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AVAGO TECHNOLOGIES LTD - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations for the fiscal year ended November 3, 2013, or fiscal year 2013, included in our Annual Report on Form 10-K for fiscal year 2013, or 2013 Annual Report on Form 10-K. References to "Avago," "the Company," "we," "our" and "us" are to Avago Technologies Limited and its consolidated subsidiaries, unless otherwise specified or the context otherwise requires. This Quarterly Report on Form 10-Q may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, which are made under the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements may include projections of financial information; statements about historical results that may suggest trends for our business; statements of the plans, strategies, and objectives of management for future operations, including merger, acquisition and divestiture and related activities; statements of expectation or belief regarding future events, technology developments, our products, product sales, expenses, liquidity, cash flow and growth rates, or enforceability of our intellectual property rights; and the effects of seasonality on our results of operations. Such statements are based on current expectations, estimates, forecasts and projections of our or industry performance and macroeconomic conditions, based on management's judgment, beliefs, current trends and market conditions, and involve risks and uncertainties that may cause actual results to differ materially from those contained in the forward-looking statements. We derive most of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Accordingly, we caution you not to place undue reliance on these statements. For example, there can be no assurance that our product sales efforts, revenues or expenses will meet any expectations or follow any trend(s), that our ability to compete effectively will be successful or yield anticipated results, or that we will realize the expected benefits of our acquisitions of LSI Corporation, or LSI, and PLX Technology, Inc., or PLX, or dispositions. Important factors that could cause actual results to differ materially from our expectations are disclosed under "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q, and in other documents we file from time to time with the Securities and Exchange Commission, or SEC. All of the forward-looking statements in this Quarterly Report on Form 10-Q are qualified in their entirety by reference to the factors listed above and those discussed under the heading "Risk Factors" below. We undertake no intent or obligation to publicly update or revise any of these forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Overview We are a leading designer, developer and global supplier of a broad range of semiconductor devices with a focus on III-V based products and complex digital and mixed signal CMOS based devices. III-V semiconductor materials have higher electrical conductivity than silicon and thus tend to have better performance characteristics in radio frequency, or RF, and optoelectronic applications. III-V refers to elements from the 3rd and 5th groups in the periodic table of chemical elements, and examples of these materials are gallium arsenide, or GaAs, gallium nitride, or GaN, and indium phosphide, or InP. We differentiate ourselves through our high performance design and integration capabilities. Through the fiscal quarter ended May 4, 2014, we served three primary target markets: wireless communications, wired infrastructure and industrial & other. Starting in the third quarter of fiscal year 2014, as a result of our acquisition of LSI on May 6, 2014, we added a fourth target market: enterprise storage. Our product portfolio is extensive and includes thousands of products. Applications for our products in these target markets include smartphones, consumer appliances, data networking and telecommunications equipment, enterprise storage and servers, factory automation and industrial equipment. The percentage of total net revenue generated by sales in each of our target markets varies from quarter to quarter, due largely to fluctuations in end-market demand, including the effects of seasonality. The first fiscal quarter has historically been our lowest revenue and cash generating quarter due, in part, to holiday shutdowns at many OEM, customers and distributors, and the first half of the fiscal year has tended to generate lower revenue than the second half. However, in recent periods, typical seasonality and industry cyclicality have been increasingly overshadowed by other factors such as wider macroeconomic effects, and the timing of significant product transitions and launches by large OEMs, particularly in the enterprise storage and wireless communications target markets. During the first three quarters of fiscal year 2014, our net revenue increased significantly compared to the first three quarters of fiscal year 2013, mainly due to revenue contribution from the enterprise storage target market, which we acquired in the LSI acquisition. Net revenue from each of our three other target markets also increased during this period compared to the first three quarters of fiscal year 2013, mainly due to revenue contribution from the acquired LSI and CyOptics Inc. or CyOptics, businesses in the wired infrastructure target market, and due to content and unit growth in the wireless communications target market. Our fiscal year ended November 3, 2013, or fiscal year 2013, was a 53-week fiscal year, with the first fiscal quarter consisting of 14 weeks. 33-------------------------------------------------------------------------------- Table of Contents Historically, a relatively small number of customers have accounted for a significant portion of our net revenue. During the fiscal quarter ended August 3, 2014, direct sales to Foxconn Technology Group companies, or Foxconn, accounted for 15% of our net revenue. During the fiscal quarter ended August 4, 2013, direct sales to Foxconn accounted for 16% of our net revenue. During the three fiscal quarters ended August 3, 2014 and August 4, 2013, direct sales to Foxconn accounted for 17% of our net revenue. Our top 10 direct customers for the fiscal quarter and three fiscal quarters ended August 3, 2014, which included three distributors, collectively accounted for 51% and 55% of our net revenue, respectively. When direct sales are combined with indirect sales to the contract manufacturers that they utilize, we believe Seagate accounted for more than 10% of our net revenues for the fiscal quarter ended August 3, 2014 and we believe Apple Inc. accounted for more than 10% of our net revenues for the three fiscal quarters ended August 3, 2014. From time to time, some of our key customers, particularly in our wireless communications and enterprise storage target markets, place large orders or delay orders, respectively, causing our quarterly net revenue to fluctuate significantly. We expect that these fluctuations will continue and that they may be exaggerated by the launches of, and seasonal variations in sales of, consumer products such as mobile handsets and hard disk drives, as well as changes in the overall economic environment. Recent Developments Pending Sale of the LSI Axxia Networking Business On August 13, 2014, we and Intel Corporation, or Intel, announced the signing of a definitive agreement for Intel to acquire LSI's Axxia Networking Business and related assets, referred to as the Axxia Business, for $650 million in cash. The transaction, which has been approved by the boards of directors of both Avago and Intel, is expected to close in our fourth fiscal quarter of 2014 upon receipt of government approvals and satisfaction of customary closing conditions. Acquisition of PLX Technology, Inc. On August 12, 2014, we completed our acquisition of PLX Technology, Inc., or PLX, through a tender offer and subsequent merger of PLX into