based on an expectation that equity securities will outperform debt securities over the long term. Accordingly, in order to maximize the return on assets, a majority of assets are invested in equities. Investments within each asset class are diversified to reduce the impact of losses in single investments. The use of derivative instruments is permitted where appropriate and necessary to achieve overall investment policy objectives and asset class targets.
The Company establishes strategic asset allocation percentage targets and appropriate benchmarks for each significant asset class to obtain a prudent balance between return and risk. The interaction between plan assets and benefit obligations is periodically studied by the Company and its actuaries to assist in the establishment of strategic asset allocation targets.
Fair value of plan assets
The following table presents plan assets measured at fair value on a recurring basis by investment categories as of
November 3, 2018
and
October 28, 2017
using the same three-level hierarchy described in Note 2j,
Fair Value,
of these Notes to Consolidated Financial Statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 3, 2018
|
|
|
|
October 28, 2017
|
|
|
|
Fair Value Measurement at Reporting Date Using:
|
|
|
|
Fair Value Measurement at Reporting Date Using:
|
|
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Total
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Total
|
Unit trust funds(1)
|
$
|
—
|
|
|
$
|
2,549
|
|
|
$
|
2,549
|
|
|
$
|
—
|
|
|
$
|
1,676
|
|
|
$
|
1,676
|
|
Equities(1)
|
3,437
|
|
|
35,221
|
|
|
38,658
|
|
|
4,701
|
|
|
32,589
|
|
|
37,290
|
|
Fixed income securities(2)
|
—
|
|
|
42,312
|
|
|
42,312
|
|
|
—
|
|
|
39,442
|
|
|
39,442
|
|
Cash and cash equivalents
|
1,136
|
|
|
—
|
|
|
1,136
|
|
|
1,208
|
|
|
—
|
|
|
1,208
|
|
Total assets measured at fair value
|
$
|
4,573
|
|
|
$
|
80,082
|
|
|
$
|
84,655
|
|
|
$
|
5,909
|
|
|
$
|
73,707
|
|
|
$
|
79,616
|
|
_______________________________________
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
(1)
|
The majority of the assets in these categories are invested in a mix of equities, including those from North America, Europe and Asia. The funds are valued using the net asset value method in which an average of the market prices for underlying investments is used to value the fund. Due to the nature of the underlying assets of these funds, changes in market conditions and the economic environment may significantly impact the net asset value of these investments and, consequently, the fair value of the investments. These investments are redeemable at net asset value to the extent provided in the documentation governing the investments. However, these redemption rights may be restricted in accordance with governing documents. Publicly traded securities are valued at the last trade or closing price reported in the active market in which the individual securities are traded.
|
|
|
(2)
|
The majority of the assets in this category are invested in funds primarily concentrated in non-U.S. debt instruments. The funds are valued using the net asset value method in which an average of the market prices for underlying investments is used to value the fund.
|
Estimated future cash flows
Expected fiscal
2019
Company contributions and estimated future benefit payments are as follows:
|
|
|
|
|
Expected Company Contributions
|
|
|
2019
|
$
|
4,149
|
|
Expected Benefit Payments
|
|
|
2020
|
$
|
2,580
|
|
2021
|
$
|
2,063
|
|
2022
|
$
|
2,212
|
|
2023
|
$
|
2,792
|
|
2024
|
$
|
3,247
|
|
2025 through 2028
|
$
|
21,966
|
|
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.
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.
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The reconciliation of income tax computed at the U.S. federal statutory rates to income tax expense for fiscal
2018
, fiscal
2017
and fiscal
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
U.S. federal statutory tax rate
|
23.4
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
Income tax provision reconciliation:
|
|
|
|
|
|
|
|
|
Tax at statutory rate:
|
$
|
383,413
|
|
|
$
|
289,970
|
|
|
$
|
334,922
|
|
Net foreign income subject to lower tax rate
|
(434,834
|
)
|
|
(385,189
|
)
|
|
(264,157
|
)
|
State income taxes, net of federal benefit
|
4,015
|
|
|
(8,801
|
)
|
|
(10,821
|
)
|
Valuation allowance
|
2,232
|
|
|
(7,778
|
)
|
|
13,658
|
|
Federal research and development tax credits
|
(33,602
|
)
|
|
(16,475
|
)
|
|
(16,237
|
)
|
Change in uncertain tax positions
|
(32,945
|
)
|
|
(51,088
|
)
|
|
4,797
|
|
Amortization of purchased intangibles
|
213,198
|
|
|
159,466
|
|
|
35,641
|
|
Acquisition and integration costs
|
—
|
|
|
109,040
|
|
|
—
|
|
Taxes attributable to the Tax Cuts and Jobs Act of 2017
|
70,029
|
|
|
—
|
|
|
—
|
|
Windfalls (Under ASU 2016-09)
|
(26,237
|
)
|
|
—
|
|
|
—
|
|
Other, net
|
(2,184
|
)
|
|
12,081
|
|
|
(2,546
|
)
|
Total income tax provision
|
$
|
143,085
|
|
|
$
|
101,226
|
|
|
$
|
95,257
|
|
For fiscal 2019, the Company’s U.S. statutory income tax rate will be
21.0%
.
