ANALOG DEVICES INC 10-Q

ITEM 1. Financial Statements ANALOG DEVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (in thousands, except per share amounts) Three Months Ended Nine Months Ended July 31, 2021 August 1, 2020 July 31, 2021 August 1, 2020 Revenue $ 1,758,853 $ 1,456,136 $ 4,978,718 $ 4,076,761 Cost of sales 537,669 483,558 1,575,526 1,409,367 Gross margin 1,221,184 972,578 3,403,192 2,667,394 Operating expenses: Research and development 306,617 260,794 897,005 770,280 Selling, marketing, general and administrative 206,076 153,753 597,963 494,808 Amortization of intangibles 107,783 107,077 323,217 321,448 Special charges, net ( 8,938 ) 31,830 ( 8,189 ) 44,286 611,538 553,454 1,809,996 1,630,822 Operating income: 609,646 419,124 1,593,196 1,036,572 Nonoperating expense (income): Interest expense 44,659 45,914 130,204 144,712 Interest income ( 300 ) ( 504 ) ( 799 ) ( 3,778 ) Other, net ( 6,991 ) 685 ( 21,090 ) 1,331 37,368 46,095 108,315 142,265 Income before income taxes 572,278 373,029 1,484,881 894,307 Provision for income taxes 68,967 10,364 170,146 60,072 Net income $ 503,311 $ 362,665 $ 1,314,735 $ 834,235 Shares used to compute earnings per common share – basic 368,476 368,791 368,834 368,417 Shares used to compute earnings per common share – diluted 371,849 372,003 372,457 371,857 Basic earnings per common share $ 1.37 $ 0.98 $ 3.56 $ 2.26 Diluted earnings per common share $ 1.35 $ 0.97 $ 3.53 $ 2.24 See accompanying notes. 1 ANALOG DEVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (in thousands) Three Months Ended Nine Months Ended July 31, 2021 August 1, 2020 July 31, 2021 August 1, 2020 Net income $ 503,311 $ 362,665 $ 1,314,735 $ 834,235 Foreign currency translation adjustments ( 2,952 ) 7,257 5,073 197 Change in fair value of derivative instruments designated as cash flow hedges (net of taxes of $ 10,657 , $ 1,437 , $ 6,452 and $ 26,503 , respectively) ( 40,040 ) ( 1,605 ) 19,853 ( 83,016 ) Changes in pension plans, net actuarial loss and foreign currency translation adjustments (net of taxes of $ 85 , $ 168 , $ 257 and $ 485 , respectively) 964 ( 1,579 ) ( 408 ) 68 Other comprehensive (loss) income ( 42,028 ) 4,073 24,518 ( 82,751 ) Comprehensive income $ 461,283 $ 366,738 $ 1,339,253 $ 751,484 See accompanying notes. 2 ANALOG DEVICES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands, except share and per share amounts) July 31, 2021 October 31, 2020 ASSETS Current Assets Cash and cash equivalents $ 1,480,701 $ 1,055,860 Accounts receivable 823,163 737,536 Inventories 657,520 608,260 Prepaid expenses and other current assets 129,071 116,032 Total current assets 3,090,455 2,517,688 Property, Plant and Equipment, at Cost Land and buildings 954,125 974,604 Machinery and equipment 2,825,698 2,667,846 Office equipment 89,399 85,291 Leasehold improvements 160,983 157,915 4,030,205 3,885,656 Less accumulated depreciation and amortization 2,856,531 2,765,095 Net property, plant and equipment 1,173,674 1,120,561 Other Assets Other investments 105,562 86,729 Goodwill 12,278,898 12,278,425 Intangible assets, net 3,248,802 3,650,280 Deferred tax assets 1,425,293 1,503,064 Other assets 318,506 311,856 Total other assets 17,377,061 17,830,354 $ 21,641,190 $ 21,468,603 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities Accounts payable $ 265,933 $ 227,273 Income taxes payable 233,055 182,080 Debt, current 1,324,677 — Accrued liabilities 969,677 955,633 Total current liabilities 2,793,342 1,364,986 Non-current liabilities Long-term debt 3,824,819 5,145,102 Deferred income taxes 1,776,308 1,919,595 Income taxes payable 529,057 591,780 Other non-current liabilities 453,701 449,195 Total non-current liabilities 6,583,885 8,105,672 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, 368,214,341 shares outstanding ( 369,484,899 on October 31, 2020) 61,370 61,582 Capital in excess of par value 4,614,677 4,949,586 Retained earnings 7,812,859 7,236,238 Accumulated other comprehensive loss ( 224,943 ) ( 249,461 ) Total shareholders’ equity 12,263,963 11,997,945 $ 21,641,190 $ 21,468,603 See accompanying notes. 3 ANALOG DEVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (in thousands) Three Months Ended July 31, 2021 Capital in Accumulated Other Common Stock Excess of Retained Comprehensive Shares Amount Par Value Earnings Loss BALANCE, MAY 1, 2021 368,827 $ 61,472 $ 4,724,493 $ 7,564,054 $ ( 182,915 ) Net income 503,311 Dividends declared and paid - $ 0.69 per share ( 254,506 ) Issuance of stock under stock plans and other 396 66 11,610 Stock-based compensation expense 41,687 Other comprehensive loss ( 42,028 ) Common stock repurchased ( 1,009 ) ( 168 ) ( 163,113 ) BALANCE, JULY 31, 2021 368,214 $ 61,370 $ 4,614,677 $ 7,812,859 $ ( 224,943 ) Nine Months Ended July 31, 2021 Capital in Accumulated Other Common Stock Excess of Retained Comprehensive Shares Amount Par Value Earnings Loss BALANCE, OCTOBER 31, 2020 369,485 $ 61,582 $ 4,949,586 $ 7,236,238 $ ( 249,461 ) Net income 1,314,735 Dividends declared and paid - $ 2.00 per share ( 738,114 ) Issuance of stock under stock plans and other 2,040 340 55,008 Stock-based compensation expense 118,683 Other comprehensive income 24,518 Common stock repurchased ( 3,311 ) ( 552 ) ( 508,600 ) BALANCE, JULY 31, 2021 368,214 $ 61,370 $ 4,614,677 $ 7,812,859 $ ( 224,943 ) See accompanying notes. 