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 January 29, 2022 January 30, 2021 Revenue $ 2,684,293 $ 1,558,458 Cost of sales 1,282,296 513,087 Gross margin 1,401,997 1,045,371 Operating expenses: Research and development 426,780 288,150 Selling, marketing, general and administrative 297,365 185,275 Amortization of intangibles 253,367 107,648 Special charges, net 59,728 438 Total operating expenses 1,037,240 581,511 Operating income: 364,757 463,860 Nonoperating expense (income): Interest expense 51,964 42,479 Interest income ( 218 ) ( 209 ) Other, net ( 10,544 ) ( 15,028 ) Total nonoperating expense (income) 41,202 27,242 Income before income taxes 323,555 436,618 Provision for income taxes 43,478 48,099 Net income $ 280,077 $ 388,519 Shares used to compute earnings per common share – basic 525,291 369,203 Shares used to compute earnings per common share – diluted 530,142 373,106 Basic earnings per common share $ 0.53 $ 1.05 Diluted earnings per common share $ 0.53 $ 1.04 See accompanying notes. 1 ANALOG DEVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (in thousands) Three Months Ended January 29, 2022 January 30, 2021 Net income $ 280,077 $ 388,519 Foreign currency translation adjustments ( 4,603 ) 8,279 Change in fair value of derivative instruments designated as cash flow hedges (net of taxes of $ 506 and $ 6,661 , respectively) 1,046 24,465 Changes in pension plans, net actuarial loss and foreign currency translation adjustments (net of taxes of $ 96 and $ 86 , respectively) 1,504 ( 1,784 ) Other comprehensive (loss) income ( 2,053 ) 30,960 Comprehensive income $ 278,024 $ 419,479 See accompanying notes. 2 ANALOG DEVICES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands, except share and per share amounts) January 29, 2022 October 30, 2021 ASSETS Current Assets Cash and cash equivalents $ 1,790,399 $ 1,977,964 Accounts receivable 1,636,928 1,459,056 Inventories 972,571 1,200,610 Prepaid expenses and other current assets 236,797 740,687 Total current assets 4,636,695 5,378,317 Non-current Assets Net property, plant and equipment 2,037,290 1,979,051 Goodwill 26,940,594 26,918,470 Intangible assets, net 14,762,722 15,267,170 Deferred tax assets 2,317,301 2,267,269 Other assets 521,012 511,794 Total non-current assets 46,578,919 46,943,754 TOTAL ASSETS $ 51,215,614 $ 52,322,071 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities Accounts payable $ 436,227 $ 443,434 Income taxes payable 400,420 332,685 Debt, current — 516,663 Accrued liabilities 1,385,259 1,477,530 Total current liabilities 2,221,906 2,770,312 Non-current Liabilities Long-term debt 6,253,575 6,253,212 Deferred income taxes 3,952,185 3,938,830 Income taxes payable 832,204 811,337 Other non-current liabilities 528,432 555,838 Total non-current liabilities 11,566,396 11,559,217 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, 523,315,130 shares outstanding ( 525,330,672 on October 30, 2021) 87,221 87,554 Capital in excess of par value 30,093,961 30,574,237 Retained earnings 7,434,748 7,517,316 Accumulated other comprehensive loss ( 188,618 ) ( 186,565 ) Total shareholders’ equity 37,427,312 37,992,542 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 51,215,614 $ 52,322,071 See accompanying notes. 3 ANALOG DEVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (in thousands) Three Months Ended January 29, 2022 Capital in Accumulated Other Common Stock Excess of Retained Comprehensive Shares Amount Par Value Earnings Loss BALANCE, OCTOBER 30, 2021 525,331 $ 87,554 $ 30,574,237 $ 7,517,316 $ ( 186,565 ) Net income 280,077 Dividends declared and paid - $ 0.69 per share ( 362,645 ) Issuance of stock under stock plans and other 579 100 8,371 Stock-based compensation expense 86,939 Other comprehensive loss ( 2,053 ) Common stock repurchased ( 2,595 ) ( 433 ) ( 575,586 ) BALANCE, JANUARY 29, 2022 523,315 $ 87,221 $ 30,093,961 $ 7,434,748 $ ( 188,618 ) Three Months Ended January 30, 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 388,519 Dividends declared and paid - $ 0.62 per share ( 229,179 ) Issuance of stock under stock plans and other 488 82 19,838 Stock-based compensation expense 36,638 Other comprehensive income 30,960 Common stock repurchased ( 1,079 ) ( 180 ) ( 156,877 ) BALANCE, JANUARY 30, 2021 368,894 $ 61,484 $ 4,849,185 $ 7,395,578 $ ( 218,501 ) See accompanying notes. 