Edgar Filing: Avago Technologies LTD

AVGO-05.03.2015-10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(MARK ONE)



R	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 3, 2015



£	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-34428

Avago Technologies Limited

(Exact Name of Registrant as Specified in Its Charter)



Singapore (State or Other Jurisdiction of Incorporation or Organization)	98-0682363 (I.R.S. Employer Identification No.)
1 Yishun Avenue 7 Singapore 768923	N/A
(Address of Principal Executive Offices)	(Zip Code)

(65) 6755-7888

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES R NO £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES R NO £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer R	Accelerated filer £	Non-accelerated filer £	Smaller reporting company £
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES £ NO R

As of May 29, 2015 there were 259,729,700 of our ordinary shares, no par value per share, outstanding.

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AVAGO TECHNOLOGIES LIMITED

Quarterly Report on Form 10-Q

For the Quarterly Period Ended May 3, 2015

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	Page
PART I — FINANCIAL INFORMATION	3
Item 1. Condensed Consolidated Financial Statements — Unaudited	3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3. Quantitative and Qualitative Disclosures About Market Risk	36
Item 4. Controls and Procedures	36
PART II — OTHER INFORMATION	37
Item 1. Legal Proceedings	37
Item 1A. Risk Factors	38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	62
Item 3. Defaults Upon Senior Securities	62
Item 4. Mine Safety Disclosures	62
Item 5. Other Information	62
Item 6. Exhibits	62
SIGNATURES	63
Exhibit Index	64

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PART I — FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements — Unaudited

AVAGO TECHNOLOGIES LIMITED

CONDENSED CONSOLIDATED BALANCE SHEETS — UNAUDITED

(in millions, except share amounts)



	May 3, 2015			November 2, 2014
ASSETS
Current assets:
Cash and cash equivalents	$	2,508		$	1,604
Trade accounts receivable, net	758			782
Inventory	490			519
Other current assets	316			302
Assets held-for-sale	4			628
Total current assets	4,076			3,835
Property, plant and equipment, net	1,344			1,158
Goodwill	1,596			1,596
Intangible assets, net	3,280			3,617
Other long-term assets	236			285
Total assets	$	10,532		$	10,491
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	501		$	515
Employee compensation and benefits	181			219
Other current liabilities	178			236
Current portion of long-term debt	46			46
Total current liabilities	906			1,016
Long-term liabilities:
Convertible notes payable to related party	926			920
Long-term debt	3,926			4,543
Pension and post-retirement benefit obligations	481			506
Other long-term liabilities	232			263
Total liabilities	6,471			7,248
Commitments and contingencies (Note 10)
Shareholders’ equity:
Ordinary shares, no par value; 259,521,268 shares and 254,330,630 shares issued and outstanding on May 3, 2015 and November 2, 2014, respectively	2,319			2,009
Retained earnings	1,791			1,284
Accumulated other comprehensive loss	(49		)	(50		)
Total shareholders’ equity	4,061			3,243
Total liabilities and shareholders’ equity	$	10,532		$	10,491

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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AVAGO TECHNOLOGIES LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS — UNAUDITED

(in millions, except per share amounts)



	Fiscal Quarter Ended						Two Fiscal Quarters Ended
	May 3, 2015			May 4, 2014			May 3, 2015			May 4, 2014
Net revenue	$	1,614		$	701		$	3,249		$	1,410
Cost of products sold:
Cost of products sold	654			326			1,348			673
Amortization of intangible assets	113			18			226			36
Restructuring charges	1			—			3			5
Total cost of products sold	768			344			1,577			714
Gross margin	846			357			1,672			696
Research and development	251			114			486			221
Selling, general and administrative	108			67			225			141
Amortization of intangible assets	59			8			118			15
Restructuring charges	10			8			24			20
Total operating expenses	428			197			853			397
Operating income	418			160			819			299
Interest expense	(53		)	(1		)	(107		)	(1		)
Other income (expense), net	(1		)	—			3			—
Income from continuing operations before income taxes	364			159			715			298
Provision for income taxes	25			1			38			6
Income from continuing operations	339			158			677			292
Income from discontinued operations (including a gain on disposal of $14 million for the two fiscal quarters ended May 3, 2015), net of income taxes	5			—			18			—
Net income	$	344		$	158		$	695		$	292

Basic income per share:
Income per share from continuing operations	$	1.31		$	0.63		$	2.63		$	1.17
Income per share from discontinued operations	$	0.02		$	—		$	0.07		$	—
Net income per share	$	1.33		$	0.63		$	2.70		$	1.17

Diluted income per share:
Income per share from continuing operations	$	1.19		$	0.61		$	2.41		$	1.14
Income per share from discontinued operations	$	0.02		$	—		$	0.06		$	—
Net income per share	$	1.21		$	0.61		$	2.47		$	1.14

Weighted-average shares:
Basic	258			251			257			250
Diluted	284			258			281			256

Cash dividends declared and paid per share	$	0.38		$	0.27		$	0.73		$	0.52

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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AVAGO TECHNOLOGIES LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME — UNAUDITED

(in millions)



	Fiscal Quarter Ended				Two Fiscal Quarters Ended
	May 3, 2015		May 4, 2014		May 3, 2015		May 4, 2014
Net income	$	344	$	158	$	695	$	292
Other comprehensive income (loss), net of tax:
Unrealized gains and amendment on retirement-related benefit plans	—		—		—		2
Reclassification to net income	—		—		1		(3		)
Other comprehensive income (loss)	—		—		1		(1		)
Comprehensive income	$	344	$	158	$	696	$	291

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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AVAGO TECHNOLOGIES LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED

(in millions)



	Two Fiscal Quarters Ended
	May 3, 2015			May 4, 2014
Cash flows from operating activities:
Net income	$	695		$	292
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	456			118
Amortization of debt issuance costs and accretion of debt discount	14			—
Share-based compensation	106			54
Tax benefits from share-based compensation	73			12
Excess tax benefits from share-based compensation	(70		)	(11		)
Gain on sale of business	(14		)	—
Deferred taxes	(2		)	(2		)
Other	24			(3		)
Changes in assets and liabilities, net of acquisitions and disposals:
Trade accounts receivable, net	24			99
Inventory	43			(16		)
Accounts payable	(23		)	(16		)
Employee compensation and benefits	(41		)	(12		)
Other current assets and current liabilities	(91		)	(11		)
Other long-term assets and long-term liabilities	(50		)	(24		)
Net cash provided by operating activities	1,144			480
Cash flows from investing activities:
Proceeds from sale of business	650			—
Purchases of property, plant and equipment	(339		)	(125		)
Proceeds from disposal of property, plant and equipment	63			—
Proceeds from sale of investments	—			14
Purchases of investments	(9		)	—
Net cash provided by (used in) investing activities	365			(111		)
Cash flows from financing activities:
Debt repayments	(617		)	—
Issuance of ordinary shares	130			53
Repurchases of ordinary shares	—			(12		)
Excess tax benefits from share-based compensation	70			11
Dividend payments to shareholders	(188		)	(130		)
Proceeds from government grants	—			2
Net cash used in financing activities	(605		)	(76		)
Net increase in cash and cash equivalents	904			293
Cash and cash equivalents at the beginning of period	1,604			985
Cash and cash equivalents at end of period	$	2,508		$	1,278

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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AVAGO TECHNOLOGIES LIMITED

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Overview, Basis of Presentation and Significant Accounting Policies

Overview

Avago Technologies Limited, or the “Company”, was organized under the laws of the Republic of Singapore in August 2005. We are a designer, developer and global supplier of a broad range of semiconductor devices with a focus on analog III-V based products and complex digital and mixed signal complementary metal oxide semiconductor based devices. We have a history of innovation and offer thousands of products that are used in end products, such as smartphones, hard disk drives, computer servers, consumer appliances, data networking and telecommunications equipment, enterprise storage and servers, and factory automation and industrial equipment. We have four reportable segments: wireless communications, enterprise storage, wired infrastructure and industrial & other, which align with our target markets.

We operate on a 52- or 53-week fiscal year ending on the Sunday closest to October 31. Our fiscal year ending November 1, 2015, or fiscal year 2015, is a 52-week fiscal year. The first quarter of our fiscal year 2015 ended on February 1, 2015, the second quarter ended on May 3, 2015 and the third quarter ends on August 2, 2015. Our fiscal year ended November 2, 2014, or fiscal year 2014, was also a 52-week fiscal year.

References herein to "the Company", "we", "our", "us" and "Avago" are to Avago Technologies Limited and its consolidated subsidiaries, unless otherwise specified or the context otherwise requires.

Basis of Presentation

On November 18, 2014, we completed the sale of the LSI Corporation, or LSI, Axxia Networking Business and related assets, or the Axxia Business, for $650 million to Intel Corporation, or Intel. Refer to Note 12. "Discontinued Operations" for more information.

The accompanying unaudited condensed consolidated financial statements include the accounts of Avago Technologies Limited and its wholly owned subsidiaries and have been prepared by us in accordance with accounting principles generally accepted in the United States, or GAAP, for interim financial information. This financial information reflects all adjustments which are, in the opinion of our management, of a normal recurring nature and necessary for a fair statement of the results for the periods presented. The November 2, 2014 condensed consolidated balance sheet data were derived from our audited consolidated financial statements included in our Annual Report on Form 10-K for fiscal year 2014, or 2014 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, or SEC, but do not include all disclosures required by GAAP. Intercompany transactions and balances have been eliminated in consolidation.

The operating results for the fiscal quarter and two fiscal quarters ended May 3, 2015 are not necessarily indicative of the results that may be expected for fiscal year 2015, or for any other future period.

Significant Accounting Policies

Use of estimates. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

Concentrations of credit risk and significant customers. Our cash, cash equivalents and accounts receivable are potentially subject to concentration of credit risk. Cash and cash equivalents may be redeemable upon demand and are maintained with several financial institutions that management believes are of high credit quality and therefore bear minimal credit risk. We seek to mitigate our credit risks by spreading such risks across multiple counterparties and monitoring the risk profile of these counterparties. Our accounts receivable are derived from revenue earned from customers located around the world. We mitigate collection risks from our customers by performing regular credit evaluations of our customers' financial condition, and require collateral, such as letters of credit and bank guarantees, in certain circumstances.

We sell our products primarily through our direct sales force and distributors, and to a small extent, through manufacturers' representatives. One direct customer accounted for 29% and 30% of our net accounts receivable balance at May 3, 2015 and November 2, 2014, respectively. During the fiscal quarter and two fiscal quarters ended May 3, 2015, one direct customer represented 21% and 24% of our net revenue, respectively. During the fiscal quarter ended May 4, 2014, two direct customers represented 14% and 13% of our net revenue, respectively. During the two fiscal quarters ended May 4, 2014, two direct customers represented 20% and 10% of our net revenue, respectively. The majority of the revenues from these customers were included in our wireless communications segment.

