NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended
November 3, 2012
,
October 29, 2011
and
October 30, 2010
(all tabular amounts in thousands except per share amounts)
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1.
|
Description of Business
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Analog Devices, Inc. (“Analog Devices” or the “Company”) is a world leader in the design, manufacture and marketing of a broad portfolio of high-performance analog, mixed-signal and digital signal processing integrated circuits (ICs) used in virtually all types of electronic equipment. Since the Company’s inception in 1965, it has focused on solving the engineering challenges associated with signal processing in electronic equipment. The Company’s signal processing products play a fundamental role in converting, conditioning, and processing real-world phenomena such as temperature, pressure, sound, light, speed and motion into electrical signals to be used in a wide array of electronic devices. As new generations of digital applications evolve, new needs for high-performance analog signal processing and digital signal processing (DSP) technology are generated. As a result, the Company produces a wide range of innovative products — including data converters, amplifiers and linear products, radio frequency (RF) ICs, power management products, sensors based on micro-electro mechanical systems (MEMS) technology and other sensors, and processing products, including DSP and other processors — that are designed to meet the needs of a broad base of customers.
The Company’s products are embedded inside many types of electronic equipment including:
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• Industrial process control systems
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• Medical imaging equipment
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• Factory automation systems
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• Patient monitoring devices
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• Instrumentation and measurement systems
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• Wireless infrastructure equipment
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• Energy management systems
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• Networking equipment
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• Aerospace and defense electronics
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• Optical systems
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• Automobiles
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• Digital cameras
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• Digital televisions
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• Portable electronic devices
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2.
Summary of Significant Accounting Policies
a.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and all of its subsidiaries. Upon consolidation, all intercompany accounts and transactions are eliminated. Certain amounts reported in previous years have been reclassified to conform to the
fiscal 2012
presentation. Such reclassified amounts were immaterial. The Company’s fiscal year is the
52
-week or
53
-week period ending on the Saturday closest to the last day in October. Fiscal year
2012
was a
53
-week period. Fiscal years
2011
and
2010
were
52
-week periods. The additional week in fiscal 2012 was included in the first quarter ended February 4, 2012.
The Company sold its baseband chipset business and related support operations (Baseband Chipset Business) to MediaTek Inc. and sold its CPU voltage regulation and PC thermal monitoring business to certain subsidiaries of ON Semiconductor Corporation during the first quarter of fiscal 2008. The Company has reflected the financial results of these businesses as discontinued operations in the consolidated statements of income for all periods presented. The historical results of operations of these businesses have been segregated from the Company’s consolidated financial statements and are included in income from discontinued operations, net of tax, in the consolidated statements of income.
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b.
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Cash, Cash Equivalents and Short-term Investments
|
Cash and cash equivalents are highly liquid investments with insignificant interest rate risk and maturities of three months or less at the time of acquisition. Cash, cash equivalents and short-term investments consist primarily of institutional money market funds, corporate obligations such as commercial paper and bonds and bank time deposits.
The Company classifies its investments in readily marketable debt and equity securities as “held-to-maturity,” “available-for-sale” or “trading” at the time of purchase. There were no transfers between investment classifications in any of the fiscal years presented. Held-to-maturity securities, which are carried at amortized cost, include only those securities the Company has the positive intent and ability to hold to maturity. Securities such as bank time deposits, which by their nature are typically held to maturity, are classified as such. The Company’s other readily marketable cash equivalents and short-term investments are classified as available-for-sale. Available-for-sale securities are carried at fair value with unrealized gains and losses, net of related tax, reported in accumulated other comprehensive (loss) income.
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s deferred compensation plan investments are classified as trading. See Note 7 for additional information on the Company’s deferred compensation plan investments. There were no cash equivalents or short-term investments classified as trading at
November 3, 2012
or
October 29, 2011
.
The Company periodically evaluates its investments for impairment. There were no other-than-temporary impairments of short-term investments in any of the fiscal years presented.
Realized gains or losses recognized in non-operating income from the sales of available-for-sale securities were not material during any of the fiscal years presented.
Unrealized gains and losses on available-for-sale securities classified as short-term investments at
November 3, 2012
and
October 29, 2011
were as follows:
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|
2012
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|
2011
|
Unrealized gains on securities classified as short-term investments
|
$
|
581
|
|
|
$
|
22
|
|
Unrealized losses on securities classified as short-term investments
|
(519
|
)
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|
(600
|
)
|
Net unrealized losses on securities classified as short-term investments
|
$
|
62
|
|
|
$
|
(578
|
)
|
Unrealized gains and losses in fiscal years
2012
and
2011
relate to corporate obligations.
The components of the Company’s cash and cash equivalents and short-term investments as of
November 3, 2012
and
October 29, 2011
were as follows:
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2012
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|
2011
|
Cash and cash equivalents:
|
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Cash
|
$
|
35,413
|
|
|
$
|
17,857
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|
Available-for-sale
|
490,904
|
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|
1,374,069
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|
Held-to-maturity
|
2,516
|
|
|
13,174
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|
Total cash and cash equivalents
|
$
|
528,833
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|
$
|
1,405,100
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|
Short-term investments:
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|
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|
Available-for-sale
|
$
|
3,370,551
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|
$
|
2,186,782
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|
Held-to-maturity (less than one year to maturity)
|
994
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|
580
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|
Total short-term investments
|
$
|
3,371,545
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|
|
$
|
2,187,362
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|
See Note 2j for additional information on the Company’s cash equivalents and short-term investments.
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c.
|
Supplemental Cash Flow Statement Information
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2012
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|
2011
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|
2010
|
Cash paid during the fiscal year for:
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Income taxes
|
$
|
143,899
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|
$
|
223,716
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|
|
$
|
137,149
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|
Interest
|
$
|
29,177
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|
$
|
16,492
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$
|
9,199
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Inventories are valued at the lower of cost (first-in, first-out method) or market. The valuation of inventory requires the Company to estimate obsolete or excess inventory as well as inventory that is not of saleable quality. The Company employs a variety of methodologies to determine the net realizable value of its inventory. While a portion of the calculation to record inventory at its net realizable value is based on the age of the inventory and lower of cost or market calculations, a key factor in estimating obsolete or excess inventory requires the Company to estimate the future demand for its products. If actual demand is less than the Company’s estimates, impairment charges, which are recorded to cost of sales, may need to be recorded in future periods. Inventory in excess of saleable amounts is not valued, and the remaining inventory is valued at the lower of cost or market.
Inventories at
November 3, 2012
and
October 29, 2011
were as follows:
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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2012
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2011
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Raw materials
|
$
|
28,111
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|
$
|
28,085
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Work in process
|
185,773
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|
170,398
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|
Finished goods
|
99,839
|
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|
96,598
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Total inventories
|
$
|
313,723
|
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|
$
|
295,081
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e.
|
Property, Plant and Equipment
|
Property, plant and equipment is recorded at cost less allowances for depreciation. The straight-line method of depreciation is used for all classes of assets for financial statement purposes while both straight-line and accelerated methods are used for income tax purposes. Leasehold improvements are amortized based upon the lesser of the term of the lease or the useful life of the asset. Repairs and maintenance charges are expensed as incurred. Depreciation and amortization are based on the following useful lives:
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Buildings & building equipment
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Up to 25 years
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Machinery & equipment
|
3-8 years
|
Office equipment
|
3-8 years
|
Depreciation expense for property, plant and equipment was
$109.7 million
,
$116.9 million
and
$116.1 million
in fiscal
2012
,
2011
and
2010
, respectively.
The Company reviews property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amount to the future undiscounted cash flows the assets are expected to generate over their remaining economic lives. If such assets are considered to be impaired, the impairment to be recognized in earnings equals the amount by which the carrying value of the assets exceeds their fair value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique. If such assets are not impaired, but their useful lives have decreased, the remaining net book value is amortized over the revised useful life.
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f.
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Goodwill and Intangible Assets
|
Goodwill
The Company evaluates goodwill for impairment annually as well as whenever events or changes in circumstances suggest that the carrying value of goodwill may not be recoverable. The Company tests goodwill for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis on the first day of the fourth quarter (on or about August 1) or more frequently if indicators of impairment exist. For the Company’s latest annual impairment assessment that occurred on
August 5, 2012
, the Company identified its reporting units to be its
five
operating segments, which meet the aggregation criteria for
one
reportable segment. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. The Company determines the fair value of its reporting units using the income approach methodology of valuation that includes the discounted cash flow method as well as other generally accepted valuation methodologies. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, the Company performs the second step of the goodwill impairment test to determine the amount of impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill. No impairment of goodwill resulted in any of the fiscal years presented. The Company’s next annual impairment assessment will be performed as of the first day of the fourth quarter of fiscal
2013
unless indicators arise that would require the Company to reevaluate at an earlier date. The following table presents the changes in goodwill during fiscal
2012
and fiscal
2011
:
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|
2012
|
|
2011
|
Balance at beginning of year
|
$
|
275,087
|
|
|
$
|
255,580
|
|
Acquisition of Lyric Semiconductor (Note 6)
|
—
|
|
|
18,865
|
|
Acquisition of Multigig, Inc. (Note 6)
|
7,298
|
|
|
—
|
|
Foreign currency translation adjustment
|
1,448
|
|
|
642
|
|
Balance at end of year
|
$
|
283,833
|
|
|
$
|
275,087
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|
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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
November 3, 2012
, the Company’s finite-lived intangible assets consisted of the following which related to the acquisition of Multigig, Inc. (Note 6):
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November 3, 2012
|
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Gross Carrying
Amount
|
|
Accumulated
Amortization
|
Technology-based
|
$
|
1,100
|
|
|
$
|
128
|
|
Amortization expense related to finite-lived intangible assets was
$0.1 million
,
$1.3 million
and
$4.8 million
in fiscal
2012
,
2011
and
2010
, respectively. The remaining amortization expense will be recognized over a weighted-average period of approximately
2.3
years.
The Company expects annual amortization expense for intangible assets to be:
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Fiscal Year
|
Amortization Expense
|
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 values of the intangible assets with their 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
November 3, 2012
and
October 29, 2011
, respectively.
