Item 1. Financial Statements
ITEM 1. Financial Statements
ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except per share amounts)
Three Months Ended Six Months Ended
April 30, 2022 May 1, 2021 April 30, 2022 May 1, 2021
Revenue $ 2,972,064 $ 1,661,407 $ 5,656,357 $ 3,219,865
Cost of sales 1,027,544 524,770 2,309,840 1,037,857
Gross margin 1,944,520 1,136,637 3,346,517 2,182,008
Operating expenses:
Research and development 420,901 302,238 847,681 590,388
Selling, marketing, general and administrative 305,308 206,612 602,673 391,887
Amortization of intangibles 253,476 107,786 506,843 215,434
Special charges, net 46,674 311 106,402 749
Total operating expenses 1,026,359 616,947 2,063,599 1,198,458
Operating income: 918,161 519,690 1,282,918 983,550
Nonoperating expense (income):
Interest expense 49,548 43,066 101,512 85,545
Interest income ( 563 ) ( 290 ) ( 781 ) ( 499 )
Other, net ( 10,069 ) 929 ( 20,613 ) ( 14,099 )
Total nonoperating expense (income) 38,916 43,705 80,118 70,947
Income before income taxes 879,245 475,985 1,202,800 912,603
Provision for income taxes 95,972 53,080 139,450 101,179
Net income $ 783,273 $ 422,905 $ 1,063,350 $ 811,424
Shares used to compute earnings per common share – basic 522,370 368,823 523,831 369,013
Shares used to compute earnings per common share – diluted 526,264 372,418 528,203 372,762
Basic earnings per common share $ 1.50 $ 1.15 $ 2.03 $ 2.20
Diluted earnings per common share $ 1.49 $ 1.14 $ 2.01 $ 2.18
See accompanying notes.
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ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in thousands)
Three Months Ended Six Months Ended
April 30, 2022 May 1, 2021 April 30, 2022 May 1, 2021
Net income $ 783,273 $ 422,905 $ 1,063,350 $ 811,424
Foreign currency translation adjustments ( 17,868 ) ( 254 ) ( 22,472 ) 8,025
Change in fair value of derivative instruments designated as cash flow hedges (net of taxes of $ 258 , $ 10,448 , $ 248 and $ 17,109 , respectively)
( 3,757 ) 35,428 ( 2,710 ) 59,893
Changes in pension plans, net actuarial loss and foreign currency translation adjustments (net of taxes of $ 91 , $ 86 , $ 187 and $ 172 , respectively)
2,628 412 4,132 ( 1,372 )
Other comprehensive (loss) income ( 18,997 ) 35,586 ( 21,050 ) 66,546
Comprehensive income $ 764,276 $ 458,491 $ 1,042,300 $ 877,970
See accompanying notes.
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ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share and per share amounts)
April 30, 2022 October 30, 2021
ASSETS
Current Assets
Cash and cash equivalents $ 1,737,733 $ 1,977,964
Accounts receivable 1,608,254 1,459,056
Inventories 1,075,297 1,200,610
Prepaid expenses and other current assets 212,905 740,687
Total current assets 4,634,189 5,378,317
Non-current Assets
Net property, plant and equipment 2,094,148 1,979,051
Goodwill 26,923,756 26,918,470
Intangible assets, net 14,258,728 15,267,170
Deferred tax assets 2,325,317 2,267,269
Other assets 564,514 511,794
Total non-current assets 46,166,463 46,943,754
TOTAL ASSETS $ 50,800,652 $ 52,322,071
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable $ 451,443 $ 443,434
Income taxes payable 337,362 332,685
Debt, current — 516,663
Accrued liabilities 1,537,407 1,477,530
Total current liabilities 2,326,212 2,770,312
Non-current Liabilities
Long-term debt 6,253,215 6,253,212
Deferred income taxes 3,873,084 3,938,830
Income taxes payable 698,525 811,337
Other non-current liabilities 549,834 555,838
Total non-current liabilities 11,374,658 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, 519,806,028 shares outstanding ( 525,330,672 on October 30, 2021)
86,636 87,554
Capital in excess of par value 29,400,284 30,574,237
Retained earnings 7,820,477 7,517,316
Accumulated other comprehensive loss ( 207,615 ) ( 186,565 )
Total shareholders’ equity 37,099,782 37,992,542
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 50,800,652 $ 52,322,071
See accompanying notes.