one of our wholly-owned subsidiaries. The aggregate consideration for the transaction was approximately $310 million, which was funded with available cash. Sale of LSI's Flash Components Division and Accelerated Solutions Division On May 29, 2014, we entered into an agreement with Seagate Technology LLC, or Seagate, pursuant to which we agreed to sell our Flash Components Division and Accelerated Solutions Division, together referred to as the Flash Business, to Seagate for $450 million in cash. This transaction closed on September 2, 2014. Acquisitions LSI Corporation On May 6, 2014, we completed our acquisition of LSI, through a merger of LSI into one of our indirect wholly-owned subsidiaries. The aggregate consideration for the acquisition was approximately $6,518 million, which includes cash paid to LSI stockholders of $6,344 million, cash paid for fully vested stock options and restricted stock units of $154 million, and $20 million for the fair value of partially vested assumed equity awards. We funded the transaction with the net proceeds from the issuance of $1 billion in aggregate principal amount of our 2% Convertible Senior Notes due 2021, or the Notes, the net proceeds from $4.6 billion in term loans under a new, senior collateralized credit facility that we entered into at the time of the closing of the transaction (discussed in more detail under "Indebtedness" below), as well as cash on hand of the combined companies. Our financial results for the fiscal quarter and the three fiscal quarters ended August 3, 2014 provided in this Quarterly Report on Form 10-Q include the operating results of LSI from May 6, 2014. CyOptics On June 28, 2013, we completed our acquisition of CyOptics, a U.S.-based company that manufactures and sells InP optical chip and component technologies for the data communications and telecommunications markets. The aggregate consideration for the acquisition was approximately $377 million, of which $373 million was paid in cash, net of $3 million in cash acquired. We have also recorded a $4 million liability representing additional deferred consideration to the previous shareholders of CyOptics. We expect to pay this amount in the fourth quarter of fiscal year 2014. In addition, approximately $27 million was payable to key employees of CyOptics as part of a retention bonus plan, of which $17 million has been paid as of August 3, 2014. This amount was paid into escrow, will be paid over a three-year period subsequent to the acquisition date and is being recognized as compensation expense in operating results over the same period. 34-------------------------------------------------------------------------------- Table of Contents For eligible CyOptics employees whose employment is involuntarily terminated by the Company, their retention bonus payments are accelerated and due in full upon such termination in accordance with the provisions of the plan. During the three fiscal quarters ended August 3, 2014, we recorded compensation expense of $10 million due to the departures of certain plan participants. The amount of such compensation expense incurred during the fiscal quarter ended August 3, 2014 was immaterial. Restructuring LSI Integration-Related Restructuring Plan In April 2014, we began the implementation of our cost reduction and restructuring activities in connection with our acquisition of LSI. As part of this plan, we expect to eliminate approximately 1,100 positions from the combined workforce across all business and functional areas on a global basis. Restructuring charges related to this action are discussed below in "Results of Operations." Critical Accounting Policies and Estimates The preparation of financial statements in accordance with generally accepted accounting principles in the United States, or GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates. Our critical accounting policies are those that affect our historical financial statements materially and involve difficult, subjective or complex judgments by management. Those policies include revenue recognition, accounting for business combinations, valuation of long-lived assets, intangible assets and goodwill, inventory valuation and warranty reserves, accounting for income taxes, retirement and post-retirement benefit plan assumptions, share-based compensation, and employee bonus programs. There were no significant changes in our critical accounting policies during the three fiscal quarters ended August 3, 2014 compared to those previously disclosed in "Critical Accounting Policies and Estimates" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our 2013 Annual Report on Form 10-K. Upon the closing of the LSI acquisition, all accounting policies relating to LSI were conformed to our accounting policies. 35-------------------------------------------------------------------------------- Table of Contents Results of Operations Fiscal Quarter and Three Fiscal Quarters Ended August 3, 2014 Compared to Fiscal Quarter and Three Fiscal Quarters Ended August 4, 2013 The following tables set forth our results of operations for the fiscal quarter and three fiscal quarters ended August 3, 2014 and August 4, 2013. Fiscal Quarter Ended August 3, August 4, August 3, August 4, 2014 2013 2014 2013 (In millions) (As a percentage of net revenue) Statements of Operations Data: Net revenue $ 1,269 $ 644 100 % 100 % Cost of products sold: Cost of products sold 760 325 60 51 Amortization of intangible assets 105 14 8 2 Restructuring charges 11 1 1 - Total cost of products sold 876 340 69 53 Gross margin 393 304 31 47 Research and development 240 101 19 15 Selling, general and administrative 137 57 11 9 Amortization of intangible assets 91 6 7 1 Restructuring charges 87 - 7 - Total operating expenses 555 164 44 25 Income (loss) from operations (162 ) 140 (13 ) 22 Interest expense (55 ) (1 ) (4 ) - Other income (expense), net (2 ) 5 - - Income (loss) from continuing operations before income taxes (219 ) 144 (17 ) 22 Provision for (benefit from) income taxes (99 ) 2 (7 ) - Income (loss) from continuing operations (120 ) 142 (10 ) 22 Loss from discontinued operations, net of income taxes (44 ) - (3 ) - Net income (loss) $ (164 ) $ 142 (13 )% 22 % 36-------------------------------------------------------------------------------- Table of Contents Three Fiscal Quarters Ended August 3, August 4, August 3, August 4, 2014 2013 2014 2013 (In millions) (As a percentage of net revenue) Statements of Operations Data: Net revenue $ 2,679 $ 1,782 100 % 100 % Cost of products sold: Cost of products sold 1,433 887 53 50 Amortization of intangible assets 141 42 5 2 Restructuring charges 16 1 1 - Total cost of products sold 1,590 930 59 52 Gross margin 1,089 852 41 48 Research and development 461 289 17 16 Selling, general and administrative 278 162 11 9 Amortization of intangible assets 106 17 4 1 Restructuring charges 107 2 4 - Total operating expenses 952 470 36 26 Income from operations 137 382 5 22 Interest expense (56 ) (2 ) (2 ) - Other income (expense), net (2 ) 8 - - Income from continuing operations before income taxes 79 388 3 22 Provision for (benefit from) income taxes (93 ) 8 (3 ) - Income from continuing operations 172 380 6 22 Loss from discontinued operations, net of income taxes (44 ) - (1 ) - Net income $ 128 $ 380 5 % 22 % Net revenue. Net revenue was $1,269 million for the fiscal quarter ended August 3, 2014, compared to $644 million for the fiscal quarter ended August 4, 2013, an increase of $625 million, or 97%. Net revenue was $2,679 million for the three fiscal quarters ended August 3, 2014, compared to $1,782 million for the three fiscal quarters ended August 4, 2013, an increase of $897 million, or 50%. The three fiscal quarters ended August 3, 2014 consisted of 39 weeks compared to 40 weeks in the three fiscal quarters ended August 4, 2013. The increase in net revenue for both the fiscal quarter and three fiscal quarters ended August 3, 2014 compared to the fiscal quarter and three fiscal quarters ended August 4, 2013 was primarily due to $525 million in revenue from the LSI acquisition, which is included in the enterprise storage, wired infrastructure and industrial & other target markets, continued strong growth in the wireless communications target market and an increase in revenue from the CyOptics business, which contributes to our wired infrastructure target market. Net revenue by target market data is derived from our understanding of our end customers' primary markets. Net revenue by target market was as follows: Fiscal Quarter Ended Three Fiscal Quarters Ended August 3, August 4, August 3, August 4, % of net revenue 2014 2013 Change 2014 2013 Change Enterprise storage 32 % - % * 15 % - % * Wireless communications 29 % 45 % (16 )% 40 % 49 % (9 )% Wired infrastructure 27 % 31 % (4 )% 30 % 28 % 2 % Industrial & other 12 % 24 % (12 )% 15 % 23 % (8 )% Total net revenue 100 % 100 % 100 % 100 % * Prior to the closing of the LSI acquisition on May 6, 2014 we did not have any revenues from this target market. Therefore, reporting a change in revenue from this target market is not meaningful. 