XNAS:ADI Analog Devices Inc Quarterly Report 10-Q Filing - 8/4/2012

Effective Date 8/4/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
 
Form 10-Q
 
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 4, 2012
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission File No. 1-7819
 
Analog Devices, Inc.
(Exact name of registrant as specified in its charter) 
 
Massachusetts
 
04-2348234
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
One Technology Way, Norwood, MA
 
02062-9106
(Address of principal executive offices)
 
(Zip Code)
(781) 329-4700
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  þ    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  þ    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
þ
  
Accelerated filer
 
¨
 
 
 
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES ¨    NO  þ
As of August 4, 2012 there were 298,905,593 shares of common stock of the registrant, $0.16 2/3 par value per share, outstanding.
 




PART I - FINANCIAL INFORMATION
 
ITEM 1.
Financial Statements

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

 
Three Months Ended
 
August 4, 2012
 
July 30, 2011
Revenue
$
683,026

 
$
757,902

Cost of sales (1)
235,152

 
248,262

Gross margin
447,874

 
509,640

Operating expenses:
 
 
 
Research and development (1)
129,694

 
128,476

Selling, marketing, general and administrative (1)
99,873

 
102,323

Special charge
5,836

 

 
235,403

 
230,799

Operating income
212,471

 
278,841

Nonoperating (income) expense:
 
 
 
Interest expense
6,459

 
6,159

Interest income
(3,506
)
 
(2,395
)
Other, net
49

 
206

 
3,002

 
3,970

Income before income taxes
209,469

 
274,871

Provision for income taxes
39,701

 
54,936

Net income
$
169,768

 
$
219,935

Shares used to compute earnings per share – basic
298,445

 
299,616

Shares used to compute earnings per share – diluted
305,359

 
308,744

Basic earnings per share
$
0.57

 
$
0.73

Diluted earnings per share
$
0.56

 
$
0.71

Dividends declared and paid per share
$
0.30

 
$
0.25

(1) Includes stock-based compensation expense as follows:
 
 
 
Cost of sales
$
1,871

 
$
1,811

Research and development
$
5,999

 
$
5,877

Selling, marketing, general and administrative
$
5,921

 
$
5,622

See accompanying notes.

1



ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(thousands, except per share amounts)
 
 
Nine Months Ended
 
August 4, 2012
 
July 30, 2011
Revenue
$
2,006,178

 
$
2,277,186

Cost of sales (1)
708,459

 
751,159

Gross margin
1,297,719

 
1,526,027

Operating expenses:
 
 
 
Research and development (1)
381,609

 
381,681

Selling, marketing, general and administrative (1)
298,910

 
307,613

Special charge
8,431

 

 
688,950

 
689,294

Operating income from continuing operations
608,769

 
836,733

Nonoperating (income) expense:
 
 
 
Interest expense
20,031

 
13,067

Interest income
(10,821
)
 
(6,877
)
Other, net
(1,450
)
 
96

 
7,760

 
6,286

Income from continuing operations before income taxes
601,009

 
830,447

Provision for income taxes
128,960

 
153,080

Income from continuing operations, net of tax
472,049

 
677,367

Gain on sale of discontinued operations, net of tax

 
6,500

Net income
$
472,049

 
$
683,867

Shares used to compute earnings per share – basic
298,121

 
299,586

Shares used to compute earnings per share – diluted
305,604

 
309,070

Basic earnings per share from continuing operations
$
1.58

 
$
2.26

Basic earnings per share
$
1.58

 
$
2.28

Diluted earnings per share from continuing operations
$
1.54

 
$
2.19

Diluted earnings per share
$
1.54

 
$
2.21

Dividends declared and paid per share
$
0.85

 
$
0.69

(1) Includes stock-based compensation expense as follows:
 
 
 
Cost of sales
$
5,349

 
$
5,459

Research and development
$
17,046

 
$
17,256

Selling, marketing, general and administrative
$
16,828

 
$
16,091

See accompanying notes.

2



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

 
August 4, 2012
 
October 29, 2011
Assets
 
 
 
Cash and cash equivalents
$
462,149

 
$
1,405,100

Short-term investments
3,302,896

 
2,187,362

Accounts receivable, net
345,795

 
348,416

Inventory (1):
 
 
 
Raw materials
26,891

 
28,085

Work in process
184,326

 
170,398

Finished goods
100,862

 
96,598

 
312,079

 
295,081

Deferred tax assets
83,919

 
82,171

Prepaid income tax
9,386

 
22,002

Prepaid expenses and other current assets
45,061

 
46,216

Total current assets
4,561,285

 
4,386,348

Property, plant and equipment, at cost:
 
 
 
Land and buildings
442,871

 
430,453

Machinery and equipment
1,670,221

 
1,606,150

Office equipment
50,442

 
51,960

Leasehold improvements
47,930

 
48,338

 
2,211,464

 
2,136,901

Less accumulated depreciation and amortization
1,720,883

 
1,658,062

Net property, plant and equipment
490,581

 
478,839

Deferred compensation plan investments
27,799

 
26,410

Other investments
1,816

 
2,951

Goodwill
279,363

 
275,087

Intangible assets, net
28,827

 
12,200

Deferred tax assets
31,480

 
37,645

Other assets
35,471

 
58,155

Total other assets
404,756

 
412,448

 
$
5,456,622

 
$
5,277,635

 
(1)
Includes $2,361 and $2,431 related to stock-based compensation at August 4, 2012 and October 29, 2011, respectively.
See accompanying notes.


3



ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(thousands, except share amounts)
(continued)
 
August 4, 2012
 
October 29, 2011
Liabilities and Shareholders’ Equity
 
 
 
Accounts payable
$
113,391

 
$
113,056

Deferred income on shipments to distributors, net
246,674

 
233,249

Income taxes payable
6,249

 
6,584

Current portion of long-term debt
14,500

 
14,500

Accrued liabilities
127,728

 
157,616

Total current liabilities
508,542

 
525,005

Long-term debt
842,540

 
871,876

Deferred income taxes
1,524

 
1,260

Deferred compensation plan liability
27,799

 
26,428

Other non-current liabilities
47,611

 
57,653

Total non-current liabilities
919,474

 
957,217

Commitments and contingencies
 
 
 
Shareholders’ Equity
 
 
 
Preferred stock, $1.00 par value, 471,934 shares authorized, none outstanding

 

Common stock, $0.16 2/3 par value, 1,200,000,000 shares authorized, 298,905,593 shares issued and outstanding (297,960,718 on October 29, 2011)
49,819

 
49,661

Capital in excess of par value
312,487

 
289,587

Retained earnings
3,701,054

 
3,482,334

Accumulated other comprehensive loss
(34,754
)
 
(26,169
)
Total shareholders’ equity
4,028,606

 
3,795,413

 
$
5,456,622

 
$
5,277,635


See accompanying notes.
 



4



ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(thousands)
  
Nine Months Ended
 
August 4, 2012
 
July 30, 2011
Cash flows from operating activities:
 
 
 
Net income
$
472,049

 
$
683,867

Adjustments to reconcile net income to net cash provided by operations:
 
 
 
Depreciation
82,221

 
88,092

Amortization of intangibles
74

 
1,079

Stock-based compensation expense
39,223

 
38,806

Gain on sale of business

 
(6,500
)
Gain on sale of investments
(1,231
)
 

Excess tax benefit-stock options
(9,552
)
 
(37,296
)
Deferred income taxes
(4,105
)
 
(6,989
)
Non-cash portion of special charge
219

 

Other non-cash activity
(1,770
)
 
1,185

Changes in operating assets and liabilities
1,367

 
(91,875
)
Total adjustments
106,446

 
(13,498
)
Net cash provided by operating activities
578,495

 
670,369

Cash flows from investing activities:
 
 
 
Purchases of short-term available-for-sale investments
(6,282,724
)
 
(3,132,633
)
Maturities of short-term available-for-sale investments
4,829,822

 
2,334,311

Sales of short-term available-for-sale investments
337,905

 
259,385

Proceeds from the sale of investments
1,506

 

Proceeds related to sale of businesses

 
10,000

Additions to property, plant and equipment
(94,665
)
 
(96,665
)
Payments for acquisitions, net of cash acquired
(24,158
)
 
(13,988
)
Increase in other assets
(915
)
 
(6,683
)
Net cash used for investing activities
(1,233,229
)
 
(646,273
)
Cash flows from financing activities:
 
 
 
Proceeds from long-term debt

 
515,507

Early termination of swap agreements
18,520

 

Term loan repayments
(22,875
)
 
(24,767
)
Dividend payments to shareholders
(253,329
)
 
(206,802
)
Repurchase of common stock
(139,741
)
 
(247,440
)
Net proceeds from employee stock plans
110,728

 
189,239

Contingent consideration payment
(1,991
)
 

(Decrease) increase in other financing activities
(6,744
)
 
365

Excess tax benefit-stock options
9,552

 
37,296

Net cash (used for) provided by financing activities
(285,880
)
 
263,398

Effect of exchange rate changes on cash
(2,337
)
 
327

Net (decrease) increase in cash and cash equivalents
(942,951
)
 
287,821

Cash and cash equivalents at beginning of period
1,405,100

 
1,070,000

Cash and cash equivalents at end of period
$
462,149

 
$
1,357,821

See accompanying notes.

