e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC
20549
Form 10-K
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(MARK ONE)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal
year ended October 31,
2010
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number:
001-34428
Avago Technologies
Limited
(Exact Name of Registrant as
Specified in Its Charter)
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Singapore
(State or Other Jurisdiction
of Incorporation or Organization)
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N/A
(I.R.S. Employer
Identification No.)
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1 Yishun Avenue 7
Singapore 768923
(Address of Principal
Executive Offices)
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N/A
(Zip
Code)
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(65) 6755-7888
(Registrants telephone number, including area
code)
Securities registered pursuant
to Section 12(b) of the Act:
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Title of Class
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Name of Each Exchange on Which Registered
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Ordinary Shares, no par value
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The NASDAQ Global Select Market
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Securities registered pursuant
to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 for 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 þ No o
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 o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
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):
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Large accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller reporting company o
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(Do not check if a smaller
reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
State the aggregate market value of the Registrants voting
and non-voting ordinary shares held by non-affiliates as of the
last business day of the Registrants most recently
completed second fiscal quarter: As of May 2, 2010, the
last business day of our most recently completed second fiscal
quarter, the aggregate market value of the Registrants
ordinary shares held by non-affiliates of the Registrant (based
upon the closing sale price of such shares on the Nasdaq Global
Select Market on April 30, 2010, the last trading day prior
to our fiscal quarter end) was approximately $1,691,316,089.
As of December 10, 2010, the Registrant had
241,589,163 ordinary shares outstanding.
Documents Incorporated by Reference
Information required in response to Part III of this Annual
Report on
Form 10-K
is hereby incorporated by reference from the Registrants
definitive Proxy Statement for its 2011 Annual Meeting of
Shareholders. Except as expressly incorporated by reference, the
Registrants Proxy Statement shall not be deemed to be a
part of this Annual Report on
Form 10-K.
The Registrant intends to file its definitive Proxy Statement
within 120 days after its fiscal year ended
October 31, 2010.
AVAGO
TECHNOLOGIES LIMITED
2010 ANNUAL REPORT ON
FORM 10-K
TABLE OF CONTENTS
2
PART I
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto included
elsewhere in this Annual Report on
Form 10-K.
This Annual Report on
Form 10-K
contains forward-looking statements within the meaning of the
federal securities laws and particularly in Item 1:
Business, Item 1A:Risk Factors,
Item 3: Legal Proceedings and Item 7:
Managements Discussion and Analysis of Financial
Condition and Results of Operations of this Annual Report
on
Form 10-K.
These statements are indicated by words or phrases such as
anticipate, expect, outlook,
foresee, believe, could,
intend, will, and similar words or
phrases. All statements other than statements of historical fact
could be deemed forward-looking, including, but not limited to,
any projections of financial information; any statements about
historical results that may suggest trends for our business; any
statements of the plans, strategies, and objectives of
management for future operations; any statements of expectation
or belief regarding future events, technology developments, our
products, product sales, expenses, liquidity, cash flow, growth
rates and restructuring efforts, or enforceability of our
intellectual property rights and related litigation expenses;
and any statements of assumptions underlying any of the
foregoing. These forward-looking statements are based on current
expectations, estimates, forecasts and projections of our or
industry performance based on managements 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. Accordingly, we caution you not to place undue
reliance on these statements. For example, there can be no
assurance that our product sales efforts, revenues or expenses
will meet any expectations or follow any trend(s), or that our
ability to compete effectively will be successful or yield
anticipated results. For Avago, particular uncertainties that
could affect future results include cyclicality in the
semiconductor industry or in our end markets; the recent
financial crisis and its impact on our business, results of
operations, and financial condition; fluctuations in interest
rates; our ability to generate cash sufficient to fund our
research and development, capital expenditures and other
business needs; our increased dependence on outsourced service
providers for certain key business services and their ability to
execute to our requirements; our dependence on contract
manufacturing and outsourced supply chain; quarterly and annual
fluctuations in operating results; loss of our significant
customers; our ability to maintain tax concessions in certain
jurisdictions; our ability to protect our intellectual property;
our competitive performance and ability to continue achieving
design wins with our customers; any expenses associated with
resolving customer product and warranty claims; our ability to
achieve the growth prospects and synergies expected from our
acquisitions; delays and challenges associated with integrating
acquired companies with our existing businesses; our ability to
improve our cost structure through our manufacturing outsourcing
program; and other events and trends on a national, regional and
global scale, including those of a political, economic,
business, competitive and regulatory nature. For a discussion of
some of the factors that could cause actual results to differ
materially from our forward-looking statements, see the
discussion on risk factors that appears in Part I,
Item 1A of this Annual Report on
Form 10-K
and other risks and uncertainties detailed in this and our other
reports and filings with the Securities and Exchange Commission,
or SEC. We undertake no obligation to update forward-looking
statements to reflect developments or information obtained after
the date hereof and disclaim any obligation to do so.
References in this Annual Report on
Form 10-K
to Avago, the Company, we,
our, or us refer to Avago Technologies
Limited and its subsidiaries, on a consolidated basis, unless
otherwise indicated or the context otherwise requires. Our
fiscal year ends on the Sunday closest to October 31. We
refer to our fiscal years by the calendar year in which they
end. For example, the fiscal year ended October 31, 2010 is
referred to as fiscal year 2010.
Overview
We are a leading designer, developer and global supplier of a
broad range of analog semiconductor devices with a focus on
III-V based products. We differentiate ourselves through our
high performance design and integration capabilities. III-V
semiconductor materials have higher electrical conductivity,
enabling faster speeds and tend to have better performance
characteristics than conventional silicon in applications such
as RF and optoelectronics. Our product portfolio is extensive
and includes over 6,500 products that we sell into four primary
target markets: wireless communications, wired infrastructure,
industrial and automotive electronics, and consumer
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and computing peripherals. Applications for our products in
these target markets include cellular phones, consumer
appliances, data networking and telecommunications equipment,
enterprise storage and servers, renewable energy and smart power
grid applications, factory automation, displays, optical mice
and printers.
We have a nearly
50-year
history of innovation dating back to our origins within
Hewlett-Packard Company. Over the years, we have assembled a
large team of analog design engineers, and we maintain design
and product development engineering resources around the world.
Our locations include two design centers in the United States,
five in Asia and four in Europe. We have developed an extensive
portfolio of intellectual property that currently includes more
than 5,000 U.S. and foreign patents and patent
applications. Our history and market position enable us to
strategically focus our research and development resources to
address attractive target markets. We leverage our significant
intellectual property portfolio to integrate multiple
technologies and create component solutions that target growth
opportunities. We design products that deliver high-performance
and provide mission-critical functionality. In particular, we
were a pioneer in commercializing vertical-cavity surface
emitting laser, or VCSEL, fiber optic products and our
VCSEL-based products have been widely adopted throughout the
wired infrastructure industry. In addition, we were among the
first to deliver commercial film bulk acoustic resonator, or
FBAR, filters for code division multiple access, or CDMA,
technology and we believe we maintain a significant market share
of personal communication service, or PCS, duplexers within the
CDMA market. In addition, our FBAR filters offer technological
advantages over competing filters in certain other radio bands,
such as GPS and 3G. In optoelectronics, we are a market leader
in submarkets such as optocouplers, fiber optic transceivers,
optical finger navigation sensors found in mobile phones and
optical computer mouse sensors.
We have a diversified and well-established customer base of
approximately 40,000 end customers, located throughout the
world, which we serve through our multi-channel sales and
fulfillment system. We have established strong relationships
with leading original equipment manufacturer, or OEM, customers
across multiple target markets. Typically, our major customer
relationships have been in place multiple years and we have
supplied multiple products during that time period. Our close
customer relationships have often been built as a result of
years of collaborative product development which has enabled us
to build our intellectual property portfolio and develop
critical expertise regarding our customers requirements,
including substantial system level knowledge. This collaboration
has provided us with key insights into our customers and has
enabled us to be more efficient and productive and to better
serve our target markets and customers. We distribute most of
our products through our broad distribution network, and we are
a significant supplier to two of the largest global electronic
components distributors, Avnet, Inc. and Arrow Electronics, Inc.
We also have a direct sales force focused on supporting large
OEMs.
We focus on maintaining an efficient global supply chain and a
variable, low-cost operating model. Accordingly, we have
outsourced a majority of our manufacturing operations utilizing
third-party foundry and assembly and test capabilities, as well
as most of our corporate infrastructure functions. We aim to
minimize capital expenditures by focusing our internal
manufacturing capacity on products utilizing our innovative
materials and processes to protect our intellectual property and
to develop the technology for manufacturing, while outsourcing
standard complementary metal oxide semiconductor, or CMOS,
processes. We also have over 35 years of operating history
in Asia, where approximately 60% of our employees are located
and where we produce and source the majority of our products.
Our presence in Asia places us in close proximity to many of our
customers manufacturing facilities and at the center of
worldwide electronics manufacturing.
Markets
and Products
We focus on leveraging our design capabilities to develop
products for target markets where we believe our innovation and
reputation will allow us to earn attractive margins. In each of
our target markets, we have multiple product families that
primarily provide OEMs with component or subsystem products. Our
product portfolio ranges from simple discrete devices to complex
sub-systems that include multiple device types and incorporate
firmware for interface between digital systems. In some cases,
our products include mechanical hardware that interfaces with
optoelectronic or capacitive sensors. We intend to expand our
product offerings to address existing and adjacent market
opportunities, and plan to selectively target attractive
segments within large established markets. We target markets
that require high quality and the integrated performance
characteristics of our products. For the fiscal year ended
October 31, 2010, wireless communications contributed 38%,
wired infrastructure contributed 24%,
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industrial and automotive electronics contributed 29% and
consumer and computing peripherals contributed 9%, of our net
revenue, respectively.
Wireless Communications. We support the
wireless industry with a broad variety of radio frequency, or
RF, semiconductor devices, including monolithic microwave
integrated circuit filters and duplexers using our proprietary
FBAR technology, front end modules that incorporate multiple die
into multi-function RF devices, diodes and discrete transistors.
Our expertise in amplifier design, FBAR technology and module
integration capability enables us to offer industry-leading
efficiency in RF transmitter applications. Our proprietary
gallium arsenide, or GaAs, processes are critical to the
production of power amplifier, or PA, and low noise amplifier
products. Our expertise in Human Interface Design has led to the
Optical Finger Navigation, or OFN, device which replaces a
mechanical trackball on certain high-end mobile phones. In
addition to RF devices and OFN, we provide a variety of
optoelectronic sensors for mobile handset applications. We also
supply light emitting diodes, or LEDs, for camera-phone flashes
and for backlighting applications in mobile handset keypads, as
well as sensors for backlighting control.
Wired Infrastructure. In the storage and
Ethernet networking markets, we supply transceivers that receive
and transmit information along optical fibers. We provide a
range of product bandwidth options for customers, including
options ranging from 125 megabyte data, or MBd, Fast
Ethernet transmitters and receivers to 10 Gigabit transceivers.
We supply parallel optic transceivers with as many as 12
parallel channels for high performance core routing and server
applications. For enterprise networking and server input/output,
or I/O, applications, we also supply high speed
serializer/deserializer, or SerDes, products integrated into
application specific integrated circuits, or ASICs.
Industrial and Automotive Electronics. We
provide a broad variety of products for the general industrial,
automotive and consumer appliance markets. We offer optical
isolators, or optocouplers, which provide electrical insulation
and signal isolation for signaling systems that are susceptible
to electrical noise or interference. Optocouplers are used in a
diverse set of applications, including industrial motors,
automotive systems including those used in hybrid engines, power
generation and distribution systems, switching power supplies,
motion sensors, telecommunications equipment, consumer
appliances, computers and office equipment, plasma displays, and
military electronics. For industrial motors and robotic motion
control, we supply optical encoders, as well as integrated
circuits, or ICs, for the controller and decoder functions. For
electronic signs and signals, we supply LED 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
Fast Ethernet transceivers using plastic optical fiber that
enable quick and interoperable networking and factory automation.
Consumer and Computing Peripherals. We
manufacture motion control encoders that control the paper feed
and print head movement in printers and other office automation
products. We were an early developer of image sensors for
optical mouse applications, using LEDs and CMOS image sensors to
create a subsystem that can detect motion over an arbitrary
desktop surface. We are a leading supplier of image sensors for
optical mice today, and have launched a new line of laser-based
mouse products with improved precision. Displays, especially in
notebook computer applications, use our products for LED
backlighting and our sensors to control display brightness based
on ambient light conditions.
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The table below presents the major product families, major
applications and major end customers in our four primary target
markets.
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Target Market
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Major Product Families
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Major Applications
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Major End Customers
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Wireless Communications
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RF amplifiers
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Voice and data communications
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LG Electronics Inc.
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RF filters
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Camera phone
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Huawei Technologies Co., Ltd.
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RF front end modules (FEMs)
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Keypad and display backlighting
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Samsung Electronics Co., Ltd.
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Ambient light sensors
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Backlighting control
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LEDs
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Base stations
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Low noise amplifiers
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mm-wave mixers
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Optical Finger Navigation (OFN)
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Diodes
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Wired Infrastructure
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Fiber optic transceivers
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Data communications
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Brocade Communications
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Serializer/deserializer (SerDes)
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Storage area networking
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Systems, Inc.
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ASICs
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Servers
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Cisco Systems Inc.
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Hewlett-Packard Company
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International Business
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Machines Corp.
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Juniper Networks Inc.
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Industrial and Automotive
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Fiber optic transceivers
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In-car infotainment
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ABB Ltd.
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Electronics
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LEDs
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Displays
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Schneider Electric
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Motion control encoders and
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Lighting
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Siemens AG
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subsystems
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Factory automation
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Optocouplers
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Motor controls
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Power supplies
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Renewable clean energy
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Consumer and Computing
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Optical mouse sensors
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Optical mice
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Hewlett-Packard Company
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Peripherals
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Motion control encoders and
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Printers
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Logitech International S.A.
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subsystems
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Optical disk drives
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Primax Electronics Ltd.
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Research
and Development
We are committed to continuous investment in product
development, with a focus on rapidly introducing new,
proprietary products. Many of our products have grown out of our
own research and development efforts, and have given us
competitive advantages in certain target markets due to
performance differentiation. We focus our research and
development efforts on the development of innovative,
sustainable and higher value product platforms. We leverage our
design capabilities in markets where we believe our innovation
and reputation will allow us to earn attractive margins by
developing high value-add products.
We intend to continue to build on our history of innovation, and
our intellectual property portfolio, design expertise and
system-level knowledge, to create more integrated solutions. We
plan to continue investing in product development to drive
growth in our business. We also invest in process development
and maintain fabrication capabilities in order to optimize
processes for devices that are manufactured internally. Our
field application engineers, or FAEs, and design engineers are
located near many of our customers around the world, enabling us
to support our customers in each stage of their product
development cycle, from early stages of production design
through volume manufacturing and future growth. By collaborating
with our customers, we have opportunities to develop high value
added, customized products for them that leverage our existing
technologies. Research and development expenses were
$280 million, $245 million and $265 million for
the years ended October 31, 2010, November 1, 2009 and
November 2, 2008, respectively. We anticipate that we will
continue to make significant research and development
expenditures in order to maintain our competitive position with
a continuous flow of innovative and sustainable product
platforms. As of October 31, 2010, we had approximately
1,200 employees dedicated to research and development at
multiple locations around the world.
We also have research and development alliances with partners
and ongoing technology sharing relationships with our principal
contract manufacturers. We anticipate that we will continue to
employ research and development alliances to maximize the impact
of our internal research and development investment.
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Customers,
Sales, Marketing and Distribution
We have a diversified and historically stable customer base. In
the year ended October 31, 2010, no customer accounted for
10% or more of our net revenue, and our top 10 customers, which
included five distributors, collectively accounted for 55% of
our net revenue.
We sell our products through a network of distributors and our
direct sales force globally. Our customers require timely
delivery often to multiple locations around the world. We have
strategically developed distributor relationships to serve tens
of thousands of customers. Our direct sales force is focused on
supporting our large OEM customers. Additionally, our extensive
network of FAEs enhances our customer reach and our visibility
into new product opportunities. Within North America, we also
complement our direct sales force with a network of
manufacturing sales representative companies to cover our
emerging OEM customers in order to ensure these customers
receive the proper level of attention and support. Our main
global distributors are Avnet, Inc., and Arrow Electronics, Inc.
complemented by a number of specialty regional distributors with
customer relationships based on their respective product ranges.
As of October 31, 2010, our sales and marketing
organization consisted of approximately 500 employees, many
of whom have responsibility for emerging accounts, for large,
global accounts, or for our distributors. Our sales force has
specialized product and service knowledge that enables us to
sell specific offerings at key levels throughout a
customers organization.
As part of our global reach, we have 11 sales offices located in
nine countries, with a significant presence in Asia, which is a
key center of the worldwide electronics supply chain. Many of
our customers design products in North America or Europe that
are then manufactured in Asia. We maintain dedicated regional
customer support call centers, where we address customer issues
and handle logistics and other order fulfillment requirements.
We are well-positioned to support our customers throughout the
design, technology transfer and manufacturing stages across all
geographies.
Operations
A majority of our manufacturing operations are outsourced and we
utilize external foundries to fabricate our semiconductors,
including Taiwan Semiconductor Manufacturing Company Ltd., or
TSMC and WIN Semiconductors Corp. For certain of our product
families, substantially all of our revenue is derived from
semiconductors fabricated by external foundries, including our
high speed SerDes ICs, LEDs, and LED-based displays. We also use
third-party contract manufacturers for a significant majority of
our assembly and test operations, including Amertron
Incorporated, SAE Magnetics (HK) Ltd, and the Hana
Microelectronics Public Company Ltd. group of companies. We
maintain our internal fabrication facilities for products
utilizing our innovative materials and processes to protect our
intellectual property and to develop the technology for
manufacturing, and we outsource standard CMOS processes.
Examples of internally fabricated semiconductors include RF GaAs
amplifiers and VCSEL-based lasers for fiber optic
communications. The majority of our internal III-V semiconductor
wafer fabrication is done in the United States and Singapore. As
of October 31, 2010, approximately 1,500 manufacturing
employees were devoted to internal fabrication operations as
well as outsourced activities. For selected customers, we
maintain finished goods inventory near or at customer
manufacturing sites to support their
just-in-time
production.
Materials
and Suppliers
Our manufacturing operations employ a wide variety of
semiconductors, electromechanical components and assemblies and
raw materials. We purchase materials from hundreds of suppliers
on a global basis. These supply relationships are generally
conducted on a purchase order basis. While we have not
experienced any difficulty in obtaining the materials used in
the conduct of our business and we believe that no single
supplier is material, some of the parts are not readily
available from alternate suppliers due to their unique design or
the length of time necessary for re-design or qualification. Our
long-term relationships with our suppliers allow us to
proactively manage our technology development and product
discontinuance plans, and to monitor our suppliers
financial health. Some suppliers may nonetheless extend their
lead times, limit supplies, increase prices or cease to produce
necessary parts for our products. If these are unique
components, we may not be able to find a substitute quickly, or
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at all. To address the potential disruption in our supply chain,
we use a number of techniques, including qualifying multiple
sources of supply where practicable, redesign of products for
alternative components and purchase of incremental inventory for
supply buffer.
Competition
The global semiconductor market is highly competitive. While no
company competes with us in all of our target markets, our
competitors range from large, international companies offering a
wide range of products to smaller companies specializing in
narrow markets. We compete with integrated device manufacturers,
or IDMs, and fabless semiconductor companies as well as the
internal resources of large, integrated OEMs. The competitive
landscape is changing as a result of a trend toward
consolidation within the industry, as some of our competitors
have merged with or been acquired by other competitors while
others have begun collaborating with each other. We expect this
consolidation trend to continue. We expect competition in the
markets in which we participate to continue to increase as
existing competitors improve or expand their product offerings
and as new companies enter the market. Additionally, our ability
to compete effectively depends on a number of factors,
including: quality, technical performance, price, product
features, product system compatibility, system-level design
capability, engineering expertise, responsiveness to customers,
new product innovation, product availability, delivery timing
and reliability, and customer sales and technical support.
In the wireless communications target market, we provide RF
amplifiers, filters, optical finger navigation sensors, modules
and LEDs for mobile phones. Our primary competitors for this
target market are Anadigics, Inc., Hittite Microwave
Corporation, RF Micro Devices, Inc., Skyworks Solutions, Inc.
and TriQuint Semiconductor, Inc. We compete based on our
expertise in amplifier design, FBAR technology and module
integration. We also compete against a number of smaller, niche
wireless players based on our proprietary design expertise,
broad product portfolio, proprietary material processes and
integration expertise.
In the wired infrastructure target market, we provide fiber
optic transceivers and SerDes ASICs for high-speed data
communications and server applications. Our primary competitors
for this target market are Finisar Corporation, International
Business Machines Corp. Microelectronics Division, LSI
Corporation, ST Microelectronics N.V. and Texas Instruments
Incorporated. We compete based on the strength of our high speed
proprietary design expertise, our customer relationships,
proprietary process technology and broad product portfolio.
In the industrial and automotive electronics target market, we
provide fiber optic transceivers for communication networks,
LEDs for displays, motion control encoders and subsystems and
optocouplers for factory automation and motor controls. Our
primary competitors for this target market are Analog Devices,
Inc., Heidenhain Corporation, NEC Electronics Corporation and
Toshiba Corporation. We compete based on our design expertise,
broad product portfolio, reputation for quality products and
large customer base.
In the consumer and computing peripherals target market, we
provide optical mouse image sensors for optical mice and motion
control encoders and subsystems for printers and optical disk
drives. Our primary competitors for this target market are
Pixart Imaging Inc. and Sharp Corporation. In these
applications, we compete based on our long history of innovation
and market leadership, along with our design expertise.
Intellectual
Property
Our success depends in part upon our ability to protect our
intellectual property. To accomplish this, we rely on a
combination of intellectual property rights, including patents,
mask works, copyrights, trademarks, service marks, trade secrets
and similar intellectual property, as well as customary
contractual protections with our customers, suppliers, employees
and consultants, and through security measures to protect our
trade secrets. We believe our current product expertise, key
engineering talent and intellectual property portfolio provide
us with a strong platform from which to develop application
specific products in key target markets.
We are the successor to the Semiconductor Products Group of
Agilent Technologies, Inc., which we acquired on
December 1, 2005 in a transaction that we refer to as the
SPG Acquisition. We acquired ownership and license rights to a
portfolio of patents and patent applications, as well as certain
registered trademarks and service marks for discrete product
offerings, from Agilent in the SPG Acquisition. We have
continued to have issued to us, and to file
8
for, additional United States and foreign patents since the SPG
Acquisition. As of October 31, 2010, we had approximately
2,200 U.S. and 1,200 foreign patents and approximately 500
U.S. and 1,100 foreign pending patent applications. Our
research and development efforts are presently resulting in
approximately 150 new patent applications per year relating to a
wide range of RF and optoelectronic components and associated
applications. The expiration dates of our patents range from
2011 to 2030, with a small number of patents expiring in the
near future, none of which are expected to be material to our
intellectual property portfolio.
We do not know whether any of our pending patent applications
will result in the issuance of patents or to the extent that the
examination process will require us to narrow our claims. Since
the SPG Acquisition, we have focused our patent application
program to a greater extent on those inventions and improvements
that we believe are likely to be incorporated into our products
as contrasted with more basic research.
Much of our intellectual property is the subject of
cross-licenses to other companies that have been granted by
Agilent, or if originally derived from Hewlett-Packard Company,
by Hewlett-Packard Company. In addition, we license third-party
technologies that are incorporated into some elements of our
design activities, products and manufacturing processes.
Historically, licenses of the third-party technologies used by
us have been available to us on acceptable terms.
The semiconductor industry is characterized by the existence of
a large number of patents, copyrights, trademarks and trade
secrets and by the vigorous pursuit, protection and enforcement
of intellectual property rights. Many of our customer agreements
require us to indemnify our customers for third-party
intellectual property infringement claims, which has in the past
required and may in the future require that we defend those
claims, and might also require that we pay damages in the case
of adverse rulings. Claims of this sort could harm our
relationships with our customers and might deter future
customers from doing business with us. With respect to any
intellectual property rights claims against us or our customers
or distributors, we may be required to cease manufacture of the
infringing product, pay damages, expend resources to develop
non-infringing technology, seek a license which may not be
available on commercially reasonable terms or at all, or
relinquish patents or other intellectual property rights.
Employees
As of October 31, 2010, we had approximately
3,500 employees worldwide. Approximately 1,200 were
dedicated to research and development, 1,500 to manufacturing,
500 to sales and marketing and 300 to general and administrative
functions. By geography, approximately 60% of our employees are
located in Asia, 33% in North America and 7% in Europe. The
substantial majority of our employees are not party to a
collective bargaining agreement. However, approximately 400 of
our 1,000 employees in Singapore, none of whom are in
management or supervisory positions, are subject to a collective
bargaining agreement with United Workers of Electronic and
Electrical Industries that expires on June 30, 2013. In
addition, all of our employees in Italy and some employees in
Japan are subject to a collective bargaining agreement. In Italy
we are also subject to national collective agreements between
unions and employer associations. Such Italian national
collective agreements are compulsory for both the employees and
the employer. In addition, in Germany we are subject to
collective agreements with the works councils at our sites,
which apply to German employees other than managing directors
and managers with similar authority. We believe we have a good
working relationship with our employees and we have never
experienced an interruption of business as a result of labor
disputes.
Environmental
and Other Regulation
Our research and development and manufacturing operations
involve the use of hazardous substances and are regulated under
international, federal, state and local laws governing health
and safety and the environment. These regulations include
limitations on discharge of pollutants to air, water, and soil;
remediation requirements; product chemical content limitations;
manufacturing chemical use and handling restrictions; pollution
control requirements; waste minimization considerations; and
treatment, transport, storage and disposal of solid and
hazardous wastes. We are also subject to regulation by the
United States Occupational Safety and Health Administration and
similar health and safety laws in other jurisdictions.
9
We believe that our properties and operations at our facilities
comply in all material respects with applicable environmental
laws and worker health and safety laws; however, the risk of
environmental liabilities cannot be completely eliminated and
there can be no assurance that the application of environmental
and health and safety laws to our business will not require us
to incur significant expenditures.
We are also regulated under a number of international, federal,
state and local laws regarding recycling, product packaging and
product content requirements, including legislation enacted in
the European Union and China, among a growing number of
jurisdictions, which have placed greater restrictions on the use
of lead, among other chemicals, in electronic products, which
affects materials composition and semiconductor packaging. These
laws are becoming more stringent and may in the future cause us
to incur significant expenditures.
Backlog
Our sales are generally made pursuant to short-term purchase
orders. These purchase orders are made without deposits and may
be, and often are, rescheduled, canceled or modified on
relatively short notice, and in most cases without substantial
penalty. Therefore, we believe that purchase orders or backlog
are not a reliable indicator of future sales.
