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0000320193
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25, Accounting for Stock Issued to Employees, and instead generally requires that such transactions be accounted for using a fair-value-based method.
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The Company uses the Black-Scholes-Merton (“BSM”) option-pricing model to determine the fair-value of stock-based awards under SFAS No.
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123R, consistent with that used for pro forma disclosures under SFAS No.
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123, Accounting for Stock-Based Compensation.
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The Company has elected the modified prospective transition method as permitted by SFAS No.
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123R and accordingly prior periods have not been restated to reflect the impact of SFAS No.
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123R.
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The modified prospective transition method requires that stock-based compensation expense be recorded for all new and unvested stock options, restricted stock, restricted stock units, and employee stock purchase plan shares that are ultimately expected to vest as the requisite service is rendered beginning on September...
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Stock-based compensation expense for awards granted prior to September 25, 2005 is based on the grant date fair-value as determined under the pro forma provisions of SFAS No.
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123.
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The Company recorded incremental stock-based compensation expense of $26 million and $58 million during the second quarter and first six months of 2006, respectively, as a result of the adoption of SFAS No.
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123R.
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In accordance with SFAS No.
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123R, beginning in the first quarter of 2006 the Company has presented excess tax benefits from the exercise of stock-based compensation awards as a financing activity in the condensed consolidated statement of cash flows.
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No stock-based compensation costs were capitalized as part of the cost of an asset as of April 1, 2006.
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The income tax benefit related to stock-based compensation expense was $12 million and $26 million for the three and six-month periods ended April 1, 2006, respectively.
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As of April 1, 2006, $400 million of total unrecognized compensation cost related to stock options and restricted stock units is expected to be recognized over a weighted-average period of 2.55 years.
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Prior to the adoption of SFAS No.
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123R, the Company measured compensation expense for its employee stock-based compensation plans using the intrinsic value method prescribed by APB Opinion No.
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25.
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The Company applied the disclosure provisions of SFAS No.
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123 as amended by SFAS No.
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148, Accounting for Stock-Based Compensation - Transition and Disclosure, as if the fair-value-based method had been applied in measuring compensation expense.
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Under APB Opinion No.
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25, when the exercise price of the Company’s employee stock options was equal to the market price of the underlying stock on the date of the grant, no compensation expense was recognized.
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The following table illustrates the effect on net income after taxes and net income per common share as if the Company had applied the fair value recognition provisions of SFAS No.
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123 to stock-based compensation during the three and six-month periods ended March 26, 2005 (in millions, except per share amounts): Further information regarding stock-based compensation can be found in Note 6 of these Notes to Condensed Consolidated Financial Statements.
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Earnings Per Share Basic earnings per common share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period.
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Diluted earnings per common share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the dilutive potential shares ...
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The dilutive effect of outstanding options, restricted stock and restricted stock units is reflected in diluted earnings per share by application of the treasury stock method.
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Under the treasury stock method, an increase in the fair market value of the Company’s common stock can result in a greater dilutive effect from outstanding options, restricted stock, and restricted stock units.
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Additionally, the exercise of employee stock options and the vesting of restricted stock and restricted stock units can result in a greater dilutive effect on earnings per share.
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The following table sets forth the computation of basic and diluted earnings per share (in thousands, except net income and per share amounts): Potentially dilutive securities representing approximately 1.5 million and 0.9 million shares of common stock for the quarters ended April 1, 2006 and March 26, 2005, respectiv...
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Potentially dilutive securities include stock options, restricted stock units, and restricted stock.
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Note 2 - Financial Instruments Cash, Cash Equivalents and Short-Term Investments The following table summarizes the fair value of the Company’s cash and available-for-sale securities held in its short-term investment portfolio, recorded as cash and cash equivalents or short-term investments as of April 1, 2006, and Sep...
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Foreign securities consist primarily of foreign commercial paper, certificates of deposit, and time deposits with foreign institutions, most of which are denominated in U.S. dollars.
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The Company had net unrealized losses totaling $5.3 million on its investment portfolio, the majority of which related to investments with stated maturities less than one year as of April 1, 2006, and net unrealized losses of $5.9 million on its investment portfolio, approximately half of which related to investments w...
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As of April 1, 2006 and September 24, 2005, approximately $76 million and $287 million, respectively, of the Company’s short-term investments had underlying maturities ranging from 1 to 5 years.