5



ANALOG DEVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED AUGUST 4, 2012
(all tabular amounts in thousands except per share amounts and percentages)

Note 1 – Basis of Presentation
In the opinion of management, the information furnished in the accompanying condensed consolidated financial statements reflects all normal recurring adjustments that are necessary to fairly state the results for these interim periods and should be read in conjunction with Analog Devices, Inc.’s (the Company) Annual Report on Form 10-K for the fiscal year ended October 29, 2011 and related notes. The results of operations for the interim periods shown in this report are not necessarily indicative of the results that may be expected for the fiscal year ending November 3, 2012 or any future period.
The Company sold its baseband chipset business and related support operations, or Baseband Chipset Business, to MediaTek Inc., during the first quarter of fiscal 2008. The Company has reflected the financial results of this business as discontinued operations in the condensed consolidated statements of income for all periods presented.
Certain amounts reported in previous years have been reclassified to conform to the fiscal 2012 presentation. Such reclassified amounts are immaterial. The Company has a 52-53 week fiscal year that ends on the Saturday closest to the last day in October. Fiscal 2012 is a 53-week fiscal year and fiscal 2011 was a 52-week fiscal year. The additional week in fiscal 2012 was included in the first quarter ended February 4, 2012. Therefore, the first nine months of fiscal 2012 included an additional week of operations as compared to the first nine months of fiscal 2011.

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

The deferred costs of sales to distributors have historically had very little risk of impairment due to the margins the

6



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 continuous contact with the distributors to ensure reserves are established for all known material issues.
As of August 4, 2012 and October 29, 2011, the Company had gross deferred revenue of $312.0 million and $309.6 million, respectively, and gross deferred cost of sales of $65.3 million and $76.4 million, respectively. Deferred income on shipments to distributors increased in the first nine months of fiscal 2012 as a result of the Company’s shipments to its distributors exceeding the distributors’ sales to their customers during the same time period and a mix shift in favor of higher margin products in the channel.
Shipping costs are charged to cost of sales as incurred.
The Company generally offers a 12-month warranty for its products. The Company’s warranty policy provides for replacement of the defective product. Specific accruals are recorded for known product warranty issues. Product warranty expenses during the three- and nine-month periods ended August 4, 2012 and July 30, 2011 were not material.

Note 3 – Stock-Based Compensation

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

Grant-Date Fair Value – The Company uses the Black-Scholes valuation model to calculate the grant-date fair value of stock option awards. The grant-date fair value of restricted stock units represents the value of the Company’s common stock on the date of grant, reduced by the present value of dividends expected to be paid on the Company’s common stock prior to vesting.
Information pertaining to the Company’s stock option awards and the related estimated weighted-average assumptions to calculate the fair value of stock options granted during the three- and nine-month periods ended August 4, 2012 and July 30, 2011 are as follows:
 
  
Three Months Ended
 
Nine Months Ended
Stock Options
August 4, 2012
 
July 30, 2011
 
August 4, 2012
 
July 30, 2011
Options granted (in thousands)
36

 
20

 
2,263

 
1,980

Weighted-average exercise price

$36.24

 

$38.50

 

$39.65

 

$37.61

Weighted-average grant-date fair value

$6.73

 

$7.91

 

$7.49

 

$8.62

Assumptions:
 
 
 
 
 
 
 
Weighted-average expected volatility
30.2
%
 
28.2
%
 
28.6
%
 
29.2
%
Weighted-average expected term (in years)
5.3

 
5.3

 
5.3

 
5.3

Weighted-average risk-free interest rate
0.6
%
 
1.7
%
 
1.1
%
 
2.1
%
Weighted-average expected dividend yield
3.3
%
 
2.6
%
 
3.0
%
 
2.3
%
Expected volatility — The Company is responsible for estimating volatility and has considered a number of factors, including third-party estimates, when estimating volatility. 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

7



estimate of the expected term of a new option, and that generally its employees exhibit similar exercise behavior.
Risk-free interest rate — The yield on zero-coupon U.S. Treasury securities for a period that is commensurate with the expected term assumption is used as the risk-free interest rate.
Expected dividend yield — Expected dividend yield is calculated by annualizing the cash dividend declared by the Company’s Board of Directors for the current quarter and dividing that result by the closing stock price on the date of grant. Until such time as the Company’s Board of Directors declares a cash dividend for an amount that is different from the current quarter’s cash dividend, the current dividend will be used in deriving this assumption. Cash dividends are not paid on options, restricted stock or restricted stock units.
Stock-Based Compensation Expense
The amount of stock-based compensation expense recognized during a period is based on the value of the awards that are ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term “forfeitures” is distinct from “cancellations” or “expirations” and represents only the unvested portion of the surrendered stock-based award. Based on an analysis of its historical forfeitures, the Company has applied an annual forfeiture rate of 4.4% to all unvested stock-based awards as of August 4, 2012. The rate of 4.4% represents the portion that is expected to be forfeited each year over the vesting period. This analysis will be re-evaluated quarterly and the forfeiture rate will be adjusted as necessary. Ultimately, the actual expense recognized over the vesting period will only be for those options that vest.
Additional paid-in-capital (APIC) Pool
The APIC pool represents the excess tax benefits related to share-based compensation that are available to absorb future tax deficiencies. If the amount of future tax deficiencies is greater than the available APIC pool, the Company records the excess as income tax expense in its condensed consolidated statements of income. During the three- and nine-month periods ended July 30, 2011, the Company had a sufficient APIC pool to provide for any tax deficiencies recorded and as a result, these deficiencies did not affect its results of operations. During the three-month period ended February 4, 2012, the Company recognized $1.8 million of income tax expense resulting from tax shortfalls related to share-based compensation in its condensed consolidated statement of income. During the three-month periods ended May 5, 2012 and August 4, 2012, the Company recorded excess tax benefits of $0.3 million and $3.9 million, respectively. The Company applied these excess tax benefits to the income tax expense previously recorded during the three-month period ended February 4, 2012, resulting in no income tax expense related to share-based compensation for the nine month period ended August 4, 2012.
Stock-Based Compensation Activity
A summary of the activity under the Company’s stock option plans as of August 4, 2012 and changes during the three- and nine-month periods then ended is presented below:
 
Activity during the Three Months Ended August 4, 2012
Options
Outstanding
(in thousands)
 
Weighted-
Average Exercise
Price Per Share
 
Weighted-
Average
Remaining
Contractual
Term in Years
 
Aggregate
Intrinsic
Value
Options outstanding May 5, 2012
30,438

 

$30.88

 
 
 
 
Options granted
36

 

$36.24

 
 
 
 
Options exercised
(1,023
)
 

$22.95

 
 
 
 
Options forfeited
(70
)
 

$28.49

 
 
 
 
Options expired
(48
)
 

$36.45

 
 
 
 
Options outstanding at August 4, 2012
29,333

 

$31.16

 
4.7

 
$
262,212

Options exercisable at August 4, 2012
18,019

 

$31.52

 
3.7

 
$
157,897

Options vested or expected to vest at August 4, 2012 (1)
28,816

 

$31.09

 
4.6

 
$
259,656

 
(1)
In addition to the vested options, the Company expects a portion of the unvested options to vest at some point in the future. Options expected to vest is calculated by applying an estimated forfeiture rate to the unvested options.

8



Activity during the Nine Months Ended August 4, 2012
Options
Outstanding
(in thousands)
 
Weighted-
Average
Exercise Price
Per Share
Options outstanding October 29, 2011
34,116

 

$30.27

Options granted
2,263

 

$39.65

Options exercised
(4,553
)
 

$24.43

Options forfeited
(358
)
 

$27.82

Options expired
(2,135
)
 

$40.94

Options outstanding at August 4, 2012
29,333

 

$31.16

During the three and nine months ended August 4, 2012, the total intrinsic value of options exercised (i.e. the difference between the market price at exercise and the price paid by the employee to exercise the options) was $15.6 million and $64.9 million, respectively, and the total amount of proceeds received by the Company from exercise of these options was $23.5 million and $111.3 million, respectively. Proceeds from stock option exercises pursuant to employee stock plans in the Company’s statement of cash flows during the nine months ended August 4, 2012 of $110.7 million are net of the value of shares surrendered by employees in certain limited circumstances to satisfy the exercise price of options and employee tax obligations upon vesting of restricted stock units and in connection with the exercise of stock options granted to the Company’s employees under the Company’s equity compensation plans. The withholding amount is based on the Company’s minimum statutory withholding requirement.
During the three and nine months ended July 30, 2011, 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 $18.9 million and $88.6 million, respectively, and the total amount of proceeds received by the Company from exercise of these options was $41.2 million and $189.4 million, respectively. Proceeds from stock option exercises pursuant to employee stock plans in the Company’s statement of cash flows during the nine months ended July 30, 2011 of $189.2 million are net of the value of shares surrendered by employees in certain limited circumstances to satisfy the exercise price of options and employee tax obligations upon vesting of restricted stock units and in connection with the exercise of stock options granted to the Company’s employees under the Company’s equity compensation plans. The withholding amount is based on the Company’s minimum statutory withholding requirement.
A summary of the Company’s restricted stock unit award activity as of August 4, 2012 and changes during the three- and nine-month periods then ended is presented below:
 
