Edgar Filing: ANALOG DEVICES INC

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

(Mark One)



þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 29, 2017



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 1-7819

Analog Devices, Inc.

(Exact name of registrant as specified in its charter)



Massachusetts		04-2348234
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

One Technology Way, Norwood, MA		02062-9106
(Address of principal executive offices)		(Zip Code)

(781) 329-4700

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer	þ	Accelerated filer	¨

Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	¨

		Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO þ

As of July 29, 2017 there were 367,667,745 shares of common stock of the registrant, $0.16 2/3 par value per share, outstanding.

PART I - FINANCIAL INFORMATION



ITEM 1.	Financial Statements

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

	Three Months Ended						Nine Months Ended
	July 29, 2017			July 30, 2016			July 29, 2017			July 30, 2016
Revenue	$	1,433,902		$	869,591		$	3,566,333		$	2,417,786
Cost of sales (1)	667,278			297,301			1,510,762			857,300
Gross margin	766,624			572,290			2,055,571			1,560,486
Operating expenses:
Research and development (1)	275,670			163,227			694,856			480,890
Selling, marketing, general and administrative (1)	183,980			122,909			505,325			342,557
Amortization of intangibles	112,153			17,447			199,003			52,224
Special charges	—			—			49,463			13,684
	571,803			303,583			1,448,647			889,355
Operating income	194,821			268,707			606,924			671,131
Nonoperating expense (income):
Interest expense	73,073			18,476			187,323			49,993
Interest income	(5,524		)	(5,665		)	(27,945		)	(14,107		)
Other, net	474			(504		)	725			1,758
	68,023			12,307			160,103			37,644
Income before income taxes	126,798			256,400			446,821			633,487
Provision for income taxes	57,882			25,970			67,212			67,980
Net income	$	68,916		$	230,430		$	379,609		$	565,507
Shares used to compute earnings per common share – basic	367,315			307,135			339,139			309,030
Shares used to compute earnings per common share – diluted	371,159			310,558			343,286			312,534
Basic earnings per common share	$	0.18		$	0.75		$	1.12		$	1.83
Diluted earnings per common share	$	0.18		$	0.74		$	1.10		$	1.81
Dividends declared and paid per share	$	0.45		$	0.42		$	1.32		$	1.24
(1) Includes stock-based compensation expense as follows:
Cost of sales	$	4,375		$	1,844		$	8,885		$	5,922
Research and development	$	15,781		$	6,682		$	34,712		$	20,032
Selling, marketing, general and administrative	$	12,668		$	8,093		$	28,242		$	22,233

See accompanying notes.

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

	Three Months Ended						Nine Months Ended
	July 29, 2017			July 30, 2016			July 29, 2017			July 30, 2016
Net income	$	68,916		$	230,430		$	379,609		$	565,507
Foreign currency translation adjustments	3,119			(2,859		)	4,297			(2,923		)
Change in fair value of available-for-sale securities (net of taxes of $21, $7, $12 and $49, respectively)	30			(307		)	(426		)	223
Change in fair value of derivative instruments designated as cash flow hedges (net of taxes of $594, $371, $2,901 and $767, respectively)	5,172			(3,545		)	11,738			2,755
Changes in pension plans including prior service cost, transition obligation, net actuarial loss and foreign currency translation adjustments (net of taxes of $108, $50, $313 and $152 respectively)	(357		)	880			(537		)	1,240
Other comprehensive income	7,964			(5,831		)	15,072			1,295
Comprehensive income	$	76,880		$	224,599		$	394,681		$	566,802

See accompanying notes.

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

	July 29, 2017			October 29, 2016
ASSETS
Current Assets
Cash and cash equivalents	$	908,569		$	921,132
Short-term investments	—			3,134,661
Accounts receivable	692,552			477,609
Inventories (1)	519,695			376,555
Prepaid income tax	5,383			6,405
Prepaid expenses and other current assets	62,444			58,501
Total current assets	2,188,643			4,974,863
Property, Plant and Equipment, at Cost
Land and buildings	788,043			564,329
Machinery and equipment	2,335,354			1,994,115
Office equipment	65,024			58,785
Leasehold improvements	67,468			59,649
	3,255,889			2,676,878
Less accumulated depreciation and amortization	2,157,041			2,040,762
Net property, plant and equipment	1,098,848			636,116
Other Assets
Deferred compensation plan investments	31,506			26,152
Other investments	28,958			21,937
Goodwill	12,241,815			1,679,116
Intangible assets, net	5,440,692			549,368
Deferred tax assets	30,200			36,005
Other assets	54,333			46,721
Total other assets	17,827,504			2,359,299
	$	21,114,995		$	7,970,278
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	228,127		$	171,439
Deferred income on shipments to distributors, net	449,663			351,538
Income taxes payable	22,301			4,100
Accrued liabilities	400,986			255,857
Total current liabilities	1,101,077			782,934
Non-current liabilities
Long-term debt	8,199,230			1,732,177
Deferred income taxes	1,730,253			109,931
Deferred compensation plan liability	31,506			26,152
Other non-current liabilities	130,029			153,466
Total non-current liabilities	10,091,018			2,021,726
Commitments and contingencies
Shareholders’ Equity
Preferred stock, $1.00 par value, 471,934 shares authorized, none outstanding	—			—
Common stock, $0.16 2/3 par value, 1,200,000,000 shares authorized, 367,667,745 shares outstanding (308,170,560 on October 29, 2016)	61,279			51,363
Capital in excess of par value	5,190,217			402,270
Retained earnings	4,730,146			4,785,799
Accumulated other comprehensive loss	(58,742		)	(73,814		)
Total shareholders’ equity	9,922,900			5,165,618
	$	21,114,995		$	7,970,278


(1)	Includes $4,628 and $2,486 related to stock-based compensation at July 29, 2017 and October 29, 2016, respectively.

See accompanying notes.

ANALOG DEVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(thousands)



	Nine Months Ended
	July 29, 2017			July 30, 2016
Cash flows from operating activities:
Net income	$	379,609		$	565,507
Adjustments to reconcile net income to net cash provided by operations:
Depreciation	138,368			100,424
Amortization of intangibles	255,955			55,703
Cost of goods sold for inventory acquired	316,678			—
Stock-based compensation expense	71,839			48,187
Loss on extinguishment of debt	—			3,290
Excess tax benefit-stock options	(30,235		)	(7,180		)
Deferred income taxes	11,475			5,072
Other non-cash activity	(18,613		)	2,371
Changes in operating assets and liabilities	(653,403		)	20,537
Total adjustments	92,064			228,404
Net cash provided by operating activities	471,673			793,911
Cash flows from investing activities:
Purchases of short-term available-for-sale investments	(705,485		)	(5,855,930		)
Maturities of short-term available-for-sale investments	3,362,791			5,010,942
Sales of short-term available-for-sale investments	577,187			290,071
Additions to property, plant and equipment	(138,883		)	(86,173		)
Payments for acquisitions, net of cash acquired	(9,687,463		)	(2,203		)
Changes in other assets	(13,125		)	(18,048		)
Net cash used for investing activities	(6,604,978		)	(661,341		)
Cash flows from financing activities:
Payments of derivative instruments	—			(33,430		)
Proceeds from debt	11,156,164			1,235,331
Payments of deferred financing fees	(5,625		)	(22,208		)
Proceeds from derivative instruments	3,904			—
Debt repayments	(4,700,000		)	(378,156		)
Dividend payments to shareholders	(435,262		)	(383,537		)
Repurchase of common stock	(35,935		)	(368,649		)
Proceeds from employee stock plans	105,244			39,342
Changes in other financing activities	(7		)	(7,423		)
Excess tax benefit-stock options	30,235			7,180
Net cash provided by financing activities	6,118,718			88,450
Effect of exchange rate changes on cash	2,024			(1,703		)
Net (decrease) increase in cash and cash equivalents	(12,563		)	219,317
Cash and cash equivalents at beginning of period	921,132			884,353
Cash and cash equivalents at end of period	$	908,569		$	1,103,670

See accompanying notes.

ANALOG DEVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED JULY 29, 2017

(all tabular amounts in thousands except per share amounts and percentages)

Note 1 – Basis of Presentation

In the opinion of management, the information furnished in the accompanying condensed consolidated financial statements reflects all normal recurring adjustments that are necessary to fairly state the results for these interim periods and should be read in conjunction with Analog Devices, Inc.’s (the Company) Annual Report on Form 10-K for the fiscal year ended October 29, 2016 (fiscal 2016) and related notes. The results of operations for the interim periods shown in this report are not necessarily indicative of the results that may be expected for the fiscal year ending October 28, 2017 (fiscal 2017) or any future period.

Certain amounts reported in previous periods have been reclassified to conform to the fiscal 2017 presentation. Such reclassified amounts are immaterial.

The Company has a 52-53 week fiscal year that ends on the Saturday closest to the last day in October. Fiscal 2017 and fiscal 2016 are 52-week fiscal years.

Acquisition of Linear Technology Corporation

On March 10, 2017 (Acquisition Date), the Company completed the acquisition of Linear Technology Corporation (Linear), a designer, manufacturer and marketer of high performance analog integrated circuits. The total consideration paid to acquire Linear was approximately $15.8 billion, consisting of $11.1 billion in cash financed through existing cash on hand, net proceeds from bridge and term loan facilities and proceeds received from the issuance of senior unsecured notes, $4.6 billion from the issuance of the Company's common stock and $0.1 billion of consideration related to the replacement of outstanding equity awards held by Linear employees. The acquisition of Linear is referred to as the Acquisition. The condensed consolidated financial statements included in this Quarterly Report on Form 10-Q include the financial results of Linear prospectively from the Acquisition Date. See Note 13, Debt and Note 15, Acquisitions, of these Notes to Condensed Consolidated Financial Statements for further information.