Warranty. We accrue for the estimated costs of product warranties at the time revenue is recognized. Product warranty costs are estimated based upon our historical experience and specific identification of product requirements, which may fluctuate based on product mix. Additionally, we accrue for warranty costs associated with occasional or unanticipated product quality issues if a loss is probable and can be reasonably estimated.

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The changes in accrued warranty were not material for the fiscal quarter or two fiscal quarters ended May 3, 2015 or May 4, 2014.

Net income per share. Basic net income per share is computed using the weighted-average number of ordinary shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of ordinary shares and potentially dilutive share equivalents outstanding during the period. Diluted shares outstanding include the dilutive effect of in-the-money options, restricted share units, or RSUs, employee share purchase rights under the Avago Technologies Limited Employee Share Purchase Plan, or ESPP, (together referred to as equity awards) and the 2.0% Convertible Senior Notes due 2021 issued by Avago Technologies Limited, or the Convertible Notes. The dilutive effect of equity awards is calculated based on the average share price for each fiscal period, using the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising share options and to purchase shares under the ESPP, the amount of compensation cost for future service that we have not yet recognized, and the amount of tax benefits that would be recognized when equity awards become deductible for income tax purposes are collectively assumed to be used to repurchase ordinary shares. The dilutive effect of the Convertible Notes is calculated using the treasury stock method. For the purpose of calculating their dilutive effect, we assumed that the Convertible Notes will be entirely settled in cash, which warrants use of the treasury stock method. In making this assumption, we considered our existing cash balance and our ability to borrow and repay our existing term loan facility under a credit agreement that Avago Technologies Finance Pte. Ltd and certain subsidiaries of the Company entered into with a syndicate of financial institutions, or the 2014 Credit Agreement. The treasury stock method assumes that the carrying value of the Convertible Notes represents proceeds, since settlement of the Convertible Notes tendered for conversion may be settled with cash, ordinary shares or a combination of both at the Company's option. The resulting incremental ordinary shares attributable to the assumed conversion of the Convertible Notes are a component of diluted shares.

There were no significant antidilutive equity awards for the fiscal quarter or two fiscal quarters ended May 3, 2015 or the fiscal quarter or two fiscal quarters ended May 4, 2014.

The following is a reconciliation of the numerators and denominators of the basic and diluted net income per share computations for the periods presented (in millions, except per share data):



	Fiscal Quarter Ended				Two Fiscal Quarters Ended
	May 3, 2015		May 4, 2014		May 3, 2015		May 4, 2014
Net income (Numerator):
Income from continuing operations	$	339	$	158	$	677	$	292
Income from discontinued operations	5		—		18		—
Net income	$	344	$	158	$	695	$	292
Shares (Denominator):
Basic weighted-average ordinary shares outstanding	258		251		257		250
Add incremental shares for:
Dilutive effect of share options, RSUs and ESPP rights	13		7		12		6
Dilutive effect of Convertible Notes	13		—		12		—
Shares used in diluted computation	284		258		281		256

Basic income per share:
Income per share from continuing operations	$	1.31	$	0.63	$	2.63	$	1.17
Income per share from discontinued operations	$	0.02	$	—	$	0.07	$	—
Net income per share	$	1.33	$	0.63	$	2.70	$	1.17

Diluted income per share:
Income per share from continuing operations	$	1.19	$	0.61	$	2.41	$	1.14
Income per share from discontinued operations	$	0.02	$	—	$	0.06	$	—
Net income per share	$	1.21	$	0.61	$	2.47	$	1.14

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Supplemental cash flow disclosures. At May 3, 2015 and November 2, 2014, we had $49 million and $45 million, respectively, of unpaid purchases of property, plant, and equipment included in accounts payable and other current liabilities. Amounts reported as unpaid purchases will be recorded as cash outflows from investing activities for purchases of property, plant, and equipment in the unaudited condensed consolidated statements of cash flows in the period in which they are paid.

Recently Adopted Accounting Guidance

In November 2014, the Financial Accounting Standards Board, or FASB, issued authoritative guidance that provides guidance on whether and at what threshold an acquired business or not-for-profit organization can apply pushdown accounting. This guidance provides an option to apply pushdown accounting in the separate financial statements of an acquired entity upon the occurrence of an event in which an acquirer obtains control of the acquired entity. The guidance was effective on November 18, 2014. After the effective date, an acquired entity can make an election to apply the guidance to future change-in-control events or to its most recent change-in-control event. However, if the financial statements for the period in which the most recent change-in-control event occurred already have been issued or made available to be issued, the application of this guidance would be a change in accounting principle. The adoption of this guidance did not impact our consolidated financial statements.

In July 2013, the FASB issued an amendment to the accounting guidance related to the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. The guidance requires an unrecognized tax benefit to be presented as a decrease in a deferred tax asset where a net operating loss, a similar tax loss or a tax credit carryforward exists and certain criteria are met. This guidance was effective for the first quarter of our fiscal year 2015. The adoption of this guidance did not have a significant impact on our consolidated balance sheets.

Recent Accounting Guidance Not Yet Adopted

In May 2015, the FASB issued an amendment to the accounting guidance related to pushdown accounting. The amendment removed the Securities and Exchange Commission staff guidance on pushdown accounting from the Accounting Standards Codification. The removal of this guidance will not impact our consolidated financial statements.

In April 2015, the FASB issued an amendment to the accounting guidance related to the financial statement presentation of debt issuance costs. The new guidance is required to be applied retrospectively to each prior reporting period presented. The guidance requires debt issuance costs to be presented on the balance sheet as a direct reduction to the carrying amount of debt, consistent with debt discounts or premiums. This guidance will be effective for the first quarter of our fiscal year 2017, with early application permitted. The adoption of this guidance will not have a material effect on our consolidated balance sheet presentation.

In April 2015, the FASB issued an amendment to the accounting guidance that provides a practical expedient to companies whose fiscal year end does not coincide with a calendar month-end. The practical expedient permits the entity to measure defined benefit plan assets and obligations using the calendar month-end that is closest to the entity’s fiscal year-end and apply the practical expedient consistently from year to year. This guidance will be effective prospectively for the first quarter of our fiscal year 2017, with early application permitted. We are currently evaluating the impact that this guidance will have on our financial condition and results of operations.

In February 2015, the FASB issued an amendment to the accounting guidance related to the criteria for consolidation of certain legal entities. The guidance will be effective for the first quarter of our fiscal year 2018, with early adoption permitted. The guidance requires either retrospective application to each prior period presented or retrospective application with a cumulative adjustment to retained earnings as of the adoption date. We are currently evaluating the impact that this guidance will have on our financial condition and results of operations.

In January 2015, the FASB issued an amendment to the accounting guidance related to the financial statement presentation of extraordinary and unusual items. The guidance eliminates the requirement to classify and present extraordinary items separately in the results of operations. This guidance will be effective prospectively for the first quarter of our fiscal year 2016, with early adoption permitted. The adoption of this guidance is not expected to have a significant impact on our consolidated financial statements.

In June 2014, the FASB issued authoritative guidance that resolves the diverse accounting treatment for share-based payment awards that require a specific performance target to be achieved in order for employees to become eligible to vest in the awards. The guidance applies to entities that grant their employees share-based awards that include a performance target that could be achieved after the requisite service period. The guidance explicitly requires that a performance target of this nature be treated as a performance condition and should not be reflected in estimating the grant-date fair value of the award. This guidance will be effective for the first quarter of our fiscal year 2016. We are currently evaluating the impact that this guidance will have on our financial condition and results of operations.

In May 2014, the FASB issued authoritative guidance that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The

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guidance is effective for the first quarter of our fiscal year 2018. Early adoption is not permitted. The new guidance is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. We have not yet selected a transition method and are currently evaluating the impact of this guidance on our consolidated financial statements.

In April 2014, the FASB issued authoritative guidance that raises the threshold for a disposal transaction to qualify as a discontinued operation and requires additional disclosures about discontinued operations and disposals of individually significant components that do not qualify as discontinued operations. This guidance will be effective for the first quarter of our fiscal year 2016, with early adoption permitted.

2. Inventory

Inventory consists of the following (in millions):



	May 3, 2015		November 2, 2014
Finished goods	$	162	$	185
Work-in-process	243		250
Raw materials	85		84
Total inventory	$	490	$	519

3. Intangible Assets

Intangible assets consist of the following (in millions):



	Gross Carrying Amount		Accumulated Amortization			Net Book Value
As of May 3, 2015:
Purchased technology	$	2,651	$	(908	)	$	1,743
Customer and distributor relationships	1,570		(358		)	1,212
Other ⁽¹⁾	282		(111		)	171
Intangible assets subject to amortization	4,503		(1,377		)	3,126
In-process research and development	154		—			154
Total	$	4,657	$	(1,377	)	$	3,280

As of November 2, 2014:
Purchased technology	$	2,651	$	(682	)	$	1,969
Customer and distributor relationships	1,570		(264		)	1,306
Other ⁽¹⁾	275		(87		)	188
Intangible assets subject to amortization	4,496		(1,033		)	3,463
In-process research and development	154		—			154
Total	$	4,650	$	(1,033	)	$	3,617

_________________________________

⁽¹⁾ Primarily represents trademarks and customer order backlog.

Amortization expense of intangible assets for the periods presented is as follows (in millions):



	Fiscal Quarter Ended				Two Fiscal Quarters Ended
	May 3, 2015		May 4, 2014		May 3, 2015		May 4, 2014
Cost of products sold	$	113	$	18	$	226	$	36
Operating expenses	59		8		118		15
Total amortization of intangible assets	$	172	$	26	$	344	$	51

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Based on the amount of intangible assets subject to amortization at May 3, 2015, the expected amortization expense for each of the next five fiscal years and thereafter is as follows (in millions):



Fiscal Year
2015 (remainder)	$	344
2016	626
2017	559
2018	437
2019	373
2020	313
Thereafter	474
	$	3,126

The weighted-average remaining amortization period for each intangible asset category at May 3, 2015 is as follows (in years):



Amortizable intangible assets:
Purchased technology	8
Customer and distributor relationships	7
Other	7

4. Retirement Plans and Post-Retirement Benefits

Defined Benefit Plans

As a result of our acquisition of LSI on May 6, 2014, we assumed LSI's defined benefit pension plans, covering certain U.S. and non-U.S. employees, under which we are obligated to make future contributions to fund benefits to participants. The U.S. defined benefit pension plans include a management plan and a represented plan. Benefits under the management plan are provided under either an adjusted career-average-pay program or a cash-balance program. Benefits under the represented plan are based on a dollar-per-month formula. Benefit accruals under the management plan were frozen in 2009. Participants in the adjusted career-average-pay program no longer earn service accruals. Participants in the cash-balance program no longer earn service accruals, but continue to earn 4% interest per year on their cash-balance accounts. There are no active participants under the represented plan. We also assumed a non-qualified supplemental pension plan in the U.S. in the LSI acquisition, which principally provides benefits based on compensation in excess of amounts that can be considered under the management plan. We also assumed pension plans covering certain non-U.S. employees.