37-------------------------------------------------------------------------------- Table of Contents Fiscal Quarter Ended Three Fiscal Quarters Ended August 3, August 4, August 3, August 4, Net revenue (in millions) 2014 2013 Change 2014 2013 Change Enterprise storage $ 404 $ - $ 404 $ 404 $ - $ 404 Wireless communications $ 364 $ 288 $ 76 $ 1,061 $ 875 $ 186 Wired infrastructure $ 352 $ 202 $ 150 $ 799 $ 498 $ 301 Industrial & other $ 149 $ 154 $ (5 ) $ 415 $ 409 $ 6 Total net revenue $ 1,269 $ 644 $ 625 $ 2,679 $ 1,782 $ 897 Net revenue from our enterprise storage target market was $404 million in the fiscal quarter and the three fiscal quarters ended August 3, 2014. The enterprise storage revenue reflected seasonal strength in hard disk drive demand. Net revenue from our wireless communications target market increased by $76 million, or 26%, and $186 million, or 21%, in the fiscal quarter and the three fiscal quarters ended August 3, 2014, respectively, compared with the corresponding prior year periods, due to continued strength in mobile smartphone sales resulting from sustained demand from two large smartphone OEM customers and strong demand from Chinese LTE smartphone OEMs. Unit sales of smartphones containing our products, the amount of our product content in those phones as well as increasing radio frequency, or RF, content in handsets, were key drivers of our revenue increase from this target market. Improvements in our product content in a number of new smartphone platforms as well as continued high demand for our film bulk acoustic resonator, or FBAR, technology products helped drive revenue growth during the third fiscal quarter and the first three fiscal quarters of fiscal year 2014. Net revenue from our wired infrastructure target market increased by $150 million, or 74%, and $301 million, or 60%, in the fiscal quarter and the three fiscal quarters ended August 3, 2014, respectively, compared with the corresponding prior fiscal year periods. For the fiscal quarter ended August 3, 2014, the increase was primarily due to revenue contribution from the acquired LSI application specific integrated circuits, or ASIC business, and the CyOptics business. For the three fiscal quarters ended August 3, 2014, approximately $274 million of the increase was attributable to revenue contribution from the acquired LSI ASIC business and the CyOptics business. Net revenue from our industrial & other target market decreased by $5 million, or 3%, and increased by $6 million, or 1%, in the fiscal quarter and the three fiscal quarters ended August 3, 2014, respectively, compared with the corresponding prior fiscal year periods. Gross margin. Gross margin was $393 million for the fiscal quarter ended August 3, 2014 compared to $304 million for the fiscal quarter ended August 4, 2013, an increase of $89 million. As a percentage of net revenue, gross margin was 31% and 47%, respectively, for the fiscal quarter ended August 3, 2014 and August 4, 2013. Gross margin was $1,089 million and $852 million for the three fiscal quarters ended August 3, 2014 and August 4, 2013, respectively. As a percentage of net revenue, gross margin was 41% and 48% for each of the three fiscal quarters ended August 3, 2014 and August 4, 2013, respectively. The increases in gross margin dollars for the fiscal quarter and three fiscal quarters ended August 3, 2014 compared to the corresponding prior year periods were due primarily to gross margin contributions from the enterprise storage products target market, as a result of the LSI acquisition, an increase in net revenue from, and improved product mix in, our wireless communication target market, as well as additional gross margin contributions from the CyOptics products, which we acquired during the third quarter of fiscal year 2013. The decreases in gross margin as a percentage of revenue for the fiscal quarter and three fiscal quarters ended August 3, 2014 compared to the corresponding prior year periods were due primarily to the amortization of inventory step up, large increases in amortization of intangible assets and restructuring expenses related to the LSI acquisition, partially offset by improved gross margins in our wireless communications target market due to the improved utilization of our internal manufacturing fabrication facility and product mix. Research and development. Research and development expense was $240 million for the fiscal quarter ended August 3, 2014, compared to $101 million for the fiscal quarter ended August 4, 2013, an increase of $139 million, or 138%. As a percentage of net revenue, research and development expense increased to 19% for the fiscal quarter ended August 3, 2014, compared to 15% for the fiscal quarter ended August 4, 2013. The increase in percentage of net revenue in the fiscal quarter is primarily due to the LSI acquisition completed at the beginning of the fiscal quarter. The increase in research and development expense is also attributable to increases in accrued incentive compensation expense related to our employee bonus program and salary and benefits expense related to annual merit-based salary increases. Research and development expense was $461 million for the three fiscal quarters ended August 3, 2014, compared to $289 million for the three fiscal quarters ended August 4, 2013, an increase of $172 million, or 60%. As a percentage of net revenue, research and development expense increased slightly to 17% for the three fiscal quarters ended August 3, 2014, compared to 16% for the three fiscal quarters ended August 4, 2013. The majority of this increase, in absolute dollars, is related to the LSI acquisition completed at the beginning of the fiscal quarter, as well increases in salary and benefits expense related to annual 38-------------------------------------------------------------------------------- Table of Contents merit-based salary increases, accrued incentive compensation expense related to our employee bonus program, and depreciation expense related to capital expenditures supporting research and development efforts. Selling, general and administrative. Selling, general and administrative expense was $137 million for the fiscal quarter ended August 3, 2014, compared to $57 million for the fiscal quarter ended August 4, 2013, an increase of $80 million, or 140%. As a percentage of net revenue, selling, general and administrative expense increased to 11% for the fiscal quarter ended August 3, 2014, compared to 9% for the fiscal quarter ended August 4, 2013. The increase in selling, general and administrative expense for the fiscal quarter ended August 3, 2014 was primarily due to the LSI acquisition. Additionally, other increases in selling, general and administrative expense consisted of a $21 million increase in professional service fees related to the LSI