Note 2 – Revenue Recognition

Revenue from product sales to customers is generally recognized when title passes, which is upon shipment in the U.S. and in certain foreign countries. Revenue from product sales to customers in other foreign countries is recognized subsequent to product shipment. Title for shipments to these other foreign countries ordinarily passes within a week of shipment. Accordingly, the Company defers the revenue recognized relating to these other foreign countries until title has passed. For multiple element arrangements, the Company allocates arrangement consideration among the elements based on the relative fair values of those elements as determined using vendor-specific objective evidence or third-party evidence. The Company uses its best estimate of selling price to allocate arrangement consideration between the deliverables in cases where neither vendor-specific objective evidence nor third-party evidence is available. A reserve for sales returns and allowances for customers is recorded based on historical experience or specific identification of an event necessitating a reserve.

Revenue from contracts with the United States government, government prime contractors and some commercial customers is generally recorded on a percentage of completion basis using either units delivered or costs incurred as the measurement basis for progress towards completion. The output measure is used to measure results directly and is generally the best measure of progress toward completion in circumstances in which a reliable measure of output can be established. Estimated revenue in excess of amounts billed is reported as unbilled receivables. Contract accounting requires judgment in estimating costs and assumptions related to technical issues and delivery schedule. Contract costs include material, subcontractor costs, labor and an allocation of indirect costs. The estimation of costs at completion of a contract is subject to numerous variables involving contract costs and estimates as to the length of time to complete the contract. Changes in contract performance, estimated gross margin, including the impact of final contract settlements, and estimated losses are recognized in the period in which the changes or losses are determined.

Revenue from product sales to certain international distributors are made under agreements that permit limited stock return privileges but not sales price rebates. Revenue on these sales is recognized upon shipment at which time title passes.

The Company defers revenue and the related cost of sales on shipments to U.S. distributors and certain international distributors until the distributors resell the products to their customers. As a result, the Company’s revenue fully reflects end customer purchases and is not impacted by distributor inventory levels. Sales to certain of these distributors are made under

agreements that allow such distributors to receive price-adjustment credits, as discussed below, and to return qualifying products for credit, as determined by the Company, in order to reduce the amounts of slow-moving, discontinued or obsolete product from their inventory. These agreements limit such returns to a certain percentage of the value of the Company’s shipments to that distributor during the prior quarter. In addition, such distributors are allowed to return unsold products if the Company terminates the relationship with the distributor.

Certain distributors are granted price-adjustment credits for sales to their customers when the distributor’s standard cost (i.e., the Company’s sales price to the distributor) does not provide the distributor with an appropriate margin on its sales to its customers. As distributors negotiate selling prices with their customers, the final sales price agreed upon with the customer will be influenced by many factors, including the particular product being sold, the quantity ordered, the particular customer, the geographic location of the distributor and the competitive landscape. As a result, the distributor may request and receive a price-adjustment credit from the Company to allow the distributor to earn an appropriate margin on the transaction.

Certain distributors are also granted price-adjustment credits in the event of a price decrease subsequent to the date the product was shipped and billed to the distributor. Generally, the Company will provide a credit equal to the difference between the price paid by the distributor (less any prior credits on such products) and the new price for the product multiplied by the quantity of the specific product in the distributor’s inventory at the time of the price decrease.

Given the uncertainties associated with the levels of price-adjustment credits to be granted to certain distributors, the sales price to the distributor is not fixed or determinable until the distributor resells the products to their customers. Therefore, the Company defers revenue recognition from sales to certain distributors until the distributors have sold the products to their customers.

Generally, title to the inventory transfers to the distributor at the time of shipment or delivery to the distributor, and payment from the distributor is due in accordance with the Company’s standard payment terms. These payment terms are not contingent upon the distributors’ sale of the products to their customers. Upon title transfer to distributors, inventory is reduced for the cost of goods shipped, the margin (sales less cost of sales) is recorded as “deferred income on shipments to distributors, net” and an account receivable is recorded. Shipping costs are charged to cost of sales as incurred.

The deferred costs of sales to distributors have historically had very little risk of impairment due to the margins the Company earns on sales of its products and the relatively long life-cycle of the Company’s products. Product returns from distributors that are ultimately scrapped have historically been immaterial. In addition, price protection and price-adjustment credits granted to distributors historically have not exceeded the margins the Company earns on sales of its products. The Company continuously monitors the level and nature of product returns and is in frequent contact with the distributors to ensure reserves are established for all known material issues.

As of July 29, 2017 and October 29, 2016, the Company had gross deferred revenue of $586.1 million and $432.3 million, respectively, and gross deferred cost of sales of $136.4 million and $80.8 million, respectively. As of July 29, 2017, approximately $89.5 million of the deferred revenue and $45.9 million of the deferred cost of sales related to the Acquisition.

The Company generally offers a twelve-month warranty for its products. The Company’s warranty policy provides for replacement of defective products. Specific accruals are recorded for known product warranty issues. Product warranty expenses during each of the three- and nine-month periods ended July 29, 2017 and July 30, 2016 were not material.

Note 3 – Stock-Based Compensation

Stock-based compensation is measured at the grant date based on the grant-date fair value of the awards ultimately expected to vest, and is recognized as an expense on a straight-line basis over the vesting period, which is generally five years for stock options and three years for restricted stock units/awards. In addition to restricted stock units with a service condition, the Company grants restricted stock units with both a market condition and a service condition (market-based restricted stock units) and in the third quarter of fiscal 2017, granted restricted stock units with both a performance condition and a service condition. The number of shares of the Company's common stock to be issued upon vesting of market-based restricted stock units will range from 0% to 200% of the target amount, based on the comparison of the Company's total shareholder return (TSR) to the median TSR of a specified peer group over a three-year period. TSR is a measure of stock price appreciation plus any dividends paid during the performance period. Determining the amount of stock-based compensation to be recorded for stock options and market-based restricted stock units requires the Company to develop estimates to calculate the grant-date fair value of awards.

Linear Replacement Awards — In connection with the Acquisition, the Company issued equity awards, consisting of restricted stock awards and restricted stock units (replacement awards), to certain Linear employees in replacement of Linear equity awards. The replacement awards consisted of restricted stock awards and restricted stock units for approximately 2.8

million shares of the Company's common stock with a weighted average grant date fair value of $82.20. The terms and intrinsic value of these replacement awards are substantially the same as the converted Linear awards. The fair value of the replacement awards associated with services rendered through the Acquisition Date was recognized as a component of the total preliminary estimated acquisition consideration, and the remaining fair value of the replacement awards associated with post-Acquisition services will be recognized as an expense on a straight-line basis over the remaining vesting period.

Modification of Awards — The Company has from time to time modified the vesting terms of its equity awards to employees and directors. The modifications made to the Company’s equity awards in the first nine months of fiscal 2017 or fiscal 2016 did not result in significant incremental compensation costs, either individually or in the aggregate.

Grant-Date Fair Value — The Company uses the Black-Scholes valuation model to calculate the grant-date fair value of stock option awards and the Monte Carlo simulation model to calculate the grant-date fair value of market-based restricted stock units. The use of these valuation models requires the Company to make estimates and assumptions, such as expected volatility, expected term, risk-free interest rate, expected dividend yield and forfeiture rates. The grant-date fair value of restricted stock units with a service condition and those with both a service and performance condition represents the value of the Company’s common stock on the date of grant, reduced by the present value of dividends expected to be paid on the Company’s common stock prior to vesting.

Information pertaining to the Company’s stock option awards and the related estimated weighted-average assumptions to calculate the fair value of stock options using the Black-Scholes valuation model granted during the three- and nine-month periods ended July 29, 2017 and July 30, 2016 are as follows:



	Three Months Ended						Nine Months Ended
Stock Options	July 29, 2017			July 30, 2016			July 29, 2017			July 30, 2016
Options granted (in thousands)	98			23			1,474			1,738
Weighted-average exercise price		$79.85			$56.20			$82.97			$54.92
Weighted-average grant-date fair value		$15.75			$10.86			$17.12			$12.77
Assumptions:
Weighted-average expected volatility	26.2		%	29.1		%	26.4		%	34.2		%
Weighted-average expected term (in years)	5.0			5.1			5.1			5.1
Weighted-average risk-free interest rate	1.8		%	1.2		%	2.1		%	1.4		%
Weighted-average expected dividend yield	2.3		%	3.0		%	2.2		%	3.1		%

The Company utilizes the Monte Carlo simulation valuation model to value market-based restricted stock units. The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the market conditions stipulated in the award grant and calculates the fair market value for the market-based restricted stock units granted. The Monte Carlo simulation model also uses stock price volatility and other variables to estimate the probability of satisfying the market conditions, including the possibility that the market condition may not be satisfied, and the resulting fair value of the award. Information pertaining to the market-based restricted stock units and the related estimated assumptions used to calculate the fair value of the market-based restricted stock units granted during the nine-month periods ended July 29, 2017 and July 30, 2016 using the Monte Carlo simulation model are as follows:



	Nine Months Ended			Nine Months Ended
Market-based Restricted Stock Units	July 29, 2017			July 30, 2016
Units granted (in thousands)	59			102
Grant-date fair value		$94.25			$58.95
Assumptions:
Historical stock price volatility	26.0		%	25.1		%
Risk-free interest rate	1.6		%	1.1		%
Expected dividend yield	2.2		%	3.0		%

The Company did not grant market-based restricted stock units during the three-month periods ended July 29, 2017 or July 30, 2016.

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. The Company utilizes historical volatility as an input variable of the Monte Carlo simulation to estimate the grant date fair value of market-based restricted stock units. The market performance measure of these awards is based upon the interaction of multiple peer companies. Given the Company is required to use consistent statistical properties in the Monte Carlo simulation and implied volatility is not available across the population, historical volatility must be used.

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 or restricted stock units. In connection with the Acquisition, the Company granted restricted stock awards to replace outstanding restricted stock awards of Linear employees. These restricted stock awards entitle recipients to voting and nonforfeitable dividend rights from the date of grant.

