NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED AUGUST 3, 2019
(all tabular amounts in thousands except per share amounts and percentages)
Note 1 – Basis of Presentation
In the opinion of management, the information furnished in the accompanying condensed consolidated financial statements reflects all normal recurring adjustments that are necessary to fairly state the results for these interim periods and should be read in conjunction with Analog Devices, Inc.’s (the Company) Annual Report on Form 10-K for the fiscal year ended
November 3, 2018
(fiscal
2018
) and related notes. The results of operations for the interim periods shown in this report are not necessarily indicative of the results that may be expected for the fiscal year ending
November 2, 2019
(fiscal
2019
) or any future period.
The Company has a 52-53 week fiscal year that ends on the Saturday closest to the last day in October. Fiscal
2019
is a
52
-week fiscal year and fiscal
2018
was a
53
-week fiscal year. The additional week in fiscal 2018 was included in the first quarter ended February 3, 2018. Therefore, the
first nine months
of fiscal 2019 included one less week of operations as compared to the
first nine months
of fiscal 2018. Certain amounts reported in previous periods have been reclassified to conform to the fiscal
2019
presentation.
As further discussed in Note 2,
Revenue Recognition
and Note 13,
New Accounting Pronouncements
, the Company adopted the Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2014-09,
Revenue from Contracts with Customers
(ASU 2014-09), in the first quarter of fiscal 2019. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period showing, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized as of the date of initial application. The Company adopted ASU 2014-09 using the full retrospective method and applied the practical expedient, in which the Company is not required to disclose the amount of consideration allocated to any remaining performance obligations or an explanation of when the Company expects to recognize that amount as revenue for all reporting periods presented before the date of the initial application.
As a result of the adoption of ASU 2014-09, the Company changed its accounting policy for revenue recognition and recognizes revenue from product sales to its customers and distributors when title passes, which is generally upon shipment. Prior to the adoption of ASU 2014-09, revenue and the related cost of sales on shipments to certain distributors were deferred until the distributor resold the products to their end customers. See Note 2,
Revenue Recognition,
in these Notes to Condensed Consolidated Financial Statements for the details of the Company’s revenue recognition policies. The adoption of ASU 2014-09 impacted the Company’s condensed consolidated statements of income and balance sheets but did not impact its condensed consolidated statements of cash flows, with the exceptions of net income and reclassifications within adjustments to reconcile net income to cash provided by operations, and did not impact the condensed consolidated statement of shareholders' equity, with the exceptions of retained earnings and net income. As shown in the tables below, pursuant to the guidance in ASU 2014-09, the Company restated its historical financial results to be consistent with the standard. Accordingly, the amounts for all periods presented in this Form 10-Q reflect the impact of ASU 2014-09.
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Statement of Income
|
Three Months Ended August 4, 2018
|
|
As Reported
|
|
Impact of Adoption
|
|
As Adjusted
|
Revenue
|
$
|
1,572,679
|
|
|
$
|
(14,490
|
)
|
|
$
|
1,558,189
|
|
Cost of sales
|
502,033
|
|
|
(4,402
|
)
|
|
497,631
|
|
Gross margin
|
1,070,646
|
|
|
(10,088
|
)
|
|
1,060,558
|
|
Operating expenses:
|
|
|
|
|
|
Research and development
|
291,642
|
|
|
—
|
|
|
291,642
|
|
Selling, marketing, general and administrative
|
171,487
|
|
|
—
|
|
|
171,487
|
|
Amortization of intangibles
|
107,409
|
|
|
—
|
|
|
107,409
|
|
Special charges
|
1,069
|
|
|
—
|
|
|
1,069
|
|
|
571,607
|
|
|
—
|
|
|
571,607
|
|
Operating income
|
499,039
|
|
|
(10,088
|
)
|
|
488,951
|
|
Nonoperating expense (income):
|
|
|
|
|
|
Interest expense
|
61,665
|
|
|
—
|
|
|
61,665
|
|
Interest income
|
(2,588
|
)
|
|
—
|
|
|
(2,588
|
)
|
Other, net
|
(632
|
)
|
|
—
|
|
|
(632
|
)
|
|
58,445
|
|
|
—
|
|
|
58,445
|
|
Income before income taxes
|
440,594
|
|
|
(10,088
|
)
|
|
430,506
|
|
Provision for income taxes
|
26,130
|
|
|
(4,181
|
)
|
|
21,949
|
|
Net income
|
$
|
414,464
|
|
|
$
|
(5,907
|
)
|
|
$
|
408,557
|
|
Shares used to compute earnings per common share – basic
|
371,315
|
|
|
—
|
|
|
371,315
|
|
Shares used to compute earnings per common share – diluted
|
375,815
|
|
|
—
|
|
|
375,815
|
|
Basic earnings per common share (1)
|
$
|
1.11
|
|
|
$
|
(0.02
|
)
|
|
$
|
1.10
|
|
Diluted earnings per common share (1)
|
$
|
1.10
|
|
|
$
|
(0.02
|
)
|
|
$
|
1.08
|
|
|
|
|
|
|
|
(1) The sum of the per share amounts may not equal the total due to rounding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Statement of Income
|
Nine Months Ended August 4, 2018
|
|
As Reported
|
|
Impact of Adoption
|
|
As Adjusted
|
Revenue
|
$
|
4,604,356
|
|
|
$
|
84,205
|
|
|
$
|
4,688,561
|
|
Cost of sales
|
1,464,708
|
|
|
19,222
|
|
|
1,483,930
|
|
Gross margin
|
3,139,648
|
|
|
64,983
|
|
|
3,204,631
|
|
Operating expenses:
|
|
|
|
|
|
Research and development
|
869,711
|
|
|
—
|
|
|
869,711
|
|
Selling, marketing, general and administrative
|
520,541
|
|
|
—
|
|
|
520,541
|
|
Amortization of intangibles
|
321,557
|
|
|
—
|
|
|
321,557
|
|
Special charges
|
59,476
|
|
|
—
|
|
|
59,476
|
|
|
1,771,285
|
|
|
—
|
|
|
1,771,285
|
|
Operating income
|
1,368,363
|
|
|
64,983
|
|
|
1,433,346
|
|
Nonoperating expense (income):
|
|
|
|
|
|
Interest expense
|
194,487
|
|
|
—
|
|
|
194,487
|
|
Interest income
|
(6,592
|
)
|
|
—
|
|
|
(6,592
|
)
|
Other, net
|
(527
|
)
|
|
—
|
|
|
(527
|
)
|
|
187,368
|
|
|
—
|
|
|
187,368
|
|
Income before income taxes
|
1,180,995
|
|
|
64,983
|
|
|
1,245,978
|
|
Provision for income taxes
|
118,528
|
|
|
25,325
|
|
|
143,853
|
|
Net income
|
$
|
1,062,467
|
|
|
$
|
39,658
|
|
|
$
|
1,102,125
|
|
Shares used to compute earnings per common share – basic
|
370,211
|
|
|
—
|
|
|
370,211
|
|
Shares used to compute earnings per common share – diluted
|
374,880
|
|
|
—
|
|
|
374,880
|
|
Basic earnings per common share
|
$
|
2.86
|
|
|
$
|
0.11
|
|
|
$
|
2.97
|
|
Diluted earnings per common share
|
$
|
2.82
|
|
|
$
|
0.11
|
|
|
$
|
2.93
|
|
The impact on the Company's previously reported condensed consolidated balance sheet line items is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 3, 2018
|
|
As Reported
|
|
Impact of Adoption
|
|
As Adjusted
|
Deferred tax assets
|
$
|
21,078
|
|
|
$
|
(11,413
|
)
|
|
$
|
9,665
|
|
Deferred income on shipments to distributors, net
|
$
|
487,417
|
|
|
$
|
(487,417
|
)
|
|
$
|
—
|
|
Accrued liabilities
|
$
|
497,080
|
|
|
$
|
133,027
|
|
|
$
|
630,107
|
|
Deferred income taxes
|
$
|
927,065
|
|
|
$
|
63,344
|
|
|
$
|
990,409
|
|
Retained earnings
|
$
|
5,703,064
|
|
|
$
|
279,633
|
|
|
$
|
5,982,697
|
|
In addition, in the first quarter of fiscal 2019, the Company adopted ASU 2016-16,
Income Taxes (Topic 740)
(ASU 2016-16) using the modified retrospective method with a cumulative-effect adjustment directly to retained earnings. ASU 2016-16 requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The adoption of ASU 2016-16 resulted in the following cumulative-effect increase in the Company's deferred tax assets, deferred tax liabilities and retained earnings as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 4, 2018