Taxes attributable to the Tax Legislation include a tax benefit of
$637.0 million
for the re-measurement of deferred tax assets and liabilities and a tax expense of
$691.0 million
for the one-time transition tax as explained further below. For fiscal 2017, acquisition and integration costs includes
$98.2 million
related to post acquisition integration and
$10.8 million
related to non-deductible acquisition costs.
As of November 3, 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 fiscal 2018.
For financial reporting purposes, income before income taxes for fiscal
2018
, fiscal
2017
and fiscal
2016
includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Pretax income:
|
|
|
|
|
|
|
|
|
Domestic
|
$
|
590,190
|
|
|
$
|
109,565
|
|
|
$
|
2,642
|
|
Foreign
|
1,048,327
|
|
|
718,920
|
|
|
954,279
|
|
Income before income taxes
|
$
|
1,638,517
|
|
|
$
|
828,485
|
|
|
$
|
956,921
|
|
The components of the provision for income taxes for fiscal
2018
, fiscal
2017
and fiscal
2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Current:
|
|
|
|
|
|
|
|
|
Federal tax
|
$
|
826,294
|
|
|
$
|
857,664
|
|
|
$
|
27,790
|
|
State
|
5,917
|
|
|
7,335
|
|
|
1,409
|
|
Foreign
|
47,633
|
|
|
62,096
|
|
|
57,934
|
|
Total current
|
$
|
879,844
|
|
|
$
|
927,095
|
|
|
$
|
87,133
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
$
|
(744,260
|
)
|
|
$
|
(795,478
|
)
|
|
$
|
325
|
|
State
|
806
|
|
|
(24,285
|
)
|
|
2,820
|
|
Foreign
|
6,695
|
|
|
(6,106
|
)
|
|
4,979
|
|
Total deferred
|
$
|
(736,759
|
)
|
|
$
|
(825,869
|
)
|
|
$
|
8,124
|
|
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In fiscal year 2018, the Company recorded a
$637.0 million
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%
. 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.
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 implemented 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 (E&P) that were previously deferred from U.S. income tax. In fiscal year 2018, the Company recorded a provisional tax expense amount for the one-time transition tax of
$691.0 million
, which is comprised of the
$755.0 million
transition tax liability less a deferred tax liability of
$64.0 million
that was recorded in prior years on a portion of the Company's E&P in certain foreign subsidiaries. This provisional estimate may be impacted by a number of additional considerations, including the issuance of final tax regulations that may impact the Company's ongoing analysis of the Tax Legislation and refinements to the Company's earnings and profits and foreign tax credit pools subject to the one-time transition taxes 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 over a period of eight years without incurring interest. As a result,
$61.6 million
of the transition tax is classified as current income taxes payable and
$693.4 million
is classified as non-current income taxes payable.
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 deferred tax impacts are included in the Company's financial statements for the fiscal 2018,
Prior to the Tax Legislation, the Company had not provided deferred taxes on certain undistributed earnings and other outside basis differences of its foreign subsidiaries as it was the Company's intention for these basis differences to remain indefinitely reinvested. The Tax Legislation fundamentally changes the U.S. approach to taxation of foreign earnings to a territorial tax system, which generally allows companies to make distributions of non-U.S. earnings to the United States without incurring additional U.S. tax. Additionally, as a result of the transition tax, substantially all of the Company’s undistributed earnings as of December 31, 2017 will not be subject to further U.S. federal income taxation. As a result, as of November 3, 2018, the Company is still in the process of analyzing the impact the Tax Legislation has on its indefinite reinvestment assertion.
The Company carries other outside basis differences in its subsidiaries, primarily arising from purchase accounting adjustments and undistributed earnings that are considered indefinitely reinvested. As of November 3, 2018, the Company has not recognized deferred income tax on
$4.3 billion
of outside basis differences because it has the intent and ability to indefinitely reinvest these basis differences. These basis differences could be reversed through a sale of the subsidiaries or the receipt of dividends from the subsidiaries, as well as various other events, none of which are considered probable at this time. Determination of the amount of unrecognized deferred income tax liability related to these outside basis differences is not practicable.
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 will continue to refine its adjustments through the permissible measurement period, which is not to extend beyond one year after the enactment date.