transaction and a $7 million increase in share-based compensation primarily attributable to a special, long-term compensation and retention equity award made to our President and Chief Executive Officer and to our annual focal employee equity awards at higher grant-date fair values. These increases were partially offset by decreased overhead expenses. Selling, general and administrative expense was $278 million for the three fiscal quarters ended August 3, 2014, compared to $162 million for the three fiscal quarters ended August 4, 2013, an increase of $116 million, or 72%. The increase in selling, general and administrative expense for the three fiscal quarters ended August 3, 2014 was primarily due to the LSI acquisition. Additionally, other increases in selling, general and administrative expense consisted of a $26 million increase in professional service fees related to the LSI transaction, a $20 million increase in share-based compensation primarily attributable to a special, long-term compensation and retention equity award made to our President and Chief Executive Officer and to our annual focal employee equity awards at higher grant-date fair values and a $10 million increase in retention bonuses related to the CyOptics acquisition. Increases in selling, general and administrative expenses were also attributable to increases in accrued incentive compensation expense related to our employee bonus program and salary and benefits expense related to annual merit-based salary increases. These increases in selling, general and administrative expense were partially offset by decreased overhead expenses. Amortization of intangible assets. Total amortization of intangible assets incurred was $196 million and $20 million for the fiscal quarters ended August 3, 2014 and August 4, 2013, respectively. Total amortization of intangible assets incurred was $247 million and $59 million for the three fiscal quarters ended August 3, 2014 and August 4, 2013, respectively. The increase in amortization expense for the fiscal quarter and three fiscal quarters ended August 3, 2014 was primarily attributable to the increase in amortizable intangible assets from the LSI acquisition. We anticipate our amortization expense will be substantially higher in future periods, primarily as a result of significant increases in amortizable intangible assets from recent acquisitions, most notably the LSI acquisition, as well as the PLX acquisition. Restructuring charges. Restructuring charges for the fiscal quarter ended August 3, 2014 were $98 million, which include $11 million and $87 million in costs of products sold and in operating expenses, respectively. Restructuring charges for the three fiscal quarters ended August 3, 2014 were $123 million, which include $16 million and $107 million in costs of products sold and in operating expenses, respectively. These restructuring charges were due primarily to employee termination costs following the LSI acquisition. Restructuring charges were $1 million and $3 million for the fiscal quarter and the three fiscal quarters ended August 4, 2013, respectively. We expect to incur additional restructuring charges in future periods as a result of further integration and alignment of the completed LSI and CyOptics acquisitions, integration of the recently completed PLX acquisition and acquisitions that we may make in the future. Interest expense. Interest expense was $55 million and $1 million for the fiscal quarters ended August 3, 2014 and August 4, 2013, respectively, and $56 million and $2 million for the three fiscal quarters ended August 3, 2014 and August 4, 2013, respectively. Interest expense in the fiscal quarter ended August 3, 2014 represents interest and fees on the $4.6 billion of term loans, the 2014 revolving credit facility, and the $1 billion convertible senior notes, together with the amortization of related debt issuance costs. We expect to incur significantly higher aggregate interest charges in future periods as a result of recent borrowings incurred to complete the acquisition of LSI and the 2014 revolving credit facility. The debt issuance costs will be expensed to operating results using the effective interest method over the respective borrowing terms. The commitment fees related to the 2014 revolving credit facility will be expensed over the commitment term. Other income (expense), net. Other expense, net was $2 million for both the fiscal quarter and three fiscal quarters ended August 3, 2014 compared to other income, net of $5 million and $8 million for the fiscal quarter and three fiscal quarters ended August 4, 2013, respectively. Other income (expense), net includes realized and unrealized gains or losses on trading securities and investment funds, interest income, foreign currency gains (losses) on balance sheet remeasurement and other miscellaneous items. Provision for (benefit from) income taxes. For the fiscal quarter and three fiscal quarters ended August 3, 2014, we recorded an income tax benefit of $99 million and $93 million, respectively, compared to an income tax provision of $2 million and $8 million for the fiscal quarter and three fiscal quarters ended August 4, 2013, respectively. The income tax benefit of $99 million and $93 million for the fiscal quarter and three fiscal quarters ended August 3, 2014 is largely due to the reversal of net deferred tax liabilities resulting from the amortization of acquired intangible assets and the recognition of previously unrecognized tax benefits as a result of lapses in statutes of limitations. 39-------------------------------------------------------------------------------- Table of Contents In connection with our acquisition of LSI during the quarter, net deferred tax liabilities were established on the acquired identifiable intangible assets and on the excess of financial reporting over the tax basis of acquired investments in certain foreign subsidiaries that have not been indefinitely reinvested. Upon finalization of our combined company legal structure, additional adjustments to our net deferred taxes may be required. The income tax expense for the three fiscal quarters ended August 4, 2013 included a benefit of $2 million from the recognition of previously unrecognized tax benefits as a result of the expiration of the statute of limitations for certain audit periods, and $3 million from the enactment of the American Taxpayer Relief Act of 2012, which was signed into law on January 2, 2013, retroactively extending the U.S. Federal Research and Development tax credit from January 1, 2012 to December 31, 2013. Pursuant to the authoritative accounting guidance, during the fiscal quarter ended February 2, 2014, we recorded a deferred charge of $32 million for the deferral of income tax expense on certain intercompany asset transactions, with $4 million included in other current assets and $28 million included in other long-term assets on our unaudited condensed consolidated balance sheets. The deferred charge will be amortized on a straight-line basis and will be included as a component of income tax expense over the life of the underlying assets, which has been estimated to be seven years. Our estimated annual effective tax rate does not reflect the tax effects of future internal restructuring and reorganizations. Subsequent restructuring may materially affect our tax expense for the full year fiscal 2014. Backlog Our sales are generally made pursuant to short-term purchase orders. These purchase orders are made without deposits and may be rescheduled, cancelled or modified on relatively short notice, and in most cases without substantial penalty. Therefore, we believe that purchase orders or backlog are not a reliable indicator of future sales. Seasonality We have historically been affected by seasonal trends in the semiconductor and related industries. Our net revenue in the second half of the fiscal year has typically been higher than our net revenue in the first half of