|
|
Beginning Balance November 3, 2018 as Adjusted
|
|
Impact of Adoption of ASU 2016-16
|
|
Balance November 4, 2018
|
Deferred tax assets
|
$
|
9,665
|
|
|
$
|
1,655,129
|
|
|
$
|
1,664,794
|
|
Deferred income taxes
|
$
|
990,409
|
|
|
$
|
1,324,103
|
|
|
$
|
2,314,512
|
|
Retained earnings
|
$
|
5,982,697
|
|
|
$
|
331,026
|
|
|
$
|
6,313,723
|
|
See Note 13,
New Accounting Pronouncements
, and Note 12,
Income Taxes,
in these Notes to Condensed Consolidated Financial Statements for more information on the adoption of ASU 2016-16.
Note 2 – Revenue Recognition
Revenue Recognition Policy:
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
, to achieve a consistent application of revenue recognition, resulting in a single revenue model to be applied by reporting companies under U.S. generally accepted accounting principles. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the providing entity expects to be entitled in exchange for those goods or services. As a result of the adoption of ASU 2014-09, at the beginning of the first quarter of fiscal 2019, the Company revised its revenue recognition policy. The Company now recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. Under ASU 2014-09, the Company recognizes revenue when all of the following criteria are met: (1) the Company has entered into a binding agreement, (2) the performance obligations have been identified, (3) the transaction price to the customer has been determined, (4) the transaction price has been allocated to the performance obligations in the contract, and (5) the performance obligations have been satisfied. The majority of the Company's shipping terms permit the Company to recognize revenue at point of shipment or delivery. Certain shipping terms require the goods to be through customs or be received by the customer before title passes. In those instances, the Company defers the revenue recognized until title has passed. Shipping costs are charged to selling, marketing, general and administrative expense as incurred. Sales taxes are excluded from revenue.
Revenue from contracts with the United States government, government prime contractors and certain commercial customers is recorded over time using either units delivered or costs incurred as the measurement basis for progress toward completion. These measures are used to measure results directly and is generally the best measure of progress toward completion in circumstances in which a reliable measure of output can be established. Estimated revenue in excess of amounts billed is reported as unbilled receivables. Contract accounting requires judgment in estimating costs and assumptions related to technical issues and delivery schedule. Contract costs include material, subcontract costs, labor and an allocation of indirect costs. The estimation of costs at completion of a contract is subject to numerous variables involving contract costs and estimates as to the length of time to complete the contract. Changes in contract performance, estimated gross margin, including the impact of final contract settlements, and estimated losses are recognized in the period in which the changes or losses are determined.
Performance Obligations:
Substantially all of the Company’s contracts with customers contain a single performance obligation, the sale of mixed-signal integrated circuit (IC) products. Such sales represent a single performance obligation because the sale is one type of good or includes multiple goods that are neither capable of being distinct nor separable from the other promises in the contract. This performance obligation is satisfied when control of the product is transferred to the customer, which occurs upon shipment or delivery. Unsatisfied performance obligations primarily represent contracts for products with future delivery dates and with an original expected duration of one year or less. As allowed under ASU 2014-09, the Company has opted to not disclose the amount of unsatisfied performance obligations as these contracts have original expected durations of less than one year. 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.
Transaction Price:
The transaction price reflects the Company’s expectations about the consideration it will be entitled to receive from the customer and may include fixed or variable amounts. Fixed consideration primarily includes sales to direct customers and sales to distributors in which both the sale to the distributor and the sale to the end customer occur within the same reporting period. Variable consideration includes sales in which the amount of consideration that the Company will receive is unknown as of the end of a reporting period. Such consideration primarily includes sales made to distributors under agreements that allow certain rights of return, referred to as stock rotation, and credits issued to the distributor due to price protection. Stock rotation allows distributors limited levels of returns in order to reduce the amounts of slow-moving, discontinued or obsolete product from their inventory. Price protection represents price discounts granted to certain distributors to allow the distributor to earn an appropriate margin on sales negotiated with certain customers and in the event of a price decrease subsequent to the date the product was shipped and billed to the distributor. A refund liability for distributor credits covering variable consideration are made based on the Company's estimate of historical experience rates as well as considering economic conditions and contractual terms. To date, actual distributor claims activity has been materially consistent with the provisions the Company has made based on its historical estimates.
Contract Balances
: Accounts receivable represents the Company’s unconditional right to receive consideration from its customers. Payments are typically due within
30
to
45
days of invoicing and do not include a significant financing component. To date, there have been no material impairment losses on accounts receivable. There were no material contract assets or contract liabilities recorded on the condensed consolidated balance sheet in any of the periods presented.
Note 3 – Stock-Based Compensation and Shareholders' Equity
A summary of the Company’s stock option activity as of
August 3, 2019
and changes during the
three- and nine-month period
s then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activity During The Three Months Ended August 3, 2019
|
Options
Outstanding
(in thousands)
|
|
Weighted-
Average Exercise
Price Per Share
|
|
Weighted-
Average
Remaining
Contractual
Term in Years
|
|
Aggregate
Intrinsic
Value
|
Options outstanding at May 4, 2019
|
5,822
|
|
|
|
$64.99
|
|
|
|
|
|
Options granted
|
14
|
|
|
|
$108.06
|
|
|
|
|
|
Options exercised
|
(360
|
)
|
|
|
$54.07
|
|
|
|
|
|
Options forfeited
|
(85
|
)
|
|
|
$85.29
|
|
|
|
|
|
Options outstanding at August 3, 2019
|
5,391
|
|
|
|
$65.51
|
|
|
6.1
|
|
|
$254,294
|
|
Options exercisable at August 3, 2019
|
3,117
|
|
|
|
$55.04
|
|
|
5.0
|
|
|
$179,685
|
|
Options vested or expected to vest at August 3, 2019 (1)
|
5,227
|
|
|
|
$64.90
|
|
|
6.1
|
|
|
$249,744
|
|
|
|
(1)
|
In addition to the vested options, the Company expects a portion of the unvested options to vest at some point in the future. The number of options expected to vest is calculated by applying an estimated forfeiture rate to the unvested options.