Net Periodic Benefit Cost (Income)

The following table summarizes the components of the net periodic benefit cost (income) for the periods presented (in millions):



	Pension Benefits
	Fiscal Quarter Ended					Two Fiscal Quarters Ended
	May 3, 2015			May 4, 2014		May 3, 2015		May 4, 2014
Service cost	$	1		$	—	1		$	1
Interest cost	15			1		31		1
Expected return on plan assets	(19		)	—		(39	)	—
Net actuarial loss and prior service cost	—			—		1		—
Total net periodic benefit cost (income)	$	(3	)	$	1	(6	)	$	2

During the fiscal quarter and two fiscal quarters ended May 3, 2015, we contributed $10 million and $16 million, respectively, to our defined benefit pension plans. We expect to contribute an additional $46 million to our defined benefit pension plans during the remainder of fiscal year 2015.

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5. Borrowings

Term Loans and Revolving Credit Facility

In connection with our acquisition of LSI on May 6, 2014, we entered into the 2014 Credit Agreement. The 2014 Credit Agreement provides for our term loan facility of $4.6 billion, or Term Loans, and our senior secured, revolving credit facility in an aggregate principal amount of up to $500 million, or the 2014 Revolving Credit Facility. Additionally, it provides for swingline loans of up to $75 million and the issuance of letters of credit of up to $100 million, both of which reduce the amount that may be borrowed under the 2014 Revolving Credit Facility. The Term Loans have a term of seven years and as of May 3, 2015, had an effective interest rate of 4.15%. In March 2015, we made a $593 million principal prepayment on the Term Loans and, as a result, we wrote off $13 million of debt issuance costs, which was reported as a component of other income (expense), net in the unaudited condensed consolidated statements of operations. As of May 3, 2015 and November 2, 2014, the outstanding balance of Term Loans was $4.0 billion and $4.6 billion, respectively. We were in compliance with the covenants described in the 2014 Credit Agreement as of May 3, 2015.

The 2014 Revolving Credit Facility has a term of five years. As of May 3, 2015 and November 2, 2014, there were no borrowings outstanding under the 2014 Revolving Credit Facility and letters of credit outstanding were not material.

Unamortized debt issuance costs associated with the Term Loans and 2014 Revolving Credit Facility as of May 3, 2015 and November 2, 2014, were $94 million and $115 million, respectively, and are included in other current assets and other long-term assets on the unaudited condensed consolidated balance sheets. Amortization of debt issuance costs related to the Term Loans and 2014 Revolving Credit Facility was $4 million and $8 million for the fiscal quarter and two fiscal quarters ended May 3, 2015, respectively, and was reported as a component of interest expense in the unaudited condensed consolidated statements of operations.

Convertible Senior Notes

In connection with our acquisition of LSI on May 6, 2014, the Company completed the private placement of $1 billion in aggregate principal amount of its Convertible Notes to two entities affiliated with Silver Lake Partners, or the Purchasers. The Convertible Notes are the Company’s unsecured senior obligations. The Convertible 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 and will mature on August 15, 2021, unless repurchased, redeemed or converted in accordance with their terms prior to such date. Subject to any limitations set forth in the indenture dated as of May 6, 2014, between the Company and U.S. Bank National Association relating to the Convertible Notes, or the Indenture, the Convertible Notes may be converted as described below. The Convertible Notes are convertible at any time until the close of business on the scheduled trading day immediately preceding the maturity date. Upon conversion, the Convertible Notes may be settled in our ordinary shares, cash or a combination of cash and ordinary shares, at the Company’s option. The Convertible Notes were convertible at an initial conversion rate of 20.8160 ordinary shares per $1,000 principal amount of the Convertible Notes, which was equivalent to an initial conversion price of approximately $48.04 per ordinary share. The conversion rate is subject to adjustment under the terms of the Convertible Notes, including as a result of cash dividends on our ordinary shares in excess of $0.27 per share. During the second half of fiscal year 2014 and the first two quarters of fiscal year 2015, quarterly dividends paid on our ordinary shares exceeded the dividend threshold for conversion price adjustment. As a result, as of May 3, 2015, the conversion rate had been adjusted to 20.8685 ordinary shares per $1,000 principal amount of the Convertible Notes, which is equivalent to a conversion price of approximately $47.92 per ordinary share. As of May 3, 2015, the “if-converted” value of the Convertible Notes exceeded the principal amount by $1.6 billion.

In accordance with the authoritative accounting guidance, we classified $85 million, representing a portion of the proceeds from the Convertible Notes, as ordinary shares within shareholders' equity. The $915 million carrying value of the long-term debt as of May 6, 2014 was calculated as the present value of its contractual payment obligations using a discount rate of 3.32%. The difference between the principal amount of the Convertible Notes and the carrying value of the long-term debt represents a debt discount on the issuance date, which is accreted as interest expense using the effective interest method through the contractual maturity date.

Subsequent to the fiscal quarter ended May 3, 2015, the Purchasers of all of the outstanding Convertible Notes submitted to the Company conversion notices exercising their right to convert all of the Convertible Notes that they hold, or the Conversion. The Company has informed the Purchasers that it intends to satisfy its conversion obligation by paying cash equal to the $1 billion principal amount of the Convertible Notes and delivering ordinary shares of the Company with respect to the conversion value in excess of that amount, or the Conversion Obligation, in each case pursuant to the terms of the Indenture. See Note 13. "Subsequent Events" for more information on the conversion of the Convertible Notes.

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The carrying value of the components of the Convertible Notes is as follows (in millions):



	May 3, 2015		November 2, 2014
Convertible notes liability component:
Principal balance	$	1,000	$	1,000
Less: debt discount	74		80
Net carrying amount	$	926	$	920

Equity component carrying amount	$	85	$	85

The following table sets forth interest expense recognized related to Convertible Notes during the fiscal quarter and two fiscal quarters ended May 3, 2015 (in millions):



	Fiscal Quarter Ended		Two Fiscal Quarters Ended
	May 3, 2015		May 3, 2015
Contractual coupon interest	$	5	$	10
Accretion of debt discount	3		6
	$	8	$	16

At May 3, 2015, the outstanding principal amount of the Convertible Notes was $1 billion. The estimated fair value of the Convertible Notes as of May 3, 2015 and November 2, 2014, was $924 million and $871 million, respectively, which was determined based on inputs that are observable in the market under Level 2 of the fair value hierarchy. At May 3, 2015, we were in compliance with the covenants relating to the Convertible Notes.

At May 3, 2015, future scheduled principal payments for our outstanding Term Loans and the Convertible Notes, including the current portion, are summarized as follows (in millions):



Fiscal Year
2015 (remainder)	$	23
2016	46
2017	46
2018	46
2019	46
2020	46
Thereafter	4,719
Total	$	4,972

6. Shareholders’ Equity

Share Repurchase Program

No shares were repurchased during the two fiscal quarters ended May 3, 2015 under the 2014 share repurchase mandate. The 2014 share repurchase mandate expired on April 8, 2015. At our 2015 annual general meeting of shareholders on April 8, 2015, shareholders approved our 2015 share purchase mandate pursuant to which we are authorized, upon the approval of the Board, to repurchase up to approximately 26 million of our ordinary shares in open market transactions or pursuant to equal access schemes, up to the date on which our 2016 annual general meeting of shareholders is held or required by law to be held, or the 2015 share purchase mandate. As of the date of this Quarterly Report on Form 10-Q, the Board had not approved any repurchases of our ordinary shares pursuant to the 2015 share purchase mandate.

Dividends

We paid cash dividends of $0.38 and $0.27 per ordinary share, or $99 million and $68 million, during the fiscal quarters ended May 3, 2015 and May 4, 2014, respectively. We paid aggregate cash dividends of $188 million and $130 million during the two fiscal quarters ended May 3, 2015 and May 4, 2014, respectively.

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Share-Based Compensation Expense

The following table summarizes share-based compensation expense reported in continuing operations related to share-based awards granted to employees, directors, and non-employees for the periods presented (in millions):



	Fiscal Quarter Ended				Two Fiscal Quarters Ended
	May 3, 2015		May 4, 2014		May 3, 2015		May 4, 2014
Cost of products sold	$	6	$	3	$	12	$	6
Research and development	27		10		46		18
Selling, general and administrative	24		17		48		30
Total share-based compensation expense	$	57	$	30	$	106	$	54

The fair values of our time-based options and ESPP purchase rights were estimated using the Black-Scholes option pricing model. Certain equity awards granted in the fiscal quarter and two fiscal quarters ended May 3, 2015 and May 4, 2014, respectively, included both service and market conditions. The fair value of market-based awards was estimated using Monte Carlo simulation techniques. The fair value of RSUs was estimated using the closing market price of our ordinary shares on the date of grant, reduced by the present value of dividends expected to be paid on our ordinary shares prior to vesting.

The weighted-average assumptions utilized for our time-based options, ESPP purchase rights and market-based awards granted for the periods presented are shown in the tables below.



	Time-Based Options
	Fiscal Quarter Ended				Two Fiscal Quarters Ended
	May 3, 2015		May 4, 2014		May 3, 2015		May 4, 2014
Risk-free interest rate	1.3	%	1.3	%	1.3	%	1.3	%
Dividend yield	1.3	%	1.7	%	1.4	%	1.8	%
Volatility	35.0	%	35.0	%	35.0	%	35.0	%
Expected term (in years)	4.0		4.3		4.0		4.2



	ESPP Purchase Rights
	Fiscal Quarter Ended				Two Fiscal Quarters Ended
	May 3, 2015		May 4, 2014		May 3, 2015		May 4, 2014
Risk-free interest rate	0.2	%	0.1	%	0.1	%	0.1	%
Dividend yield	1.2	%	1.7	%	1.3	%	2.0	%
Volatility	37.0	%	31.0	%	32.0	%	34.0	%
Expected term (in years)	0.5		0.5		0.5		0.5



	Market-Based Awards
	Fiscal Quarter Ended				Two Fiscal Quarters Ended
	May 3, 2015		May 4, 2014		May 3, 2015		May 4, 2014
Risk-free interest rate	1.3	%	2.3	%	1.4	%	2.3	%
Dividend yield	1.2	%	1.7	%	1.2	%	1.8	%
Volatility	35.0	%	45.0	%	36.0	%	45.0	%
Expected term (in years)	4.0		7.0		4.5		7.0

The dividend yields for the fiscal quarters and two fiscal quarters ended May 3, 2015 and May 4, 2014 were based on the dividend yield as of the respective award grant dates. For the fiscal quarters and two fiscal quarters ended May 3, 2015 and May 4, 2014, expected volatility for time-based and market-based options were based on our own historical share price volatility or combining historical volatility of guideline publicly-traded companies and our own historical share price volatility over the period commensurate with the expected life of the awards and the implied volatility from our own traded ordinary shares with a term of 180 days measured at a specific date.