Stock-Based Compensation Expense

The amount of stock-based compensation expense recognized during a period is based on the value of the awards that are ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term “forfeitures” is distinct from “cancellations” or “expirations” and represents only the unvested portion of the surrendered stock-based award. Based on an analysis of its historical forfeitures, the Company has applied an annual forfeiture rate of 4.7% to all unvested stock-based awards as of July 29, 2017. This analysis will be re-evaluated quarterly and the forfeiture rate will be adjusted as necessary. Ultimately, the actual expense recognized over the vesting period will only be for those options that vest.

Additional paid-in-capital (APIC) Pool

The APIC pool represents the excess tax benefits related to share-based compensation that are available to absorb future tax deficiencies. If the amount of future tax deficiencies is greater than the available APIC pool, the Company records the excess as income tax expense in its condensed consolidated statements of income. During the three- and nine-month periods ended July 29, 2017 and July 30, 2016, the Company had a sufficient APIC pool to cover any tax deficiencies recorded and as a result, these deficiencies did not affect its results of operations.

Stock-Based Compensation Activity

A summary of the Company’s stock option activity as of July 29, 2017 and changes during the three- and nine-month periods then ended is presented below:



Activity during the Three Months Ended July 29, 2017	Options Outstanding (in thousands)		Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term in Years	Aggregate Intrinsic Value
Options outstanding at April 29, 2017	10,530			$50.49
Options granted	98			$79.85
Options exercised	(456	)		$39.42
Options forfeited	(59	)		$59.68
Options expired	(1	)		$48.94
Options outstanding at July 29, 2017	10,112			$51.22	6.3		$288,944
Options exercisable at July 29, 2017	5,602			$41.47	4.7		$211,596
Options vested or expected to vest at July 29, 2017 (1)	9,725			$50.59	6.2		$283,617


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



Activity during the Nine Months Ended July 29, 2017	Options Outstanding (in thousands)		Weighted- Average Exercise Price Per Share
Options outstanding at October 29, 2016	11,704			$44.43
Options granted	1,474			$82.97
Options exercised	(2,724	)		$38.81
Options forfeited	(335	)		$54.71
Options expired	(7	)		$34.10
Options outstanding at July 29, 2017	10,112			$51.22

During the three- and nine-month periods ended July 29, 2017, the total intrinsic value of options exercised (i.e., the difference between the market price at exercise and the price paid by the employee to exercise the options) was $19.9 million and $109.0 million, respectively, and the total amount of proceeds received by the Company from the exercise of these options was $18.0 million and $105.2 million, respectively.

During the three- and nine-month periods ended July 30, 2016, the total intrinsic value of options exercised (i.e., the difference between the market price at exercise and the price paid by the employee to exercise the options) was $13.0 million and $26.9 million, respectively, and the total amount of proceeds received by the Company from the exercise of these options was $16.6 million and $39.3 million, respectively.

A summary of the Company’s restricted stock unit/award activity as of July 29, 2017 and changes during the three- and nine-month periods then ended is presented below:



Activity during the Three Months Ended July 29, 2017	Restricted Stock Units/Awards Outstanding (in thousands)		Weighted- Average Grant- Date Fair Value Per Share
Restricted stock units/awards outstanding at April 29, 2017	5,313			$70.59
Units/Awards granted	644			$75.59
Restrictions lapsed	(311	)		$79.14
Forfeited	(55	)		$70.94
Restricted stock units/awards outstanding at July 29, 2017	5,591			$70.69



Activity during the Nine Months Ended July 29, 2017	Restricted Stock Units/Awards Outstanding (in thousands)		Weighted- Average Grant- Date Fair Value Per Share
Restricted stock units/awards outstanding at October 29, 2016	2,690			$50.11
Units/Awards granted (a)	4,307			$79.55
Restrictions lapsed	(1,241	)		$58.44
Forfeited	(165	)		$58.71
Restricted stock units/awards outstanding at July 29, 2017	5,591			$70.69

(a) includes replacement awards for 2.8 million shares of the Company's common stock that were granted to certain Linear employees to replace outstanding Linear equity awards.

As of July 29, 2017, there was $369.8 million of total unrecognized compensation cost related to unvested stock-based awards comprised of stock options and restricted stock units/awards. That cost is expected to be recognized over a weighted-average period of 1.9 years. The total grant-date fair value of shares that vested during the three- and nine-month periods ended July 29, 2017 was approximately $28.3 million and $95.2 million, respectively. The total grant-date fair value of shares that vested during the three- and nine-month periods ended July 30, 2016 was approximately $1.7 million and $59.0 million, respectively.

Note 4 – Accumulated Other Comprehensive Income (Loss)

The following table provides the changes in accumulated other comprehensive income (loss) (OCI) by component and the related tax effects during the first nine months of fiscal 2017.



	Foreign currency translation adjustment			Unrealized holding gains on available for sale securities			Unrealized holding (losses) on available for sale securities			Unrealized holding gains (losses) on derivatives			Pension plans			Total
October 29, 2016	$	(24,063	)	$	800		$	(281	)	$	(18,884	)	$	(31,386	)	$	(73,814	)
Other comprehensive income (loss) before reclassifications	4,297			(697		)	283			7,582			(1,630		)	9,835
Amounts reclassified out of other comprehensive income (loss)	—			—			—			7,057			1,406			8,463
Tax effects	—			(3		)	(9		)	(2,901		)	(313		)	(3,226		)
Other comprehensive income (loss)	4,297			(700		)	274			11,738			(537		)	15,072
July 29, 2017	$	(19,766	)	$	100		$	(7	)	$	(7,146	)	$	(31,923	)	$	(58,742	)

The amounts reclassified out of accumulated other comprehensive income (loss) with presentation location during each period were as follows:



	Three Months Ended						Nine Months Ended
Comprehensive Income Component	July 29, 2017			July 30, 2016			July 29, 2017			July 30, 2016			Location
Unrealized holding losses (gains) on derivatives
Currency forwards	$	(106	)	$	46		$	2,842		$	1,672		Cost of sales
	(354		)	93			1,154			783			Research and development
	(195		)	(577		)	1,600			(231		)	Selling, marketing, general and administrative
Interest rate derivatives	468			562			1,461			1,407			Interest expense
	(187		)	124			7,057			3,631			Total before tax
	(80		)	(141		)	(1,469		)	(807		)	Tax
	$	(267	)	$	(17	)	$	5,588		$	2,824		Net of tax

Amortization of pension components
Transition obligation	$	3		$	4		$	9		$	12		(a)
Prior service credit	(2		)	—			(6		)	—			(a)
Actuarial losses	482			168			1,403			511			(a)
	483			172			1,406			523			Total before tax
	(109		)	(50		)	(313		)	(152		)	Tax
	$	374		$	122		$	1,093		$	371		Net of tax

Total amounts reclassified out of accumulated other comprehensive income (loss), net of tax	$	107		$	105		$	6,681		$	3,195

______________

a) The amortization of pension components is included in the computation of net periodic pension cost. For further information see Note 13, Retirement Plans, contained in Item 8 of the Annual Report on Form 10-K for the fiscal year ended October 29, 2016.

The Company estimates $5.2 million of forward foreign currency derivative instruments included in OCI will be reclassified into earnings within the next twelve months. There was no ineffectiveness related to designated forward foreign currency derivative instruments in the three- and nine-month periods ended July 29, 2017 and July 30, 2016.

Gross unrealized gains and losses on available-for-sale securities at July 29, 2017 and October 29, 2016 were as follows:



	July 29, 2017			October 29, 2016
Unrealized gains on available-for-sale securities	$	149		$	846
Unrealized losses on available-for-sale securities	(11		)	(294		)
Net unrealized gains on available-for-sale securities	$	138		$	552

As of July 29, 2017, the Company held 19 investment securities, 7 of which were in an unrealized loss position with gross unrealized losses of $0.01 million and an aggregate fair value of $194.7 million. As of October 29, 2016, the Company held 100 investment securities, 25 of which were in an unrealized loss position with gross unrealized losses of $0.3 million and an aggregate fair value of $729.6 million. These unrealized losses were primarily related to corporate obligations that earn lower interest rates than current market rates. None of these investments have been in a loss position for more than twelve months. As the Company does not intend to sell these investments and it is unlikely that the Company will be required to sell the investments before recovery of their amortized basis, which will be at maturity, the Company does not consider those investments to be other-than-temporarily impaired at July 29, 2017 and October 29, 2016.

Realized gains or losses on investments are determined based on the specific identification basis and are recognized in nonoperating expense (income). There were no material net realized gains or losses from the sales of available-for-sale investments during any of the fiscal periods presented.

Note 5 – Earnings Per Share

Basic earnings per share is computed based only on the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect of potential future issuances of common stock relating to stock option programs and other potentially dilutive securities using the treasury stock method. In calculating diluted earnings per share, the dilutive effect of stock options and restricted stock units is computed using the average market price for the respective period. In addition, the assumed proceeds under the treasury stock method include the average unrecognized compensation expense of stock options that are in-the-money and restricted stock units. This results in the “assumed” buyback of additional shares, thereby reducing the dilutive impact of in-the-money stock options. Potential shares related to certain of the Company’s outstanding stock options and restricted stock units were excluded because they were anti-dilutive. Those potential shares, determined based on the weighted average exercise prices during the respective periods, could be dilutive in the future. In connection with the Acquisition, the Company granted restricted stock awards to replace outstanding restricted stock awards of Linear employees. These restricted stock awards entitle recipients to voting and nonforfeitable dividend rights from the date of grant. These unvested stock-based compensation awards are considered participating securities and the two-class method is used for purposes of calculating earnings per share. Under the two-class method, a portion of net income is allocated to these participating securities and therefore is excluded from the calculation of earnings per share allocated to common stock, as shown in the table below.