Activity during the Three Months Ended August 4, 2012
Restricted
Stock Units
Outstanding
(in thousands)
 
Weighted-
Average Grant-
Date Fair Value
Per Share
Restricted stock units outstanding at May 5, 2012
2,830

 

$32.71

Units granted
39

 

$34.10

Restrictions lapsed
(16
)
 

$27.24

Forfeited
(16
)
 

$32.65

Restricted stock units outstanding at August 4, 2012
2,837

 

$32.76

 
Activity during the Nine Months Ended August 4, 2012
Restricted
Stock Units
Outstanding
(in thousands)
 
Weighted-
Average Grant-
Date Fair Value
Per Share
Restricted stock units outstanding at October 29, 2011
2,088

 

$31.10

Units granted
882

 

$36.10

Restrictions lapsed
(63
)
 

$27.57

Forfeited
(70
)
 

$29.89

Restricted stock units outstanding at August 4, 2012
2,837

 

$32.76


As of August 4, 2012, there was $94.8 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 1.4 years. The total grant-date fair value of shares that vested during the three and nine months ended August 4, 2012

9



was approximately $0.6 million and $27.4 million, respectively. The total grant-date fair value of shares that vested during the three and nine months ended July 30, 2011 was approximately $0.4 million and $27.4 million, respectively.

Note 4 – Comprehensive Income
Components of comprehensive income include net income and certain transactions that have generally been reported in the consolidated statement of shareholders’ equity and consist of the following:
 
 
Three Months Ended
 
August 4, 2012
 
July 30, 2011
Net income
$
169,768

 
$
219,935

Foreign currency translation adjustments
(2,045
)
 
1,455

Change in unrealized holding gains (losses) (net of taxes of $319 and $17, respectively) on securities classified as short-term investments
1,334

 
(113
)
Change in unrealized holding losses (net of taxes of $0 and $62, respectively) on securities classified as other investments

 
(116
)
Change in unrealized losses (net of taxes of $344 and $783, respectively) on derivative instruments designated as cash flow hedges
(2,062
)
 
(5,155
)
Pension plans
 
 
 
Transition obligation

 
(2
)
Net actuarial gain
1,240

 
980

Other comprehensive loss
(1,533
)
 
(2,951
)
Comprehensive income
$
168,235

 
$
216,984

 
Nine Months Ended
 
August 4, 2012
 
July 30, 2011
Income from continuing operations, net of tax
$
472,049

 
$
677,367

Foreign currency translation adjustments
(5,686
)
 
7,614

Change in unrealized holding gains (net of taxes of $90 and $1, respectively) on securities classified as short-term investments
447

 
11

Change in unrealized holding (losses) gains (net of taxes of $300 and $1, respectively) on securities classified as other investments
(558
)
 
1

Change in unrealized losses (net of taxes of $757 and $334, respectively) on derivative instruments designated as cash flow hedges
(5,168
)
 
(2,512
)
Pension plans
 
 
 
Transition obligation
(1
)
 
(4
)
Net actuarial gain (loss)
2,381

 
(1,175
)
Other comprehensive (loss) gain
(8,585
)
 
3,935

Comprehensive income from continuing operations
463,464

 
681,302

Gain on sale of discontinued operations, net of tax

 
6,500

Comprehensive income
$
463,464

 
$
687,802

The components of accumulated other comprehensive loss, net of tax, at August 4, 2012 and October 29, 2011 consisted of the following: 

10



 
August 4, 2012
 
October 29, 2011
Foreign currency translation adjustment
$
(7,724
)
 
$
(2,038
)
Unrealized gains on available-for-sale securities
346

 
695

Unrealized losses on available-for-sale securities
(403
)
 
(641
)
Unrealized (losses) gains on derivative instruments
(3,481
)
 
1,687

Pension plans

 

Transition obligation
(118
)
 
(117
)
Net actuarial loss
(23,374
)
 
(25,755
)
Total accumulated other comprehensive loss
$
(34,754
)
 
$
(26,169
)
The aggregate fair value of investments with unrealized losses as of August 4, 2012 and October 29, 2011 was $1,357.5 million and $1,899.4 million, respectively. These unrealized losses were primarily related to commercial paper that earns lower interest rates than current market rates. None of these investments have been in a loss position for more than twelve months.
Unrealized gains and losses on available-for-sale securities classified as short-term investments at August 4, 2012 and October 29, 2011 are as follows:
 
 
August 4, 2012
 
October 29, 2011
Unrealized gains on securities classified as short-term investments
$
450

 
$
22

Unrealized losses on securities classified as short-term investments
(491
)
 
(600
)
Net unrealized losses on securities classified as short-term investments
$
(41
)
 
$
(578
)
Realized gains or losses on investments are determined based on the specific identification basis and are recognized in nonoperating (income) expense. Gross realized gains of approximately $1.3 million and gross realized losses of approximately $0.1 million on sales of available-for-sale investments were recognized in the nine-month period ended August 4, 2012. There were no material net realized gains or losses from the sales of available-for-sale investments during any other of the fiscal periods presented.

Note 5 – Earnings Per Share
Basic earnings per share is computed based only on the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect of potential future issuances of common stock relating to stock option programs and other potentially dilutive securities using the treasury stock method. In calculating diluted earnings per share, the dilutive effect of stock options is computed using the average market price for the respective period. In addition, the assumed proceeds under the treasury stock method include the average unrecognized compensation expense of stock options that are in-the-money and restricted stock units. This results in the “assumed” buyback of additional shares, thereby reducing the dilutive impact of in-the-money stock options. Potential shares related to certain of the Company’s outstanding stock options were excluded because they were anti-dilutive. Those potential shares, determined based on the weighted average exercise prices during the respective years, related to the Company’s outstanding stock options could be dilutive in the future.
 
 
Three Months Ended
 
August 4, 2012
 
July 30, 2011
Net Income
$
169,768

 
$
219,935

Basic shares:
 
 
 
Weighted-average shares outstanding
298,445

 
299,616

Earnings per share Basic:
$
0.57

 
$
0.73

Diluted shares:
 
 
 
Weighted-average shares outstanding
298,445

 
299,616

Assumed exercise of common stock equivalents
6,914

 
9,128

Weighted-average common and common equivalent shares
305,359

 
308,744

Earnings per share Diluted:
$
0.56

 
$
0.71

Weighted average anti-dilutive shares related to:
 
 
 
Outstanding stock options
8,829

 
4,820


11




 
Nine Months Ended
 
August 4, 2012
 
July 30, 2011
Income from continuing operations, net of tax
$
472,049

 
$
677,367

Gain on sale of discontinued operations, net of tax

 
6,500

Net income
$
472,049

 
$
683,867

Basic shares:
 
 
 
Weighted-average shares outstanding
298,121

 
299,586

Earnings per share-basic:
 
 
 
Income from continuing operations, net of tax
$
1.58

 
$
2.26

Gain on sale of discontinued operations, net of tax

 
0.02

Net income
$
1.58

 
$
2.28

Diluted shares:
 
 
 
Weighted-average shares outstanding
298,121

 
299,586

Assumed exercise of common stock equivalents
7,483

 
9,484

Weighted-average common and common equivalent shares
305,604

 
309,070

Earnings per share-diluted:
 
 
 
Income from continuing operations, net of tax
$
1.54

 
$
2.19

Gain on sale of discontinued operations, net of tax

 
0.02

Net income
$
1.54

 
$
2.21

Weighted average anti-dilutive shares related to:
 
 
 
Outstanding stock options
6,565

 
5,942


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 and better alignment of expenses with revenues. As a result of these assessments, the Company has undertaken various restructuring actions over the past several years. These actions are described below.
The following tables display the special charges taken for ongoing actions and a roll-forward from October 29, 2011 to August 4, 2012 of the employee separation and exit cost accruals established related to these actions.
 