The risk-free interest rate was derived from the average U.S. Treasury Strips rate during the period, which approximated the rate in effect at the time of grant.

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For the fiscal quarters and two fiscal quarters ended May 3, 2015 and May 4, 2014, the expected term for time-based options was based on a weighted-average combining the average life of options that have already been exercised or cancelled with the expected life of all unexercised options. The expected life for unexercised options was calculated assuming that the options will be exercised at the midpoint of the vesting date (if unvested) or the valuation date (if vested) and the full contractual term.

The expected term of market-based options valued using Monte Carlo simulation techniques was based upon the vesting dates forecasted by the simulation and then assuming that options which vest, and for which the market condition has been satisfied, are exercised at the midpoint between the forecasted vesting date and their expiration. The expected term of market-based RSUs valued using Monte Carlo simulation techniques was commensurate with the awards' contractual terms.

The total unrecognized compensation cost of time and market-based options granted but not yet vested as of May 3, 2015 was $189 million, which is expected to be recognized over the remaining weighted-average service period of 2.7 years.

Total unrecognized compensation cost related to the ESPP purchase rights as of May 3, 2015 was $3 million and is expected to be recognized over the remaining portion of the current offering period under the ESPP, which ends on September 14, 2015. Total unrecognized compensation cost related to unvested RSUs and unvested market-based RSUs as of May 3, 2015 was $406 million, which is expected to be recognized over the remaining weighted-average service period of 3.5 years.

Equity Incentive Award Plans

A summary of option award activity related to our equity incentive plans is as follows (in millions, except years and per share amounts):



	Option Awards Outstanding
	Number Outstanding		Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value
Balance as of November 2, 2014	29		$	44.97
Granted	1		$	96.52
Exercised	(4	)	$	31.20
Cancelled	(1	)	$	65.27
Balance as of May 3, 2015	25		$	47.33	5.08	$	1,843
Vested as of May 3, 2015	9		$	32.88	4.31	$	821
Fully vested and expected to vest as of May 3, 2015	23		$	46.86	5.06	$	1,780

The total intrinsic values of options exercised during the fiscal quarters ended May 3, 2015 and May 4, 2014 were $202 million and $46 million, respectively. Total intrinsic values of options exercised during the two fiscal quarters ended May 3, 2015 and May 4, 2014 were $334 million and $69 million, respectively.

A summary of RSU activity related to our equity incentive plans is as follows (in millions, except years and per share amounts):



	RSU Awards Outstanding
	Number Outstanding		Weighted- Average Grant Date Fair Market Value		Weighted- Average Remaining Contractual Life (in years)
Balance as of November 2, 2014	4		$	48.82
Granted	3		$	115.77
Vested	(1	)	$	53.12
Forfeited	(1	)	$	65.64
Balance as of May 3, 2015	5		$	89.51	2.04

Employee Share Purchase Plan

A total of 0.1 million shares were issued under the ESPP during each of the fiscal quarters and two fiscal quarters ended May 3, 2015 and May 4, 2014.

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7. Income Taxes

For the fiscal quarter and two fiscal quarters ended May 3, 2015, we recorded an income tax provision of $25 million and $38 million, respectively, compared to an income tax provision of $1 million and $6 million for the fiscal quarter and two fiscal quarters ended May 4, 2014, respectively. The increase in income tax provision was largely due to the increase in profit before tax.

The income tax provision for the fiscal quarter and two fiscal quarters ended May 3, 2015 included tax benefits of $5 million and $9 million, respectively, from the net recognition of previously unrecognized tax benefits, compared to $10 million and $14 million for the fiscal quarter and two fiscal quarters ended May 4, 2014, respectively, as a result of the expiration of the statute of limitations for certain audit periods. The income tax provision for the two fiscal quarters ended May 3, 2015 also included a discrete benefit of $15 million from the retroactive reinstatement of the U.S. Federal Research and Development tax credit from January 1, 2014 to December 31, 2014, with the enactment of the Tax Increase Prevention Act of 2014.

Unrecognized Tax Benefits

We are subject to Singapore income tax examinations for the years ended October 31, 2010 and later, and in major jurisdictions outside Singapore for the years ended November 2, 2008 and later. We believe it is possible that we may recognize up to $11 million of our existing unrecognized tax benefits within the next 12 months as a result of lapses of the statute of limitations for certain audit periods.

8. Segment Information

Reportable Segments

During the fourth quarter of fiscal year 2014, we changed our organizational structure resulting in four reportable segments: wireless communications, enterprise storage, wired infrastructure and industrial & other. These segments align with our principal target markets. The segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the Chief Executive Officer, who has been identified as the Chief Operating Decision Maker, or CODM, as defined by authoritative guidance on segment reporting, in determining how to allocate resources and evaluate performance. The segments are determined based on several factors, including client base, homogeneity of products, technology, delivery channels and similar economic characteristics. The amounts for the fiscal quarter and two fiscal quarters ended May 4, 2014 have been revised to conform to the current year’s presentation.

Wireless Communications. We support the wireless communications industry with a broad variety of radio frequency, or RF, semiconductor devices that amplify, as well as selectively filter, RF signals. In addition to RF devices, we provide a variety of optoelectronic sensors for mobile handset applications.

Enterprise Storage. This segment consists of LSI's storage products and PLX Technology, Inc.'s, or PLX, Peripheral Component Interconnect Express, or PCIe, switches and bridges. LSI's storage products enable secure movement of digital data to and from host machines, such as servers, personal computers and storage systems, to the underlying storage devices, such as hard disk drives, or HDDs, and solid state drives, or SSDs. We provide read channel-based system-on-a-chip, or SoCs, and preamplifiers to HDD original equipment manufacturers, or OEMs. We also provide custom flash controllers to SSD OEMs, and serial attached SCSI and redundant array of independent disks controller and adapter solutions to server and storage system OEMs. PLX's PCIe devices are interconnect semiconductors supporting the PCIe communication standards and are the primary interconnection mechanism inside computing systems.

Wired Infrastructure. In the storage and Ethernet networking markets, we supply transceivers that receive and transmit information along optical fibers. We also supply optical laser and receiver components to the access, metro and long-haul telecommunication markets. For enterprise networking and server input/output applications, we supply high speed serializer/deserializer products integrated into application specific integrated circuits.

Industrial & Other. We provide a broad variety of products for the general industrial and automotive markets. We offer optical isolators, which provide electrical insulation and signal isolation. For industrial motors and robotic motion control, we supply optical encoders, as well as integrated circuits, for the controller and decoder functions. For electronic signs and signals, we supply light-emitting diode assemblies that offer high brightness and stable light output over thousands of hours, enabling us to support traffic signals, large commercial signs and other displays. For industrial networking, we provide faster optical transceivers using plastic optical fiber that enable quick and interoperable networking and factory automation.

Our CODM assesses the performance of each segment and allocates resources to those segments based on net revenue and operating income and does not evaluate operating segments using discrete asset information. Operating income by segment includes items that are directly attributable to each segment. Operating income by segment also includes shared expenses, such as global operations, including manufacturing support, logistics and quality control, which are allocated primarily based on headcount, expenses associated with our globally integrated support organizations, such as sales and corporate marketing functions, as well as finance, information technology, human resources, legal and related corporate infrastructure costs, along

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with certain benefit related expenses, which are allocated primarily based on a percentage of revenue, and facilities allocated based on square footage.

Unallocated Expenses

Unallocated expenses include amortization of intangible assets, share-based compensation expense, restructuring charges and acquisition-related costs, including charges related to inventory step-up to fair value, which are not used in evaluating the results of, or in allocating resources to, our segments. Acquisition-related costs include transaction costs and any costs directly related to the acquisition and integration of acquired businesses.

Depreciation expense directly attributable to each reportable segment is included in operating income for each segment. However, the CODM does not evaluate depreciation expense by operating segment and, therefore, it is not separately presented. There was no inter-segment revenue for the fiscal quarter or two fiscal quarters ended May 3, 2015 or May 4, 2014. The accounting policies of the segments are the same as those described in the summary of significant accounting policies.

The following tables present our net revenue and operating income by reportable segment for the periods presented (in millions):



	Fiscal Quarter Ended						Two Fiscal Quarters Ended
	May 3, 2015			May 4, 2014			May 3, 2015			May 4, 2014
Net revenue:
Wireless communications	$	576		$	348		$	1,240		$	697
Enterprise storage	467			—			953			—
Wired infrastructure	382			219			729			447
Industrial & other	189			134			327			266

Operating income:
Wireless communications	$	264		$	125		$	586		$	231
Enterprise storage	177			—			363			—
Wired infrastructure	120			45			215			102
Industrial & other	109			63			165			124
Unallocated expenses	(252		)	(73		)	(510		)	(158		)

9. Related Party Transactions

2.0% Convertible Senior Notes due 2021

On December 15, 2013, in connection with our agreement to acquire LSI, the Company entered into a Note Purchase Agreement with Silver Lake Partners IV, L.P, or SLP IV, and Deutsche Bank, A.G., Singapore Branch, as Lead Manager, or the Note Purchase Agreement, in connection with the private placement of the Convertible Notes. SLP IV is an investment fund affiliated with Silver Lake Partners, of which Kenneth Hao, one of our directors, is a Managing Partner and Managing Director. SLP IV's rights and obligations under the Note Purchase Agreement were thereafter assigned to and assumed by the Purchasers. The Company completed the private placement of the Convertible Notes on May 6, 2014 in connection with the acquisition of LSI. Subsequent to the fiscal quarter ended May 3, 2015, the Purchasers submitted to the Company conversion notices exercising their right to convert all of the Convertible Notes that they hold. See Note 13. "Subsequent Events" for more information on the conversion of the Convertible Notes.

In connection with the issuance of the Convertible Notes, the Company and the Purchasers also entered into a Registration Rights Agreement pursuant to which SLP IV has certain registration rights with respect to the Convertible Notes and our ordinary shares issuable upon conversion of the Convertible Notes.

Silicon Manufacturing Partners Pte. Ltd.