4 ANALOG DEVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (in thousands) Three Months Ended August 1, 2020 Capital in Accumulated Other Common Stock Excess of Retained Comprehensive Shares Amount Par Value Earnings Loss BALANCE, MAY 2, 2020 368,425 $ 61,405 $ 4,861,013 $ 6,945,442 $ ( 277,002 ) Net income 362,665 Dividends declared and paid - $ 0.62 per share ( 228,798 ) Issuance of stock under stock plans and other 892 149 26,704 Stock-based compensation expense 39,560 Other comprehensive income 4,073 Common stock repurchased ( 151 ) ( 25 ) ( 17,626 ) BALANCE, AUGUST 1, 2020 369,166 $ 61,529 $ 4,909,651 $ 7,079,309 $ ( 272,929 ) Nine Months Ended August 1, 2020 Capital in Accumulated Other Common Stock Excess of Retained Comprehensive Shares Amount Par Value Earnings Loss BALANCE, NOVEMBER 2, 2019 368,302 $ 61,385 $ 4,936,349 $ 6,899,253 $ ( 187,799 ) Effect of Accounting Standards Update 2018-02 2,379 ( 2,379 ) Net income 834,235 Dividends declared and paid - $ 1.78 per share ( 656,558 ) Issuance of stock as charitable contribution 336 56 39,944 Issuance of stock under stock plans and other 2,730 455 57,295 Stock-based compensation expense 112,961 Other comprehensive loss ( 82,751 ) Common stock repurchased ( 2,202 ) ( 367 ) ( 236,898 ) BALANCE, AUGUST 1, 2020 369,166 $ 61,529 $ 4,909,651 $ 7,079,309 $ ( 272,929 ) See accompanying notes. 5 ANALOG DEVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Nine Months Ended July 31, 2021 August 1, 2020 Cash flows from operating activities: Net income $ 1,314,735 $ 834,235 Adjustments to reconcile net income to net cash provided by operations: Depreciation 158,937 176,722 Amortization of intangibles 436,734 431,985 Stock-based compensation expense 118,683 112,961 Gain on sale of property, plant and equipment ( 13,557 ) — Deferred income taxes ( 72,578 ) ( 42,802 ) Non-cash contribution to charitable foundation — 40,000 Other ( 14,965 ) 5,675 Changes in operating assets and liabilities ( 133,644 ) ( 222,887 ) Total adjustments 479,610 501,654 Net cash provided by operating activities 1,794,345 1,335,889 Cash flows from investing activities: Proceeds from other investments 22,215 — Additions to property, plant and equipment ( 212,899 ) ( 135,804 ) Proceeds from sale of property, plant and equipment 35,714 — Payments for acquisitions, net of cash acquired ( 24,950 ) ( 12,763 ) Changes in other assets ( 3,360 ) ( 1,214 ) Net cash used for investing activities ( 183,280 ) ( 149,781 ) Cash flows from financing activities: Proceeds from debt — 395,646 Proceeds from revolver — 350,000 Payments on revolver — ( 350,000 ) Debt repayments — ( 300,000 ) Dividend payments to shareholders ( 738,114 ) ( 656,558 ) Repurchase of common stock ( 509,152 ) ( 237,265 ) Proceeds from employee stock plans 55,348 57,750 Changes in other financing activities 1,952 ( 4,015 ) Net cash used for financing activities ( 1,189,966 ) ( 744,442 ) Effect of exchange rate changes on cash 3,742 276 Net increase in cash and cash equivalents 424,841 441,942 Cash and cash equivalents at beginning of period 1,055,860 648,322 Cash and cash equivalents at end of period $ 1,480,701 $ 1,090,264 See accompanying notes. 6 ANALOG DEVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED JULY 31, 2021 (UNAUDITED) (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 31, 2020 (fiscal 2020) 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 30, 2021 (fiscal 2021) or any future period. The Company has a 52-53 week fiscal year that ends on the Saturday closest to the last day in October. Certain amounts reported in previous periods have been reclassified to conform to the fiscal 2021 presentation. Proposed acquisition of Maxim Integrated Products, Inc. On July 12, 2020, the Company entered into a definitive agreement (the Merger Agreement) to acquire Maxim Integrated Products, Inc. (Maxim), an independent manufacturer of innovative analog and mixed-signal products and technologies. See Note 14, Acquisitions , for additional information. Note 2 – Stock-Based Compensation and Shareholders' Equity A summary of the Company’s stock option activity as of July 31, 2021 and changes during the nine-month period then ended is presented below: Options Outstanding (in thousands) Weighted- Average Exercise Price Per Share Weighted- Average Remaining Contractual Term in Years Aggregate Intrinsic Value Options outstanding at October 31, 2020 4,192 $ 70.73 Options granted 644 $ 145.04 Options exercised ( 875 ) $ 63.18 Options forfeited ( 36 ) $ 87.18 Options expired ( 6 ) $ 40.69 Options outstanding at July 31, 2021 3,919 $ 84.53 5.7 $ 324,862 Options exercisable at July 31, 2021 2,511 $ 66.15 4.3 $ 254,262 Options vested or expected to vest at July 31, 2021 (1) 3,816 $ 83.41 5.7 $ 320,532 (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. In the first quarter of fiscal 2021, the Company issued a special performance stock option award to the Company's chief executive officer. The performance stock option award is exercisable for up to 460,000 shares of the Company's common stock (the Target Number of Shares) at an exercise price per share of $ 144.06 , which was the closing price of the Company's common stock on the date of grant, and vests subject to the satisfaction of certain target stock price thresholds during a five-year period, measured on the basis of the average of the closing prices of the Company's common stock over 70 consecutive trading days. The actual number of shares that will become exercisable will range from 0 % to a maximum of 100 % of the Target Number of Shares based on the attainment of such target stock price thresholds at any time during a five-year period from December 15, 2020 to December 15, 2025. The grant date fair value of the award was calculated using the Monte Carlo simulation model which utilizes multiple input variables that determine the probability of satisfying the performance conditions stipulated in the award to calculate the fair market value. The Monte Carlo simulation model also uses stock price volatility and other variables to estimate the probability of satisfying the performance conditions, including the possibility that the market condition may not be satisfied, and the resulting fair value of the award. 