The following table sets forth the computation of basic and diluted earnings per share:



	Three Months Ended				Nine Months Ended
	July 29, 2017		July 30, 2016		July 29, 2017		July 30, 2016
Net Income	$	68,916	$	230,430	$	379,609	$	565,507
Less: income allocated to participating securities	981		—		981		—
Net income allocated to common stockholders	$	67,935	$	230,430	$	378,628	$	565,507

Basic shares:
Weighted-average shares outstanding	367,315		307,135		339,139		309,030
Earnings per common share basic:	$	0.18	$	0.75	$	1.12	$	1.83
Diluted shares:
Weighted-average shares outstanding	367,315		307,135		339,139		309,030
Assumed exercise of common stock equivalents	3,844		3,423		4,147		3,504
Weighted-average common and common equivalent shares	371,159		310,558		343,286		312,534
Earnings per common share diluted:	$	0.18	$	0.74	$	1.10	$	1.81
Anti-dilutive shares related to:
Outstanding share based awards	1,758		3,498		1,135		3,409

Note 6 – Special Charges

The Company monitors global macroeconomic conditions on an ongoing basis and continues to assess opportunities for improved operational effectiveness and efficiency, as well as a better alignment of expenses with revenues. As a result of these assessments, the Company has undertaken various restructuring actions over the past several years. These actions are described below.

The following tables display the special charges taken for actions in fiscal 2017 and fiscal 2016 and a roll-forward from October 29, 2016 to July 29, 2017 of the employee separation and exit cost accruals established related to these actions.



	Reduction of Operating Costs Action		Early Retirement Action		Total Special Charges
Statements of Income
Fiscal 2016 - Workforce reductions	$	13,684	$	—	13,684
Fiscal 2017 - Workforce reductions	$	8,126	$	41,337	$	49,463



Accrued Restructuring	Reduction of Operating Costs Action			Early Retirement Action
Balance at October 29, 2016	$	12,374		$	—
Fiscal 2017 - workforce reductions	8,126			41,337
Severance and other payments	(2,611		)	(199		)
Effect of foreign currency on accrual	(6		)	—
Balance at January 28, 2017	$	17,883		$	41,138
Severance and other payments	(3,987		)	(697		)
Effect of foreign currency on accrual	108			—
Balance at April 29, 2017	$	14,004		$	40,441
Severance and other payments	(6,811		)	(1,873		)
Effect of foreign currency on accrual	317			—
Balance at July 29, 2017	$	7,510		$	38,568

Early Retirement Offer Action

During the first quarter of fiscal 2017, the Company initiated an early retirement offer. This resulted in a special charge of approximately $41.3 million for severance, related benefits and other costs in accordance with this program for 225 manufacturing, engineering and selling, marketing, general and administrative (SMG&A) employees. As of July 29, 2017, the Company still employed 45 of the 225 employees included in these cost reduction actions. These employees must continue to be employed by the Company until their employment is terminated in order to receive the severance benefits.

Reduction of Operating Costs Action

During the second quarter of fiscal 2016, the Company recorded special charges of approximately $13.7 million for severance and fringe benefit costs in accordance with the Company's ongoing benefit plan for 123 manufacturing, engineering and SMG&A employees. As of July 29, 2017, the Company still employed 24 of the 123 employees included in this cost reduction action. These employees must continue to be employed by the Company until their employment is involuntarily terminated in order to receive the severance benefits.

During the first quarter of fiscal 2017, the Company recorded special charges of approximately $8.1 million for severance and fringe benefit costs in accordance with the Company's ongoing benefit plan or statutory requirements at foreign locations for 177 manufacturing, engineering and SMG&A employees. As of July 29, 2017, the Company still employed 12 of the 177 employees included in this cost reduction action. These employees must continue to be employed by the Company until their employment is terminated in order to receive the severance benefits.

Note 7 – Segment Information

The Company operates and tracks its results in one reportable segment based on the aggregation of seven operating segments. As of the filing date of this Quarterly Report on Form 10-Q, the assignment of goodwill resulting from the Acquisition to the Company's reporting units has not been completed. The Company designs, develops, manufactures and markets a broad range of integrated circuits (ICs). The Chief Executive Officer has been identified as the Company's Chief Operating Decision Maker. The Company has determined that all of the Company's operating segments share the following similar economic characteristics, and therefore meet the criteria established for operating segments to be aggregated into one reportable segment, namely:

•The primary source of revenue for each operating segment is the sale of ICs.

•The ICs sold by each of the Company's operating segments are manufactured using similar semiconductor manufacturing processes and raw materials in either the Company’s own production facilities or by third-party wafer fabricators using proprietary processes.

•The Company sells its products to tens of thousands of customers worldwide. Many of these customers use products spanning all operating segments in a wide range of applications.

•The ICs marketed by each of the Company's operating segments are sold globally through a direct sales force, third-party distributors, independent sales representatives and via the Company's website to the same types of customers.

All of the Company's operating segments share a similar long-term financial model as they have similar economic characteristics. The causes for variation in operating and financial performance are the same among the Company's operating

segments and include factors such as (i) life cycle and price and cost fluctuations, (ii) number of competitors, (iii) product differentiation and (iv) size of market opportunity. Additionally, each operating segment is subject to the overall cyclical nature of the semiconductor industry. Lastly, the number and composition of employees and the amounts and types of tools and materials required for production of products are proportionately similar for each operating segment.

Revenue Trends by End Market

The following tables summarize revenue by end market for the three- and nine-month periods ended July 29, 2017 and July 30, 2016. The categorization of revenue by end market is determined using a variety of data points including the technical characteristics of the product, the “sold to” customer information, the “ship to” customer information and the end customer product or application into which the Company’s product will be incorporated. As data systems for capturing and tracking this data evolve and improve, the categorization of products by end market can vary over time. When this occurs, the Company reclassifies revenue by end market for prior periods. Such reclassifications typically do not materially change the sizing of, or the underlying trends of results within, each end market.



	Three Months Ended
	July 29, 2017						July 30, 2016
	Revenue		% of Revenue*		Y/Y%		Revenue		% of Revenue
Industrial	$	700,213	49	%	87	%	$	373,923	43	%
Automotive	227,462		16	%	69	%	134,804		16	%
Consumer	252,498		18	%	36	%	186,171		21	%
Communications	253,729		18	%	45	%	174,693		20	%
Total revenue	$	1,433,902	100	%	65	%	$	869,591	100	%

____________

* The sum of the individual percentages may not equal the total due to rounding.



	Nine Months Ended
	July 29, 2017						July 30, 2016
	Revenue		% of Revenue		Y/Y%		Revenue		% of Revenue
Industrial	$	1,645,801	46	%	49	%	$	1,108,034	46	%
Automotive	548,068		15	%	37	%	399,868		17	%
Consumer	733,799		21	%	87	%	393,024		16	%
Communications	638,665		18	%	24	%	516,860		21	%
Total revenue	$	3,566,333	100	%	48	%	$	2,417,786	100	%

____________

Revenue Trends by Geographic Region

Revenue by geographic region, based on the primary end customer location, for the three- and nine-month periods ended July 29, 2017 and July 30, 2016 were as follows:



	Three Months Ended				Nine Months Ended
Region	July 29, 2017		July 30, 2016		July 29, 2017		July 30, 2016
United States	$	530,335	$	334,455	$	1,383,661	$	846,407
Rest of North and South America	25,961		22,677		76,548		64,812
Europe	346,436		232,324		865,949		694,200
Japan	153,188		73,753		338,368		213,938
China	239,701		146,069		590,893		425,732
Rest of Asia	138,281		60,313		310,914		172,697
Total revenue	$	1,433,902	$	869,591	$	3,566,333	$	2,417,786

In the three- and nine-month periods ended July 29, 2017 and July 30, 2016, the predominant country comprising “Rest of North and South America” is Canada; the predominant countries comprising “Europe” are Germany, Sweden, France and the United Kingdom; and the predominant countries comprising “Rest of Asia” are South Korea and Taiwan.

Note 8 – Fair Value

The Company defines fair value as the price that would be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

Level 1 — Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 — Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability.

Level 3 — Level 3 inputs are unobservable inputs for the asset or liability in which there is little, if any, market activity for the asset or liability at the measurement date.

The tables below, set forth by level, presents the Company’s financial assets and liabilities, excluding accrued interest components that are accounted for at fair value on a recurring basis as of July 29, 2017 and October 29, 2016. 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 July 29, 2017 and October 29, 2016, the Company held $192.4 million and $252.5 million, respectively, of cash and held-to-maturity investments that were excluded from the tables below.



	July 29, 2017
	Fair Value measurement at Reporting Date using:
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Total
Assets
Cash equivalents:
Available-for-sale:
Institutional money market funds	$	374,650	$	—	$	—	$	374,650
Corporate obligations (1)	—		341,500		—		341,500
Other assets:
Deferred compensation investments	—		32,513		—		32,513
Interest rate derivatives	—		2,031		—		2,031
Forward foreign currency exchange contracts (2)	—		8,872		—		8,872
Total assets measured at fair value	$	374,650	$	384,916	$	—	$	759,566
Liabilities
Contingent consideration	—		—		9,807		9,807
Total liabilities measured at fair value	$	—	$	—	$	9,807	$	9,807


(1)	The amortized cost of the Company’s investments classified as available-for-sale as of July 29, 2017 was $331.6 million.


(2)	The Company has a master netting arrangement by counterparty with respect to derivative contracts. See Note 9, Derivatives, of these Notes to Condensed Consolidated Financial Statements for more information related to the Company's master netting arrangements.