Seasonality
We are affected by seasonal trends in the semiconductor and
related industries. We typically experience sequentially lower
revenues in the first fiscal half of the year. Our revenue in
the second half of the fiscal year is typically higher than our
revenue in the first half of the fiscal year due to seasonality
in two of our target markets, consumer and computing peripherals
and wireless communications. These target markets typically
experience seasonality due to the back to school and
calendar year end holiday selling seasons.
Financial
Information about Geographic Areas
For information on the geographic concentration of our net
revenues and long-lived assets, please see Note 15.
Segment Information, of our consolidated financial
statements.
Other
Information
Avago Technologies Limited was incorporated under the laws of
the Republic of Singapore in August 2005. Our Singapore company
registration number is 200510713C. The address of our registered
office and our principal executive offices is 1 Yishun Avenue 7,
Singapore 768923, and our telephone number is +65-6755-7888. We
are the successor to the Semiconductor Products Group of
Agilent, which we acquired on December 1, 2005. Our
ordinary shares are listed on the Nasdaq Global Select Market
under the trading symbol AVGO.
We are subject to the information and periodic reporting
requirements of the Securities Exchange Act of 1934, or Exchange
Act, and, in accordance therewith, file periodic reports, proxy
statements and other information with the SEC. Such periodic
reports, proxy statements and other information is available for
inspection and copying at the SECs Public Reference Room
at 100 F Street, NE., Washington, DC 20549 or may be
obtained by calling the SEC at 1800SEC0330. In
addition, the SEC maintains a website at
http://www.sec.gov
that contains reports, proxy statements and other information
regarding issuers that file electronically with the SEC. We
maintain a website at www.avagotech.com. You may access our
annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
proxy statements and other reports (and amendments thereto)
filed or furnished pursuant to Section 13(a) or 15(d) of
the Exchange Act with the SEC free of charge at the
Investors SEC Filings section of our
website, as soon as reasonably practicable after such material
is electronically filed with, or furnished to, the SEC. The
reference to our website address does not constitute
incorporation by reference of the information contained on or
accessible through our website.
10
Our business, operations and financial results are subject to
various risks and uncertainties, including those described
below, that could adversely affect our business, financial
condition, results of operations, cash flows, and the trading
price of our ordinary shares. The following important factors,
among others, could cause our actual results to differ
materially from those expressed in forward-looking statements
made by us or on our behalf in filings with the SEC, press
releases, communications with investors and oral statements.
Risks
Related to Our Business
We
operate in the highly cyclical semiconductor industry, which is
subject to significant downturns.
The semiconductor industry is highly cyclical and is
characterized by constant and rapid technological change and
price erosion, evolving technical standards, short product life
cycles (for semiconductors and for the end-user products in
which they are used) and wide fluctuations in product supply and
demand. From time to time, these and other factors, together
with changes in general economic conditions, cause significant
upturns and downturns in the industry in general and in our
business in particular. For example, the global semiconductor
market experienced substantial declines in 2001 and 2009, in
each case beyond the declines experienced in the typical cycles
experienced by the semiconductor industry, due in large part to
deteriorating global economic conditions during those periods.
Periods of industry downturns, including the recent economic
downturn, have been characterized by diminished demand for
end-user products, high inventory levels, underutilization of
manufacturing capacity, changes in revenue mix and accelerated
erosion of average selling prices, resulting in, an adverse
effect on our business, financial condition and results of
operations. We expect our business to continue to be subject to
cyclical downturns even as overall economic conditions improve.
Our
operating results are subject to substantial quarterly and
annual fluctuations.
Our revenues and operating results have fluctuated in the past
and are likely to fluctuate in the future. These fluctuations
may occur on a quarterly and annual basis and are due to a
number of factors, many of which are beyond our control. These
factors include, among others:
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changes in end-user demand for the products manufactured and
sold by our customers;
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the timing of receipt, reduction or cancellation of significant
orders by customers;
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fluctuations in the levels of component inventories held by our
customers;
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the gain or loss of significant customers;
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market acceptance of our products and our customers
products;
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our ability to develop, introduce and market new products and
technologies on a timely basis;
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the timing and extent of product development costs;
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new product announcements and introductions by us or our
competitors;
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incurrence of research and development and related new product
expenditures;
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seasonality or cyclical fluctuations in our markets;
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currency fluctuations;
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utilization of our internal manufacturing facilities;
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fluctuations in manufacturing yields;
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significant warranty claims, including those not covered by our
suppliers or our insurers;
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availability and cost of raw materials from our suppliers;
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changes in our product mix or customer mix;
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intellectual property disputes;
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loss of key personnel or the shortage of available skilled
workers;
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the effects of competitive pricing pressures, including
decreases in average selling prices of our products; and
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changes in our tax incentive arrangements or structure, which
may adversely affect our net tax expense in any quarter in which
such an event occurs.
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The foregoing factors are difficult to forecast, and these, as
well as other factors, could materially adversely affect our
quarterly or annual operating results. In addition, a
significant amount of our operating expenses are relatively
fixed in nature due to our significant sales, research and
development and internal manufacturing overhead costs. Any
failure to adjust spending quickly enough to compensate for a
revenue shortfall could magnify the adverse impact of such
revenue shortfall on our results of operations. As a result, we
believe that
quarter-to-quarter
comparisons of our revenue and operating results may not be
meaningful or a reliable indicator of our future performance. If
our operating results in one or more future quarters fail to
meet the expectations of securities analysts or investors, an
immediate and significant decline in the trading price of our
ordinary shares may occur.
The
recent economic downturn and financial crisis has negatively
affected our business and continuing poor economic conditions
may negatively affect our future business, results of
operations, and financial condition.
The recent global economic downturn and financial crisis led to
slower economic activity, unemployment, concerns about inflation
and energy costs, decreased business and consumer confidence,
reduced corporate profits and capital spending, adverse business
conditions and lower levels of liquidity in many financial
markets. The global recession also led to reduced customer
spending in the semiconductor market and in our target markets
during 2009, made it difficult for our customers, our vendors
and us to accurately forecast and plan future business
activities, and caused U.S. and foreign businesses to slow
spending on our products. It has also caused consumers to reduce
spending on many products our customers make, such as personal
computers, mobile phone and flat screen televisions. While many
areas of the global economy are improving, including portions of
the semiconductor industry, a slowdown in the economic recovery
or worsening global economic conditions, including as a result
of conditions in Europe, may cause additional reductions in
customer spending and could lead to the insolvency of key
suppliers resulting in product delays, customer insolvencies,
and also counterparty failures that may negatively impact our
treasury operations. Our business, financial condition and
result of operations were negatively affected in prior periods
as a result of the recent downturn, and, if the global economic
situation worsens, could be materially adversely affected in
future periods.
If we
do not adapt to technological changes in the semiconductor
industry, we could lose customers or market share.
The semiconductor industry is subject to constant and rapid
changes in technology, frequent new product introductions, short
product life cycles, rapid product obsolescence and evolving
technical standards. Technological developments may reduce the
competitiveness of our products and require unbudgeted upgrades
that could be expensive and time consuming to implement. Our
products could become obsolete sooner than we expect because of
faster than anticipated, or unanticipated, changes in one or
more of the technologies related to our products. Furthermore,
we continually evaluate expenditures for research and
development and must choose among alternative technologies based
on our expectations of future market growth and other factors.
We may be unable to develop and introduce new or enhanced
products that satisfy customer requirements and achieve market
acceptance in a timely manner or at all, the technologies where
we have focused our research and development expenditures may
not become commercially successful, and we may be unable to
anticipate new industry standards and technological changes. We
also may not be able to respond successfully to new product
announcements and introductions by competitors. If we fail to
adapt successfully to technological changes or fail to obtain
access to important new technologies, we may be unable to retain
customers, attract new customers or sell new products to our
existing customers.
12
Dependence
on contract manufacturing and outsourcing other portions of our
supply chain may adversely affect our ability to bring products
to market and damage our reputation.
We operate a primarily outsourced manufacturing business model
that principally utilizes third-party foundry and assembly and
test capabilities. As a result, we are highly reliant on
third-party foundry wafer fabrication and assembly and test
capacity, including sole sourcing for many components or
products. For certain of our product families, substantially all
of our revenue from those products is derived from
semiconductors fabricated by external foundries such as Taiwan
Semiconductor Manufacturing Company Ltd. and WIN Semiconductors
Corp. We also use third-party contract manufacturers for a
significant majority of our assembly and test operations,
including Amertron Incorporated, SAE Magnetics (HK) Ltd, and the
Hana Microelectronics Public Company Ltd. group of companies.
The ability and willingness of our contract manufacturers to
perform is largely outside of our control. If one or more of our
contract manufacturers or other outsourcers fails to perform its
obligations in a timely manner or at satisfactory quality
levels, our ability to bring products to market and our
reputation could suffer. If one of our suppliers, particularly a
single- source supplier, ceases to, or is unable to, manufacture
such a component or supply is otherwise constrained, we may be
forced to re-engineer a product or may fail to meet customer
demand. In addition to discontinuing parts, suppliers may also
extend lead times, limit supplies or increase prices due to
capacity constraints or other factors. For example, in the event
that manufacturing capacity is reduced or eliminated at one or
more facilities, including as a response by contract
manufacturers to cycles in the semiconductor industry,
manufacturing could be disrupted, we could have difficulties
fulfilling our customer orders and our net revenue could
decline. In addition, if these third parties on whom we are
highly reliant fail to deliver quality products and components
on time and at reasonable prices, we could have difficulties
fulfilling our customer orders and our net revenue could
decline. In such events, our business, financial condition and
results of operations would be adversely affected.
To the extent we rely on third-party manufacturing
relationships, we face the following risks:
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inability of our manufacturers to develop manufacturing methods
appropriate for our products and their unwillingness to devote
adequate capacity to produce our products;
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product and manufacturing costs that are higher than anticipated;
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reduced control over product reliability and delivery schedules;
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more complicated supply chains; and
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time, expense and uncertainty in identifying and qualifying
additional or replacement manufacturers.
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Much of our outsourcing takes place in developing countries, and
as a result may additionally be subject to geopolitical
uncertainty. See Our business, financial
condition and results of operations could be adversely affected
by the political and economic conditions of the countries in
which we conduct business and other factors related to our
international operations.
A
prolonged disruption of our manufacturing facilities could have
a material adverse effect on our business, financial condition
and results of operations.
Although we operate using a primarily outsourced manufacturing
business model, we do rely on the manufacturing facilities we
own, in particular our fabrication facilities in
Fort Collins, Colorado and Singapore. We maintain our
internal fabrication facilities for products utilizing our
innovative materials and processes, to protect our intellectual
property and to develop the technology for manufacturing. A
prolonged disruption or material malfunction of, interruption in
or the loss of operations at one or more of our production
facilities, especially our Fort Collins and Singapore
facilities, or the failure to maintain our labor force at one or
more of these facilities, would limit our capacity to meet
customer demands and delay new product development until a
replacement facility and equipment, if necessary, were found.
The lease on our primary internal fabrication facility in
Singapore expires in 2015. If we are unable to renew this lease
on satisfactory terms, we would be required to locate suitable
replacement premises, with the goal of ensuring a smooth
transition between facilities on or prior to the expiration of
our current lease. However, the replacement of this, or any
other, manufacturing facility could take an extended amount of
time and significant expenditures on our part before
manufacturing operations could restart.
13
While we would seek to minimize any disruption to our operations
and supply chain associated with any such changes in
manufacturing facilities, we may experience delays and
significant costs resulting from these steps, which could have a
material adverse effect on our business, financial condition and
results of operations.
Unless
we and our suppliers continuously improve manufacturing
efficiency and quality, our financial performance could be
adversely affected.
Manufacturing semiconductors involves highly complex processes
that require advanced equipment. We and our suppliers, as well
as our competitors, continuously modify these processes in an
effort to improve yields and product performance. Defects or
other difficulties in the manufacturing process can reduce
yields and increase costs. Our manufacturing efficiency will be
an important factor in our future financial performance, and we
may be unable to maintain or increase our manufacturing
efficiency to the same extent as our competitors. For products
that we outsource manufacturing, our product yields and
performance will be subject to the manufacturing efficiencies of
our third-party suppliers.
From time to time, we and our suppliers have experienced
difficulty in beginning production at new facilities,
transferring production to other facilities, achieving and
maintaining a high level of process quality and effecting
transitions to new manufacturing processes, all of which have
caused us to suffer delays in product deliveries or reduced
yields. We and our suppliers may experience manufacturing
problems in achieving acceptable yields or experience product
delivery delays in the future as a result of, among other
things, capacity constraints, construction delays, transferring
production to other facilities (as we may be required to do with
our manufacturing facility in Singapore, in or prior to 2015),
upgrading or expanding existing facilities or changing our
process technologies, any of which could result in a loss of
future revenues. Our results of operations could be adversely
affected by any increase in costs related to increases in
production capacity if revenues do not increase proportionately.
Winning
business is subject to lengthy, competitive selection processes
that require us to incur significant expense. Even if we begin a
product design, a customer may decide to cancel or change its
product plans, which could cause us to generate no revenues from
a product and adversely affect our results of
operations.
We are focused on winning competitive bid selection processes,
known as design wins, to develop semiconductors for
use in our customers products. These selection processes
are typically lengthy and can require us to incur significant
design and development expenditures and dedicate scarce
engineering resources in pursuit of a single customer
opportunity. We may not win the competitive selection process
and may never generate any revenue despite incurring significant
design and development expenditures. These risks are exacerbated
by the fact that many of our products will likely have very
short life cycles. Failure to obtain a design win sometimes
prevents us from offering an entire generation of a product.
This can result in lost revenues and could weaken our position
in future competitive selection processes.
After winning a product design, we may experience delays in
generating revenue from our products as a result of the lengthy
development cycle typically required. In addition, a delay or
cancellation of a customers plans could materially and
adversely affect our financial results, as we may have incurred
significant expense in the design process and generated no
revenue. Finally, our customers failure to successfully
market and sell their products could reduce demand for our
products and materially adversely affect our business, financial
condition and results of operations.
We may
be subject to claims of infringement of third-party intellectual
property rights or demands that we license third-party
technology, which could result in significant expense and loss
of our intellectual property rights.
The semiconductor industry is characterized by companies holding
large numbers of patents, copyrights, trademarks and trade
secrets and by the vigorous pursuit, protection and enforcement
of intellectual property rights. From time to time, third
parties assert against us and our customers and distributors
their patent, copyright, trademark, trade secret and other
intellectual property rights to technologies that are important
to our business. For example, we are currently involved in a
dispute with TriQuint Semiconductor, Inc., or TriQuint, in
which, among
14
other things, TriQuint is seeking a judgment that one of our
patents relating to RF filter technology used in our wireless
products is invalid and, if valid, that TriQuints products
do not infringe that patent, and is claiming that certain of our
wireless products infringe three of its patents. See
Part II, Item 1. Legal Proceedings above
for additional information regarding this dispute.
Claims that our products or processes infringe or misappropriate
these rights, regardless of their merit or resolution, are
frequently costly and divert the efforts and attention of our
management and technical personnel. In addition, many of our
customer agreements and in some cases our asset sale agreements
require us to indemnify our customers or purchasers for
third-party intellectual property infringement claims, which
have required and may in the future require that we defend those
claims, and might require that we pay damages in the case of
adverse rulings. Claims of this sort could also harm our
relationships with our customers and might deter future
customers from doing business with us. We do not know whether we
will prevail in such proceedings given the complex technical
issues and inherent uncertainties in intellectual property
litigation. If any pending or future proceedings result in an
adverse outcome, we could be required to:
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cease the manufacture, use or sale of the infringing products,
processes or technology;
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pay substantial damages for past, present and future use of the
infringing technology;
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expend significant resources to develop non-infringing
technology;
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license technology from the third-party claiming infringement,
which license may not be available on commercially reasonable
terms, or at all;
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enter into cross-licenses with our competitors, which could
weaken our overall intellectual property portfolio;
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indemnify customers or distributors;
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pay substantial damages to our customers or end users to
discontinue use or replace infringing technology with
non-infringing technology; or
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relinquish intellectual property rights associated with one or
more of our patent claims, if such claims are held invalid or
otherwise unenforceable.
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Any of the foregoing results could have a material adverse
effect on our business, financial condition and results of
operations.
We
utilize a significant amount of intellectual property in our
business. If we are unable to protect our intellectual property,
our business could be adversely affected.
Our success depends in part upon our ability to protect our
intellectual property. To accomplish this, we rely on a
combination of intellectual property rights, including patents,
copyrights, trademarks, service marks, trade secrets and similar
intellectual property, as well as customary contractual
protections with our customers, suppliers, employees and
consultants, and through security measures to protect our trade
secrets. We may be required to spend significant resources to
monitor and protect our intellectual property rights and there
can be no assurance that, even with significant expenditures, we
will be able to protect our intellectual property rights. We are
unable to predict that:
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any of the patents and pending patent applications, trademarks,
copyrights, trade secrets, know-how or other intellectual
property rights that we presently employ in our business will
not lapse or be invalidated, circumvented, challenged, or, in
the case of third-party intellectual property rights, licensed
or
sub-licensed
to us, be licensed to others
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our intellectual property rights will provide competitive
advantages to us;
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rights previously granted by third parties to intellectual
property rights licensed or assigned to us, including portfolio
cross-licenses, will not hamper our ability to assert our
intellectual property rights against potential competitors or
hinder the settlement of currently pending or future disputes;
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any of our pending or future patent, trademark or copyright
applications will be issued or have the coverage originally
sought; or
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our intellectual property rights will be enforced in certain
jurisdictions where competition may be intense or where legal
protection may be weak.
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In addition, our competitors or others may develop products or
technologies that are similar or superior to our products or
technologies, duplicate our products or technologies or design
around our protected technologies. Effective patent, trademark,
copyright and trade secret protection may be unavailable or more
limited in one or more relevant jurisdictions, relative to those
protections available in the United States, or may not be
applied for in one or more relevant jurisdictions. Moreover,
from time to time we pursue litigation to assert our
intellectual property rights, including, in some cases, against
third parties with whom we have ongoing relationships, such as
customers and suppliers, and third parties may pursue litigation
against us. For example, we have filed suit against ST
Microelectronics NV., or ST Microelectronics, in which, we are
seeking a judgment that they have infringed five of our patents
relating to optical navigation devices and they have
counter-filed against us alleging that certain of our optical
navigation devices infringe two of their patents, among other
things. See Part I, Item 3. Legal
Proceedings below for additional information regarding
this dispute. An adverse decision in such types of legal action
could limit our ability to assert our intellectual property
rights and limit the value of our technology, including the loss
of opportunities to license our technology to others or to
collect royalty payments based upon successful protection and
assertion of our intellectual property against others. In
addition, such legal actions or adverse decisions could
otherwise negatively impact our business, financial condition
and results of operations.
From time to time we may need to obtain additional intellectual
property licenses or renew existing license agreements. We are
unable to predict whether these license agreements can be
obtained or renewed on acceptable terms or at all.
Competition
in our industry could prevent us from growing our revenue and
from raising prices to offset increases in costs.
The global semiconductor market is highly competitive. We
compete in different target markets to various degrees on the
basis of, among other things, quality, technical performance,
price, product features, product system compatibility,
system-level design capability, engineering expertise,
responsiveness to customers, new product innovation, product
availability, delivery timing and reliability, and customer
sales and technical support. Current and prospective customers
for our products evaluate our capabilities against the merits of
our direct competitors. Some of our competitors are well
established, have a more extensive product portfolio, have
substantially greater market share and manufacturing, financial,
research and development and marketing resources to pursue
development, engineering, manufacturing, marketing and
distribution of their products. In addition, many of our
competitors have longer independent operating histories, greater
presence in key markets, more comprehensive patent protection
and greater name recognition. We compete with integrated device
manufacturers, or IDMs, and fabless semiconductor companies as
well as the internal resources of large, integrated OEMs. Our
competitors range from large, international companies offering a
wide range of semiconductor products to smaller companies
specializing in narrow markets. We expect competition in the
markets in which we participate to continue to increase as
existing competitors improve or expand their product offerings.
In addition, companies not currently in direct competition with
us may introduce competing products in the future. Because our
products are often building block semiconductors providing
functions that in some cases can be integrated into more complex
integrated circuits, or ICs, we also face competition from
manufacturers of ICs, as well as customers that develop their
own IC products. The competitive landscape is changing as a
result of an increasing trend of consolidation within the
industry, as some of our competitors have merged with or been
acquired by other competitors while others have begun
collaborating with each other. We expect this consolidation
trend to continue.
Our ability to compete successfully depends on elements both
within and outside of our control, including industry and
general economic trends. During past periods of downturns in our
industry, competition in the markets in which we operate
intensified as manufacturers of semiconductors reduced prices in
order to combat production overcapacity and high inventory
levels. The actions of our competitors, particularly in the area
of pricing, can have a substantial adverse impact on our
revenues, and potentially on revenues in specific industry end
markets. In periods
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where the semiconductor industry experiences significant
declines, manufacturers in financial difficulties or in
bankruptcy may implement pricing structures designed to ensure
short-term market share and near-term survival, rather than
securing long-term viability. In addition, many of our
competitors have substantially greater financial and other
resources than us with which to withstand adverse economic or
market conditions and any associated pricing actions of other
market participants in the future.
We may
be unable to make the substantial and productive research and
development investments which are required to remain competitive
in our business.
The semiconductor industry requires substantial investment in
research and development in order to develop and bring to market
new and enhanced technologies and products. In order to remain
competitive, we anticipate that we will need to maintain or
increase our levels of research and development expenditures,
and we expect research and development expenses to increase in
absolute dollars for the foreseeable future, due to the
increasing complexity and number of products we plan to develop.
We do not know whether we will have sufficient resources to
maintain or increase the level of investment in research and
development required to remain competitive. In addition, we
cannot assure you that the technologies where we have focused
our research and development expenditures will become
commercially successful. If we are required to invest
significantly greater resources than anticipated in our research
and development efforts without a corresponding increase in
revenue, our operating results could decline.
Our
business would be adversely affected by the departure of
existing members of our senior management team or if our senior
management team is unable to effectively implement our
strategy.
Our success depends, in large part, on the continued
contributions of our senior management team, in particular, the
services of Mr. Hock E. Tan, our President and Chief
Executive Officer. None of our senior management is bound by
written employment contracts to remain with us for a specified
period. In addition, we do not currently maintain key person
life insurance covering our senior management. The loss of any
of our senior management could harm our ability to implement our
business strategy and respond to the rapidly changing market
conditions in which we operate.
If we
are unable to attract, train and retain qualified personnel,
especially our design and technical personnel, we may not be
able to execute our business strategy effectively.
Our future success depends on our ability to retain, attract and
motivate qualified personnel, including our management, sales
and marketing, legal and finance, and especially our design and
technical personnel. We do not know whether we will be able to
retain all of these employees as we continue to pursue our
business strategy. We have historically encountered difficulties
in hiring and retaining qualified engineers because there is a
limited pool of engineers with expertise in analog and
optoelectronic semiconductor design. Competition for such
personnel is intense in the semiconductor industry. As the
source of our technological and product innovations, our design
and technical personnel represent a significant asset. The loss
of the services of key employees, especially our key design and
technical personnel, or our inability to retain, attract and
motivate qualified design and technical personnel, could have a
material adverse effect on our business, financial condition and
results of operations.
We are
subject to warranty claims, product recalls and product
liability.
We are currently, and from time to time may be, subject to
warranty or product liability claims that have lead and may in
the future lead to significant expenses as we compensate
affected customers for costs incurred related to product quality
issues. For example, in the second quarter of 2009 we identified
a product quality issue with a particular component that we took
steps to correct, including notifying our customers and offering
to replace such components. We are continuing our discussions
with affected customers regarding this issue, and have
compensated or otherwise rectified the issue with many of those
customers. As at October 31, 2010, we have recorded
$17 million in charges associated with this issue,
including $11 million in fiscal year 2010, and may incur
additional charges as we continue to work with our customers to
resolve the matter.
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Although we maintain product liability insurance, such insurance
is subject to significant deductibles and there is no guarantee
that such insurance will be available or adequate to protect
against all such claims, or we may elect to self-insure with
respect to certain matters. We may incur costs and expenses in
the event of any recall of a customers product containing
one of our devices. The process of identifying a recalled
product in devices that have been widely distributed may be
lengthy and require significant resources, and we may incur
significant replacement costs, contract damage claims from our
customers and reputational harm. Costs or payments made in
connection with warranty and product liability claims and
product recalls could materially affect our financial condition
and results of operations.
The
complexity of our products could result in unforeseen delays or
expenses or undetected defects or bugs, which could adversely
affect the market acceptance of new products, damage our
reputation with current or prospective customers, and materially
and adversely affect our operating costs.
Highly complex products such as the products that we offer, may
contain defects and bugs when they are first introduced or as
new versions are released, or their release may be delayed due
to unforeseen difficulties during product development. We have
in the past experienced, and may in the future experience, these
defects, bugs and delays. If any of our products contain defects
or bugs, or have reliability, quality or compatibility problems,
we may not be able to successfully design workarounds.
Consequently, our reputation may be damaged and customers may be
reluctant to buy our products, which could materially and
adversely affect our ability to retain existing customers,
attract new customers, and our financial results. In addition,
these defects or bugs could interrupt or delay sales to our
customers. To resolve these problems, we may have to invest
significant capital and other resources. Although our products
are tested by our suppliers, our customers and ourselves, it is
possible that our new products will contain defects or bugs. If
any of these problems are not found until after we have
commenced commercial production of a new product, we may be
required to incur additional development costs and product
recall, repair or replacement costs. These problems may also
result in claims against us by our customers or others. For
example, if a delay in the manufacture and delivery of our
products causes the delay of a customers product delivery,
we may be required, under the terms of our agreement with that
customer, to compensate the customer for the adverse effects of
such delays. In addition, these problems may divert our
technical and other resources from other development efforts,
and we would likely lose, or experience a delay in, market
acceptance of the affected product or products, and we could
lose credibility with our current and prospective customers. As
a result, our financial results could be materially and
adversely affected.
Failure
to adjust our supply chain volume due to changing market
conditions or failure to accurately estimate our customers
demand could adversely affect our results of
operations.
We make significant decisions, including determining the levels
of business that we will seek and accept, production schedules,
levels of reliance on contract manufacturing and outsourcing,
personnel needs and other resource requirements, based on our
estimates of customer requirements. The short-term nature of
commitments by many of our customers and the possibility of
rapid changes in demand for their products reduces our ability
to accurately estimate future customer requirements. Our results
of operations could be harmed if we are unable to adjust our
supply chain volume to address market fluctuations, including
those caused by the seasonal or cyclical nature of the markets
in which we operate. The sale of our products is dependent, to a
large degree, on customers whose industries are subject to
seasonal or cyclical trends in the demand for their products.