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 amount reported for U.S. state and local income taxes represents the Company’s best estimate as it continues to accumulate and process data to finalize its underlying calculations and to review further guidance. 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.
During fiscal 2018 the Company also recorded a total of
$26.2 million
in discrete benefits for excess tax benefits from share-based payments, pursuant to ASU 2016-09, which became effective for fiscal 2018.
The significant components of the Company’s deferred tax assets and liabilities for fiscal
2018
and fiscal
2017
are as follows:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Deferred tax assets:
|
|
|
|
|
|
Inventory reserves
|
$
|
22,184
|
|
|
$
|
28,137
|
|
Deferred income on shipments to distributors
|
46,168
|
|
|
62,923
|
|
Reserves for compensation and benefits
|
39,185
|
|
|
84,096
|
|
Tax credit carryovers
|
112,851
|
|
|
68,317
|
|
Stock-based compensation
|
53,105
|
|
|
99,815
|
|
Depreciation
|
1,707
|
|
|
2,659
|
|
Net operating losses
|
5,997
|
|
|
11,158
|
|
Acquisition-related costs
|
—
|
|
|
3,384
|
|
Other
|
34,031
|
|
|
34,737
|
|
Total gross deferred tax assets
|
315,228
|
|
|
395,226
|
|
Valuation allowance
|
(82,280
|
)
|
|
(53,787
|
)
|
Total deferred tax assets
|
232,948
|
|
|
341,439
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Depreciation
|
(37,023
|
)
|
|
(64,868
|
)
|
Undistributed earnings of foreign subsidiaries
|
—
|
|
|
(64,067
|
)
|
Acquisition-related intangibles
|
(1,099,998
|
)
|
|
(1,851,818
|
)
|
Other
|
(1,914
|
)
|
|
(3,047
|
)
|
Total gross deferred tax liabilities
|
(1,138,935
|
)
|
|
(1,983,800
|
)
|
Net deferred tax liabilities
|
$
|
(905,987
|
)
|
|
$
|
(1,642,361
|
)
|
The valuation allowances of
$82.3 million
and
$53.8 million
at
November 3, 2018
and
October 28, 2017
, respectively, are valuation allowances primarily for the Company’s state credit carryforwards. The Company believes that it is more-likely-than-not that these credit carryovers will not be realized and as a result has recorded a partial valuation allowance as of
November 3, 2018
. The state credit carryover of
$112.9 million
will begin to expire in 2019.
The net operating losses relate to the U.S and are not subject to a valuation allowance. These losses will begin to expire in fiscal 2030.
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 than 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.
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of
November 3, 2018
and
October 28, 2017
, the Company had a net liability of
$16.8 million
and
$47.6 million
, respectively, for unrealized tax benefits, all of which, if settled in the Company’s favor, would lower the Company’s effective tax rate in the period recorded. As of
November 3, 2018
and
October 28, 2017
, the Company had a liability of approximately
$3.5 million
and
$10.8 million
, respectively, for interest and penalties. The Company includes interest and penalties related to unrecognized tax benefits within the provision for taxes in the consolidated statements of income. The total gross liability as of
November 3, 2018
and
October 28, 2017
of
$16.8 million
and
$49.6 million
, respectively, for uncertain tax positions is classified as non-current, and is included in non-current income taxes payable, because the Company believes that the ultimate payment or settlement of these liabilities may not occur within the next twelve months. The consolidated statements of income for fiscal year
2018
, fiscal
2017
and fiscal
2016
include
$(7.3) million
,
($12.3) million
and
$4.0 million
, respectively, of interest and penalties related to these uncertain tax positions. Over the next fiscal year, the Company anticipates the liability may be reduced up to
$0.6 million
for the possible expiration of an income tax statute of limitations.
The following table summarizes the changes in the total amounts of unrealized tax benefits for fiscal
2016
through fiscal
2018
:
|
|
|
|
|
|
Unrealized Tax Benefits
|
Balance, October 31, 2015
|
$
|
71,782
|
|
Additions for tax positions related to current year
|
2,539
|
|
Reductions for tax positions related to prior years
|
(4,475
|
)
|
Reductions due to lapse of applicable statute of limitations
|
(1,311
|
)
|
Balance, October 29, 2016
|
$
|
68,535
|
|
Additions for tax positions related to current year
|
1,742
|
|
Additions for tax positions related to acquisition
|
12,332
|
|
Reductions for tax positions related to prior years
|
(43,186
|
)
|
Reductions due to lapse of applicable statute of limitations
|
(1,566
|
)
|
Balance, October 28, 2017
|
$
|
37,857
|
|
Additions for tax positions related to current year
|
1,334
|
|
Reductions for tax positions related to prior years
|
(295
|
)
|
Reductions due to lapse of applicable statute of limitations
|
(25,640
|
)
|
Balance, November 3, 2018
|
$
|
13,256
|
|
In fiscal 2017 the Company released a reserve of
$50.5 million
, which was comprised of the
$41.7 million
in accrued tax and
$8.8 million
of accrued net interest due to favorable settlement with the U.S. Tax Court. The settled issued pertained to Section 965 of the Internal Revenue Code related to the beneficial tax treatment of dividends paid from foreign owned companies under The American Jobs Creation Act.