	October 29, 2016
	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	$	277,595	$	—	$	—	$	277,595
Corporate obligations (1)	—		415,660		—		415,660
Short-term investments:
Available-for-sale:
Securities with one year or less to maturity:
Corporate obligations (1)	—		2,518,148		—		2,518,148
Floating rate notes, issued at par	—		29,989		—		29,989
Floating rate notes (1)	—		561,874		—		561,874
Other assets:
Deferred compensation investments	26,916		—		—		26,916
Total assets measured at fair value	$	304,511	$	3,525,671	$	—	$	3,830,182
Liabilities
Contingent consideration	—		—		7,555		7,555
Forward foreign currency exchange contracts (2)	—		5,231		—		5,231
Total liabilities measured at fair value	$	—	$	5,231	$	7,555	$	12,786


(1)	The amortized cost of the Company’s investments classified as available-for-sale as of October 29, 2016 was $3.5 billion.


(2)	The Company has a master netting arrangement by counterparty with respect to derivative contracts. See Note 9, Derivatives, of these Notes to Condensed Consolidated Financial Statements for more information related to the Company's master netting arrangements.

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

Cash equivalents and short-term investments — These investments are adjusted to fair value based on quoted market prices or are determined using a yield curve model based on current market rates.

Deferred compensation plan investments — The fair value of these mutual fund, money market fund and equity investments are based on quoted market prices.

Forward foreign currency exchange contracts — The estimated fair value of forward foreign currency exchange contracts, which includes derivatives that are accounted for as cash flow hedges and those that are not designated as cash flow hedges, is based on the estimated amount the Company would receive if it sold these agreements at the reporting date taking into consideration current interest rates as well as the creditworthiness of the counterparty for assets and the Company’s creditworthiness for liabilities. The fair value of these instruments is based upon valuation models using current market information such as strike price, spot rate, maturity date and volatility.

Interest rate derivatives — The fair value of the interest rate derivatives is estimated using a discounted cash flow analysis based on the contractual terms of the derivative.

Contingent consideration — The fair value of the contingent consideration was estimated utilizing the income approach and is based upon significant inputs not observable in the market. The income approach is based on two steps. The first step

involves a projection of the cash flows that is based on the Company’s estimates of the timing and probability of achieving the defined milestones. The second step involves converting the cash flows into a present value equivalent through discounting. The discount rate reflects the Baa costs of debt plus the relevant risk associated with the asset and the time value of money.

The fair value measurement of the contingent consideration encompasses the following significant unobservable inputs:



Unobservable Inputs	Range
Estimated contingent consideration payments	$10,500
Discount rate	0% - 2%
Timing of cash flows	1 - 3 years
Probability of achievement	90% - 100%

Changes in the fair value of the contingent consideration are recognized in operating income in the period of the estimated fair value change. Significant increases or decreases in any of the inputs in isolation may 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) from October 29, 2016 to July 29, 2017:



	Contingent Consideration
Balance as of October 29, 2016	$	7,555
Contingent consideration liability recorded (1)	2,000
Fair value adjustment (2)	252
Balance as of July 29, 2017	$	9,807

(1) Represents liability related to acquisitions that were not material to the Company on either an individual or aggregate basis.

(2) Recorded in research and development expense in the Company's condensed consolidated statements of income.

Financial Instruments Not Recorded at Fair Value on a Recurring Basis

On June 3, 2013, the Company issued $500.0 million aggregate principal amount of 2.875% senior unsecured notes due June 1, 2023 (the 2023 Notes) with semi-annual fixed interest payments due on June 1 and December 1 of each year, commencing December 1, 2013. The fair value of the 2023 Notes as of July 29, 2017 and October 29, 2016 was $504.6 million and $501.3 million, respectively, and is classified as a Level 1 measurement according to the fair value hierarchy.

On December 14, 2015, the Company issued $850.0 million aggregate principal amount of 3.9% senior unsecured notes due December 15, 2025 (the 2025 Notes) and $400.0 million aggregate principal amount of 5.3% senior unsecured notes due December 15, 2045 (the 2045 Notes) with semi-annual fixed interest payments due on June 15 and December 15 of each year, commencing June 15, 2016. The fair value of the 2025 Notes and 2045 Notes as of July 29, 2017 was $894.1 million and $468.8 million, respectively, and are classified as a Level 1 measurements according to the fair value hierarchy. The fair value of the 2025 Notes and 2045 Notes as of October 29, 2016 was $901.5 million and $425.1 million, respectively.

On the Acquisition Date, the Company entered into a 90-day Bridge Credit Agreement that provided for unsecured loans in an aggregate principal amount of up to $4.1 billion and borrowed under a term loan agreement consisting of a 3-year unsecured term loan in the principal amount of $2.5 billion, due March 10, 2020 and a 5-year unsecured term loan in the principal amount of $2.5 billion, due March 10, 2022. In the third quarter of fiscal 2017, the Company repaid all of the $4.1 billion of outstanding loans under the 90-day Bridge Credit Agreement, repaid $350.0 million of principal on the 3-year unsecured term loan and repaid $250.0 million of principal on the 5-year unsecured term loan. The carrying amounts of the loans approximate fair value. The loans are classified as a Level 2 measurements according to the fair value hierarchy.

Note 9 – Derivatives

Foreign Exchange Exposure Management — The Company enters into forward foreign currency exchange contracts to offset certain operational and balance sheet exposures from the impact of changes in foreign currency exchange rates. Such exposures result from the portion of the Company’s operations, assets and liabilities that are denominated in currencies other than the U.S. dollar, primarily the Euro; other significant exposures include the Philippine Peso, the Japanese Yen and the British Pound. These foreign currency exchange contracts are entered into to support transactions made in the normal course of business, and accordingly, are not speculative in nature. The contracts are for periods consistent with the terms of the underlying transactions, generally one year or less. Hedges related to anticipated transactions are designated and documented at the inception of the respective hedges as cash flow hedges and are 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 reported as a component of accumulated OCI in shareholders’ equity and reclassified into earnings in the same period during which the hedged transaction affects earnings. Any residual change in fair value of the instruments, or ineffectiveness, is recognized immediately in other (income) expense.

The total notional amount of forward foreign currency derivative instruments designated as hedging instruments of cash flow hedges denominated in Euros, British Pounds, Philippine Pesos and Japanese Yen as of July 29, 2017 and October 29, 2016 was $174.1 million and $179.5 million, respectively. The fair value of forward foreign currency derivative instruments designated as hedging instruments in the Company’s condensed consolidated balance sheets as of July 29, 2017 and October 29, 2016 was as follows:



		Fair Value At
	Balance Sheet Location	July 29, 2017		October 29, 2016
Forward foreign currency exchange contracts	Prepaid expenses and other current assets	$	6,709	$	—
Forward foreign currency exchange contracts	Accrued liabilities	$	—	$	5,260

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 July 29, 2017 and October 29, 2016, the total notional amount of these undesignated hedges was $94.7 million and $46.2 million, respectively. The fair value of these undesignated hedges in the Company’s condensed consolidated balance sheets as of July 29, 2017 was $2.2 million and was immaterial as of October 29, 2016.

All of the Company’s derivative financial instruments are eligible for netting arrangements that allow the Company and its counterparties to net settle amounts owed to each other. Derivative assets and liabilities that can be net settled under these arrangements have been presented in the Company's condensed consolidated balance sheet on a net basis. As of July 29, 2017 and October 29, 2016, none of the master netting arrangements involved collateral. The following table presents the gross amounts of the Company's derivative assets and liabilities and the net amounts recorded in the Company's condensed consolidated balance sheet:



	July 29, 2017			October 29, 2016
Gross amount of recognized assets (liabilities)	$	9,694		$	(5,788	)
Gross amounts of recognized (liabilities) assets offset in the condensed consolidated balance sheet	(822		)	557
Net assets (liabilities) presented in the condensed consolidated balance sheet	$	8,872		$	(5,231	)

Interest Rate Exposure Management — The Company's current and future debt may be subject to interest rate risk. The Company utilizes interest rate derivatives to alter interest rate exposure in an attempt to reduce the effects of these changes.

The market risk associated with the Company’s derivative instruments results from currency exchange rate or interest rate movements that are expected to offset the market risk of the underlying transactions, assets and liabilities being hedged. The counterparties to the agreements relating to the Company’s derivative instruments consist of a number of major international financial institutions with high credit ratings. Based on the credit ratings of the Company’s counterparties as of July 29, 2017 and October 31, 2016, 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 its condensed consolidated financial statements in other current assets, other assets or accrued liabilities, depending on their net position, regardless of the purpose or intent for holding the derivative contract. Changes in the fair value of the derivative financial instruments are either recognized periodically in earnings or in shareholders’ equity as a component of OCI. Changes in the fair value of cash flow hedges are recorded in OCI and reclassified into earnings when the underlying contract matures and, for interest rate exposure derivatives, over the term of the corresponding debt instrument. Changes in the fair values of derivatives not qualifying for hedge accounting or the ineffective portion of designated hedges are reported in earnings as they occur.

For information on the unrealized holding gains (losses) on derivatives included in and reclassified out of accumulated other comprehensive income into the condensed consolidated statement of income related to forward foreign currency exchange contracts, see Note 4, Accumulated Other Comprehensive Income (Loss) of these Notes to Condensed Consolidated Financial Statements for further information.