As a result of the acquisition of LSI, we acquired a 51% equity interest in Silicon Manufacturing Partners Pte. Ltd., or SMP, a joint venture with GLOBALFOUNDRIES. We have a take-or-pay agreement with SMP under which we have agreed to purchase 51% of the managed wafer capacity from SMP’s IC manufacturing facility and GLOBALFOUNDRIES has agreed to purchase the remaining managed wafer capacity. SMP determines its managed wafer capacity each year based on forecasts provided by us and GLOBALFOUNDRIES. If we fail to purchase our required commitments, we will be required to pay SMP for the fixed costs associated with the unpurchased wafers. GLOBALFOUNDRIES is similarly obligated with respect to the wafers allotted to it. The agreement may be terminated by either party upon two years written notice. The agreement may also be terminated for material breach, bankruptcy or insolvency.

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Other

During the fiscal quarter and two fiscal quarters ended May 3, 2015 and May 4, 2014, in the ordinary course of business, the Company purchased from, or sold (directly or indirectly) to, several entities for which one of the Company's directors also serves or served as a director, or is otherwise affiliated with, including Alibaba Group Holding Limited, Avaya Inc., Blackline Systems, Inc., Dell Inc., KLA-Tencor Corporation, Kulicke & Soffa Industries, Inc., Smart Modular Technologies, Smart Storage Systems and QLogic Corporation.

Aggregate transactions for the periods presented and balances with our related parties are as follows (in millions):



	Fiscal Quarter Ended					Two Fiscal Quarters Ended
	May 3, 2015		May 4, 2014			May 3, 2015		May 4, 2014
Total net revenue	$	48	$	—		$	91	$	—
Total costs and expenses including inventory purchases (1)	$	27	$	—	*	$	47	$	—	*



	May 3, 2015		November 2, 2014
Total receivables	$	7	$	14
Total payables (1)	$	8	$	8
Carrying value of the Convertible Notes and accrued interest	$	926	$	930

_________________________________

* Represents amounts less than $0.5 million.

(1) We purchased $15 million and $30 million of inventory from SMP for the fiscal quarter and two fiscal quarters ended May 3, 2015, respectively. As of May 3, 2015 and November 2, 2014, the amount payable to SMP was $7 million and $8 million, respectively.

10. Commitments and Contingencies

Commitments

The following table summarizes contractual obligations and commitments as of May 3, 2015, that have materially changed from the end of fiscal year 2014 (in millions):



	Total		2015 (remainder)		2016		2017		2018		2019		2020		Thereafter
Debt principal, interest and fees	$	6,002	$	109	$	208	$	216	$	214	$	211	$	209	$	4,835
Purchase commitments	$	389	$	385	$	4	$	—	$	—	$	—	$	—	$	—
Operating lease obligations	$	145	$	14	$	21	$	16	$	14	$	11	$	8	$	61

Debt Principal, Interest and Fees. Represents principal, interest and commitment fees payable on borrowings and credit facilities under the 2014 Credit Agreement, and principal and interest payable on the Convertible Notes. Subsequent to the fiscal quarter ended May 3, 2015, the Purchasers submitted to the Company conversion notices exercising their right to convert all of the Convertible Notes that they hold. See Note 13. "Subsequent Events" for more information on the conversion of the Convertible Notes.

Purchase Commitments. Represents unconditional purchase obligations that include agreements to purchase goods or services, primarily inventory, that are enforceable and legally binding on us and that specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable price provisions, and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty.

We also make capital expenditures with a variety of vendors in connection with the expansion of our Fort Collins, Colorado, internal fabrication facility. These purchases are typically conducted on a purchase order basis and the amount shown in the table includes $115 million of cancelable and non-cancelable outstanding purchase obligations under such purchase orders as of May 3, 2015.

Under our take-or-pay agreement with SMP, we have agreed to purchase 51% of the managed wafer capacity from SMP’s IC manufacturing facility. If we fail to purchase our required commitments, we will be required to pay SMP for the fixed costs associated with the unpurchased wafers.

Operating Lease Obligations. Represents real property and equipment leased from third parties under non-cancelable operating leases.

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There were no other substantial changes to our contractual commitments during the first two quarters of fiscal year 2015 from those disclosed in our 2014 Annual Report on Form 10-K.

Contingencies

From time to time, we are involved in litigation that we believe is of the type common to companies engaged in our line of business, including commercial disputes, employment issues and disputes involving claims by third parties that our activities infringe their patent, copyright, trademark or other intellectual property rights. Legal proceedings are often complex, may require the expenditure of significant funds and other resources, and the outcome of litigation is inherently uncertain, with material adverse outcomes possible. Intellectual property claims generally involve the demand by a third-party that we cease the manufacture, use or sale of the allegedly infringing products, processes or technologies and/or pay substantial damages or royalties for past, present and future use of the allegedly infringing intellectual property. Claims that our products or processes infringe or misappropriate any third-party intellectual property rights (including claims arising through our contractual indemnification of our customers) often involve highly complex, technical issues, the outcome of which is inherently uncertain. Moreover, from time to time we pursue litigation to assert our intellectual property rights. Regardless of the merit or resolution of any such litigation, complex intellectual property litigation is generally costly and diverts the efforts and attention of our management and technical personnel.

Lawsuits Relating to the Acquisition of Broadcom

Following the announcement of our pending acquisition of Broadcom Corporation, or Broadcom, on May 28, 2015, four putative class action lawsuits were filed in the Superior Court of the State of California, County of Orange as of June 4, 2015 under the following captions: Xu v. Broadcom Corp., et al., Case No. 30-2015-00790689-CU-SL-CXC, filed June 1, 2015; Freed v. Broadcom Corp., et al., Case No. 30-2015-00790699-CU-SL-CXC, filed June 1, 2015; N.J. Building Laborers Statewide Pension Fund v. Samueli, et al., Case No. 00791484-CU-SL-CXC, filed June 4, 2015; and Yiu v. Broadcom Corp., et al., Case No. 00791490-CU-SL-CXC, filed June 4, 2015. A fifth putative class action was filed in the Superior Court of the State of California, County of Santa Clara, captioned Jew v. Broadcom Corp., et al., Case No. 115-CV-281353, filed June 2, 2015. The complaints name as defendants, among other parties, Avago, Broadcom, and members of Broadcom’s board of directors, and allege, among other claims, that members of Broadcom’s board breached their fiduciary duties by pursuing a flawed sale process and failing to obtain adequate consideration. The complaints further allege that Avago, among other parties, aided and abetted these purported breaches of fiduciary duty. The complaints seek, among other things, an order enjoining or rescinding the proposed acquisition and an award of attorney’s and other fees and costs. We believe these claims are entirely without merit and intend to vigorously defend these actions.

Lawsuits Relating to the Acquisition of Emulex

On March 3, 2015, two putative shareholder class action complaints were filed in the Court of Chancery of the State of Delaware against Emulex Corporation, or Emulex, its directors, Avago Technologies Wireless (U.S.A.) Manufacturing Inc., or AT Wireless, and Emerald Merger Sub, Inc., or Merger Sub, captioned as follows: James Tullman v. Emulex Corporation, et al., Case No. 10743-VCL (Del. Ch.); Moshe Silver ACF/Yehudit Silver U/NY/UTMA v. Emulex Corporation, et al., Case No. 10744-VCL (Del. Ch.). On March 11, 2015, a third complaint was filed in the Delaware Court of Chancery, captioned Hoai Vu v. Emulex Corporation, et al., Case No. 10776-VCL (Del. Ch.). The complaints allege, among other things, that Emulex’s directors breached their fiduciary duties by approving the Agreement and Plan of Merger, dated February 25, 205, by and among AT Wireless, Merger Sub and Emulex, or the Merger Agreement, and that AT Wireless and Merger Sub aided and abetted these alleged breaches of fiduciary duty. The complaints seek, among other things, either to enjoin the proposed transaction or to rescind it should it be consummated, as well as damages, including attorneys’ and experts’ fees. The Delaware Court of Chancery has entered an order consolidating the three Delaware actions under the caption In re Emulex Corporation Stockholder Litigation, Consolidated C.A. No. 10743-VCL. On June 5, 2015, the Court of Chancery dismissed the consolidated action without prejudice.

On April 8, 2015, a class action complaint was filed in the United States District Court for the Central District of California, entitled Gary Varjabedian, et al. v. Emulex Corporation, et al., No. 8:15-cv-554-CJC-JCG. The complaint names as defendants Emulex, its directors, AT Wireless and Merger Sub, and purports to assert claims under Sections 14(d), 14(e) and 20(a) of the Exchange Act. The complaint alleges that the Board of Directors of Emulex failed to provide material information and/or omitted material information from the Solicitation/Recommendation Statement on Schedule 14D-9 filed with the SEC on April 7, 2015 by Emulex, together with the exhibits and annexes thereto. The complaint seeks to enjoin the tender offer to purchase all of the outstanding shares of Emulex common stock, as well as certain other equitable relief and attorneys’ fees and costs.

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Lawsuits Relating to the Acquisition of PLX Technology Inc.

In June and July 2014, four lawsuits were filed in the Superior Court for the State of California, County of Santa Clara challenging our acquisition of PLX. On July 22, 2014, the court consolidated these California actions under the caption In re PLX Technology, Inc. S’holder Litig., Lead Case No. 1-14-CV-267079 (Cal. Super. Ct., Santa Clara) and appointed lead counsel. That same day, the court also stayed the consolidated action, pending resolution of related actions filed in the Delaware Court of Chancery, described below.

Also in June and July 2014, five similar lawsuits were filed in the Delaware Court of Chancery. On July 21, 2014, the court consolidated these Delaware actions under the caption In re PLX Technology, Inc. Stockholders Litigation, Consol. C.A. No. 9880-VCL (Del. Ch.), appointed lead plaintiffs and lead counsel, and designated an operative complaint for the consolidated action. On July 31, 2014, counsel for lead plaintiffs in Delaware informed the court that they would not seek a preliminary injunction, but intend to seek damages and pursue monetary remedies through post-closing litigation. Our acquisition of PLX closed on August 12, 2014.

On October 31, 2014, lead plaintiffs filed a consolidated amended complaint. This complaint alleges, among other things, that PLX’s directors breached their fiduciary duties to PLX’s stockholders by seeking to sell PLX for an inadequate price, pursuant to an unfair process, and by agreeing to preclusive deal protections in the merger agreement. Plaintiffs also allege that Potomac Capital Partners II, L.P., Deutsche Bank Securities, Avago Technologies Wireless (U.S.A.) Manufacturing, Inc. and the acquisition subsidiary aided and abetted the alleged fiduciary breaches. Plaintiffs also allege that PLX’s 14D-9 recommendation statement contained false and misleading statements and/or omitted material information necessary to inform the shareholder vote. The complaint seeks, among other things, monetary damages and attorneys’ fees and costs. On November 26, 2014, defendants filed motions to dismiss the complaint for failure to state a claim as a matter of law. The motions were heard on April 15, 2015 and the Court has requested further briefing by June 15, 2015.