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ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(in thousands)
Three Months Ended April 30, 2022
Capital in Accumulated
Other
Common Stock Excess of Retained Comprehensive
Shares Amount Par Value Earnings Loss
BALANCE, JANUARY 29, 2022
523,315 $ 87,221 $ 30,093,961 $ 7,434,748 $ ( 188,618 )
Net income 783,273
Dividends declared and paid - $ 0.76 per share
( 397,544 )
Issuance of stock under stock plans and other 1,404 234 11,348
Stock-based compensation expense 70,996
Other comprehensive loss ( 18,997 )
Common stock repurchased ( 4,913 ) ( 819 ) ( 776,021 )
BALANCE, APRIL 30, 2022
519,806 $ 86,636 $ 29,400,284 $ 7,820,477 $ ( 207,615 )
Six Months Ended April 30, 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 1,063,350
Dividends declared and paid - $ 1.45 per share
( 760,189 )
Issuance of stock under stock plans and other 1,983 332 19,722
Stock-based compensation expense 157,935
Other comprehensive loss ( 21,050 )
Common stock repurchased ( 7,508 ) ( 1,250 ) ( 1,351,610 )
BALANCE, APRIL 30, 2022
519,806 $ 86,636 $ 29,400,284 $ 7,820,477 $ ( 207,615 )
See accompanying notes.
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ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(in thousands)
Three Months Ended May 1, 2021
Capital in Accumulated
Other
Common Stock Excess of Retained Comprehensive
Shares Amount Par Value Earnings Loss
BALANCE, JANUARY 30, 2021 368,894 $ 61,484 $ 4,849,185 $ 7,395,578 $ ( 218,501 )
Net income 422,905
Dividends declared and paid - $ 0.69 per share
( 254,429 )
Issuance of stock under stock plans and other 1,155 192 23,560
Stock-based compensation expense 40,358
Other comprehensive income 35,586
Common stock repurchased ( 1,222 ) ( 204 ) ( 188,610 )
BALANCE, MAY 1, 2021
368,827 $ 61,472 $ 4,724,493 $ 7,564,054 $ ( 182,915 )
Six Months Ended May 1, 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 811,424
Dividends declared and paid - $ 1.31 per share
( 483,608 )
Issuance of stock under stock plans and other 1,644 274 43,398
Stock-based compensation expense 76,996
Other comprehensive income 66,546
Common stock repurchased ( 2,302 ) ( 384 ) ( 345,487 )
BALANCE, MAY 1, 2021
368,827 $ 61,472 $ 4,724,493 $ 7,564,054 $ ( 182,915 )
See accompanying notes.
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ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
April 30, 2022 May 1, 2021
Cash flows from operating activities:
Net income $ 1,063,350 $ 811,424
Adjustments to reconcile net income to net cash provided by operations:
Depreciation 137,016 108,775
Amortization of intangibles 1,008,900 290,745
Stock-based compensation expense 157,935 76,996
Cost of goods sold for inventory acquired 271,396 —
Deferred income taxes ( 122,992 ) ( 48,292 )
Non-cash operating lease costs ( 27,697 ) 8,040
Other ( 10,225 ) ( 12,122 )
Changes in operating assets and liabilities ( 399,463 ) ( 71,263 )
Total adjustments 1,014,870 352,879
Net cash provided by operating activities 2,078,220 1,164,303
Cash flows from investing activities:
Additions to property, plant and equipment ( 229,912 ) ( 126,558 )
Other 13,010 ( 9,210 )
Net cash used for investing activities ( 216,902 ) ( 135,768 )
Cash flows from financing activities:
Early termination of debt ( 519,116 ) —
Dividend payments to shareholders ( 760,189 ) ( 483,608 )
Repurchase of common stock ( 852,860 ) ( 345,871 )
Proceeds from employee stock plans 20,054 43,672
Other 26,657 2,399
Net cash used for financing activities ( 2,085,454 ) ( 783,408 )
Effect of exchange rate changes on cash ( 16,095 ) 4,229
Net (decrease) increase in cash and cash equivalents ( 240,231 ) 249,356
Cash and cash equivalents at beginning of period 1,977,964 1,055,860
Cash and cash equivalents at end of period $ 1,737,733 $ 1,305,216
See accompanying notes.