Note 10 – Goodwill and Intangible Assets

Goodwill

The Company evaluates goodwill for impairment annually, 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 as of July 31, 2016, the Company identified its reporting units to be its seven operating segments. As of the filing date of this Quarterly Report on Form 10-Q, the assignment of goodwill resulting from the Acquisition to the Company's reporting units has not been completed. The performance of the test involves a two-step process. The first step of the quantitative 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 a weighting of the income and market approaches. Under the income approach, the Company uses a discounted cash flow methodology which requires management to make significant estimates and assumptions related to forecasted revenues, gross profit margins, operating income margins, working capital cash flow, perpetual growth rates, and long-term discount rates, among others. For the market approach, the Company uses the guideline public company method. Under this method the Company utilizes information from comparable publicly traded companies with similar operating and investment characteristics as the reporting units to create valuation multiples that are applied to the operating performance of the reporting unit being tested in order to obtain their respective fair values. In order to assess the reasonableness of the calculated reporting unit fair values, the Company reconciles the aggregate fair values of its reporting units (determined as described above) to its current market capitalization, allowing for a reasonable control premium. If the carrying amount of a reporting unit, calculated using the above approaches, exceeds the reporting unit’s fair value, 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 reporting unit. There was no impairment of goodwill in any period presented. The Company's next annual impairment assessment will be performed as of the first day of the fourth quarter of fiscal 2017. The following table presents the changes in goodwill during the first nine months of fiscal 2017:



	Nine Months Ended
	July 29, 2017
Balance as of October 29, 2016	$	1,679,116
Goodwill related to acquisition of Linear (Note 15)	10,555,688
Goodwill related to other acquisitions (1)	4,851
Foreign currency translation adjustment	2,160
Balance as of July 29, 2017	$	12,241,815

(1) Represents goodwill related to acquisitions that were not material to the Company on either an individual or aggregate basis.

Intangible Assets

The Company reviews finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of assets may not be recoverable. Recoverability of these assets is determined by comparison of their carrying value to the estimated future undiscounted cash flows the assets are expected to generate over their remaining estimated useful lives. If such assets are considered to be impaired, the impairment to be recognized in earnings equals the 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.

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 a qualitative assessment on the indefinite-lived intangible assets to determine whether it is more likely-than not that the indefinite-lived intangible asset is impaired. If it is determined that the fair value of the indefinite-lived intangible asset is less than the carrying value, the Company would recognize into earnings the amount by which the carrying value of the assets exceeds the fair value. No impairment of intangible assets resulted from the impairment tests in any of the fiscal periods presented.

Definite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives or on an accelerated method of amortization that is expected to reflect the estimated pattern of economic use. In-process research and development (IPR&D) assets are considered indefinite-lived intangible assets until completion or abandonment of the associated research and development (R&D) efforts. Upon completion of the projects, the IPR&D assets are reclassified to technology-based intangible assets and amortized over their estimated useful lives.

As of July 29, 2017 and October 29, 2016, the Company’s intangible assets consisted of the following:



	July 29, 2017				October 29, 2016
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Customer relationships	$	4,671,288	$	353,735	$	649,159	$	158,979
Technology-based	1,097,049		66,841		38,731		9,958
Trade-name	72,800		4,252		600		60
Backlog	200		150		200		—
IPR&D	24,333		—		29,675		—
Total (1)(2)	$	5,865,670	$	424,978	$	718,365	$	168,997

___________

(1) Foreign intangible asset carrying amounts are affected by foreign currency translation.

(2) Increases in intangible assets primarily relate to the Acquisition and other acquisitions. See Note 15, Acquisitions, of these Notes to Condensed Consolidated Financial Statements for further information.

Intangible assets, along with the related accumulated amortization, are removed from the table above at the end of the fiscal year they become fully amortized.

For the three- and nine-month periods ended July 29, 2017, amortization expense related to finite-lived intangible assets was $147.2 million and $256.0 million, respectively. For the three- and nine-month periods ended July 30, 2016, amortization expense related to finite-lived intangible assets was $18.9 million and $55.7 million, respectively. The remaining amortization expense will be recognized over an estimated weighted average life of approximately 4.8 years.

The Company expects annual amortization expense for intangible assets to be:



Fiscal Year	Amortization Expense
Remainder of fiscal 2017		$147,239
2018		$587,637
2019		$584,448
2020		$584,210
2021		$583,789

Note 11 – Pension Plans

The Company has various defined benefit pension and other retirement plans for certain non-U.S. employees that are consistent with local statutory requirements and practices. The Company’s funding policy for its foreign defined benefit

pension plans is consistent with the local requirements of each country. The plans’ assets consist primarily of U.S. and non-U.S. equity securities, bonds, property and cash.

Net periodic pension cost of non-U.S. plans is presented in the following table:



	Three Months Ended						Nine Months Ended
	July 29, 2017			July 30, 2016			July 29, 2017			July 30, 2016
Service cost	$	1,687		$	1,390		$	4,993		$	4,163
Interest cost	904			921			2,678			2,792
Expected return on plan assets	(1,031		)	(940		)	(3,054		)	(2,880		)
Amortization of initial net obligation	3			4			9			12
Amortization of prior service cost	(2		)	—			(6		)	—
Amortization of net loss	482			168			1,403			511
Net periodic pension cost	$	2,043		$	1,543		$	6,023		$	4,598

Note 12 – Revolving Credit Facility

On December 19, 2012, the Company entered into a five-year, $500.0 million senior unsecured revolving credit facility with certain institutional lenders (the Credit Agreement). On July 10, 2015, the Credit Agreement was amended and restated to increase the available borrowings to $750.0 million and extend the term to July 10, 2020. On September 23, 2016, in connection with the planned acquisition of Linear, the Company amended and restated the Credit Agreement. On the Acquisition Date, the aggregate amount of commitments under the revolving credit facility increased to $1.0 billion and the maximum covenant level was temporarily revised. To date, the Company has not borrowed under this revolving credit facility but may borrow in the future and use the proceeds for repayment of existing indebtedness, stock repurchases, acquisitions, capital expenditures, working capital and other lawful corporate purposes. Revolving loans under the Credit Agreement (other than swing line loans) bear interest, at the Company's option, at either a rate equal to (a) the Eurodollar Rate (as defined in the Credit Agreement) plus a margin based on the Company's debt rating or (b) the Base Rate (defined as the highest of (i) the Bank of America prime rate, (ii) the Federal Funds Rate (as defined in the Credit Agreement) plus 0.50% or (iii) one month Eurodollar Rate plus 1%). The Credit Agreement imposes restrictions on the Company’s ability to undertake certain transactions, to create certain liens on assets and to incur certain subsidiary indebtedness. In addition, the Credit Agreement contains a consolidated leverage ratio covenant of total consolidated funded debt to consolidated EBITDA (earnings before interest, taxes, depreciation, and amortization) of not greater than 5.0 to 1.0. As of July 29, 2017, the Company was compliant with these covenants.

Note 13 – Debt

On July 26, 2016, the Company entered into a definitive agreement to acquire Linear (the Merger Agreement). In connection with the Acquisition, the Company announced that it had obtained commitment financing in the form of a 364-day senior unsecured bridge facility in an aggregate principal amount of up to $7.5 billion (364-day Bridge Commitment) and a 90-day senior unsecured bridge facility in an aggregate principal amount of up to $4.1 billion (90-day Bridge Commitment). As discussed below, as a result of entering into the term loan facility and the issuance of $2.1 billion senior unsecured notes, the 364-day Bridge Commitment was terminated and $13.7 million and $7.2 million of unamortized bridge fees relating to the 364-day Bridge Commitment were accelerated and amortized into interest expense in fiscal 2016 and first quarter of fiscal 2017, respectively. Total fees incurred by the Company for the 364-day Bridge Commitment were approximately $27.5 million.

On the Acquisition Date, the Company entered into a 90-day Bridge Credit Agreement (the Bridge Credit Agreement) with JPMorgan Chase Bank, N.A., as administrative agent, and several banks and other financial institutions as lenders. The Bridge Credit Agreement provided for unsecured loans in an aggregate principal amount of up to $4.1 billion. In the third quarter of fiscal 2017, the Company repaid all of the $4.1 billion of outstanding loans under the Bridge Credit Agreement. Total fees incurred by the Company for the 90-day Bridge Commitment and Bridge Credit Agreement were approximately $15.0 million.

On September 23, 2016, the Company entered into a term loan facility consisting of a 3-year unsecured term loan facility in the principal amount of $2.5 billion and a 5-year unsecured term loan facility in the principal amount of $2.5 billion established pursuant to a credit agreement with JP Morgan Chase Bank, N.A. as administrative agent and other banks identified therein as lenders (Term Loan Agreement). The Term Loan Agreement replaced $5.0 billion of the 364-day Bridge Commitment. On the Acquisition Date, the Company borrowed under the Term Loan Agreement, consisting of a 3-year unsecured term loan in the principal amount of $2.5 billion, due March 10, 2020 and a 5-year unsecured term loan in the

principal amount of $2.5 billion, due March 10, 2022. The 5-year term loan requires repayment in quarterly installments on the last business day of each March, June, September and December with the first required payment due June 2017. Prepayments of principal on the term loans can be made at any time without penalty. In the third quarter of fiscal 2017, the Company repaid $250.0 million of principal on the 5-year unsecured term loan, which satisfied the quarterly obligations due through March 2019. In addition, in the third quarter of fiscal 2017, the Company repaid $350.0 million of principal on the 3-year unsecured term loan. The term loans bear interest at a rate per annum equal to the Eurodollar Rate plus a margin based on the Company’s debt ratings from time to time of between 0.75% and 1.63% in the case of the 3-year term loan, and a margin of between 0.88% and 1.75% in the case of the 5-year term loan. As a result of entering into the Term Loan Agreement and drawing on the available borrowings, the Company incurred fees of approximately $11.5 million. The Company recorded these costs as deferred financing costs and will amortize them on a straight-line basis through interest expense over the expected 3- and 5-year terms of the term loans. The Company also paid ticking fees based on the Company’s debt rating accruing beginning 60 days following the effectiveness of the Term Loan Agreement through the Acquisition Date.