For example, the consumer electronics market is particularly
volatile and is subject to seasonality related to the holiday
selling season, making demand difficult to anticipate. On
occasion, customers may require rapid increases in production,
which can challenge our resources and reduce margins. During a
market upturn, we may not be able to purchase sufficient
supplies or components, or secure sufficient contract
manufacturing capacity, to meet increasing product demand, which
could harm our reputation, prevent us from taking advantage of
opportunities and reduce revenue growth. In addition, some parts
are not readily available from alternate suppliers due to their
unique design or the length of time necessary for design work.
In order to secure components for the production of products, we
may continue to enter into non-cancelable purchase commitments
with vendors or make advance payments to suppliers, which could
reduce our ability to adjust our inventory or expense levels to
declining market demands. Prior commitments of this type have
resulted in
18
an excess of parts when demand for our products has decreased.
Downturns in the semiconductor industry have in the past caused,
and may in the future cause, our customers to reduce
significantly the amount of products ordered from us. If demand
for our products is less than we expect, we may experience
excess and obsolete inventories and be forced to incur
additional charges. Conversely, if OEMs order more of our
products in any particular quarter than are ultimately required
to satisfy end customer demand, inventories at these OEMs may
grow in such quarter, which could adversely affect our product
revenues in a subsequent quarter as such OEMs would likely
+reduce future orders until their inventory levels realign with
end customer demand. In addition, because certain of our sales,
research and development and internal manufacturing overhead
expenses are relatively fixed, a reduction in customer demand
may decrease our gross margins and operating income.
We are
subject to currency exchange risks that could adversely affect
our operations.
Although a majority of our revenue and operating expenses is
denominated in U.S. dollars, and we prepare our financial
statements in U.S. dollars in accordance with generally
accepted accounting principles, or GAAP, a portion of our
revenue and operating expenses is in foreign currencies. As a
result, we are subject to currency risks that could adversely
affect our operations, including:
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risks resulting from changes in currency exchange rates and the
implementation of exchange controls; and
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limitations on our ability to reinvest earnings from operations
in one country to fund the capital needs of our operations in
other countries.
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Changes in exchange rates will result in increases or decreases
in our costs and earnings, and may also affect the book value of
our assets located outside the United States and the amount of
our equity. Although we seek to minimize our currency exposure
by engaging in hedging transactions where we deem it
appropriate, we do not know whether our efforts will be
successful.
Our
operating results and financial condition could be harmed if the
markets into which we sell our products decline.
Visibility into our markets is limited. As was the case in the
recent economic downturn, any decline in our customers
markets would likely result in a reduction in demand for our
products and make it more difficult to collect on outstanding
amounts due to us. For example, if the Asian market does not
continue to grow as anticipated or if the semiconductor market
declines, our results of operations will likely suffer. In such
an environment, pricing pressures could intensify and, if we
were unable to respond quickly, could significantly reduce our
gross margins. To the extent we cannot offset recessionary
periods or periods of reduced growth that may occur in these
markets through increased market share or otherwise, our net
revenue may decline and our business, financial condition and
results of operations may suffer. Pricing pressures and
competition are especially intense in semiconductor-related
industries, which could prevent achievement of our long-term
financial goals and could require us to implement additional
cost-cutting measures. Furthermore, industry growth rates may
not be as forecasted, which could result in us spending on
process and product development well ahead of market
requirements, which in turn could have a material adverse effect
on our business, financial condition and results of operations.
The
demands or loss of one or more of our significant customers may
adversely affect our business.
Some of our customers are material to our business and results
of operations. During fiscal year 2010, no customer accounted
for 10% or more of our net revenue, and our top 10 customers,
which included five distributors, collectively accounted for 55%
of our net revenue. During fiscal year 2009, no customer
accounted for 10% or more of our net revenue, and our top 10
customers, which included four distributors, collectively
accounted for 60% of our net revenue. We believe our top
customers purchasing power has given them the ability to
make greater demands on their suppliers, including us. We expect
this trend to continue, which we expect will result in our
results of operations becoming increasingly sensitive to
deterioration in the financial condition of, or other adverse
developments related to, one or more of our significant
customers. Although we believe that our relationships with our
major customers are good, we generally do not have long-term
contracts with any of them, which is typical of our industry. As
a result, although our customers provide indications of their
product needs and purchases on an annual basis, they generally
purchase our products on a weekly or daily basis and the
relationship, as well as
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particular orders, can be terminated at any time. The loss of
any of our major customers, or any substantial reduction in
sales to any of these customers, could have a material adverse
effect on our business, financial condition and results of
operations.
We
generally do not have any long-term supply contracts with our
contract manufacturers or materials suppliers and may not be
able to obtain the products or raw materials required for our
business, which could have a material adverse affect on our
business.
We either obtain the products we need for our business from
third-party contract manufacturers or we obtain the materials we
need for our products from suppliers, some of which are our
single source suppliers for these materials. We purchase a
significant portion of our semiconductor materials and finished
goods from a few suppliers and contract manufacturers. For
fiscal year 2010, we purchased 54% of the materials for our
manufacturing processes from eight suppliers. For fiscal year
2009, we purchased 52% of the materials for our manufacturing
processes from eight suppliers. Substantially all of our
purchases are on a purchase order basis, and we have not
generally entered into long-term contracts with our contract
manufacturers or suppliers. In the event that these purchase
orders or relationships with suppliers are terminated, we cannot
obtain sufficient quantities of raw materials at reasonable
prices, the quality of the material deteriorates, we fail to
satisfy our customers requirements or we are not able to
pass on higher materials or energy costs to our customers, our
business, financial condition and results of operations could be
adversely impacted.
Our manufacturing processes rely on many materials, including
silicon and GaAs wafers, copper lead frames, mold compound,
ceramic packages and various chemicals and gases. From time to
time, suppliers may extend lead times, limit supplies or
increase prices due to capacity constraints or other factors.
Although we believe that our current supplies of materials are
adequate, shortages could occur in various essential materials
due to interruption of supply or increased demand in the
industry.
We use third-party contractor manufacturers for most of our
manufacturing activities, primarily for wafer fabrication and
module assembly and test services. Our agreements with these
manufacturers typically require us to forecast product needs,
commit to purchase services consistent with these forecasts and
may require other commitments in the early stages of the
relationship. Our operations could be adversely affected in the
event that these contractual relationships were disrupted or
terminated, the cost of such services increased significantly,
the quality of the services provided deteriorated, our forecasts
proved to be materially incorrect or capacity is consumed by our
competitors.
We
rely on third parties to provide corporate infrastructure
services necessary for the operation of our business. Any
failure of one or more of our vendors to provide these services
could have a material adverse effect on our
business.
We rely on third-party vendors to provide critical corporate
infrastructure services, including, among other things, certain
services related to accounting, billing, human resources,
information technology, or IT, network development and network
monitoring. We depend on these vendors to ensure that our
corporate infrastructure will consistently meet our business
requirements. The ability of these third-party vendors to
successfully provide reliable, high quality services is subject
to technical and operational uncertainties that are beyond our
control. While we may be entitled to damages if our vendors fail
to perform under their agreements with us, our agreements with
these vendors limit the amount of damages we may receive. In
addition, we do not know whether we will be able to collect on
any award of damages or that any such damages would be
sufficient to cover the actual costs we would incur as a result
of any vendors failure to perform under its agreement with
us. We are currently implementing a phased migration of our data
centers in Singapore from one managed location to another,
refreshing critical hardware and implementing centralized
disaster recovery procedures. Any difficulties in the migration
of certain enterprise-critical applications during this process
may result in short periods of downtime for these applications,
which may adversely affect our ability to accept customer
orders, manufacture or ship products or invoice customers during
those periods. Any failure of our corporate infrastructure could
have a material adverse effect on our business, financial
condition and results of operations. Upon expiration or
termination of any of our agreements with third-party vendors,
we may not be able to replace the services provided to us in a
timely manner or on terms
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and conditions, including service levels and cost, that are
favorable to us and a transition from one vendor to another
vendor could subject us to operational delays and inefficiencies
until the transition is complete.
Our
gross margin is dependent on a number of factors, including our
product mix and level of capacity utilization.
Our gross margin is highly dependent on product mix, with
proprietary products and products sold into our industrial and
automotive target market typically providing higher gross margin
than other products. A shift in sales mix away from our higher
margin products could adversely affect our future gross margin
percentages. In addition, semiconductor manufacturing requires
significant capital investment, leading to high fixed costs,
including depreciation expense. Although we outsource a
significant portion of our manufacturing activities, we do
retain some semiconductor fabrication facilities. If we are
unable to utilize our owned fabrication facilities at a high
level, the fixed costs associated with these facilities will not
be fully absorbed, resulting in higher average unit costs and
lower gross margins. In the past, we have experienced periods
where our gross margins declined due to, among other things,
reduced factory utilization resulting from reduced customer
demand, reduced selling prices and a change in product mix
towards lower margin devices. Increased competition and the
existence of product alternatives, more complex engineering
requirements, lower demand and other factors may lead to further
price erosion, lower revenues and lower margins for us in the
future.
Our
business, financial condition and results of operations could be
adversely affected by the political and economic conditions of
the countries in which we conduct business and other factors
related to our international operations.
We sell our products throughout the world. In addition, as at
October 31, 2010, approximately 67% of our employees are
located outside of the United States. Multiple factors relating
to our international operations and to particular countries in
which we operate could have a material adverse effect on our
business, financial condition and results of operations. These
factors include:
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changes in political, regulatory, legal or economic conditions;
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restrictive governmental actions, such as restrictions on the
transfer or repatriation of funds and foreign investments and
trade protection measures, including export duties and quotas
and customs duties and tariffs;
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disruptions of capital and trading markets;
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changes in import or export licensing requirements;
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transportation delays;
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civil disturbances or political instability;
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geopolitical turmoil, including terrorism, war or political or
military coups;
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changes in labor standards;
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limitations on our ability under local laws to protect our
intellectual property;
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nationalization of businesses and expropriation of assets;
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changes in tax laws;
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currency fluctuations, which may result in our products becoming
too expensive for foreign customers or foreign-sourced materials
and services becoming more expensive for us; and
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difficulty in obtaining distribution and support.
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A majority of our products are produced and sourced in Asia,
including in China, Malaysia, the Philippines, Singapore, Taiwan
and Thailand. Any conflict or uncertainty in these countries,
including due to political or civil unrest or public health or
safety concerns could have a material adverse effect on our
business, financial condition and results of operations. In
addition, if the government of any country in which our products
are manufactured or
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sold sets technical standards for products manufactured in or
imported into their country that are not widely shared, it may
lead certain of our customers to suspend imports of their
products into that country, require manufacturers in that
country to manufacture products with different technical
standards and disrupt cross-border manufacturing relationships
which, in each case, could have a material adverse effect on our
business, financial condition and results of operations.
In addition, our subsidiaries may require future equity-related
financing, and any capital contributions to certain of our
subsidiaries may require the approval of the relevant
authorities in the jurisdiction in which the subsidiary is
incorporated. The approvals are required from the investment
commissions or similar agency of the particular jurisdiction and
relate to any initial or additional equity investment by foreign
entities in local corporations. Our failure to obtain the
required approvals and our resulting inability to provide such
equity-related financing or capital contributions could have an
adverse effect on our business, financial condition and results
of operations.
If we
suffer loss or significant damage to our factories, facilities
or distribution system due to catastrophe, our operations could
be seriously harmed.
Our factories, facilities and distribution system, and those of
our contract manufacturers, are subject to risk of catastrophic
loss due to fire, flood, or other natural or man-made disasters.
The majority of our facilities and those of our contract
manufacturers are located in the Pacific Rim region, a region
with above average seismic and severe weather activity. In
addition, our research and development personnel are
concentrated in a few locations, primarily Korea, Malaysia,
Singapore, Fort Collins, Colorado and San Jose,
California, with the expertise of the personnel at each such
location tending to be focused on one or two specific areas. Any
catastrophic loss or significant damage to any of these
facilities would likely disrupt our operations, delay
production, shipments and revenue and result in significant
expenses to repair or replace the facility, and in some
instances could significantly curtail our research and
development efforts in a particular product area or target
market. In particular, any catastrophic loss at our
Fort Collins, Colorado and Singapore facilities would
materially and adversely affect our business.
If the
tax incentive or tax holiday arrangements we have negotiated in
Singapore and other jurisdictions change or cease to be in
effect or applicable, or if our assumptions and interpretations
regarding tax laws and incentive or holiday arrangements prove
to be incorrect, the amount of corporate income taxes we have to
pay could significantly increase.
We have structured our operations to maximize the benefit from
various tax incentives and tax holidays extended to us in
various jurisdictions to encourage investment or employment. For
example, we have obtained several tax incentives from the
Singapore Economic Development Board, an agency of the
Government of Singapore, which provide that certain classes of
income we earn in Singapore are subject to tax holidays or
reduced rates of Singapore income tax. Each such tax incentive
is separate and distinct from the others, and may be granted,
withheld, extended, modified, truncated, complied with or
terminated independently without any effect on the other
incentives. In order to retain these tax benefits in Singapore,
we must meet certain operating conditions specific to each
incentive relating to, among other things, maintenance of a
treasury function, a corporate headquarters function, specified
intellectual property activities and specified manufacturing
activities in Singapore. Some of these operating conditions are
subject to phase-in periods through 2015. The Singapore tax
incentives are presently scheduled to expire at various dates
generally between 2014 and 2025, subject in certain cases to
potential extensions. Absent such tax incentives, the corporate
income tax rate in Singapore that would otherwise apply to us
would be 17% commencing from the 2010 year of assessment.
For the fiscal years ended November 2, 2008,
November 1, 2009 and October 31, 2010, the effect of
all these tax incentives, in the aggregate, was to reduce the
overall provision for income taxes from what it otherwise would
have been in such year by approximately $24 million,
$17 million and $63 million, respectively. The tax
incentives that we have negotiated in other jurisdictions are
also subject to our compliance with various operating and other
conditions. If we cannot or elect not to comply with the
operating conditions included in any particular tax incentive,
we will lose the related tax benefits and could be required to
refund material tax benefits previously realized by us with
respect to that incentive and, depending on the incentive at
issue, could likely be required to modify our operational
structure and tax strategy.
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Any such modified structure or strategy may not be as beneficial
to us from an income tax expense or operational perspective as
the benefits provided under the present tax concession
arrangements.
Our interpretations and conclusions regarding the tax incentives
are not binding on any taxing authority, and if our assumptions
about tax and other laws are incorrect or if these tax
incentives are substantially modified or rescinded we could
suffer material adverse tax and other financial consequences,
which would increase our expenses, reduce our profitability and
adversely affect our cash flows. In addition, taxable income in
any jurisdiction is dependent upon acceptance of our operational
practices and intercompany transfer pricing by local tax
authorities as being on an arms length basis. Due to
inconsistencies in application of the arms length standard
among taxing authorities, as well as lack of adequate
treaty-based protection, transfer pricing challenges by tax
authorities could, if successful, substantially increase our
income tax expense.
The
enactment of legislation implementing changes in U.S. taxation
of international business activities or the adoption of other
tax reform policies could materially impact our financial
position and results of operations.
Tax bills are introduced from time to time to reform
U.S. taxation of international business activities.
Depending on the final form of legislation enacted, if any,
these consequences may be significant for us due to the large
scale of our international business activities. If any of these
proposals are enacted into legislation, they could have material
adverse consequences on the amount of tax we pay and thereby on
our financial position and results of operations.
We may
pursue acquisitions, dispositions, investments and joint
ventures, which could affect our results of
operations.
We have made and expect to continue to make acquisitions of, and
investments in, businesses that offer complementary products,
services and technologies, augment our market coverage, or
enhance our technological capabilities. We may also enter into
strategic alliances or joint ventures to achieve these goals. We
cannot assure you that we will be able to identify suitable
acquisition, investment, alliance, or joint venture
opportunities or that we will be able to consummate any such
transactions or relationships on terms and conditions acceptable
to us, or that such transactions or relationships will be
successful.
These transactions or any other acquisitions or dispositions
involve risks and uncertainties. For example, the integration of
acquired businesses may not be successful and could result in
disruption to other parts of our business. In addition, the
integration may require that we incur significant restructuring
charges. To integrate acquired businesses, we must implement our
management information systems, operating systems and internal
controls, and assimilate and manage the personnel of the
acquired operations. The difficulties of the integrations may be
further complicated by such factors as geographic distances,
lack of experience operating in the geographic market or
industry sector of the acquired business, delays and challenges
associated with integrating the business with our existing
businesses, diversion of managements attention from daily
operations of the business, potential loss of key employees and
customers of the acquired business, the potential for
deficiencies in internal controls at the acquired or combined
business, performance problems with the acquired business
technology, difficulties in entering markets in which we have no
or limited direct prior experience, exposure to unanticipated
liabilities of the acquired business, insufficient revenues to
offset increased expenses associated with the acquisition, and
our potential inability to achieve the growth prospects and
synergies expected from any such acquisition. Even when an
acquired business has already developed and marketed products,
there can be no assurance that product enhancements will be made
in a timely fashion or that all pre-acquisition due diligence
will have identified all material issues that might arise with
respect to such acquired assets.
Any acquisition may also cause us to assume liabilities, acquire
goodwill and
non-amortizable
intangible assets that will be subject to impairment testing and
potential impairment charges, incur amortization expense related
to certain intangible assets, increase our expenses and working
capital requirements, and subject us to litigation, which would
reduce our return on invested capital. Failure to manage and
successfully integrate the acquisitions we make could materially
harm our business and operating results.
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Any future acquisitions may require additional debt or equity
financing, which, in the case of debt financing, would increase
our leverage and potentially affect our credit ratings, and in
the case of equity financing, would be dilutive to our existing
shareholders. Any downgrades in our credit ratings associated
with an acquisition could adversely affect our ability to borrow
by resulting in more restrictive borrowing terms. As a result of
the foregoing, we also may not be able to complete acquisitions
or strategic customer transactions in the future to the same
extent as in the past, or at all. These and other factors could
harm our ability to achieve anticipated levels of profitability
at acquired operations or realize other anticipated benefits of
an acquisition, and could adversely affect our business,
financial condition and results of operations.
Our
business is subject to various governmental regulations, and
compliance with these regulations may cause us to incur
significant expenses. If we fail to maintain compliance with
applicable regulations, we may be forced to recall products and
cease their manufacture and distribution, and we could be
subject to civil or criminal penalties.
Our business is subject to various significant international and
U.S. laws and other legal requirements, including
packaging, product content, labor and import/export regulations.
These regulations are complex, change frequently and have
generally become more stringent over time. We may be required to
incur significant expenses to comply with these regulations or
to remedy violations of these regulations. Any failure by us to
comply with applicable government regulations could result in
cessation of our operations or portions of our operations,
product recalls or impositions of fines and restrictions on our
ability to conduct our operations. In addition, because many of
our products are regulated or sold into regulated industries, we
must comply with additional regulations in marketing our
products.
Our products and operations are also subject to the rules of
industrial standards bodies, like the International Standards
Organization, as well as regulation by other agencies, such as
the U.S. Federal Communications Commission. If we fail to
adequately address any of these rules or regulations, our
business could be harmed.
We must conform the manufacture and distribution of our
semiconductors to various laws and adapt to regulatory
requirements in all countries as these requirements change. If
we fail to comply with these requirements in the manufacture or
distribution of our products, we could be required to pay civil
penalties, face criminal prosecution and, in some cases, be
prohibited from distributing our products commercially until the
products or component substances are brought into compliance.
We are
subject to environmental, health and safety laws, which could
increase our costs, restrict our operations and require
expenditures that could have a material adverse affect on our
results of operations and financial condition.
We are subject to a variety of international and U.S. laws
and other legal requirements relating to the use, disposal,
clean-up of
and human exposure to, hazardous materials. Any failure by us to
comply with environmental, health and safety requirements could
result in the limitation or suspension of production or subject
us to future liabilities in excess of our reserves. In addition,
compliance with environmental, health and safety requirements
could restrict our ability to expand our facilities or require
us to acquire costly pollution control equipment, incur other
significant expenses or modify our manufacturing processes. In
the event of the discovery of new contamination, additional
requirements with respect to existing contamination, or the
imposition of other cleanup obligations for which we are
responsible, we may be required to take remedial or other
measures which could have a material adverse effect on our
business, financial condition and results of operations.
We also face increasing complexity in our product design and
procurement operations as we adjust to new requirements relating
to the materials composition of our products, including the
restrictions on lead and certain other substances in electronics
that apply to specified electronics products sold in the
European Union as of July 1, 2006 under the Restriction of
Hazardous Substances in Electrical and Electronic Equipment
Directive. Other countries, such as the United States, China and
Japan, have enacted or may enact laws or regulations similar to
the EU legislation. Other environmental regulations may require
us to reengineer our products to utilize components that are
more environmentally compatible. Such reengineering and
component substitution may result in excess inventory or other
additional costs and could have a material adverse effect on our
results of operations.
24
In addition to the costs of complying with environmental, health
and safety requirements, we may in the future incur costs
defending against environmental litigation brought by government
agencies and private parties. We may be defendants in lawsuits
brought by parties in the future alleging environmental damage,
personal injury or property damage. A significant judgment
against us could harm our business, financial condition and
results of operations.
In the last few years, there has been increased media scrutiny
and associated reports focusing on a potential link between
working in semiconductor manufacturing clean room environments
and certain illnesses, primarily different types of cancers.
Regulatory agencies and industry associations have begun to
study the issue to see if any actual correlation exists. Because
we utilize clean rooms, we may become subject to liability
claims. In addition, these reports may also affect our ability
to recruit and retain employees.
We cannot predict:
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changes in environmental or health and safety laws or
regulations;
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the manner in which environmental or health and safety laws or
regulations will be enforced, administered or interpreted;
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our ability to enforce and collect under indemnity agreements
and insurance policies relating to environmental
liabilities; or
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the cost of compliance with future environmental or health and
safety laws or regulations or the costs associated with any
future environmental claims, including the cost of
clean-up of
currently unknown environmental conditions.
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We
have taken significant restructuring charges in the past and may
need to take material restructuring charges in the
future.
During fiscal year 2009, we pursued a number of restructuring
initiatives designed to reduce costs and increase revenue across
our operations, in large part due to the global economic
downturn and related decline in demand for our customers
products. These initiatives included significant workforce
reductions in certain areas as we realigned our business,
establishing certain operations closer in location to our global
customers, evaluating functions more efficiently performed
through partnerships or other outside relationships and steps to
attempt to further reduce our overhead costs. As a result of
these initiatives, we incurred restructuring charges of
$34 million in fiscal year 2009 and $4 million in
fiscal year 2010.
We may be required to take additional charges in the future as
we continue to evaluate our operations and cost structures
relative to general economic conditions, market demands, cost
competitiveness, and our geographic footprint as it relates to
our customers production requirements. We cannot assure
you as to the timing or amount of any future restructuring
charges. If we are required to take additional restructuring
charges in the future, our operating results, financial
condition, and cash flows may be adversely impacted.
Additionally, there are other potential risks associated with
our restructurings that could adversely affect us, such as
delays encountered with the finalization and implementation of
the restructuring activities, work stoppages, and the failure to
achieve targeted cost savings.
We are
subject to risks associated with our distributors product
inventories and product sell-through.
We sell many of our products to customers through distributors
who maintain their own inventory of our products for sale to
dealers and end users. We recognize revenues for sales to
distributors upon delivery to the distributor. We limit
distributor return rights and we allow limited price adjustments
on sales to distributors. We provide reserves for distributor
rights related to these limited stock returns and price
adjustments. Sales to distributors accounted for 41% and 33% of
our net revenue for the fiscal years 2010 and 2009, respectively.
If these distributors are unable to sell an adequate amount of
their inventory of our products in a given quarter to dealers
and end users or if they decide to decrease their inventories
for any reason, such as due to the recent global recession or
due to any downturn in technology spending, our sales to these
distributors and our revenues may decline. In addition, if
distributors decide to purchase more inventory in any particular
quarter, due to product
25
availability or other reasons, than is required to satisfy end
customer demand, inventory at our distributors may grow in such
quarter, which could adversely affect our product revenues in a
subsequent quarter as such distributors will likely reduce
future orders until their inventory levels realign with end
customer demand. For example, during the fiscal year ended
November 1, 2009, and in particular during the first fiscal
quarter of that year, the semiconductor industry experienced a
significant decline in demand. Consequently, our distributors
experienced declines in their resales of our products and were
carrying a higher level of inventories of our products than
historical levels at the end of the first quarter of fiscal year
2009. As a result, our distributors reduced their inventory of
our products during the second fiscal quarter of 2009 and we
also reduced our own inventory by $27 million or 15% in
that quarter.
We also face the risk that our distributors may for other
reasons have inventory levels of our products in excess of
future anticipated sales. If such sales do not occur in the time
frame anticipated by these distributors for any reason, these
distributors may substantially decrease the amount of product
they order from us in subsequent periods, which would harm our
business.
Our reserve estimates associated with products stocked by our
distributors are based largely on reports that our distributors
provide to us on a monthly basis. To date, we believe this data
has been generally accurate. To the extent that this resale and
channel inventory data is inaccurate or not received in a timely
manner, we may not be able to make reserve estimates for future
periods accurately or at all.
We
rely on third-party distributors and manufacturers
representatives, as well as our employee sales representatives,
and the failure of these representatives to perform as expected
could reduce our future sales.
We sell many of our products to customers through distributors
and manufacturers representatives, as well as through our
employee sales representatives. We are unable to predict the
extent to which our distributors and manufacturers
representatives will be successful in marketing and selling our
products. Moreover, many of our distributors and
manufacturers representatives and distributors also market
and sell competing products. Our relationships with our
representatives and distributors may be terminated by either
party at any time. As part of a change in strategy, in order to
more effectively manage sales representatives performance, we
recently terminated our relationships with a substantial number
of our manufacturing representatives in the United States and
have replaced them with additional employee representatives. We
continue to evaluate our sales strategy and may make further
changes in the future, which may include terminating additional
manufacturing representatives. Our future performance will
depend, in part, on our ability to attract additional
distributors or manufacturers representatives that will be
able to market and support our products effectively, especially
in markets in which we have not previously distributed our
products, and on our ability to effectively transition sales
efforts from our terminated U.S. manufacturing
representatives to our employee sales representatives. If we
cannot retain our current distributors or manufacturers
representatives or recruit additional or replacement
distributors or manufacturers representatives, or
effectively manage the transition from our terminated
U.S. manufacturing representatives to our employee sales
representatives, our sales and operating results will be harmed.
We continue to adjust our sales strategy regarding the use of
manufacturing representatives and direct sales employees as
needed.
The
average selling prices of products in our markets have
historically decreased rapidly and will likely do so in the
future, which could harm our revenues and gross
profits.