the fiscal year due to seasonality in our wireless communications target market. This target market historically experienced seasonality due to the calendar year-end holiday selling seasons. From time to time, some of our key customers, particularly in our wireless communications and enterprise storage target markets, place large orders or delay orders, respectively, causing our quarterly net revenue to fluctuate significantly. We expect that these fluctuations will continue and that they may be exaggerated by the launches, and seasonal variations in sales of, consumer products such as mobile handsets and hard disk drives, as well as changes in the overall economic environment. These fluctuations combined with other factors have increasingly overshadowed these seasonal effects in recent periods. Liquidity and Capital Resources Our primary sources of liquidity as of August 3, 2014 consisted of: (1) approximately $1,277 million in cash and cash equivalents, (2) cash we expect to generate from operations and (3) our 2014 Credit Agreement which includes a $500 million revolving credit facility, which is committed until May 6, 2019, and was available to be drawn as of August 3, 2014. Our short-term and long-term liquidity requirements primarily arise from: (i) interest, principal and commitment fees payments related to borrowings incurred to fund the acquisition of LSI, (ii) working capital requirements, (iii) research and development and capital expenditure needs, (iv) business acquisitions, such as the recently closed acquisition of PLX and investments we may make from time to time, (v) quarterly cash dividend payments (if and when declared by our board of directors, or the Board), (vi) funding employee benefit plan obligations and (vii) any ordinary share repurchases we may choose to make. Our ability to fund these requirements will depend, in part, on our future cash flows, which are determined by future operating performance and are, therefore, subject to prevailing global macroeconomic conditions and financial, business and other factors, some of which are beyond our control, as well as on receipt of cash proceeds from asset sales we may make, including the recently completed sale of the Flash Business and the pending sale of the Axxia Business. Acquisition of PLX Technology, Inc. On August 12, 2014, we completed acquisition of PLX for aggregate cash consideration of approximately $310 million, or $293 million net of cash and debt acquired, which was funded with our available cash. 40-------------------------------------------------------------------------------- Table of Contents Pension Plans Assumed in the LSI Acquisition As a result of the LSI acquisition, we assumed pension plans under which we are obligated to make future contributions to fund benefits to participants. The plans provide retirement benefits to certain former U.S. employees of LSI under defined benefit pension plans. The projected benefit obligations under these pension plans exceeded the value of the assets of those plans by approximately $446 million at May 6, 2014. Our minimum required funding contributions to these plans for the remainder of our fiscal year 2014 is at least $41 million. We expect to have additional funding requirements with respect to the plans in future years. We may also choose to make additional, voluntary contributions to the plans. In connection with the LSI acquisition, we also entered into an agreement with the Pension Benefit Guaranty Corporation pursuant to which we have agreed to make contributions in excess of the minimum required contributions ranging from $11 million to $31 million in each of our fiscal years 2015, 2016 and 2017, if we do not meet specified financial ratios. Depending on our cash position at the time, any such contributions to our pension plans could impact our liquidity and financial position. Share Repurchases On April 10, 2013, the Board, authorized the Company to repurchase up to 20 million of its ordinary shares in open market transactions, referred to as the 2013 share repurchase program. The 2013 share repurchase program expired on April 8, 2014. Under the 2013 share repurchase program, the Company repurchased and retired 0.3 million shares for an aggregate purchase price of $12 million in cash during the three fiscal quarters ended August 3, 2014. At the Company's 2014 annual general meeting of shareholders on April 9, 2014, shareholders approved the Company's 2014 share purchase mandate pursuant to which the Company is authorized, upon Board approval, to repurchase up to approximately 25 million of its ordinary shares in open market transactions or pursuant to equal access schemes, up to the date on which the Company's 2015 annual general meeting of shareholders is held or required by law to be held, referred to as the 2014 share purchase mandate. As of the date of this Quarterly Report on Form 10-Q, the Board had not approved any repurchases of the Company's ordinary shares pursuant to the 2014 share purchase mandate. The timing and amount of any future share repurchases will depend on a variety of factors including price, market conditions, the requirements of our 2014 Credit Agreement and applicable legal requirements. Dividends On September 3, 2014, the Board declared an interim cash dividend on the Company's ordinary shares of $0.32 per share, payable on September 30, 2014 to shareholders of record on September 19, 2014. Summary Our cash and cash equivalents increased by $292 million to $1,277 million at August 3, 2014 from $985 million at November 3, 2013. The increase was largely due to $794 million in cash provided by operating activities, $4.6 billion in proceeds from bank term loans under the 2014 Credit Agreement, $1 billion in proceeds from the Notes, $86 million from the issuance of ordinary shares upon exercises of options, and $14 million in proceeds from the sale of investments, partially offset by $5,644 million of payments for the acquisition of LSI, net of cash acquired, $124 million paid for debt issuance costs, $203 million in dividends to our shareholders, $220 million for capital expenditures, and $12 million to repurchase 0.3 million of our ordinary shares. We believe that our cash and cash equivalents on hand and cash flows from operations, combined with current borrowing availability under our $500 million 2014 revolving credit facility, $450 million from the sale of the Flash Business and $650 million from the pending sale of the Axxia Business, will provide sufficient liquidity to fund our current obligations including the current portions of our long-term debt and interest due, the tender or conversion of outstanding Notes and interest due for settlement in cash, annual cash contributions to fund assumed LSI pension and retirement plan obligations, projected working capital requirements, capital expenditures, quarterly cash dividends (if and when declared by our Board) and any share repurchases (if and when authorized by our Board) we may choose to make for at least the next 12 months. We believe that, after giving effect to the recently completed acquisition of PLX for approximately $310 million in cash, we will have sufficient cash on hand to operate our business and satisfy our current obligations. We anticipate that our capital expenditures for fiscal year 2014 will be higher than for fiscal year 2013, due primarily to spending on capacity expansion in our Fort Collins fabrication facility, expenditures related to LSI and campus rationalization. From time to time, we engage in discussions with third parties regarding potential acquisitions of, or investments in, businesses, technologies and product lines, including but not limited to our recently completed $310 million acquisition of PLX. Any such transaction could require significant use of our cash and cash equivalents, require us to issue additional debt or equity securities and require us to borrow under our 2014 Credit Agreement or arrange new