The Delaware class litigation is on-going.

Lawsuits Relating to the Acquisition of LSI

Fifteen purported class action complaints were filed by alleged former stockholders of LSI against us. Eight of those lawsuits were filed in the Delaware Court of Chancery, and the other seven lawsuits were filed in the Superior Court of the State of California, County of Santa Clara on behalf of the same putative class as the Delaware actions, or the California Actions. On January 17, 2014, the Delaware Court of Chancery entered an order consolidating the Delaware actions into a single action, or the Delaware Action. These actions generally alleged that we aided and abetted breaches of fiduciary duty by the members of LSI's board of directors in connection with the merger because the merger was not in the best interest of LSI, the merger consideration was unfair and certain other terms of the merger agreement were unfair. Among other remedies, the lawsuits sought to rescind the merger or obtain unspecified money damages, costs and attorneys' fees.

On March 7, 2014, the parties to the Delaware Action reached an agreement in principle to settle the Delaware Action on a class wide basis, and negotiated a stipulation of settlement that was presented to the Delaware Court of Chancery on March 10, 2014. On March 12, 2014, the parties to the California Actions entered into a stipulation staying the California Actions pending resolution of the Delaware Action. On May 16, 2014, the plaintiffs in the Delaware Action filed a motion for final approval of the proposed settlement and award of attorneys’ fees and expenses with the Delaware Court of Chancery. On June 10, 2014, the Delaware court approved the settlement, including the payment of $2 million to counsel for the stockholders, entered final judgment and dismissed the case, or the Order and Final Judgment. On July 10, 2014, a class member of the Delaware Action filed a notice of appeal from the Order and Final Judgment. On February 5, 2015, the appeal was dismissed with prejudice.

Other Matters

In addition to the matters discussed above, we are currently engaged in a number of legal actions in the ordinary course of our business.

We do not believe, based on currently available facts and circumstances, that the final outcome of any pending legal proceedings, taken individually or as a whole, will have a material adverse effect on the our financial condition, results of operations or cash flows. However, lawsuits may involve complex questions of fact and law and may require the expenditure of significant funds and other resources to defend. The results of litigation are inherently uncertain, and material adverse outcomes are possible. From time to time, we may enter into confidential discussions regarding the potential settlement of such lawsuits. Any settlement of pending litigation could require us to incur substantial costs and other ongoing expenses, such as future royalty payments in the case of an intellectual property dispute.

During the periods presented we have not recorded any accrual for loss contingencies associated with any legal proceedings, nor determined that an unfavorable outcome is probable. As a result, no amounts have been accrued or disclosed in the accompanying unaudited condensed consolidated financial statements with respect to these legal proceedings, as potential losses for such matters are not considered probable and ranges of losses are not reasonably estimable. These matters are subject to many uncertainties and the ultimate outcomes are not predictable. There can be no assurances that the actual amounts

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required to satisfy any liabilities arising from the matters described above will not have a material adverse effect on our results of operations, financial position or cash flows.

Other Indemnifications

As is customary in our industry and as provided for in local law in the United States and other jurisdictions, many of our standard contracts provide remedies to our customers and others with whom we enter into contracts, such as defense, settlement, or payment of judgment for intellectual property claims related to the use of our products. From time to time, we indemnify customers, as well as our suppliers, contractors, lessors, lessees, companies that purchase our businesses or assets and others with whom we enter into contracts, against combinations of loss, expense, or liability arising from various triggering events related to the sale and the use of our products, the use of their goods and services, the use of facilities and state of our owned facilities, the state of the assets and businesses that we sell and other matters covered by such contracts, usually up to a specified maximum amount. In addition, from time to time we also provide protection to these parties against claims related to undiscovered liabilities, additional product liability or environmental obligations. In our experience, claims made under such indemnifications are rare and the associated estimated fair value of the liability is not material.

11. Restructuring Charges

During fiscal year 2014, we initiated a series of restructuring activities intended to realign our operations to improve overall efficiency and effectiveness. The following is a summary of significant restructuring expenses recognized in continuing operations for the periods specified below:


•	We implemented planned cost reduction and restructuring activities, primarily in our enterprise storage segment, in connection with the acquisition of LSI. As a result, we recognized $8 million and $22 million of employee termination costs, primarily in operating expenses during the fiscal quarter and two fiscal quarters ended May 3, 2015, respectively.


•	We closed a fabrication facility in Italy related to our wired infrastructure segment. As a result, we recognized $5 million in cost of products sold and $8 million in operating expenses during the two fiscal quarters ended May 4, 2014 related to employee termination costs.


•	We recognized $6 million of employee termination costs in operating expenses during the fiscal quarter and two fiscal quarters ended May 4, 2014 related to Avago's pre-acquisition workforce in order to achieve annual cost savings from the LSI acquisition.

The following table summarizes the significant activities within, and components of, the restructuring liabilities related to continuing and discontinued operations during the two fiscal quarters ended May 3, 2015 (in millions):



	Employee Termination Costs			Leases and Other Exit Costs			Total
Balance as of November 2, 2014	$	34		$	6		$	40
Cost of product sold	3			—			3
Operating expenses (a)	21			8			29
Cash payments	(37		)	(9		)	(46		)
Balance as of May 3, 2015 (b)	$	21		$	5		$	26

_________________________________

(a) In connection with the sale of the Axxia Business, we recognized $5 million of liabilities for leases and other exit costs, which are included in the table above and in income from discontinued operations in the unaudited condensed consolidated statements of operations.

(b) The majority of the employee termination costs balance is expected to be paid by the third quarter of fiscal year 2015. The leases and other exit costs balance is expected to be paid during the remaining terms of the leases, which extend through fiscal year 2019.

12. Discontinued Operations

On November 18, 2014, we completed the sale of the Axxia Business to Intel for $650 million in cash. As part of this transaction, we provided transitional services to Intel to provide short-term assistance to the buyer in assuming the operations of the purchased business. We have determined that we do not have any material continuing involvement with the discontinued operations.

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The following table summarizes the selected financial information of the Axxia Business included in discontinued operations in our unaudited condensed consolidated statements of operations for the periods presented (in millions):



	Fiscal Quarter Ended		Two Fiscal Quarters Ended
	May 3, 2015		May 3, 2015
Net revenue	$	12	$	53
Income from discontinued operations, net of income taxes	$	5	$	18

Income from discontinued operations included a gain on disposal of $14 million for the two fiscal quarters ended May 3, 2015.

13. Subsequent Events

Emulex Acquisition

On May 5, 2015, we completed the previously announced tender offer to purchase all of the outstanding shares of common stock of Emulex, a publicly traded company and a global leader in network connectivity, monitoring and management. Following the acceptance of, and payment for, the tendered shares, the merger was completed and Emulex became our wholly-owned subsidiary. The aggregate cash consideration paid to acquire all of the outstanding shares of Emulex was approximately $583 million, which was funded by cash available on our balance sheet. We acquired Emulex to broaden our portfolios to better serve the enterprise storage end market.

We are currently evaluating the purchase price allocation following the consummation of the Emulex acquisition. It is not practicable to disclose the preliminary purchase price allocation or unaudited pro-forma combined financial information for this transaction, given the short period of time between the acquisition date and the issuance of these unaudited condensed consolidated financial statements.

Pending Acquisition of Broadcom Corporation

On May 28, 2015, we entered into an Agreement and Plan of Merger, or the Broadcom Agreement, by and among Broadcom, Pavonia Limited, a limited company incorporated under the laws of the Republic of Singapore, or Holdco, Safari Cayman L.P., an exempted limited partnership formed under the laws of the Cayman Islands and a direct wholly-owned subsidiary of Holdco, or the Partnership, Avago Technologies Cayman Holdings Ltd., an exempted company incorporated under the laws of the Cayman Islands and a direct wholly-owned subsidiary of the Partnership, or Intermediate Holdco, Avago Technologies Cayman Finance Limited, an exempted company incorporated under the laws of the Cayman Islands and a direct wholly-owned subsidiary of Intermediate Holdco, or Finance Holdco, Buffalo CS Merger Sub, Inc., a California corporation and wholly-owned subsidiary of Finance Holdco and Buffalo UT Merger Sub, Inc., a California corporation and wholly-owned subsidiary of Finance Holdco, which provides for a proposed business combination transaction between us and Broadcom, or the Transaction.

As a result of the Transaction, at closing, each share of Broadcom common stock will be converted into the right to receive, at the election of each holder of such Broadcom common stock and subject to pro-ration in accordance with the Broadcom Agreement, cash or equity interest in either Holdco or the Partnership. Upon the terms and subject to the conditions set forth in the Broadcom Agreement, Broadcom shareholders will have the ability to elect to receive, with respect to each issued and outstanding share of Broadcom common stock: (a) $54.50 per share in cash; (b) 0.4378 freely-tradable ordinary shares in Holdco; or (c) a restricted equity security that is designed to be the economic equivalent of 0.4378 ordinary shares of Holdco that will not be transferable or saleable for a period of one to two years after closing and is subject to related anti-hedging prohibitions. The foregoing exchange ratios are fixed. The shareholder election will be subject to a pro-ration mechanism, which is anticipated to result in payment in the aggregate of approximately $17 billion in cash consideration and the economic equivalent of approximately 140 million of our ordinary shares (assuming no more than 50% of outstanding shares of Broadcom common stock elect restricted equity securities), valued at $20 billion as of May 27, 2015, resulting in Broadcom shareholders owning approximately 32% of the combined company. Based on the closing share price of our ordinary shares as of May 27, 2015, the implied value of the total transaction consideration for Broadcom is $37 billion. Also as a result of the Transaction, at closing, all our issued ordinary shares as of immediately prior to the effective time of the Transaction will be exchanged on a one-to-one basis for new ordinary shares of Holdco. We intend to finance the $17 billion of cash consideration with cash on hand from both companies and $9 billion in new, fully-committed debt financing from a consortium of banks. We also intend to refinance substantially all of our and Broadcom's existing debt with committed debt financing, presently aggregating approximately $6 billion.

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All vested Broadcom stock options and restricted stock units, after giving effect to any acceleration, will be cashed out, except that any vested Broadcom option that is an underwater option will be cancelled for no consideration.

At the closing of the Transaction, each outstanding Avago option and restricted share unit will be converted into the right to receive, on the same terms and conditions as were applicable under such Avago option or restricted share unit (including with respect to vesting and, in case of Avago options, exercise price), an equity award from Holdco in respect of the same number of Holdco ordinary shares as were subject to, and on the same terms as, the underlying Avago option or restricted share unit.