The products we develop and sell are used for high volume
applications. As a result, the prices of those products have
historically decreased rapidly. Gross profits on our products
may be negatively affected by, among other things, pricing
pressures from our customers, and the proportion of sales of our
wireless and other products into consumer application markets,
which are highly competitive and cost sensitive. In the past, we
have reduced the average selling prices of our products in
anticipation of future competitive pricing pressures, new
product introductions by us or our competitors and other
factors. Our gross profits and financial results will suffer if
we are unable to offset any reductions in our average selling
prices by increasing our sales volumes, reducing manufacturing
costs, or developing new and higher value-added products on a
timely basis.
26
We are
required to assess our internal control over financial reporting
on an annual basis and any adverse findings from such assessment
could result in a loss of investor confidence in our financial
reports, significant expenses to remediate any internal control
deficiencies and ultimately have an adverse effect on our share
price.
We are required to assess the effectiveness of our internal
control over financial reporting annually and disclosure
controls and procedures quarterly. As required, we complied with
Section 404 under the Sarbanes-Oxley Act of 2002, as
amended, or the Sarbanes-Oxley Act, for fiscal year 2010. Even
though our system of internal controls has achieved compliance
with Section 404, we need to maintain our processes and
systems and adapt them to changes as our business changes and we
rearrange management responsibilities and reorganize our
business accordingly. This continuous process of maintaining and
adapting our internal controls and complying with
Section 404 is expensive, time-consuming and requires
significant management attention. We cannot be certain that our
internal control measures will continue to provide adequate
control over our financial processes and reporting and ensure
compliance with Section 404. Furthermore, as our business
changes and as we acquire other companies, our internal controls
may become more complex and we may require more resources to
ensure they remain effective. Failure to implement required new
or improved controls, or difficulties encountered in their
implementation, could harm our operating results or cause us to
fail to meet our reporting obligations. If we or our independent
registered public accounting firm identify material weaknesses
in our internal controls, the disclosure of that fact, even if
quickly remedied, may cause investors to lose confidence in our
financial statements and the trading price of our ordinary
shares may decline.
Remediation of a material weakness could require us to incur
significant expense and if we fail to remedy any material
weakness, our financial statements may be inaccurate, our
ability to report our financial results on a timely and accurate
basis may be adversely affected, our access to the capital
markets may be restricted, the trading price of our ordinary
shares may decline, and we may be subject to sanctions or
investigation by regulatory authorities, including the SEC or
The Nasdaq Global Select Market. We may also be required to
restate our financial statements from prior periods.
Our
indebtedness could adversely affect our financial health and our
ability to raise additional capital to fund our operations,
limit our ability to react to changes in the economy or our
industry and prevent us from fulfilling our obligations under
our indebtedness.
We have a $350 million revolving credit facility of which
$339 million is currently available for borrowings.
Borrowings under our senior credit agreement are secured by
substantially all of our assets. Subject to restrictions in our
senior credit agreement, we may incur additional indebtedness.
While we have recently significantly reduced the amount of our
indebtedness by redeeming and repurchasing all of our previously
outstanding notes in 2009 and 2010, if we were to borrow
substantial amounts under our revolving credit facility or
otherwise incur significant additional indebtedness, it could
have important consequences including:
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increasing our vulnerability to adverse general economic and
industry conditions;
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requiring us to dedicate a substantial portion of our cash flow
from operations to payments on our indebtedness, thereby
reducing the availability of our cash flow to fund working
capital, capital expenditures, research and development efforts,
execution of our business strategy and other general corporate
purposes;
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limiting our flexibility in planning for, or reacting to,
changes in the economy and the semiconductor industry;
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placing us at a competitive disadvantage compared to our
competitors with less indebtedness;
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exposing us to interest rate risk to the extent of our variable
rate indebtedness;
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limiting our ability to, or increasing the costs to, refinance
indebtedness; and
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making it more difficult to borrow additional funds in the
future to fund working capital, capital expenditures and other
purposes.
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Any of the foregoing could materially and adversely affect our
business, financial conditions and results of operations.
Our
senior credit agreement imposes significant restrictions on our
business.
Our senior credit agreement contains a number of covenants
imposing significant restrictions on our business. These
restrictions may affect our ability to operate our business and
may limit our ability to take advantage of potential business
opportunities as they arise. The restrictions placed on us
include limitations on our ability and the ability of our
subsidiaries to:
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incur additional indebtedness and issue ordinary or preferred
shares;
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pay dividends or make other distributions on, redeem or
repurchase our shares or make other restricted payments;
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make investments, acquisitions, loans or advances;
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incur or create liens;
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transfer or sell certain assets;
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engage in sale and lease back transactions;
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declare dividends or make other payments to us;
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guarantee indebtedness;
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engage in transactions with affiliates; and
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consolidate, merge or transfer all or substantially all of our
assets.
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In addition, over a specified limit, our senior credit agreement
requires us to meet a financial ratio test and restricts our
ability to make capital expenditures or prepay certain other
indebtedness. Our ability to meet the financial ratio test may
be affected by events beyond our control, and we do not know
whether we will be able to maintain this ratio. The foregoing
restrictions could limit our ability to plan for, or react to,
changes in market conditions or our capital needs. We do not
know whether we will be granted waivers under, or amendments to,
our senior credit agreement if for any reason we are unable to
meet these requirements, or whether we will be able to refinance
our indebtedness on terms acceptable to us, or at all.
The breach of any of these covenants or restrictions could
result in a default under our senior credit agreement. If we are
unable to repay amounts due under the credit facility when due
or in the event of a default, the lenders under our senior
credit agreement could proceed against the collateral securing
that debt. Any of the foregoing could have a material adverse
effect on our business, financial condition and results of
operations.
Risks
Relating to Investments in Singapore Companies
It may
be difficult to enforce a judgment of U.S. courts for civil
liabilities under U.S. federal securities laws against us, our
directors or officers in Singapore.
We are incorporated under the laws of the Republic of Singapore,
and certain of our officers and directors are or will be
residents outside the United States. Moreover, a majority of our
consolidated assets are located outside the United States.
Although we are incorporated outside the United States, we have
agreed to accept service of process in the United States through
our agent designated for that purpose. Nevertheless, since a
majority of the consolidated assets owned by us are located
outside the United States, any judgment obtained in the United
States against us may not be collectible within the United
States.
There is no treaty between the United States and Singapore
providing for the reciprocal recognition and enforcement of
judgments in civil and commercial matters and a final judgment
for the payment of money rendered
28
by any federal or state court in the United States based on
civil liability, whether or not predicated solely upon the
federal securities laws, would, therefore, not be automatically
enforceable in Singapore. There is doubt whether a Singapore
court may impose civil liability on us or our directors and
officers who reside in Singapore in a suit brought in the
Singapore courts against us or such persons with respect to a
violation solely of the federal securities laws of the United
States, unless the facts surrounding such a violation would
constitute or give rise to a cause of action under Singapore
law. Consequently, it may be difficult for investors to enforce
against us, our directors or our officers in Singapore judgments
obtained in the United States which are predicated upon the
civil liability provisions of the federal securities laws of the
United States.
We are
incorporated in Singapore and our shareholders may have more
difficulty in protecting their interest than they would as
shareholders of a corporation incorporated in the United
States.
Our corporate affairs are governed by our memorandum and
articles of association and by the laws governing corporations
incorporated in Singapore. The rights of our shareholders and
the responsibilities of the members of our board of directors
under Singapore law are different from those applicable to a
corporation incorporated in the United States. Therefore, our
public shareholders may have more difficulty in protecting their
interest in connection with actions taken by our management,
members of our board of directors or our controlling shareholder
than they would as shareholders of a corporation incorporated in
the United States. For example, controlling shareholders in
U.S. corporations are subject to fiduciary duties while
controlling shareholders in Singapore corporations are not
subject to such duties. Please see Comparison of
Shareholder Rights in the definitive Proxy Statement for
our 2010 annual general meeting.
For a
limited period of time, our directors have general authority to
allot and issue new ordinary shares on terms and conditions as
may be determined by our board of directors in its sole
discretion.
Under Singapore law, we may only allot and issue new shares with
the prior approval of our shareholders in a general meeting. At
our 2010 annual general meeting of shareholders, our
shareholders provided our directors with the general authority
to allot and issue any number of new ordinary shares until the
earlier of (i) the conclusion of our 2011 annual general
meeting, (ii) the expiration of the period within which the
next annual general meeting is required to be held (i.e., within
15 months from the conclusion of the last general meeting)
or (iii) the subsequent revocation or modification of such
general authority by our shareholders acting at a duly noticed
and convened meeting. Subject to the general authority to allot
and issue new ordinary shares provided by our shareholders, the
provisions of the Singapore Companies Act and our memorandum and
articles of association, our board of directors may allot and
issue new ordinary shares on terms and conditions as they may
think fit to impose. Any additional issuances of new ordinary
shares by our directors may adversely impact the market price of
our ordinary shares.
Risks
Relating to Owning Our Ordinary Shares
Control
by principal shareholders could adversely affect our other
shareholders.
Investment funds affiliated with KKR and investment funds
affiliated with Silver Lake together beneficially own
approximately 39% of our outstanding ordinary shares through
their ownership of Bali Investments S.àr.l, our principal
shareholder, and Seletar Investments Pte. Ltd., or Seletar, and
Geyser Investment Pte. Ltd., or Geyser, beneficially own
approximately 5% and 4% of our outstanding ordinary shares,
respectively (based on the number of ordinary shares outstanding
as of December 10, 2010). In addition, pursuant to the
terms of our Second Amended and Restated Shareholder Agreement,
or the Shareholder Agreement, KKR and Silver Lake together, the
Sponsors, or their respective affiliates, and Seletar, can elect
their respective designees to serve as members of our board of
directors. These shareholders will have a continuing ability to
control our board of directors and will continue to have
significant influence over our affairs for the foreseeable
future, including controlling the election of directors and
significant corporate transactions, such as a merger or other
sale of our company or our assets. This concentrated control
will limit the ability of other shareholders to influence
corporate matters and, as a result, we may take actions that our
non-Sponsor shareholders do not view as beneficial. For example,
this concentration of ownership could have the effect of
delaying or preventing a change in control or otherwise
discouraging a potential acquirer from attempting to obtain
control of us, which in turn could cause the market price of our
ordinary shares to decline or prevent our shareholders from
realizing a premium over the market price for their ordinary
shares.
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Prior to December 10, 2010 we were a controlled
company under the rules of The Nasdaq Global Select
Market, as Bali, Seletar and Geyser, together referred to as the
Sponsor Group, elected to file as a group with the SEC, with
respect to their collective ownership of our shares. As of
December 10, 2010, the Sponsor Group ceased to own a
majority of our outstanding ordinary shares, and we ceased to be
a controlled company under the rules of The Nasdaq
Global Select Market. As a result, our board of directors will
be required to be composed of a majority of independent
directors and our compensation committee and our nominating and
corporate governance committee will be required to be comprised
entirely of independent directors, subject to applicable
transition periods prescribed by The Nasdaq Global Select Market.
At
times, our share price has been volatile and it may fluctuate
substantially in the future, which could result in substantial
losses for our investors.
The trading price of our ordinary shares has at times fluctuated
significantly. Our ordinary shares have traded as high as $28.48
per share and as low as $14.33 per share since our initial
public offering, or IPO, in August 2009. The trading price of
our ordinary shares could be subject to wide fluctuations in
response to many risk factors listed in this Risk
Factors section, and others, many of which are beyond our
control, including:
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actual or anticipated fluctuations in our financial condition
and operating results;
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overall conditions in the semiconductor market and general
economic and market conditions;
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addition or loss of significant customers;
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changes in laws or regulations applicable to our products;
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actual or anticipated changes in our growth rate relative to our
competitors;
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announcements of technological innovations or competitive
products by us or our competitors;
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announcements by us or our competitors of significant
acquisitions, strategic partnerships, joint ventures or capital
commitments;
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additions or departures of key personnel;
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issuance of new or updated research or reports by securities
analysts;
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fluctuations in the valuation of companies perceived by
investors to be comparable to us;
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disputes or other developments related to proprietary rights,
including patents, litigation matters and our ability to obtain
intellectual property protection for our technologies;
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announcement of, or expectation of additional financing efforts;
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sales of our ordinary shares by us or our shareholders;
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share price and volume fluctuations attributable to inconsistent
trading volume levels of our shares; and
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changes in our dividend policy.
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Furthermore, the stock markets have experienced extreme price
and volume fluctuations that have affected and continue to
affect the market prices of equity securities of many companies.
These fluctuations often have been unrelated or disproportionate
to the operating performance of those companies. These broad
market and industry fluctuations, as well as general economic,
political and market conditions such as recessions, interest
rate changes or international currency fluctuations, may
negatively impact the market price of our ordinary shares. You
may not realize any return on your investment in us and may lose
some or all of your investment. In the past, companies that have
experienced volatility in the market price of their stock have
been subject to securities class action litigation. We may be
the target of this type of litigation in the future. Securities
litigation against us could result in substantial costs and
divert our managements attention from other business
concerns, which could seriously harm our business.
There has been a public market for our ordinary shares for only
a short period of time. An active, liquid and orderly market for
our ordinary shares may not develop or be sustained, which could
depress the trading price of our
30
ordinary shares. An inactive market may also impair our ability
to raise capital to continue to fund operations by selling
shares and may impair our ability to acquire other companies or
technologies by using our shares as consideration.
If
securities or industry analysts do not publish research or
reports about our business, or publish negative reports about
our business, our share price and trading volume could
decline.
The trading market for our ordinary shares depends, in part, on
the research and reports that securities or industry analysts
publish about us or our business. We do not have any control
over these analysts. If one or more of the analysts who cover us
downgrade our shares or change their opinion of our shares, our
share price would likely decline. If one or more of these
analysts cease coverage of our company or fail to regularly
publish reports on us, we could lose visibility in the financial
markets, which could cause our share price or trading volume to
decline.
Future
sales of our ordinary shares in the public market could cause
our share price to fall.
Sales of a substantial number of our ordinary shares in the
public market, or the perception that these sales might occur,
could depress the market price of our ordinary shares and could
impair our ability to raise capital through the sale of
additional equity securities.
As of December 10, 2010, approximately 116.0 million
outstanding ordinary shares are subject to the contractual
transfer restrictions in our Shareholder Agreement, which is
described under Certain Relationships and Related Party
Transactions Second Amended and Restated Shareholder
Agreement Transfer Restrictions in the
definitive proxy statement for our 2010 annual general meeting
of shareholders. These shares are also subject to
lock-up
agreements that holders of the shares have signed with the
underwriter of the secondary offering of our ordinary shares
that was completed on December 10, 2010, under which they
have agreed not to sell, transfer or dispose of, directly or
indirectly, any shares of our ordinary shares or any securities
convertible into or exercisable or exchangeable for ordinary
shares without the prior written consent of Deutsche Bank
Securities until January 5, 2011, subject to a possible
extension under certain circumstances. The underwriter of this
offering may, in its sole discretion, release all or some
portion of the shares subject to the
30-day
lock-up
agreements prior to expiration of such period, and the Company
and the Sponsors may decide to waive the restrictions in the
Shareholder Agreement.
An aggregate of approximately 1.8 million shares, as of
August 1, 2010, and additional shares subject to options
(of which 4.5 million were vested and exercisable as of
August 1, 2010), held by certain employees and former
employees were subject to transfer restrictions, pursuant to the
terms of the management shareholders agreement, or Management
Shareholders Agreement, to which they were party. The Management
Shareholders Agreements, and the share transfer restrictions
contained therein, were terminated with effect from
September 27, 2010. As a result, these shares have become
generally available for sale, subject to compliance with
applicable securities laws and our insider trading policy.
As of December 10, 2010, holders of approximately
116.0 million ordinary shares are entitled to rights with
respect to registration of such shares under the Securities Act
pursuant to a registration rights agreement. If such holders, by
exercising their registration rights, sell a large number of
shares, they could adversely affect the market price for our
ordinary shares. If we register the sale of additional shares to
raise capital, and are required to include shares held by these
holders pursuant to the exercise of their registration rights,
our ability to raise capital may be impaired.
In addition, shares issued pursuant to our equity incentive
plans may be freely sold in the public market upon vesting and
issuance, subject to the restrictions provided under the terms
of the plan under which they were issued
and/or the
option agreements entered into with option holders.
There
can be no assurance that we will continue to declare cash
dividends or declare them in any particular
amounts.
Notwithstanding that we recently adopted a cash dividend policy,
and have declared our first interim cash dividend of $0.07 per
share, payable on December 30, 2010 to shareholders of
record at the close of business (5:00 p.m.), Eastern time,
on December 15, 2010, there can be no assurance that we
will declare cash dividends in
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the future or in any particular amounts. The actual declaration
and payment of any future dividend is subject to the approval of
our board of directors and our dividend policy could change at
any time. The payment of cash dividends is restricted under the
terms of our senior credit agreement, applicable law and our
corporate structure. Pursuant to Singapore law and our articles
of association, no dividends may be paid except out of our
profits. Also, because we are a holding company, our ability to
pay cash dividends on our ordinary shares may be limited by
restrictions on our ability to obtain sufficient funds through
dividends from subsidiaries, including restrictions under the
terms of our credit agreement. In addition to these constraints,
the payment of cash dividends in the future, if any, will be at
the discretion of our board of directors and will depend upon
such factors as our earnings levels, capital requirements,
contractual restrictions, cash position and overall financial
condition and any other factors deemed relevant by our board of
directors.
Furthermore, any such dividend, if declared, may be an interim
dividend, under Singapore law, which is wholly provisional and
may be revoked by our board of directors at any time prior to
the payment thereof.
The
requirements of being a public company may strain our resources,
divert managements attention and affect our ability to
attract and retain qualified board members.
As a public company, we are subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended,
or the Exchange Act, the Sarbanes-Oxley Act, listing
requirements of The Nasdaq Global Select Market and other
applicable securities rules and regulations. Compliance with
these rules and regulations increases our legal and financial
compliance costs, make some activities more difficult,
time-consuming or costly and increases demand on our systems and
resources. The Exchange Act requires, among other things, that
we file annual, quarterly and current reports with respect to
our business and financial condition. The Sarbanes-Oxley Act
requires, among other things, that we maintain effective
disclosure controls and procedures and internal control over
financial reporting. In order to maintain and, if required,
improve our disclosure controls and procedures and internal
control over financial reporting to meet this standard,
significant resources and management oversight may be required.
As a result, managements attention may be diverted from
other business concerns, which could have a material adverse
effect on our business, financial condition and results of
operations. We may need to hire more employees in the future,
which will increase our costs and expenses. Furthermore, as we
grow our business or acquire new businesses, our internal
controls will become more complex and we may require
significantly more resources to ensure our internal controls
overall remain effective. Failure to implement required new or
improved controls, or difficulties encountered in their
implementation, could harm our operating results or cause us to
fail to meet our reporting obligations.
In addition, changing laws, regulations and standards relating
to corporate governance and public disclosure are creating
uncertainty for public companies, increasing legal and financial
compliance costs and making some activities more time consuming.
These laws, regulations and standards are subject to varying
interpretations, in many cases due to their lack of specificity,
and, as a result, their application in practice may evolve over
time as new guidance is provided by regulatory and governing
bodies. This could result in continuing uncertainty regarding
compliance matters and higher costs necessitated by ongoing
revisions to disclosure and governance practices. We intend to
invest resources to comply with evolving laws, regulations and
standards, and this investment may result in increased general
and administrative expenses and a diversion of managements
time and attention from revenue-generating activities to
compliance activities. If our efforts to comply with new laws,
regulations and standards differ from the activities intended by
regulatory or governing bodies due to ambiguities related to
practice, regulatory authorities may initiate legal proceedings
against us and our business may be harmed.
Being a public company makes it more expensive for us to obtain
director and officer liability insurance, and we may be required
to accept reduced coverage or incur substantially higher costs
to obtain coverage. These factors could also make it more
difficult for us to attract and retain qualified members of our
board of directors, particularly to serve on committees of our
board of directors, and qualified executive officers.
32
Singapore
corporate law may impede a takeover of our company by a
third-party, which could adversely affect the value of our
ordinary shares.
The Singapore Code on Take-overs and Mergers contains provisions
that may delay, deter or prevent a future takeover or change in
control of our company for so long as we remain a public company
with more than 50 shareholders and net tangible assets of
S$5 million or more. Any person acquiring an interest,
whether by a series of transactions over a period of time or
not, either on their own or together with parties acting in
concert with such person, in 30% or more of our voting shares,
or, if such person holds, either on their own or together with
parties acting in concert with such person, between 30% and 50%
(both inclusive) of our voting shares, and such person (or
parties acting in concert with such person) acquires additional
voting shares representing more than 1% of our voting shares in
any six-month period, must, except with the consent of the
Securities Industry Council in Singapore, extend a mandatory
takeover offer for the remaining voting shares in accordance
with the provisions of the Singapore Code on Take-overs and
Mergers. While the Singapore Code on Take-overs and Mergers
seeks to ensure equality of treatment among shareholders, its
provisions may discourage or prevent certain types of
transactions involving an actual or threatened change of control
of our company. These legal requirements may impede or delay a
takeover of our company by a third-party, which could adversely
affect the value of our ordinary shares.
Our
actual operating results may differ significantly from our
guidance.
From time to time, we release guidance regarding our future
performance that represents our managements estimates as
of the date of release. This guidance, which consists of
forward- looking statements, is prepared by our management and
is qualified by, and subject to, the assumptions and the other
information contained or referred to in the release. Our
guidance is not prepared with a view toward compliance with
published guidelines of the American Institute of Certified
Public Accountants, and neither our independent registered
public accounting firm nor any other independent expert or
outside party compiles or examines the guidance and,
accordingly, no such person expresses any opinion or any other
form of assurance with respect thereto.
Guidance is based upon a number of assumptions and estimates
that, while presented with numerical specificity, is inherently
subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond our
control and are based upon specific assumptions with respect to
future business decisions, some of which will change. We
generally state possible outcomes as high and low ranges which
are intended to provide a sensitivity analysis as variables are
changed but are not intended to represent that actual results
could not fall outside of the suggested ranges. The principal
reason that we release this data is to provide a basis for our
management to discuss our business outlook with analysts and
investors. We do not accept any responsibility for any
projections or reports published by any such persons.
Guidance is necessarily speculative in nature, and it can be
expected that some or all of the assumptions of the guidance
furnished by us will not materialize or will vary significantly
from actual results. Accordingly, our guidance is only an
estimate of what management believes is realizable as of the
date of release. Actual results will vary from the guidance and
the variations may be material. Investors should also recognize
that the reliability of any forecasted financial data diminishes
the farther in the future that the data is forecast. In light of
the foregoing, investors are urged to put the guidance in
context and not to place undue reliance on it.
Any failure to successfully implement our operating strategy or
the occurrence of any of the events or circumstances set forth
in this Annual Report on
Form 10-K
could result in the actual operating results being different
than the guidance, and such differences may be adverse and
material.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
33
Our principal executive offices are located in Yishun,
Singapore, and the headquarters for our U.S. subsidiaries
is located in San Jose, California. We conduct our
administration, manufacturing, research and development and
sales and marketing in both owned and leased facilities. We
believe that our owned and leased facilities are adequate for
our present operations. The following is a list of our principal
facilities and their primary functions.
|
|
|
|
|
|
|
|
|
Site
|
|
Major Activity
|
|
Owned/Leased
|
|
Square Footage
|
|
Lease Expiration
|
|
Yishun, Singapore
|
|
Administration, Manufacturing, Research and Development and
Sales and Marketing
|
|
Leased
|
|
116,500
|
|
November 2015
|
Depot Road, Singapore
|
|
Manufacturing
|
|
Leased
|
|
50,000
|
|
October 2015
|
Senoko, Singapore
|
|
Manufacturing
|
|
Leased
|
|
72,000
|
|
September 2029
|
Seoul, Korea
|
|
Research and Development and
|
|
Leased
|
|
53,000
|
|
October 2015
|
|
|
Sales and Marketing
|
|
Leased
|
|
19,000
|
|
October 2012
|
Penang, Malaysia
|
|
Manufacturing, Research and
Development, and Administration
|
|
OwnedBuilding
LeasedLand
|
|
318,000
|
|
June 2045
|
San Jose, CA, United States
|
|
Administration, Research and Development and Sales and Marketing
|
|
Leased
|
|
148,000
|
|
November 2015
|
Fort Collins, CO, United States
|
|
Manufacturing and Research and Development
|
|
Owned
|
|
833,000
|
|
|
Boeblingen, Germany
|
|
Administration, Research and Development and Sales and Marketing
|
|
Leased
|
|
19,000
|
|
April 2012
|
Regensburg, Germany
|
|
Manufacturing, Research and Development and Marketing
|
|
Leased
|
|
8,590
|
|
June 2013
|
Samorin, Slovakia
|
|
Manufacturing
|
|
Leased
|
|
31,000
|
|
March 2018
|
Turin, Italy
|
|
Manufacturing and Research and
|
|
Leased
|
|
10,500
|
|
April 2012
|
|
|
Development
|
|
Leased
|
|
22,000
|
|
June 2017
|
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
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 and employment issues.
As of the date of this filing, we are not involved in any
pending legal proceedings that we believe would likely have a
material adverse effect on our financial condition, results of
operations or cash flows. However, certain pending disputes
involve claims by third parties that our activities infringe
their patent, copyright, trademark or other intellectual
property rights. These 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. For
example, on July 23, 2009, TriQuint Semiconductor, Inc.
filed a complaint against us and certain of our subsidiaries in
the U.S. District Court, District of Arizona seeking
declaratory judgment that four of our patents relating to RF
filter technology used in our wireless products are invalid and,
if valid, that TriQuints products do not infringe any of
those patents. TriQuint has subsequently withdrew those claims
with respect to three of those four patents. In addition,
TriQuint claims that certain of our wireless products infringe
three of its patents. TriQuint is seeking damages in an
unspecified amount, treble damages for alleged willful
infringement, attorneys fees and injunctive relief. We filed our
answer and initial counterclaim on September 17, 2009,
denying infringement, asserting the invalidity of
TriQuints patents and asserting infringement by TriQuint
of ten Avago patents and filed additional counterclaims on
March 25, 2010 for the misappropriation of Avago trade
secrets. On October 16, 2009, TriQuint filed its answer to
our initial counterclaim, denying infringement and filed an
antitrust counterclaim and counterclaims for declaratory
judgment of non infringement and invalidity. While the court
dismissed TriQuints antitrust counterclaims on procedural
grounds on March 16, 2010, TriQuint has since filed a
motion to file an amended pleading for its anti-trust claims,
which was granted on August 3, 2010. We intend to defend
this lawsuit vigorously, and future actions may include the
assertion by us of additional claims or counterclaims against
TriQuint related to our intellectual property portfolio.