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The remaining short-term investments had maturities of 3 to 12 months.
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The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position at Ap...
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The Company typically invests in highly rated securities with low probabilities of default.
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The Company’s investment policy requires investments to be rated single-A or better.
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Therefore, the Company considers the declines to be temporary in nature.
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As of April 1, 2006, the Company does not consider the investments to be other-than-temporarily impaired.
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Market values were determined for each individual security in the investment portfolio.
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When evaluating the investments, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer, and the Company’s ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery in ma...
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Derivative Financial Instruments The Company uses derivatives to partially offset its business exposure to foreign exchange and interest rate risk.
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Foreign currency forward and option contracts are used to offset the foreign exchange risk on certain existing assets and liabilities and to hedge the foreign exchange risk on expected future cash flows on certain forecasted revenue and cost of sales.
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From time to time, the Company enters into interest rate derivative agreements to modify the interest rate profile of certain investments and debt.
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The Company’s accounting policies for these instruments are based on whether the instruments are designated as hedge or non-hedge instruments.
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The Company records all derivatives on the balance sheet at fair value.
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Derivatives that are not hedges are adjusted to fair value through earnings.
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If the derivative is a hedge, depending on the nature of the hedge, changes in fair value will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings.
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As of April 1, 2006, the Company had a net deferred gain associated with cash flow hedges of approximately $1 million net of taxes, substantially all of which is expected to be reclassified to earnings by the end of the fourth quarter of fiscal 2006.
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As of the end of the second quarter of 2006, the general nature of the Company’s risk management activities and the general nature and mix of the Company’s derivative financial instruments have not changed materially from the end of 2005.
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Foreign Exchange Risk Management The Company may enter into foreign currency forward and option contracts with financial institutions to protect against foreign exchange risk associated with existing assets and liabilities, certain firm commitments, forecasted future cash flows, and net investments in foreign subsidiar...
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Generally, the Company’s practice is to hedge a majority of its existing material foreign exchange transaction exposures.
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However, the Company may not hedge certain foreign exchange transaction exposures due to immateriality, prohibitive economic cost of hedging particular exposures, or limited availability of appropriate hedging instruments.
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Note 3 - Condensed Consolidated Financial Statement Details (in millions) Other Current Assets Property, Plant, and Equipment, Net Other Assets Accrued Expenses Non-Current Liabilities Other Income and Expense Note 4 - Restructuring Actions 2004 and 2003 Restructuring Actions The Company recorded total restructuring ch...
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Of the $23.0 million charge, $20.7 million had been utilized by the end of the second quarter of 2006, with the remaining $2.3 million consisting of $0.2 million for employee severance benefits and $2.1 million for lease cancellations.
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These actions have resulted in the termination of 451 positions.
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The following table summarizes activity associated with restructuring actions initiated during 2004 (in millions): The Company recorded total restructuring charges of approximately $26.8 million during 2003, including approximately $7.4 million in severance costs, a $5.0 million charge to write off deferred compensatio...
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Of the $26.8 million charge, all had been utilized by the end of the second quarter of 2006, except for approximately $1.5 million related to operating lease costs on abandoned facilities.
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The following table summarizes activity associated with restructuring actions initiated during 2003 (in millions): Note 5 - Shareholders’ Equity Preferred Stock The Company has five million shares of authorized preferred stock, none of which is outstanding.
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Under the terms of the Company’s Restated Articles of Incorporation, the Board of Directors is authorized to determine or alter the rights, preferences, privileges and restrictions of the Company’s authorized but unissued shares of preferred stock.
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Restricted Stock Units The Company’s Board of Directors has granted restricted stock units to members of the Company’s senior management team, excluding its CEO.
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These restricted stock units generally vest over four years either at the end of the four-year service period, in two equal installments on the second and fourth anniversaries of the date of grant, or in equal installments on each of the first through fourth anniversaries of the grant date.
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Upon vesting, the restricted stock units will convert into an equivalent number of shares of common stock.
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The amounts of the restricted stock units expensed by the Company are based on the closing market price of the Company’s common stock on the date of grant and are amortized on a straight-line basis over the four-year requisite service period.
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The restricted stock units have been reflected in the calculation of diluted earnings per share utilizing the treasury stock method.