7 During the nine-month periods ended July 31, 2021 and August 1, 2020, 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 $ 79.1 million and $ 61.7 million, respectively. A summary of the Company’s restricted stock unit/award activity as of July 31, 2021 and changes during the nine-month period then ended is presented below: Restricted Stock Units/Awards Outstanding (in thousands) Weighted- Average Grant- Date Fair Value Per Share Restricted stock units/awards outstanding at October 31, 2020 3,637 $ 91.54 Units/Awards granted 1,034 $ 143.88 Restrictions lapsed ( 1,160 ) $ 89.08 Forfeited ( 163 ) $ 100.74 Restricted stock units/awards outstanding at July 31, 2021 3,348 $ 107.70 In the first half of fiscal 2021, the Company issued approximately 121,000 performance-based restricted stock units (Maxim Integration PRSUs) related to the Company's planned acquisition of Maxim to a select group of employees. The number of Maxim Integration PRSUs that may be earned will range from 0 % to a maximum of 200 % of the issued amount of Maxim Integration PRSUs and will be determined according to the achievement of certain performance metrics. Any shares earned will vest on the 60th day following the two-year anniversary of the closing of the Maxim acquisition. If the Maxim acquisition does not close, the awards will be cancelled. The grant date fair value of these awards were calculated using 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. The grant-date fair value of these awards is also impacted by the number of units that are expected to vest during the performance period and is adjusted through the related stock-based compensation expense at each reporting period based on the probability of achievement of that performance condition. As of July 31, 2021, there was $ 337.9 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 1.4 years. The total grant-date fair values of awards that vested during the nine-month periods ended July 31, 2021 and August 1, 2020 were approximately $ 114.7 million and $ 157.9 million, respectively. Total stock-based compensation expense recognized was as follows: Three Months Ended Nine Months Ended July 31, 2021 August 1, 2020 July 31, 2021 August 1, 2020 Cost of sales $ 4,331 $ 4,508 $ 13,338 $ 13,428 Research and development 19,806 19,158 57,675 55,163 Selling, marketing, general and administrative 17,550 14,951 47,670 43,427 Special charges, net — 943 — 943 Total stock-based compensation expense $ 41,687 $ 39,560 $ 118,683 $ 112,961 As of July 31, 2021 and October 31, 2020, the Company capitalized $ 6.0 million and $ 5.8 million, respectively, of stock-based compensation in Inventories on the Condensed Consolidated Balance Sheets. Common Stock Repurchases As of July 31, 2021, the Company had repurchased a total of approximately 159.0 million shares of its common stock for approximately $ 6.7 billion under the Company's share repurchase program. As of July 31, 2021, an additional $ 1.4 billion remains available for repurchase of shares under the current authorized program. The Company also repurchases shares in settlement of employee tax withholding obligations due upon the vesting of restricted stock units/awards or the exercise of stock options. Future repurchases of common stock will be dependent upon the Company's financial position, results of operations, outlook, liquidity, and other factors deemed relevant by the Company. 8 Note 3 – Accumulated Other Comprehensive (Loss) Income The following table provides the changes in accumulated other comprehensive (loss) income (AOCI) by component and the related tax effects during the first nine months of fiscal 2021. Foreign currency translation adjustment Unrealized holding gains (losses) on derivatives Pension plans Total October 31, 2020 $ ( 26,852 ) $ ( 172,670 ) $ ( 49,939 ) $ ( 249,461 ) Other comprehensive income (loss) before reclassifications 5,073 32,548 ( 2,396 ) 35,225 Amounts reclassified out of other comprehensive income (loss) — ( 6,243 ) 2,245 ( 3,998 ) Tax effects — ( 6,452 ) ( 257 ) ( 6,709 ) Other comprehensive income (loss) 5,073 19,853 ( 408 ) 24,518 July 31, 2021 $ ( 21,779 ) $ ( 152,817 ) $ ( 50,347 ) $ ( 224,943 ) The amounts reclassified out of AOCI into the Condensed Consolidated Statements of Income and the Condensed Consolidated Statements of Shareholders' Equity with presentation location during each period were as follows: Three Months Ended Nine Months Ended Comprehensive Income Component July 31, 2021 August 1, 2020 July 31, 2021 August 1, 2020 Location Unrealized holding losses (gains) on derivatives Currency forwards $ ( 351 ) $ ( 842 ) $ ( 3,700 ) $ ( 762 ) Cost of sales ( 283 ) ( 226 ) ( 2,138 ) 640 Research and development 28 ( 189 ) ( 1,796 ) 895 Selling, marketing, general and administrative Interest rate derivatives 464 464 1,391 1,392 Interest expense ( 142 ) ( 793 ) ( 6,243 ) 2,165 Total before tax ( 28 ) 79 505 ( 488 ) Tax Effect of Accounting Standards Update 2018-02 — — — ( 2,379 ) Retained earnings $ ( 170 ) $ ( 714 ) $ ( 5,738 ) $ ( 702 ) Net of tax Amortization of pension components included in the computation of net periodic pension cost Actuarial losses 747 672 2,245 1,954 ( 85 ) ( 168 ) ( 257 ) ( 485 ) Tax $ 662 $ 504 $ 1,988 $ 1,469 Net of tax Total amounts reclassified out of AOCI, net of tax $ 492 $ ( 210 ) $ ( 3,750 ) $ 767 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. 