34
In addition, on February 8, 2010, PixArt Imaging Inc. filed
an action against us in the U.S District Court, Northern
District of California seeking a determination of whether PixArt
is licensed to use our portfolio of patents for optical finger
navigation products pursuant to an existing cross-license
agreement between us and PixArt, which license is limited to
optical mouse and optical mouse trackball products. We did not
license to PixArt our patents for optical finger navigation
products. We intend to defend this action vigorously and to seek
to have the scope of the cross-license agreement properly
construed by the court as excluding such products. We also filed
a counterclaim against PixArt on March 31, 2010, asserting
that PixArt has breached the terms of the cross-license
agreement between the parties. We are seeking a determination
that PixArt is not licensed to use our portfolio of patents for
optical finger navigation products, damages in an unspecified
amount, termination for breach, or rescission, of the license
agreement and attorneys fees.
On March 15, 2010 we filed a patent infringement action
against ST Microelectronics NV in the Eastern District of Texas
for infringement of four of our patents related to optical
navigation devices. We amended the complaint on July 6,
2010 adding infringement of a fifth optical navigation related
patent to the action. We are seeking injunctive relief, damages
in an unspecified amount, treble damages for willful
infringement and attorneys fees. In response, ST
Microelectronics filed a patent infringement action against us
in the Northern District of Texas alleging that our sales of
certain optical navigation devices infringed two ST
Microelectronics patents. ST Microelectronics is seeking
injunctive relief and damages in an unspecified amount. ST
Microelectronics filed a second suit against us on
November 5, 2010 in the Northern District of California
alleging certain anticompetitive actions by us in the optical
navigation sensor market. ST Microelectronics is seeking
injunctive and compensatory relief under the Sherman Act and the
Clayton Act and attorneys fees. We have not yet filed our
response. We intend to defend these lawsuits vigorously, and
future actions may include the assertion by us of additional
claims or counterclaims against ST Microelectronics related to
our intellectual property portfolio.
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.
35
PART II
|
|
ITEM 5.
|
MARKET
FOR THE REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Market
Information
Our ordinary shares have been listed on The Nasdaq Global Select
Market under the symbol AVGO since our IPO on
August 6, 2009. Prior to that date, there was no public
market for our ordinary shares. The following table sets forth,
for the periods indicated, the high and low sales prices of our
ordinary shares as reported by The Nasdaq Global Select Market:
|
|
|
|
|
|
|
|
|
|
|
Market Prices
|
|
|
High
|
|
Low
|
|
Fiscal Year ended November 1, 2009
|
|
|
|
|
|
|
|
|
Fourth Quarter (Beginning August 6, 2009, ended
November 1, 2009))
|
|
$
|
19.00
|
|
|
$
|
14.72
|
|
Fiscal Year ended October 31, 2010
|
|
|
|
|
|
|
|
|
First Quarter (ended January 31, 2010)
|
|
$
|
19.55
|
|
|
$
|
14.33
|
|
Second Quarter (ended May 2, 2010)
|
|
$
|
22.88
|
|
|
$
|
16.50
|
|
Third Quarter (ended August 1, 2010)
|
|
$
|
23.69
|
|
|
$
|
18.38
|
|
Fourth Quarter (ended October 31, 2010)
|
|
$
|
24.95
|
|
|
$
|
18.41
|
|
Holders
As of December 10, 2010, there were 14 holders of
record of our ordinary shares. A substantially greater number of
shareholders are street name or beneficial holders,
whose shares are held of record by banks, brokers and other
financial institutions.
Dividends
We recently declared our first interim cash dividend of $0.07
per share payable on December 30, 2010 to shareholders of
record at the close of business (5:00 p.m.), Eastern Time,
on December 15, 2010.
The board of directors reviews our dividend policy regularly and
the declaration and payment of future dividends is subject to
the boards continuing determination that they are in the
best interests of the Companys future dividend payments
will also depend upon such factors as our earnings level,
capital requirements, contractual restrictions, cash position,
overall financial condition and any other factors deemed
relevant by our board of directors.
The payment of cash dividends on our ordinary shares is
restricted under the terms of our senior credit agreement,
applicable law and our corporate structure. Pursuant to
Singapore law and our articles of association, no dividends may
be paid except out of our profits. Also, because we are a
holding company, our ability to pay cash dividends on our
ordinary shares may be limited by restrictions on our ability to
obtain sufficient funds through dividends from subsidiaries,
including restrictions under the terms of our senior credit
agreement.
36
Share
Performance Graph
The following graph shows a comparison of cumulative total
return for the Companys ordinary shares, the
Standard & Poors 500 Stock Index, or S&P
500 Index, and the Philadelphia Semiconductor Index. The graph
covers the period from August 6, 2009 (the first trading
day of our ordinary shares on the Nasdaq Global Select Market)
to October 29, 2010, the last trading day of our 2010
fiscal year. While the initial public offering price of our
ordinary shares was $15.00 per share, the graph assumes the
initial value of our ordinary shares on August 6, 2009 was
the closing sales price of $16.18 per share. The graph and table
assume that $100 was invested on August 6, 2009 in each of
Avago Technologies Limited ordinary shares, the S&P 500
Index and the Philadelphia Semiconductor Index and that all
dividends were reinvested (in the case of data for the S&P
500 Index and the Philadelphia Semiconductor Index).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8/6/2009
|
|
|
10/30/2009
|
|
|
1/29/2010
|
|
|
4/30/2010
|
|
|
7/30/2010
|
|
|
10/29/2010
|
Avago Technologies Limited
|
|
|
$
|
100
|
|
|
|
$
|
93
|
|
|
|
$
|
107
|
|
|
|
$
|
127
|
|
|
|
$
|
134
|
|
|
|
$
|
153
|
|
S&P 500 Index
|
|
|
|
100
|
|
|
|
|
104
|
|
|
|
|
108
|
|
|
|
|
119
|
|
|
|
|
110
|
|
|
|
|
119
|
|
Philadelphia Semiconductor Index
|
|
|
|
100
|
|
|
|
|
99
|
|
|
|
|
105
|
|
|
|
|
125
|
|
|
|
|
116
|
|
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The share price performance included in the graph above is not
necessarily indicative of future share price performance.
Note: The graph and the table above shall not
be deemed filed with the SEC for the purposes of
Section 18 of the Exchange Act or otherwise subject to the
liabilities of that section, nor shall it be deemed incorporated
by reference in any filing made by us with the SEC, regardless
of any general incorporation language in such filing.
Securities
Authorized for Issuance Under Equity Compensation
Plans
The information required by this item regarding securities
authorized for issuance under equity compensation plans is
incorporated herein by reference to the definitive Proxy
Statement for our 2011 Annual Meeting of Shareholders to be
filed with the SEC within 120 days after the end of the
fiscal year ended October 31, 2010.
37
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
You should read the following selected financial data together
with the information included under the headings Risk
Factors and Managements Discussion and
Analysis of Financial Condition and Results of Operations
and our historical financial statements and related notes
included elsewhere in this Annual Report on
Form 10-K.
The selected statements of operations data for the years ended
November 2, 2008, November 1, 2009 and
October 31, 2010 and the selected balance sheet data as of
November 1, 2009 and October 31, 2010 have been
derived from audited historical financial statements and related
notes included elsewhere in this Annual Report on
Form 10-K.
The selected statements of operations data for the one month
ended November 30, 2005, the years ended October 31,
2006 and October 31, 2007 and the selected balance sheet
data as of October 31, 2006, October 31, 2007 and
November 2, 2008 have been derived from audited historical
financial statements and related notes not included in this
Annual Report on
Form 10-K.
The historical financial data may not be indicative of our
future performance and does not reflect what our financial
position and results of operations would have been if we had
operated as a fully stand-alone entity during all of the periods
presented. We adopted a 52-or 53-week fiscal year beginning with
our fiscal year 2008. Our fiscal year ends on the Sunday closest
to October 31.
Summary
of 5 Year Selected Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor(1)
|
|
|
|
Company
|
|
|
|
One Month Ended
|
|
|
|
Year Ended
|
|
|
|
November 30,
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
November 2,
|
|
|
November 1,
|
|
|
October 31,
|
|
|
|
2005
|
|
|
|
2006(2)
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In millions)
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
114
|
|
|
|
$
|
1,399
|
|
|
$
|
1,527
|
|
|
$
|
1,699
|
|
|
$
|
1,484
|
|
|
$
|
2,093
|
|
Cost of products sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
|
87
|
|
|
|
|
926
|
|
|
|
936
|
|
|
|
981
|
|
|
|
855
|
|
|
|
1,068
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
|
55
|
|
|
|
60
|
|
|
|
57
|
|
|
|
58
|
|
|
|
58
|
|
Asset impairment charges(3)
|
|
|
|
|
|
|
|
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges(4)
|
|
|
|
|
|
|
|
2
|
|
|
|
29
|
|
|
|
6
|
|
|
|
11
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of products sold
|
|
|
87
|
|
|
|
|
983
|
|
|
|
1,165
|
|
|
|
1,044
|
|
|
|
924
|
|
|
|
1,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
27
|
|
|
|
|
416
|
|
|
|
362
|
|
|
|
655
|
|
|
|
560
|
|
|
|
966
|
|
Research and development
|
|
|
22
|
|
|
|
|
187
|
|
|
|
205
|
|
|
|
265
|
|
|
|
245
|
|
|
|
280
|
|
Selling, general and administrative
|
|
|
27
|
|
|
|
|
243
|
|
|
|
193
|
|
|
|
196
|
|
|
|
165
|
|
|
|
196
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
|
56
|
|
|
|
28
|
|
|
|
28
|
|
|
|
21
|
|
|
|
21
|
|
Asset impairment charges(3)
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges(4)
|
|
|
1
|
|
|
|
|
3
|
|
|
|
22
|
|
|
|
6
|
|
|
|
23
|
|
|
|
3
|
|
Advisory agreement termination fee(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
Selling shareholder expenses(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
Litigation settlement(6)
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired in-process research and development
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
50
|
|
|
|
|
510
|
|
|
|
467
|
|
|
|
495
|
|
|
|
512
|
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations(7)(8)
|
|
|
(23
|
)
|
|
|
|
(94
|
)
|
|
|
(105
|
)
|
|
|
160
|
|
|
|
48
|
|
|
|
466
|
|
Interest expense(9)
|
|
|
|
|
|
|
|
(143
|
)
|
|
|
(109
|
)
|
|
|
(86
|
)
|
|
|
(77
|
)
|
|
|
(34
|
)
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
(10
|
)
|
|
|
(8
|
)
|
|
|
(24
|
)
|
Other income (expense), net
|
|
|
|
|
|
|
|
12
|
|
|
|
14
|
|
|
|
(4
|
)
|
|
|
1
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before taxes
|
|
|
(23
|
)
|
|
|
|
(225
|
)
|
|
|
(212
|
)
|
|
|
60
|
|
|
|
(36
|
)
|
|
|
406
|
|
Provision for (benefit from) income taxes(10)
|
|
|
2
|
|
|
|
|
3
|
|
|
|
8
|
|
|
|
3
|
|
|
|
8
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(25
|
)
|
|
|
|
(228
|
)
|
|
|
(220
|
)
|
|
|
57
|
|
|
|
(44
|
)
|
|
|
415
|
|
Income from and gain on discontinued operations, net of income
taxes(11)
|
|
|
1
|
|
|
|
|
1
|
|
|
|
61
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(24
|
)
|
|
|
$
|
(227
|
)
|
|
$
|
(159
|
)
|
|
$
|
83
|
|
|
$
|
(44
|
)
|
|
$
|
415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor(1)
|
|
|
|
Company
|
|
|
|
One Month Ended
|
|
|
|
Year Ended
|
|
|
|
November 30,
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
November 2,
|
|
|
November 1,
|
|
|
October 31,
|
|
|
|
2005
|
|
|
|
2006(2)
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In millions)
|
|
Balance Sheet Data (at end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
$
|
272
|
|
|
$
|
309
|
|
|
$
|
213
|
|
|
$
|
472
|
|
|
$
|
561
|
|
Total assets
|
|
|
|
|
|
|
|
2,217
|
|
|
|
1,951
|
|
|
|
1,871
|
|
|
|
1,970
|
|
|
|
2,157
|
|
Long-term debt and capital lease obligations
|
|
|
|
|
|
|
|
1,004
|
|
|
|
907
|
|
|
|
708
|
|
|
|
233
|
|
|
|
4
|
|
Total shareholders equity
|
|
|
|
|
|
|
|
842
|
|
|
|
693
|
|
|
|
780
|
|
|
|
1,040
|
|
|
|
1,505
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of earnings to fixed charges(12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.7
|
|
|
|
|
|
|
|
11.7
|
|
|
|
|
(1) |
|
Predecessor refers to SPG, business segment of Agilent
Technologies, Inc, or Agilent. |
|
(2) |
|
We completed the SPG Acquisition on December 1, 2005. The
SPG Acquisition was accounted for as a purchase business
combination under GAAP and thus the financial results for all
periods from and after December 1, 2005 are not necessarily
comparable to the prior results of Predecessor. We did not have
any significant operating activity prior to December 1,
2005. Accordingly, our results for the year ended
October 31, 2006 represent only the eleven months of our
operations after the completion of the SPG Acquisition. |
|
(3) |
|
During the year ended October 31, 2007, we recorded a
$158 million write-down of certain long-lived assets
following a review of the recoverability of the carrying value
of certain manufacturing facilities, of which $18 million
was recorded as part of operating expenses and the remainder was
recorded as part of cost of products sold. |
|
(4) |
|
Our restructuring charges predominantly represent one-time
employee termination benefits. We incurred total restructuring
charges of $5 million during the year ended
October 31, 2006 ($6 million on a combined basis
including the one month period ended November 30,
2005) related to our effort to rationalize our product
lines. During the year ended October 31, 2007, we incurred
restructuring charges of $51 million, of which
$22 million was recorded as part of operating expenses and
the remainder was recorded as part of cost of products sold.
During the year ended November 2, 2008, we incurred
restructuring charges of $12 million, of which
$6 million was recorded as part of operating expenses and
the remainder was recorded as part of cost of products sold.
During year ended November 1, 2009, we incurred
restructuring charges of $34 million, of which
$23 million was recorded as part of operating expenses and
the remainder was recorded as part of cost of products sold.
During year ended October 31, 2010, we incurred
restructuring charges of $4 million, of which
$3 million was recorded as part of operating expenses and
the remainder was recorded as part of cost of products sold. |
|
(5) |
|
The advisory agreement was terminated pursuant to its terms upon
completion of our IPO, for a termination fee of
$54 million, during the quarter ended November 1, 2009
and no further payments will be made thereunder. We also
recorded $4 million in selling shareholder expenses, in
connection with the IPO, on behalf of the Sponsors and other
selling shareholders. |
|
(6) |
|
In November 2006, we agreed to settle a trade secret lawsuit
filed by Sputtered Films Inc., a subsidiary of Tegal
Corporation, against Agilent, Advanced Modular Sputtering Inc.
and our company. We assumed responsibility for this litigation
in connection with the SPG Acquisition and accrued this
liability in the fourth quarter of fiscal year 2006. |
|
(7) |
|
Includes share-based compensation expense recorded by
Predecessor of $4 million for the one month ended
November 30, 2005, and for the Company, $3 million for
the year ended October 31, 2006, $12 million for the
year ended October 31, 2007, $15 million for the year
ended November 2, 2008 and $12 million for the year
ended November 1, 2009 and $25 million for the year
ended October 31, 2010. |
|
(8) |
|
Includes expense recorded in connection with the advisory
agreement with our Sponsors of $5 million for the year
ended October 31, 2006, $5 million for the year ended
October 31, 2007, $6 million for the year ended
November 2, 2008, and $4 million for the year ended
November 1, 2009. |
39
|
|
|
(9) |
|
Interest expense for the year ended October 31, 2006
includes an aggregate of $30 million of amortization of
debt issuance costs and commitment fees for expired credit
facilities, including $19 million of unamortized debt
issuance costs that were written off in conjunction with the
repayment of our term loan facility during this period. As of
October 31, 2006, we had permanently repaid all outstanding
amounts under our term loan facility. |
|
(10) |
|
In fiscal year 2010, we recorded an income tax benefit totaling
$9 million. The income tax benefit is associated with the
release of $29 million of deferred tax asset valuation
allowances, mainly associated with the Company irrevocably
calling our senior subordinated notes for redemption in October
2010, partially offset by the write-off of $6 million of
deferred tax assets resulting from the grant of Malaysia tax
incentive status, and an increase in overall tax provision due
to an increase in worldwide taxable income. |
|
(11) |
|
In October 2005, we sold our Storage Business to PMC-Sierra Inc.
This transaction closed on February 28, 2006, resulting in
$420 million of net cash proceeds. No gain or loss was
recorded on the sale. |
|
|
|
In February 2006, we sold our Printer ASICs Business to Marvell
Technology Group Ltd. for $245 million in cash. Our
agreement with Marvell also provides for up to $35 million
in additional earn-out payments by Marvell to us based solely on
the achievement by Marvell of certain revenue targets in respect
of the acquired business subsequent to the acquisition. This
transaction closed on May 1, 2006 and no gain or loss was
recorded on the initial sale. In April 2007, we received
$10 million of the earn-out payment from Marvell and
recorded it as a gain on discontinued operations. In May 2008,
we received $25 million of the earn-out payment from
Marvell and recorded it as a gain on discontinued operations. In
November 2006, we sold our Image Sensor operations to Micron
Technology, Inc. for $53 million. Our agreement with Micron
also provides for up to $17 million in additional earn-out
payments by Micron to us upon the achievement of certain
milestones. This transaction closed on December 8, 2006,
resulting in $57 million of net proceeds, including
$4 million of earn-out payments during the year ended
October 31, 2007. In addition to this transaction, we also
sold intellectual property rights related to the Image Sensor
operations to another party for $12 million. We recorded a
gain on discontinued operations of approximately
$50 million for both of these transactions. |
|
|
|
In October 2007, we sold our Infra-red operations to Lite-On
Technology Corporation for $19 million in cash and the
right to receive guaranteed cost reductions or rebates based on
our future purchases of non infra-red products from Lite-On. We
recorded an overall loss from disposal of Infra-red operations
of $5 million for fiscal year 2008. |
|
(12) |
|
For purposes of computing this ratio of earnings to fixed
charges, fixed charges consist of interest expense
on all indebtedness plus amortization of debt issuance costs and
an estimate of interest expense within rental expense.
Earnings consist of pre-tax income (loss) from
continuing operations plus fixed charges. Earnings were
insufficient to cover fixed charges by $23 million,
$225 million, $212 million and $36 million for
the one month ended November 30, 2005, the years ended
October 31, 2006, October 31, 2007 and
November 1, 2009, respectively. |
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
This Managements Discussion and Analysis of Financial
Condition and Results of Operations should be read in
conjunction with Selected Financial Data and our
consolidated financial statements and notes thereto which appear
elsewhere in this Annual Report on
Form 10-K.
This discussion may contain forward-looking statements based
upon current expectations that involve risks and uncertainties.
Our actual results may differ materially from those anticipated
in these forward-looking statements as a result of various
factors, including those set forth under the caption Risk
Factors or in other parts of this Annual Report on
Form 10-K.
Overview
We are a leading designer, developer and global supplier of a
broad range of analog semiconductor devices with a focus on
III-V based products. We differentiate ourselves through our
high performance design and integration capabilities. III-V
semiconductor materials have higher electrical conductivity,
enabling faster speeds and tend to have better performance
characteristics than conventional silicon in applications such
as RF and
40
optoelectronics. Our product portfolio is extensive and includes
over 6,500 products that we sell into four primary target
markets: wireless communications, wired infrastructure,
industrial and automotive electronics, and consumer and
computing peripherals. Applications for our products in these
target markets include cellular phones, consumer appliances,
data networking and telecommunications equipment, enterprise
storage and servers, renewable energy and smart power grid
applications, factory automation, displays, optical mice and
printers.
We have a nearly
50-year
history of innovation dating back to our origins within
Hewlett-Packard Company. Over the years, we have assembled a
large team of analog design engineers, and we maintain design
and product development engineering resources around the world.
Our locations include two design centers in the United States,
five in Asia and four in Europe. We have developed an extensive
portfolio of intellectual property that currently includes more
than 5,000 U.S. and foreign patents and patent
applications. Our history and market position enable us to
strategically focus our research and development resources to
address attractive target markets. We leverage our significant
intellectual property portfolio to integrate multiple
technologies and create component solutions that target growth
opportunities. We design products that deliver high-performance
and provide mission-critical functionality. In particular, we
were a pioneer in commercializing vertical-cavity surface
emitting laser, or VCSEL, fiber optic products and our
VCSEL-based products have been widely adopted throughout the
wired infrastructure industry. In addition, we were among the
first to deliver commercial film bulk acoustic resonator, or
FBAR, filters for code division multiple access, or CDMA,
technology and we believe we maintain a significant market share
of PCS duplexers within the CDMA market. In addition, our FBAR
filters offer technological advantages over competing filters in
certain other radio bands, such as GPS and 3G. In
optoelectronics, we are a market leader in submarkets such as
optocouplers, fiber optic transceivers, optical finger
navigation sensors found in mobile phones and optical computer
mouse sensors.
We have a diversified and well-established customer base of
approximately 40,000 end customers, located throughout the
world, which we serve through our multi-channel sales and
fulfillment system. We have established strong relationships
with leading original equipment manufacturer, or OEM, customers
across multiple target markets. Typically, our major customer
relationships have been in place multiple years and we have
supplied multiple products during that time period. Our close
customer relationships have often been built as a result of
years of collaborative product development which has enabled us
to build our intellectual property portfolio and develop
critical expertise regarding our customers requirements,
including substantial system level knowledge. This collaboration
has provided us with key insights into our customers and has
enabled us to be more efficient and productive and to better
serve our target markets and customers. We distribute most of
our products through our broad distribution network, and we are
a significant supplier to two of the largest global electronic
components distributors, Avnet, Inc. and Arrow Electronics, Inc.
We also have a direct sales force focused on supporting large
OEMs. For the year ended October 31, 2010, our top 10
customers, which included five distributors, collectively
accounted for 55% of our net revenue.
We focus on maintaining an efficient global supply chain and a
variable, low-cost operating model. Accordingly, we have
outsourced a majority of our manufacturing operations utilizing
third-party foundry and assembly and test capabilities, as well
as most of our corporate infrastructure functions We aim to
minimize capital expenditures by focusing our internal
manufacturing capacity on products utilizing our innovative
materials and processes to protect our intellectual property and
to develop the technology for manufacturing, while outsourcing
standard complementary metal oxide semiconductor, or CMOS,
processes. We also have over 35 years of operating history
in Asia, where approximately 60% of our employees are located
and where we produce and source the majority of our products.
Our presence in Asia places us in close proximity to many of our
customers manufacturing facilities and at the center of
worldwide electronics manufacturing.
Our business is impacted by general conditions of the
semiconductor industry and seasonal demand patterns in our
target markets. We believe that our focus on multiple target
markets and geographies helps mitigate our exposure to
volatility in any single target market.
Erosion of average selling prices of established products is
typical of the semiconductor industry. Consistent with trends in
the industry, we anticipate that average selling prices will
continue to decline in the future. However, as part of our
normal course of business, we plan to offset declining average
selling prices with efforts to reduce manufacturing costs of
existing products and the introduction of new and higher
value-added products.
41
Historically, a relatively small number of customers have
accounted for a significant portion of our net revenue. Sales to
distributors accounted for 33% and 41% of our net revenue for
the years ended November 1, 2009 and October 31, 2010,
respectively. In the year ended November 1, 2009, our top
10 customers, which included four distributors, collectively
accounted for 60% of our net revenue. No customer accounted for
10% or more of our net revenue during the fiscal year ended
November 1, 2009. During the fiscal year ended
October 31, 2010, our top 10 customers, which included five
distributors, collectively accounted for 55% of our net revenue.
No customer accounted for 10% or more of our net revenue during
the fiscal year ended October 31, 2010. We expect to
continue to experience significant customer concentration in
future periods.
The demand for our products has been affected in the past, and
is likely to continue to be affected in the future, by various
factors, including the following:
|
|
|
|
|
general economic and market conditions in the semiconductor
industry and in our target markets;
|
|
|
|
our ability to specify, develop or acquire, complete, introduce
and market new products and technologies in a cost-effective and
timely manner;
|
|
|
|
the timing, rescheduling or cancellation of expected customer
orders and our ability to manage inventory;
|
|
|
|
the rate at which our present and future customers and end-users
adopt our products and technologies in our target
markets; and
|
|
|
|
the qualification, availability and pricing of competing
products and technologies and the resulting effects on sales and
pricing of our products.
|
The recent economic downturn and financial crisis negatively
affected our business during fiscal year 2009, Although the
global economy improved during fiscal year 2010, current
uncertainty in global economic conditions still poses potential
risks to our business. For example, customers may defer
purchases in response to tighter credit and negative financial
news, which would in turn negatively affect product demand and
our results of operations.
Net
Revenue
Substantially all of our net revenue is derived from sales of
semiconductor devices which our customers incorporate into
electronic products. We serve four primary target markets:
wireless communications, wired infrastructure, industrial and
automotive electronics, and consumer and computing peripherals.
We sell our products primarily through our direct sales force.
We also use distributors for a portion of our business and
recognize revenue upon delivery of product to the distributors.
Such revenue is reduced for estimated returns and distributor
allowances.
Costs and
Expenses
Total cost of products sold. Cost of products
sold consists primarily of the cost of semiconductor wafers and
other materials, and the cost of assembly and test. Cost of
products sold also includes personnel costs and overhead related
to our manufacturing operations, including share-based
compensation, and related occupancy, computer services and
equipment costs, manufacturing quality, order fulfillment,
warranty and inventory adjustments, including write-downs for
inventory obsolescence, energy costs and other manufacturing
expenses. Total cost of products sold also includes amortization
of intangible assets and restructuring charges.
Although we outsource a significant portion of our manufacturing
activities, we do retain some semiconductor fabrication and
assembly and test facilities. If we are unable to utilize our
owned fabrication and assembly and test facilities at a desired
level, the fixed costs associated with these facilities will not
be fully absorbed, resulting in higher average unit costs and
lower gross margins.
Research and development. Research and
development expense consists primarily of personnel costs for
our engineers engaged in the design and development of our
products and technologies, including share-based compensation.
These expenses also include project material costs, third-party
fees paid to consultants, prototype development expenses,
allocated facilities costs and other corporate expenses and
computer services costs related to supporting computer tools
used in the engineering and design process.