financing to fund the transaction. If we do not have sufficient cash to fund our operations or finance growth opportunities, including acquisitions, or unanticipated capital expenditures, our business and financial condition could suffer. In such circumstances we may also seek to obtain debt or equity financing in the future. However, we cannot assure that such additional financing will be available on terms acceptable to us or at all. Our ability to service any indebtedness we may incur, including under our 2014 Credit Agreement and 41-------------------------------------------------------------------------------- Table of Contents the outstanding convertible senior notes, will depend on our ability to generate cash in the future. We could also reduce or eliminate certain expenditures, such as payment of our current quarterly cash dividend and repurchases of our ordinary shares. In addition, even though we may not need additional funds, we may still elect to sell additional debt or equity securities or increase the aggregate term loans and revolving credit commitments capacity to $6.7 billion as allowed under the 2014 Credit Agreement, or increase our current $500 million 2014 revolving credit facility for reasons other than those specified above. Cash Flows for the Three Fiscal Quarters Ended August 3, 2014 and August 4, 2013 Our cash flows for the three fiscal quarters ended August 3, 2014 and August 4, 2013 were as follows (in millions): Three Fiscal Quarters Ended August 3, August 4, 2014 2013 Net cash provided by operating activities $ 794 $ 510 Net cash used in investing activities (5,850 ) (598 ) Net cash provided by (used in) financing activities 5,348 (133 ) Net increase (decrease) in cash and cash equivalents $ 292 $ (221 ) Operating Activities Net cash provided by operating activities during the three fiscal quarters ended August 3, 2014 was $794 million. The net cash provided by operating activities was principally due to net income of $128 million, which includes non-cash charges of $498 million and changes in operating assets and liabilities of $168 million. The non-cash charges of $498 million included $375 million for depreciation and amortization, $109 million of non-cash share-based compensation, and $7 million of amortization of debt discount and debt issuance costs. On May 6, 2014, we closed the LSI acquisition. The following table presents the changes in selected balance sheet captions, the assets acquired and liabilities assumed in connection with the LSI acquisition, and changes due to non-LSI acquisition activities during the three fiscal quarters ended August 3, 2014 (in millions). Our discussion of these balance sheet captions and their impact on liquidity and capital resources is principally focused on those amounts presented in the non-LSI acquisition column below and, unless otherwise noted, excludes the impact of balances acquired and assumed from LSI on May 6, 2014. Balances acquired and assumed from Balances at LSI on Balances at Non-LSI acquisition May 6, November 3, 2013 2014 August 3, 2014 Increase (Decrease) Trade accounts receivable, net $ 418 $ 282 $ 590 $ (110 ) Inventory 285 386 482 (189 ) Assets held-for-sale - 450 1,029 579 Other current assets 130 357 462 (25 ) Other long-term assets 53 178 328 97 Accounts payable 278 207 459 (26 ) Employee compensation and benefits 98 91 207 18 Other current liabilities 47 175 228 6 Pension and post-retirement benefit obligations 62 446 481 (27 ) Other long-term liabilities 44 353 271 (126 ) Trade accounts receivable decreased by $110 million. The number of days sales outstanding decreased to 42 days at August 3, 2014 from 52 days at November 3, 2013 due to the linearity of revenue and timing of collections. Inventory decreased by $189 million. The number of days of inventory on hand decreased to 58 days at August 3, 2014 compared to 69 days at November 3, 2013, due primarily to the impact of the LSI acquisition. This decrease was partially offset by planned increases in certain inventory to support an anticipated increase in demand from our wireless communication and wired infrastructure target markets, as well as lifetime purchases of certain wafers and other materials in the fiscal quarter ended 42-------------------------------------------------------------------------------- Table of Contents August 3, 2014. Of the 58 days and 69 days of inventory on hand as of August 3, 2014 and November 3, 2013, respectively, 8 days and 9 days, respectively, were attributable to the lifetime purchases. Assets-held-for-sale increased to $1,029 million from the end of fiscal year 2013 due to the pending sale of the Axxia Business and the recently closed sale of the Flash Business. Other current assets decreased by $25 million. The decrease was primarily attributable to a $16 million decrease in receivables from development arrangements and intellectual property-related revenue, a $16 million decrease in other receivables, an $11 million decrease due to the sale of our investment in common stock of a U.S. publicly-traded company, and an $8 million decrease in current deferred tax assets. These decreases were substantially offset by a $17 million increase in unamortized debt issuance costs related to the 2014 Credit Agreement, and a $6 million increase in receivables from our contract manufacturers for materials purchased by us on their behalf to secure pricing. Other long-term assets increased by $97 million. The increase was primarily attributable to a $102 million increase in unamortized debt issuance costs related to the 2014 Credit Agreement and a $26 million increase in tax-related deferred charges associated with the CyOptics acquisition. These increases were partially offset by an $11 million decrease in prepaid bonuses related to the CyOptics acquisition, a $9 million decrease in intellectual property related receivables and an $8 million impairment charge on privately-held cost method investments. Accounts payable decreased by $26 million due to the timing of disbursements. Employee compensation and benefits accruals increased by $18 million due to a $19 million increase due to performance levels under our employee bonus program related to our overall profitability and other performance metrics, a $6 million increase in salary payable due to annual merit-based salary increases and a $3 million increase in withholdings for the employee share purchase program, partially offset by an $11 million decrease in accrued employee benefits. Other current liabilities increased by $6 million due to a $33 million increase in accrued interest related to our borrowings, a $26 million increase in restructuring liabilities, and a $9 million increase in rebate accruals, partially offset by a $35 million decrease in deferred revenue, a $31 million decrease in LSI acquisition related payables and a $5 million decrease in a CyOptics acquisition employee related payable and other miscellaneous accrued liabilities. Long-term pension and post-retirement benefit obligations decreased by $27 million primarily due to $13 million of pension plan contributions and a $9 million decrease resulting from plan amendments. Other long-term liabilities decreased by $126 million primarily due to a decrease in tax-related liabilities. Net cash provided by operating activities during the three fiscal quarters ended August 4, 2013 was $510 million. The net cash provided by operating activities was principally due to net income of $380 million, which includes non-cash charges of $186 million that were partially offset by changes in operating assets and liabilities of $56 million. The non-cash charges of $186 million included $129 million for depreciation and amortization and $55 million of non-cash, share based compensation. Accounts receivable increased to $365 million at August 4, 2013 from $341 million at the end of fiscal year 2012. The number of days sales outstanding increased to 52 days at August 4, 2013 from 51 days at October 28, 