 
Reduction of Operating Costs
Statement of Income
2008
 
2009
 
2010
 
2011
 
2012
Workforce reductions
$
1,627

 
$
26,583

 
$
10,908

 
$
2,239

 
$
7,966

Facility closure costs

 
2,411

 

 

 
186

Non-cash impairment charge

 
839

 
487

 

 
219

Other items

 
500

 
24

 

 
60

Total Charges
$
1,627

 
$
30,333

 
$
11,419

 
$
2,239

 
$
8,431

 

12



Accrued Restructuring
Reduction of Operating Costs
Balance at October 29, 2011
$
3,876

First quarter fiscal 2012 special charges
2,595

Severance payments
(1,359
)
Balance at February 4, 2012
$
5,112

Severance payments
(2,760
)
Balance at May 5, 2012
$
2,352

Third quarter fiscal 2012 special charges
5,836

Severance payments
(3,043
)
Facility closure costs
(128
)
Non-cash impairment charge
(219
)
Effect of foreign currency on accrual
3

Balance at August 4, 2012
$
4,801

Reduction of Operating Costs
During fiscal 2008 through fiscal 2010, the Company recorded special charges of approximately $43.3 million. These special charges included: $39.1 million for severance and fringe benefit costs in accordance with its ongoing benefit plan or statutory requirements at foreign locations for 245 manufacturing employees and 470 engineering and selling, marketing, general and administrative (SMG&A) employees; $2.1 million for lease obligation costs for facilities that the Company ceased using during the first quarter of fiscal 2009; $0.8 million for the write-off of property, plant and equipment; $0.5 million for contract termination costs and $0.3 million for clean-up and closure costs that were expensed as incurred; and $0.5 million related to the impairment of intellectual property. The Company terminated the employment of all employees associated with these actions.
During fiscal 2011, the Company recorded a special charge of approximately $2.2 million for severance and fringe benefit costs in accordance with its ongoing benefit plan or statutory requirements at foreign locations for 25 engineering and SMG&A employees. As of August 4, 2012, the Company employed 2 of the 25 employees included in this cost reduction action. These employees must continue to be employed by the Company until their employment is involuntarily terminated in order to receive the severance benefit.
During the first quarter of fiscal 2012, the Company recorded a special charge of approximately $2.6 million. The special charge included $2.5 million for severance and fringe benefit costs in accordance with its ongoing benefit plan or statutory requirements at foreign locations for 34 manufacturing, engineering and SMG&A employees and $0.1 million for contract termination costs. The Company terminated the employment of all employees associated with these actions and is paying amounts owed to them as income continuance.
During the third quarter of fiscal 2012, the Company recorded a special charge of approximately $5.8 million. The special charge included $5.4 million for severance and fringe benefits costs in accordance with its ongoing benefit plan or statutory requirements at foreign locations for 61 manufacturing, engineering and SMG&A employees; $0.2 million for lease obligation costs for facilities that the Company ceased using during the third quarter of fiscal 2012 and $0.2 million for the write-off of property, plant and equipment. As of August 4, 2012, the Company employed 25 of the 61 employees included in this cost reduction action. These employees must continue to be employed by the Company until their employment is involuntarily terminated in order to receive the severance benefit.

Note 7 – Segment Information
The Company operates and tracks its results in one reportable segment based on the aggregation of five operating segments. The Company designs, develops, manufactures and markets a broad range of integrated circuits. The Chief Executive Officer has been identified as the Chief Operating Decision Maker.
Revenue Trends by End Market
The following table summarizes revenue by end market. The categorization of revenue by end market is determined using a variety of data points including the technical characteristics of the product, the “sold to” customer information, the “ship to” customer information and the end customer product or application into which the Company’s product will be incorporated. As data systems for capturing and tracking this data evolve and improve, the categorization of products by end market can vary

13



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
 
Three Months Ended
 
August 4, 2012
 
July 30, 2011
 
Revenue
 
% of
Revenue
 
Y/Y%
 
Revenue
 
% of
Revenue*
Industrial
$
322,295

 
47
%
 
(12
)%
 
$
367,511

 
48
%
Automotive
114,655

 
17
%
 
12
 %
 
102,160

 
13
%
Consumer
108,905

 
16
%
 
(19
)%
 
134,771

 
18
%
Communications
137,171

 
20
%
 
(11
)%
 
153,460

 
20
%
Total revenue
$
683,026

 
100
%
 
(10
)%
 
$
757,902

 
100
%
* The sum of the individual percentages does not equal the total due to rounding.
 
Nine Months Ended
 
Nine Months Ended
 
August 4, 2012
 
July 30, 2011
 
Revenue
 
% of
Revenue*
 
Y/Y%
 
Revenue
 
% of
Revenue*
Industrial
$
935,054

 
47
%
 
(15
)%
 
$
1,094,316

 
48
%
Automotive
353,232

 
18
%
 
16
 %
 
304,620

 
13
%
Consumer
333,049

 
17
%
 
(20
)%
 
415,056

 
18
%
Communications
384,843

 
19
%
 
(17
)%
 
463,194

 
20
%
Total revenue
$
2,006,178

 
100
%
 
(12
)%
 
$
2,277,186

 
100
%
* The sum of the individual percentages does not equal the total due to rounding.
 
Revenue Trends by Product Type
The following table summarizes revenue by product categories. The categorization of the Company’s products into broad categories is based on the characteristics of the individual products, the specification of the products and in some cases the specific uses that certain products have within applications. The categorization of products into categories is therefore subject to judgment in some cases and can vary over time. In instances where products move between product categories, the Company reclassifies the amounts in the product categories for all prior periods. Such reclassifications typically do not materially change the sizing of, or the underlying trends of results within, each product category.
 
Three Months Ended
 
Three Months Ended
 
August 4, 2012
 
July 30, 2011
 
Revenue
 
% of
Revenue*
 
Y/Y%
 
Revenue
 
% of
Revenue*
Converters
$
299,594

 
44
%
 
(11
)%
 
$
337,239

 
44
%
Amplifiers / Radio frequency
180,939

 
26
%
 
(8
)%
 
197,447

 
26
%
Other analog
98,269

 
14
%
 
(8
)%
 
106,702

 
14
%
Subtotal analog signal processing
578,802

 
85
%
 
(10
)%
 
641,388

 
85
%
Power management & reference
45,401

 
7
%
 
(17
)%
 
54,957

 
7
%
Total analog products
$
624,203

 
91
%
 
(10
)%
 
$
696,345

 
92
%
Digital signal processing
58,823

 
9
%
 
(4
)%
 
61,557

 
8
%
Total revenue
$
683,026

 
100
%
 
(10
)%
 
$
757,902

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


14



 
Nine Months Ended
 
Nine Months Ended
 
August 4, 2012
 
July 30, 2011
 
Revenue
 
% of
Revenue
 
Y/Y%
 
Revenue
 
% of
Revenue*
Converters
$
884,771

 
44
%
 
(13
)%
 
$
1,020,194

 
45
%
Amplifiers / Radio frequency
523,208

 
26
%
 
(14
)%
 
605,593

 
27
%
Other analog
285,293

 
14
%
 
(8
)%
 
309,146

 
14
%
Subtotal analog signal processing
1,693,272

 
84
%
 
(12
)%
 
1,934,933

 
85
%
Power management & reference
136,326

 
7
%
 
(17
)%
 
164,442

 
7
%
Total analog products
$
1,829,598

 
91
%
 
(13
)%
 
$
2,099,375

 
92
%
Digital signal processing
176,580

 
9
%
 
(1
)%
 
177,811

 
8
%
Total revenue
$
2,006,178

 
100
%
 
(12
)%
 
$
2,277,186

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

Revenue Trends by Geographic Region
During the second quarter of fiscal 2012, the Company revised its method for classifying revenue by geographic region to more accurately reflect the primary location of our customers’ design activity for our products. Prior periods have been reclassified to align with this definition. In general, the prior classification method reflected the customers’ manufacturing location or the distributors’ stocking territory. No changes have been made to the Company’s revenue recognition policy. Revenue by geographic region for the three- and nine-month periods ended August 4, 2012 and July 30, 2011 was as follows:
 
 
Three Months Ended
 
Nine Months Ended
Region
August 4, 2012
 
July 30, 2011
 
August 4, 2012
 
July 30, 2011
United States
$
202,080

 
$
218,447

 
$
590,155

 
$
659,094

Rest of North and South America
25,268

 
33,816

 
87,533

 
112,032

Europe
216,809

 
245,917

 
640,102

 
738,718

Japan
87,169

 
96,730

 
254,195

 
292,010

China
89,616

 
98,865

 
254,597

 
282,993

Rest of Asia
62,084

 
64,127

 
179,596

 
192,339

Total revenue
$
683,026

 
$
757,902

 
$
2,006,178

 
$
2,277,186

In the three- and nine-month periods ended August 4, 2012 and July 30, 2011, 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 Taiwan and South Korea.

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

15



for the asset or liability at the measurement date.
The tables below set forth by level the Company’s financial assets and liabilities, excluding accrued interest components that were accounted for at fair value on a recurring basis as of August 4, 2012 and October 29, 2011. The tables exclude cash on hand and assets and liabilities that are measured at historical cost or any basis other than fair value. As of August 4, 2012 and October 29, 2011, the Company held $154.5 million and $31.6 million, respectively, of cash and held-to-maturity investments that were excluded from the tables below.
 
August 4, 2012
 
Fair Value measurement at
Reporting Date using:
 
 
 
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Other
Unobservable
Inputs
(Level 3)
 
Total
Assets
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
Institutional money market funds
$
110,313

 
$

 
$

 
$
110,313

Corporate obligations (1)

 
310,329

 

 
310,329

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

 
2,745,579

 

 
2,745,579

Floating rate notes, issued at par

 
210,068

 

 
210,068

Floating rate notes (1)

 
167,773

 

 
167,773

Securities with greater than one year to maturity:
 
 
 
 
 
 
 
Floating rate notes, issued at par
 
 
50,002

 
 
 
50,002

Floating rate notes (1)

 
16,522

 

 
16,522

Other assets:
 
 
 
 
 
 
 
Deferred compensation investments
27,850

 

 

 
27,850

Total assets measured at fair value
$
138,163

 
$
3,500,273

 
$

 
$
3,638,436

Liabilities
 
 
 
 
 
 
 
Forward foreign currency exchange contracts (2)
$

 
$
4,031

 
$

 
$
4,031

Contingent consideration

 

 
12,316

 
12,316

Total liabilities measured at fair value
$

 
$
4,031

 
$
12,316

 
$
16,347

 
(1)
The amortized cost of the Company’s investments classified as available-for-sale as of August 4, 2012 was $3,242.5 million.
(2)
The Company has a master netting arrangement by counterparty with respect to derivative contracts. As of August 4, 2012, contracts in an asset position of $1.1 million were netted against contracts in a liability position in the condensed consolidated balance sheet.