42
Selling, general and
administrative. Selling expense consists
primarily of compensation and associated costs for sales and
marketing personnel, including share-based compensation, sales
commissions paid to our independent sales representatives, costs
of advertising, trade shows, corporate marketing, promotion,
travel related to our sales and marketing operations, related
occupancy and equipment costs and other marketing costs. General
and administrative expense consists primarily of compensation
and associated costs for executive management, finance, human
resources and other administrative personnel, outside
professional fees, allocated facilities costs and other
corporate expenses. In connection with our IPO, during the
fourth fiscal quarter of 2009, we expensed $54 million
related to the termination of the advisory agreement with our
Sponsors as well as approximately $4 million of offering
costs incurred in our IPO that relate to selling shareholders
which were absorbed by us.
Amortization of intangible assets. In
connection with acquisitions, we recorded intangible assets that
are being amortized over their estimated useful lives of six
months to 25 years. In connection with these acquisitions,
we also recorded goodwill which is not being amortized.
Interest expense. Interest expense is
associated with our borrowings incurred in connection with the
SPG Acquisition. Our debt has been substantially reduced over
the past four fiscal years, principally through net proceeds
derived from the divestiture of our Storage and Printer ASICs
Businesses as well as cash flows from operations, and through
the use of the net proceeds from our IPO.
Gain (loss) on extinguishment of debt. In
connection with the repurchase or redemption of our outstanding
indebtedness, we incur a gain (loss) on the extinguishment of
debt.
Other income (expense), net. Other income
(expense), net includes interest income, currency gains (losses)
on balance sheet remeasurement and other miscellaneous items.
Provision (benefit) for income taxes. We have
structured our operations to maximize the benefit from various
tax incentives and tax holidays extended to us in various
jurisdictions to encourage investment or employment. For
example, we have obtained several tax incentives from the
Singapore Economic Development Board, an agency of the
Government of Singapore, which provide that certain classes of
income we earn in Singapore are subject to tax holidays or
reduced rates of Singapore income tax. Each such tax incentive
is separate and distinct from the others, and may be granted,
withheld, extended, modified, truncated, complied with or
terminated independently without any effect on the other
incentives. In order to retain these tax benefits in Singapore,
we must meet certain operating conditions specific to each
incentive relating to, among other things, maintenance of a
treasury function, a corporate headquarters function, specified
intellectual property activities and specified manufacturing
activities in Singapore. Some of these operating conditions are
subject to phase-in periods through 2015. The Singapore tax
incentives are presently scheduled to expire at various dates
generally between 2014 and 2025, subject in certain cases to
potential extensions. Absent such tax incentives, the corporate
income tax rate in Singapore that would otherwise apply to us
would be 17% commencing from the 2010 year of assessment.
For the fiscal years ended November 2, 2008,
November 1, 2009 and October 31, 2010, the effect of
all these tax incentives, in the aggregate, was to reduce the
overall provision for income taxes from what it otherwise would
have been in such year by approximately $24 million,
$17 million and $63 million, respectively. The tax
incentives that we have negotiated in other jurisdictions are
also subject to our compliance with various operating and other
conditions. If we cannot or elect not to comply with the
operating conditions included in any particular tax incentive,
we will lose the related tax benefits and could be required to
refund material tax benefits previously realized by us with
respect to that incentive and, depending on the incentive at
issue, could likely be required to modify our operational
structure and tax strategy. Any such modified structure may not
be as beneficial to us from an income tax expense or operational
perspective as the benefits provided under the present tax
concession arrangements. As a result of the tax incentives and
tax holidays, if we continue to comply with the operating
conditions, we expect the income from our operations to be
subject to relatively lower income taxes than would otherwise be
the case under ordinary income tax rules.
Our interpretations and conclusions regarding the tax incentives
are not binding on any taxing authority, and if our assumptions
about tax and other laws are incorrect or if these tax
incentives are substantially modified or rescinded we could
suffer material adverse tax and other financial consequences,
which would increase our expenses, reduce our profitability and
adversely affect our cash flows. In addition, taxable income in
any jurisdiction is dependent upon acceptance of our operational
practices and intercompany transfer pricing by local tax
authorities as being on an arms length basis. Due to
inconsistencies in application of the arms length standard
43
among taxing authorities, as well as lack of adequate
treaty-based protection, transfer pricing challenges by tax
authorities could, if successful, substantially increase our
income tax expense.
Going forward, our effective tax rate will vary based on a
variety of factors, including overall profitability, the
geographical mix of income before taxes and the related tax
rates in the jurisdictions where we operate, as well as discrete
events, such as settlements of future audits. In particular, we
may owe significant taxes in jurisdictions outside Singapore
during periods when we are profitable in those jurisdictions
even though we may be experiencing low operating profit or
operating losses on a consolidated basis, potentially resulting
in significant tax liabilities on a consolidated basis during
those periods. Conversely, we expect to realize more favorable
effective tax rates as our profitability increases. Our
historical income tax provisions are not necessarily reflective
of our future results of operations.
History
SPG
Acquisition
On December 1, 2005, we completed the acquisition of the
Semiconductor Products Group of Agilent for approximately
$2.7 billion. The SPG Acquisition was accounted for by the
purchase method of accounting for business combinations and,
accordingly, the purchase price was allocated to the net assets
acquired based on their estimated fair values. Among other
things, the purchase accounting adjustments increased the
carrying value of our inventory and property, plant and
equipment, and established intangible assets for our developed
technology, customer and distributorship relationships, order
backlog, and in-process research and development, or IPRD. As a
result of the SPG Acquisition and related borrowings, interest
expense and non-cash depreciation and amortization charges have
significantly increased.
Acquisitions
In fiscal years 2008, 2009 and 2010 we completed five
acquisitions for aggregate cash consideration of
$91 million:
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During the first quarter of fiscal year 2008, we completed the
acquisition of a privately-held manufacturer of motion control
encoders for $29 million (net of cash acquired of
$2 million) plus $9 million repayment of existing debt.
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During the second quarter of fiscal year 2008, we completed the
acquisition of a privately-held developer of low-power wireless
devices for $6 million, plus potential earn-out payments.
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During the fourth quarter of fiscal year 2008, we completed the
acquisition of the Bulk Acoustic Wave Filter business of
Infineon Technologies AG for $32 million in cash.
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During the second quarter of fiscal year 2009, we completed the
acquisition of a manufacturer of motion control encoders for
$7 million in cash.
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|
During the third quarter of fiscal year 2010, we completed the
acquisition of a manufacturer of motion control encoders for
$8 million in cash.
|
The accompanying consolidated financial statements include the
results of operations of the acquired companies and businesses
commencing on their respective acquisition dates. See
Note 3. Acquisitions and Investments, in the
Consolidated Financial Statements for information related to
these acquisitions.
Restructuring
Charges
In fiscal year 2007, we began to increase the use of outsourced
service providers in our manufacturing operations, particularly
our assembly and test operations, to lower our costs and reduce
the capital deployed in these activities. In connection with
this strategy, we introduced a largely voluntary severance
program intended to reduce our workforce and resulting in an
approximately 40% decline in our headcount during fiscal year
2007, primarily in our major locations in Asia. Consequently,
during the year ended November 2, 2008, we incurred total
restructuring charges of $12 million, predominantly
representing one-time employee termination costs.
44
In the first quarter of fiscal year 2009, we initiated a
restructuring plan intended to realign our cost structure with
the then prevailing macroeconomic business conditions. This plan
eliminated approximately 230 positions or 6% of our global
workforce and was substantially completed in fiscal year 2009.
In the third quarter of fiscal year 2009, we announced a further
reduction in our worldwide workforce of up to
200 employees. This plan was completed in the fourth
quarter of fiscal year 2009. During the year ended
November 1, 2009, we recorded restructuring charges of
$26 million in connection with both of these plans,
predominantly representing one-time employee termination costs.
In fiscal year 2009, we also committed to a plan to outsource
certain of our manufacturing in Germany. During the year ended
November 1, 2009, we recorded $5 million of one-time
employee termination costs, $1 million related to asset
abandonment and other exit costs and approximately
$1 million related to excess lease costs in connection with
this plan.
During fiscal year 2009, we recorded and paid $1 million of
one-time employee termination costs and recognized
$2 million as share-based compensation expense in
connection with the departure of our former Chief Operating
Officer in January 2009.
As part of our efforts to continue to realign our cost
structure, we incurred approximately $3 million of one-time
employee termination costs and $1 million of excess lease
costs during fiscal year 2010.
See Note 10. Restructuring Charges to the
Consolidated Financial Statements for further information.
Critical
Accounting Policies and Estimates
The preparation of financial statements in accordance with 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, valuation of long-lived
assets, intangible assets and goodwill, inventory valuation and
warranty reserves and accounting for income taxes.
Revenue recognition. We recognize revenue, net
of sales returns and allowances, provided that
(i) persuasive evidence of an arrangement exists,
(ii) delivery has occurred, (iii) the price is fixed
or determinable and (iv) collectibility is reasonably
assured. Delivery is considered to have occurred when title and
risk of loss have transferred to the customer. We consider the
price to be fixed or determinable when the price is not subject
to refund or adjustments or when any such adjustments are
accounted for. We evaluate the creditworthiness of our customers
to determine that appropriate credit limits are established
prior to the acceptance of an order. Revenue, including sales to
resellers and distributors, is reduced for estimated returns and
distributor allowances. We recognize revenue from sales of our
products to distributors upon delivery of product to the
distributors. An allowance for distributor credits covering
price adjustments and scrap allowances is made based on our
estimate of historical experience rates as well as considering
economic conditions and contractual terms. To date, actual
distributor claims activity has been materially consistent with
the provisions we have made based on our historical estimates.
However, because of the inherent nature of estimates, there is
always a risk that there could be significant differences
between actual amounts and our estimates. Different judgments or
estimates could result in variances that might be significant to
reported operating results.
Valuation of long-lived assets, intangible assets and
goodwill. We assess the impairment of long-lived
assets, intangible assets and goodwill whenever events or
changes in circumstances indicate that the carrying value of
such assets may not be recoverable. Factors we consider
important which could trigger an impairment review of our
long-lived and intangible assets include significant
underperformance relative to historical or projected future
operating results, significant changes in the manner of our use
of the acquired assets or the strategy for our overall business,
45
and significant negative industry or economic trends. An
impairment loss must be measured if the sum of the expected
future cash flows (undiscounted and before interest) from the
use of the asset is less than the net book value of the asset.
The amount of the impairment loss will generally be measured as
the difference between the net book values of the asset (or
asset group) and its (their) estimated fair value.
We perform an annual impairment review of our goodwill during
the fourth fiscal quarter of each year, and more frequently if
we believe indicators of impairment exist and we follow the
two-step approach in performing the impairment test in
accordance with ASC 350 Intangibles
Goodwill and Other. The first step of the goodwill
impairment test compares the estimated fair value of the
reporting unit with the related carrying amount. If the fair
value of the reporting unit exceeds its carrying amount, the
reporting units goodwill is not considered to be impaired
and the second step of the impairment test is unnecessary. If
the reporting units carrying amount exceeds its estimated
fair value, the second step of the test must be performed to
measure the amount of the goodwill impairment loss, if any. The
second step of the test compares the implied fair value of the
reporting units goodwill, determined in the same manner as
the amount of goodwill recognized in a business combination,
with the carrying amount of such goodwill. If the carrying
amount of the reporting units goodwill exceeds the implied
fair value, an impairment loss is recognized in an amount equal
to that excess. The process of evaluating the potential
impairment of goodwill is highly subjective and requires
significant judgment. We have one reporting unit for goodwill
impairment testing purposes which is based on the manner in
which we operate our business and the nature of those
operations, including consideration of how the Chief Operating
Decision Maker, as defined in ASC 280 Segment
Reporting, manages the business as a whole. We operate as
one semiconductor company with sales of semiconductors
representing the only material source of revenue. Substantially
all products offered incorporate analog functionality and are
manufactured under similar manufacturing processes.
For fiscal year 2010, we used the quoted market price of our
ordinary shares to determine the fair value of our reporting
unit, which is the Company as a whole. No impairment of goodwill
was identified based on the annual impairment review during the
fourth quarter of fiscal year 2010. A 10% decline in the
ordinary share quoted market prices would not impact the result
of our goodwill impairment assessment.
The process of evaluating the potential impairment of long-lived
assets under ASC 360 Property, Plant and
Equipment, such as our property, plant and equipment and
other intangible assets is also highly subjective and requires
significant judgment. In order to estimate the fair value of
long-lived assets, we typically make various assumptions about
the future prospects about our business or the part of our
business that the long-lived asset relates to, consider market
factors specific to the business and estimate future cash flows
to be generated by the business, which requires significant
judgment as it is based on assumptions about market demand for
our products over a number of future years. Based on these
assumptions and estimates, we determine whether we need to take
an impairment charge to reduce the value of the long-lived asset
stated on our balance sheet to reflect its estimated fair value.
Assumptions and estimates about future values and remaining
useful lives are complex and often subjective. They can be
affected by a variety of factors, including external factors
such as the real estate market, industry and economic trends,
and internal factors such as changes in our business strategy
and our internal forecasts. Although we believe the assumptions
and estimates we have made in the past have been reasonable and
appropriate, changes in assumptions and estimates could
materially impact our reported financial results.
Inventory valuation and warranty reserves. We
value our inventory at the lower of the actual cost of the
inventory or the current estimated market value of the
inventory, cost being determined under the
first-in,
first-out method. We regularly review inventory quantities on
hand and record a provision for excess and obsolete inventory
based primarily on our estimated forecast of product demand and
production requirements. Demand for our products can fluctuate
significantly from period to period. A significant decrease in
demand could result in an increase in the amount of excess
inventory quantities on hand. In addition, our industry is
characterized by rapid technological change, frequent new
product development and rapid product obsolescence that could
result in an increase in the amount of obsolete inventory
quantities on hand. Additionally, our estimates of future
product demand may prove to be inaccurate, which may cause us to
understate or overstate both the provision required for excess
and obsolete inventory and cost of products sold. Therefore,
although we make every effort to ensure the accuracy of our
forecasts of future product demand, any significant
unanticipated changes in demand or technological developments
could have a significant impact on the value of our inventory
and our results of operations. We establish reserves for
estimated product warranty costs at the time revenue is
recognized. Although we engage in
46
extensive product quality programs and processes, our warranty
obligation has been and may in the future be affected by product
failure rates, product recalls, repair or field replacement
costs and additional development costs incurred in correcting
any product failure, as well as possible claims for
consequential costs. Should actual product failure rates, use of
materials or service delivery costs differ from our estimates,
additional warranty reserves could be required. In that event,
our gross profit and gross margins would be reduced.
Accounting for income taxes. We account for
income taxes in accordance with ASC 740 Income
Taxes, or ASC 740. The provision for income taxes is
computed using the asset and liability method, under which
deferred tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences
between the financial reporting and tax basis of assets and
liabilities, and for operating losses and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using the currently enacted tax rates that apply to taxable
income in effect for the years in which those tax assets are
expected to be realized or settled. We record a valuation
allowance to reduce deferred tax assets to the amount that is
believed more likely than not to be realized. Significant
management judgment is required in developing our provision for
income taxes, including the determination of deferred tax assets
and liabilities and any valuation allowances that might be
required against the deferred tax assets. We have considered
future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for valuation
allowances. If we determine, in the future, a valuation
allowance is required, such adjustment to the deferred tax
assets would increase tax expense in the period in which such
determination is made. Conversely, if we determine, in the
future, a valuation allowance exceeds our requirement, such
adjustment to the deferred tax assets would decrease tax expense
in the period in which such determination is made. In evaluating
the exposure associated with various tax filing positions, we
accrue an income tax liability when such positions do not meet
the more-likely-than-not threshold for recognition.
The calculation of our tax liabilities involves dealing with
uncertainties in the application of complex tax law and
regulations in a multitude of jurisdictions. We recognize
potential liabilities for anticipated tax audit issues in the
U.S. and other tax jurisdictions based on our estimate of
whether, and the extent to which, additional taxes and interest
will be due. If our estimate of income tax liabilities proves to
be less than the ultimate assessment, a further charge to
expense would be required. If events occur and the payment of
these amounts ultimately proves to be unnecessary, the reversal
of the liabilities would result in tax benefits being recognized
in the period when we determine the liabilities are no longer
necessary.
Total unrecognized tax benefits increased by $6 million
during fiscal year 2009, resulting in total unrecognized tax
benefits of $24 million as of November 1, 2009. The
total unrecognized tax benefit increased to approximately
$27 million as of October 31, 2010.
We recognize interest and penalties related to unrecognized tax
benefits within the provision for (benefit from) income taxes
line in the consolidated statement of operations. Accrued
interest and penalties are included within the other current
liabilities and other long-term liabilities lines in the
consolidated balance sheet. As of November 2, 2008,
November 1, 2009 and October 31, 2010, the combined
amount of cumulative accrued interest and penalties was
approximately $3 million, $4 million and
$5 million, respectively.
Share-based compensation. We measure and
recognize share-based compensation expense for all share-based
payment awards issued to employees and directors in accordance
with the authoritative guidance. Under the authoritative
guidance, for option awards granted or modified after
November 1, 2006, we recognize compensation expense based
on estimated fair values on the date of grant, net of an
estimated forfeiture rate. Compensation expense for share based
awards granted after November 1, 2006, is recognized over
the requisite service period of the award on a straight-line
basis. Forfeiture rates used in the determination of
compensation expense are revised in subsequent periods if actual
forfeitures differ from estimates. Changes in the estimated
forfeiture rates can have a significant effect on share-based
compensation expense since the effect of adjusting the rate is
recognized in the period the forfeiture estimate is changed.
For outstanding performance share-based awards granted before
November 1, 2006 and not modified thereafter, we continue
to account for any portion of such awards under the originally
applied accounting principles. Performance-based awards granted
before November 1, 2006 were subject to variable accounting
until such options are modified, vested, forfeited or cancelled.
Variable accounting requires us to value the variable options at
the end of each accounting period based upon the then current
fair value of the underlying ordinary
47
shares. Accordingly, our share-based compensation expense was
subject to significant fluctuation based on changes in the fair
value of our ordinary shares and our estimate of vesting
probability of unvested performance-based options. However,
subsequent to November 1, 2006, the Compensation Committee
approved two modifications of all outstanding employee
performance-based awards. As a result of the first modification
in fiscal year 2008, all variable accounting on outstanding
employee performance-based options ceased and instead, pursuant
to the authoritative guidance, we recognized a combination of
unamortized intrinsic value of these modified options and the
incremental fair value of those options up until the date of the
second modification in fiscal year 2009. In accordance with the
authoritative guidance, at the second modification date, we
measured the incremental fair value of unvested outstanding
performance-based options, that is expected to be recognized
over the remaining service period and are recognizing that
amount on a straight-line basis over such expected service
period.
For options granted or modified after November 1, 2006, we
utilize the Black-Scholes option pricing model for determining
the estimated fair value for share options. The Black-Scholes
valuation calculation requires us to estimate key assumptions,
such as future share price volatility, expected terms, risk-free
rates and dividend yield. We also estimate potential forfeitures
of share grants and adjust compensation cost recorded
accordingly. The estimate of forfeitures is adjusted over the
requisite service period to the extent that actual forfeitures
differ, or are expected to differ, from such estimates. Changes
in estimated forfeitures are recognized through a cumulative
catch-up
adjustment in the period of change, and the amount of
share-based compensation expense recognized in future periods is
adjusted.
The weighted-average assumptions utilized for our Black-Scholes
valuation model for options and employee share purchase rights
granted during the fiscal years ended November 2, 2008,
November 1, 2009 and October 31, 2010 are as follows:
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|
|
|
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|
|
|
|
|
|
|
|
ESPP
|
|
|
Year Ended
|
|
Year Ended
|
|
|
November 2,
|
|
November 1,
|
|
October 31,
|
|
October 31,
|
|
|
2008
|
|
2009
|
|
2010
|
|
2010
|
|
Risk-free interest rate
|
|
|
3.4
|
%
|
|
|
2.3
|
%
|
|
|
1.9
|
%
|
|
|
0.2
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Volatility
|
|
|
44
|
%
|
|
|
52
|
%
|
|
|
45
|
%
|
|
|
42
|
%
|
Expected term (in years)
|
|
|
6.5
|
|
|
|
5.7
|
|
|
|
5.0
|
|
|
|
0.5
|
|
The dividend yield of zero is based on the fact that we had not
declared any cash dividends as of the respective option grant
date. Volatility is based on the combination of historical
volatility of guideline publicly traded companies over the
period commensurate with the expected term of the options and
the implied volatility of guideline publicly traded companies
from traded options with a term of 180 days or greater
measured over the last three months. The risk-free interest rate
is derived from the average U.S. Treasury Strips rate
during the period, which approximates the rate in effect at the
time of grant. For all options granted after August 2, 2009
and a portion of options granted before August 2, 2009, our
computation of expected term was based on other data, such as
the data of peer companies and company-specific attributes that
we believe could affect employees exercise behavior. For
the majority of options granted prior to August 2, 2009, we
used the simplified method as specified in the accounting
guidance.
In fiscal year 2010, we began to grant restricted share units,
or RSUs, which are restricted shares that are granted with the
exercise price equal to zero and are converted to shares
immediately upon vesting. We recognize compensation expense for
RSUs using the straight-line amortization method based on the
fair value of RSUs on the date of grant. The fair value of RSUs
is the closing market price of our ordinary shares on the date
of grant, which is equal to their intrinsic value on the date of
grant.
We also record share-based compensation expense based on an
estimate of the fair value of rights to purchase ordinary shares
under the Avago Employee Share Purchase Plan, which was
implemented in June 2010, and recognize this share-based
compensation expense using the straight-line amortization method.
48
Fiscal
Year Presentation
We adopted a 52- or 53-week fiscal year beginning with our
fiscal year 2008. Our fiscal year ends on the Sunday closest to
October 31.
The financial statements included in this Annual Report on
Form 10-K
are presented in accordance with GAAP and expressed in
U.S. dollars.
Results
from Continuing Operations
Year
Ended October 31, 2010 Compared to Year Ended
November 1, 2009
The following tables set forth our results of operations for the
years ended October 31, 2010 and November 1, 2009.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
November 1,
|
|
|
October 31,
|
|
|
November 1,
|
|
|
October 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
|
(In millions)
|
|
|
(As a percentage of net revenue)
|
|
|
Statement of Operations Data:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
1,484
|
|
|
$
|
2,093
|
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of products sold:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
|
855
|
|
|
|
1,068
|
|
|
|
58
|
|
|
|
51
|
|
Amortization of intangible assets
|
|
|
58
|
|
|
|
58
|
|
|
|
4
|
|
|
|
3
|
|
Restructuring charges
|
|
|
11
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of products sold
|
|
|
924
|
|
|
|
1,127
|
|
|
|
63
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
560
|
|
|
|
966
|
|
|
|
37
|
|
|
|
46
|
|
Research and development
|
|
|
245
|
|
|
|
280
|
|
|
|
17
|
|
|
|
14
|
|
Selling, general and administrative
|
|
|
165
|
|
|
|
196
|
|
|
|
11
|
|
|
|
9
|
|
Amortization of intangible assets
|
|
|
21
|
|
|
|
21
|
|
|
|
1
|
|
|
|
1
|
|
Restructuring charges
|
|
|
23
|
|
|
|
3
|
|
|
|
1
|
|
|
|
|
|
Advisory agreement termination fee
|
|
|
54
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
Selling shareholder expenses
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
512
|
|
|
|
500
|
|
|
|
34
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
48
|
|
|
|
466
|
|
|
|
3
|
|
|
|
22
|
|
Interest expense
|
|
|
(77
|
)
|
|
|
(34
|
)
|
|
|
(5
|
)
|
|
|
(2
|
)
|
Loss on extinguishment of debt
|
|
|
(8
|
)
|
|
|
(24
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Other income (expense), net
|
|
|
1
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations before taxes
|
|
|
(36
|
)
|
|
|
406
|
|
|
|
(3
|
)
|
|
|
19
|
|
Provision for (benefit from) income taxes
|
|
|
8
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(44
|
)
|
|
|
415
|
|
|
|
(3
|
)%
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended November 1, 2009, we recorded an
accrual of $4 million for indirect taxes on certain prior
years purchase and sale transactions. This accrual
increased cost of products sold and research and development
expenses for the year ended November 1, 2009 by
$2 million each and increased net loss for the year by
$4 million. We determined that the impact of the adjustment
was not material to prior periods or to the results for the
second quarter of fiscal year 2009, and as such the adjustment
was recorded in the second quarter of fiscal year 2009 under ASC
270 Interim Reporting.
Net revenue. Net revenue was
$2,093 million for the year ended October 31, 2010,
compared to $1,484 million for the year ended
November 1, 2009, an increase of $609 million or 41%.
This year over year increase was due, in large part, to the
improvement in global economic conditions that occurred during
this period, but also due to our introduction of a number of
new, proprietary products over the year, which helped us to grow
net revenues substantially over the period.
49
Net revenue by target market data is derived from our
understanding of our end customers primary markets, and
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
November 1,
|
|
October 31,
|
|
|
% of Net Revenue
|
|
2009
|
|
2010
|
|
Change
|
|
Wireless communications
|
|
|
42
|
%
|
|
|
38
|
%
|
|
|
(4
|
)%
|
Industrial and automotive electronics
|
|
|
22
|
|
|
|
29
|
|
|
|
7
|
|
Wired infrastructure
|
|
|
26
|
|
|
|
24
|
|
|
|
(2
|
)
|
Consumer and computing peripherals
|
|
|
10
|
|
|
|
9
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
November 1,
|
|
|
October 31,
|
|
|
|
|
Net Revenue
|
|
2009
|
|
|
2010
|
|
|
Change
|
|
|
|
(In millions)
|
|
|
Wireless communications
|
|
$
|
622
|
|
|
$
|
796
|
|
|
$
|
174
|
|
Industrial and automotive electronics
|
|
|
332
|
|
|
|
605
|
|
|
|
273
|
|
Wired infrastructure
|
|
|
384
|
|
|
|
509
|
|
|
|
125
|
|
Consumer and computing peripherals
|
|
|
146
|
|
|
|
183
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
1,484
|
|
|
$
|
2,093
|
|
|
$
|
609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue from wireless communications products, in absolute
dollars increased in fiscal year 2010 compared with fiscal year
2009. The growth of key platforms in next-generation smart
phones at leading OEM customers, which incorporate many of our
products such as FBAR filters, power amplifiers and PA-Duplexer
front-end modules as well as optical finger navigation sensors,
drove this revenue growth. Revenue from this target market
decreased as a percentage of net revenue due to the
disproportionate growth in revenues from the industrial and
automotive electronics target market.
Net revenue from industrial and automotive electronics products,
both in absolute dollars and as a percentage of net revenue,
substantially increased in fiscal year 2010 compared with fiscal
year 2009. The increase was in large part due to the effects of
a recovery in market conditions from fiscal year 2009. The
growth in this target market was broad based, with particular
strength in sales of optocouplers, industrial fiber optic
transceivers and motion encoders. We benefitted from increased
spending on and new uses for our devices in applications such as
inverters, servo machine tools and programmable logic
controller/fieldbus industrial data communications systems used
in power production and distribution, including renewable energy
and smart power grid installations, factory automation and
transportation applications, as well as gains in market share
for a number of these products. We believe a substantial amount
of the demand for these products was driven by spending on
infrastructure in emerging economies.