On December 5, 2016, the Company issued $400.0 million aggregate principal amount of 2.5% senior unsecured notes due December 5, 2021 (the 2021 Notes), $550.0 million aggregate principal amount of 3.125% senior unsecured notes due December 5, 2023 (the December 2023 Notes), $900.0 million aggregate principal amount of 3.5% senior unsecured notes due December 5, 2026 (the 2026 Notes) and $250.0 million aggregate principal amount of 4.5% senior unsecured notes due December 5, 2036 (the 2036 Notes, and together with the 2021 Notes, the December 2023 Notes and the 2026 Notes, the Notes) with semi-annual fixed interest payments due on June 5 and December 5 of each year, commencing June 5, 2017. The Notes were issued in an underwritten public offering pursuant to the terms of an underwriting agreement, dated as of November 30, 2016, among the Company and J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit Suisse Securities (USA) LLC and MUFG Securities Americas Inc., as representatives of the several underwriters named therein. The net proceeds of the offering were $2.1 billion, after discount and issuance costs. Debt discount and issuance costs will be amortized through interest expense over the term of the Notes. The Notes were issued pursuant to an indenture, as supplemented by a supplemental indenture, and the indenture and supplemental indenture contain certain covenants, events of default and other customary provisions. As of July 29, 2017, the Company was compliant with these covenants. The Notes rank without preference or priority among themselves and equally in right of payment with all other existing and future senior unsecured debt and senior in right of payment to all of the Company's future subordinated debt. The issuance of the Notes replaced the remaining $2.5 billion of the 364-day Bridge Commitment.

The Company’s debt consisted of the following as of July 29, 2017 and October 29, 2016:



	July 29, 2017				October 29, 2016
	Principal		Unamortized discount and debt issuance costs		Principal		Unamortized discount and debt issuance costs
3-Year term loan	2,150,000		3,620		—		—
5-Year term loan	2,250,000		4,999		—		—
2021 Notes, due December 2021	400,000		3,982		—		—
2023 Notes, due June 2023	500,000		3,586		500,000		4,047
2023 Notes, due December 2023	550,000		5,611		—		—
2025 Notes, due December 2025	850,000		7,373		850,000		8,034
2026 Notes, due December 2026	900,000		11,972		—		—
2036 Notes, due December 2036	250,000		4,033		—		—
2045 Notes, due December 2045	400,000		5,594		400,000		5,742
Total Debt	$	8,250,000	$	50,770	$	1,750,000	$	17,823

Note 14 – Inventories

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

Inventories at July 29, 2017 and October 29, 2016 were as follows:



	July 29, 2017		October 29, 2016
Raw materials	$	32,997	$	20,263
Work in process	349,991		232,196
Finished goods	136,707		124,096
Total inventories	$	519,695	$	376,555

Note 15 – Acquisitions

Linear Technology Corporation

On the Acquisition Date, the Company completed its acquisition of all of the voting interests of Linear, an independent manufacturer of high performance analog integrated circuits. Under the terms of the Merger Agreement, Linear stockholders received, for each outstanding share of Linear common stock, $46.00 in cash and 0.2321 of a share of the Company's common stock at the closing. The combination creates the premier analog technology company with the industry’s most comprehensive suite of high-performance analog offerings. The results of operations of Linear from the Acquisition Date are included in the Company’s consolidated statements of income for the three- and nine-month periods ended July 29, 2017. The amount of revenue attributable to Linear included in the Company's consolidated statements of income for the three- and nine-month periods ended July 29, 2017 was $368.6 million and $516.1 million, respectively.

The Acquisition Date fair value of the consideration transferred in the Acquisition consisted of the following:



(in thousands)
Cash consideration (a)	$	11,092,047
Issuance of common stock (b)	4,593,655
Fair value of replacement share-based and cash awards (c)	70,954
Total estimated purchase consideration	$	15,756,656

_______________

(a)The cash consideration was funded utilizing cash on hand, the net proceeds from the bridge and term loan agreements and the proceeds received from the Company's issuance of the Notes. This reflects the cash portion of the purchase consideration paid to Linear stockholders of approximately $11.1 billion, as well as $16.3 million for the cash-settled portion of consideration paid to holders of restricted stock and restricted stock awards that automatically vested at the effective time of the Acquisition pursuant to pre-existing change-of-control agreements.

(b) The fair value is based on the issuance of approximately 55.9 million shares of the Company's common stock with a per-share value of $82.20 (the closing price of the Company's common stock on The NASDAQ Global Select Market on the Acquisition Date).

(c) In connection with the Acquisition, the Company issued equity and cash awards to certain Linear employees to replace Linear equity awards. The amount represents the portion of the fair value of the replacement equity and cash awards associated with services rendered though the Acquisition Date and have been included as a component of the total estimated purchase consideration.

The preliminary fair values of assets acquired and liabilities assumed as of the Acquisition Date are set forth in the table below. The excess of the purchase consideration over the aggregate Acquisition Date value of identifiable net assets acquired was recorded as goodwill. None of the goodwill is expected to be deductible for tax purposes. These preliminary Acquisition Date values were generally determined through established and generally accepted valuation techniques and are subject to change during the measurement period as valuations are finalized. As a result, the Acquisition accounting is not complete and additional information that existed at the Acquisition Date may become known to the Company during the remainder of the measurement period. During the third quarter of fiscal 2017, the Company recorded acquisition accounting adjustments of $28.6 million to goodwill, $21.9 million to deferred tax liabilities, $6.0 million to inventory and $0.7 million to fixed assets.The adjustment to inventory and fixed assets included a portion of which would have been recognized as an expense in the prior quarter if it was recognized as of the acquisition date. As of the filing date of this Quarterly Report on Form 10-Q, the Company is still in the process of valuing Linear's assets, including inventory, fixed assets, intangible assets, and liabilities, including deferred revenue and related income tax accounting.



(in thousands)
Cash and cash equivalents	$	1,419,193
Marketable securities	100,246
Accounts receivable (a)	146,532
Inventories	443,907
Prepaid expenses and other assets	14,782
Property, plant and equipment	462,265
Intangible assets (Note 10)	5,140,400
Goodwill (Note 10)	10,555,688
Total assets	$	18,283,013
Assumed liabilities	138,452
Deferred tax liabilities	2,387,905
Total estimated purchase consideration	$	15,756,656

____________


(a)	The fair value of accounts receivable was $146.5 million, with the gross contractual amount being $148.2 million, of which the Company estimates that $1.7 million is uncollectible.

The acquired intangible assets consisted of the following, which are being amortized on a straight-line basis over their estimated useful lives or on an accelerated method of amortization that is expected to reflect the estimated pattern of economic use.



	Fair Value (in thousands)		Weighted Average Useful Lives (in Years)
Technology-based	$	1,046,100	8
Trade name	72,200		7
Customer relationships	4,022,100		11
Total amortizable intangible assets	$	5,140,400	10

The goodwill recognized is attributable to synergies which are expected to enhance and expand the Company’s overall product portfolio and opportunities in new and existing markets, future technologies that have yet to be determined and Linear's assembled workforce. Future technologies do not meet the criteria for recognition separately from goodwill because they are part of future development and growth of the business. As of the filing date of this Quarterly Report on Form 10-Q, the assignment of goodwill resulting from the Acquisition to the Company's reporting units has not been completed.

There were no significant contingencies assumed as part of the Acquisition.

The Company recognized $7.8 million and $54.7 million of transaction-related costs, including legal, accounting and other related fees that were expensed in the three- and nine-month periods ended July 29, 2017, respectively. These costs are included in the condensed consolidated statements of income in operating expenses within SMG&A expenses. The Company may incur additional transaction-related costs within the next twelve months related to the Acquisition that will be expensed as incurred.

The following unaudited pro forma consolidated financial information combines the unaudited results of the Company for the three-and nine-month periods ended July 29, 2017 and the unaudited results of Linear for the three- and nine-month periods ended July 29, 2017 and assumes that the Acquisition, which closed on March 10, 2017, was completed on November 1, 2015 (the first day of fiscal 2016). The pro forma consolidated financial information has been calculated after applying the Company’s accounting policies and includes adjustments for amortization expense of acquired intangible assets, transaction-related costs, a step-up in the value of acquired inventory and property, plant and equipment, compensation expense for ongoing share-based compensation arrangements replaced and interest expense for the debt incurred to fund the Acquisition, together with the consequential tax effects. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the operating results of the Company that would have been achieved had the Acquisition actually taken place on November 1, 2015. In addition, these results are not intended to be a projection of future results and do not reflect events that may occur after the Acquisition, including but not limited to revenue enhancements, cost savings or operating synergies that the combined Company may achieve as a result of the Acquisition.



(thousands, except per share data)	Pro Forma Three Months Ended
	July 29, 2017		July 30, 2016
Revenue	$	1,452,684	$	1,241,283
Net income	$	279,608	$	216,633
Basic net income per common share	$	0.76	$	0.60
Diluted net income per common share	$	0.75	$	0.59



(thousands, except per share data)	Pro Forma Nine Months Ended
	July 29, 2017		July 30, 2016
Revenue	$	4,161,671	$	3,460,954
Net income	$	625,366	$	64,315
Basic net income per common share	$	1.70	$	0.18
Diluted net income per common share	$	1.68	$	0.17

Other Acquisitions

The Company has not provided pro forma results of operations for any other acquisitions completed in the three- and nine-month periods ended July 29, 2017 or July 30, 2016 herein as they were not material to the Company on either an individual or an aggregate basis. The Company included the results of operations of each acquisition in its consolidated statement of income from the date of each acquisition.

Note 16 – Income Taxes

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

The Company’s effective tax rate reflects the applicable tax rate in effect in the various tax jurisdictions around the world where the Company's income is earned. The Company's effective tax rate is generally lower than the U.S. federal statutory rate of 35%, primarily due to lower statutory tax rates applicable to the Company's operations in jurisdictions in which the Company earns a portion of its income.

The Company had filed a petition with the U.S. Tax Court for a matter relating to fiscal years 2006 and 2007 that pertained to Section 965 of the Internal Revenue Code related to the beneficial tax treatment of dividends paid from foreign owned companies under The American Jobs Creation Act. The Company recorded a $36.5 million reserve for this potential liability in the fourth quarter of fiscal 2013. A favorable ruling was rendered by the U.S. Tax Court on November 22, 2016. On February 27, 2017, the U.S. Tax Court’s Decision Order was entered and the 90-day period for the Internal Revenue Service to file a Notice of Appeal lapsed on May 30, 2017. As a result, on May 30, 2017, the Company released the $50.5 million reserve, which was comprised of the $41.7 million in originally-recorded and subsequent accruals for this potential liability, plus $8.8 million of net interest.