|
|
|
|
|
|
|
|
|
Activity During The Nine Months Ended August 3, 2019
|
Options
Outstanding
(in thousands)
|
|
Weighted-
Average Exercise
Price Per Share
|
Options outstanding at November 3, 2018
|
7,297
|
|
|
|
$58.42
|
|
Options granted
|
454
|
|
|
|
$107.11
|
|
Options exercised
|
(2,168
|
)
|
|
|
$49.38
|
|
Options forfeited
|
(187
|
)
|
|
|
$78.03
|
|
Options expired
|
(5
|
)
|
|
|
$21.97
|
|
Options outstanding at August 3, 2019
|
5,391
|
|
|
|
$65.51
|
|
During the
three- and nine-month period
s ended
August 3, 2019
, the total intrinsic value of options exercised (i.e., the difference between the market price at exercise and the price paid by the employee to exercise the options) was
$21.0 million
and
$120.7 million
, respectively, and the total amount of proceeds received by the Company from the exercise of these options was
$19.2 million
and
$106.1 million
, respectively.
During the
three- and nine-month period
s ended
August 4, 2018
, the total intrinsic value of options exercised (i.e., the difference between the market price at exercise and the price paid by the employee to exercise the options) was
$29.3 million
and
$111.9 million
, respectively, and the total amount of proceeds received by the Company from the exercise of these options was
$22.8 million
and
$88.4 million
, respectively.
A summary of the Company’s restricted stock unit/award activity as of
August 3, 2019
and changes during the
three- and nine-month period
s then ended is presented below:
|
|
|
|
|
|
|
|
Activity During The Three Months Ended August 3, 2019
|
Restricted
Stock Units/Awards
Outstanding
(in thousands)
|
|
Weighted-
Average Grant-
Date Fair Value
Per Share
|
Restricted stock units/awards outstanding at May 4, 2019
|
4,978
|
|
|
|
$85.49
|
|
Units/Awards granted
|
96
|
|
|
|
$95.68
|
|
Restrictions lapsed
|
(304
|
)
|
|
|
$79.38
|
|
Forfeited
|
(90
|
)
|
|
|
$81.62
|
|
Restricted stock units/awards outstanding at August 3, 2019
|
4,680
|
|
|
|
$86.17
|
|
|
|
|
|
Activity During The Nine Months Ended August 3, 2019
|
Restricted
Stock Units/Awards
Outstanding
(in thousands)
|
|
Weighted-
Average Grant-
Date Fair Value
Per Share
|
Restricted stock units/awards outstanding at November 3, 2018
|
5,289
|
|
|
|
$77.54
|
|
Units/Awards granted
|
1,296
|
|
|
|
$97.88
|
|
Restrictions lapsed
|
(1,635
|
)
|
|
|
$68.49
|
|
Forfeited
|
(270
|
)
|
|
|
$79.55
|
|
Restricted stock units/awards outstanding at August 3, 2019
|
4,680
|
|
|
|
$86.17
|
|
As of
August 3, 2019
, there was
$358.4 million
of total unrecognized compensation cost related to unvested stock-based awards comprised of stock options and restricted stock units/awards. That cost is expected to be recognized over a weighted-average period of
1.54
years. The total grant-date fair value of shares that vested during the
three- and nine-month period
s ended
August 3, 2019
was approximately
$24.6 million
and
$131.0 million
, respectively. The total grant-date fair value of shares that vested during the
three- and nine-month period
s ended
August 4, 2018
was approximately
$28.2 million
and
$112.7 million
, respectively.
Common Stock Repurchases
As of
August 3, 2019
, the Company had repurchased a total of approximately
152.9 million
shares of its common stock for approximately
$5.9 billion
under the Company's share repurchase program. As of
August 3, 2019
, an additional
$2.2 billion
remains available for repurchase of shares under the current authorized program.
Note 4 – Accumulated Other Comprehensive Income (Loss)
The following table provides the changes in accumulated other comprehensive income (loss) (OCI) by component and the related tax effects during the
first nine months
of fiscal
2019
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
Unrealized holding gains (losses) on available for sale securities
|
|
Unrealized holding gains (losses) on derivatives
|
|
Pension plans
|
|
Total
|
November 3, 2018
|
$
|
(28,711
|
)
|
|
$
|
(10
|
)
|
|
$
|
(14,355
|
)
|
|
$
|
(15,364
|
)
|
|
$
|
(58,440
|
)
|
Other comprehensive income (loss) before reclassifications
|
(4,133
|
)
|
|
10
|
|
|
(124,532
|
)
|
|
983
|
|
|
(127,672
|
)
|
Amounts reclassified out of other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
7,114
|
|
|
754
|
|
|
7,868
|
|
Tax effects
|
—
|
|
|
—
|
|
|
24,757
|
|
|
(186
|
)
|
|
24,571
|
|
Other comprehensive income (loss)
|
(4,133
|
)
|
|
10
|
|
|
(92,661
|
)
|
|
1,551
|
|
|
(95,233
|
)
|
August 3, 2019
|
$
|
(32,844
|
)
|
|
$
|
—
|
|
|
$
|
(107,016
|
)
|
|
$
|
(13,813
|
)
|
|
$
|
(153,673
|
)
|
The amounts reclassified out of accumulated OCI into the Condensed Consolidated Statement of Income with presentation location during each period were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
Comprehensive Income Component
|
|
August 3, 2019
|
|
August 4, 2018
|
|
August 3, 2019
|
|
August 4, 2018
|
|
Location
|
Unrealized holding losses (gains) on derivatives
|
|
|
|
|
Currency forwards
|
|
$
|
185
|
|
|
$
|
988
|
|
|
$
|
1,382
|
|
|
$
|
(877
|
)
|
|
Cost of sales
|
|
|
652
|
|
|
514
|
|
|
2,270
|
|
|
(1,269
|
)
|
|
Research and development
|
|
|
617
|
|
|
526
|
|
|
2,488
|
|
|
(1,230
|
)
|
|
Selling, marketing, general and administrative
|
Interest rate derivatives
|
|
464
|
|
|
(789
|
)
|
|
974
|
|
|
(632
|
)
|
|
Interest expense
|
|
|
1,918
|
|
|
1,239
|
|
|
7,114
|
|
|
(4,008
|
)
|
|
Total before tax
|
|
|
(384
|
)
|
|
(401
|
)
|
|
(1,187
|
)
|
|
74
|
|
|
Tax
|
|
|
$
|
1,534
|
|
|
$
|
838
|
|
|
$
|
5,927
|
|
|
$
|
(3,934
|
)
|
|
Net of tax
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of pension components
|
|
|
|
|
|
|
Transition obligation
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
7
|
|
|
(a)
|
Prior service credit
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
(a)
|
Actuarial losses
|
|
243
|
|
|
394
|
|
|
754
|
|
|
1,226
|
|
|
(a)
|
|
|
243
|
|
|
397
|
|
|
754
|
|
|
1,234
|
|
|
Total before tax
|
|
|
(60
|
)
|
|
(96
|
)
|
|
(186
|
)
|
|
(298
|
)
|
|
Tax
|
|
|
$
|
183
|
|
|
$
|
301
|
|
|
$
|
568
|
|
|
$
|
936
|
|
|
Net of tax
|
|
|
|
|
|
|
|
|
|
|
|
Total amounts reclassified out of accumulated other comprehensive income (loss), net of tax
|
|
$
|
1,717
|
|
|
$
|
1,139
|
|
|
$
|
6,495
|
|
|
$
|
(2,998
|
)
|
|
|
______________
(a) The amortization of pension components is included in the computation of net periodic pension cost. For further information see Note 11,
Retirement Plans
, in the Notes to Consolidated Financial Statements in Item 8 of the Annual Report on Form 10-K for the fiscal year ended
November 3, 2018
.