Net revenue from wired infrastructure products, in absolute
dollars, increased in fiscal year 2010 compared with fiscal year
2009, as spending on enterprise networking data centers and core
routing improved and also due, in part, to gains in market
share. Wired networking continued to benefit from increasing
demand for data traffic, generating increased demand for
fiber-optic based networking connections to replace copper-based
connections and generating increased demand for higher speed
SerDes communications links.
Net revenue from consumer and computing peripheral products, in
absolute dollars, increased in fiscal year 2010 compared with
fiscal year 2009, reflecting improved sales of optical sensors
used in optical mice and improved sales of motion encoders used
in applications such as optical disc drives and printers during
fiscal year 2010. However, this target market continues to be
adversely affected by ongoing weakness in consumer spending and
we did not experience the usual seasonal benefits in our
personal computer-related businesses in the fourth quarter of
fiscal year 2010.
50
The categorization of revenue by target market is determined
using a variety of data points including the technical
characteristics of the product, the sold to customer
information, the ship to customer information and
the end customer product or application into which our product
will be incorporated. As data systems for capturing and tracking
this data evolve and improve, the categorization of products by
target market can vary over time. When this occurs, we
reclassify revenue by target market for prior periods. Such
reclassifications typically do not materially change the sizing
of, or the underlying trends of results within, each target
market.
Gross margin. Gross margin was
$966 million for the year ended October 31, 2010
compared to $560 million for the year ended
November 1, 2009, an increase of $406 million or 73%.
As a percentage of net revenue, gross margin increased to 46%
for the year ended October 31, 2010 from 37% for the year
ended November 1, 2009. The increase in gross margin
percentage was attributable to continuing improvements in
product mix, as well as increased operating levels in our
internal fabrication facilities. During the year ended
October 31, 2010, compared to the year ended
November 1, 2009, a higher proportion of our net revenues
were from products sold into the industrial and automotive
electronics target market and from sales of our proprietary
products, which generally earn higher gross margins than our
other products. During the year ended October 31, 2010, we
recorded write-downs to inventories associated with reduced
demand assumptions of $15 million compared to
$23 million during the year ended November 1, 2009. We
also recorded charges of $12 million during the year ended
October 31, 2010 for warranty costs compared to
$8 million in the year ended November 1, 2009. See
Note 17. Commitments and Contingencies to the
Consolidated Financial Statements.
Research and development. Research and
development expense was $280 million for the year ended
October 31, 2010, compared to $245 million for the
year ended November 1, 2009, an increase of
$35 million or 14%. As a percentage of net revenue,
research and development expenses decreased to 14% for the year
ended October 31, 2010 from 17% for the year ended
November 1, 2009. The increase in absolute dollars was
primarily attributable to $11 million increase in incentive
compensation expense related to our employee bonus program,
which is a variable expense related to our overall
profitability, $6 million increase in compensation expense
resulting from annual salary adjustment, $4 million
increase in share-based compensation due to grants of
share-based awards at higher fair market values and
$11 million in additional research and development project
materials and supplies in fiscal year 2010 as compared to the
year ended November 1, 2009. The decrease as a percentage
of net revenue is attributable to higher net revenue in fiscal
year 2010. We expect research and development expenses to
increase in absolute dollars for the foreseeable future, due to
the increasing complexity and number of products we plan to
develop.
Selling, general and administrative. Selling,
general and administrative expense was $196 million for the
year ended October 31, 2010 compared to $165 million
for the year ended November 1, 2009, an increase of
$31 million or 19%. As a percentage of net revenue,
selling, general and administrative expense decreased to 9% for
the year ended October 31, 2010 compared to 11% for the
year ended November 1, 2009. The increase in absolute
dollars was attributable to $11 million increase in
incentive compensation expense related to our employee bonus
program which is a variable expense related to our overall
profitability in fiscal year 2010 as compared to the year ended
November 1, 2009, $2 million increase in sales
commissions expense paid to our sales employees, $3 million
increase in compensation expense resulting from annual salary
adjustment, $8 million increase in share-based compensation
expense due to grants of share-based awards at higher fair
market values, $3 million increase in third party fees and
$4 million increase in computer and related services. The
decrease as a percentage of net revenue was attributable to
higher net revenue in fiscal year 2010.
Selling, general and administrative expenses for fiscal year
2009 does not include $54 million that we recorded related
to the termination of the advisory agreement with our Sponsors
pursuant to its terms, upon the closing of the IPO, as well as
approximately $4 million of offering costs incurred in our
IPO that relate to selling shareholders which were absorbed by
us. The advisory agreement termination fees and the selling
shareholder expenses are included as separate components of
operating expenses in the consolidated statements of operations
for fiscal year 2009.
Amortization of intangible assets. Total
amortization of intangible assets incurred was $79 million
each, for the years ended October 31, 2010 and
November 1, 2009.
51
Restructuring charges. During the year ended
October 31, 2010, we incurred total restructuring charges
of $4 million, compared to $34 million for the year
ended November 1, 2009, both predominantly representing
employee termination costs. We undertook significant
restructuring activities in fiscal year 2009 in response to the
then macroeconomic business conditions and some incremental
restructuring activities in fiscal year 2010, which resulted in
significantly higher restructuring charges in fiscal year 2009
compared to fiscal year 2010. See Note 10.
Restructuring Charges to the Consolidated Financial
Statements.
Interest expense. Interest expense was
$34 million for the year ended October 31, 2010,
compared to $77 million for the year ended November 1,
2009, which represents a decrease of $43 million or 56%.
The decrease is primarily due to the redemption and repurchases
of $364 million aggregate principal amount of our
outstanding notes made in fiscal year 2010. Interest expense is
expected to be significantly lower during fiscal year 2011,
compared to fiscal year 2010, due to the redemption of the
remaining $230 million aggregate principal amount of our
senior subordinated rate notes on December 1, 2010.
Gain (loss) on extinguishment of debt. During
the year ended October 31, 2010, we redeemed
$318 million aggregate principal amount of our senior fixed
rate notes and the remaining $46 million aggregate
principal amount of our senior floating rate notes. The
redemption of the senior fixed rate notes and senior floating
rate notes in fiscal year 2010 resulted in a loss on
extinguishment of debt of $24 million. During the year
ended November 1, 2009, we repurchased an aggregate of
$106 million of debt, consisting of $85 million in
principal amount of senior fixed rate notes, $17 million in
principal amount of senior subordinated notes and
$4 million in principal amount of senior floating rate
notes in a tender offer for all or a part of our outstanding
notes, resulting in a loss on extinguishment of debt in fiscal
year 2009 of $9 million. We also repurchased
$3 million in principal amount of senior subordinated notes
in the open market, resulting in a gain on extinguishment of
debt of $1 million during the year ended November 1,
2009. See Note 7. Senior Credit Facility and
Borrowings to the Consolidated Financial Statements.
Other income (expense), net. Other income
(expense), net includes interest income, foreign currency gain
(loss), loss on
other-than-temporary
impairment of investment and other miscellaneous items. Other
expense, net was $2 million for the year ended
October 31, 2010 compared to other income, net was
$1 million for the year ended November 1, 2009. The
decrease is primarily attributable to a $2 million decrease
in government grants received and a $1 million increase in
currency losses during the year ended October 31, 2010
compared to the year ended November 1, 2009.
Provision for (benefit from) income taxes. We
recorded an income tax benefit totaling $9 million for the
year ended October 31, 2010 compared to an income tax
expense of $8 million for the year ended November 1,
2009. The decrease is primarily attributable to the release of
$29 million of deferred tax asset valuation allowances,
mainly associated with the Company irrevocably calling our
senior subordinated notes for redemption in October 2010,
partially offset by the write-off of $6 million of deferred
tax assets resulting from the grant of a new tax incentive in
Malaysia, and an increase in overall tax provision due to an
increase in worldwide taxable income.
52
Year
Ended November 1, 2009 Compared to Year Ended
November 2, 2008
The following tables set forth our results of operations for the
years ended November 1, 2009 and November 2, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
November 2,
|
|
|
November 1,
|
|
|
November 2,
|
|
|
November 1,
|
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
|
(In millions)
|
|
|
(As a percentage of net revenue)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
1,699
|
|
|
$
|
1,484
|
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of products sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
|
981
|
|
|
|
855
|
|
|
|
58
|
|
|
|
58
|
|
Amortization of intangible assets
|
|
|
57
|
|
|
|
58
|
|
|
|
3
|
|
|
|
4
|
|
Restructuring charges
|
|
|
6
|
|
|
|
11
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of products sold
|
|
|
1,044
|
|
|
|
924
|
|
|
|
61
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
655
|
|
|
|
560
|
|
|
|
39
|
|
|
|
37
|
|
Research and development
|
|
|
265
|
|
|
|
245
|
|
|
|
16
|
|
|
|
17
|
|
Selling, general and administrative
|
|
|
196
|
|
|
|
165
|
|
|
|
12
|
|
|
|
11
|
|
Amortization of intangible assets
|
|
|
28
|
|
|
|
21
|
|
|
|
2
|
|
|
|
1
|
|
Restructuring charges
|
|
|
6
|
|
|
|
23
|
|
|
|
|
|
|
|
1
|
|
Advisory agreement termination fee
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
|
4
|
|
Selling shareholder expenses
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
495
|
|
|
|
512
|
|
|
|
30
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
160
|
|
|
|
48
|
|
|
|
9
|
|
|
|
3
|
|
Interest expense
|
|
|
(86
|
)
|
|
|
(77
|
)
|
|
|
(5
|
)
|
|
|
(5
|
)
|
Loss on extinguishment of debt
|
|
|
(10
|
)
|
|
|
(8
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Other income (expense), net
|
|
|
(4
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before taxes
|
|
|
60
|
|
|
|
(36
|
)
|
|
|
3
|
|
|
|
(3
|
)
|
Provision for income taxes
|
|
|
3
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
57
|
|
|
|
(44
|
)
|
|
|
3
|
|
|
|
(3
|
)
|
Income from and gain on discontinued operations, net of income
taxes
|
|
|
26
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
83
|
|
|
$
|
(44
|
)
|
|
|
5
|
%
|
|
|
(3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended November 1, 2009, we recorded an
accrual of $4 million for indirect taxes on certain prior
years purchase and sale transactions. This accrual
increased cost of products sold and research and development
expenses for the year ended November 1, 2009 by
$2 million each and increased net loss for the year by
$4 million. We determined that the impact of the adjustment
was not material to prior periods or to the results for the
second quarter of fiscal year 2009, and as such the adjustment
was recorded in the second quarter of fiscal year 2009 under ASC
270 Interim Reporting.
Net revenue. Net revenue was
$1,484 million for the year ended November 1, 2009,
compared to $1,699 million for the year ended
November 2, 2008, a decrease of $215 million or 13%.
The global recession, continuing financial and credit crisis and
deteriorating economic conditions resulted in more cautious
customer spending and generally lower demand for our products,
particularly in the first three quarters of fiscal year 2009.
53
Net revenue by target market data is derived from our
understanding of our end customers primary markets, and
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
November 2,
|
|
November 1,
|
|
|
% of Net Revenue
|
|
2008
|
|
2009
|
|
Change
|
|
Wireless communications
|
|
|
31
|
%
|
|
|
42
|
%
|
|
|
11
|
%
|
Wired infrastructure
|
|
|
28
|
|
|
|
26
|
|
|
|
(2
|
)
|
Industrial and automotive electronics
|
|
|
30
|
|
|
|
22
|
|
|
|
(8
|
)
|
Consumer and computing peripherals
|
|
|
11
|
|
|
|
10
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
November 2,
|
|
|
November 1,
|
|
|
|
|
Net Revenue
|
|
2008
|
|
|
2009
|
|
|
Change
|
|
|
|
(In millions)
|
|
|
|
|
|
Wireless communications
|
|
$
|
524
|
|
|
$
|
622
|
|
|
$
|
98
|
|
Wired infrastructure
|
|
|
470
|
|
|
|
384
|
|
|
|
(86
|
)
|
Industrial and automotive electronics
|
|
|
513
|
|
|
|
332
|
|
|
|
(181
|
)
|
Consumer and computing peripherals
|
|
|
192
|
|
|
|
146
|
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
1,699
|
|
|
$
|
1,484
|
|
|
$
|
(215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue from wireless communications products, both in
absolute dollars and as a percentage of net revenue, increased
in fiscal year 2009 compared with fiscal year 2008. The growth
of key platforms in next-generation smart phones at leading OEM
customers, which incorporate many of our proprietary products
such as FBAR filters and front-end modules, drove this revenue
growth.
Net revenue from wired infrastructure products, both in absolute
dollars and as a percentage of net revenue, decreased in fiscal
year 2009 compared with fiscal year 2008. This was primarily due
to softness in spending on enterprise networking and data center
equipment, during the first three quarters of fiscal year 2009,
which led to reduced shipments to the contract manufacturers
supporting OEMs. However, our revenue from this market began to
improve in the fourth quarter of fiscal year 2009 due to an
increase in enterprise networking and data center spending in
that quarter. Contract manufacturers constitute our principal
direct customers for wired infrastructure products.
Net revenue from industrial and automotive electronics products,
both in absolute dollars and as a percentage of net revenue,
decreased in fiscal year 2009 compared with fiscal year 2008.
This was primarily due to reduced sales by OEMs as well as
reductions in sales to our distributors during the first three
quarters of fiscal year 2009, due largely to a reduction in
channel inventory. However, our revenue from this market
improved significantly in the fourth quarter of fiscal year 2009
due, in part, to a rebound in demand from major OEMs in Europe
and Japan for drives and servo motor components and continued
demand for inverters and industrial fibers from renewable energy
and transportation businesses.
Net revenue from consumer and computing peripheral products,
both in absolute dollars and as a percentage of net revenue,
decreased in fiscal year 2009 compared with fiscal year 2008,
reflecting lower consumer spending caused by the overall
economic downturn partly offset by improved sales of optical
mouse sensors and motion control encoders for printers in the
fourth quarter of fiscal year 2009.
The categorization of revenue by target market is determined
using a variety of data points including the technical
characteristics of the product, the sold to customer
information, the ship to customer information and
the end customer product or application into which our product
will be incorporated. As data systems for capturing and tracking
this data evolve and improve, the categorization of products by
target market can vary over time. When
54
this occurs, we reclassify revenue by target market for prior
periods. Such reclassifications typically do not materially
change the sizing of, or the underlying trends of results
within, each target market.
Gross margin. Gross margin was
$560 million for the year ended November 1, 2009,
compared to $655 million for the year ended
November 2, 2008, a decrease of $95 million or 15%. As
a percentage of net revenue, gross margin decreased slightly to
37% for the year ended November 1, 2009 from 39% for the
year ended November 2, 2008. The decrease in absolute
dollars was primarily attributable to decrease in revenue of 13%
during the year ended November 1, 2009 compared to the
prior year ended November 2, 2008. During the year ended
November 1, 2009, we recorded write-downs to inventories of
$23 million associated with reduced demand assumptions
compared to $11 million during the prior year. In addition,
the year ended November 1, 2009 included $2 million of
indirect taxes relating to prior periods and payments of
$3 million in connection with terminating our relationship
with a contract manufacturer as part of a transition to another
supplier, which primarily related to production equipment
procured by the contract manufacturer for which we agreed to
compensate the contract manufacturer. During the year ended
November 1, 2009, we also recorded $5 million to cover
potential costs in excess of expected insurance coverage for
warranty obligations arising out of certain product quality
issues, as well as $3 million to scrap inventory of such
components held by us.
Research and development. Research and
development expense was $245 million for the year ended
November 1, 2009, compared to $265 million for the
year ended November 2, 2008, a decrease of $20 million
or 8%. As a percentage of net revenue, research and development
expenses slightly increased to 17% for the year ended
November 1, 2009 from 16% for the year ended
November 2, 2008. The decrease in absolute dollars
reflected our concerted efforts to control discretionary costs
during the downturn resulting in lower spending on consumable
tools and supplies and travel, as well as a reduction in
incentive compensation expense due to the impact of our
headcount reductions and lower profitability during fiscal year
2009 compared to fiscal year 2008. We expect research and
development expenses to increase in absolute dollars for the
foreseeable future, due to the increasing complexity and number
of products we plan to develop.
Selling, general and administrative. Selling,
general and administrative expense was $165 million for the
year ended November 1, 2009 compared to $196 million
for the year ended November 2, 2008, a decrease of
$31 million or 16%. As a percentage of net revenue,
selling, general and administrative decreased to 11% for the
year ended November 1, 2009 compared to 12% for the year
ended November 2, 2008. The decrease in absolute dollars
and as a percentage of net revenue was attributable to lower
incentive compensation expense due to the impact of our
headcount reductions as well as lower profitability during
fiscal 2009 compared to fiscal 2008, reduction in travel costs,
decrease in costs of outsourced information technology services
offset by higher legal costs mainly incurred in connection with
intellectual property litigation of which a substantial majority
related to actions in which we were the plaintiff, compared to
an insignificant amount of such expenses in the prior period and
by lower share based compensation expense.
Selling, general and administrative expenses for fiscal year
2009 does not include $54 million that we recorded related
to the termination of the advisory agreement with our Sponsors
pursuant to its terms, upon the closing of the IPO, as well as
approximately $4 million of offering costs incurred in our
IPO that relate to selling shareholders which were absorbed by
us. The advisory agreement termination fee and the selling
shareholder expenses are included as separate components of
operating expenses in the consolidated statements of operations
for fiscal 2009.
Amortization of intangible assets. Total
amortization of intangible assets charged incurred was
$79 million and $85 million, respectively, for the
years ended November 1, 2009 and November 2, 2008. The
decrease is attributable to certain intangible assets becoming
fully amortized during the year ended November 1, 2009,
offset by additions to intangible assets during the year ended
November 1, 2009.
Restructuring charges. During the year ended
November 1, 2009, we incurred total restructuring charges
of $34 million, compared to $12 million for the year
ended November 2, 2008, both predominantly representing
employee termination costs. The increase is attributable to
restructuring plans initiated in the year ended November 1,
2009 in response to the economic downturn. See Note 10.
Restructuring Charges to the Consolidated Financial
Statements.
55
Interest expense. Interest expense was
$77 million for the year ended November 1, 2009,
compared to $86 million for the year ended November 2,
2008, which represents a decrease of $9 million or 10%. The
decrease is primarily due to the redemption and repurchases of
$109 million in aggregate principal amount of our
outstanding notes made since the beginning of fiscal year 2009.
Interest expense is expected to be significantly lower during
fiscal year 2010, compared to fiscal year 2009, due to these
repurchases and the redemption of the remaining
$318 million aggregate principal amount of our senior fixed
rate notes and the remaining $46 million aggregate
principal amount of our senior floating rate notes on
December 1, 2009.
Gain (loss) on extinguishment of debt. During
the year ended November 1, 2009, we repurchased an
aggregate of $106 million of debt, consisting of
$85 million in principal amount of senior fixed rate notes,
$17 million in principal amount of senior subordinated
notes and $4 million in principal amount of senior floating
rate notes in a tender offer for all or a part of our
outstanding notes, resulting in a loss on extinguishment of debt
in fiscal year 2009 of $9 million. We also repurchased
$3 million in principal amount of senior subordinated notes
in the open market, resulting in a gain on extinguishment of
debt of $1 million during the year ended November 1,
2009. During the year ended November 2, 2008, we redeemed
$200 million principal amount of our senior floating rate
notes. The redemption of the senior floating rate notes in
fiscal year 2008 resulted in a loss on extinguishment of debt of
$10 million. See Note 7. Senior Credit Facility
and Borrowings to the Consolidated Financial Statements.
Other income (expense), net. Other income
(expense), net includes interest income, foreign currency gain
(loss), loss on
other-than-temporary
impairment of investment and other miscellaneous items. Other
income, net was $1 million for the year ended
November 1, 2009 compared to other expense, net of
$4 million for the year ended November 2, 2008. The
increase is attributable to $4 million in government grants
received during the year ended November 1, 2009 offset by a
$2 million
other-than-temporary
impairment charge related to an investment accounted for under
the cost method.
Provision for income taxes. We recorded income
tax expense of $8 million for the year ended
November 1, 2009 compared to an income tax expense of
$3 million for the year ended November 2, 2008. The
increase is primarily attributable to changes in valuation
allowances and distribution of jurisdictional income.
Liquidity
and Capital Resources
Our primary sources of liquidity as at October 31, 2010
consisted of: (1) approximately $561 million in cash
and cash equivalents, (2) cash we expect to generate from
operations and (3) our $350 million revolving credit
facility, which is committed until December 1, 2011, of
which $339 million is available to be drawn (after taking
into account $11 million of letters of credit outstanding
under the facility). Our short-term and long-term liquidity
requirements primarily arise from: (i) working capital
requirements and (ii) capital expenditures, including
acquisitions from time to time. In addition, on December 1,
2010, our board of directors declared our first interim cash
dividend of $0.07 per ordinary share, or approximately
$17 million in total, to be paid on December 30, 2010
to shareholders of record as of the close of business, Eastern
Time, on December 15, 2010.
In August 2010, we also filed a shelf registration statement on
Form S-3
with the SEC, through which we may sell from time to time any
combination of ordinary shares, debt securities, warrants,
rights, purchase contracts and units, in one or more offerings.
We may seek to obtain debt or equity financing in the future.
However, we cannot assure that such additional financing will be
available on terms acceptable to us or at all.
In December 2010, we paid $258 million for the redemption
of our remaining $230 million senior subordinated notes at
a redemption price of 105.938% of their principal amount, and
accrued and unpaid interest thereon up to, but not including,
the redemption date.
We anticipate that our capital expenditures for fiscal year 2011
will be higher than for fiscal year 2010, due to spending on
mask sets for new ASIC designs and capacity expansion in both of
our Fort Collins and Singapore internal fabrication
facilities. We believe that our cash and cash equivalents on
hand, and cash flows from operations, combined with availability
under our revolving credit facility, will provide sufficient
liquidity to fund our current obligations, projected working
capital requirements and capital spending for at least the next
12 months.
Our ability to service any indebtedness we incur under our
revolving credit facility will depend on our ability to generate
cash in the future. We may not have significant cash available
to meet any large unanticipated liquidity
56
requirements, other than from available borrowings, if any,
under our revolving credit facility. As a result, we may not
retain a sufficient amount of cash to finance growth
opportunities, including acquisitions, or unanticipated capital
expenditures or to fund our operations. If we do not have
sufficient cash for these purposes, our financial condition and
our business could suffer.
In summary, our cash flows were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
November 2,
|
|
|
November 1,
|
|
|
October 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Net cash provided by operating activities
|
|
$
|
208
|
|
|
$
|
139
|
|
|
$
|
510
|
|
Net cash used in investing activities
|
|
|
(94
|
)
|
|
|
(63
|
)
|
|
|
(86
|
)
|
Net cash (used in) provided by financing activities
|
|
|
(210
|
)
|
|
|
183
|
|
|
|
(335
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
(96
|
)
|
|
$
|
259
|
|
|
$
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows for the Years Ended October 31, 2010 and
November 1, 2009
Operating
Activities
Net cash provided by operating activities during the year ended
October 31, 2010 was $510 million. The net cash
provided by operating activities was principally due to net
income of $415 million and non-cash charges of
$194 million, offset by changes in operating assets and
liabilities of $99 million.
Accounts receivable increased to $285 million at the end of
fiscal year 2010 from $186 million at the end of fiscal
year 2009. Accounts receivable days sales outstanding increased
to 45 days at October 31, 2010 from 40 days at
November 1, 2009 primarily due to linearity of shipments in
the last three months of fiscal year 2010 as compared to the
last three months of fiscal year 2009. We use the current
quarter revenue in our calculation of number of days sales
outstanding.
Inventory increased to $189 million at October 31,
2010 from $162 million at November 1, 2009. The
increase in inventory dollar amount is attributable to
anticipated increased demand. Inventory days on hand decreased
slightly from 62 days at November 1, 2009 to
61 days at October 31, 2010. We use the current
quarter cost of products sold in our calculation of days on hand
of inventory.
Current liabilities decreased from $633 million at the end
of fiscal year 2009 to $565 million at the end of fiscal
year 2010 mainly due to the net decrease in short-term debt of
$134 million as a result of redemption of $364 million
of long-term debt that was classified as a current liability as
of November 1, 2009 (as it had been irrevocably called for
redemption before the fiscal year end) and decreases in accrued
interest and the $230 million of long-term debt (our senior
subordinated notes) that was classified as a current liability
as of October 31, 2010 (as it had been irrevocably called
for redemption before the fiscal year end). This decrease was
offset by an increase in accounts payable and employee
compensation and benefits. Accrued interest decreased
$13 million or 52% from fiscal year 2009 mainly due to the
debt redemption and semi-annual interest payments made during
fiscal year 2010. Accounts payable increased to
$198 million from $154 million at the end of fiscal
year 2009 mainly due to timing of disbursements and higher
volume of purchases related to increase in revenue. Employee
compensation and benefits increased to $82 million from
$55 million at fiscal year 2009 mainly due to our employee
bonus program related to our overall profitability.
Other long-term assets increased from $24 million at the
end of fiscal year 2009 to $44 million at the end of fiscal
year 2010 mainly due to the $29 million release of
valuation allowance on our deferred tax assets primarily
associated with the irrevocable call for redemption of our
senior subordinated notes prior to the end of fiscal year 2010.
Other long-term liabilities increased from $64 million at
the end of fiscal year 2009 to $83 million at the end of
fiscal year 2010 mainly due to the change in actuarial
assumptions used in the valuation of our
U.S. post-retirement benefit plan and
non-U.S. defined
benefit pension plan liabilities.
Net cash provided by operating activities during the year ended
November 1, 2009 was $139 million. The net loss of
$44 million was offset primarily by non-cash charges of
$160 million for depreciation and amortization and
$12 million in share-based compensation.
57
Investing
Activities
Net cash used in investing activities for the year ended
October 31, 2010 was $86 million. The net cash used in
investing activities principally related to purchases of
property, plant and equipment of $79 million and
acquisitions and investments of $9 million.
Net cash used in investing activities for the year ended
November 1, 2009 was $63 million. The net cash used in
investing activities was primarily due to purchases of property,
plant and equipment of $57 million and $7 million
related to a business acquisition.
Financing
Activities
Net cash used in financing activities for the year ended
October 31, 2010 was $335 million, comprised mainly of
the redemption of $318 million in principal amount of
senior fixed rate notes and $46 million principal amount of
senior floating rate notes, offset by $28 million provided
by the issuance of ordinary shares, upon the exercise of options.