9 Note 4 – Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share: Three Months Ended Nine Months Ended July 31, 2021 August 1, 2020 July 31, 2021 August 1, 2020 Net Income $ 503,311 $ 362,665 $ 1,314,735 $ 834,235 Basic shares: Weighted-average shares outstanding 368,476 368,791 368,834 368,417 Earnings per common share basic: $ 1.37 $ 0.98 $ 3.56 $ 2.26 Diluted shares: Weighted-average shares outstanding 368,476 368,791 368,834 368,417 Assumed exercise of common stock equivalents 3,373 3,212 3,623 3,440 Weighted-average common and common equivalent shares 371,849 372,003 372,457 371,857 Earnings per common share diluted: $ 1.35 $ 0.97 $ 3.53 $ 2.24 Anti-dilutive shares related to: Outstanding stock-based awards 645 384 502 487 Note 5 – Special Charges, net The following table is a quarterly roll-forward from October 31, 2020 to July 31, 2021 of the employee separation and exit cost accruals established related to existing restructuring actions: Accrued Restructuring Closure of Manufacturing Facilities Repositioning Action Other Actions Balance at October 31, 2020 $ 45,176 $ 20,774 $ 3,489 First quarter fiscal 2021 special charges 438 — — Severance and other payments ( 1,950 ) ( 8,128 ) ( 333 ) Effect of foreign currency on accrual — 248 — Balance at January 30, 2021 $ 43,664 $ 12,894 $ 3,156 Second quarter fiscal 2021 special charges 311 — — Severance and other payments ( 5,769 ) ( 2,767 ) ( 270 ) Effect of foreign currency on accrual — ( 44 ) — Balance at May 1, 2021 $ 38,206 $ 10,083 $ 2,886 Third quarter fiscal 2021 special charges 4,618 — — Severance and other payments ( 15,949 ) ( 2,178 ) ( 219 ) Effect of foreign currency on accrual — ( 24 ) — Balance at July 31, 2021 $ 26,875 $ 7,881 $ 2,667 Accrued liabilities $ 26,875 $ 7,881 $ 2,667 Special charges, net, for the quarter ended July 31, 2021 was a net gain of $ 8.9 million, which included charges of $ 4.6 million related to the closure of the Company’s manufacturing facilities reflected in the table above as well as a gain of $ 13.6 million related to the sale of the Company’s Singapore test facility described further below. Repositioning Action The Company recorded special charges of $ 137.5 million on a cumulative basis through July 31, 2021, as a result of organizational initiatives to better align the global workforce with the Company's long-term strategic plan. Approximately $ 123.3 million of the total charges was for severance and fringe benefit costs in accordance with either the Company's ongoing benefit plan or statutory requirements for the impacted manufacturing, engineering and selling, marketing, general and administrative (SMG&A) employees. The remaining $ 14.2 million of the charges were recorded in the fiscal year ended November 2, 2019 (fiscal 2019) and related to the write-off of acquired intellectual property due to the Company's decision to discontinue certain product development strategies. 10 Closure of Manufacturing Facilities The Company recorded net special charges of $ 46.8 million on a cumulative basis through July 31, 2021 as a result of its decision to consolidate certain wafer and test facility operations acquired as part of the acquisition of Linear Technology Corporation (Linear). The special charges include severance and fringe benefit costs, in accordance with the Company's ongoing benefit plan or statutory requirements at foreign locations, one-time termination benefits for the impacted manufacturing, engineering and SMG&A employees and other exit costs. These one-time termination benefits are being recognized over the future service period required for employees to earn these benefits. During the third quarter of fiscal 2021, the Company ceased production at its Hillview wafer fabrication facility located in Milpitas, California and determined that this facility met the held for sale criteria specified in Accounting Standards Codification (ASC ) 360. See Note 6 - Property, Plant and Equipment for amounts reclassified. During the third quarter of fiscal 2021, the Company completed the sale of its facility and certain equipment in Singapore, that were previously classified as held for sale, for approximately $ 35.7 million, which resulted in a gain of $ 13.6 million. Concurrent with the sale, the Company entered into a short-term lease agreement to leaseback a portion of the facility while it completes its transition of related operations to its facilities in Penang, Malaysia and the Philippines, as well as to its outsourced assembly and test partners, which is expected to be competed in the fiscal year ending October 29, 2022 (fiscal 2022). Note 6 – Property, Plant and Equipment During the third quarter of fiscal 2021, the Company ceased production at its Hillview wafer fabrication facility located in Milpitas, California and determined that this facility met the held for sale criteria specified in ASC 360. No write-down to fair value was required upon this designation, as the fair value of the asset group, less costs to sell, was greater than its carrying value. As shown below, this carrying value was reclassified from Property, plant and equipment to Prepaid expenses and other current assets upon designation and remains in Prepaid expenses and other current assets as of July 31, 2021. Land and buildings $ 42,608 Less accumulated depreciation and amortization ( 13,634 ) Net property, plant and equipment reclassified to Prepaid expenses and other current assets $ 28,974 Note 7 – Segment Information The Company designs, develops, manufactures and markets a broad range of integrated circuits. The Company operates and tracks its results in one reportable segment based on the aggregation of nine operating segments. Revenue Trends by End Market The following table summarizes revenue by end market. The categorization of revenue by end market is determined using a variety of data points including the technical characteristics of the product, the “sold to” customer information, the “ship to” customer information and the end customer product or application into which the Company’s product will be incorporated. As data systems for capturing and tracking