In fiscal 2018, the Company released reserves of
$18.1 million
relating to certain international transfer pricing matters,
$4.2 million
relating to worthless stock deductions and
$3.3 million
relating to other releases in fiscal year 2013 due to the lapse of the statute of limitations. With accrued interest of
$9.9 million
, the released reserves totaled
$35.5 million
.
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 2015 and fiscal 2016, various U.S. state and local tax audits, and transfer pricing audits in Spain, the Philippines and Ireland.
With the exception of the Linear pre-acquisition audit, the Company’s U.S. federal tax returns prior to fiscal year 2015 are no longer subject to examination.
All of the Company’s Ireland tax returns prior to fiscal year 2013 are no longer subject to examination. During the fourth quarter of fiscal 2018, the Company’s Irish tax resident subsidiary received an assessment for fiscal 2013 of approximately
€43.0 million
, or
$52.0 million
(as of November 3, 2018), from the Irish Revenue Commissioners. This assessment excludes any penalties and interest. The assessment claims that the Company’s Irish entity failed to conform to 2010 OECD Transfer Pricing Guidelines. The Company strongly disagrees with the assessment and maintains that its transfer pricing is appropriate. Therefore, the Company has not recorded any additional tax liability related to the 2013 tax year or any other periods. The Company intends to vigorously defend its originally filed tax return position and has filed an appeal with the Irish Tax Appeals Commission, which is the normal process for the resolution of differences between Irish Revenue and taxpayers. If Irish Revenue were ultimately to prevail with respect to its assessment for the tax year 2013, such assessment and any potential
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
impact related to years subsequent to 2013 could have a material unfavorable impact on the Company's income tax expense and net earnings in future periods.
The tax returns for Linear Technology Pte. Ltd. (Singapore) prior to the fiscal 2018 are no longer subject to examination by the Economic Development Board pursuant to terms of the tax holiday re-negotiation.
The tax returns for Linear Semiconductor Sdn. Bhd. (Malaysia) prior to the fiscal year ended June 2012 are no longer subject to examination.
The Company has a partial tax holiday in Malaysia whereby the local statutory rate is significantly reduced, if certain conditions are met. The tax holiday for Malaysia is effective through July 2025. A partial tax holiday in Singapore had been in place through August 2019, but was terminated early effective September 2018 due to negotiations with the Economic Development Board. This was due to the on-going relocation of our test operations from our Singapore facility to our facilities in Malaysia and Philippines as well as certain OSAT partners. The impact of the Singapore and Malaysia tax holidays was to increase net income by approximately
$27.7 million
in fiscal year 2018 and
$27.4 million
in fiscal year 2017. The impact of the tax holidays during fiscal 2018 increased the basic and diluted net income per common share by
$0.07
each. The impact of the tax holidays during fiscal 2017 increased the basic and diluted net income per common share by
$0.08
each.
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.
|
|
13.
|
Revolving Credit Facility
|
The Company has a senior unsecured revolving credit facility with certain institutional lenders that expires on July 10, 2020. The agreement for such revolving credit facility (the Credit Agreement) provides that the Company may borrow up to
$1.0 billion
. To date, the Company has not borrowed under this revolving credit facility but may borrow in the future and use the proceeds for repayment of existing indebtedness, stock repurchases, acquisitions, capital expenditures, working capital and other lawful corporate purposes. Revolving loans under the Credit Agreement (other than swing line loans) bear interest, at the Company's option, at either a rate equal to (a) the Eurodollar Rate (as defined in the Credit Agreement) plus a margin based on the Company's debt rating or (b) the Base Rate (defined as the highest of (i) the Bank of America prime rate, (ii) the Federal Funds Rate (as defined in the Credit Agreement) plus 0
.50%
or (iii) one month Eurodollar Rate plus
1%
). The Credit Agreement imposes restrictions on the Company’s ability to undertake certain transactions, to create certain liens on assets and to incur certain subsidiary indebtedness. In addition, the Credit Agreement contains a consolidated leverage ratio covenant of total consolidated funded debt to
consolidated EBITDA (earnings before interest, taxes, depreciation, and amortization) of not greater than 4.5 to 1.0
. The debt covenant will be reduced over time to 3.0 to 1.0, which began in May 2018. As of
November 3, 2018
, the Company was
compliant with these covenants
.