The Company estimates
$2.1 million
, net of tax, of losses of forward foreign currency derivative instruments included in OCI will be reclassified into earnings within the next 12 months.
As of
August 3, 2019
, the Company held
8
investment securities,
6
of which were in an unrealized loss position with immaterial gross unrealized losses and an aggregate fair value of
$30.0 million
. 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
. These unrealized losses were primarily related to corporate obligations that earn lower interest rates than current market rates. None of these investments have been in a loss position for more than twelve months. As the Company does not intend to sell these investments and it is unlikely that the Company will be required to sell the investments before recovery of their amortized basis, which will be at maturity, the Company does not consider those investments to be other-than-temporarily impaired at
August 3, 2019
and
November 3, 2018
.
Realized gains or losses on investments are determined based on the specific identification basis and are recognized in nonoperating expense (income). There were
no
material net realized gains or losses from the sales of available-for-sale investments during any of the fiscal periods presented.
Note 5 – Earnings Per Share
Unvested restricted stock awards that entitle recipients to voting and nonforfeitable dividend rights from the date of grant are considered participating securities and the two-class method is used for purposes of calculating earnings per share. Under the two-class method, a portion of net income is allocated to these participating securities and therefore is excluded from the
calculation of earnings per share allocated to common stock, as shown in the table below. The difference between the income allocated to participating securities under the basic and diluted two-class methods is not material.
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
August 3, 2019
|
|
August 4, 2018 (1)
|
|
August 3, 2019
|
|
August 4, 2018 (1)
|
|
|
|
|
|
|
|
|
Net Income
|
$
|
362,374
|
|
|
$
|
408,557
|
|
|
$
|
1,085,317
|
|
|
$
|
1,102,125
|
|
Less: income allocated to participating securities
|
812
|
|
|
1,526
|
|
|
2,750
|
|
|
4,439
|
|
Net income allocated to common stockholders
|
$
|
361,562
|
|
|
$
|
407,031
|
|
|
$
|
1,082,567
|
|
|
$
|
1,097,686
|
|
|
|
|
|
|
|
|
|
Basic shares:
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
369,533
|
|
|
371,315
|
|
|
369,160
|
|
|
370,211
|
|
Earnings per common share basic:
|
$
|
0.98
|
|
|
$
|
1.10
|
|
|
$
|
2.93
|
|
|
$
|
2.97
|
|
Diluted shares:
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
369,533
|
|
|
371,315
|
|
|
369,160
|
|
|
370,211
|
|
Assumed exercise of common stock equivalents
|
3,544
|
|
|
4,500
|
|
|
3,807
|
|
|
4,669
|
|
Weighted-average common and common equivalent shares
|
373,077
|
|
|
375,815
|
|
|
372,967
|
|
|
374,880
|
|
Earnings per common share diluted:
|
$
|
0.97
|
|
|
$
|
1.08
|
|
|
$
|
2.90
|
|
|
$
|
2.93
|
|
Anti-dilutive shares related to:
|
|
|
|
|
|
|
|
Outstanding share-based awards
|
446
|
|
|
810
|
|
|
963
|
|
|
1,424
|
|
(1) Balances have been restated to reflect the full retrospective adoption of ASU 2014-09. See Note 1,
Basis of Presentation
, in these Notes to Condensed Consolidated Financial Statements.
Note 6 – Special Charges
The Company monitors global macroeconomic conditions on an ongoing basis and continues to assess opportunities for improved operational effectiveness and efficiency, as well as a better alignment of expenses with revenues. As a result of these assessments, the Company has undertaken various restructuring actions over the past several years. These actions are described below.
The following table is a roll-forward from
November 3, 2018
to
August 3, 2019
of the employee separation and exit cost accruals established related to these actions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Restructuring
|
Closure of Manufacturing Facilities
|
|
Reduction of Operating Costs Action
|
|
Early Retirement Action
|
|
Repositioning Action
|
Balance at November 3, 2018
|
$
|
42,974
|
|
|
$
|
5,255
|
|
|
$
|
9,897
|
|
|
$
|
—
|
|
First quarter fiscal 2019 special charges
|
1,127
|
|
|
—
|
|
|
—
|
|
|
20,655
|
|
Severance and other payments
|
—
|
|
|
(2,489
|
)
|
|
(2,766
|
)
|
|
(1,051
|
)
|
Non-cash impairment charge
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,367
|
)
|
Effect of foreign currency on accrual
|
(14
|
)
|
|
4
|
|
|
—
|
|
|
(2
|
)
|
Balance at February 2, 2019
|
$
|
44,087
|
|
|
$
|
2,770
|
|
|
$
|
7,131
|
|
|
$
|
15,235
|
|
Second quarter fiscal 2019 special charges
|
4,593
|
|
|
—
|
|
|
—
|
|
|
3,569
|
|
Severance and other payments
|
—
|
|
|
(909
|
)
|
|
(1,641
|
)
|
|
(3,782
|
)
|
Effect of foreign currency on accrual
|
(18
|
)
|
|
—
|
|
|
—
|
|
|
(9
|
)
|
Balance at May 4, 2019
|
$
|
48,662
|
|
|
$
|
1,861
|
|
|
$
|
5,490
|
|
|
$
|
15,013
|
|
Third quarter fiscal 2019 special charges
|
927
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Severance and other payments
|
—
|
|
|
(596
|
)
|
|
(583
|
)
|
|
(4,321
|
)
|
Effect of foreign currency on accrual
|
(84
|
)
|
|
—
|
|
|
—
|
|
|
(5
|
)
|
Balance at August 3, 2019
|
$
|
49,505
|
|
|
$
|
1,265
|
|
|
$
|
4,907
|
|
|
$
|
10,687
|
|
Current - accrued liabilities
|
$
|
—
|
|
|
$
|
1,265
|
|
|
$
|
4,907
|
|
|
$
|
10,687
|
|
Other non-current liabilities
|
$
|
49,505
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Repositioning Action
During the first and second quarters of fiscal 2019, the Company recorded special charges of
$20.7 million
and
$3.6 million
, respectively, as a result of organizational initiatives to reposition the Company's global workforce skill set to align with the Company's long-term strategic plan. Approximately
$19.8 million
of the total charges for the first and second quarters of fiscal 2019 were for severance and fringe benefit costs in accordance with either the Company's ongoing benefit plan or statutory requirements for
140
engineering and selling, marketing, general and administrative (SMG&A) employees. As of
August 3, 2019
, the Company still employed
18
of the
140
employees included in this action. These employees must continue to be employed by the Company until their employment is involuntarily terminated in order to receive the severance benefits. The remaining
$4.4 million
of the charges related to the write-off of acquired intellectual property during the first quarter of fiscal 2019 due to the Company's decision to discontinue certain product development strategies.