16



 
October 29, 2011
 
Fair Value measurement at
Reporting Date using:
 
 
 
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Other
Unobservable
Inputs
(Level 3)
 
Total
Assets
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
Institutional money market funds
$
1,278,121

 
$

 
$

 
$
1,278,121

Corporate obligations (1)

 
95,948

 

 
95,948

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

 
2,169,078

 

 
2,169,078

Floating rate notes (1)

 
17,704

 

 
17,704

Other assets:
 
 
 
 
 
 
 
Forward foreign currency exchange contracts (2)

 
2,472

 

 
2,472

Deferred compensation investments
26,410

 

 

 
26,410

Other investments
1,135

 

 

 
1,135

Interest rate swap agreements

 
22,187

 

 
22,187

Total assets measured at fair value
$
1,305,666

 
$
2,307,389

 
$

 
$
3,613,055

Liabilities
 
 
 
 
 
 
 
$375 million aggregate principal 5.0% debt (3)
$

 
$
396,337

 
$

 
$
396,337

Contingent consideration

 

 
13,973

 
13,973

Total liabilities measured at fair value
$

 
$
396,337

 
$
13,973

 
$
410,310

 
(1)
The amortized cost of the Company’s investments classified as available-for-sale as of October 29, 2011 was $2,284.9 million.
(2)
The Company has a master netting arrangement by counterparty with respect to derivative contracts. As of October 29, 2011, contracts in a liability position of $0.8 million were netted against contracts in an asset position in the condensed consolidated balance sheet.
(3)
Equal to the accreted notional value of the debt plus the fair value of the interest rate component of the long-term debt. The fair value of the long-term debt as of October 29, 2011 was $413.4 million, which is classified as a level 1 measurement according to the fair value hierarchy.
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
Cash equivalents and short-term investments — These investments are adjusted to fair value based on quoted market prices or are determined using a yield curve model based on current market rates.
Deferred compensation plan investments and other investments — The fair value of these mutual fund, money market fund and equity investments are based on quoted market prices.
Long-term debt — The fair value of long-term debt is based on quotes received from third-party banks.
Interest rate swap agreements — The fair value of interest rate swap agreements is based on quotes received from third-party banks. These values represent the estimated amount the Company would receive or pay to terminate the agreements taking into consideration current interest rates as well as the creditworthiness of the counterparty.
Forward foreign currency exchange contracts — The estimated fair value of forward foreign currency exchange

17



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.

Contingent consideration — The fair value of the contingent consideration was estimated utilizing the income approach and is based upon significant inputs not observable in the market. The income approach is based on two steps. The first step involves a projection of the cash flows which is based on the Company’s estimates of the timing and probability of achieving the defined milestones. The second step involves converting the cash flows into a present value equivalent through discounting. The discount rate reflects the Baa costs of debt plus the relevant risk associated with the asset and the time value of money.
The fair value measurement of the contingent consideration encompasses the following significant unobservable inputs:
 
 
 
Unobservable Inputs
Range
Estimated contingent consideration payments
$13,000
Discount rate
7% - 10%
Timing of cash flows
1 - 16 months
Probability of achievement
100%
Changes in the fair value of the contingent consideration subsequent to the acquisition date that are primarily driven by assumptions pertaining to the achievement of the defined milestones will be recognized in operating income in the period of the estimated fair value change. Significant increases or decreases in any of the inputs in isolation could result in a fluctuation in the fair value measurement.
The following table summarizes the change in the fair value of the contingent consideration measured using significant unobservable inputs (Level 3) as of October 29, 2011 and August 4, 2012:
 
 
Contingent
Consideration
Balance as of October 30, 2010
$

Contingent consideration liability recorded
13,790

Fair value adjustment (1)
183

Balance as of October 29, 2011
$
13,973

Payment made (2)
(2,000
)
Fair value adjustment (1)
343

Balance as of August 4, 2012
$
12,316

 
(1)
Recorded in research and development expense in the condensed consolidated statements of income.
(2)
The payment is reflected in the statements of cash flows as cash used in financing activities related to the liability recognized at fair value as of the acquisition date and as cash provided by operating activities related to the fair value adjustments previously recognized in earnings.
Financial Instruments Not Recorded at Fair Value on a Recurring Basis
On June 30, 2009, the Company issued $375.0 million aggregate principal amount of 5.0% senior unsecured notes due July 1, 2014 (the 5.0% Notes) with semi-annual fixed interest payments due on January 1 and July 1 of each year, commencing January 1, 2010 . Based on quotes received from third-party banks, the fair value of the 5.0% Notes as of August 4, 2012 was $405.7 million and is classified as a Level 1 measurement according to the fair value hierarchy.
On April 4, 2011, the Company issued $375.0 million aggregate principal amount of 3.0% senior unsecured notes due April 15, 2016 (the 3.0% Notes) with semi-annual fixed interest payments due on April 15 and October 15 of each year, commencing October 15, 2011. Based on quotes received from third-party banks, the fair value of the 3.0% Notes as of August 4, 2012 and October 29, 2011 was $403.9 million and $392.8 million, respectively and is classified as a Level 1 measurement according to the fair value hierarchy.


18



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 and the British Pound. These foreign currency exchange contracts are entered into to support transactions made in the normal course of business, and accordingly, are not speculative in nature. The contracts are for periods consistent with the terms of the underlying transactions, generally one year or less. Hedges related to anticipated transactions are designated and documented at the inception of the respective hedges as cash flow hedges and are evaluated for effectiveness monthly. Derivative instruments are employed to eliminate or minimize certain foreign currency exposures that can be confidently identified and quantified. As the terms of the contract and the underlying transaction are matched at inception, forward contract effectiveness is calculated by comparing the change in fair value of the contract to the change in the forward value of the anticipated transaction, with the effective portion of the gain or loss on the derivative instrument reported as a component of accumulated other comprehensive (loss) income (OCI) in shareholders’ equity and reclassified into earnings in the same period during which the hedged transaction affects earnings. Any residual change in fair value of the instruments, or ineffectiveness, is recognized immediately in other (income) expense. Additionally, the Company enters into forward foreign currency contracts that economically hedge the gains and losses generated by the re-measurement of certain recorded assets and liabilities in a non-functional currency. Changes in the fair value of these undesignated hedges are recognized in other (income) expense immediately as an offset to the changes in the fair value of the asset or liability being hedged. As of August 4, 2012 and October 29, 2011, the total notional amount of these undesignated hedges was $28.7 million and $41.2 million, respectively. The fair value of these hedging instruments in the Company’s condensed consolidated balance sheets as of August 4, 2012 and October 29, 2011 was immaterial.
Interest Rate Exposure Management — On June 30, 2009, the Company entered into interest rate swap transactions related to its outstanding 5.0% senior unsecured notes where the Company swapped the notional amount of its $375.0 million of fixed rate debt at 5.0% into floating interest rate debt through July 1, 2014. Under the terms of the swaps, the Company would (i) receive on the $375.0 million notional amount a 5.0% annual interest payment that is paid in two installments on the 1st business day of every January and July, commencing January 1, 2010 through and ending on the maturity date; and (ii) pay on the $375.0 million notional amount an annual three months LIBOR plus 2.05% interest payment, payable in four installments on the 1st business day of every January, April, July and October, commencing on October 1, 2009 and ending on the maturity date. The LIBOR-based rate was set quarterly three months prior to the date of the interest payment. The Company designated these swaps as fair value hedges. The fair value of the swaps at inception was zero and subsequent changes in the fair value of the interest rate swaps were reflected in the carrying value of the interest rate swaps on the balance sheet. The carrying value of the debt on the balance sheet was adjusted by an equal and offsetting amount. The gain or loss on the hedged item (that is, the fixed-rate borrowings) attributable to the hedged benchmark interest rate risk and the offsetting gain or loss on the related interest rate swaps for the nine-month periods ended August 4, 2012 and July 30, 2011 were as follows:
 
Statement of income classification
August 4, 2012
 
July 30, 2011
Loss on Swaps
 
Gain on Note
 
Net Income Effect
 
Loss on Swaps
 
Gain on Note
 
Net Income Effect
Other income
$
(769
)
 
$
769

 
$

 
$
(4,182
)
 