On
June 3, 2013
, the Company issued
$500.0 million
aggregate principal amount of
2.875%
senior unsecured notes due
June 1, 2023
(the 2023 Notes) with
semi-annual fixed interest payments due on June 1 and December 1 of each year, commencing December 1, 2013
. Prior to issuing the 2023 Notes, on
April 24, 2013
, the Company entered into a treasury rate lock agreement with Bank of America. This agreement allowed the Company to lock a 10-year US Treasury rate of
1.7845%
through
June 14, 2013
for its anticipated issuance of the 2023 Notes. The net proceeds of the offering were
$493.9 million
, after discount and issuance costs. Debt discount and issuance costs will be amortized through interest expense over the term of the 2023 Notes. The indenture governing the 2023 Notes contains covenants that may limit the Company's ability to: incur, create, assume or guarantee any debt for borrowed money secured by a lien upon a principal property; enter into sale and lease-back transactions with respect to a principal property; and consolidate with or merge into, or transfer or lease all or substantially all of its assets to, any other party. As of
November 3, 2018
, the Company was
compliant with these covenants
. The notes are subordinated to any future secured debt and to the other liabilities of the Company's subsidiaries.
On
December 14, 2015
, the Company issued
$850.0 million
aggregate principal amount of
3.9%
senior unsecured notes due
December 15, 2025
(the 2025 Notes) and
$400.0 million
aggregate principal amount of
5.3%
senior unsecured notes due
December 15, 2045
(the 2045 Notes) with
semi-annual fixed interest payments due on June 15 and December 15 of each year, commencing June 15, 2016
. The net proceeds of the offering were
$1.2 billion
, after discount and issuance costs. Debt discount and issuance costs will be amortized through interest expense over the term of the 2025 Notes and 2045 Notes. The indenture governing the 2025 Notes and 2045 Notes contains covenants that may limit the Company's ability to: incur, create, assume or guarantee any debt for borrowed money secured by a lien upon a principal property; enter into sale and lease-back
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
transactions with respect to a principal property; and consolidate with or merge into, or transfer or lease all or substantially all of its assets to, any other party. As of
November 3, 2018
, the Company was
compliant with these covenants
. The 2025 Notes and 2045 Notes are subordinated to any future secured debt and to the other liabilities of the Company's subsidiaries.
On
July 26, 2016
, the Company entered into a definitive agreement to acquire Linear (the Merger Agreement). In connection with the Acquisition, the Company announced that it had obtained commitment financing in the form of a
364
-day senior unsecured bridge facility in an aggregate principal amount of up to
$7.5 billion
(
364
-day Bridge Commitment) and a
90
-day senior unsecured bridge facility in an aggregate principal amount of up to
$4.1 billion
(
90
-day Bridge Commitment). As discussed below, as a result of entering into the term loan facility and the issuance of
$2.1 billion
senior unsecured notes, the
364
-day Bridge Commitment was terminated and
$13.7 million
and
$7.2 million
of unamortized bridge fees relating to the
364
-day Bridge Commitment were accelerated and amortized into interest expense in fiscal 2016 and first quarter of fiscal 2017, respectively. Total fees incurred by the Company for the
364
-day Bridge Commitment were approximately
$27.5 million
.
On the Acquisition Date, the Company entered into a
90
-day Bridge Credit Agreement (the Bridge Credit Agreement). The Bridge Credit Agreement provided for unsecured loans in an aggregate principal amount of up to
$4.1 billion
. In the third quarter of fiscal 2017, the Company repaid all of the
$4.1 billion
of outstanding loans under the Bridge Credit Agreement. Total fees incurred by the Company for the
90
-day Bridge Commitment and Bridge Credit Agreement were approximately
$15.0 million
.