this data and the Company's methodology evolves and improves, 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 31, 2021 August 1, 2020 Revenue % of Revenue* Y/Y% Revenue % of Revenue* Industrial $ 1,001,867 57 % 29 % $ 778,361 53 % Communications 288,743 16 % ( 21 ) % 363,304 25 % Automotive 290,077 16 % 80 % 161,489 11 % Consumer 178,166 10 % 16 % 152,982 11 % Total revenue $ 1,758,853 100 % 21 % $ 1,456,136 100 % 11 Nine Months Ended July 31, 2021 August 1, 2020 Revenue % of Revenue* Y/Y% Revenue % of Revenue* Industrial $ 2,829,648 57 % 30 % $ 2,184,413 54 % Communications 847,632 17 % ( 4 ) % 880,633 22 % Automotive 793,443 16 % 45 % 548,002 13 % Consumer 507,995 10 % 10 % 463,713 11 % Total revenue $ 4,978,718 100 % 22 % $ 4,076,761 100 % * The sum of the individual percentages may not equal the total due to rounding. Revenue by Sales Channel The following table summarizes revenue by channel. The Company sells its products globally through a direct sales force, third party distributors, independent sales representatives and via its website. Distributors are customers that buy products with the intention of reselling them. Direct customers are non-distributor customers and consist primarily of original equipment manufacturers (OEMs). Other customers include the U.S. government, government prime contractors and certain commercial customers for which revenue is recorded over time. Three Months Ended July 31, 2021 August 1, 2020 Channel Revenue % of Revenue* Revenue % of Revenue* Distributors $ 1,123,301 64 % $ 819,472 56 % Direct customers 588,001 33 % 614,770 42 % Other 47,551 3 % 21,894 2 % Total revenue $ 1,758,853 100 % $ 1,456,136 100 % Nine Months Ended July 31, 2021 August 1, 2020 Channel Revenue % of Revenue* Revenue % of Revenue* Distributors $ 3,162,615 64 % $ 2,317,421 57 % Direct customers 1,724,012 35 % 1,692,152 42 % Other 92,091 2 % 67,188 2 % Total revenue $ 4,978,718 100 % $ 4,076,761 100 % * The sum of the individual percentages may not equal the total due to rounding. 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. 12 The tables below, set forth by level, presents the Company’s financial assets and liabilities, excluding accrued interest components that were accounted for at fair value on a recurring basis as of July 31, 2021 and October 31, 2020. 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 31, 2021 and October 31, 2020, the Company held $ 289.7 million and $ 239.6 million, respectively, of cash that was excluded from the tables below. July 31, 2021 Fair Value measurement at Reporting Date using: Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Total Assets Cash equivalents: Available-for-sale: Government and institutional money market funds $ 810,935 $ — $ 810,935 Corporate obligations (1) — 380,050 380,050 Other assets: Deferred compensation plan investments 68,383 — 68,383 Total assets measured at fair value $ 879,318 $ 380,050 $ 1,259,368 Liabilities Forward foreign currency exchange contracts (2) $ — $ 4,573 $ 4,573 Interest rate derivatives — 181,189 181,189 Total liabilities measured at fair value $ — $ 185,762 $ 185,762 (1) The amortized cost of the Company’s investments classified as available-for-sale as of July 31, 2021 was $ 380.0 million. (2) The Company has master netting arrangements by counterparty with respect to derivative contracts. See Note 9, Derivatives, in these Notes to Condensed Consolidated Financial Statements for more information related to the Company's master netting arrangements. October 31, 2020 Fair Value measurement at Reporting Date using: Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Total Assets Cash equivalents: Available-for-sale: Government and institutional money market funds $ 816,253 $ — $ 816,253 Other assets: Forward foreign currency exchange contracts (1) — 5,427 5,427 Deferred compensation plan investments 52,956 — 52,956 Total assets measured at fair value $ 869,209 $ 5,427 $ 874,636 Liabilities Interest rate derivatives $ — $ 214,586 $ 214,586 Total liabilities measured at fair value $ — $ 214,586 $ 214,586 (1) The Company has master netting arrangements by counterparty with respect to derivative contracts. See Note 9, Derivatives, in these Notes to Condensed Consolidated Financial Statements for more information related to the Company's master netting arrangements. 13 The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash equivalents — These investments are adjusted to fair value based on quoted market prices or are determined using a yield curve model based on current market rates. Deferred compensation plan investments — The fair value of these mutual fund, money market fund and equity investments are based on quoted market prices. Interest rate derivatives — The fair value of the interest rate derivatives is estimated using a discounted cash flow analysis based on the contractual terms of the derivative. Forward foreign currency exchange contracts — The estimated fair value of forward foreign currency exchange contracts, which includes derivatives that are accounted for as cash flow hedges and those that are not designated as cash flow hedges, is based on the estimated amount the Company would receive if it sold these agreements at the reporting date taking into consideration current interest rates as well as the creditworthiness of the counterparty for assets and the Company’s creditworthiness for liabilities. The fair value of these instruments is based upon valuation models using current market information such as strike price, spot rate, maturity date and volatility. Financial Instruments Not Recorded at Fair Value on a Recurring Basis Held for sale assets — The Company has classified the assets held for sale at carrying value. However, if they were to be carried at fair