$
4,182

 
$

The amounts earned and owed under the swap agreements were accrued each period and were reported in interest expense. There was no ineffectiveness recognized in any of the periods presented. In the second quarter of fiscal 2012, the Company terminated the interest rate swap agreement. The Company received $19.8 million in cash proceeds from the swap termination, which included $1.3 million in accrued interest. The proceeds, net of interest received, are disclosed in cash flows from financing activities in the consolidated statements of cash flows. As a result of the termination the carrying value of the 5.0% Notes was adjusted for the change in the fair value of the interest component of the debt up to the date of the termination of the swap in an amount equal to the fair value of the swap, and will be amortized to earnings as a reduction of interest expense over the remaining life of the debt. This amortization is reflected in the consolidated statements of cash flows within operating activities.
The market risk associated with the Company’s derivative instruments results from currency exchange rate or interest rate movements that are expected to offset the market risk of the underlying transactions, assets and liabilities being hedged. The counterparties to the agreements relating to the Company’s derivative instruments consist of a number of major international financial institutions with high credit ratings. Based on the credit ratings of the Company’s counterparties as of August 4, 2012, nonperformance is not perceived to be a significant risk. Furthermore, none of the Company’s derivatives are subject to collateral or other security arrangements and none contain provisions that are dependent on the Company’s credit ratings from any credit rating agency. While the contract or notional amounts of derivative financial instruments provide one measure of the

19



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 the condensed consolidated financial statements in other current assets, other assets or accrued liabilities, depending on their net position, regardless of the purpose or intent for holding the derivative contract. Changes in the fair value of the derivative financial instruments are either recognized periodically in earnings or in shareholders’ equity as a component of OCI. Changes in the fair value of cash flow hedges are recorded in OCI and reclassified into earnings when the underlying contract matures. Changes in the fair values of derivatives not qualifying for hedge accounting are reported in earnings as they occur.
The total notional amounts of derivative instruments designated as hedging instruments was $147.5 million and $153.7 million, respectively, of cash flow hedges denominated in Euros, British Pounds, Philippine Pesos and Japanese Yen as of August 4, 2012 and October 29, 2011, respectively. The Company also had $375.0 million of interest rate swap agreements accounted for as fair value hedges as of October 29, 2011. The fair values of these hedging instruments in the Company’s condensed consolidated balance sheets as of August 4, 2012 and October 29, 2011 were as follows:
 
 
 
 
Fair Value At
 
Balance Sheet Location
 
August 4, 2012
 
October 29, 2011
Interest rate swap agreements
Other assets
 
$

 
$
22,187

Forward foreign currency exchange contracts
Prepaid expenses and other current assets
 
$

 
$
2,038

 
Accrued liabilities
 
$
4,039

 
$

The effect of derivative instruments designated as cash flow hedges on the condensed consolidated statements of income for the three- and nine-month periods ended August 4, 2012 and July 30, 2011 were as follows:
 
 
Three Months Ended
 
August 4, 2012
 
July 30, 2011
Loss recognized in OCI on derivatives (net of tax of $862 in 2012 and $351 in 2011)
$
(5,161
)
 
$
(2,311
)
Loss (gain) reclassified from OCI into income (net of tax of $517 in 2012 and $432 in 2011)
$
3,099

 
$
(2,844
)
 
 
Nine Months Ended
 
August 4, 2012
 
July 30, 2011
(Loss) gain recognized in OCI on derivatives (net of tax of $1,807 in 2012 and $693 in 2011)
$
(11,805
)
 
$
4,344

Loss (gain) reclassified from OCI into income (net of tax of $1,049 in 2012 and $1,027 in 2011)
$
6,637

 
$
(6,856
)
The amounts reclassified into earnings before tax are recognized in cost of sales and operating expenses for the three- and nine-month periods ended August 4, 2012 and July 30, 2011 were as follows:
 
 
Three Months Ended
 
August 4, 2012
 
July 30, 2011
Cost of sales
$
1,390

 
$
1,535

Research and development
$
978

 
$
833

Selling, marketing, general and administrative
$
1,248

 
$
908

 

20



 
Nine Months Ended
 
August 4, 2012
 
July 30, 2011
Cost of sales
$
2,912

 
$
3,784

Research and development
$
2,071

 
$
2,029

Selling, marketing, general and administrative
$
2,703

 
$
2,070

All derivative gains and losses included in OCI will be reclassified into earnings within the next 12 months. There was no ineffectiveness in the three- and nine-month periods ended August 4, 2012 and July 30, 2011.

Note 10 – Goodwill and Intangible Assets
Goodwill
The Company annually evaluates goodwill for impairment as well as whenever events or changes in circumstances suggest that the carrying value of goodwill may not be recoverable. The Company tests goodwill for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis on the first day of the fourth quarter (on or about August 1) or more frequently if indicators of impairment exist. For the Company’s latest annual impairment assessment that occurred on July 31, 2011, the Company identified its reporting units to be its five operating segments, which meet the aggregation criteria for one reportable segment. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. The Company determines the fair value of its reporting units using the income approach methodology of valuation that includes the discounted cash flow method as well as other generally accepted valuation methodologies. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, the Company performs the second step of the goodwill impairment test to determine the amount of impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill. No impairment of goodwill resulted in any of the fiscal years presented. The Company’s next annual impairment assessment will be performed as of the first day of the fourth quarter of fiscal 2012. The following table presents the changes in goodwill during the first nine months of fiscal 2012:

 
Nine Months Ended
 
August 4, 2012
Balance at beginning of period
$
275,087

Acquisition of Multigig (Note 16)
6,878

Foreign currency translation adjustment
(2,602
)
Balance at end of period
$
279,363

Intangible Assets
The Company reviews finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of assets may not be recoverable. Recoverability of these assets is measured by comparison of their carrying value to future undiscounted cash flows the assets are expected to generate over their remaining economic lives. If such assets are considered to be impaired, the impairment to be recognized in earnings equals the amount by which the carrying value of the assets exceeds their fair value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique. As of October 29, 2011, the Company’s finite-lived intangible assets were fully amortized. As of August 4, 2012, the Company’s finite-lived intangible assets consisted of the following which related to the acquisition of Multigig, Inc. (Note 16):
 
 
August 4, 2012
 
Gross Carrying
Amount
 
Accumulated
Amortization
Technology-based
$
1,100

 
$
74

Amortization expense related to finite-lived intangible assets was immaterial for the three- and nine-month periods ended August 4, 2012 and was $0.3 million and $1.1 million for the three- and nine-month periods ended July 30, 2011, respectively. The remaining amortization expense will be recognized over a weighted-average period of approximately 2.5 years.

21



The Company expects annual amortization expense for intangible assets to be:
 
 
 
Fiscal Year
Amortization Expense
Remaining of fiscal year 2012

$55

2013

$220

2014

$220

2015

$220

2016

$220

2017

$92

Indefinite-lived intangible assets are tested for impairment on an annual basis on the first day of the fourth quarter (on or about August 1) or more frequently if indicators of impairment exist. The impairment test involves the comparison of the fair value of the intangible asset with its carrying amount. No impairment of intangible assets resulted in any of the fiscal years presented.
Intangible assets, excluding in-process research and development (IPR&D), are amortized on a straight-line basis over their estimated useful lives or on an accelerated method of amortization that is expected to reflect the estimated pattern of economic use. IPR&D assets are considered indefinite-lived intangible assets until completion or abandonment of the associated R&D efforts. Upon completion of the projects, the IPR&D assets will be amortized over their estimated useful lives.

Indefinite-lived intangible assets consisted of $27.8 million and $12.2 million of IPR&D as of August 4, 2012 and October 29, 2011, respectively.

Note 11 – Pension Plans
The Company has various defined benefit pension and other retirement plans for certain non-U.S. employees that are consistent with local statutory requirements and practices. The Company’s funding policy for its foreign defined benefit pension plans is consistent with the local requirements of each country. The plans’ assets consist primarily of U.S. and non-U.S. equity securities, bonds, property and cash.
Net periodic pension cost of non-U.S. plans is presented in the following table:
 
 
Three Months Ended
 
August 4, 2012
 
July 30, 2011
Service cost
$
1,938

 
$
2,340

Interest cost
2,648

 
2,916

Expected return on plan assets
(2,547
)
 
(2,797
)
Amortization of initial net obligation
5

 
4

Amortization of net loss
89

 
417

Net periodic pension cost
$
2,133

 
$
2,880

 
Nine Months Ended
 
August 4, 2012
 
July 30, 2011
Service cost
$
5,926

 
$
6,872

Interest cost
8,185

 
8,544

Expected return on plan assets
(7,857
)
 
(8,202
)
Amortization of initial net obligation
15

 
12

Amortization of net loss
269

 
1,221

Net periodic pension cost
$
6,538

 
$
8,447


Pension contributions of $3.5 million and $9.1 million were made by the Company during the three and nine months ended August 4, 2012, respectively. The Company presently anticipates contributing an additional $1.1 million to fund its

22



defined benefit pension plans in fiscal year 2012 for a total of $10.2 million.

Note 12 – Revolving Credit Facility
As of August 4, 2012, the Company had $3,765.0 million of cash and cash equivalents and short-term investments, of which $1,007.3 million was held in the United States. The balance of the Company’s cash and cash equivalents and short-term investments was held outside the United States in various foreign subsidiaries. As the Company intends to reinvest certain of its foreign earnings indefinitely, this cash is not available to meet certain of the Company’s cash requirements in the United States, including for cash dividends and common stock repurchases. The Company entered into a five-year, $165.0 million unsecured revolving credit facility with certain institutional lenders in May 2008. To date, the Company has not borrowed under this credit facility but the Company may borrow in the future and use the proceeds for support of commercial paper issuance, stock repurchases, dividend payments, acquisitions, capital expenditures, working capital and other lawful corporate purposes. Any advances under this credit agreement will accrue interest at rates that are equal to LIBOR plus a margin that is based on the Company’s leverage ratio. The terms of the facility impose restrictions on the Company’s ability to undertake certain transactions, to create certain liens on assets and to incur certain subsidiary indebtedness. The terms of this facility also include financial covenants that require the Company to maintain a minimum interest coverage ratio and not exceed a maximum leverage ratio. As of August 4, 2012, the Company was compliant with these covenants.