Certain of the Company’s foreign subsidiaries have received grants from governmental agencies. These grants include capital, employment and research and development grants. Capital grants for the acquisition of property and equipment are netted against the related capital expenditures and amortized as a credit to depreciation expense over the useful life of the related asset. Employment grants, which relate to employee hiring and training, and research and development grants are recognized in earnings in the period in which the related expenditures are incurred by the Company.
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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h.
|
Translation of Foreign Currencies
|
The functional currency for the Company’s foreign sales and research and development operations is the applicable local currency. Gains and losses resulting from translation of these foreign currencies into U.S. dollars are recorded in accumulated other comprehensive (loss) income. Transaction gains and losses and re-measurement of foreign currency denominated assets and liabilities are included in income currently, including those at the Company’s principal foreign manufacturing operations where the functional currency is the U.S. dollar. Foreign currency transaction gains or losses included in other expenses, net, were not material in fiscal
2012
,
2011
or
2010
.
|
|
i.
|
Derivative Instruments and Hedging Agreements
|
Foreign Exchange Exposure Management
— The Company enters into forward foreign currency exchange contracts to offset certain operational and balance sheet exposures from the impact of changes in foreign currency exchange rates. Such exposures result from the portion of the Company’s operations, assets and liabilities that are denominated in currencies other
than the U.S. dollar, primarily the Euro; other significant exposures include the 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 effects 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
November 3, 2012
and
October 29, 2011
, the total notional amount of these undesignated hedges was
$31.5 million
and
$41.2 million
, respectively. The fair value of these hedging instruments in the Company’s consolidated balance sheets as of
November 3, 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 fiscal year
2012
and fiscal year
2011
were as follows:
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|
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|
Statement of income classification
|
November 3, 2012
|
|
October 29, 2011
|
Loss on Swaps
|
|
Gain on Note
|
|
Net Income Effect
|
|
Loss on Swaps
|
|
Gain on Note
|
|
Net Income Effect
|
Other income
|
$
|
(769
|
)
|
|
$
|
769
|
|
|
$
|
—
|
|
|
$
|
(4,614
|
)
|
|
$
|
4,614
|
|
|
$
|
—
|
|
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. During fiscal year 2012,
$5.3 million
was amortized into earnings as a reduction of interest expense related to the swap termination. This amortization is reflected in the consolidated statements of cash flows
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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
November 3, 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 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 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
$151.8 million
and
$153.7 million
, respectively, of cash flow hedges denominated in Euros, British Pounds, Philippine Pesos and Japanese Yen as of
November 3, 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 consolidated balance sheets as of
November 3, 2012
and
October 29, 2011
were as follows:
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|
|
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|
|
|
|
|
|
|
|
Fair Value At
|
|
Balance Sheet Location
|
|
November 3, 2012
|
|
October 29, 2011
|
Interest rate swap agreements
|
Other assets
|
|
$
|
—
|
|
|
$
|
22,187
|
|
Forward foreign currency exchange contracts
|
Prepaid expenses and other current assets
|
|
$
|
1,161
|
|
|
$
|
2,038
|
|
The effect of derivative instruments designated as cash flow hedges on the consolidated statements of income for fiscal
2012
and
2011
were as follows:
|
|
|
|
|
|
|
|
|
|
November 3, 2012
|
|
October 29, 2011
|
(Gain) loss recognized in OCI on derivatives (net of tax of $1,233 in 2012 and $539 in 2011)
|
$
|
(7,923
|
)
|
|
$
|
3,347
|
|
Loss (gain) reclassified from OCI into income (net of tax of $1,160 in 2012 and $1,171 in 2011)
|
$
|
7,401
|
|
|
$
|
(7,793
|
)
|
The amounts reclassified into earnings before tax are recognized in cost of sales and operating expenses for fiscal
2012
and fiscal
2011
were as follows:
|
|
|
|
|
|
|
|
|
|
November 3, 2012
|
|
October 29, 2011
|
Cost of sales
|
$
|
3,096
|
|
|
$
|
(4,363
|
)
|
Research and development
|
$
|
2,344
|
|
|
$
|
(2,264
|
)
|
Selling, marketing, general and administrative
|
$
|
3,121
|
|
|
$
|
(2,337
|
)
|
All derivative gains and losses included in OCI will be reclassified into earnings within the next 12 months. There was
no ineffectiveness
during fiscal years ended
November 3, 2012
and
October 29, 2011
.
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accumulated Derivative Gains or Losses
The following table summarizes activity in accumulated other comprehensive (loss) income related to derivatives classified as cash flow hedges held by the Company during the period from
October 31, 2010
through
November 3, 2012
:
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
Balance at beginning of year
|
$
|
1,687
|
|
|
$
|
6,133
|
|
Changes in fair value of derivatives — (loss) gain, net of tax
|
(7,923
|
)
|
|
3,347
|
|
Loss (gain) reclassified into earnings from other comprehensive income (loss), net of tax
|
7,401
|
|
|
(7,793
|
)
|
Balance at end of year
|
$
|
1,165
|
|
|
$
|
1,687
|
|
The Company defines fair value as the price that would be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
Level 1
— Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2
— Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability.
Level 3
— Level 3 inputs are unobservable inputs for the asset or liability in which there is little, if any, market activity for the asset or liability at the measurement date.
The tables below, set forth by level, the Company’s financial assets and liabilities, excluding accrued interest components that were accounted for at fair value on a recurring basis as of
November 3, 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
November 3, 2012
and
October 29, 2011
, the Company held
$38.9 million
and
$31.6 million
, respectively, of cash and held-to-maturity investments that were excluded from the tables below. The carrying value of the debt outstanding on our
$145 million
term loan facility is considered to approximate fair value as the term loan bears interest at a variable rate.
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 3, 2012
|
|
Fair Value measurement at
Reporting Date using:
|
|
|
|
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Other
Unobservable
Inputs
(Level 3)
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
Institutional money market funds
|
$
|
143,876
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
143,876
|
|
Corporate obligations (1)
|
—
|
|
|
347,028
|
|
|
—
|
|
|
347,028
|
|
Short - term investments:
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
Securities with one year or less to maturity:
|
|
|
|
|
|
|
|
Corporate obligations (1)
|
—
|
|
|
2,818,798
|
|
|
—
|
|
|
2,818,798
|
|
Floating rate notes, issued at par
|
—
|
|
|
280,065
|
|
|
—
|
|
|
280,065
|
|
Floating rate notes (1)
|
—
|
|
|
234,280
|
|
|
—
|
|
|
234,280
|
|
Securities with greater than one year to maturity:
|
|
|
|
|
|
|
|
Floating rate notes, issued at par
|
|
|
37,408
|
|
|
|
|
37,408
|
|
Other assets:
|
|
|
|
|
|
|
|
Forward foreign currency exchange contracts (2)
|
$
|
—
|
|
|
$
|
1,061
|
|
|
$
|
—
|
|
|
$
|
1,061
|
|
Deferred compensation investments
|
28,480
|
|
|
—
|
|
|
—
|
|
|
28,480
|
|
Total assets measured at fair value
|
$
|
172,356
|
|
|
$
|
3,718,640
|
|
|
$
|
—
|
|
|
$
|
3,890,996
|
|
Liabilities
|
|
|
|
|
|
|
|
Contingent consideration
|
—
|
|
|
—
|
|
|
12,219
|
|
|
12,219
|
|
Total liabilities measured at fair value
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,219
|
|
|
$
|
12,219
|
|
|
|
(1)
|
The amortized cost of the Company’s investments classified as available-for-sale as of
November 3, 2012
was
$3,327.5 million
.
|
|
|
(2)
|
The Company has a master netting arrangement by counterparty with respect to derivative contracts. As of
November 3, 2012
, contracts in a liability position of
$1.9 million
were netted against contracts in an asset position in the consolidated balance sheet.
|
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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.
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Forward foreign currency exchange contracts
— The estimated fair value of forward foreign currency exchange contracts, which includes derivatives that are accounted for as cash flow hedges and those that are not designated as cash flow hedges, is based on the estimated amount the Company would receive if it sold these agreements at the reporting date taking into consideration current interest rates as well as the creditworthiness of the counterparty for assets and the Company’s creditworthiness for liabilities.
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 - 20 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
November 3, 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)
|
246
|
|
Balance as of November 3, 2012
|
$
|
12,219
|
|
|
|
(1)
|
Recorded in research and development expense in the 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
November 3, 2012
was
$402.5 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
November 3, 2012
and
October 29, 2011
was
$402.3 million
and
$392.8 million
, respectively and is classified as a Level 1 measurement according to the fair value hierarchy.
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Such estimates relate to the useful lives of fixed assets and identified intangible assets, allowances for doubtful accounts and customer returns, the net realizable value of inventory, potential reserves relating to litigation matters, accrued liabilities, accrued taxes, deferred tax valuation allowances, assumptions pertaining to share-based payments and other reserves. Actual results could differ from those estimates and such differences may be material to the financial statements.
|
|
l.
|
Concentrations of Risk
|
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of investments and trade accounts receivable.
The Company maintains cash, cash equivalents and short-term and long-term investments with high credit quality counterparties, continuously monitors the amount of credit exposure to any one issuer and diversifies its investments in order to minimize its credit risk.
The Company sells its products to distributors and original equipment manufacturers involved in a variety of industries including industrial process automation, instrumentation, defense/aerospace, automotive, communications, computers and computer peripherals and consumer electronics. The Company has adopted credit policies and standards to accommodate growth in these markets. The Company performs continuing credit evaluations of its customers’ financial condition and although the Company generally does not require collateral, the Company may require letters of credit from customers in certain circumstances. The Company provides reserves for estimated amounts of accounts receivable that may not be collected.
|
|
m.
|
Concentration of Other Risks
|
The semiconductor industry is characterized by rapid technological change, competitive pricing pressures and cyclical market patterns. The Company’s financial results are affected by a wide variety of factors, including general economic conditions worldwide, economic conditions specific to the semiconductor industry, the timely implementation of new manufacturing technologies, the ability to safeguard patents and intellectual property in a rapidly evolving market and reliance on assembly and test subcontractors, third-party wafer fabricators and independent distributors. In addition, the semiconductor market has historically been cyclical and subject to significant economic downturns at various times. The Company is exposed to the risk of obsolescence of its inventory depending on the mix of future business. Additionally, a large portion of the Company’s purchases of external wafer and foundry services are from a limited number of suppliers, primarily Taiwan Semiconductor Manufacturing Company (TSMC). If TSMC or any of the Company’s other key suppliers are unable or unwilling to manufacture and deliver sufficient quantities of components, on the time schedule and of the quality that the Company requires, the Company may be forced to engage additional or replacement suppliers, which could result in significant expenses and disruptions or delays in manufacturing, product development and shipment of product to the Company’s customers. Although the Company has experienced shortages of components, materials and external foundry services from time to time, these items have generally been available to the Company as needed.