4 ANALOG DEVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Three Months Ended January 29, 2022 January 30, 2021 Cash flows from operating activities: Net income $ 280,077 $ 388,519 Adjustments to reconcile net income to net cash provided by operations: Depreciation 65,165 56,309 Amortization of intangibles 504,645 145,044 Stock-based compensation expense 86,939 36,638 Cost of goods sold for inventory acquired 271,396 — Deferred income taxes ( 34,651 ) ( 27,275 ) Other ( 1,748 ) ( 14,553 ) Changes in operating assets and liabilities ( 315,410 ) ( 156,741 ) Total adjustments 576,336 39,422 Net cash provided by operating activities 856,413 427,941 Cash flows from investing activities: Additions to property, plant and equipment ( 111,133 ) ( 67,388 ) Other 7,824 ( 7,683 ) Net cash used for investing activities ( 103,309 ) ( 75,071 ) Cash flows from financing activities: Early termination of debt ( 519,116 ) — Dividend payments to shareholders ( 362,645 ) ( 229,179 ) Repurchase of common stock ( 76,019 ) ( 157,057 ) Proceeds from employee stock plans 8,471 19,920 Other 12,041 2,493 Net cash used for financing activities ( 937,268 ) ( 363,823 ) Effect of exchange rate changes on cash ( 3,401 ) 3,156 Net decrease in cash and cash equivalents ( 187,565 ) ( 7,797 ) Cash and cash equivalents at beginning of period 1,977,964 1,055,860 Cash and cash equivalents at end of period $ 1,790,399 $ 1,048,063 See accompanying notes. 5 ANALOG DEVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED JANUARY 29, 2022 (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 30, 2021 (fiscal 2021) 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 29, 2022 (fiscal 2022) 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 2022 presentation. On August 26, 2021 (Acquisition Date), the Company completed the acquisition of Maxim Integrated Products, Inc. (Maxim), an independent manufacturer of innovative analog and mixed-signal products and technologies. The acquisition of Maxim is referred to as the Acquisition. The consolidated financial statements included in this Quarterly Report on Form 10-Q include the financial results of Maxim prospectively from the Acquisition Date. See Note 14, Acquisitions , in these Notes to Condensed Consolidated Financial Statements for additional information. Note 2 – Shareholders' Equity In fiscal 2021, the Company entered into accelerated share repurchase agreements (ASR) with third party financial institutions, paid $ 2.5 billion and received an initial delivery of 12.3 million shares of common stock, which represented approximately 80 % of the notional amount of the ASR. As of October 30, 2021, the Company recorded the remaining 20 %, or $ 500.0 million, within Prepaid expenses and other current assets on the Consolidated Balance Sheet, which was utilized during the first quarter of fiscal 2022. During the first quarter of fiscal 2022, the ASR was completed and an additional 2.1 million shares of common stock were received as final settlement of the ASR. In total, the Company repurchased 14.4 million shares under the ASR at an average price per share of $ 173.77 . As of January 29, 2022, the Company had repurchased a total of approximately 174.0 million shares of its common stock for approximately $ 9.3 billion under the Company's share repurchase program. As of January 29, 2022, an additional $ 7.3 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. 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 three months of fiscal 2022. Foreign currency translation adjustment Unrealized holding gains (losses) on derivatives Pension plans Total October 30, 2021 $ ( 25,795 ) $ ( 123,754 ) $ ( 37,016 ) $ ( 186,565 ) Other comprehensive (loss) income before reclassifications ( 4,603 ) ( 7,013 ) 1,015 ( 10,601 ) Amounts reclassified out of other comprehensive income — 8,565 585 9,150 Tax effects — ( 506 ) ( 96 ) ( 602 ) Other comprehensive (loss) income ( 4,603 ) 1,046 1,504 ( 2,053 ) January 29, 2022 $ ( 30,398 ) $ ( 122,708 ) $ ( 35,512 ) $ ( 188,618 ) 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: 6 Three Months Ended Comprehensive Income Component January 29, 2022 January 30, 2021 Location Unrealized holding (gains) losses on derivatives Currency forwards $ 1,751 $ ( 1,986 ) Cost of sales 1,210 ( 1,064 ) Research and development 1,873 ( 1,218 ) Selling, marketing, general and administrative Interest rate derivatives 3,731 464 Interest expense 8,565 ( 3,804 ) Total before tax ( 1,301 ) 204 Tax $ 7,264 $ ( 3,600 ) Net of tax Amortization of pension components included in the computation of net periodic pension cost Actuarial losses 585 748 ( 96 ) ( 86 ) Tax $ 489 $ 662 Net of tax Total amounts reclassified out of AOCI, net of tax $ 7,753 $ ( 2,938 ) Note 4 – Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share: Three Months Ended January 29, 2022 January 30, 2021 Net Income $ 280,077 $ 388,519 Basic shares: Weighted-average shares outstanding 525,291 369,203 Earnings per common share basic: $ 0.53 $ 1.05 Diluted shares: Weighted-average shares outstanding 525,291 369,203 Assumed exercise of common stock equivalents 4,851 3,903 Weighted-average common and common equivalent shares 530,142 373,106 Earnings per common share diluted: $ 0.53 $ 1.04 Anti-dilutive shares related to: Outstanding stock-based awards 185 239 Note 5 – Special Charges, net Liabilities related to special charges, net are included in Accrued liabilities in the Condensed Consolidated Balance Sheets. The activity is detailed below: Accrued Special Charges Closure of Manufacturing Facilities Global Repositioning Actions Balance at October 30, 2021 $ 25,774 $ 21,065 Employee severance and benefit costs 75 44,411 Facility closure costs 6,513 — Severance and benefit payments ( 4,016 ) ( 25,776 ) Facility closure cost payments ( 6,513 ) — Effect of foreign currency on accrual — ( 54 ) Balance at January 29, 2022 $ 21,833 $ 39,646 Closure of Manufacturing Facilities The Company recorded net special charges of $ 62.6 million on a cumulative basis through January 29, 2022 as a result of its decision to consolidate certain wafer and test facility operations acquired as part of the acquisition of Linear Technology Corporation. 