Closure of Manufacturing Facilities
The Company recorded special charges of
$51.1 million
on a cumulative basis through
August 3, 2019
as a result of its decision to consolidate certain wafer and test facility operations acquired as part of the acquisition of Linear Technology Corporation (Linear). Over the next one to three 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 charges include severance and fringe benefit costs, in accordance with the Company's ongoing benefit plan or statutory requirements at foreign locations, and one-time termination benefits for
1,249
manufacturing, engineering and SMG&A employees. 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.
Note 7 – Segment Information
The Company designs, develops, manufactures and markets a broad range of ICs. The Company operates and tracks its results in
one
reportable segment based on the aggregation of
eight
operating segments. The Chief Executive Officer has been identified as the Company's Chief Operating Decision Maker.
Revenue Trends by End Market
The following table summarizes revenue by end market for the
three- and nine-month period
s ended
August 3, 2019
and
August 4, 2018
. 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 and the Company's methodology evolve and improve, the categorization of products by end market can vary over time. When this occurs, the Company reclassifies revenue by end market for prior periods. Such reclassifications typically do not materially change the sizing of, or the underlying trends of results within, each end market.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
August 3, 2019
|
|
August 4, 2018
|
|
Revenue
|
|
% of
Revenue*
|
|
Y/Y%
|
|
Revenue (1)
|
|
% of
Revenue*
|
Industrial
|
$
|
752,529
|
|
|
51
|
%
|
|
(4
|
)%
|
|
$
|
786,618
|
|
|
50
|
%
|
Automotive
|
227,760
|
|
|
15
|
%
|
|
(9
|
)%
|
|
251,396
|
|
|
16
|
%
|
Consumer
|
183,399
|
|
|
12
|
%
|
|
(18
|
)%
|
|
224,549
|
|
|
14
|
%
|
Communications
|
316,455
|
|
|
21
|
%
|
|
7
|
%
|
|
295,626
|
|
|
19
|
%
|
Total revenue
|
$
|
1,480,143
|
|
|
100
|
%
|
|
(5
|
)%
|
|
$
|
1,558,189
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
August 3, 2019
|
|
August 4, 2018
|
|
Revenue
|
|
% of
Revenue*
|
|
Y/Y%
|
|
Revenue (1)
|
|
% of
Revenue*
|
Industrial
|
$
|
2,260,907
|
|
|
50
|
%
|
|
(5
|
)%
|
|
$
|
2,386,708
|
|
|
51
|
%
|
Automotive
|
706,531
|
|
|
16
|
%
|
|
(8
|
)%
|
|
765,385
|
|
|
16
|
%
|
Consumer
|
557,097
|
|
|
12
|
%
|
|
(21
|
)%
|
|
705,690
|
|
|
15
|
%
|
Communications
|
1,023,311
|
|
|
23
|
%
|
|
23
|
%
|
|
830,778
|
|
|
18
|
%
|
Total revenue
|
$
|
4,547,846
|
|
|
100
|
%
|
|
(3
|
)%
|
|
$
|
4,688,561
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
* The sum of the individual percentages may not equal the total due to rounding.
|
(1) Balances have been restated to reflect the full retrospective adoption of ASU 2014-09. See Note 1,
Basis of Presentation
, in these Notes to Condensed Consolidated Financial Statements.
|
Revenue by Sales Channel
The Company sells its products globally through a direct sales force, third party distributors, independent sales representatives and via its website. Distributors are customers that buy products with the intention of reselling them. Direct customers are non-distributor customers and consist primarily of original equipment manufacturers (OEMs). Other customers include the U.S. government, government prime contractors and some commercial customers.
The following tables summarize revenue by channel for the
three- and nine-month period
s ended
August 3, 2019
and
August 4, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
August 3, 2019
|
|
August 4, 2018
|
Channel
|
Revenue
|
|
% of Revenue*
|
|
Revenue (1)
|
|
% of Revenue*
|
Distributors
|
$
|
863,055
|
|
|
58
|
%
|
|
$
|
856,504
|
|
|
55
|
%
|
Direct customers
|
600,609
|
|
|
41
|
%
|
|
687,151
|
|
|
44
|
%
|
Other
|
16,479
|
|
|
1
|
%
|
|
14,534
|
|
|
1
|
%
|
Total revenue
|
$
|
1,480,143
|
|
|
100
|
%
|
|
$
|
1,558,189
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
August 3, 2019
|
|
August 4, 2018
|
Channel
|
Revenue
|
|
% of Revenue*
|
|
Revenue (1)
|
|
% of Revenue*
|
Distributors
|
$
|
2,563,807
|
|
|
56
|
%
|
|
$
|
2,590,792
|
|
|
55
|
%
|
Direct customers
|
1,934,376
|
|
|
43
|
%
|
|
2,035,743
|
|
|
43
|
%
|
Other
|
49,663
|
|
|
1
|
%
|
|
62,026
|
|
|
1
|
%
|
Total revenue
|
$
|
4,547,846
|
|
|
100
|
%
|
|
$
|
4,688,561
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
* The sum of the individual percentages may not equal the total due to rounding.
|
(1) Balances have been restated to reflect the full retrospective adoption of ASU 2014-09. See Note 1,
Basis of Presentation
, in these Notes to Condensed Consolidated Financial Statements.
|
Note 8 – Fair Value
The Company defines fair value as the price that would be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
Level 1
— Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2
— Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability.
Level 3
— Level 3 inputs are unobservable inputs for the asset or liability in which there is little, if any, market activity for the asset or liability at the measurement date.
The tables below, set forth by level, presents the Company’s financial assets and liabilities, excluding accrued interest components that were accounted for at fair value on a recurring basis as of
August 3, 2019
and
November 3, 2018
. The tables exclude cash on hand and assets and liabilities that are measured at historical cost or any basis other than fair value. As of
August 3, 2019
and
November 3, 2018
, the Company held
$250.7 million
and
$217.6 million
, respectively, of cash and held-to-maturity investments that were excluded from the tables below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 3, 2019
|
|
Fair Value measurement at
Reporting Date using:
|
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Total
|
Assets
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
Government and institutional money market funds
|
$
|
321,499
|
|
|
$
|
—
|
|
|
$
|
321,499
|
|
Corporate obligations (1)
|
—
|
|
|
39,968
|
|
|
39,968
|
|
Other assets:
|
|
|
|
|
|
Deferred compensation investments
|
46,888
|
|
|
—
|
|
|
46,888
|
|
Total assets measured at fair value
|
$
|
368,387
|
|
|
$
|
39,968
|
|
|
$
|
408,355
|
|
Liabilities
|
|
|
|
|
|
Forward foreign currency exchange contracts (2)
|
—
|
|
|
3,746
|
|
|
3,746
|
|
Interest rate derivatives
|
—
|
|
|
121,754
|
|
|
121,754
|
|
Total liabilities measured at fair value
|
$
|
—
|
|
|
$
|
125,500
|
|
|
$
|
125,500
|
|
|
|
(1)
|
The amortized cost of the Company’s investments classified as available-for-sale as of
August 3, 2019
was
$40.0 million
.
|
|
|
(2)
|
The Company has master netting arrangements by counterparty with respect to derivative contracts. See Note 9,
Derivatives,
in these Notes to Condensed Consolidated Financial Statements for more information related to the Company's master netting arrangements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
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 master netting arrangements by counterparty with respect to derivative contracts. See Note 9,
Derivatives,
in these Notes to Condensed 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 the interest rate derivatives is estimated using a discounted cash flow analysis based on the contractual terms of the derivative.