Revenue from product sales to customers is generally recognized when title passes, which for shipments to certain foreign countries is subsequent to product shipment. Title for these shipments ordinarily passes within a week of shipment. A reserve for sales returns and allowances for customers is recorded based on historical experience or specific identification of an event necessitating a reserve.
In all regions of the world, the Company defers revenue and the related cost of sales on shipments to distributors until the distributors resell the products to their customers. As a result, the Company’s revenue fully reflects end customer purchases and is not impacted by distributor inventory levels. Sales to distributors are made under agreements that allow distributors to receive price-adjustment credits, as discussed below, and to return qualifying products for credit, as determined by the Company, in order to reduce the amounts of slow-moving, discontinued or obsolete product from their inventory. These agreements limit such returns to a certain percentage of the value of the Company’s shipments to that distributor during the prior quarter. In addition, distributors are allowed to return unsold products if the Company terminates the relationship with the distributor.
Distributors are granted price-adjustment credits for sales to their customers when the distributor’s standard cost (i.e., the Company’s sales price to the distributor) does not provide the distributor with an appropriate margin on its sales to its customers. As distributors negotiate selling prices with their customers, the final sales price agreed upon with the customer will be influenced by many factors, including the particular product being sold, the quantity ordered, the particular customer, the
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
geographic location of the distributor and the competitive landscape. As a result, the distributor may request and receive a price-adjustment credit from the Company to allow the distributor to earn an appropriate margin on the transaction.
Distributors are also granted price-adjustment credits in the event of a price decrease subsequent to the date the product was shipped and billed to the distributor. Generally, the Company will provide a credit equal to the difference between the price paid by the distributor (less any prior credits on such products) and the new price for the product multiplied by the quantity of the specific product in the distributor’s inventory at the time of the price decrease.
Given the uncertainties associated with the levels of price-adjustment credits to be granted to distributors, the sales price to the distributor is not fixed or determinable until the distributor resells the products to their customers. Therefore, the Company defers revenue recognition from sales to distributors until the distributors have sold the products to their customers.
Title to the inventory transfers to the distributor at the time of shipment or delivery to the distributor, and payment from the distributor is due in accordance with the Company’s standard payment terms. These payment terms are not contingent upon the distributors’ sale of the products to their customers. Upon title transfer to distributors, inventory is reduced for the cost of goods shipped, the margin (sales less cost of sales) is recorded as “deferred income on shipments to distributors, net” and an account receivable is recorded.
The deferred costs of sales to distributors have historically had very little risk of impairment due to the margins the Company earns on sales of its products and the relatively long life-cycle of the Company’s products. Product returns from distributors that are ultimately scrapped have historically been immaterial. In addition, price protection and price-adjustment credits granted to distributors historically have not exceeded the margins the Company earns on sales of its products. The Company continuously monitors the level and nature of product returns and is in frequent contact with the distributors to ensure reserves are established for all known material issues.
As of
November 3, 2012
and
October 29, 2011
, the Company had gross deferred revenue of
$299.0 million
and
$309.6 million
, respectively, and gross deferred cost of sales of
$60.5 million
and
$76.4 million
, respectively. Deferred income on shipments to distributors increased in fiscal
2012
primarily as a result of 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 fiscal
2012
,
2011
and
2010
were
not material
.
|
|
o.
|
Accumulated Other Comprehensive (Loss) Income
|
Other comprehensive (loss) income includes certain transactions that have generally been reported in the consolidated statement of shareholders’ equity. The components of accumulated other comprehensive loss at
November 3, 2012
and
October 29, 2011
consisted of the following, net of tax:
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
Foreign currency translation adjustment
|
$
|
982
|
|
|
$
|
(2,038
|
)
|
Unrealized gains on available-for-sale securities
|
444
|
|
|
695
|
|
Unrealized losses on available-for-sale securities
|
(423
|
)
|
|
(641
|
)
|
Unrealized gains on derivative instruments
|
1,165
|
|
|
1,687
|
|
Pension plans
|
|
|
|
Prior Service Cost
|
4,079
|
|
|
—
|
|
Transition obligation
|
(102
|
)
|
|
(117
|
)
|
Net actuarial loss
|
(70,539
|
)
|
|
(25,755
|
)
|
Total accumulated other comprehensive loss
|
$
|
(64,394
|
)
|
|
$
|
(26,169
|
)
|
The aggregate fair value of investments with unrealized losses as of
November 3, 2012
and
October 29, 2011
was
$1,214.1 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.
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Advertising costs are expensed as incurred. Advertising expense was approximately
$3.8 million
in fiscal
2012
,
$4.1 million
in fiscal
2011
and
$3.7 million
in fiscal
2010
.
Deferred tax assets and liabilities are determined based on the differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted income tax rates and laws that are expected to be in effect when the temporary differences are expected to reverse. Additionally, deferred tax assets and liabilities are separated into current and non-current amounts based on the classification of the related assets and liabilities for financial reporting purposes.
|
|
r.
|
Earnings Per Share of Common Stock
|
Basic earnings per share is computed based only on the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect of potential future issuances of common stock relating to stock option programs and other potentially dilutive securities using the treasury stock method. In calculating diluted earnings per share, the dilutive effect of stock options 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.
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
Income from continuing operations, net of tax
|
$
|
651,236
|
|
|
$
|
860,894
|
|
|
$
|
711,225
|
|
Gain on sale of discontinued operations, net of tax
|
—
|
|
|
6,500
|
|
|
859
|
|
Net income
|
$
|
651,236
|
|
|
$
|
867,394
|
|
|
$
|
712,084
|
|
Basic shares:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
298,761
|
|
|
299,417
|
|
|
297,387
|
|
Earnings per share-basic:
|
|
|
|
|
|
|
|
|
Income from continuing operations, net of tax
|
$
|
2.18
|
|
|
$
|
2.88
|
|
|
$
|
2.39
|
|
Total income from discontinued operations, net of tax
|
—
|
|
|
0.02
|
|
|
—
|
|
Net income
|
$
|
2.18
|
|
|
$
|
2.90
|
|
|
$
|
2.39
|
|
Diluted shares:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
298,761
|
|
|
299,417
|
|
|
297,387
|
|
Assumed exercise of common stock equivalents
|
7,430
|
|
|
8,819
|
|
|
8,474
|
|
Weighted average common and common equivalent shares
|
306,191
|
|
|
308,236
|
|
|
305,861
|
|
Earnings per share-diluted:
|
|
|
|
|
|
|
|
|
Income from continuing operations, net of tax
|
$
|
2.13
|
|
|
$
|
2.79
|
|
|
$
|
2.33
|
|
Total income from discontinued operations, net of tax
|
—
|
|
|
0.02
|
|
|
0.00
|
|
Net income
|
$
|
2.13
|
|
|
$
|
2.81
|
|
|
$
|
2.33
|
|
Weighted average anti-dilutive shares related to:
|
|
|
|
|
|
|
|
|
Outstanding stock options
|
5,860
|
|
|
7,298
|
|
|
18,206
|
|
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
s.
|
Stock-Based Compensation
|
Stock-based compensation is measured at the grant date based on the grant-date fair value of the awards ultimately expected to vest, and is recognized as an expense on a straight-line basis over the vesting period, which is generally
five years
for stock options and
three years
for restricted stock units. Determining the amount of stock-based compensation to be recorded requires the Company to develop estimates used in calculating the grant-date fair value of stock options. The Company calculates the grant-date fair value of stock options using the Black-Scholes valuation model. The use of valuation models requires the Company to make estimates and assumptions such as expected volatility, expected term, risk-free interest rate, expected dividend yield and forfeiture rates. The grant-date fair value of restricted stock units represents the value of the Company's common stock on the date of grant, reduced by the present value of dividends expected to be paid on the Company's common stock prior to vesting.
See Note 3 for additional information relating to stock-based compensation.
|
|
t.
|
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.
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, however early adoption is permitted. The Company adopted this standard in the fourth quarter of fiscal 2012. The adoption of ASU No. 2012-02 in the fourth quarter of fiscal 2012 did not have a material impact on the Company's financial condition and results of operations.
Standards to be Implemented
Balance Sheet
In December 2011, the FASB issued ASU No. 2011-11,
Disclosures about Offsetting Assets and Liabilities
(ASU No. 2011-11). ASU No. 2011-11 amended ASC 210,
Balance Sheet,
to converge the presentation of offsetting assets and liabilities between U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). ASU No. 2011-11 requires that entities disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. ASU No. 2011-11 is effective for fiscal years, and interim periods within those years, beginning after January 1, 2013, which is the Company’s fiscal year 2014. The adoption of ASU No. 2011-11 will require additional disclosures related to offsetting assets and liabilities but will not materially 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
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 materially impact the Company’s financial condition or results of operations.
|
|
u.
|
Discontinued Operations
|
In November 2007, the Company entered into a purchase and sale agreement with certain subsidiaries of ON Semiconductor Corporation to sell the Company’s CPU voltage regulation and PC thermal monitoring business which consisted of core voltage regulator products for the central processing unit in computing and gaming applications and temperature sensors and fan-speed controllers for managing the temperature of the central processing unit. During fiscal 2008, the Company completed the sale of this business. In the first quarter of fiscal 2010, proceeds of
$1 million
were released from escrow and
$0.6 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.