On September 23, 2016, the Company entered into a term loan facility consisting of a
3
-year unsecured term loan facility in the principal amount of
$2.5 billion
and a
5
-year unsecured term loan facility in the principal amount of
$2.5 billion
established pursuant to a credit agreement (Term Loan Agreement). The Term Loan Agreement replaced
$5.0 billion
of the
364
-Bridge Commitment. On the Acquisition Date, the Company borrowed under the Term Loan Agreement, consisting of a
3
-year unsecured term loan in the principal amount of
$2.5 billion
, due March 10, 2020 and a
5
-year unsecured term loan in the principal amount of
$2.5 billion
, due March 10, 2022. The
5
-year term loan requires repayment in quarterly installments on the last business day of each March, June, September and December with the first required payment due June 2017. Prepayments of principal on the term loans can be made at any time without penalty. The term loans bear interest at a rate per annum equal to the Eurodollar Rate plus a margin based on the Company’s debt ratings from time to time of between
0.75%
and
1.63%
in the case of the
3
-year term loan, and a margin of between
0.88%
and
1.75%
in the case of the
5
-year term loan. As a result of entering into the Term Loan Agreement and drawing on the available borrowings, the Company incurred fees of approximately
$11.5 million
. The Company recorded these costs as deferred financing costs and will amortize them on a straight-line basis through interest expense over the expected
3
- and
5
-year terms of the term loans. In fiscal 2017, the Company repaid
$400.0 million
of principal on the
5
-year term loan, which satisfied the quarterly obligations due through September 2019. In addition, in fiscal 2017, the Company repaid
$550.0 million
of principal on the
3
-year term loan. On November 10, 2017, the Company paid
$300.0 million
of principal on the
3
-year 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 fiscal 2018, the Company made additional principal payments of
$1.2 million
on the
3
-year term loan and
$750.0 million
on the
5
-year term loan. These amounts were not contractually due under the terms of the loans. As of
November 3, 2018
,
$67.0 million
of principal on the
3
-year term loan was classified as current debt as the Company intends to utilize cash on hand as of
November 3, 2018
to repay this amount of debt within the next twelve months.
On
December 5, 2016
, the Company issued
$400.0 million
aggregate principal amount of
2.5%
senior unsecured notes due
December 5, 2021
(the 2021 Notes),
$550.0 million
aggregate principal amount of
3.125%
senior unsecured notes due
December 5, 2023
(the December 2023 Notes),
$900.0 million
aggregate principal amount of
3.5%
senior unsecured notes due
December 5, 2026
(the 2026 Notes) and
$250.0 million
aggregate principal amount of
4.5%
senior unsecured notes due
December 5, 2036
(the 2036 Notes, and together with the 2021 Notes, the December 2023 Notes and the 2026 Notes, the Notes) with
semi-annual fixed interest payments due on June 5 and December 5 of each year, commencing June 5, 2017
. The net proceeds of the offering were
$2.1 billion
, after discount and issuance costs. Debt discount and issuance costs will be amortized through interest expense over the term of the Notes. The Notes were issued pursuant to an indenture, as supplemented by a supplemental indenture, and the indenture and supplemental indenture contain certain covenants, events of default and other customary provisions. As of
November 3, 2018
, the Company was compliant with these covenants. The Notes rank without preference or priority among themselves and equally in right of payment with all other existing and future senior unsecured debt and senior in right of payment to all of the Company's future subordinated debt. The issuance of the Notes replaced the remaining
$2.5 billion
of the
364
-day Bridge Commitment.
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 2018 Note Offerings). Interest on the 2020 Notes is payable on March 12 and September 12 of each year, beginning on September 12,
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 term loan. Debt discount and issuance costs will be amortized through interest expense over the term of the 2018 Note Offerings. At any time prior to the applicable maturity date of the 2018 Note Offerings, the Company may, at its option, redeem some or all of the applicable series of the 2018 Note Offerings by paying a make-whole premium, plus accrued and unpaid interest, if any, to the date of redemption. The 2018 Note Offerings are unsecured and rank equally in right of payment with all of the Company’s other unsecured senior indebtedness. The 2018 Note Offerings 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
November 3, 2018
, the Company was in
compliance with these covenants
.
The Company’s debt consisted of the following as of
November 3, 2018
and
October 28, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 3, 2018
|
|
October 28, 2017
|
|
Principal
|
|
Unamortized discount and debt issuance costs
|
|
Principal
|
|
Unamortized discount and debt issuance costs
|
3-Year term loan
|
$
|
358,000
|
|
|
$
|
318
|
|
|
$
|
1,650,000
|
|
|
$
|
3,270
|
|
5-Year term loan
|
1,350,000
|
|
|
1,503
|
|
|
2,100,000
|
|
|
4,727
|
|
2020 Notes, due March 2020
|
300,000
|
|
|
1,273
|
|
|
—
|
|
|
—
|
|
2021 Notes, due January 2021
|
450,000
|
|
|
3,344
|
|
|
—
|
|
|
—
|
|
2021 Notes, due December 2021
|
400,000
|
|
|
2,830
|
|
|
400,000
|
|
|
3,756
|
|
2023 Notes, due June 2023
|
500,000
|
|
|
2,813
|
|
|
500,000
|
|
|
3,434
|
|
2023 Notes, due December 2023
|
550,000
|
|
|
4,499
|
|
|
550,000
|
|
|
5,392
|
|
2025 Notes, due December 2025
|
850,000
|
|
|
6,262
|
|
|
850,000
|
|
|
7,154
|
|
2026 Notes, due December 2026
|
900,000
|
|
|
10,361
|
|
|
900,000
|
|
|
11,655
|
|
2036 Notes, due December 2036
|
250,000
|
|
|
3,778
|
|
|
250,000
|
|
|
3,983
|
|
2045 Notes, due December 2045
|
400,000
|
|
|
5,345
|
|
|
400,000
|
|
|
5,545
|
|
Total Long-Term Debt
|
$
|
6,308,000
|
|
|
$
|
42,326
|
|
|
$
|
7,600,000
|
|
|
$
|
48,916
|
|
3-Year term loan, current
|
67,000
|
|
|
—
|
|
|
300,000
|
|
|
—
|
|
Total Current Debt
|
$
|
67,000
|
|
|
$
|
—
|
|
|
$
|
300,000
|
|
|
$
|
—
|
|
Total Debt
|
$
|
6,375,000
|
|
|
$
|
42,326
|
|
|
$
|
7,900,000
|
|
|
$
|
48,916
|
|
On
November 19, 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
December 10, 2018
to all shareholders of record at the close of business on
November 29, 2018
.