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.
Financial Instruments Not Recorded at Fair Value on a Recurring Basis
The table below presents the estimated fair value of certain financial instruments not recorded at fair value on a recurring basis. The carrying amounts of the term loans approximate fair value. The term loans are classified as Level 2 measurements according to the fair value hierarchy. The fair values of the senior unsecured notes are obtained from broker prices and are classified as Level 1 measurements according to the fair value hierarchy. See Note 10,
Debt,
in these Notes to Condensed Consolidated Financial Statements for further discussion related to outstanding debt.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 3, 2019
|
|
November 3, 2018
|
|
Principal Amount Outstanding
|
|
Fair Value
|
|
Principal Amount Outstanding
|
|
Fair Value
|
3-Year term loan, due March 2022
|
$
|
1,125,000
|
|
|
$
|
1,125,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
3-Year term loan, due March 2020
|
—
|
|
|
—
|
|
|
425,000
|
|
|
425,000
|
|
5-Year term loan, due March 2022
|
—
|
|
|
—
|
|
|
1,350,000
|
|
|
1,350,000
|
|
2.85% Senior unsecured notes, due March 2020
|
300,000
|
|
|
301,375
|
|
|
300,000
|
|
|
298,147
|
|
2.95% Senior unsecured notes, due January 2021
|
450,000
|
|
|
455,147
|
|
|
450,000
|
|
|
444,568
|
|
2.50% Senior unsecured notes, due December 2021
|
400,000
|
|
|
403,714
|
|
|
400,000
|
|
|
386,375
|
|
2.875% Senior unsecured notes, due June 2023
|
500,000
|
|
|
512,529
|
|
|
500,000
|
|
|
479,189
|
|
3.125% Senior unsecured notes, due December 2023
|
550,000
|
|
|
568,844
|
|
|
550,000
|
|
|
529,120
|
|
3.90% Senior unsecured notes, due December 2025
|
850,000
|
|
|
921,161
|
|
|
850,000
|
|
|
829,611
|
|
3.50% Senior unsecured notes, due December 2026
|
900,000
|
|
|
944,452
|
|
|
900,000
|
|
|
848,027
|
|
4.50% Senior unsecured notes, due December 2036
|
250,000
|
|
|
273,838
|
|
|
250,000
|
|
|
232,627
|
|
5.30% Senior unsecured notes, due December 2045
|
400,000
|
|
|
494,982
|
|
|
400,000
|
|
|
407,984
|
|
Total debt
|
$
|
5,725,000
|
|
|
$
|
6,001,042
|
|
|
$
|
6,375,000
|
|
|
$
|
6,230,648
|
|
Note 9 – Derivatives
Foreign Exchange Exposure Management
— The Company enters into forward foreign currency exchange contracts to offset certain operational and balance sheet exposures from the impact of changes in foreign currency exchange rates. Such exposures result from the portion of the Company’s operations, assets and liabilities that are denominated in currencies other than the U.S. dollar, primarily the Euro; other significant exposures include the Philippine Peso, the Japanese Yen and the British Pound. These foreign currency exchange contracts are entered into to support transactions made in the normal course of business, and accordingly, are not speculative in nature. The contracts are for periods consistent with the terms of the underlying transactions, generally
one year or less
. Hedges related to anticipated transactions are designated and documented at the inception of the respective hedges as cash flow hedges and are qualitatively evaluated for effectiveness quarterly. Derivative instruments are employed to eliminate or minimize certain foreign currency exposures that can be confidently identified and
quantified. As the terms of the contract and the underlying transaction are matched at inception, forward contract effectiveness is calculated by comparing the change in fair value of the contract to the change in the forward value of the anticipated transaction, with the gain or loss on the derivative reported as a component of accumulated OCI in shareholders’ equity and reclassified into earnings in the same period during which the hedged transaction affects earnings.
The total notional amounts of forward foreign currency derivative instruments designated as hedging instruments of cash flow hedges denominated in Euros, British Pounds, Philippine Pesos and Japanese Yen as of
August 3, 2019
and
November 3, 2018
was
$195.1 million
and
$194.4 million
, respectively. The fair values of forward foreign currency derivative instruments designated as hedging instruments in the Company’s condensed consolidated balance sheets as of
August 3, 2019
and
November 3, 2018
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value At
|
|
Balance Sheet Location
|
|
August 3, 2019
|
|
November 3, 2018
|
Forward foreign currency exchange contracts
|
Accrued liabilities
|
|
$
|
2,812
|
|
|
$
|
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
August 3, 2019
and
November 3, 2018
, the total notional amount of these undesignated hedges was
$70.6 million
and
$40.6 million
, respectively. The fair value of these hedging instruments in the Company’s condensed consolidated balance sheets was immaterial as of
August 3, 2019
and
November 3, 2018
.
All the Company’s derivative financial instruments are eligible for netting arrangements that allow the Company and its counterparties to net settle amounts owed to each other. Derivative assets and liabilities that can be net settled under these arrangements have been presented in the Company's condensed consolidated balance sheet on a net basis. As of
August 3, 2019
and
November 3, 2018
, 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 condensed consolidated balance sheet:
|
|
|
|
|
|
|
|
|
|
August 3, 2019
|
|
November 3, 2018
|
Gross amount of recognized liabilities
|
$
|
(5,866
|
)
|
|
$
|
(8,054
|
)
|
Gross amounts of recognized assets offset in the condensed consolidated balance sheet
|
2,120
|
|
|
904
|
|
Net liabilities presented in the condensed consolidated balance sheet
|
$
|
(3,746
|
)
|
|
$
|
(7,150
|
)
|
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. In the first quarter of fiscal 2019, the Company entered into an interest rate swap agreement which locked in the interest rate for up to
$1.0 billion
in future debt issuances. The interest rate swap agreement was designated and qualified as a cash flow hedge. The fair value of this hedge was
$121.8 million
as of
August 3, 2019
and is included within accrued liabilities in the Company's condensed consolidated balance sheets.