2012 due to linearity of revenue and timing of collections. Inventory increased to $284 million at August 4, 2013 from $194 million at the end of fiscal year 2012. The number of days of inventory on hand increased to 80 days at August 4, 2013 compared to 58 days at October 28, 2012, due primarily to an increase in inventory to prepare for an anticipated increase in demand from our wireless target market, as well as significant lifetime purchases of certain wafers and other materials in the three fiscal quarters ended August 4, 2013. Of the 80 days and 58 days of inventory on hand as of August 4, 2013 and October 28, 2012, respectively, 9 days and 8 days, respectively, were attributable to these lifetime purchases. Inventory on hand as of August 4, 2013 was also adversely impacted by 5 days due to inventory acquired from CyOptics. Other current assets increased to $129 million at August 4, 2013 from $72 million at the end of fiscal year 2012, primarily due to a $2 million increase in prepaid expenses, a $3 million increase in receivables from our contract manufacturers for materials purchased by us on their behalf to secure pricing, an $8 million increase in advances made to certain of our existing distributors for anticipated distributor price adjustments, an $8 million increase in current deferred tax assets attributable to the CyOptics and Javelin acquisitions, a $10 million increase due to the CyOptics employee retention plan, a $27 million increase due to the fair market value and classification as short-term marketable securities investments to other current assets from long-term assets and an increase in the fair market value of deferred compensation plan assets during the fiscal quarter ended August 4, 2013. These increases were partially offset by a $1 million decrease in receivables from intellectual property-related revenue and a $1 million decrease in deposits paid for fixed assets. Current liabilities increased to $380 million at August 4, 2013 from $346 million at the end of fiscal year 2012, primarily due to increases in employee compensation and benefits and accounts payable, partially offset by decreases in other current liabilities. Employee compensation and benefits increased to $80 million at August 4, 2013 compared to $61 million at the end of fiscal year 2012 primarily due to an $11 million increase in accruals under our employee bonus program related to our overall profitability, a $5 million increase in salaries payable, other commissions and employee benefits, and a $3 million 43-------------------------------------------------------------------------------- Table of Contents increase due to employee contributions to the ESPP, 401(k) and flexible spending plans. Accounts payable increased to $266 million at August 4, 2013 from $248 million at the end of fiscal year 2012 mainly due to timing of disbursements. Other current liabilities decreased to $32 million at August 4, 2013 from $36 million at the end of fiscal year 2012 due to a $12 million decrease in income, sales and use taxes payable, a $1 million decrease in supplier liabilities, and a $1 million decrease in accrued sales commissions, partially offset by a $2 million increase in deferred sales and support income. Investing Activities Net cash used in investing activities for the three fiscal quarters ended August 3, 2014 was $5,850 million, primarily due to $5,644 million, net of cash acquired for the LSI acquisition and $220 million in purchases of property, plant and equipment in connection with the continued expansion of our manufacturing facility in Fort Collins, Colorado, partially offset by $14 million in cash proceeds from the sale of an investment in trading securities. Net cash used in investing activities for the three fiscal quarters ended August 4, 2013 was $598 million, primarily due to the $372 million and $37 million in cash paid for the acquisitions of CyOptics and Javelin, respectively, $179 million in purchases of property, plant and equipment in connection with the continued expansion of our manufacturing facility in Fort Collins, Colorado, and $10 million in purchases of short-term marketable equity securities. Financing Activities Net cash provided by financing activities for the three fiscal quarters ended August 3, 2014 was $5,348 million. The net cash provided by financing activities was principally due to $4,600 million of proceeds from bank term loans under the 2014 Credit Agreement, $1,000 million of proceeds from the issuance of convertible senior notes, $86 million of proceeds from the exercise of share options and purchases under our ESPP, and $2 million in proceeds from research and development grants. These financing cash inflows were partially offset by $124 million of debt issuance costs, $203 million of dividends to shareholders, and $12 million to repurchase 0.3 million of our ordinary shares. Net cash used in financing activities for the three fiscal quarters ended August 4, 2013 was $133 million. The net cash used in financing activities was principally due to $141 million of dividends to shareholders and $62 million to repurchase 1.7 million of our ordinary shares under our 2013 share repurchase program. These cash outflows were partially offset by $60 million of proceeds from the exercise of options and purchases under our ESPP, proceeds from research and development grants of $8 million and an excess tax benefit of $3 million. Indebtedness 2013 Revolving Credit Facility Prior to May 6, 2014, we had an unsecured, revolving credit facility, or the 2013 revolving credit facility, in the amount of $575 million, which included borrowing capacity available for letters of credit. We had no borrowings outstanding under this revolving credit facility, and we were in compliance with the covenants under the related credit agreement when it was terminated at the time of our acquisition of LSI. Term Loans and Revolving Credit Facilities In connection with the acquisition of LSI on May 6, 2014, our subsidiaries Avago Technologies Finance Pte. Ltd., or AT Finance, Avago Technologies Cayman Ltd., or AT Cayman, and Avago Technologies Holdings Luxembourg S.àr.l, or AT Luxco and together with AT Cayman, referred to as the Borrowers, together with a group of lenders, including Deutsche Bank AG New York Branch as the Administrative Agent, entered into a new Credit Agreement, dated May 6, 2014, referred to as the 2014 Credit Agreement. The 2014 Credit Agreement provides for a term loan facility in the aggregate principal amount of $4.6 billion and a revolving credit facility that permits the Borrowers to borrow loans from time to time in an aggregate principal amount of up to $500 million, for general corporate purposes, for swingline loans of up to $75 million in the aggregate and for the issuance of letters of credit of up to $100 million in the aggregate, which, in the case of swingline loans and letters of credit, reduce the available borrowing capacity under the revolving credit facility on a dollar for dollar basis. The Borrowers' obligations under the 2014 Credit Agreement are guaranteed by AT Finance and certain of its subsidiaries, or the Subsidiary Guarantors, and are collateralized, subject to certain exceptions, by all the assets of AT Finance, each Borrower, and each Subsidiary Guarantor. The term loan facility has a term of 7 years and the revolving credit facility has a term of 5 years. Loans under the 2014 Credit Agreement will bear interest at a rate per annum equal to, at our option: (i) the greatest of (a) the rate of interest per annum publicly announced from time to time by Deutsche Bank AG New York Branch as its prime rate in effect at its principal office in New York City, (b) the Federal Funds Effective Rate (as defined in the 2014 Credit Agreement) in effect on the relevant day plus 1/2 of 1% per annum, (c) the Adjusted LIBO Rate (as defined in the 2014 Credit Agreement) on the relevant day for a deposit in dollars with a maturity of one