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 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 in these Notes to Condensed Consolidated Financial Statements for amounts reclassified. During fiscal 2021, the Company completed the sale of its facility and certain equipment in Singapore, which 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. Global Repositioning Actions The Company recorded net special charges of $ 274.1 million on a cumulative basis through January 29, 2022, as a result of organizational initiatives to better align its global workforce with the Company's long-term strategic plan. Special charges of $ 53.1 million recognized in the first quarter of fiscal 2022 primarily consisted of $ 61.4 million of severance and benefit costs as well as charges recorded from the acceleration of equity awards in connection with the termination of a limited number of employees as part of the integration of the Acquisition. These charges were partially offset by a gain of $ 8.3 million recognized upon the sale of a business. Note 6 – Property, Plant and Equipment During 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. As of January 29, 2022, Prepaid expenses and other current assets includes the following assets held for sale recorded at the fair value of the asset group, less costs to sell: Land and buildings $ 40,070 Less accumulated depreciation and amortization ( 13,634 ) Net property, plant and equipment reclassified to Prepaid expenses and other current assets $ 26,436 7 Note 7 – Revenue 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 January 29, 2022 January 30, 2021 Revenue % of Revenue* Y/Y% Revenue % of Revenue* Industrial $ 1,341,113 50 % 57 % $ 856,186 55 % Automotive 552,671 21 % 124 % 246,504 16 % Communications 412,397 15 % 46 % 281,726 18 % Consumer 378,112 14 % 117 % 174,042 11 % Total revenue $ 2,684,293 100 % 72 % $ 1,558,458 100 % * 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 January 29, 2022 January 30, 2021 Channel Revenue % of Revenue* Revenue % of Revenue* Distributors $ 1,653,054 62 % $ 946,386 61 % Direct customers 1,003,181 37 % 589,456 38 % Other 28,058 1 % 22,616 1 % Total revenue $ 2,684,293 100 % $ 1,558,458 100 % * 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. 8 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 January 29, 2022 and October 30, 2021. 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 January 29, 2022 and October 30, 2021, the Company held $ 1,053.5 million and $ 1,315.0 million, respectively, of cash that was excluded from the tables below. January 29, 2022 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 $ 606,876 $ — $ 606,876 Corporate obligations (1) — 129,993 129,993 Other assets: Deferred compensation plan investments 70,258 — 70,258 Total assets measured at fair value $ 677,134 $ 129,993 $ 807,127 Liabilities Forward foreign currency exchange contracts (2) $ — $ 11,004 $ 11,004 Total liabilities measured at fair value $ — $ 11,004 $ 11,004 (1) The amortized cost of the Company’s investments classified as available-for-sale as of January 29, 2022 was $ 130.0 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 30, 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 $ 662,997 $ — $ 662,997 Other assets: Deferred compensation plan investments 71,301 — 71,301 Total assets measured at fair value $ 734,298 $ — $ 734,298 Liabilities Forward foreign currency exchange contracts (1) $ — $ 8,085 $ 8,085 Total liabilities measured at fair value $ — $ 8,085 $ 8,085 (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. 9 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. 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 fair value, which is determined based on the use of appraisals and input from market participants, and as such is considered a Level 3 fair value measurement. See Note 6, Property, Plant and Equipment , in these Notes to Condensed Consolidated Financial Statements for more information related to held for sale assets. Debt — The table below presents the estimated fair value of certain financial instruments not recorded at fair value on a recurring basis. 