The market risk associated with the Company’s derivative instruments results from currency exchange rate or interest rate movements that are expected to offset the market risk of the underlying transactions, assets and liabilities being hedged. The counterparties to the agreements relating to the Company’s derivative instruments consist of a number of major international financial institutions with high credit ratings. Based on the credit ratings of the Company’s counterparties as of
August 3, 2019
and
November 3, 2018
, 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 condensed 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 condensed consolidated statement of income as the impact of the hedged transaction when the underlying contract matures and, for interest rate exposure derivatives, over the term of the corresponding debt instrument. Changes in the fair values of derivatives not qualifying for hedge accounting are reported in earnings as they occur.
For information on the unrealized holding gains (losses) on derivatives included in and reclassified out of accumulated other comprehensive income into the condensed consolidated statement of income related to forward foreign currency exchange contracts, see Note 4,
Accumulated Other Comprehensive Income (Loss),
in these Notes to Condensed Consolidated Financial Statements for further information.
Note 10 – Debt
Term Loan Agreement
On June 28, 2019, the Company entered into a term loan credit agreement (Term Loan Agreement) with the Company as the borrower and JPMorgan Chase Bank, N.A. as administrative agent and the other banks identified therein as lenders, for an unsecured term loan facility in the principal amount of
$1.25 billion
, maturing on March 10, 2022. Loans under the term loan facility bear interest, at the Company’s option, at either a rate equal to (a) the Adjusted LIBO Rate (as defined in the Term Loan Agreement) plus a margin based on the Company’s debt rating or (b) the Base Rate (defined as the highest of (i) the prime rate, (ii) the NYFRB Rate (as defined in the Term Loan Agreement) plus
.50%
, and (iii) one month Adjusted LIBO Rate plus
1.00%
) plus a margin based on the Company’s debt rating.
The Term Loan Agreement contains customary representations and warranties, affirmative and negative covenants and events of default applicable to the Company and its subsidiaries. The events of default include, among others, nonpayment of principal, interest, fees or other amounts, failure to perform certain covenants, cross-defaults to certain other indebtedness, insolvency or bankruptcy, customary ERISA defaults or the occurrence of a change of control. The negative covenants include limitations on liens, indebtedness of non-guarantor subsidiaries and mergers and other fundamental changes, among others. The Term Loan Agreement also requires the Company to maintain a consolidated leverage ratio of total consolidated funded debt to consolidated EBITDA (earnings before interest, taxes, depreciation, and amortization) for a trailing twelve-month period of not greater than
4.0
to 1.0. The covenant will be reduced to
3.5
to 1.0 beginning in fiscal year 2020, assuming the Company does not undertake any significant acquisitions, mergers, and other fundamental changes. Should such a change occur, the Company may be authorized to increase the covenant back to
4.0
to 1.0. As of August 3, 2019, the Company was compliant with these covenants.
The Company used the proceeds from the new term loan facility to satisfy the obligations under its then-outstanding
3
-year and
5
-year term loan facilities. The
3
-year unsecured term loan facility was scheduled to mature on March 10, 2020, and the
5
-year unsecured term loan facility was scheduled to mature on March 10, 2022. In addition, prior to the refinancing, the Company made additional principal payments on its then-outstanding term loans including
$350.0 million
paid in the first and second quarters of fiscal 2019 and
$75.0 million
paid in the third quarter of fiscal 2019 related to the former
3
-year term loan and
$100.0 million
paid in the third quarter of fiscal 2019 related to the
5
-year term loan. Following the refinancing, in the third quarter of fiscal 2019, the Company made additional principal payments on the term loan facility in the amount of
$125.0 million
. These amounts were not contractually due under the terms of the respective term loan agreements.
Revolving Credit Agreement
On June 28, 2019, the Company entered into a second amended and restated revolving credit agreement (Revolving Credit Agreement) with the Company as borrower and Bank of America, N.A. as administrative agent and the other banks identified therein as lenders, which further amended and restated its amended and restated revolving credit agreement dated as of September 23, 2016. The Revolving Credit Agreement provides for a
five
year unsecured revolving credit facility in an aggregate principal amount of up to
$1.25 billion
, expiring on June 28, 2024. The Revolving Credit Agreement is subject to
two
one
-year extension options at the request of the Company and with the consent of the lenders. 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 Revolving Credit Agreement (other than swing line loans) bear interest, at the Company's option, at either a rate equal to (a) the Eurocurrency Rate (as defined in the Revolving Credit Agreement) plus a margin based on the Company’s debt rating or (b) the Base Rate (defined as the highest of (i) the Federal Funds Rate (as defined in the Revolving Credit Agreement) plus
.50%
, (ii) Bank of America’s prime rate, and (iii) the Eurocurrency Rate plus
1.00%
) plus a margin based on the Company’s debt rating. The Revolving Credit Agreement includes a multicurrency borrowing feature for
certain specified foreign currencies. The Company will guarantee the obligations of each subsidiary that is named a designated borrower under the Revolving Credit Agreement.
The Revolving Credit Agreement contains the customary representations and warranties, and affirmative and negative covenants and events of default applicable to the Company and its subsidiaries as summarized above for the Term Loan Agreement.
In December 2018, the Company borrowed
$75.0 million
under its previously existing revolving credit facility and utilized the proceeds for the repayment of existing indebtedness and working capital requirements. The Company repaid the
$75.0 million
plus interest of
$0.2 million
in January 2019.
Note 11 – Inventories
Inventories at
August 3, 2019
and
November 3, 2018
were as follows:
|
|
|
|
|
|
|
|
|
|
August 3, 2019
|
|
November 3, 2018
|
Raw materials
|
$
|
36,966
|
|
|
$
|
30,511
|
|
Work in process
|
416,327
|
|
|
375,908
|
|
Finished goods
|
185,012
|
|
|
180,341
|
|
Total inventories
|
$
|
638,305
|
|
|
$
|
586,760
|
|
Note 12 – Income Taxes
The Tax Cuts and Jobs Act of 2017 (Tax Legislation), enacted in December 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 resulted in a blended statutory income tax rate for the Company of
23.4%
for fiscal 2018. For fiscal 2019, the Company’s U.S. statutory income tax rate was reduced to the statutory income tax rate of
21.0%
.
In fiscal 2018, the Company recorded a provisional tax benefit of
$637.0 million
for the re-measurement of deferred tax assets and liabilities based on the rates to which they are expected to reverse in the future, which is generally
21.0%
.
The Tax Legislation also implemented a territorial tax system. As part of transitioning to the territorial tax system, the Tax Legislation included a one-time transition tax based on the Company's total post-1986 undistributed foreign earnings and profits that were previously deferred from U.S. income tax. In fiscal 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. In the first quarter of fiscal 2019, the Company adjusted its provisional net charge by recording an additional tax benefit of
$7.5 million
for a change to its estimate for the transition tax due to the finalization of the aggregate foreign cash positions.
The Tax Legislation subjects U.S. corporations to tax on its global intangible low-taxed income (GILTI). Under U.S. GAAP, an accounting policy election can be made to either treat taxes due on the GILTI inclusion as a current period expense or to recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years. The Company elected the deferral method and recorded the corresponding GILTI deferred tax assets and liabilities on its consolidated balance sheet.