value, they would be considered a Level 3 fair value measurement and would be determined based on the use of appraisals and input from market participants. Debt — The table below presents the estimated fair value of certain financial instruments not recorded at fair value on a recurring basis. The carrying amounts of the term loan approximates fair value. The term loan is classified as a Level 2 measurement according to the fair value hierarchy. The fair values of the senior unsecured notes are obtained from broker prices and are classified as Level 1 measurements according to the fair value hierarchy. July 31, 2021 October 31, 2020 Principal Amount Outstanding Fair Value Principal Amount Outstanding Fair Value 3 -Year term loan, due March 2022 $ 925,000 $ 925,000 $ 925,000 $ 925,000 2.50 % Senior unsecured notes, due December 2021 400,000 403,072 400,000 $ 408,565 2.875 % Senior unsecured notes, due June 2023 500,000 523,041 500,000 $ 526,855 3.125 % Senior unsecured notes, due December 2023 550,000 583,885 550,000 $ 590,177 2.95 % Senior unsecured notes, due April 2025 400,000 429,643 400,000 $ 434,919 3.90 % Senior unsecured notes, due December 2025 850,000 953,017 850,000 $ 969,033 3.50 % Senior unsecured notes, due December 2026 900,000 1,004,709 900,000 $ 1,017,505 4.50 % Senior unsecured notes, due December 2036 250,000 300,420 250,000 $ 298,153 5.30 % Senior unsecured notes, due December 2045 400,000 549,646 400,000 $ 538,788 Total debt $ 5,175,000 $ 5,672,433 $ 5,175,000 $ 5,708,995 As of July 31, 2021, the Company believed that none of its unrealized losses on its available-for-sale investments were attributable to credit losses and therefore were not impaired. The investments with unrealized losses consisted primarily of corporate debt securities. In making the determination that the decline in fair value of these securities did not indicate impairment, the Company considered various factors, including, but not limited to: the extent to which fair value was less than cost; the financial condition and near-term prospects of the issuers; and the Company’s intent not to sell these securities and the assessment that it is more likely than not that the Company would not be required to sell these securities before the recovery of their amortized cost basis. Unrealized gains and losses, net of taxes, are reported as a component of AOCI in the Company’s Condensed Consolidated Statements of Stockholders’ Equity. No material amounts were reclassified out of AOCI during the three- and nine-month periods ended July 31, 2021 and August 1, 2020 for realized gains or losses on available-for-sale investments. 14 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 British Pound, Philippine Peso and the Japanese Yen. Derivative instruments are employed to eliminate or minimize certain foreign currency exposures that can be confidently identified and quantified. 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 matched with the underlying exposures at inception and designated and documented as cash flow hedges. They are qualitatively evaluated for effectiveness on a quarterly basis. The gain or loss on the derivative is recorded as a component of AOCI in shareholders’ equity and is reclassified into earnings in the same line item on the Consolidated Statements of Income as the impact of the hedged transaction in the same period during which the hedged transaction affects earnings. The total notional amounts of forward foreign currency derivative instruments designated as hedging instruments of cash flow hedges denominated in Euros, British Pounds, Philippine Pesos and Japanese Yen as of July 31, 2021 and October 31, 2020 were $ 236.5 million and $ 202.7 million, respectively. The fair values of forward foreign currency derivative instruments designated as hedging instruments in the Company’s Condensed Consolidated Balance Sheets as of July 31, 2021 and October 31, 2020 were as follows: Fair Value At Balance Sheet Location July 31, 2021 October 31, 2020 Forward foreign currency exchange contracts Prepaid expenses and other current assets $ — $ 5,550 Forward foreign currency exchange contracts Accrued liabilities $ 4,327 $ — As of July 31, 2021 and October 31, 2020, the total notional amounts of undesignated hedges related to forward foreign currency exchange contracts were $ 142.4 million and $ 62.7 million, respectively. The fair values of these hedging instruments in the Company’s Condensed Consolidated Balance Sheets were immaterial as of July 31, 2021 and October 31, 2020. The Company estimates $ 3.5 million, net of tax, of losses on forward foreign currency derivative instruments included in AOCI will be reclassified into earnings within the next twelve months. All of the Company’s derivative financial instruments are eligible for netting arrangements that allow the Company and its counterparties to net settle amounts owed to each other. Derivative assets and liabilities that can be net settled under these arrangements have been presented in the Company's Condensed Consolidated Balance Sheets on a net basis. As of July 31, 2021 and October 31, 2020, none of the netting arrangements involved collateral. The following table presents the gross amounts of the Company's forward foreign currency exchange contract derivative assets and liabilities and the net amounts recorded in the Company's Condensed Consolidated Balance Sheets: July 31, 2021 October 31, 2020 Gross amount of recognized assets $ 659 $ 6,114 Gross amounts of recognized liabilities ( 5,232 ) ( 687 ) Net (liabilities) assets offset and presented in the Condensed Consolidated Balance Sheets $ ( 4,573 ) $ 5,427 As of July 31, 2021 and October 31, 2020, the fair value of the interest rate swap agreement designated as a cash flow hedge