Note 13 – Debt
On June 30, 2009, the Company issued $375.0 million aggregate principal amount of 5.0% senior unsecured notes due July 1, 2014 (the 5.0% Notes) with semi-annual fixed interest payments due on January 1 and July 1 of each year, commencing January 1, 2010. The sale of the 5.0% Notes was made pursuant to the terms of an underwriting agreement dated June 25, 2009 between the Company and Credit Suisse Securities (USA) LLC, as representative of the several underwriters named therein. The net proceeds of the offering were $370.4 million, after issuing at a discount and deducting expenses, underwriting discounts and commissions, which will be amortized over the term of the 5.0% Notes. The indenture governing the 5.0% Notes contains covenants that may limit the Company’s ability to: incur, create, assume or guarantee any debt for borrowed money secured by a lien upon a principal property; enter into sale and lease-back transactions with respect to a principal property; and consolidate with or merge into, or transfer or lease all or substantially all of its assets to, any other party. As of August 4, 2012, 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 June 30, 2009, the Company entered into interest rate swap transactions where the Company swapped the notional amount of its $375.0 million of fixed rate debt at 5.0% into floating interest rate debt through July 1, 2014. Under the terms of the swaps, the Company would (i) receive on the $375.0 million notional amount a 5.0% annual interest payment that is paid in two installments on the 1st business day of every January and July, commencing January 1, 2010 through and ending on the maturity date; and (ii) pay on the $375.0 million notional amount an annual three month LIBOR plus 2.05% interest payment, payable in four installments on the 1st business day of every January, April, July and October, commencing on October 1, 2009 and ending on the maturity date. The LIBOR-based rate was set quarterly three months prior to the date of the interest payment. The Company designated these swaps as fair value hedges. The changes in the fair value of the interest rate swaps were reflected in the carrying value of the interest rate swaps in other assets on the balance sheet. The carrying value of the debt on the balance sheet was adjusted by an equal and offsetting amount. In the second quarter of fiscal 2012, the Company terminated the interest rate swap agreement. The Company received $19.8 million in cash proceeds from the swap termination, which included $1.3 million in accrued interest. The proceeds, net of interest received, are disclosed in cash flows from financing activities in the consolidated statements of cash flows. As a result of the termination, the carrying value of the 5.0% Notes was adjusted for the change in the fair value of the interest component of the debt up to the date of the termination of the swap in an amount equal to the fair value of the swap, and will be amortized to earnings as a reduction of interest expense over the remaining life of the debt. This amortization is reflected in the consolidated statements of cash flows within operating activities.
On December 22, 2010, Analog Devices Holdings B.V., a wholly owned subsidiary of the Company, entered into a credit agreement with Bank of America, N.A., London Branch as administrative agent. The borrower’s obligations are guaranteed by the Company. The credit agreement provides for a term loan facility of $145.0 million, which matures on December 22, 2013. The terms of the agreement provide for a three year principal amortization schedule with $3.6 million payable quarterly every March, June, September and December with the balance payable upon the maturity date. During the third quarter of fiscal 2011, the Company made an additional principal payment of $17.5 million. During the first quarter of fiscal 2012, the Company made an additional principal payment of $12.0 million. The loan will bear interest at a fluctuating rate for each period equal to the LIBOR rate corresponding with the tenor of the interest period plus a spread of 1.25% (1.72% as of August 4, 2012). The terms of this facility include limitations on subsidiary indebtedness and on liens against the assets of the Company and its subsidiaries, and also include financial covenants that require the Company to maintain a minimum interest coverage ratio and not exceed a maximum leverage ratio. As of August 4, 2012, the Company was compliant with these covenants. As of

23



August 4, 2012, $14.5 million of this debt was classified as short-term.
On April 4, 2011, the Company issued $375.0 million aggregate principal amount of 3.0% senior unsecured notes due April 15, 2016 (the 3.0% Notes) with semi-annual fixed interest payments due on April 15 and October 15 of each year, commencing October 15, 2011. The sale of the 3.0% Notes was made pursuant to the terms of an underwriting agreement dated March 30, 2011 between the Company and Credit Suisse Securities (USA) LLC and Merrill Lynch, Pierce, Fenner and Smith Incorporated, as representative of the several underwriters named therein. The net proceeds of the offering were $370.5 million, after issuing at a discount and deducting expenses, underwriting discounts and commissions, which will be amortized over the term of the 3.0% Notes. The indenture governing the 3.0% Notes contains covenants that may limit the Company’s ability to: incur, create, assume or guarantee any debt for borrowed money secured by a lien upon a principal property; enter into sale and lease-back transactions with respect to a principal property; and consolidate with or merge into, or transfer or lease all or substantially all of its assets to, any other party. As of August 4, 2012, the Company was compliant with these covenants. The notes are subordinated to any future secured debt and to the other liabilities of the Company’s subsidiaries.
The Company’s principal payments related to its long-term debt obligations are as follows: $3.6 million remaining in fiscal year 2012; $14.5 million in fiscal year 2013; $450.6 million in fiscal year 2014; and $375.0 million in fiscal year 2016.

Note 14 – Common Stock Repurchase
The Company’s common stock repurchase program has been in place since August 2004. In the aggregate, the Board of Directors has authorized the Company to repurchase $5.0 billion of the Company’s common stock under the program. Under the program, the Company may repurchase outstanding shares of its common stock from time to time in the open market and through privately negotiated transactions. Unless terminated earlier by resolution of the Company’s Board of Directors, the repurchase program will expire when the Company has repurchased all shares authorized under the program. As of August 4, 2012, the Company had repurchased a total of approximately 128.6 million shares of its common stock for approximately $4,418.2 million under this program. An additional $581.8 million remains available for repurchase of shares under the current authorized program. The repurchased shares are held as authorized but unissued shares of common stock. Any future common stock repurchases will be dependent upon several factors, including the amount of cash available to the Company in the United States and the Company’s financial performance, outlook and liquidity. The Company also from time to time repurchases shares in settlement of employee tax withholding obligations due upon the vesting of restricted stock units, or in certain limited circumstances to satisfy the exercise price of options granted to the Company’s employees under the Company’s equity compensation plans.

Note 15 – Discontinued Operations
In September 2007, the Company entered into a definitive agreement to sell its Baseband Chipset Business to MediaTek Inc. The decision to sell the Baseband Chipset Business was due to the Company’s decision to focus its resources in areas where its signal processing expertise can provide unique capabilities and earn superior returns. During fiscal 2008, the Company completed the sale of its Baseband Chipset Business for net cash proceeds of $269.0 million. The Company made cash payments of $1.7 million during fiscal 2009 related to retention payments for employees who transferred to MediaTek Inc. and for the reimbursement of intellectual property license fees incurred by MediaTek. During fiscal 2010, the Company received cash proceeds of $62.0 million as a result of the receipt of a refundable withholding tax and also recorded an additional gain on sale of $0.3 million, or $0.2 million net of tax, due to the settlement of certain items at less than the amounts accrued. In fiscal 2011, additional proceeds of $10.0 million were released from escrow and $6.5 million, net of tax, was recorded as additional gain from the sale of discontinued operations. The Company does not expect any additional proceeds from this sale.
The following amounts related to the Baseband Chipset Business have been segregated from continuing operations and reported as discontinued operations.
 
 
Nine Months Ended
 
July 30, 2011
Gain on sale of discontinued operations before income taxes
$
10,000

Provision for income taxes
3,500

Gain on sale of discontinued operations, net of tax
$
6,500


Note 16 – Acquisitions
On March 30, 2012, the Company acquired privately-held Multigig, Inc. (Multigig) of San Jose, California. The acquisition of Multigig is expected to enhance the Company’s clocking capabilities in stand-alone and embedded applications