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 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 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 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 CPU voltage regulation and PC thermal monitoring and baseband chipset businesses have been segregated from continuing operations and reported as discontinued operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
Gain on sale of discontinued operations before income taxes
|
$
|
—
|
|
|
$
|
10,000
|
|
|
$
|
1,316
|
|
Provision for income taxes
|
—
|
|
|
3,500
|
|
|
457
|
|
Gain on sale of discontinued operations, net of tax
|
$
|
—
|
|
|
$
|
6,500
|
|
|
$
|
859
|
|
3. Stock-Based Compensation and Shareholders’ Equity
Equity Compensation Plans
The Company grants, or has granted, stock options and other stock and stock-based awards under The 2006 Stock Incentive Plan (2006 Plan). The 2006 Plan was approved by the Company’s Board of Directors on January 23, 2006 and was approved by shareholders on March 14, 2006 and subsequently amended in March 2006, June 2009, September 2009, December 2009, December 2010 and June 2011. The 2006 Plan provides for the grant of up to
15 million
shares of the Company’s common stock, plus such number of additional shares that were subject to outstanding options under the Company’s previous plans that are not issued because the applicable option award subsequently terminates or expires without being exercised. The 2006 Plan provides for the grant of incentive stock options intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended, non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards. Employees, officers, directors, consultants and advisors of the Company and its subsidiaries are eligible to be granted awards under the 2006 Plan. No award may be made under the 2006 Plan after March 13, 2016, but awards previously granted may extend beyond that date. The Company will not grant further options under any previous plans.
While the Company may grant to employees options that become exercisable at different times or within different periods, the Company has generally granted to employees options that vest over five years and become exercisable in annual installments of
20%
on each of the first, second, third, fourth and fifth anniversaries of the date of grant;
33.3%
on each of the third, fourth, and fifth anniversaries of the date of grant; or in annual installments of
25%
on each of the second, third, fourth and fifth anniversaries of the date of grant. The maximum contractual term of all options is
ten years
. In addition, the Company has granted to employees restricted stock units that generally vest in one installment on the third anniversary of the grant date.
As of
November 3, 2012
, a total of
7,781,812
common shares were available for future grant and
37,294,337
common
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
shares were reserved for issuance under the 2006 Plan.
Stock-based compensation is measured at the grant date based on the grant-date fair value of the awards ultimately expected to vest, and is recognized as an expense on a straight-line basis over the vesting period, which is generally
five years
for stock options and
three years
for restricted stock units. Determining the amount of stock-based compensation to be recorded requires the Company to develop estimates used in calculating the grant-date fair value of stock options.
Grant-Date Fair Value
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 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
2012
|
|
2011
|
|
2010
|
Options granted (in thousands)
|
2,456
|
|
|
1,990
|
|
|
1,866
|
|
Weighted-average exercise price
|
|
$39.58
|
|
|
|
$37.59
|
|
|
|
$31.49
|
|
Weighted-average grant-date fair value
|
|
$7.37
|
|
|
|
$8.62
|
|
|
|
$7.77
|
|
Assumptions:
|
|
|
|
|
|
Weighted-average expected volatility
|
28.4
|
%
|
|
29.3
|
%
|
|
31.4
|
%
|
Weighted-average expected term (in years)
|
5.3
|
|
|
5.3
|
|
|
5.3
|
|
Weighted-average risk-free interest rate
|
1.1
|
%
|
|
2.1
|
%
|
|
2.5
|
%
|
Weighted-average expected dividend yield
|
3.0
|
%
|
|
2.4
|
%
|
|
2.6
|
%
|
Expected volatility
— The Company is responsible for estimating volatility and has considered a number of factors, including third-party estimates. The Company currently believes that the exclusive use of implied volatility results in the best estimate of the grant-date fair value of employee stock options because it reflects the market’s current expectations of future volatility. In evaluating the appropriateness of exclusively relying on implied volatility, the Company concluded that: (1) options in the Company’s common stock are actively traded with sufficient volume on several exchanges; (2) the market prices of both the traded options and the underlying shares are measured at a similar point in time to each other and on a date close to the grant date of the employee share options; (3) the traded options have exercise prices that are both near-the-money and close to the exercise price of the employee share options; and (4) the remaining maturities of the traded options used to estimate volatility are at least
one
year.
Expected term
— The Company uses historical employee exercise and option expiration data to estimate the expected term assumption for the Black-Scholes grant-date valuation. The Company believes that this historical data is currently the best estimate of the expected term of a new option, and that generally its employees exhibit similar exercise behavior.
Risk-free interest rate
— The yield on zero-coupon U.S. Treasury securities for a period that is commensurate with the expected term assumption is used as the risk-free interest rate.
Expected dividend yield
— Expected dividend yield is calculated by annualizing the cash dividend declared by the Company’s Board of Directors for the current quarter and dividing that result by the closing stock price on the date of grant. Until such time as the Company’s Board of Directors declares a cash dividend for an amount that is different from the current quarter’s cash dividend, the current dividend will be used in deriving this assumption. Cash dividends are not paid on options, restricted stock or restricted stock units.
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
November 3, 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.
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 consolidated statements of income. For fiscal year
2010
, the Company had a sufficient APIC pool to cover any tax deficiencies recorded and as a result, these deficiencies did not affect its results of operations. During fiscal year
2012
and
2011
, the Company recognized an
immaterial
amount of income tax expense resulting from tax shortfalls related to share-based compensation in its consolidated statements of income.
Stock-Based Compensation Activity
A summary of the activity under the Company’s stock option plans as of
November 3, 2012
and changes during the fiscal year then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding
(in thousands)
|
|
Weighted-
Average Exercise
Price Per Share
|
|
Weighted-
Average
Remaining
Contractual
Term in Years
|
|
Aggregate
Intrinsic
Value
|
Options outstanding October 29, 2011
|
34,116
|
|
|
|
$30.27
|
|
|
|
|
|
Options granted
|
2,456
|
|
|
|
$39.58
|
|
|
|
|
|
Options exercised
|
(7,568
|
)
|
|
|
$25.34
|
|
|
|
|
|
Options forfeited
|
(396
|
)
|
|
|
$27.85
|
|
|
|
|
|
Options expired
|
(2,155
|
)
|
|
|
$40.78
|
|
|
|
|
|
Options outstanding at November 3, 2012
|
26,453
|
|
|
|
$31.73
|
|
|
4.7
|
|
|
|
$222,689
|
|
Options exercisable at November 3, 2012
|
18,605
|
|
|
|
$31.63
|
|
|
3.4
|
|
|
|
$161,135
|
|
Options vested or expected to vest at November 3, 2012 (1)
|
26,019
|
|
|
|
$31.66
|
|
|
4.6
|
|
|
|
$221,059
|
|
|
|
(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.
|
The total intrinsic value of options exercised (i.e. the difference between the market price at exercise and the price paid by the employee to exercise the options) during fiscal
2012
,
2011
and
2010
was
$105.4 million
,
$96.5 million
and
$29.6 million
, respectively, and the total amount of proceeds received by the Company from exercise of these options during fiscal
2012
,
2011
and
2010
was
$191.8 million
,
$217.4 million
and
$240.4 million
, respectively. Proceeds from stock option exercises pursuant to employee stock plans in the Company’s statement of cash flows of
$191.2 million
,
$217.2 million
, and
$216.1 million
for fiscal
2012
,
2011
and
2010
, respectively, 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
November 3, 2012
and changes during the fiscal year then ended is presented below:
|
|
|
|
|
|
|
|
|
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
|
1,122
|
|
|
|
$36.05
|
|
Restrictions lapsed
|
(67
|
)
|
|
|
$27.48
|
|
Forfeited
|
(83
|
)
|
|
|
$30.37
|
|
Restricted stock units outstanding at November 3, 2012
|
3,060
|
|
|
|
$33.01
|
|
As of
November 3, 2012
, there was
$89.9 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 fiscal
2012
,
2011
and
2010
was approximately
$48.6 million
,
$49.6 million
and
$67.7 million
, respectively.
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Common Stock Repurchase Program
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 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
November 3, 2012
, the Company had repurchased a total of approximately
129.2 million
shares of its common stock for approximately
$4,439.0 million
under this program. An additional
$561.0 million
remains available for repurchase of shares under the current authorized program. The repurchased shares are held as authorized but unissued shares of common stock. 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.
Preferred Stock
The Company has
471,934
authorized shares of
$1.00
par value preferred stock,
none
of which is issued or outstanding. The Board of Directors is authorized to fix designations, relative rights, preferences and limitations on the preferred stock at the time of issuance.
|
|
4.
|
Industry, Segment and Geographic Information
|
The Company operates and tracks its results in
one
reportable segment based on the aggregation of
five
operating segments. The Company designs, develops, manufactures and markets a broad range of ICs. The Chief Executive Officer has been identified as the Chief Operating Decision Maker.