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. January 29, 2022 October 30, 2021 Principal Amount Outstanding Fair Value Principal Amount Outstanding Fair Value Maxim 2023 Notes, due March 2023 $ — $ — $ 500,000 $ 520,236 2024 Notes, due October 2024 500,000 500,233 500,000 500,482 2025 Notes, due April 2025 400,000 413,314 400,000 423,265 2026 Notes, due December 2026 900,000 960,798 900,000 986,243 Maxim 2027 Notes, due June 2027 500,000 528,442 500,000 542,942 2028 Notes, due October 2028 750,000 722,982 750,000 743,109 2031 Notes, due October 2031 1,000,000 964,300 1,000,000 996,702 2036 Notes, due December 2036 144,278 165,586 144,278 176,960 2041 Notes, due October 2041 750,000 712,026 750,000 758,246 2045 Notes, due December 2045 332,587 444,072 332,587 469,592 2051 Notes, due October 2051 1,000,000 952,121 1,000,000 1,029,830 Total debt $ 6,276,865 $ 6,363,874 $ 6,776,865 $ 7,147,607 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, Thai Baht, South Korean Won 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. 10 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, Thai Baht, South Korean Won and Japanese Yen as of January 29, 2022 and October 30, 2021 were $ 304.9 million and $ 343.6 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 January 29, 2022 and October 30, 2021 were as follows: Fair Value At Balance Sheet Location January 29, 2022 October 30, 2021 Forward foreign currency exchange contracts Accrued liabilities $ 9,464 $ 7,113 As of January 29, 2022 and October 30, 2021, the total notional amounts of undesignated hedges related to forward foreign currency exchange contracts were $ 206.2 million and $ 120.0 million, respectively. The fair values of these hedging instruments in the Company’s Condensed Consolidated Balance Sheets were immaterial as of January 29, 2022 and October 30, 2021. The Company estimates $ 7.3 million, net of tax, of settlements 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 January 29, 2022 and October 30, 2021, 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: January 29, 2022 October 30, 2021 Gross amount of recognized assets $ 544 $ 319 Gross amounts of recognized liabilities ( 11,548 ) ( 8,404 ) Net liabilities offset and presented in the Condensed Consolidated Balance Sheets $ ( 11,004 ) $ ( 8,085 ) 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 January 29, 2022 and October 30, 2021, nonperformance is not perceived to be a material risk. Furthermore, none of the Company’s derivatives are subject to collateral or other security arrangements and none contain provisions that are dependent on the Company’s credit ratings from any credit rating agency. While the contract or notional amounts of derivative financial instruments provide one measure of the volume of these transactions, they do not represent the amount of the Company’s exposure to credit risk. The amounts potentially subject to credit risk (arising from the possible inability of counterparties to meet the terms of their contracts) are generally limited to the amounts, if any, by which the counterparties’ obligations under the contracts exceed the obligations of the Company to the counterparties. As a result of the above considerations, the Company does not consider the risk of counterparty default to be significant. 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 January 29, 2022 and October 30, 2021 were as follows: January 29, 2022 October 30, 2021 Raw materials $ 80,456 $ 71,639 Work in process 679,644 858,627 Finished goods 212,471 270,344 Total inventories $ 972,571 $ 1,200,610 11 Note 11 – Debt In conjunction with the Acquisition, the Company acquired $ 500.0 million aggregate principal amount of Maxim’s 3.375 % senior unsecured and unsubordinated notes due March 15, 2023 (the Maxim March 2023 Notes). On November 4, 2021, the Maxim March 2023 Notes were redeemed for cash at a redemption price equal to $1,038.23 for each $1,000 principal amount. Note 12 – Income Taxes The Company’s effective tax rates for the three-month periods ended January 29, 2022 and January 30, 2021 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. In the first quarter of fiscal 2022, the Company increased acquisition related tax reserves by $ 25.3 million consisting of $ 21.8 million in tax and $ 3.5 million in accrued interest primarily relating to tax audits. The Company engages in continuous discussions and negotiations with tax authorities regarding tax matters in various jurisdictions. It is reasonably possible that the balance of gross unrecognized tax benefits, including accrued interest and penalties, could decrease by as much as $ 146.0 million within the next twelve months due to the completion of tax audits, including any administrative appeals. The Company has numerous audits ongoing throughout the world including: an IRS income tax audit for the fiscal years ended November 3, 2018 and November 2, 2019; a pre-acquisition IRS income tax audit for Maxim's fiscal years ended June 27, 2015 through June 24, 2017; various U.S. state and local audits and various international audits. The Company's U.S. federal tax