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During the second quarter of 2006, 2.4 million of previously granted restricted stock units vested.
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A majority of these vested restricted stock units were net-share settled such that the Company withheld shares with value equivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities.
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The total shares withheld of 954,079 was based on the value of the restricted stock units on their vesting date as determined by the Company’s closing stock price of $59.96.
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Total payments for the employees’ tax obligations to the taxing authorities were approximately $57 million.
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These net-share settlements had the effect of share repurchases by the Company as they reduced and retired the number of shares that would have otherwise been issued as a result of the vesting and did not represent an expense to the Company.
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CEO Restricted Stock Award On March 19, 2003, the Company’s Board of Directors granted 10 million shares of restricted stock to the Company’s CEO that vested on March 19, 2006.
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The amount of the restricted stock award expensed by the Company was based on the closing market price of the Company’s common stock on the date of grant and was amortized on a straight-line basis over the three-year requisite service period.
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Upon vesting during the second quarter of 2006, the restricted stock award was net-share settled such that the Company withheld shares with value equivalent to the CEO’s minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities.
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The total shares withheld of 4.6 million was based on the value of the restricted stock award on the vesting date as determined by the Company’s closing stock price of $64.66.
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The remaining shares net of those withheld were delivered to the Company’s CEO.
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Total payments for the CEO’s tax obligations to the taxing authorities were approximately $296 million.
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The net-share settlement had the effect of share repurchases by the Company as they reduced and retired the number of shares outstanding and did not represent an expense to the Company.
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Stock Repurchase Plan In July 1999, the Company’s Board of Directors authorized a plan for the Company to repurchase up to $500 million of its common stock.
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This repurchase plan does not obligate the Company to acquire any specific number of shares or acquire shares over any specified period of time.
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During the second quarter of 2006, the Company withheld a total of 4.6 million shares of its common stock at a price of $64.66 per share related to the net-share settlement upon vesting of restricted stock to pay the CEO’s minimum statutory obligation for the applicable income and other employment taxes.
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This share withholding was not part of the Company’s authorized stock repurchase plan.
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Other than this net-share settlement, the Company has not engaged in any transactions to repurchase its common stock since 2001.
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The Company has repurchased a total of 13.1 million shares at a cost of $217 million under this plan and was authorized to repurchase up to an additional $283 million of its common stock as of April 1, 2006.
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Comprehensive Income Comprehensive income consists of two components, net income and other comprehensive income.
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Other comprehensive income refers to revenue, expenses, gains, and losses that under U.S. generally accepted accounting principles are recorded as an element of shareholders’ equity but are excluded from net income.
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The Company’s other comprehensive income consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency, unrealized gains and losses on marketable securities categorized as available-for-sale, and net deferred gains and losses on certain derivative in...
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The following table summarizes components of total comprehensive income, net of taxes, during the three and six-month periods ended April 1, 2006 and March 26, 2005 (in millions): The following table summarizes the components of accumulated other comprehensive income (loss), net of taxes (in millions): The following ta...
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Based on the terms of individual option grants, options granted under the 2003 Plan generally expire 7 to 10 years after the grant date and generally become exercisable over a period of four years, based on continued employment, with either annual or quarterly vesting.
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The 2003 Plan permits the granting of incentive stock options, nonstatutory stock options, restricted stock units, stock appreciation rights, and stock purchase rights.
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1997 Employee Stock Option Plan In August 1997, the Company’s Board of Directors approved the 1997 Employee Stock Option Plan (the 1997 Plan), a non-shareholder approved plan for grants of stock options to employees who are not officers of the Company.
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Based on the terms of individual option grants, options granted under the 1997 Plan generally expire 7 to 10 years after the grant date and generally become exercisable over a period of four years, based on continued employment, with either annual or quarterly vesting.
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In October 2003, the Company terminated the 1997 Plan and no new options can be granted from this plan.
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1997 Director Stock Option Plan In August 1997, the Company’s Board of Directors adopted a shareholder approved Director Stock Option Plan (DSOP) for non-employee directors of the Company.
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Initial grants of 30,000 options under the DSOP vest in three equal installments on each of the first through third anniversaries of the date of grant, and subsequent annual grants of 10,000 options are fully vested at the date of grant.
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Based on the terms of individual option grants, options granted under the DSOP generally expire 10 years after the grant date.
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