The Transaction has been unanimously approved by the boards of directors of both companies, as well as a special committee of the independent directors of Broadcom. Consummation of the Transaction is subject to the satisfaction or waiver of the conditions set forth in the definitive agreement, including approval of the Transaction by our shareholders and Broadcom shareholders, the expiration or termination of the waiting period under the United States Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the receipt of regulatory clearance under certain foreign anti-trust laws, as well as other customary closing conditions.

Avago and Broadcom may each terminate the definitive agreement under certain circumstances, and in connection with the termination of the definitive agreement under specified circumstances, Avago or Broadcom may be required to pay the other party a termination fee of $1 billion. Additionally, in the event that either Avago or Broadcom terminates the definitive agreement as a result of the failure by either party’s shareholders to approve the Transaction, Broadcom or Avago, as the case may be, must pay the other party a fee of approximately $333 million.

Avago and Broadcom have each made customary covenants in the Broadcom Agreement, including, without limitation, covenants not to solicit alternative transactions or, subject to certain exceptions, not to enter into discussions concerning, or provide confidential information in connection with, an alternative transaction.

We currently expect the Transaction to close by the end of the first calendar quarter of 2016.

Conversion of Convertible Notes

On June 1, 2015, the Purchasers of all of the outstanding Convertible Notes submitted to the Company conversion notices exercising their right to convert all of the Convertible Notes that they hold, or the Conversion. The Company will satisfy its conversion obligation by paying cash equal to the $1 billion principal amount of the Convertible Notes and delivering ordinary shares with respect to the conversion value in excess of that amount, or the Conversion Obligation, in each case pursuant to the terms of the Indenture. The number of our ordinary shares which it is obligated to issue to the Purchasers pursuant to the Conversion Obligation will be based on (a) the per share volume-weighted average market prices of our ordinary shares during each of the 20 consecutive trading day period beginning on, and including, the second trading day immediately succeeding the conversion date (June 1, 2015), and (b) the applicable conversion ratio (20.8685 ordinary shares per $1,000 principal amount of Convertible Notes as of June 1, 2015) on each such trading day, which is subject to adjustment pursuant to the terms of the Indenture. If settlement of the Conversion occurs in accordance with the terms of the Indenture, we would expect the Conversion to occur on July 6, 2015.

Cash Dividends Declared

On June 3, 2015, the Board declared a quarterly cash dividend of $0.40 per ordinary share, payable on June 30, 2015 to shareholders of record at the close of business (Eastern time) on June 19, 2015.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 2, 2014, or fiscal year 2014, included in our Annual Report on Form 10-K for fiscal year 2014, or 2014 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, including our pending acquisition of Broadcom Corporation, or Broadcom; statements of expectation or belief regarding future events, technology developments, our products, product sales, expenses, liquidity, cash flow and growth rates, customer concentration and relationships, or enforceability of our intellectual property, or IP, 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 we will complete our pending acquisition of Broadcom Corporation, or Broadcom, 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 pending acquisition of Broadcom, our acquisitions of LSI Corporation, or LSI, PLX Technology, Inc., or PLX, and Emulex Corporation, or Emulex, or dispositions we may make. 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 analog III-V based products and complex digital and mixed signal complementary metal oxide semiconductor based devices. We have a history of innovation and offer thousands of products that are used in end products, such as smartphones, hard disk drives, or HDDs, computer servers, consumer appliances, data networking and telecommunications equipment, enterprise storage and servers, and factory automation and industrial equipment. We have four reportable segments: wireless communications, enterprise storage, wired infrastructure and industrial & other, which align with our principal target markets. We differentiate ourselves through our high performance design and integration capabilities and focus on developing products for target markets where we believe we can earn attractive margins.

The percentage of total net revenue generated by sales in each of our segments varies from fiscal quarter to quarter, due largely to fluctuations in target-market demand. During the first two quarters of fiscal year 2015, our net revenue increased significantly compared to the first two quarters of fiscal year 2014, mainly due to revenue contribution from the enterprise storage segment, which we acquired in the LSI acquisition. Net revenue from each of our three other segments also increased during this period compared to the first two quarters of fiscal year 2014, mainly due to content and unit growth in the wireless communications segment, and due to revenue contribution from the acquired LSI business in the wired infrastructure segment.

Historically, a relatively small number of customers have accounted for a significant portion of our net revenue. Foxconn Technology Group companies, or Foxconn, accounted for 21% and 24% of our net revenue during the fiscal quarter and two fiscal quarters ended May 3, 2015, respectively. Foxconn and Samsung Group companies, or Samsung, accounted for 14% and 13% of our net revenue, respectively, during the fiscal quarter ended May 4, 2014 and 20% and 10% of our net revenue, respectively, during the two fiscal quarters ended May 4, 2014.

Our top 10 direct customers collectively account for an increasing portion of our total net revenue. For the fiscal quarter and two fiscal quarters ended May 3, 2015, our top 10 direct customers, which included three and four distributors, respectively, collectively accounted for 56% and 57% of our net revenue, respectively. We believe our aggregate sales to Apple Inc., when

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our direct sales to it are combined with indirect sales to the contract manufacturers that it utilizes, accounted for more than 10% of our net revenues for the fiscal quarter and two fiscal quarters ended May 3, 2015.

From time to time, some of our key customers, particularly in our wireless communications and enterprise storage segments, 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 HDDs, as well as changes in the overall economic environment.

Acquisitions and Divestiture

Pending Acquisition of Broadcom Corporation

On May 28, 2015, we entered into an Agreement and Plan of Merger, or the Broadcom Agreement, by and among Broadcom Corporation, or Broadcom, Pavonia Limited, a limited company incorporated under the laws of the Republic of Singapore, or Holdco, Safari Cayman L.P., an exempted limited partnership formed under the laws of the Cayman Islands and a direct wholly-owned subsidiary of Holdco, or the Partnership, Avago Technologies Cayman Holdings Ltd., an exempted company incorporated under the laws of the Cayman Islands and a direct wholly-owned subsidiary of the Partnership, or Intermediate Holdco, Avago Technologies Cayman Finance Limited, an exempted company incorporated under the laws of the Cayman Islands and a direct wholly-owned subsidiary of Intermediate Holdco, or Finance Holdco, Buffalo CS Merger Sub, Inc., a California corporation and wholly-owned subsidiary of Finance Holdco and Buffalo UT Merger Sub, Inc., a California corporation and wholly-owned subsidiary of Finance Holdco, which provides for a proposed business combination transaction between us and Broadcom, or the Transaction.

As a result of the Transaction, at closing, each share of Broadcom common stock will be converted into the right to receive, at the election of each holder of such Broadcom common stock and subject to pro-ration in accordance with the Broadcom Agreement as described below, cash or equity interest in either Holdco or the Partnership. Upon the terms and subject to the conditions set forth in the Broadcom Agreement, Broadcom shareholders will have the ability to elect to receive, with respect to each issued and outstanding share of Broadcom common stock: (a) $54.50 per share in cash; (b) 0.4378 freely-tradable ordinary shares in Holdco; or (c) a restricted equity security that is designed to be the economic equivalent of 0.4378 ordinary shares of Holdco that will not be transferable or saleable for a period of one to two years after closing and is subject to related anti-hedging prohibitions. The foregoing exchange ratios are fixed. The shareholder election will be subject to a pro-ration mechanism, which is anticipated to result in payment in the aggregate of approximately $17 billion in cash consideration and the economic equivalent of approximately 140 million of our ordinary shares (assuming no more than 50% of outstanding shares of Broadcom common stock elect restricted equity securities). Also as a result of the Transaction, at closing, all our issued ordinary shares as of immediately prior to the effective time of the Transaction will be exchanged on a one-to-one basis for new ordinary shares of Holdco.

We intend to finance the $17 billion of cash consideration with cash on hand from both companies and $9 billion in new, fully-committed debt financing from a consortium of banks. We also intend to refinance substantially all of our and Broadcom's existing debt with committed debt financing, presently aggregating approximately $6 billion.

At the closing of the Transaction, each unvested Broadcom option and restricted stock unit will be converted into the right to receive, on the same terms and conditions as were applicable under such Broadcom option or restricted stock unit (including with respect to vesting), an equity award from Holdco appropriately adjusted to take into account the transaction consideration. All vested Broadcom stock options and restricted stock units, after giving effect to any acceleration, will be cashed out, except that any vested Broadcom option that is an underwater option will be cancelled for no consideration.

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We currently expect the Transaction to close by the end of the first calendar quarter of 2016.

Acquisition of Emulex Corporation

On May 5, 2015, we completed our acquisition of Emulex through a tender offer and subsequent merger of Emulex into one of our wholly-owned subsidiaries. The aggregate cash consideration paid to acquire all of the outstanding shares of Emulex was approximately $583 million, which was funded with available cash on hand. We are in the process of integrating Emulex into our enterprise storage segment.

Sale of the LSI Axxia Networking Business

On November 18, 2014, we completed the sale of the LSI Axxia Networking Business and related assets, or the Axxia Business, to Intel Corporation for $650 million in cash. The results of the Axxia Business were included in discontinued operations.

Restructuring

During fiscal year 2014, we initiated a series of planned restructuring activities in connection with the LSI and PLX acquisitions and also to improve overall operational efficiency and effectiveness. Restructuring charges related to these actions 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 two fiscal quarters ended May 3, 2015 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 2014 Annual Report on Form 10-K.

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Results of Operations

Fiscal Quarter and Two Fiscal Quarters Ended May 3, 2015 Compared to Fiscal Quarter and Two Fiscal Quarters Ended May 4, 2014

The following tables set forth our results of operations for the fiscal quarters and two fiscal quarters ended May 3, 2015 and May 4, 2014.