Revenue Trends by End Market
The following table summarizes revenue by end market. The categorization of revenue by end market is determined using a variety of data points including the technical characteristics of the product, the “sold to” customer information, the “ship to” customer information and the end customer product or application into which the Company’s product will be incorporated. As data systems for capturing and tracking this data evolve and improve, the categorization of products by end market can vary over time. When this occurs, the Company reclassifies revenue by end market for prior periods. Such reclassifications typically do not materially change the sizing of, or the underlying trends of results within, each end market.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
Revenue
|
|
% of
Total
Product
Revenue
|
|
Y/Y%
|
|
Revenue
|
|
% of
Total
Product
Revenue
|
|
Revenue
|
|
% of
Total
Product
Revenue
|
Industrial
|
$
|
1,240,344
|
|
|
46
|
%
|
|
(12
|
)%
|
|
$
|
1,411,386
|
|
|
47
|
%
|
|
$
|
1,280,027
|
|
|
46
|
%
|
Automotive
|
463,577
|
|
|
17
|
%
|
|
11
|
%
|
|
417,929
|
|
|
14
|
%
|
|
335,163
|
|
|
12
|
%
|
Consumer
|
467,626
|
|
|
17
|
%
|
|
(16
|
)%
|
|
559,142
|
|
|
19
|
%
|
|
605,541
|
|
|
22
|
%
|
Communications
|
529,595
|
|
|
20
|
%
|
|
(12
|
)%
|
|
604,863
|
|
|
20
|
%
|
|
540,772
|
|
|
20
|
%
|
Total Revenue
|
$
|
2,701,142
|
|
|
100
|
%
|
|
(10
|
)%
|
|
$
|
2,993,320
|
|
|
100
|
%
|
|
$
|
2,761,503
|
|
|
100
|
%
|
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
Revenue
|
|
% of
Total
Product
Revenue*
|
|
Y/Y%
|
|
Revenue
|
|
% of
Total
Product
Revenue
|
|
Revenue
|
|
% of
Total
Product
Revenue
|
Converters
|
$
|
1,192,064
|
|
|
44
|
%
|
|
(11
|
)%
|
|
$
|
1,343,487
|
|
|
45
|
%
|
|
$
|
1,295,700
|
|
|
47
|
%
|
Amplifiers/Radio frequency
|
697,687
|
|
|
26
|
%
|
|
(11
|
)%
|
|
788,299
|
|
|
26
|
%
|
|
701,557
|
|
|
25
|
%
|
Other analog
|
397,376
|
|
|
15
|
%
|
|
(3
|
)%
|
|
410,323
|
|
|
14
|
%
|
|
334,663
|
|
|
12
|
%
|
Subtotal analog signal processing
|
2,287,127
|
|
|
85
|
%
|
|
(10
|
)%
|
|
2,542,109
|
|
|
85
|
%
|
|
2,331,920
|
|
|
84
|
%
|
Power management & reference
|
182,134
|
|
|
7
|
%
|
|
(16
|
)%
|
|
217,615
|
|
|
7
|
%
|
|
194,740
|
|
|
7
|
%
|
Total analog products
|
$
|
2,469,261
|
|
|
91
|
%
|
|
(11
|
)%
|
|
$
|
2,759,724
|
|
|
92
|
%
|
|
$
|
2,526,660
|
|
|
91
|
%
|
Digital signal processing
|
231,881
|
|
|
9
|
%
|
|
(1
|
)%
|
|
233,596
|
|
|
8
|
%
|
|
234,843
|
|
|
9
|
%
|
Total Revenue
|
$
|
2,701,142
|
|
|
100
|
%
|
|
(10
|
)%
|
|
$
|
2,993,320
|
|
|
100
|
%
|
|
$
|
2,761,503
|
|
|
100
|
%
|
________________
|
|
*
|
The sum of the individual percentages do not equal the total due to rounding.
|
Geographic Information
During 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. In fiscal years
2012
,
2011
and
2010
, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
Revenue from continuing operations
|
|
|
|
|
|
|
|
|
United States
|
$
|
818,653
|
|
|
$
|
866,142
|
|
|
$
|
794,463
|
|
Rest of North and South America
|
114,133
|
|
|
144,585
|
|
|
134,327
|
|
Europe
|
852,668
|
|
|
967,417
|
|
|
816,561
|
|
Japan
|
333,558
|
|
|
398,587
|
|
|
433,706
|
|
China
|
341,196
|
|
|
360,594
|
|
|
320,739
|
|
Rest of Asia
|
240,934
|
|
|
255,995
|
|
|
261,707
|
|
Subtotal all foreign countries
|
1,882,489
|
|
|
2,127,178
|
|
|
1,967,040
|
|
Total revenue
|
$
|
2,701,142
|
|
|
$
|
2,993,320
|
|
|
$
|
2,761,503
|
|
Property, plant and equipment
|
|
|
|
|
|
|
|
|
United States
|
$
|
194,937
|
|
|
$
|
187,013
|
|
|
$
|
188,776
|
|
Ireland
|
127,669
|
|
|
128,660
|
|
|
139,165
|
|
Philippines
|
164,727
|
|
|
149,098
|
|
|
131,963
|
|
All other countries
|
13,534
|
|
|
14,068
|
|
|
12,761
|
|
Subtotal all foreign countries
|
305,930
|
|
|
291,826
|
|
|
283,889
|
|
Total property, plant and equipment
|
$
|
500,867
|
|
|
$
|
478,839
|
|
|
$
|
472,665
|
|
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 31, 2009
to
November 3, 2012
of the employee separation and exit cost accruals established related to these actions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Income
|
|
Closure of Wafer
Fabrication
Facility
in Sunnyvale
|
|
Reduction of
Operating
Costs
|
|
Closure of Wafer
Fabrication
Facility
in Cambridge
|
|
Total
Special
Charges
Related to Ongoing Actions
|
Workforce reductions
|
|
$
|
—
|
|
|
$
|
1,627
|
|
|
$
|
—
|
|
|
$
|
1,627
|
|
Total Fiscal 2008 Charges
|
|
$
|
—
|
|
|
$
|
1,627
|
|
|
$
|
—
|
|
|
$
|
1,627
|
|
Workforce reductions
|
|
—
|
|
|
26,583
|
|
|
7,446
|
|
|
34,029
|
|
Facility closure costs
|
|
—
|
|
|
2,411
|
|
|
57
|
|
|
2,468
|
|
Non-cash impairment charge
|
|
—
|
|
|
839
|
|
|
14,629
|
|
|
15,468
|
|
Other items
|
|
—
|
|
|
500
|
|
|
—
|
|
|
500
|
|
Total Fiscal 2009 Charges
|
|
$
|
—
|
|
|
$
|
30,333
|
|
|
$
|
22,132
|
|
|
$
|
52,465
|
|
Workforce reductions
|
|
—
|
|
|
10,908
|
|
|
—
|
|
|
10,908
|
|
Facility closure costs
|
|
375
|
|
|
—
|
|
|
4,689
|
|
|
5,064
|
|
Non-cash impairment charge
|
|
—
|
|
|
487
|
|
|
—
|
|
|
487
|
|
Other items
|
|
—
|
|
|
24
|
|
|
—
|
|
|
24
|
|
Total Fiscal 2010 Charges
|
|
$
|
375
|
|
|
$
|
11,419
|
|
|
$
|
4,689
|
|
|
$
|
16,483
|
|
Workforce reductions
|
|
—
|
|
|
2,239
|
|
|
—
|
|
|
2,239
|
|
Total Fiscal 2011 Charges
|
|
$
|
—
|
|
|
$
|
2,239
|
|
|
$
|
—
|
|
|
$
|
2,239
|
|
Workforce reductions
|
|
—
|
|
|
7,966
|
|
|
—
|
|
|
7,966
|
|
Facility closure costs
|
|
—
|
|
|
186
|
|
|
—
|
|
|
186
|
|
Non-cash impairment charge
|
|
—
|
|
|
219
|
|
|
—
|
|
|
219
|
|
Other items
|
|
—
|
|
|
60
|
|
|
—
|
|
|
60
|
|
Total Fiscal 2012 Charges
|
|
$
|
—
|
|
|
$
|
8,431
|
|
|
$
|
—
|
|
|
$
|
8,431
|
|
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Restructuring
|
|
Closure of Wafer
Fabrication
Facility
in Sunnyvale
|
|
Reduction of
Operating
Costs
|
|
Closure of Wafer
Fabrication
Facility
in Cambridge
|
|
Total
|
Balance at October 31, 2009
|
|
$
|
169
|
|
|
$
|
8,161
|
|
|
$
|
6,690
|
|
|
$
|
15,020
|
|
Fiscal 2010 special charges
|
|
375
|
|
|
11,419
|
|
|
4,689
|
|
|
16,483
|
|
Severance payments
|
|
—
|
|
|
(12,223
|
)
|
|
(5,337
|
)
|
|
(17,560
|
)
|
Facility closure costs
|
|
(544
|
)
|
|
(1,216
|
)
|
|
(4,079
|
)
|
|
(5,839
|
)
|
Non-cash impairment charge
|
|
—
|
|
|
(487
|
)
|
|
—
|
|
|
(487
|
)
|
Other payments
|
|
—
|
|
|
(24
|
)
|
|
—
|
|
|
(24
|
)
|
Effect of foreign currency on accrual
|
|
—
|
|
|
(84
|
)
|
|
—
|
|
|
(84
|
)
|
Balance at October 30, 2010
|
|
$
|
—
|
|
|
$
|
5,546
|
|
|
$
|
1,963
|
|
|
$
|
7,509
|
|
Fiscal 2011 special charges
|
|
—
|
|
|
2,239
|
|
|
—
|
|
|
2,239
|
|
Severance payments
|
|
—
|
|
|
(3,913
|
)
|
|
(1,352
|
)
|
|
(5,265
|
)
|
Facility closure costs
|
|
—
|
|
|
—
|
|
|
(611
|
)
|
|
(611
|
)
|
Effect of foreign currency on accrual
|
|
—
|
|
|
4
|
|
|
—
|
|
|
4
|
|
Balance at October 29, 2011
|
|
$
|
—
|
|
|
$
|
3,876
|
|
|
$
|
—
|
|
|
$
|
3,876
|
|
Fiscal 2012 special charges
|
|
—
|
|
|
8,431
|
|
|
—
|
|
|
8,431
|
|
Severance payments
|
|
—
|
|
|
(8,931
|
)
|
|
—
|
|
|
(8,931
|
)
|
Facility closure costs
|
|
—
|
|
|
(186
|
)
|
|
—
|
|
|
(186
|
)
|
Non-cash impairment charge
|
|
—
|
|
|
(219
|
)
|
|
—
|
|
|
(219
|
)
|
Effect of foreign currency on accrual
|
|
—
|
|
|
22
|
|
|
—
|
|
|
22
|
|
Balance at November 3, 2012
|
|
$
|
—
|
|
|
$
|
2,993
|
|
|
$
|
—
|
|
|
$
|
2,993
|
|
Closure of Wafer Fabrication Facility in Sunnyvale
The Company ceased production at its California wafer fabrication facility in November 2006. The Company paid the related lease obligation costs on a monthly basis over the remaining lease term, which expired in March 2010. The Company recorded a one-time settlement charge of
$0.4 million
in fiscal
2010
related to the termination of the lease. This action was completed during fiscal
2010
.
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 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. The Company terminated the employment of all employees associated with these actions.
During fiscal
2012
, the Company recorded special charges of approximately
$8.4 million
. The special charges included
$7.9 million
for severance and fringe benefit costs in accordance with its ongoing benefit plan or statutory requirements at foreign locations for
95
manufacturing, engineering and SMG&A employees;
$0.1 million
for contract termination costs;
$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
November 3, 2012
, the Company employed
6
of the
95
employees included in these cost reduction actions. These employees must continue to be employed by the Company until their employment is involuntarily terminated in order to receive the severance benefit.