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ANALOG DEVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED APRIL 30, 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 April 30, 2022, the Company had repurchased a total of approximately 178.5 million shares of its common stock for approximately $ 10.0 billion under the Company's share repurchase program. As of April 30, 2022, an additional $ 6.6 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 six 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 ( 22,472 ) ( 20,728 ) 3,185 ( 40,015 )
Amounts reclassified out of other comprehensive income — 18,266 1,134 19,400
Tax effects — ( 248 ) ( 187 ) ( 435 )
Other comprehensive (loss) income ( 22,472 ) ( 2,710 ) 4,132 ( 21,050 )
April 30, 2022 $ ( 48,267 ) $ ( 126,464 ) $ ( 32,884 ) $ ( 207,615 )
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:
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Three Months Ended Six Months Ended
Comprehensive Income Component April 30, 2022 May 1, 2021 April 30, 2022 May 1, 2021 Location
Unrealized holding (gains) losses on derivatives
Currency forwards $ 2,113 $ ( 1,363 ) $ 3,864 $ ( 3,350 ) Cost of sales
1,373 ( 791 ) 2,583 ( 1,855 ) Research and development
2,485 ( 606 ) 4,357 ( 1,824 ) Selling, marketing, general and administrative
Interest rate derivatives 3,731 464 7,462 928 Interest expense
9,702 ( 2,296 ) 18,266 ( 6,101 ) Total before tax
( 1,485 ) 329 ( 2,786 ) 533 Tax
$ 8,217 $ ( 1,967 ) $ 15,480 $ ( 5,568 ) Net of tax
Amortization of pension components included in the computation of net periodic pension cost
Actuarial losses 549 750 1,134 1,498
( 91 ) ( 86 ) ( 187 ) ( 172 ) Tax
$ 458 $ 664 $ 947 $ 1,326 Net of tax
Total amounts reclassified out of AOCI, net of tax $ 8,675 $ ( 1,303 ) $ 16,427 $ ( 4,242 )
Note 4 – Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended Six Months Ended
April 30, 2022 May 1, 2021 April 30, 2022 May 1, 2021
Net Income $ 783,273 $ 422,905 $ 1,063,350 $ 811,424
Basic shares:
Weighted-average shares outstanding 522,370 368,823 523,831 369,013
Earnings per common share basic: $ 1.50 $ 1.15 $ 2.03 $ 2.20
Diluted shares:
Weighted-average shares outstanding 522,370 368,823 523,831 369,013
Assumed exercise of common stock equivalents 3,894 3,595 4,372 3,749
Weighted-average common and common equivalent shares 526,264 372,418 528,203 372,762
Earnings per common share diluted: $ 1.49 $ 1.14 $ 2.01 $ 2.18
Anti-dilutive shares related to:
Outstanding stock-based awards 738 622 461 430
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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
Employee severance and benefit costs — 39,610
Facility closure costs 4,287 —
Severance and benefit payments ( 14,026 ) ( 25,608 )
Facility closure cost payments ( 4,287 ) —
Effect of foreign currency on accrual — ( 156 )
Balance at April 30, 2022 $ 7,807 $ 53,492
Closure of Manufacturing Facilities
The Company recorded net special charges of $ 66.9 million on a cumulative basis through April 30, 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 selling, marketing, general and administrative (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 $ 316.4 million on a cumulative basis through April 30, 2022, as part of the integration of the Acquisition and continued organizational initiatives to better align its global workforce with the Company's long-term strategic plan. Special charges of $ 95.5 million recognized in the first six months of fiscal 2022 primarily consisted of $ 103.8 million of severance and benefit costs as well as charges recorded from the acceleration of equity awards in connection with the termination of certain employees in manufacturing, engineering and SMG&A roles at sites assumed related to the Acquisition and various locations throughout the world. 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 April 30, 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:
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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
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
April 30, 2022 May 1, 2021
Revenue % of Revenue* Y/Y% Revenue % of Revenue*
Industrial $ 1,501,111 51 % 54 % $ 975,706 59 %
Automotive 633,926 21 % 145 % 258,943 16 %
Communications 473,074 16 % 70 % 278,650 17 %
Consumer 363,953 12 % 146 % 148,108 9 %
Total revenue $ 2,972,064 100 % 79 % $ 1,661,407 100 %
Six Months Ended
April 30, 2022 May 1, 2021
Revenue % of Revenue* Y/Y% Revenue % of Revenue*
Industrial $ 2,847,838 50 % 55 % $ 1,833,198 57 %
Automotive 1,184,927 21 % 134 % 505,748 16 %
Communications 885,450 16 % 58 % 560,904 17 %
Consumer 738,142 13 % 131 % 320,015 10 %
Total revenue $ 5,656,357 100 % 76 % $ 3,219,865 100 %
* 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
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customers for which revenue is recorded over time.
Three Months Ended
April 30, 2022 May 1, 2021
Channel Revenue % of Revenue* Revenue % of Revenue*
Distributors $ 1,849,988 62 % $ 1,092,928 66 %
Direct customers 1,091,710 37 % 546,555 33 %
Other 30,366 1 % 21,924 1 %
Total revenue $ 2,972,064 100 % $ 1,661,407 100 %
Six Months Ended
April 30, 2022 May 1, 2021
Channel Revenue % of Revenue* Revenue % of Revenue*
Distributors $ 3,503,042 62 % $ 2,039,314 63 %
Direct customers 2,094,891 37 % 1,136,011 35 %
Other 58,424 1 % 44,540 1 %
Total revenue $ 5,656,357 100 % $ 3,219,865 100 %
* 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.
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 April 30, 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 April 30, 2022 and October 30, 2021, the Company held $ 1,030.1 million and $ 1,315.0 million, respectively, of cash that was
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excluded from the tables below.
April 30, 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 $ 577,683 $ — $ 577,683
Corporate obligations (1) — 129,941 129,941
Other assets:
Deferred compensation plan investments 66,390 — 66,390
Total assets measured at fair value $ 644,073 $ 129,941 $ 774,014
Liabilities
Forward foreign currency exchange contracts (2) $ — $ 22,524 $ 22,524
Total liabilities measured at fair value $ — $ 22,524 $ 22,524
(1) The amortized cost of the Company’s investments classified as available-for-sale as of April 30, 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.
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.
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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.
April 30, 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 500,000 496,904 500,000 500,482
2025 Notes, due April 2025 400,000 394,337 400,000 423,265
2026 Notes, due December 2026 900,000 895,250 900,000 986,243
Maxim 2027 Notes, due June 2027 500,000 484,078 500,000 542,942
2028 Notes, due October 2028 750,000 655,130 750,000 743,109
2031 Notes, due October 2031 1,000,000 854,753 1,000,000 996,702
2036 Notes, due December 2036 144,278 143,752 144,278 176,960
2041 Notes, due October 2041 750,000 595,806 750,000 758,246
2045 Notes, due December 2045 332,587 365,491 332,587 469,592
2051 Notes, due October 2051 1,000,000 772,751 1,000,000 1,029,830
Total debt $ 6,276,865 $ 5,658,252 $ 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.