	Fiscal Quarter Ended
	May 3, 2015			May 4, 2014			May 3, 2015		May 4, 2014
	(In millions)						(As a percentage of net revenue)
Statements of Operations Data:
Net revenue	$	1,614		$	701		100	%	100	%
Cost of products sold:
Cost of products sold	654			326			41		46
Amortization of intangible assets	113			18			7		3
Restructuring charges	1			—			—		—
Total cost of products sold	768			344			48		49
Gross margin	846			357			52		51
Research and development	251			114			15		16
Selling, general and administrative	108			67			7		10
Amortization of intangible assets	59			8			3		1
Restructuring charges	10			8			1		1
Total operating expenses	428			197			26		28
Operating income	418			160			26		23
Interest expense	(53		)	(1		)	(3	)	—
Other expense, net	(1		)	—			—		—
Income from continuing operations before income taxes	364			159			23		23
Provision for income taxes	25			1			2		—
Income from continuing operations	339			158			21		23
Income from discontinued operations, net of income taxes	5			—			—		—
Net income	$	344		$	158		21	%	23	%

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	Two Fiscal Quarters Ended
	May 3, 2015			May 4, 2014			May 3, 2015		May 4, 2014
	(In millions)						(As a percentage of net revenue)
Statements of Operations Data:
Net revenue	$	3,249		$	1,410		100	%	100	%
Cost of products sold:
Cost of products sold	1,348			673			42		48
Amortization of intangible assets	226			36			7		3
Restructuring charges	3			5			—		—
Total cost of products sold	1,577			714			49		51
Gross margin	1,672			696			51		49
Research and development	486			221			15		16
Selling, general and administrative	225			141			7		10
Amortization of intangible assets	118			15			3		1
Restructuring charges	24			20			1		1
Total operating expenses	853			397			26		28
Operating income	819			299			25		21
Interest expense	(107		)	(1		)	(3	)	—
Other income, net	3			—			—		—
Income from continuing operations before income taxes	715			298			22		21
Provision for income taxes	38			6			1		—
Income from continuing operations	677			292			21		21
Income from and gain on discontinued operations, net of income taxes	18			—			—		—
Net income	$	695		$	292		21	%	21	%

Net revenue. Net revenue was $1,614 million for the fiscal quarter ended May 3, 2015 compared to $701 million for the fiscal quarter ended May 4, 2014, an increase of $913 million, or 130%. Net revenue was $3,249 million for the two fiscal quarters ended May 3, 2015 compared to $1,410 million for the two fiscal quarters ended May 4, 2014, an increase of $1,839 million, or 130%. The increases in net revenue for the fiscal quarter and two fiscal quarters ended May 3, 2015 were primarily due to revenue from the acquired LSI businesses, which included increases of $630 million and $1,235 million, respectively, from our enterprise storage and wired infrastructure segments, as well as an increase of $228 million and $543 million, respectively, in net revenue due to continued strong growth in our wireless communications segment. Net revenue for the fiscal quarter and two fiscal quarters ended May 3, 2015 also included $94 million and $146 million, respectively, of revenue from development arrangements and sales and licensing of IP, compared to $24 million and $53 million, respectively, in the corresponding prior year fiscal periods.

Gross margin. Gross margin was $846 million for the fiscal quarter ended May 3, 2015 compared to $357 million for the fiscal quarter ended May 4, 2014, an increase of $489 million. As a percentage of net revenue, gross margin was 52% and 51% for the fiscal quarters ended May 3, 2015 and May 4, 2014, respectively. Gross margin was $1,672 million for the two fiscal quarters ended May 3, 2015 compared to $696 million for the two fiscal quarters ended May 4, 2014, an increase of $976 million. As a percentage of net revenue, gross margin was 51% and 49% for the two fiscal quarters ended May 3, 2015 and May 4, 2014, respectively. The increase in gross margin dollars and percentage of revenue was due primarily to gross margin contributions from our enterprise storage segment, which we acquired in the LSI acquisition, an increase in net revenue from, and improved product mix in, our wireless communications segment, as well as an increase in net revenue from development arrangements and sales and licensing of IP, partially offset by a large increase in amortization of intangible assets related to the LSI and PLX acquisitions.

Research and development. Research and development expense increased $137 million, or 120%, for the fiscal quarter ended May 3, 2015 compared to the fiscal quarter ended May 4, 2014. Research and development expense increased $265 million, or 120%, for the two fiscal quarters ended May 3, 2015 compared to the two fiscal quarters ended May 4, 2014. As a percentage of net revenue, research and development expense remained relatively flat at 15% in the fiscal quarter and two fiscal

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quarters ended May 3, 2015 compared to 16% in the corresponding prior year periods. The increase in research and development expense dollars was primarily due to the LSI and PLX acquisitions.

Selling, general and administrative. Selling, general and administrative expense increased $41 million, or 61%, for the fiscal quarter ended May 3, 2015 compared to the fiscal quarter ended May 4, 2014. Selling, general and administrative expense increased $84 million, or 60%, for the two fiscal quarters ended May 3, 2015 compared to the two fiscal quarters ended May 4, 2014. As a percentage of net revenue, selling, general and administrative expense decreased to 7% for the fiscal quarter and two fiscal quarters ended May 3, 2015 compared to 10% in the corresponding prior year periods. The increase in selling, general and administrative expense dollars year over year was primarily due to the LSI acquisition. The decrease in selling, general and administrative expense as a percentage of net revenue was due to revenue increases proportionally outpacing growth in selling, general and administrative expense.

Amortization of intangible assets. Total amortization of intangible assets was $172 million and $344 million for the fiscal quarter and two fiscal quarters ended May 3, 2015, respectively, compared to $26 million and $51 million, respectively, in the corresponding prior year fiscal periods. The increase in amortization expense in fiscal year 2015 was primarily attributable to an increase in amortizable intangible assets from the LSI and PLX acquisitions.

Restructuring charges. Restructuring charges, recognized primarily in operating expenses, were $11 million and $27 million for the fiscal quarter and two fiscal quarters ended May 3, 2015, respectively, compared to $8 million and $25 million, respectively, in the corresponding prior year fiscal periods. These restructuring charges were due primarily to employee termination costs resulting from the LSI acquisition. We expect to incur additional restructuring charges in future periods as a result of the acquisition of Emulex on May 5, 2015 and further integration and alignment of the completed LSI and PLX acquisitions.

Interest expense. Interest expense was $53 million and $107 million for the fiscal quarter and two fiscal quarters ended May 3, 2015, respectively, primarily consisting of interest on the outstanding balance of our $4.0 billion term loan borrowings, or Term Loans, and on the $1 billion principal amount of our 2.0% Convertible Senior Notes due 2021, or the Convertible Notes, as well as fees related to our senior secured, revolving credit facility in a principal amount of up to $500 million, or the 2014 Revolving Credit Facility, together with the amortization of related debt issuance costs and accretion of the debt discount on the Convertible Notes. Interest expense was $1 million for the fiscal quarter and two fiscal quarters ended May 4, 2014.

Other income (expense), net. Other income (expense), net includes gains (losses) on investments, interest income, gains (losses) on foreign currency remeasurement and other miscellaneous items. In March 2015, we made a $593 million principal prepayment on our Term Loans, which resulted in a partial write-off of debt issuance costs of $13 million for the fiscal quarter and two fiscal quarters ended May 3, 2015.

Provision for income taxes. For the fiscal quarter and two fiscal quarters ended May 3, 2015, we recorded an income tax provision of $25 million and $38 million, respectively, compared to an income tax provision of $1 million and $6 million for the fiscal quarter and two fiscal quarters ended May 4, 2014, respectively. The increase in income tax provision was largely due to the increase in profit before tax.

Segment Results

Net revenue and operating income by segment were as follows (in millions, except percentages):



	Fiscal Quarter Ended				Two Fiscal Quarters Ended
% of Net Revenue	May 3, 2015		May 4, 2014		May 3, 2015		May 4, 2014
Wireless communications	36	%	50	%	38	%	49	%
Enterprise storage	29		—		29		—
Wired infrastructure	23		31		23		32
Industrial & other	12		19		10		19
Total net revenue	100	%	100	%	100	%	100	%

Table of Contents



	Fiscal Quarter Ended								Two Fiscal Quarters Ended
Net Revenue	May 3, 2015		May 4, 2014		Change				May 3, 2015		May 4, 2014		Change
Wireless communications	$	576	$	348	$	228	66	%	$	1,240	$	697	$	543	78	%
Enterprise storage	467		—		467		*		953		—		953		*
Wired infrastructure	382		219		163		74	%	729		447		282		63	%
Industrial & other	189		134		55		41	%	327		266		61		23	%
Total net revenue	$	1,614	$	701	$	913			$	3,249	$	1,410	$	1,839

* Prior to the closing of the LSI acquisition on May 6, 2014, we had no revenue from this segment. Therefore, reporting a change as a percentage of net revenue for this segment is not meaningful.



	Fiscal Quarter Ended									Two Fiscal Quarters Ended
Operating Income	May 3, 2015			May 4, 2014			Change			May 3, 2015			May 4, 2014			Change
Wireless communications	$	264		$	125		$	139		$	586		$	231		$	355
Enterprise storage	177			—			177			363			—			363
Wired infrastructure	120			45			75			215			102			113
Industrial & other	109			63			46			165			124			41
Unallocated expenses	(252		)	(73		)	(179		)	(510		)	(158		)	(352		)
Total operating income	$	418		$	160		$	258		$	819		$	299		$	520

Wireless Communications. Net revenue from our wireless communications segment increased by $228 million, or 66%, and $543 million, or 78%, in the fiscal quarter and two fiscal quarters ended May 3, 2015, respectively, compared with the corresponding prior fiscal year periods, primarily due to a substantial increase in our radio frequency product content in smartphones and an increase in unit sales of smartphones containing our products. As a result of stronger than expected demand in this segment, we have been and expect to remain capacity constrained with respect to our film bulk acoustic resonator, or FBAR, products for the remainder of fiscal year 2015.

Operating income from our wireless communications segment was 46% and 47% of segment revenue in the fiscal quarter and two fiscal quarters ended May 3, 2015, respectively, compared to 36% and 33% of segment revenue in the corresponding prior fiscal year periods, primarily due to higher revenue and stable research and development expense.

Enterprise Storage. Our enterprise storage segment resulted from our acquisition of LSI in May 2014. Operating income from our enterprise storage segment was 38% of segment revenue in the fiscal quarter and two fiscal quarters ended May 3, 2015.

Wired Infrastructure. Net revenue from our wired infrastructure segment increased by $163 million, or 74%, and $282 million, or 63%, in the fiscal quarter and two fiscal quarters ended May 3, 2015, respectively, compared with the corresponding prior fiscal year periods. The increase was primarily due to revenue contribution from the application specific integrated circuits, or ASIC, products from the acquired LSI business. Operating income from our wired infrastructure segment was 31% and 29% of segment revenue in the fiscal quarter and two fiscal quarters ended May 3, 2015, respectively, compared to 21% and 23% of segment revenue in the corresponding prior fiscal year periods primarily due to higher revenue and an increase in gross margin.

Industrial & Other. Net revenue from our industrial & other segment increased by $55 million, or 41%, and $61 million, or 23%, in the fiscal quarter and two fiscal quarters ended May 3, 2015, respectively, compared with the corresponding prior fiscal year periods, primarily due to an increase in IP licensing revenue. Operating income from our industrial & other segment was 58% and 50% of segment revenue in the fiscal quarter and two fiscal quarters ended May 3, 2015, respectively, compared to 47% of segment revenue in each of the corresponding prior fiscal year periods, primarily due to higher IP licensing revenue in the fiscal quarter and