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Closure of a Wafer Fabrication Facility in Cambridge
During fiscal 2009 and fiscal 2010, the Company recorded special charges of
$26.8 million
as a result of its decision to consolidate its Cambridge, Massachusetts wafer fabrication facility into its existing Wilmington, Massachusetts facility. These special charges included:
$7.4 million
for severance and fringe benefit costs recorded in accordance with the Company’s ongoing benefit plan for
124
manufacturing employees and
9
SMG&A employees;
$14.6 million
for the impairment of manufacturing assets;
$3.4 million
for lease obligation costs for the Cambridge wafer fabrication facility, which the Company ceased using in the first quarter of fiscal 2010; and
$1.4 million
for clean-up and closure costs that were expensed as incurred. This action was completed during the third quarter of fiscal 2011.
On
March 30, 2012
, the Company acquired privately-held Multigig, Inc. (Multigig) of San Jose, California. The acquisition of Multigig is expected to enhance the Company’s clocking capabilities in stand-alone and embedded applications and strengthen the Company’s high speed signal processing solutions. The acquisition-date fair value of the consideration transferred totaled
$26.8 million
, which consisted of
$24.2 million
in initial cash payments at closing and an additional
$2.6 million
subject to an indemnification holdback that is payable within
15 months
of the transaction date, which is included in accrued liabilities in the consolidated balance sheet as of
November 3, 2012
. The Company’s assessment of fair value of the tangible and intangible assets acquired and liabilities assumed was based on their estimated fair values at the date of acquisition, resulting in the recognition of
$15.6 million
of IPR&D,
$1.1 million
of developed technology,
$7.0 million
of goodwill and
$3.1 million
of net deferred tax assets. The goodwill recognized is attributable to future technologies that have yet to be determined as well as the assembled workforce of Multigig. Future technologies do not meet the criteria for recognition separately from goodwill because they are a part of future development and growth of the business.
None
of the goodwill is expected to be deductible for tax purposes. During the third quarter of fiscal 2012, the Company reduced this holdback amount by
$0.1 million
as a result of indemnification claims. During the fourth quarter of fiscal
2012
, the Company finalized its purchase accounting for Multigig which resulted in adjustments of
$0.4 million
to deferred taxes and goodwill. In addition, the Company will be obligated to pay royalties to the Multigig employees on revenue recognized from the sale of certain Multigig products through the
earlier of 5 years
or the aggregate maximum payment of
$1.0 million
. Royalty payments to Multigig employees require post-acquisition services to be rendered and, as such, the Company will record these amounts as compensation expense in the related periods. As of
November 3, 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 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
November 3, 2012
, the Company has 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 Company’s assessment of the fair value of the tangible and intangible assets acquired and liabilities assumed was based on their estimated fair values at the date of acquisition, resulting in the recognition of
$12.2 million
of IPR&D,
$18.9 million
of goodwill and
$3.3 million
of net deferred tax liabilities. The goodwill recognized is attributable to future technologies that have yet to be determined as well as the assembled workforce of Lyric. Future technologies do not meet the criteria for recognition separately from goodwill because they are a part of future development and growth of the business.
None
of the goodwill is expected to be deductible for tax purposes. The fair value of the remaining contingent consideration was approximately
$12.2 million
as of
November 3, 2012
, of which
$6.8 million
is included in accrued liabilities and
$5.4 million
is included in other non-current liabilities in the consolidated balance sheet. In addition, the Company will be obligated to pay royalties to the former equity holders of Lyric on revenue recognized from the sale of Lyric products and licenses through the
earlier of 20 years
or the accrual of a maximum of
$25.0 million
. Royalty payments to Lyric employees require post-acquisition services to be rendered and, as such, the Company will record these amounts as compensation expense in the related periods. As of
November 3, 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 consolidated statement
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
|
|
7.
|
Deferred Compensation Plan Investments
|
Investments in The Analog Devices, Inc. Deferred Compensation Plan (the Deferred Compensation Plan) are classified as trading. The components of the investments as of
November 3, 2012
and
October 29, 2011
were as follows:
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
Money market funds
|
$
|
17,939
|
|
|
$
|
17,187
|
|
Mutual funds
|
10,541
|
|
|
9,223
|
|
Total Deferred Compensation Plan investments
|
$
|
28,480
|
|
|
$
|
26,410
|
|
The fair values of these investments are based on published market quotes on
November 3, 2012
and
October 29, 2011
, respectively. Adjustments to the fair value of, and income pertaining to, Deferred Compensation Plan investments are recorded in operating expenses. Gross realized and unrealized gains and losses from trading securities were
not material
in fiscal
2012
,
2011
or
2010
.
The Company has recorded a corresponding liability for amounts owed to the Deferred Compensation Plan participants (see Note 10). These investments are specifically designated as available to the Company solely for the purpose of paying benefits under the Deferred Compensation Plan. However, in the event the Company became insolvent, the investments would be available to all unsecured general creditors.
Other investments consist of equity securities and other long-term investments. Investments are stated at fair value, which is based on market quotes or on a cost-basis, dependent on the nature of the investment, as appropriate. Adjustments to the fair value of investments classified as available-for-sale are recorded as an increase or decrease in accumulated other comprehensive (loss) income, unless the adjustment is considered an other-than-temporary impairment, in which case the adjustment is recorded as a charge in the statement of income.
During fiscal
2010
, the Company recognized an other-than-temporary impairment of
$0.7 million
. The investment impairment was related to the decline in fair value of a publicly-traded equity investment below its cost basis that was determined to be other-than-temporary.
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 fiscal
2012
. There were no material net realized gains or losses from the sales of available-for-sale investments during fiscal
2011
and fiscal
2010
.
There were
no
net unrealized gains or losses on securities classified as other investments as of
November 3, 2012
. Unrealized gains and losses on securities classified as other investments as of
October 29, 2011
were as follows:
|
|
|
|
|
|
2011
|
Unrealized gains
|
$
|
1,038
|
|
Unrealized losses
|
(179
|
)
|
Net unrealized gains on securities classified as other investments
|
$
|
859
|
|
Accrued liabilities at
November 3, 2012
and
October 29, 2011
consisted of the following:
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
Accrued compensation and benefits
|
$
|
82,027
|
|
|
$
|
91,918
|
|
Special charges
|
2,993
|
|
|
3,876
|
|
Other
|
63,887
|
|
|
61,822
|
|
Total accrued liabilities
|
$
|
148,907
|
|
|
$
|
157,616
|
|
|
|
10.
|
Deferred Compensation Plan Liability
|
The deferred compensation plan liability relates to obligations due under the Deferred Compensation Plan. The Deferred Compensation Plan allows certain members of management and other highly-compensated employees and non-employee directors to defer receipt of all or any portion of their compensation. The balance represents Deferred Compensation Plan participant accumulated deferrals and earnings thereon since the inception of the Deferred Compensation Plan net of withdrawals. The Company’s liability under the Deferred Compensation Plan is an unsecured general obligation of the Company.
The Company leases certain facilities, equipment and software under various operating leases that expire at various dates through 2022
. The lease agreements frequently include renewal and escalation clauses and require the Company to pay taxes, insurance and maintenance costs. Total rental expense under operating leases was approximately
$48 million
in fiscal
2012
,
$45 million
in fiscal
2011
and
$40 million
in fiscal
2010
.
The following is a schedule of future minimum rental payments required under long-term operating leases at
November 3, 2012
:
|
|
|
|
|
|
|
|
Operating
|
Fiscal Years
|
|
Leases
|
2013
|
|
$
|
29,559
|
|
2014
|
|
23,714
|
|
2015
|
|
12,585
|
|
2016
|
|
6,494
|
|
2017
|
|
4,239
|
|
Later Years
|
|
12,437
|
|
Total
|
|
$
|
89,028
|
|
|
|
12.
|
Commitments and Contingencies
|
From time to time, in the ordinary course of the Company’s business, various claims, charges and litigation are asserted or commenced against the Company arising from, or related to, contractual matters, patents, trademarks, personal injury, environmental matters, product liability, insurance coverage and personnel and employment disputes. As to such claims and litigation, the Company can give no assurance that it will prevail. The Company does not believe that any current legal matters will have a material adverse effect on the Company’s financial position, results of operations or cash flows.
The Company and its subsidiaries have various savings and retirement plans covering substantially all employees. The Company maintains a defined contribution plan for the benefit of its eligible U.S. employees. This plan provides for Company contributions of up to
5%
of each participant’s total eligible compensation. In addition, the Company contributes an amount equal to each participant’s pre-tax contribution, if any, up to a maximum of
3%
of each participant’s total eligible compensation. The total expense related to the defined contribution plan for U.S. employees was
$22.8 million
in fiscal
2012
,
$21.9 million
in fiscal
2011
and
$20.5 million
in fiscal
2010
. The Company also has various defined benefit pension and other retirement plans for certain non-U.S. employees that are consistent with local statutory requirements and practices. The total expense related to the various defined benefit pension and other retirement plans for certain non-U.S. employees was
$18.9 million
in fiscal
2012
,
$21.4 million
in fiscal
2011
and
$11.7 million
in fiscal
2010
.
Non-U.S. Plan Disclosures
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s funding policy for its foreign defined benefit pension plans is consistent with the local requirements of each country. The plans’ assets consist primarily of U.S. and non-U.S. equity securities, bonds, property and cash. The benefit obligations and related assets under these plans have been measured at
November 3, 2012
and
October 29, 2011
.