ANALOG DEVICES, INC.
SUPPLEMENTARY FINANCIAL INFORMATION
(Unaudited) (thousands, except per share amounts and as noted)
The Company’s fiscal year is the 52-week or 53-week period ending on the Saturday closest to the last day in October. Fiscal
2018
is a
53
-week fiscal year. Fiscal
2017
was a
52
-week fiscal year. The Company's interim periods operate on a 4-4-5 fiscal calendar, where each fiscal quarter is comprised of two 4-week periods and one 5-week period, with each week ending on a Saturday. The additional week in fiscal 2018 was included in the first quarter ended February 3, 2018. Therefore, fiscal 2018 included an additional week of operations as compared to fiscal 2017. The Company's fiscal year quarterly financial information for fiscal
2018
and fiscal
2017
include results of operations of Linear from March 10, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4Q18
|
|
3Q18
|
|
2Q18
|
|
1Q18
|
|
4Q17
|
|
3Q17
|
|
2Q17
|
|
1Q17
|
Revenue
|
|
1,596,586
|
|
|
1,572,679
|
|
|
1,513,053
|
|
|
1,518,624
|
|
|
1,541,170
|
|
|
1,433,902
|
|
|
1,147,982
|
|
|
984,449
|
|
Cost of sales
|
|
502,932
|
|
|
502,033
|
|
|
479,241
|
|
|
483,434
|
|
|
535,145
|
|
|
667,278
|
|
|
507,539
|
|
|
335,945
|
|
Gross margin
|
|
1,093,654
|
|
|
1,070,646
|
|
|
1,033,812
|
|
|
1,035,190
|
|
|
1,006,025
|
|
|
766,624
|
|
|
640,443
|
|
|
648,504
|
|
% of Revenue
|
|
68.5
|
%
|
|
68.1
|
%
|
|
68.3
|
%
|
|
68.2
|
%
|
|
65.3
|
%
|
|
53.5
|
%
|
|
55.8
|
%
|
|
65.9
|
%
|
Research and development
|
|
295,699
|
|
|
291,642
|
|
|
289,472
|
|
|
288,597
|
|
|
273,746
|
|
|
275,670
|
|
|
235,232
|
|
|
183,954
|
|
Selling, marketing, general and administrative
|
|
175,396
|
|
|
171,487
|
|
|
172,146
|
|
|
176,908
|
|
|
185,721
|
|
|
183,980
|
|
|
190,686
|
|
|
130,659
|
|
Special charges (a)
|
|
1,842
|
|
|
1,069
|
|
|
1,089
|
|
|
57,318
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
49,463
|
|
Amortization of intangibles
|
|
107,345
|
|
|
107,409
|
|
|
107,129
|
|
|
107,019
|
|
|
98,348
|
|
|
112,153
|
|
|
68,690
|
|
|
18,160
|
|
Total operating expenses
|
|
580,282
|
|
|
571,607
|
|
|
569,836
|
|
|
629,842
|
|
|
557,815
|
|
|
571,803
|
|
|
494,608
|
|
|
382,236
|
|
Operating income
|
|
513,372
|
|
|
499,039
|
|
|
463,976
|
|
|
405,348
|
|
|
448,210
|
|
|
194,821
|
|
|
145,835
|
|
|
266,268
|
|
% of Revenue
|
|
32
|
%
|
|
32
|
%
|
|
31
|
%
|
|
27
|
%
|
|
29
|
%
|
|
14
|
%
|
|
13
|
%
|
|
27
|
%
|
Nonoperating (income) expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense (b)
|
|
59,102
|
|
|
61,665
|
|
|
64,792
|
|
|
68,030
|
|
|
63,517
|
|
|
73,073
|
|
|
71,636
|
|
|
42,614
|
|
Interest income
|
|
(2,791
|
)
|
|
(2,588
|
)
|
|
(1,912
|
)
|
|
(2,092
|
)
|
|
(2,388
|
)
|
|
(5,524
|
)
|
|
(12,421
|
)
|
|
(10,000
|
)
|
Other, net
|
|
(461
|
)
|
|
(632
|
)
|
|
(451
|
)
|
|
556
|
|
|
5,417
|
|
|
474
|
|
|
(94
|
)
|
|
345
|
|
Total nonoperating (income) expense
|
|
55,850
|
|
|
58,445
|
|
|
62,429
|
|
|
66,494
|
|
|
66,546
|
|
|
68,023
|
|
|
59,121
|
|
|
32,959
|
|
Income before income taxes
|
|
457,522
|
|
|
440,594
|
|
|
401,547
|
|
|
338,854
|
|
|