24



and strengthen the Company’s high speed signal processing solutions. The acquisition-date fair value of the consideration transferred totaled $26.8 million, which consisted of $24.2 million in initial cash payments at closing and an additional $2.6 million subject to an indemnification holdback that is payable within 15 months of the transaction date, which is included in accrued liabilities in the condensed consolidated balance sheet as of August 4, 2012. During the third quarter of fiscal 2012, we reduced this holdback amount by $0.1 million as a result of indemnification claims made by the Company. The Company’s assessment of fair value to the tangible and intangible assets acquired and liabilities assumed was based on their estimated fair values at the date of acquisition, resulting in the recognition of $15.6 million of IPR&D, $1.1 million of developed technology, $7.0 million of goodwill and $3.1 million of net deferred tax assets. The goodwill recognized is attributable to future technologies that have yet to be determined as well as the assembled workforce of Multigig. Future technologies do not meet the criteria for recognition separately from goodwill because they are a part of future development and growth of the business. None of the goodwill is expected to be deductible for tax purposes. The acquisition accounting is not complete and adjustments may be recorded to deferred tax assets in future periods due to the evaluation of net operating loss carryforwards. In addition, the Company will be obligated to pay royalties to the Multigig employees on revenue recognized from the sale of certain Multigig products through the earlier of 5 years or the aggregate maximum payment of $1.0 million. Royalty payments to Multigig employees require post-acquisition services to be rendered and, as such, the Company will record these amounts as compensation expense in the related periods. As of August 4, 2012, no royalty payments have been made. The Company recognized $0.5 million of acquisition-related costs that were expensed in the second quarter of fiscal 2012, which were included in operating expenses in the condensed consolidated statement of income.
On June 9, 2011, the Company acquired privately-held Lyric Semiconductor, Inc. (Lyric) of Cambridge, Massachusetts. The acquisition of Lyric gives the Company the potential to achieve significant improvement in power efficiency in mixed signal processing. The acquisition-date fair value of the consideration transferred totaled $27.8 million, which consisted of $14.0 million in initial cash payments at closing and contingent consideration of up to $13.8 million. The contingent consideration arrangement requires additional cash payments to the former equity holders of Lyric upon the achievement of certain technological and product development milestones payable during the period from June 2011 through June 2016. The Company estimated the fair value of the contingent consideration arrangement utilizing the income approach. Changes in the fair value of the contingent consideration subsequent to the acquisition date primarily driven by assumptions pertaining to the achievement of the defined milestones will be recognized in operating income in the period of the estimated fair value change. As of August 4, 2012, the Company had paid $2.0 million in contingent consideration. The payment is reflected in the statements of cash flows as cash used in financing activities related to the liability recognized at fair value as of the acquisition date and cash provided by operating activities related to the fair value adjustments previously recognized in earnings. The fair value of the remaining contingent consideration was approximately $12.3 million as of August 4, 2012, of which $7.8 million is included in accrued liabilities and $4.5 million is included in other non-current liabilities in the condensed consolidated balance sheet. The Company’s assessment of fair value to the tangible and intangible assets acquired and liabilities assumed was based on their estimated fair values at the date of acquisition, resulting in the recognition of $12.2 million of IPR&D, $18.9 million of goodwill and $3.3 million of net deferred tax liabilities. The goodwill recognized is attributable to future technologies that have yet to be determined as well as the assembled workforce of Lyric. Future technologies do not meet the criteria for recognition separately from goodwill because they are a part of future development and growth of the business. None of the goodwill is expected to be deductible for tax purposes. In addition, the Company will be obligated to pay royalties to the former equity holders of Lyric on revenue recognized from the sale of Lyric products and licenses through the earlier of 20 years or the accrual of a maximum of $25.0 million. Royalty payments to Lyric employees require post-acquisition services to be rendered and, as such, the Company will record these amounts as compensation expense in the related periods. As of August 4, 2012, no royalty payments have been made. The Company recognized $0.2 million of acquisition-related costs that were expensed in the third quarter of fiscal 2011, which were included in operating expenses in the condensed consolidated statement of income.
The Company has not provided pro forma results of operations for Multigig and Lyric herein as they were not material to the Company on either an individual or an aggregate basis. The Company included the results of operations of each acquisition in its consolidated statement of income from the date of each acquisition.

Note 17 – Income Taxes
The Company has provided for potential tax liabilities due in the various jurisdictions in which the Company operates. Judgment is required in determining the worldwide income tax expense provision. In the ordinary course of global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of cost reimbursement arrangements among related entities. Although the Company believes its estimates are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in the historical income tax provisions and accruals. Such differences could have a material impact on the Company’s income tax provision and operating results in the period in which such determination is made.

25



The Company has filed a petition with the Tax Court for one open matter for fiscal years 2006 and 2007 that pertains to Section 965 of the Internal Revenue Code related to the beneficial tax treatment of dividends paid from foreign owned companies under The American Jobs Creation Act. The potential liability for this adjustment is $36.5 million. The Company has concluded, based on discussions with its tax advisors that this item is not likely to result in any additional tax liability. Therefore, the Company has not recorded any additional tax liability for this issue.
All of the Company’s U.S. federal tax returns prior to fiscal year 2009 are no longer subject to examination.
All of the Company’s Ireland tax returns prior to fiscal year 2008 are no longer subject to examination.
Unrealized Tax Benefits
The following table summarizes the changes in the total amounts of unrealized tax benefits for the three and nine months ended August 4, 2012.
 
Balance, October 29, 2011
$
9,665

Settlements with taxing authorities
(3,488
)
Balance, February 4, 2012
$
6,177

Settlements with taxing authorities

Balance, May 5, 2012
$
6,177

Reductions for tax positions related to prior years
(2,681
)
Balance, August 4, 2012
$
3,496

Although the Company believes its estimates of income tax payable are reasonable, no assurance can be given that the Company will prevail in the matters raised and that the outcome 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 but could have a material impact on the Company’s income tax provision, operating results and operating cash flows in the period in which such matters are resolved as well as for subsequent years.

Note 18 – New Accounting Pronouncements
Standards Implemented
Intangibles – Goodwill and Other
In December 2010, the Financial Accounting Standards Board (FASB) issued ASU No. 2010-28, Intangibles - Goodwill and Other (ASC Topic 350) (ASU No. 2010-28). ASU No. 2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test only if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. ASU No. 2010-28 is effective for fiscal years that begin after December 15, 2010, which is the Company’s fiscal year 2012. The adoption of ASU No. 2010-28 in the first quarter of fiscal 2012 did not have a material impact on the Company’s financial condition and results of operations
Standards to be Implemented
Intangibles – Goodwill and Other
In July 2012, the FASB issued ASU No. 2012-02, Intangibles - Goodwill and Other (ASC Topic 350) Testing Indefinite-Lived Intangible Assets for Impairment (ASU No. 2012-02). ASU No. 2012-02 permits an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30, Intangibles-Goodwill and Other-General Intangibles Other than Goodwill. ASU No. 2012-02 is effective for fiscal years that begin after September 15, 2012, which is the Company’s fiscal year 2013. The adoption of ASU No. 2012-02 will not impact the Company’s financial condition or results of operations.
Balance Sheet
In December 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities (ASU No. 2011-11). ASU No. 2011-11 amended ASC 210, Balance Sheet, to converge the presentation of offsetting assets and liabilities between U.S. GAAP and IFRS. ASU No. 2011-11 requires that entities disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments

26



and transactions subject to an agreement similar to a master netting arrangement. ASU No. 2011-11 is effective for fiscal years, and interim periods within those years, beginning after January 1, 2013, which is the Company’s fiscal year 2014. The adoption of ASU No. 2011-11 will require additional disclosures related to offsetting assets and liabilities but will not impact the Company’s financial condition or results of operations.
Comprehensive Income
In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income (ASU No. 2011-05). ASU No. 2011-05 amended ASC 220, Comprehensive Income, to converge the presentation of comprehensive income between U.S. GAAP and IFRS. ASU No. 2011-05 requires that all non-owner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements and requires reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statements where the components of net income and the components of other comprehensive income are presented. ASU No. 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement in changes of stockholders equity. ASU No. 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, which is the Company’s fiscal year 2013. Subsequently, in December 2011, the FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (ASU No. 2011-12), which defers only those changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments but does not affect all other requirements in ASU No. 2011-05. The adoption of ASU No. 2011-05 and ASU No. 2011-12 will affect the presentation of comprehensive income but will not impact the Company’s financial condition or results of operations.

Note 19 – Subsequent Event
On August 20, 2012, the Board of Directors of the Company declared a cash dividend of $0.30 per outstanding share of common stock. The dividend will be paid on September 12, 2012 to all shareholders of record at the close of business on August 31, 2012.

27



ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This information should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in Item 1 of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended October 29, 2011.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations, including in particular the section entitled “Outlook,” contains forward-looking statements regarding future events and our future results that are subject to the safe harbor created under the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “continues,” and “may,” and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections regarding our future financial performance; our anticipated growth and trends in our businesses; our future capital needs and capital expenditures; our future market position and expected competitive changes in the marketplace for our products; our ability to pay dividends or repurchase stock; our ability to service our outstanding debt; our expected tax rate; the effect of new accounting pronouncements; and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified in Part II, Item 1A. Risk Factors and elsewhere in our Quarterly Report on Form 10-Q. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements except to the extent required by law.
During the first quarter of fiscal 2008, we sold our baseband chipset business and related support operations, or Baseband Chipset Business, to MediaTek Inc. The financial results of this business are presented as discontinued operations in the condensed consolidated statements of income for all periods presented. Unless otherwise noted, this Management’s Discussion and Analysis relates only to financial results from continuing operations.

Results of Operations
(all tabular amounts in thousands except per share amounts and percentages)
Overview
 
 
Three Months Ended
 
 
 
 
 
August 4, 2012
 
July 30, 2011
 
$ Change
 
% Change
Revenue
$
683,026

 
$
757,902

 
$
(74,876
)
 
(10
)%
Gross margin %
65.6
%
 
67.2
%
 
 
 
 
Net income
$
169,768

 
$
219,935

 
$
(50,167
)
 
(23
)%
Net income as a % of revenue
24.9
%
 
29.0
%