All of the Company's U.S. federal tax returns prior to fiscal year 2013 are no longer subject to examination.

All of the Company's Ireland tax returns prior to fiscal year 2012 are no longer subject to examination.

Unrealized Tax Benefits

The following table summarizes the changes in the total amounts of unrealized tax benefits for the nine months ended July 29, 2017.



	Unrealized Tax Benefits
Balance, October 29, 2016	$	68,535
Additions related to acquisitions	12,332
Additions for tax positions related to current year	127
Additions for tax positions related to prior years	—
Reductions for tax positions related to prior years	(43,046		)
Reductions due to lapse of applicable statute of limitations	(650		)
Balance, July 29, 2017	$	37,298

Note 17 – New Accounting Pronouncements

Standards Implemented

Business combinations

In September 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments (ASU 2015-16). The update requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The update also requires that the acquirer record, in the financial statements of the period in which adjustments to provisional amounts are determined, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The new standard is effective prospectively for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years, with early adoption permitted. The Company adopted ASU 2015-16 in the first quarter of fiscal 2017.

Intangibles-Goodwill and other

In April 2015, the FASB issued ASU 2015-05, Intangibles - Goodwill and Other - Internal Use Software (Subtopic 350-40) - Customer's Accounting for Fees Paid in a Cloud Computing Arrangement (ASU 2015-05), which provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. Consequently, all software licenses within the scope of Subtopic 350-40 will be accounted for consistent with other licenses of intangible assets. The guidance in ASU 2015-05 is effective for fiscal years beginning after December 15, 2015 and early adoption is permitted. The adoption of ASU 2015-05 in the first quarter of fiscal 2017 did not impact the Company's financial position or results of operations.

Compensation - Retirement Benefits

In April 2015, the FASB issued ASU 2015-04, Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets (ASU 2015-04), which provides a practical expedient for entities with a fiscal year-end that does not coincide with a month-end, that permits the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end and apply that practical expedient consistently from year to year. Entities are required to disclose the accounting policy election and the date used to measure defined benefit plan assets and obligations. ASU 2015-04 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early application is permitted. Amendments should be applied prospectively. The adoption of ASU 2015-04 in the first quarter of fiscal 2017 did not impact the Company’s financial position or results of operations.

Consolidation

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis (ASU 2015-02). ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. ASU 2015-02 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. A reporting entity may apply the amendments in this guidance using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. A reporting entity also may apply the amendments retrospectively. The adoption of ASU 2015-02 in the first quarter of fiscal 2017 did not impact the Company’s financial position or results of operations.

Stock Compensation

In June 2014, the FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (ASU 2014-12), which requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU 2014-12 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted. The adoption of ASU 2014-12 in the first quarter of fiscal 2017 did not impact the Company's financial position or results of operations.

Standards to Be Implemented

Intangibles - Goodwill and Other

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350) (ASU 2017-04). ASU 2017-04 simplifies the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The amendment requires an entity to perform its annual, or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. A goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The amendment should be applied on a prospective basis. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. ASU 2017-04 is effective for the Company in the first quarter of the fiscal year ending October 30, 2021 (fiscal 2021). The Company is currently evaluating the adoption date and the impact, if any, adoption will have on its financial position and results of operations.

Business combinations

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business (ASU 2017-01). ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company will adopt ASU 2017-01 in the first quarter of the fiscal year ending November 2, 2019 (fiscal 2019). The impact of the adoption on the Company's financial position and results of operations will be dependent upon any future acquisitions or disposals.

Income Taxes

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740) (ASU 2016-16). ASU 2016-16 will require an entity to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. ASU 2016-16 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted as of the beginning of an annual reporting period for which financial statements have not been issued or made available for issuance. ASU 2016-16 is effective for the Company in the first quarter of fiscal 2019. The Company is currently evaluating the adoption date and the impact, if any, adoption will have on its financial position and results of operations.

Statement of Cash Flows

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15). ASU 2016-15 provides guidance on several specific cash flow issues, including debt prepayment or extinguishment costs, settlement of certain debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of certain insurance claims and distributions received from equity method investees. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted in any interim or annual period. ASU 2016-15 is effective for the Company in the first quarter of fiscal 2019. The Company is currently evaluating the adoption date and the impact, if any, adoption will have on its statement of cash flows.

Equity Method Investments

In March 2016, the FASB issued ASU 2016-07, Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting (ASU 2016-07). ASU 2016-07 eliminates the requirement that when an investment, initially accounted for under a method other than the equity method of accounting, subsequently qualifies for use of the equity method, an investor must retrospectively apply the equity method in prior periods in which it held the investment. This requires an investor to determine the fair value of the investee’s underlying assets and liabilities retrospectively at each

investment date and revise all prior periods as if the equity method had always been applied. The new guidance requires the investor to apply the equity method prospectively from the date the investment qualifies for the equity method. The investor will add the carrying value of the existing investment to the cost of the additional investment to determine the initial cost basis of the equity method investment. ASU 2016-07 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted in any interim or annual period. ASU 2016-07 is effective for the Company in the first quarter of the fiscal year ending November 3, 2018 (fiscal 2018). The Company is currently evaluating the adoption date and the impact, if any, adoption will have on its financial position and results of operations.

Derivatives and Hedging

In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments (ASU 2016-06). ASU 2016-06 clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under ASU 2016-06 is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. ASU 2016-06 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. ASU 2016-06 is effective for the Company in the first quarter of fiscal 2019. The Company is currently evaluating the adoption date and the impact, if any, adoption will have on its financial position and results of operations.

Leases

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (ASU 2016-02). ASU 2016-02 requires a lessee to recognize most leases on the balance sheet but recognize expenses on the income statement in a manner similar to current practice. The update states that a lessee will recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying assets for the lease term. Leases will continue to be classified as either financing or operating, with classification affecting the recognition, measurement and presentation of expenses and cash flows arising from a lease. ASU 2016-02 is effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. ASU 2016-02 is effective for the Company in the first quarter of the fiscal year ending October 31, 2020 (fiscal 2020). The Company is currently evaluating the adoption date and the impact adoption will have on its financial position and results of operations.

Financial Instruments

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 requires a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years. ASU 2016-13 is effective for the Company in the first quarter of fiscal 2020. The Company is currently evaluating the adoption date and the impact, if any, adoption will have on its financial position and results of operations.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01). ASU 2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU 2016-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. ASU 2016-01 is effective for the Company in the first quarter of fiscal 2019. The Company is currently evaluating the adoption date and the impact adoption will have on its financial position and results of operations.

Inventory

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330) - Simplifying the Measurement of Inventory (ASU 2015-11), which simplifies the subsequent measurement of inventories by replacing the lower of cost or market test with a

lower of cost and net realizable value test. The guidance applies only to inventories for which cost is determined by methods other than last-in first-out (LIFO) and the retail inventory method. The guidance in ASU 2015-11 is effective for fiscal years beginning after December 15, 2016 and early adoption is permitted. ASU 2015-11 is effective for the Company in the first quarter of fiscal 2018. The Company is currently evaluating the adoption date and the impact, if any, adoption will have on its financial position and results of operations.

Presentation of Financial Statements

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40) (ASU 2014-15), which provides guidance about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The update requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the update (1) provides a definition of the term "substantial doubt", (2) requires an evaluation every reporting period including interim periods, (3) provides principles for considering the mitigating effect of management’s plans, (4) requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) requires an express statement and other disclosures when substantial doubt is not alleviated, and (6) requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). ASU 2014-15 is effective for annual reporting periods ending after December 15, 2016, and for annual periods and interim periods thereafter. Early adoption is permitted. ASU 2014-15 is effective for the Company for its annual period ending October 28, 2017. The Company does not expect the adoption to have a material impact on the Company's consolidated financial statements.

Stock Compensation

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting (ASU 2017-09). The new guidance clarifies when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. ASU 2017-09 is effective for fiscal years, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. ASU 2017-09 is effective for the Company in the first quarter of fiscal 2019. The Company is currently evaluating the adoption date and the impact, if any, adoption will have on its financial position and results of operations.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years, and interim periods within those annual periods, beginning after December 15, 2016 and allows for prospective, retrospective or modified retrospective adoption, depending on the area covered in the update, with early adoption permitted. ASU 2016-09 is effective for the Company in the first quarter of fiscal 2018. The Company is currently evaluating the impact, if any, adoption will have on its financial position and results of operations.

Revenue Recognition

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, the guidance requires improved disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has issued several amendments and updates to the new revenue standard, including guidance related to when an entity should recognize revenue gross as a principal or net as an agent and how an entity should identify performance obligations. As amended, ASU 2014-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, which is the Company's first quarter of fiscal 2019. Early adoption is permitted for all entities only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company has developed a project plan for the implementation of the guidance, including a review of all revenue streams to identify any differences in the timing, measurement or presentation of revenue recognition. The Company has reviewed its revenue streams and is nearing completion in assessing all potential impacts of the standard, including any impacts from recently issued amendments, and retrospectively adjusting financial information for prior fiscal years. The Company has also made progress on its impact assessment of the recent acquisition of Linear. While the Company is still in the process of completing its evaluation of the standard, it currently believes the most significant impact will be related to the timing of recognition of sales to certain distributors. As described in Note 2, Revenue Recognition, of these Notes to the Condensed Consolidated Financial Statements, the Company currently defers revenue and the related cost of sales on shipments to certain distributors until the distributors resell the products to their customers. Upon adoption of ASU 2014-09, the Company will no longer be permitted to defer revenue until sale by the distributor to the end