381,664
|
|
|
126,798
|
|
|
86,714
|
|
|
233,309
|
|
% of Revenue
|
|
29
|
%
|
|
28
|
%
|
|
27
|
%
|
|
22
|
%
|
|
25
|
%
|
|
9
|
%
|
|
8
|
%
|
|
24
|
%
|
Provision (benefit) for income taxes (c)
|
|
24,557
|
|
|
26,130
|
|
|
21,716
|
|
|
70,682
|
|
|
34,014
|
|
|
57,882
|
|
|
(6,850
|
)
|
|
16,180
|
|
Net income
|
|
432,965
|
|
|
414,464
|
|
|
379,831
|
|
|
268,172
|
|
|
347,650
|
|
|
68,916
|
|
|
93,564
|
|
|
217,129
|
|
% of Revenue
|
|
27
|
%
|
|
26
|
%
|
|
25
|
%
|
|
18
|
%
|
|
23
|
%
|
|
5
|
%
|
|
8
|
%
|
|
22
|
%
|
Net income allocable to common shares (d)
|
|
431,621
|
|
|
412,938
|
|
|
378,299
|
|
|
266,929
|
|
|
345,876
|
|
|
67,935
|
|
|
93,564
|
|
|
217,129
|
|
Basic earnings per common share
|
|
1.16
|
|
|
1.11
|
|
|
1.02
|
|
|
0.72
|
|
|
0.94
|
|
|
0.18
|
|
|
0.27
|
|
|
0.70
|
|
Diluted earnings per common share
|
|
1.15
|
|
|
1.10
|
|
|
1.01
|
|
|
0.71
|
|
|
0.93
|
|
|
0.18
|
|
|
0.27
|
|
|
0.69
|
|
Shares used to compute earnings per share (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
371,074
|
|
|
371,315
|
|
|
370,384
|
|
|
369,093
|
|
|
368,043
|
|
|
367,315
|
|
|
341,316
|
|
|
308,786
|
|
Diluted
|
|
375,116
|
|
|
375,815
|
|
|
374,778
|
|
|
374,189
|
|
|
372,053
|
|
|
371,159
|
|
|
345,654
|
|
|
313,076
|
|
Dividends declared per share
|
|
0.48
|
|
|
0.48
|
|
|
0.48
|
|
|
0.45
|
|
|
0.45
|
|
|
0.45
|
|
|
0.45
|
|
|
0.42
|
|
a) Represents charges recorded for various restructuring actions. See Note 5,
Special Charges,
of the Notes to the Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K.
b) Interest expense in fiscal 2017 and 2018 includes interest and fees associated with financing commitments entered into in connection with the Acquisition. See Note 14,
Debt,
of the Notes to the Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K.
c) Provision for income taxes in the first quarter of fiscal 2018 included the impact related to the Tax Cuts and Jobs Act of 2017, enacted on December 22, 2017. Provision for income taxes in the fourth quarter of fiscal 2018 included a release of
reserves relating to certain international transfer pricing matters. Provision for income taxes in the second quarter of fiscal 2017 included a tax benefit of
$15.0 million
for the release of a state tax credit valuation allowance as a result of the Acquisition. Provision for income taxes in the third quarter of fiscal 2017 included approximately
$98.2 million
of tax expense incurred during the quarter as part of the post-Acquisition integration, partially offset by a tax benefit of
$50.5 million
related to the reduction of reserves and related interest resulting from the U.S. Tax Court’s favorable ruling, as well as lower statutory tax rates applicable to our operations in the foreign jurisdictions in which the Company earns income. See Note 12,
Income Taxes,
of the Notes to the Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K.
d) Under the two-class method, earnings per share is calculated using net earnings allocable to common shares, which is derived by reducing net income by the income allocable to participating securities.