Components of Net Periodic Benefit Cost
Net annual periodic pension cost of non-U.S. plans is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
Service cost
|
$
|
7,909
|
|
|
$
|
9,175
|
|
|
$
|
5,933
|
|
Interest cost
|
10,901
|
|
|
11,395
|
|
|
9,594
|
|
Expected return on plan assets
|
(10,469
|
)
|
|
(10,938
|
)
|
|
(11,079
|
)
|
Amortization of prior service cost
|
—
|
|
|
—
|
|
|
1
|
|
Amortization of transition obligation (asset)
|
19
|
|
|
15
|
|
|
(27
|
)
|
Recognized actuarial loss (gain)
|
361
|
|
|
1,630
|
|
|
(133
|
)
|
Subtotal
|
$
|
8,721
|
|
|
$
|
11,277
|
|
|
$
|
4,289
|
|
Settlement impact
|
—
|
|
|
—
|
|
|
(39
|
)
|
Net periodic pension cost
|
$
|
8,721
|
|
|
$
|
11,277
|
|
|
$
|
4,250
|
|
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Benefit Obligations and Plan Assets
Obligation and asset data of the Company’s non-U.S. plans at each fiscal year end is presented in the following table:
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
Change in Benefit Obligation
|
|
|
|
|
|
Benefit obligation at beginning of year
|
$
|
210,913
|
|
|
$
|
215,012
|
|
Service cost
|
7,909
|
|
|
9,175
|
|
Interest cost
|
10,901
|
|
|
11,395
|
|
Participant contributions
|
2,523
|
|
|
2,301
|
|
Plan Amendments
|
(4,663
|
)
|
|
—
|
|
Premiums paid
|
(191
|
)
|
|
(192
|
)
|
Actuarial loss (gain)
|
63,127
|
|
|
(27,544
|
)
|
Benefits paid
|
(3,411
|
)
|
|
(2,625
|
)
|
Exchange rate adjustment
|
(14,852
|
)
|
|
3,391
|
|
Benefit obligation at end of year
|
$
|
272,256
|
|
|
$
|
210,913
|
|
Change in Plan Assets
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
$
|
184,754
|
|
|
$
|
176,220
|
|
Actual return on plan assets
|
18,391
|
|
|
(2,938
|
)
|
Employer contributions
|
10,611
|
|
|
9,233
|
|
Participant contributions
|
2,523
|
|
|
2,301
|
|
Premiums paid
|
(191
|
)
|
|
(192
|
)
|
Benefits paid
|
(3,411
|
)
|
|
(2,625
|
)
|
Exchange rate adjustment
|
(12,516
|
)
|
|
2,755
|
|
Fair value of plan assets at end of year
|
$
|
200,161
|
|
|
$
|
184,754
|
|
Reconciliation of Funded Status
|
|
|
|
|
|
Funded status
|
$
|
(72,095
|
)
|
|
$
|
(26,159
|
)
|
Amounts Recognized in the Balance Sheet
|
|
|
|
|
|
Non-current assets
|
$
|
2,596
|
|
|
$
|
2,741
|
|
Current liabilities
|
(657
|
)
|
|
(573
|
)
|
Non-current liabilities
|
(74,034
|
)
|
|
(28,327
|
)
|
Net amount recognized
|
$
|
(72,095
|
)
|
|
$
|
(26,159
|
)
|
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
Reconciliation of Amounts Recognized in the Statement of Financial Position
|
|
|
|
|
|
Initial net obligation
|
$
|
(109
|
)
|
|
$
|
(125
|
)
|
Prior Service credit
|
4,663
|
|
|
—
|
|
Net loss
|
(82,640
|
)
|
|
(30,613
|
)
|
Accumulated other comprehensive loss
|
(78,086
|
)
|
|
(30,738
|
)
|
Accumulated contributions in excess of net periodic benefit cost
|
5,991
|
|
|
4,579
|
|
Net amount recognized
|
$
|
(72,095
|
)
|
|
$
|
(26,159
|
)
|
Changes Recognized in Other Comprehensive Income
|
|
|
|
|
|
Changes in plan assets and benefit obligations recognized in other comprehensive income
|
|
|
|
|
|
Prior Service cost
|
$
|
(4,663
|
)
|
|
$
|
—
|
|
Net loss (gain) arising during the year (includes curtailment gains not recognized as a component of net periodic cost)
|
$
|
55,205
|
|
|
$
|
(13,667
|
)
|
Effect of exchange rates on amounts included in accumulated other comprehensive (loss) income
|
(2,202
|
)
|
|
445
|
|
Amounts recognized as a component of net periodic benefit cost
|
|
|
|
|
|
Amortization, settlement or curtailment recognition of net transition obligation
|
(19
|
)
|
|
(15
|
)
|
Amortization or settlement recognition of net loss
|
(361
|
)
|
|
(1,630
|
)
|
Total recognized in other comprehensive loss (income)
|
$
|
47,960
|
|
|
$
|
(14,867
|
)
|
Total recognized in net periodic cost and other comprehensive loss (income)
|
$
|
56,681
|
|
|
$
|
(3,590
|
)
|
Estimated amounts that will be amortized from accumulated other comprehensive (loss) income over the next fiscal year
|
|
|
|
|
|
Initial net obligation
|
$
|
(20
|
)
|
|
$
|
(20
|
)
|
Prior Service credit
|
228
|
|
|
—
|
|
Net loss
|
(2,939
|
)
|
|
(366
|
)
|
Total
|
$
|
(2,731
|
)
|
|
$
|
(386
|
)
|
The accumulated benefit obligation for non-U.S. pension plans was
$214.5 million
and
$169.0 million
at
November 3, 2012
and
October 29, 2011
, respectively.
Information relating to the Company’s non-U.S. plans with projected benefit obligations in excess of plan assets and accumulated benefit obligations in excess of plan assets at each fiscal year end is presented in the following table:
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
Plans with projected benefit obligations in excess of plan assets:
|
|
|
|
|
|
Projected benefit obligation
|
$
|
237,422
|
|
|
$
|
180,182
|
|
Fair value of plan assets
|
$
|
162,731
|
|
|
$
|
151,281
|
|
Plans with accumulated benefit obligations in excess of plan assets:
|
|
|
|
|
|
Projected benefit obligation
|
$
|
219,248
|
|
|
$
|
25,236
|
|
Accumulated benefit obligation
|
$
|
175,243
|
|
|
$
|
21,022
|
|
Fair value of plan assets
|
$
|
146,155
|
|
|
$
|
635
|
|
Assumptions
The range of assumptions used for the non-U.S. defined benefit plans reflects the different economic environments within the various countries. The projected benefit obligation was determined using the following weighted-average assumptions:
|
|
|
|
|
|
|
|
2012
|
|
2011
|
Discount rate
|
4.55
|
%
|
|
5.60
|
%
|
Rate of increase in compensation levels
|
2.85
|
%
|
|
3.07
|
%
|
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Net annual periodic pension cost was determined using the following weighted average assumptions:
|
|
|
|
|
|
|
|
2012
|
|
2011
|
Discount rate
|
5.60
|
%
|
|
5.33
|
%
|
Expected long-term return on plan assets
|
5.71
|
%
|
|
6.15
|
%
|
Rate of increase in compensation levels
|
3.07
|
%
|
|
3.40
|
%
|
The expected long-term rate of return on assets is a weighted-average of the long-term rates of return selected for the various countries where the Company has funded pension plans. The expected long-term rate of return on assets assumption is selected based on the facts and circumstances that exist as of the measurement date and the specific portfolio mix of plan assets. Management, in conjunction with its actuaries, reviewed anticipated future long-term performance of individual asset categories and considered the asset allocation strategy adopted by the Company and/or the trustees of the plans. While the review considered recent fund performance and historical returns, the assumption is primarily a long-term prospective rate.
The Company’s investment strategy is based on an expectation that equity securities will outperform debt securities over the long term. Accordingly, in order to maximize the return on assets, a majority of assets are invested in equities. Investments within each asset class are diversified to reduce the impact of losses in single investments. The use of derivative instruments is permitted where appropriate and necessary to achieve overall investment policy objectives and asset class targets.
The Company establishes strategic asset allocation percentage targets and appropriate benchmarks for each significant asset class to obtain a prudent balance between return and risk. The interaction between plan assets and benefit obligations is periodically studied by the Company and its actuaries to assist in the establishment of strategic asset allocation targets.
Fair value of plan assets
The following table presents plan assets measured at fair value on a recurring basis by investment categories as of
November 3, 2012
and
October 29, 2011
using the same three-level hierarchy described in Note 2j:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 3, 2012
|
|
|
|
October 29, 2011
|
|
|
|
Fair Value Measurement at Reporting Date Using:
|
|
|
|
Fair Value Measurement at Reporting Date Using:
|
|
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Unobservable
Inputs
(Level 3)
|
|
Total
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Unobservable
Inputs
(Level 3)
|
|
Total
|
Unit trust funds(1)
|
$
|
—
|
|
|
$
|
142,556
|
|
|
$
|
—
|
|
|
$
|
142,556
|
|
|
$
|
—
|
|
|
$
|
100,161
|
|
|
$
|
—
|
|
|
$
|
100,161
|
|
Equities(1)
|
2,892
|
|
|
24,176
|
|
|
635
|
|
|
27,703
|
|
|
2,003
|
|
|
56,163
|
|
|
614
|
|
|
58,780
|
|
Fixed income securities(2)
|
—
|
|
|
26,340
|
|
|
—
|
|
|
26,340
|
|
|
—
|
|
|
21,984
|
|
|
—
|
|
|
21,984
|
|
Property(3)
|
—
|
|
|
—
|
|
|
2,881
|
|
|
2,881
|
|
|
—
|
|
|
—
|
|
|
3,166
|
|
|
3,166
|
|
Cash and cash equivalents
|
681
|
|
|
—
|
|
|
—
|
|
|
681
|
|
|
663
|
|
|
—
|
|
|
—
|
|
|
663
|
|
Total assets measured at fair value
|
$
|
3,573
|
|
|
$
|
193,072
|
|
|
$
|
3,516
|
|
|
$
|
200,161
|
|
|
$
|
2,666
|
|
|
$
|
178,308
|
|
|
$
|
3,780
|
|
|
$
|
184,754
|
|
_______________________________________
|
|
(1)
|
The majority of the assets in these categories are invested in a mix of equities, including those from North America, Europe and Asia. The funds are valued using the net asset value method in which an average of the market prices for underlying investments is used to value the fund. Due to the nature of the underlying assets of these funds, changes in market conditions and the economic environment may significantly impact the net asset value of these investments and, consequently, the fair value of the investments. These investments are redeemable at net asset value to the extent provided in the documentation governing the investments. However, these redemption rights may be restricted in accordance with governing documents. Publicly traded securities are valued at the last trade or closing price reported in the active market in which the individual securities are traded. Level 3 securities are valued at book value per share based upon the financial statements of the investment.
|
|
|
(2)
|
The majority of the assets in this category are invested in funds primarily concentrated in non-U.S. debt instruments. The
|
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
funds are valued using the net asset value method in which an average of the market prices for underlying investments is used to value the fund.