was $ 181.2 million and $ 214.6 million, respectively, and is included within Accrued liabilities in the Company's Condensed Consolidated Balance Sheets. The market risk associated with the Company’s derivative instruments results from currency exchange rate or interest rate movements that are expected to offset the market risk of the underlying transactions, assets and liabilities being hedged. The counterparties to the agreements relating to the Company’s derivative instruments consist of a number of major international financial institutions with high credit ratings. Based on the credit ratings of the Company’s counterparties as of July 31, 2021 and October 31, 2020, nonperformance is not perceived to be a material risk. Furthermore, none of the Company’s derivatives are subject to collateral or other security arrangements and none contain provisions that are dependent on the Company’s credit ratings from any credit rating agency. While the contract or notional amounts of derivative financial instruments provide one measure of the volume of these transactions, they do not represent the amount of the Company’s exposure to credit risk. The amounts potentially subject to credit risk (arising from the possible inability of counterparties to meet the terms of their contracts) are generally limited to the amounts, if any, by which the counterparties’ obligations under the contracts exceed the 15 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. For information on the unrealized holding gains (losses) on derivatives included in and reclassified out of AOCI into the Condensed Consolidated Statements of Income related to forward foreign currency exchange contracts, see Note 3, Accumulated Other Comprehensive (Loss) Income, in these Notes to Condensed Consolidated Financial Statements for further information. Note 10 – Inventories Inventories at July 31, 2021 and October 31, 2020 were as follows: July 31, 2021 October 31, 2020 Raw materials $ 42,173 $ 33,806 Work in process 482,227 443,690 Finished goods 133,120 130,764 Total inventories $ 657,520 $ 608,260 Note 11 – Revolving Credit Facility On June 23, 2021, the Company entered into a Third Amended and Restated Credit Agreement (Revolving Credit Agreement) with Bank of America, N.A. as administrative agent and the other banks identified therein as lenders, which further amended and restated its existing Second Amended and Restated Credit Agreement dated as of June 28, 2019. The Revolving Credit Agreement provides for a five year unsecured revolving credit facility in an aggregate principal amount not to exceed (i) $ 1.25 billion or (ii) upon the completion of the acquisition by the Company of Maxim on or before January 12, 2022 (subject to certain terms and conditions), $ 2.5 billion. To date, the Company has not borrowed under this revolving credit facility but may borrow in the future and use the proceeds for repayment of existing indebtedness, stock repurchases, acquisitions, capital expenditures, working capital and other lawful corporate purposes. Revolving loans under the Revolving Credit Agreement can be Eurocurrency Rate Loans or Base Rate Loans (each as defined in the Revolving Credit Agreement) at the Company’s option. Each Eurocurrency Rate Loan will bear interest at a rate per annum equal to the applicable Eurocurrency Rate plus a margin based on the Company’s Debt Ratings (as defined in the Revolving Credit Agreement) from time to time of between 0.690 % and 1.175 %. Each Base Rate Loan will bear interest at a rate per annum equal to the Base Rate plus a margin based on the Company’s Debt Ratings from time to time of between 0.00 % and 0.175 %. In addition, the Company has agreed to pay a facility fee based on the Company’s Debt Ratings from time to time of between 0.060 % and 0.200 % multiplied by the actual daily amount of the Commitments (as defined in the Revolving Credit Agreement) in effect. The Revolving Credit Agreement also contains a sustainability-linked pricing component which provides for interest rate and facility fee reductions or increases based on the Company meeting or missing targets related to environmental sustainability, specifically greenhouse gas emissions and renewable energy usage. The Revolving Credit Agreement includes a multicurrency borrowing feature for certain specified foreign currencies. The Company will guarantee the obligations of each subsidiary that is named a Designated Borrower under the Revolving Credit Agreement. The Revolving Credit Agreement contains customary representations and warranties, and affirmative and negative covenants and events of default applicable to the Company and its subsidiaries. As of July 31, 2021, the Company was in compliance with these covenants. Note 12 – Income Taxes The Company’s effective tax rates for the three- and nine-month periods ended July 31, 2021 and August 1, 2020 were below the U.S. statutory tax rate of 21.0 %, due to lower statutory tax rates applicable to the Company's operations in the foreign jurisdictions in which it earns income. The Company has numerous audits ongoing throughout the world including: an IRS income tax audit for the fiscal year ended November 3, 2018 (fiscal 2018) and fiscal 2019; various U.S. state and local tax audits; and international audits. The Company's U.S. federal tax returns prior to the fiscal year ended October 28, 2017 (fiscal 2017) are no longer subject to examination. During the fourth quarter of fiscal 2018, the Company’s Irish tax resident subsidiary received an assessment, excluding any penalties and interest, for the fiscal year ended November 2, 2013 (fiscal 2013) of approximately € 43.0 million, or approximately $ 51.0 million (as of July 31, 2021), from the Irish Revenue Commissioners (Irish Revenue). The