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 April 30, 2022 and October 30, 2021 were $ 289.3 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
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as of April 30, 2022 and October 30, 2021 were as follows:
Fair Value At
Balance Sheet Location April 30, 2022 October 30, 2021
Forward foreign currency exchange contracts Accrued liabilities $ 19,214 $ 7,113
As of April 30, 2022 and October 30, 2021, the total notional amounts of undesignated hedges related to forward foreign currency exchange contracts were $ 249.4 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 April 30, 2022 and October 30, 2021.
The Company estimates $ 14.0 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 April 30, 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:
April 30, 2022 October 30, 2021
Gross amounts of recognized liabilities $ ( 24,924 ) $ ( 8,404 )
Gross amount of recognized assets 2,400 319
Net liabilities offset and presented in the Condensed Consolidated Balance Sheets $ ( 22,524 ) $ ( 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 April 30, 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 April 30, 2022 and October 30, 2021 were as follows:
April 30, 2022 October 30, 2021
Raw materials $ 85,122 $ 71,639
Work in process 756,449 858,627
Finished goods 233,726 270,344
Total inventories $ 1,075,297 $ 1,200,610
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.
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Note 12 – Income Taxes
The Company’s effective tax rates for the three- and six-month periods ended April 30, 2022 and May 1, 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.
During the first six-months of fiscal 2022, the Company increased acquisition related tax reserves by $ 15.6 million consisting of $ 12.3 million in tax and $ 3.3 million in accrued interest primarily relating to tax audits. 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 27, 2020; 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 2020 noted above.
Note 13 – New Accounting Pronouncements
Standards Implemented
Reference Rate Reform
In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 Statements of Income, Condensed Consolidated Statements of Comprehensive Income, Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Cash Flows and Condensed Consolidated Statement of Shareholders’ Equity for the three- and six-month periods ended April 30, 2022.
During the first half of fiscal 2022, the Company recorded acquisition accounting adjustments of $ 15.3 million to goodwill comprised of $ 19.0 million to income tax payable and $ 1.6 million to accrued liabilities offset by decreases of $ 3.5 million to deferred income taxes and $ 1.8 million to other non-current liabilities. The Acquisition accounting is not complete and additional information relating to conditions that existed at the Acquisition Date may become known to the
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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- and six-month periods ended May 1, 2021 combines the results of the Company for the three- and six-month periods ended May 1, 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)
Pro Forma
Six Months Ended
(unaudited)
May 1, 2021 May 1, 2021
Revenue
$ 2,320,711 $ 4,498,698
Net income
$ 352,949 $ 625,506
Basic net income per common share
$ 0.66 $ 1.16
Diluted net income per common share
$ 0.65 $ 1.15
Note 15 - Commitments and Contingencies
On March 17, 2022, Walter E. Ryan and Ryan Asset Management, LLC, purported stockholders of Maxim, filed a putative class action in the Court of Chancery of the State of Delaware (C.A. No. 2022—0255) against the Company and the former directors of Maxim. The complaint alleges breach of fiduciary duties by the individual defendants in connection with Maxim’s agreement, as part of the merger negotiations with the Company, to suspend Maxim dividends for up to four quarters prior to the closing of the Acquisition. The complaint further alleges that the Company aided and abetted that alleged breach of fiduciary duties. The plaintiffs seek damages in an amount to be determined at trial, plaintiffs’ costs and disbursements, including reasonable attorneys’ and experts’ fees, costs and other expenses. The Company believes that it and the other defendants have meritorious defenses to these allegations; however, the Company is currently unable to determine the ultimate outcome of this matter or determine an estimate, or a range of estimates, of potential losses, if any.
Note 16 – Subsequent Events
On May 17, 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 June 9, 2022 to all shareholders of record at the close of business on May 31, 2022 and is expected to total approximately $ 395.1 million.
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