returns prior to the fiscal year ended November 3, 2018 are no longer subject to examination, except for the Maxim pre-Acquisition fiscal years 2015 to 2017 noted above. Note 13 – New Accounting Pronouncements Standards Implemented Reference Rate Reform In March 2020, the Financial Accounting Standards Board (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 adopted this standard in the first quarter of fiscal 2022 with no material impact on the Company's financial position and results of operations. Standards to Be Implemented Acquired Contract Assets and Contract Liabilities In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Acquired Contract Assets and Contract Liabilities. Under the new guidance (ASC 805-20-30-28), the acquirer should determine what contract assets and/or contract liabilities it would have recorded under ASC 606 (the revenue guidance) as of the acquisition date, as if the acquirer had entered into the original contract at the same date and on the same terms as the acquiree. The recognition and measurement of those contract assets and contract liabilities will likely be comparable to what the acquiree has recorded on its books under ASC 606 as of the acquisition date. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. ASU 2021-08 is effective for the Company in the first quarter of the fiscal year ended November 1, 2024. Early adoption is permitted, including in an interim period, for any period for which financial statements have not yet been issued. However, adoption in an interim period other than the first fiscal quarter requires an entity to apply the new guidance to all prior business combinations that have occurred since the beginning of the annual period in which the new guidance is adopted. The Company is currently evaluating the adoption date of ASU 2021-08 and the impact, if any, adoption will have on its financial position and results of operations. Note 14 – Acquisitions Maxim Integrated Products, Inc. On the Acquisition Date, the Company completed its acquisition of all of the voting interests of Maxim, an independent manufacturer of innovative analog and mixed-signal products and technologies. The total consideration paid to acquire Maxim, which consisted of cash, common stock of the Company and share-based compensation awards, was approximately $ 28.0 billion. The Company believes the combination creates an expanded suite of top-performing mixed-signal and power management technology offerings and complements the Company's legacy offerings. The results of operations of Maxim from the Acquisition Date are included in the Company’s Condensed Consolidated Statement of Income, Condensed Consolidated 12 Balance Sheet, Condensed Consolidated Statement of Cash Flows and Condensed Consolidated Statement of Shareholders’ Equity for the three-month period ended January 29, 2022. During the first quarter of 2022, the Company recorded acquisition accounting adjustments of $ 24.9 million to goodwill comprised of $ 19.0 million to income tax payable, $ 7.8 million to other non-current liabilities and $ 1.6 million to accrued liabilities offset by $ 3.5 million to deferred income taxes. The Acquisition accounting is not complete and additional information relating to conditions that existed at the Acquisition Date may become known to the Company during the remainder of the measurement period. As of the filing date of this Quarterly Report on Form 10-Q, the Company is still in the process of valuing Maxim's assets, including fixed assets, intangible assets, and liabilities, including related income tax accounting. The following unaudited pro forma consolidated financial information for the three-month period ended January 30, 2021 combines the results of the Company for the three-month period ended January 30, 2021 and the unaudited results of Maxim for the corresponding period. The unaudited pro forma consolidated financial information assumes that the Acquisition, which closed on August 26, 2021, was completed on November 3, 2019 (the first day of fiscal 2020). 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, fair value adjustments for acquired inventory, property, plant and equipment and long-term debt and compensation expense for ongoing share-based compensation arrangements that were replaced in conjunction with 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 3, 2019. 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. Pro Forma Three Months Ended (unaudited) January 30, 2021 Revenue $ 2,059,679 Net income $ 298,895 Basic net income per common share $ 0.56 Diluted net income per common share $ 0.55 Note 15 – Subsequent Events On February 15, 2022, the Board of Directors of the Company declared a cash dividend of $ 0.76 per outstanding share of common stock. The dividend will be paid on March 8, 2022 to all shareholders of record at the close of business on February 25, 2022 and is expected to total approximately $ 397.7 million. 13