assessment 16 claimed that the Company’s Irish entity failed to conform to 2010 OECD Transfer Pricing Guidelines. During the third quarter of fiscal 2021, the Company settled the fiscal 2013 audit with Irish Revenue for an amount that was not material to the Company. During fiscal 2019, Irish Revenue commenced transfer pricing audits of fiscal years ended November 1, 2014 (fiscal 2014) through fiscal 2017. The Company settled the audits relating to fiscal 2014 through fiscal 2017 with either no assessment or for additional tax payments that were not material to the Company. Note 13 – New Accounting Pronouncements Standards Implemented Financial Instruments In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 requires a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. In 2019, the FASB issued ASU 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief (ASU 2019-05) and ASU 2019-11, Codification Improvements to Topic 326 (ASU 2019-11). ASU 2019-05 allows an entity to irrevocably elect the fair value option for certain financial instruments. Once elected, an entity would recognize the difference between the carrying amount and the fair value of the financial instrument as part of the cumulative effect adjustments associated with the adoption of ASU 2016-13. ASU 2019-11 allows entities to exclude the accrued interest component of amortized cost from various disclosures required by ASC 326. The Company is exposed to credit losses through sales of its products and certain financial instruments. The Company determines if there is an expected loss on its accounts receivables using historical collection experience, current and future economic and market conditions and a review of the current status of customers' trade accounts receivables. The Company adopted these standards effective November 1, 2020 using the modified retrospective approach, which did not have a material impact on the Company's financial position and results of operations. See Note 8, Fair Value, in these Notes to Condensed Consolidated Financial Statements for more information related to how the Company assesses credit losses on its available-for-sale debt securities. Income taxes In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (ASU-2019-12). ASU 2019-12 eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. The Company adopted ASU 2019-12 in the first quarter of fiscal 2021. Upon adoption, ASU 2019-12 did not have a material impact on the Company's financial position and results of operations. Retirement Benefits In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Topic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans (ASU 2018-14), which modifies the disclosure requirements for defined benefit pension plans and other post-retirement plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020, with early adoption permitted. The Company adopted ASU 2018-14 in the first quarter of fiscal 2021. Upon adoption, ASU 2018-14 did not have a material impact on the Company's financial position and results of operations. Standards to Be Implemented Reference Rate Reform In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting , which provides optional guidance for accounting for contracts, hedging relationships, and other transactions affected by reference rate reform, if certain criteria are met. The provisions of this standard are available for election through December 31, 2022. The Company is currently evaluating the impact of the reference rate reform on its contracts and the resulting impact of adopting this standard on our financial statements. 17 Note 14 – Acquisitions Proposed Acquisition of Maxim Integrated Products, Inc. On July 12, 2020, the Company entered into the Merger Agreement to acquire Maxim, an independent manufacturer of innovative analog and mixed-signal products and technologies. Under the terms of the Merger Agreement, Maxim stockholders will receive, for each outstanding share of Maxim common stock, 0.630 of a share of the Company’s common stock at the closing. The estimated merger consideration is approximately $ 29.0 billion based on the closing price of the Company's common stock on August 13, 2021. The value of the merger consideration will fluctuate based upon changes in the price of the Company's common stock and the number of shares of Maxim common stock, restricted stock awards and restricted stock unit awards outstanding on the closing date. The transaction is subject to customary closing conditions, including receipt of regulatory approvals. To date, required regulatory approvals have been obtained in all jurisdictions with the exception of China. The Merger Agreement includes termination rights for both the Company and Maxim. The Company may be required to pay Maxim a regulatory termination fee of $ 830.0 million in cash if the Merger Agreement is terminated in certain circumstances involving the failure to obtain required regulatory approvals. On October 8, 2020, the required shareholder approvals relating to the Merger Agreement were obtained from both the Company's shareholders and Maxim's shareholders. In the three- and nine-month periods ended July 31, 2021, the Company incurred $ 18.3 million and $ 56.6 million of transaction-related costs related to the proposed acquisition of Maxim, respectively, recorded within Selling, marketing, general and administrative expenses in the Company's Condensed Consolidated Statements of Income. Note 15 – Subsequent Events On August 17, 2021, the Board of Directors of the Company declared a cash dividend of $ 0.69 per outstanding share of common stock. The dividend will be paid on September 8, 2021 to all shareholders of record at the close of business on August 27, 2021 and is expected to total approximately $ 254.1 million. 18