month plus 1% per annum and (d), with respect to term loans, 1.75%; or 44-------------------------------------------------------------------------------- Table of Contents (ii) the interest rate per annum equal to the greater of (a) (x) the LIBO Rate for such Interest Period (as defined in the 2014 Credit Agreement) multiplied by (y) the Statutory Reserve Rate (as defined in the 2014 Credit Agreement) and (b) with respect to term loans, 0.75% per annum. The 2014 Credit Agreement includes (i) financial covenants requiring AT Finance to, at any time the revolving credit facility is drawn by more than 30%, maintain a maximum first lien leverage ratio; (ii) customary restrictive covenants (subject, in each case, to certain exceptions and amounts) that limit AT Finance and its subsidiaries' ability to, among other things, incur indebtedness, create liens, merge or consolidate with and into other persons, make acquisitions and sell assets; (iii) customary events of default, upon the occurrence of which, after any applicable grace period, the lenders will have the ability to accelerate all outstanding loans thereunder and terminate the commitments; and (iv) customary representations and warranties. In addition, AT Finance has the ability, at any time, to increase the aggregate term loans and revolving credit commitments under the 2014 Credit Agreement from $5.1 billion to $6.7 billion, subject to the condition that no default or event of default shall have occurred and be continuing and other terms and conditions set forth in the 2014 Credit Agreement, and the receipt of sufficient commitments for such increase from the lenders. The Borrowers have agreed to pay the lenders a commitment fee at a rate per annum that varies based on the total leverage ratio. The Borrowers also entered into collateral and related agreements ancillary to the 2014 Credit Agreement. As of August 3, 2014, $4.6 billion in term loans were outstanding and we had no borrowings outstanding under the revolving credit facility. At August 3, 2014, we were in compliance with the covenants contained in the 2014 Credit Agreement. Convertible Senior Notes In connection with the acquisition of LSI on May 6, 2014, the Company completed the private placement of $1 billion in aggregate principal amount of 2% Convertible Senior Notes due 2021, or the Notes, to investment funds affiliated with Silver Lake Partners, or the Purchasers, pursuant to the terms of the Note Purchase Agreement among the Company, Silver Lake Partners IV, L.P. (whose rights and obligations under the Note Purchase Agreement were thereafter assigned to and assumed by the Purchasers), and Deutsche Bank AG, Singapore Branch, as lead manager. All of the net proceeds from issuance of the Notes were used to fund the LSI acquisition. The Notes were issued pursuant to an Indenture, dated May 6, 2014, between the Company and U.S. Bank National Association, as trustee, or the Indenture. The Indenture includes customary terms and covenants, including certain events of default after which the Notes may be due and payable immediately. The Notes are the Company's unsecured senior obligations. The Notes will mature on August 15, 2021, unless repurchased, redeemed or converted in accordance with their terms prior to such date. The Notes will pay interest semi-annually at a rate of 2.0% per year, payable in arrears on May 1 and November 1 of each year, beginning on November 1, 2014, and on the maturity date. Subject to any limitations set forth in the Indenture, the Notes will be convertible at any time until the close of business on the scheduled trading day immediately preceding the maturity date. Upon conversion, the Notes may be settled in the Company's ordinary shares, cash or a combination of cash and ordinary shares, at the Company's option. The Notes were convertible at an initial conversion rate of 20.8160 ordinary shares per $1,000 principal amount of the Notes, which is equivalent to an initial conversion price of approximately $48.04 per ordinary share, and is subject to adjustment under the terms of the Notes (including adjustments for quarterly cash dividends paid on the Company's ordinary shares to the extent they exceed $0.27 per share). Holders of the Notes will have the right to require the Company to repurchase all or some of their Notes at 100% of their principal amount, plus any accrued and unpaid interest, upon the occurrence of a fundamental change (as defined in the Indenture). In addition, upon the occurrence of a make-whole fundamental change (as defined in the Indenture), Avago may be required to increase the conversion rate for the Notes converted in connection with such a make-whole fundamental change. Prior to May 6, 2019, the Company may not redeem the Notes. Beginning May 6, 2019, the Company may, at its option, redeem the Notes, in whole or in part if the closing sale price (as defined in the Indenture) of the ordinary shares for 20 or more trading days (as defined in the Indenture) in the period of 30 consecutive trading days ending on the trading day immediately prior to the date on which the Company provides notice of such redemption exceeds 150% of the applicable conversion price in effect on each such trading day, at a redemption price equal to 100% of the principal amount of notes being redeemed, together with accrued and unpaid interest to, but not including, the redemption date (as defined in the Indenture). In connection with the sale of the Notes, the Company entered into a registration rights agreement, dated as of May 6, 2014, with the Purchasers, or the Registration Rights Agreement, providing for customary resale registration rights with respect to the Notes and the ordinary shares issuable upon conversion of the Notes, if any. As of August 3, 2014, $1 billion in Notes were outstanding. As a result of quarterly dividend paid on our ordinary shares after the date of issuance of the Notes, as of August 3, 2014, the conversion rate was 20.8218 per ordinary shares per $1,000 principal amount of the Notes, which is equivalent to a conversion price of approximately $48.03 per ordinary share. At August 3, 2014, we were in compliance with the covenants described in the Indenture. 45-------------------------------------------------------------------------------- Table of Contents Contractual Commitments See Note 12. "Commitments and Contingencies" to the Unaudited Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q. Due to the inherent uncertainty with respect to the timing of future cash outflows associated with our unrecognized tax benefits at August 3, 2014, we are unable to reliably estimate the timing of cash settlement with the respective taxing authority. Therefore, $79 million of unrecognized tax benefits and accrued interest classified as long-term income tax payable on the unaudited condensed consolidated balance sheet as of August 3, 2014 have been excluded from the contractual obligations and commitments table included in Note 12 "Commitments and Contingencies". There were no other material changes to our contractual commitments as of August 3, 2014 from those disclosed in our 2013 Annual Report on Form 10-K other than those updated in this Quarterly Report on Form 10-Q . Off-Balance Sheet Arrangements We had no material off-balance sheet arrangements at August 3, 2014 as defined in Item 303(a)(4)(ii) of Regulation S-K under the Exchange Act . Indemnifications See Note 12. "Commitments and Contingencies" to the Unaudited Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q. Accounting Changes and Recent Accounting Standards For a description of accounting changes and recent accounting standards, including the expected dates of adoption and estimated effects, if any, on our unaudited condensed consolidated financial statements, see Note 1 to the Unaudited Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q. 46-------------------------------------------------------------------------------- Table of Contents |