The Company completed its accounting for the income tax effects of the Tax Legislation during the first quarter of fiscal 2019, in accordance with the U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 118. As of
August 3, 2019
, the U.S. Treasury Department and the Internal Revenue Service (IRS) are still in the process of issuing various regulations relating to the Tax Legislation. Furthermore, there is a possibility that Congress could enact technical corrections to the Tax Legislation in the future.
Accordingly, future adjustments to the financial statements may be necessary depending upon the substance of the final regulations, when issued.
In October 2016, the FASB issued ASU 2016-16,
Income Taxes
(Topic 740) (ASU 2016-16). ASU 2016-16 requires 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. The Company adopted ASU 2016-16 in the first quarter of fiscal 2019 using the modified retrospective method with a cumulative-effect adjustment directly to retained earnings. The Company adopted the guidance effective as of November 4, 2018. The adoption of ASU 2016-16 resulted in a net cumulative-effect adjustment that resulted in an increase in retained earnings of
$331.0 million
, by recording new deferred tax assets from intra-entity transfers involving assets other than inventory, partially offset by a U.S. deferred tax liability related to GILTI. Adoption of the standard resulted in an increase in long-term deferred tax assets of
$1.7 billion
and an increase in long-term deferred tax liabilities of
$1.3 billion
.
The Company has numerous income tax audits ongoing at any time throughout the world, including an IRS audit for Linear’s pre-acquisition fiscal years 2015, 2016 and 2017, various U.S. state and local tax audits, and international audits including the transfer pricing audit in Ireland discussed below.
Except for the Linear pre-acquisition audit year, the Company’s U.S. federal tax returns prior to the fiscal year ended October 29, 2016 are no longer subject to examination.
The Company’s Ireland tax returns prior to the fiscal year ended November 2, 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
$47.8 million
(as of
August 3, 2019
), from the Irish Revenue Commissioners (Irish Revenue). 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 fiscal 2013 or any other periods. The Company intends to vigorously defend its originally filed tax return position and is currently preparing for 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 fiscal 2013, such assessment and any potential impact related to years subsequent to fiscal 2013 could have a material unfavorable impact on the Company's income tax expense and net earnings in future periods. Irish Revenue has also commenced a transfer pricing audit of the fiscal years ended November 1, 2014; October 31, 2015; October 29, 2016; and October 28, 2017.
Although the Company believes that 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, with the exception of the matter described above related to the assessment received from Irish Revenue.
Note 13 – New Accounting Pronouncements
Standards Implemented
Revenue Recognition
In May 2014, the FASB issued 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 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. The Company adopted ASU 2014-09 in the first quarter of fiscal 2019 using the full retrospective method and restated prior periods. As a result of the adoption of ASU 2014-09 the Company changed its accounting policy for revenue recognition. See Note 1,
Basis of Presentation,
and Note 2,
Revenue Recognition
, in these Notes to Condensed Consolidated Financial Statements for details of the impact of ASU 2014-09 on the Company's financial statements.
Income Taxes
In October 2016, the FASB issued ASU 2016-16,
Income Taxes (Topic 740)
(ASU 2016-16)
.
ASU 2016-16 requires 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. The Company adopted ASU 2016-16 in the first quarter of fiscal 2019 using the modified retrospective method with a cumulative-effect adjustment directly to retained earnings. The adoption of ASU 2016-16 resulted in a net cumulative-effect adjustment that resulted in an increase in retained earnings of
$331.0 million
, by recording new deferred tax assets from intra-entity transfers involving assets other than inventory, partially offset by a U.S. deferred tax liability related to GILTI. Adoption of the standard resulted in an increase in long-term deferred tax assets of
$1.7 billion
and an increase in long-term deferred tax liabilities of
$1.3 billion
.
Other
The following standards were adopted during the first quarter of fiscal 2019 and did not have a material impact on the Company's financial position and results of operations:
|
|
•
|
ASU 2017-01,
Business Combinations (Topic 805) Clarifying the Definition of a Business
.
|
|
|
•
|
ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
.
|
|
|
•
|
ASU 2016-01,
Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
.
|
|
|
•
|
ASU 2017-09,
Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting.
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ASU 2017-07,
Improving the Presentation of Net Period Pension Cost and Net Period Postretirement Benefit Cost.
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Standards to Be Implemented
Comprehensive Income
In February 2018, the FASB issued ASU 2018-02,
Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
(ASU 2018-02). ASU 2018-02 allows for reclassification of stranded tax effects resulting from the Tax Legislation from accumulated other comprehensive income to retained earnings. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. ASU 2018-02 is effective for the Company in the first quarter of the fiscal year ending October 31, 2020 (fiscal 2020). The Company is currently evaluating the adoption date and the impact, if any, adoption will have on its financial position and results of operations.
Leases
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
(ASU 2016-02). ASU 2016-02 requires a lessee to recognize most leases on the balance sheet but recognize expenses on the income statement in a manner similar to current practice. The update states that a lessee will recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying assets for the lease term. Leases will continue to be classified as either financing or operating, with classification affecting the recognition, measurement and presentation of expenses and cash flows arising from a lease. In January 2018, the FASB issued ASU 2018-01,
Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842
(ASU 2018-01). ASU 2018-01 permits an entity to elect an optional transition practical expedient to not evaluate land easements that exist or expired before the entity’s adoption of Topic 842 and that were not previously accounted for as leases under Topic 840. In July 2018, the FASB issued ASU 2018-11,
Leases – Targeted Improvements (Topic 842)
(ASU 2018-11), which provides for an additional transition method that allows companies to apply the new lease standard at the adoption date, eliminating the requirement to apply the standard to the earliest period presented in the financial statements.
ASU 2016-02, ASU 2018-01 and ASU 2018-11 are effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. ASU 2016-02 and ASU 2018-01 are effective for the Company in the first quarter of fiscal 2020. The Company is currently evaluating the impact adoption will have on its financial position and results of operations and expects that there will be an increase in assets and liabilities on the Consolidated Balance Sheets at adoption due to the recognition of right-of-use assets and related lease liabilities. At November 3, 2018, the Company was contractually obligated to make future payments of
$0.4 billion
under its operating lease obligations in existence as of that date, primarily related to long-term facility leases. The Company does not expect the adoption of ASU 2016-02, ASU 2018-01 and ASU 2018-11 to have a material impact on its results of operations.
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 the fiscal year ending October 30, 2021 (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.
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. In May 2019, the FASB issued ASU 2019-05,
Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief
(ASU 2019-05). ASU 2019-05 allows an entity to irrevocably elect the fair value option for certain financial instruments. Once elected, an entity would recognize the difference between the carrying amount and the fair value of the financial instrument as part of the cumulative effect adjustments associated with the adoption of ASU 2016-13. ASU 2016-13 and ASU 2019-05 are effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years. ASU 2016-13 and ASU 2019-05 are effective for the Company in the first quarter of fiscal 2021. The Company is currently evaluating the adoption date and the impact, if any, adoption will have on its financial position and results of operations.
Note 14 – Subsequent Events
On
August 20, 2019
, the Board of Directors of the Company declared a cash dividend of
$0.54
per outstanding share of common stock. The dividend will be paid on
September 11, 2019
to all shareholders of record at the close of business on
August 30, 2019
and is expected to total approximately
$199.5 million
.