|
|
(3)
|
The majority of the assets in this category are invested in properties in Ireland, the UK, Europe and other established international markets. Investments in properties are stated at estimated fair values based upon valuations by external independent property valuers.
|
The table below presents a reconciliation of the plan assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for fiscal years
2011
and
2012
.
|
|
|
|
|
|
|
|
|
|
Properties
|
|
Equities
|
Balance as of October 30, 2010
|
$
|
3,186
|
|
|
$
|
607
|
|
Purchases, sales, and settlements, net
|
64
|
|
|
—
|
|
Realized and unrealized return on plan assets
|
(141
|
)
|
|
—
|
|
Exchange rate adjustment
|
57
|
|
|
7
|
|
Balance as of October 29, 2011
|
$
|
3,166
|
|
|
$
|
614
|
|
Purchases, sales, and settlements, net
|
—
|
|
|
—
|
|
Realized and unrealized return on plan assets
|
12
|
|
|
—
|
|
Exchange rate adjustment
|
(297
|
)
|
|
21
|
|
Balance as of November 3, 2012
|
$
|
2,881
|
|
|
$
|
635
|
|
Estimated future cash flows
Expected fiscal
2013
Company contributions and estimated future benefit payments are as follows:
|
|
|
|
|
Expected Company Contributions
|
|
|
2013
|
$
|
15,975
|
|
Expected Benefit Payments
|
|
|
2013
|
$
|
2,488
|
|
2014
|
$
|
3,430
|
|
2015
|
$
|
3,015
|
|
2016
|
$
|
3,168
|
|
2017
|
$
|
4,290
|
|
2018 through 2022
|
$
|
28,867
|
|
The reconciliation of income tax computed at the U.S. federal statutory rates to income tax expense is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
U.S. federal statutory tax rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
Income tax provision reconciliation:
|
|
|
|
|
|
|
|
|
Tax at statutory rate:
|
$
|
284,737
|
|
|
$
|
371,506
|
|
|
$
|
315,583
|
|
Irish income subject to lower tax rate
|
(117,693
|
)
|
|
(144,845
|
)
|
|
(131,823
|
)
|
State income taxes, net of federal benefit
|
610
|
|
|
1,162
|
|
|
2,622
|
|
Valuation allowance
|
(599
|
)
|
|
(6,700
|
)
|
|
—
|
|
Research and development tax credits
|
(964
|
)
|
|
(14,681
|
)
|
|
(1,045
|
)
|
Change in uncertain tax positions
|
(5,184
|
)
|
|
(9,897
|
)
|
|
2,082
|
|
Net foreign tax in excess of U.S. federal statutory tax rate
|
14
|
|
|
338
|
|
|
1,315
|
|
Other, net
|
1,376
|
|
|
3,670
|
|
|
1,706
|
|
Total income tax provision
|
$
|
162,297
|
|
|
$
|
200,553
|
|
|
$
|
190,440
|
|
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
For financial reporting purposes, income before income taxes includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
Pretax income:
|
|
|
|
|
|
|
|
|
Domestic
|
$
|
233,478
|
|
|
$
|
355,819
|
|
|
$
|
289,748
|
|
Foreign
|
580,055
|
|
|
705,628
|
|
|
611,917
|
|
Income from continuing operations before income taxes
|
$
|
813,533
|
|
|
$
|
1,061,447
|
|
|
$
|
901,665
|
|
The components of the provision for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
Current:
|
|
|
|
|
|
|
|
|
Federal tax
|
$
|
90,303
|
|
|
$
|
92,103
|
|
|
$
|
117,097
|
|
Foreign
|
80,825
|
|
|
104,959
|
|
|
79,055
|
|
State
|
970
|
|
|
1,787
|
|
|
4,154
|
|
Total current
|
$
|
172,098
|
|
|
$
|
198,849
|
|
|
$
|
200,306
|
|
Deferred (prepaid):
|
|
|
|
|
|
|
|
|
Federal
|
$
|
(9,948
|
)
|
|
$
|
9,399
|
|
|
$
|
(6,159
|
)
|
State
|
(551
|
)
|
|
(5,762
|
)
|
|
(173
|
)
|
Foreign
|
698
|
|
|
(1,933
|
)
|
|
(3,534
|
)
|
Total (prepaid) deferred
|
$
|
(9,801
|
)
|
|
$
|
1,704
|
|
|
$
|
(9,866
|
)
|
The Company continues to intend to reinvest certain of its foreign earnings indefinitely. Accordingly, no U.S. income taxes have been provided for approximately
$3,221 million
of unremitted earnings of international subsidiaries. As of
November 3, 2012
, the amount of unrecognized deferred tax liability on these earnings was
$848 million
.
The significant components of the Company’s deferred tax assets and liabilities for the fiscal years ended
November 3, 2012
and
October 29, 2011
are as follows:
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
Deferred tax assets:
|
|
|
|
|
|
Inventory reserves
|
$
|
23,496
|
|
|
$
|
23,503
|
|
Deferred income on shipments to distributors
|
33,236
|
|
|
34,061
|
|
Reserves for compensation and benefits
|
26,046
|
|
|
21,164
|
|
Tax credit carryovers
|
44,550
|
|
|
41,468
|
|
Stock-based compensation
|
96,140
|
|
|
91,417
|
|
Depreciation
|
4,386
|
|
|
4,781
|
|
Other
|
8,712
|
|
|
(592
|
)
|
Total gross deferred tax assets
|
236,566
|
|
|
215,802
|
|
Valuation allowance
|
(37,350
|
)
|
|
(34,768
|
)
|
Total deferred tax assets
|
199,216
|
|
|
181,034
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Depreciation
|
(40,634
|
)
|
|
(36,624
|
)
|
Undistributed earnings of foreign subsidiaries
|
(19,928
|
)
|
|
(24,025
|
)
|
Other
|
(5,918
|
)
|
|
(1,829
|
)
|
Total gross deferred tax liabilities
|
(66,480
|
)
|
|
(62,478
|
)
|
Net deferred tax assets
|
$
|
132,736
|
|
|
$
|
118,556
|
|
The valuation allowances of
$37.4 million
and
$34.8 million
at
November 3, 2012
and
October 29, 2011
, respectively, are valuation allowances for the Company’s state credit carryovers that began expiring in 2008.
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 than that which is reflected in the historical income tax provisions and accruals. Such differences could have a material impact on the Company’s income tax provision and operating results in the period in which such determination is made.
As of
November 3, 2012
and
October 29, 2011
, the Company had a liability of
$7.1 million
and
$9.7 million
, respectively, for gross unrealized tax benefits, all of which, if settled in the Company’s favor, would lower the Company’s effective tax rate in the period recorded. In addition, as of
November 3, 2012
and
October 29, 2011
, the Company had a liability of approximately
$3.0 million
and
$11.1 million
, respectively, for interest and penalties. The Company includes interest and penalties related to unrecognized tax benefits within the provision for taxes in the consolidated statements of income. The total liability as of
November 3, 2012
and
October 29, 2011
of
$10.1 million
and
$20.8 million
, respectively, for uncertain tax positions is classified as non-current, and is included in other non-current liabilities, because the Company believes that the ultimate payment or settlement of these liabilities may not occur within the next twelve months. The consolidated statements of income for fiscal years
2012
,
2011
and
2010
include
$(7.1) million
,
$0.9 million
and
$1.8 million
, respectively, of interest and penalties related to these uncertain tax positions. Over the next fiscal year, the Company anticipates the liability to be reduced by
$3.6 million
for a tax settlement payment and the possible expiration of an income tax statute of limitations.
The following table summarizes the changes in the total amounts of unrealized tax benefits for fiscal
2010
through fiscal
2012
.
|
|
|
|
|
Balance, October 31, 2009
|
$
|
18,161
|
|
Additions for tax positions of 2010
|
286
|
|
Balance, October 30, 2010
|
$
|
18,447
|
|
Additions for tax positions related to prior years
|
9,265
|
|
Reductions for tax positions related to prior years
|
(17,677
|
)
|
Settlements with taxing authorities
|
(370
|
)
|
Balance, October 29, 2011
|
$
|
9,665
|
|
Reductions for tax positions related to prior years
|
(6,168
|
)
|
Additions for tax positions related to prior years
|
2,212
|
|
Additions for tax positions related to current year
|
1,394
|
|
Balance, November 3, 2012
|
$
|
7,103
|
|
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.
|
|
15.
|
Revolving Credit Facility
|
As of
November 3, 2012
, the Company had
$3,900.4 million
of cash and cash equivalents and short-term investments, of which
$1,105.8 million
was held in the United States. The balance of the Company’s cash and cash equivalents and short-term investments was held outside the United States in various foreign subsidiaries. As the Company intends to reinvest its foreign earnings indefinitely, this cash is not available to meet certain aspects of the Company’s cash requirements in the United States, including 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 either the Company's leverage ratio or public debt rating by both Standard & Poor's and Moody's, whichever results in the lowest
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
margin. 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
November 3, 2012
, the Company was
compliant with these covenants
.
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
November 3, 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 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 changes in the fair value of the interest rate swaps were reflected in the carrying value of the interest rate swaps in other assets on the balance sheet. The carrying value of the debt on the balance sheet was adjusted by an equal and offsetting amount. In fiscal 2012, the Company terminated the interest rate swap agreement. The Company received
$19.8 million
in cash proceeds from the swap termination, which included
$1.3 million
in accrued interest. The proceeds, net of interest received, are disclosed in cash flows from financing activities in the 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. During fiscal year 2012,
$5.3 million
was amortized into earnings as a reduction of interest expense related to the swap termination.
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 and fourth quarter of fiscal 2012, the Company made additional principal payments of
$12.0 million
and
$30.0 million
, respectively.
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% (1.46% as of November 3, 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
November 3, 2012
, the Company was
compliant with these covenants
. As of
November 3, 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
ANALOG DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
substantially all of its assets to, any other party. As of
November 3, 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 debt obligations are as follows:
$14.5 million
in fiscal year
2013
;
$420.6 million
in fiscal year
2014
; and
$375.0 million
in fiscal year
2016
.
On
November 26, 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
December 18, 2012
to all shareholders of record at the close of business on
December 7, 2012
.