Net cash provided by financing activities for the year ended
November 1, 2009 was $183 million. The net cash
provided by financing activities was principally from proceeds
of $304 million from the issuance of ordinary shares, net
of issuance costs, less $85 million associated with the
purchase of senior fixed rate notes, $17 million associated
with the purchase of senior subordinated notes and
$4 million associated with the purchase of senior floating
rate notes as part of an early tender offer.
Cash
Flows for the Years Ended November 1, 2009 and
November 2, 2008
Net cash provided by operating activities during the year ended
November 1, 2009 was $139 million. The net loss of
$44 million was offset primarily by non-cash charges of
$160 million for depreciation and amortization and
$12 million in share-based compensation.
Accounts receivable at the end of fiscal year 2009 increased by
$2 million, or 1%, from the amount at the end of fiscal
year 2008. Accounts receivable days sales outstanding increased
to 40 days at November 1, 2009 from 37 days at
November 2, 2008 primarily due to better linearity of
shipments in the last month of fiscal year 2008 as compared to
the last month of fiscal year 2009.
Inventory decreased to $162 million at November 1,
2009 from $188 million at the end of fiscal year 2008.
Inventory days on hand decreased from 65 days at
November 2, 2008 to 62 days at November 1, 2009.
The inventory balance at the end of fiscal year 2008 was high
mainly due to certain strategic,
end-of-life
purchases. During the year ended November 1, 2009, we
recorded write-downs to inventories of $23 million
associated with reduced demand assumptions compared to
$11 million during the prior year.
Current liabilities increased from $328 million at the end
of fiscal year 2008 to $633 million at the end of fiscal
year 2009 mainly due to the reclassification of long
term debt of $364 million from long-term to short-term
which we irrevocably called for redemption before the year end,
partially offset by decreases in accounts payable and employee
compensation and benefit accruals. Accounts payable decreased by
$20 million or 11% from fiscal year 2008 mainly due to
timing of disbursements. The decrease in employee compensation
and benefit accruals from November 2, 2008 is attributable
to our headcount reductions related to our restructuring plans
as well as lower accruals under employee bonus plans.
Net cash provided by operating activities during the year ended
November 2, 2008 was $208 million. The net cash
provided by operations was primarily due to net income of
$83 million and non-cash charges of $159 million for
depreciation and amortization, $15 million in share-based
compensation, offset by increases in operating assets and
liabilities of $34 million.
Net cash used in investing activities for the year ended
November 1, 2009 was $63 million. The net cash used in
investing activities was primarily due to purchases of property,
plant and equipment of $57 million and $7 million
related to a business acquisition.
58
Net cash used in investing activities for the year ended
November 2, 2008 was $94 million. The net cash used in
investing activities principally related to acquisitions and
investments of $78 million, and purchases of property,
plant and equipment of $65 million, offset by earn-out
payments of $50 million related to the divestiture of the
Printer ASICs Business and the Image Sensor operations.
Net cash provided by financing activities for the year ended
November 1, 2009 was $183 million. The net cash
provided by financing activities was principally from proceeds
of $304 million from the issuance of ordinary shares, net
of issuance costs, less $85 million associated with the
purchase of senior fixed rate notes, $17 million associated
with the purchase of senior subordinated notes and
$4 million associated with the purchase of senior floating
rate notes as part of an early tender offer. Net cash used in
financing activities for the year ended November 2, 2008
was $210 million, comprised mainly of the redemption of
senior floating rate notes of $200 million.
Indebtedness
As of October 31, 2010, we had $236 million
outstanding in aggregate indebtedness and capital lease
obligations, with an additional $350 million of borrowing
capacity available under our revolving credit facility
(including outstanding letters of credit of $11 million at
October 31, 2010, which reduce the amount available under
our revolving credit facility on a
dollar-for-dollar
basis). As discussed above, subsequent to the end of fiscal year
2010, we redeemed $230 million aggregate principal amount
of our outstanding notes, as discussed in more detail below.
On December 1, 2010, after the end of fiscal year 2010, our
subsidiaries, Avago Technologies Finance Pte. Ltd., Avago
Technologies U.S. Inc. and Avago Technologies Wireless
(U.S.A.) Manufacturing Inc. redeemed $230 million aggregate
principal amount of their outstanding senior subordinated notes
at a redemption price of 105.938% of their principal amount,
plus accrued and unpaid interest thereon up to, but not
including, the redemption date. The total amount paid was
approximately $258 million. As a result, our aggregate
indebtedness and capital lease obligations have been reduced by
a corresponding amount.
Revolving
Credit Facility
Our $350 million revolving credit facility includes
borrowing capacity available for letters of credit and for
borrowings on
same-day or
one-day
notice, referred to as swingline loans, and is available to us
and certain of our subsidiaries in U.S. dollars and other
currencies. As of October 31, 2010, we had no borrowings
outstanding under the revolving credit facility, although we had
$11 million of letters of credits outstanding under the
facility, which reduce the amount available on a
dollar-for-dollar
basis. Principal amounts outstanding under the revolving credit
facility are due and payable in full on December 1, 2011.
Borrowings under our revolving credit facility bear interest at
a rate equal to an applicable margin plus, at our option, either
(a) a base rate determined by reference to the higher of
(1) the United States prime rate and (2) the federal
funds rate plus 0.5% (or an equivalent base rate for loans
originating outside the United States, to the extent available)
or (b) a LIBOR rate (or the equivalent thereof in the
relevant jurisdiction) determined by reference to the costs of
funds for deposits in the currency of such borrowing for the
interest period relevant to such borrowing adjusted for certain
additional costs. At October 31, 2010, the lenders
base rate was 3.25% and the one-month LIBOR rate was 0.25%. The
applicable margin for borrowings under the revolving credit
facility is 0.75% with respect to base rate borrowings and 1.75%
with respect to LIBOR borrowings.
We are required to pay a commitment fee to the lenders under the
revolving credit facility with respect to any unutilized
commitments thereunder. At October 31, 2010 and
November 1, 2009, the commitment fee on the revolving
credit facility was 0.375% per annum. We must also pay customary
letter of credit fees. The commitment fee is expensed as
additional interest expense.
The senior credit agreement governing the revolving credit
facility has various limitations on certain transactions that
may occur, including limitations on incurrence of additional
debt, issuance of preferred shares, creation of liens,
sale-leaseback transactions, mergers and consolidations, asset
sales, payment of dividends or distribution, share repurchases,
restricted payments, investments, loans or advances, capital
expenditures, repayment of or material amendments to the
agreements governing our subordinated indebtedness, making
certain
59
acquisitions, changing our business lines, and changing the
status of our direct wholly-owned subsidiary, Avago Technologies
Holding Pte. Ltd., as a passive holding company. In July 2010,
we amended the senior credit agreement to, among other things
(i) give our subsidiaries party to the credit facility
additional flexibility, subject to certain conditions, to make
certain restricted payments, and (ii) clarify and amend the
provisions in the credit agreement relating to defaulting
lenders, including provisions relating to the rights and
obligations of the borrowers and the non-defaulting lenders in
the event of, among other things, the insolvency of a lender or
its parent company.
All obligations under the revolving credit facility, and the
guarantees of those obligations, are secured by substantially
all of our assets and that of each guarantor subsidiary, subject
to certain exceptions.
In addition, the senior credit agreement requires us to maintain
senior secured leverage ratios not exceeding levels set forth in
the senior credit agreement. The senior credit agreement also
contains certain customary affirmative covenants and events of
default including a cross-default triggered by certain events of
default under our other material debt instruments. We were in
compliance with all our covenants under the senior credit
agreement at October 31, 2010.
Contractual
Commitments
Our cash flows from operations are dependent on a number of
factors, including fluctuations in our operating results,
accounts receivable collections, inventory management, and the
timing of payments. As a result, the impact of contractual
obligations on our liquidity and capital resources in future
periods should be analyzed in conjunction with such factors.
The following table sets forth our long-term debt, operating and
capital lease and purchase obligations as of October 31,
2010 for the fiscal periods noted (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 to
|
|
2014 to
|
|
|
|
|
Total
|
|
2011
|
|
2013
|
|
2015
|
|
Thereafter
|
|
Current portion of long-term debt(1)
|
|
$
|
230
|
|
|
$
|
230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated future interest expense and redemption premium
payments(2)
|
|
|
18
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases(3)
|
|
|
40
|
|
|
|
9
|
|
|
|
14
|
|
|
|
14
|
|
|
|
3
|
|
Capital leases(4)
|
|
|
6
|
|
|
|
3
|
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
Commitments to contract manufacturers and other purchase
obligations(5)
|
|
|
56
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional contractual commitments(6)
|
|
|
51
|
|
|
|
24
|
|
|
|
23
|
|
|
|
4
|
|
|
|
|
|
|
|
|
(1) |
|
Represents our outstanding notes as of October 31, 2010.
Subsequent to that date, we redeemed the remaining
$230 million principal amount of our senior subordinated
notes, including the obligation to pay interest thereon. |
|
(2) |
|
Represents interest payments, commitment fees and letter of
credit fees. The premium payment related to the redemption noted
in (1) above is also included in the preceding table. See
Note 7. Senior Credit Facility and Borrowings to the
Consolidated Financial Statements. |
|
(3) |
|
Includes operating lease commitments for facilities and
equipment that we have entered into with third parties. |
|
(4) |
|
Includes capital lease commitments for equipment that we have
entered into with third parties. |
|
(5) |
|
We purchase components from a variety of suppliers and use
several contract manufacturers to provide manufacturing services
for our products. During the normal course of business, we issue
purchase orders with estimates of our requirements several
months ahead of the delivery dates. However, our agreements with
these suppliers usually allow us the option to cancel,
reschedule, and adjust our requirements based on our business
needs prior to firm orders being placed. Typically purchase
orders outstanding with delivery dates within 30 days are
non-cancelable. In addition to the above, we record a liability
for firm, non-cancelable, and unconditional purchase commitments
for quantities in excess of our future demand forecasts in
conjunction with our write-down of inventory. As of
October 31, 2010, the liability for our firm,
non-cancelable and unconditional purchase commitments was
$3 million. These amounts are included in other liabilities
in our balance sheets at October 31, 2010, and are excluded
from the preceding table. |
60
|
|
|
(6) |
|
We have entered into several agreements related to outsourced
IT, human resources, financial advisory services and other
services agreements. |
We adopted the provisions of ASC 740 Income
Taxes on accounting for uncertainty in income taxes on
November 1, 2007. Due to the inherent uncertainty with
respect to the timing of future cash outflows associated with
our unrecognized tax benefits at October 31, 2010, we are
unable to reliably estimate the timing of cash settlement with
the respective taxing authority. Therefore, $27 million of
unrecognized tax benefits classified as long-term income tax
payable in the consolidated balance sheet as of October 31,
2010 have been excluded from the contractual obligations table
above.
Off-Balance
Sheet Arrangements
We had no material off-balance sheet arrangements at
October 31, 2010 as defined in Item 303(a)(4)(ii) of
SEC
Regulation S-K.
Indemnifications
to Hewlett-Packard and Agilent
Agilent Technologies, Inc. has given multiple indemnities to
Hewlett-Packard Company in connection with its activities prior
to its spin-off from Hewlett-Packard Company in June 1999 for
the businesses that constituted Agilent prior to the spin-off.
As the successor to the SPG business of Agilent, we may acquire
responsibility for indemnifications related to assigned
intellectual property agreements. Additionally, when we
completed the SPG Acquisition in December 2005, we provided
indemnities to Agilent with regard to Agilents conduct of
the SPG business prior to the SPG Acquisition. In our opinion,
the fair value of these indemnifications is not material.
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.
Accounting
Changes and Recent Accounting Standards
For a description of accounting changes and recent accounting
standards, including the expected dates of adoption and
estimated effects, if any, on our consolidated financial
statements, see Note 2. Summary of Significant
Accounting Policies to Consolidated Financial Statements
of this Annual Report on
Form 10-K.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Foreign
Currency Derivative Instruments
Although a majority of our revenue and operating expenses is
denominated in U.S. dollars, and we prepare our financial
statements in U.S. dollars in accordance with GAAP, a
portion of our revenue and operating expenses is in foreign
currencies. Our revenues, costs and expenses and monetary assets
and liabilities are exposed to changes in currency exchange
rates as a result of our global operating and financing
activities. To mitigate the exposures resulting from the changes
in the exchange rates of these currencies, we enter into foreign
exchange forward contracts to hedge a portion of these
exposures. Contracts that meet accounting criteria are
designated at inception as hedges of the related foreign
currency exposures, which include committed and anticipated
transactions that are denominated in currencies other than the
U.S. dollar. The criteria for designating a derivative as a
hedge include the
61
assessment of the instruments effectiveness in risk
reduction, matching of the derivative instrument to its
underlying transaction, and the assessment of the probability
that the underlying transaction will occur. Our foreign exchange
forward contracts generally mature within three to six months.
We do not use derivative financial instruments for speculative
or trading purposes. As of October 31, 2010, there were no
foreign exchange forward contracts outstanding. Losses from
foreign currency transactions, as well as derivative
instruments, are included in our consolidated statements of
operations in the amounts of $6 million, $3 million
and $4 million, for the years ended November 2, 2008,
November 1, 2009, and October 31, 2010.
Interest
Rate Risk
Borrowings under our revolving credit facility are subject to
floating rates of interest, based on, at our option, either
(a) lenders base rate determined by reference to the
higher of (1) the United States prime rate and (2) the
federal funds rate plus 0.5% (or an equivalent base rate for
loans originating outside the United States, to the extent
available) or (b) a LIBOR rate (or the equivalent thereof
in the relevant jurisdiction). We did not have any borrowings
outstanding under this facility during fiscal year 2010 or as at
October 31, 2010, although we did have $11 million of
letters of credit outstanding as at October 31, 2010 (and
similar amounts during the course of fiscal year 2010), which
reduce the amount available under the facility on a
dollar-for-dollar-basis.
62
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
AVAGO
TECHNOLOGIES LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
63
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Avago Technologies
Limited:
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(a)(1) present fairly, in
all material respects, the financial position of Avago
Technologies Limited and its subsidiaries at October 31,
2010 and November 1, 2009, and the results of their
operations and their cash flows for each of the three years in
the period ended October 31, 2010 in conformity with
accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 15(a)(2)
presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related
consolidated financial statements. Also in our opinion, the
Company maintained, in all material respects, effective internal
control over financial reporting as of October 31, 2010,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Companys management is responsible for these financial
statements and financial statement schedule, for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in Managements Report on
Internal Control over Financial Reporting appearing under
Item 9A. Our responsibility is to express opinions on these
financial statements, on the financial statement schedule, and
on the Companys internal control over financial reporting
based on our audits (which was an integrated audit in 2010). We
conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
As discussed in Note 2 to the consolidated financial
statements, the Company changed the manner in which it accounts
for uncertainty in income taxes in fiscal year 2008.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
LLP
San Jose, California
December 15, 2010
64
AVAGO
TECHNOLOGIES LIMITED
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
November 1,
|
|
|
October 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
(In millions, except share amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
472
|
|
|
$
|
561
|
|
Trade accounts receivable, net
|
|
|
186
|
|
|
|
285
|
|
Inventory
|
|
|
162
|
|
|
|
189
|
|
Other current assets
|
|
|
44
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
864
|
|
|
|
1,087
|
|
Property, plant and equipment, net
|
|
|
264
|
|
|
|
281
|
|
Goodwill
|
|
|
171
|
|
|
|
172
|
|
Intangible assets, net
|
|
|
647
|
|
|
|
573
|
|
Other long-term assets
|
|
|
24
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,970
|
|
|
$
|
2,157
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
154
|
|
|
$
|
198
|
|
Employee compensation and benefits
|
|
|
55
|
|
|
|
82
|
|
Accrued interest
|
|
|
25
|
|
|
|
12
|
|
Capital lease obligations current
|
|
|
2
|
|
|
|
2
|
|
Other current liabilities
|
|
|
33
|
|
|
|
41
|
|
Current portion of long-term debt
|
|
|
364
|
|
|
|
230
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
633
|
|
|
|
565
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
230
|
|
|
|
|
|
Capital lease obligations non-current
|
|
|
3
|
|
|
|
4
|
|
Other long-term liabilities
|
|
|
64
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
930
|
|
|
|
652
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 17)
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Ordinary shares, no par value; 235,392,897 shares and
239,888,231 shares issued and outstanding on
November 1, 2009 and October 31, 2010, respectively
|
|
|
1,393
|
|
|
|
1,450
|
|
Retained earnings (accumulated deficit)
|
|
|
(356
|
)
|
|
|
59
|
|
Accumulated other comprehensive income (loss)
|
|
|
3
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
1,040
|
|
|
|
1,505
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
1,970
|
|
|
$
|
2,157
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
November 2,
|
|
|
November 1,
|
|
|
October 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In millions, except per share data)
|
|
|
Net revenue
|
|
$
|
1,699
|
|
|
$
|
1,484
|
|
|
$
|
2,093
|
|
Cost of products sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
|
981
|
|
|
|
855
|
|
|
|
1,068
|
|
Amortization of intangible assets
|
|
|
57
|
|
|
|
58
|
|
|
|
58
|
|
Restructuring charges
|
|
|
6
|
|
|
|
11
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of products sold
|
|
|
1,044
|
|
|
|
924
|
|
|
|
1,127
|
|
Gross margin
|
|
|
655
|
|
|
|
560
|
|
|
|
966
|
|
Research and development
|
|
|
265
|
|
|
|
245
|
|
|
|
280
|
|
Selling, general and administrative
|
|
|
196
|
|
|
|
165
|
|
|
|
196
|
|
Amortization of intangible assets
|
|
|
28
|
|
|
|
21
|
|
|
|
21
|
|
Restructuring charges
|
|
|
6
|
|
|
|
23
|
|
|
|
3
|
|
Advisory agreement termination fee
|
|
|
|
|
|
|
54
|
|
|
|
|
|
Selling shareholder expenses
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
495
|
|
|
|
512
|
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
160
|
|
|
|
48
|
|
|
|
466
|
|
Interest expense
|
|
|
(86
|
)
|
|
|
(77
|
)
|
|
|
(34
|
)
|
Loss on extinguishment of debt
|
|
|
(10
|
)
|
|
|
(8
|
)
|
|
|
(24
|
)
|
Other income (expense), net
|
|
|
(4
|
)
|
|
|
1
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
60
|
|
|
|
(36
|
)
|
|
|
406
|
|
Provision for (benefit from) income taxes
|
|
|
3
|
|
|
|
8
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
57
|
|
|
|
(44
|
)
|
|
|
415
|
|
Income from and gain on discontinued operations, net of income
taxes
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
83
|
|
|
$
|
(44
|
)
|
|
$
|
415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.27
|
|
|
$
|
(0.20
|
)
|
|
$
|
1.74
|
|
Income from and gain on discontinued operations, net of income
taxes
|
|
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
0.39
|
|
|
$
|
(0.20
|
)
|
|
$
|
1.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.26
|
|
|
$
|
(0.20
|
)
|
|
$
|
1.69
|
|
Income from and gain on discontinued operations, net of income
taxes
|
|
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
0.38
|
|
|
$
|
(0.20
|
)
|
|
$
|
1.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares :
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
214
|
|
|
|
219
|
|
|
|
238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
219
|
|
|
|
219
|
|
|
|
246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
November 2,
|
|
|
November 1,
|
|
|
October 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In millions)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
83
|
|
|
$
|
(44
|
)
|
|
$
|
415
|
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
159
|
|
|
|
160
|
|
|
|
159
|
|
Amortization of debt issuance costs
|
|
|
4
|
|
|
|
4
|
|
|
|
2
|
|
Gain on discontinued operations
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
Loss on extinguishment of debt
|
|
|
6
|
|
|
|
8
|
|
|
|
8
|
|
Loss on disposal of property, plant and equipment
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
Non-cash portion of restructuring charges
|
|
|
|
|
|
|
1
|
|
|
|
|
|
Impairment of investment
|
|
|
|
|
|
|
2
|
|
|
|
|
|
Share-based compensation
|
|
|
15
|
|
|
|
12
|
|
|
|
25
|
|
Tax benefits from share-based compensation
|
|
|
|
|
|
|
1
|
|
|
|
|
|
Excess tax benefits from share-based compensation
|
|
|
|
|
|
|
(1
|
)
|
|
|
(2
|
)
|
Changes in assets and liabilities, net of acquisitions and
dispositions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable, net
|
|
|
38
|
|
|
|
|
|
|
|
(96
|
)
|
Inventory
|
|
|
(45
|
)
|
|
|
27
|
|
|
|
(26
|
)
|
Accounts payable
|
|
|
(29
|
)
|
|
|
(16
|
)
|
|
|
23
|
|
Employee compensation and benefits
|
|
|
18
|
|
|
|
(19
|
)
|
|
|
27
|
|
Other current assets and current liabilities
|
|
|
(13
|
)
|
|
|
(39
|
)
|
|
|
(16
|
)
|
Other long-term assets and long-term liabilities
|
|
|
(3
|
)
|
|
|
41
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
208
|
|
|
|
139
|
|
|
|
510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment
|
|
|
(65
|
)
|
|
|
(57
|
)
|
|
|
(79
|
)
|
Acquisitions and investments, net of cash acquired
|
|
|
(78
|
)
|
|
|
(7
|
)
|
|
|
(9
|
)
|
Purchase of intangible assets
|
|
|
(6
|
)
|
|
|
(1
|
)
|
|
|
|
|
Proceeds from disposal of property, plant and equipment
|
|
|
5
|
|
|
|
|
|
|
|
2
|
|
Proceeds from sale of discontinued operations
|
|
|
50
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(94
|
)
|
|
|
(63
|
)
|
|
|
(86
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of ordinary shares, net of issuance costs
|
|
|
(2
|
)
|
|
|
304
|
|
|
|
28
|
|
Repurchase of ordinary shares
|
|
|
(5
|
)
|
|
|
(6
|
)
|
|
|
|
|
Debt repayments
|
|
|
(202
|
)
|
|
|
(114
|
)
|
|
|
(364
|
)
|
Excess tax benefits from share-based compensation
|
|
|
1
|
|
|
|
1
|
|
|
|
3
|
|
Cash settlement of equity awards
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
|
|
Payment on capital lease obligation
|
|
|
|
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(210
|
)
|
|
|
183
|
|
|
|
(335
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(96
|
)
|
|
|
259
|
|
|
|
89
|
|
Cash and cash equivalents at the beginning of year
|
|
|
309
|
|
|
|
213
|
|
|
|
472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
213
|
|
|
$
|
472
|
|
|
$
|
561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
85
|
|
|
$
|
79
|
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
8
|
|
|
$
|
10
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
Ordinary Shares
|
|
|
(Accumulated
|
|
|
Comprehensive
|
|
|
Shareholders
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Deficit)
|
|
|
Income (loss)
|
|
|
Equity
|
|
|
Income (loss)
|
|
|
|
(In millions, except share amounts)
|
|
|
Balance as of October 31, 2007
|
|
|
213,959,783
|
|
|
$
|
1,075
|
|
|
$
|
(386
|
)
|
|
$
|
4
|
|
|
$
|
693
|
|
|
$
|
(155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of adopting amended guidance of ASC 740
|
|
|
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of ordinary shares to employees
|
|
|
28,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of ordinary shares
|
|
|
(471,000
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash settlement of equity awards
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefits from share-based compensation
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
Changes in accumulated other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial gains and prior service costs associated with
post-retirement benefit and defined benefit pension plans, net
of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
5
|
|
|
|
5
|
|
Unrealized net loss on derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
83
|
|
|
|
|
|
|
|
83
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of November 2, 2008
|
|
|
213,517,292
|
|
|
|
1,084
|
|
|
|
(312
|
)
|
|
|
8
|
|
|
|
780
|
|
|
$
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of ordinary shares, net of issuance costs of
$23 million
|
|
|
21,500,000
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of options
|
|
|
1,183,405
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of ordinary shares
|
|
|
(807,800
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash settlement of equity awards
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefits from share-based compensation
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
Changes in accumulated other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial losses and prior service costs associated with
post-retirement benefit and defined benefit pension plans, net
of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
(6
|
)
|
|
|
(6
|
)
|
Unrealized net gain on derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(44
|
)
|
|
|
|
|
|
|
(44
|
)
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of November 1, 2009
|
|
|
235,392,897
|
|
|
$
|
1,393
|
|
|
$
|
(356
|
)
|
|
$
|
3
|
|
|
$
|
1,040
|
|
|
$
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of ordinary shares in connection with exercise of
options
|
|
|
4,495,334
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefits from share-based compensation
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
Changes in accumulated other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial losses and prior service costs associated with
post-retirement benefit and defined benefit pension plans, net
of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
(7
|
)
|
|
|
(7
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
415
|
|
|
|
|
|
|
|
415
|
|
|
|
415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2010
|
|
|
239,888,231
|
|
|
$
|
1,450
|
|
|
$
|
59
|
|
|
$
|
(4
|
)
|
|
$
|
1,505
|
|
|
$
|
408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
68
AVAGO
TECHNOLOGIES LIMITED
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
Overview
and Basis of Presentation
|
Overview
Avago Technologies Limited, or the Company, we, our, or Avago,
was organized under the laws of the Republic of Singapore in
August 2005. We are the successor to the Semiconductor Products
Group, or SPG, of Agilent Technologies, Inc., or Agilent. On
December 1, 2005, we acquired substantially all of the
assets of SPG from Agilent for $2.7 billion, or the SPG
Acquisition.
We are a designer, developer and global supplier of analog
semiconductor devices with a focus on III-V based products. We
offer products in four primary target markets: wireless
communications, wired infrastructure, industrial and automotive
electronics, and consumer and computing peripherals.
Applications for our products in these target markets include
cellular phones, consumer appliances, data networking and
telecommunications equipment, enterprise storage and servers,
renewable energy and smart power grid applications, factory
automation, displays, optical mice and printers.
Basis of
Presentation
Fiscal
Periods
We adopted a 52- or 53-week fiscal year beginning with our
fiscal year 2008. Our fiscal year ends on the Sunday closest to
October 31.
Principles
of Consolidation
Our consolidated financial statements include the accounts of
Avago and our wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Use of estimates. The preparation of financial
statements in conformity with GAAP requires management 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 revenues and expenses during the reporting
period. Actual results could differ from those estimates, and
such differences could affect the results of operations reported
in future periods.
Out-of-period
Adjustment. During the year ended
November 1, 2009, we recorded an accrual of $4 million
for indirect taxes on certain prior years purchases and
sales transactions. This accrual increased each of cost of
products sold and research and development expenses for the
fiscal year 2009 by $2 million and increased net loss for
the period by $4 million. We determined that the impact of
the adjustment was not material to prior periods or to the
results for the second quarter of fiscal year 2009, and the
adjustment was therefore recorded in the second quarter of
fiscal year 2009 under Accounting Standard Codification, or ASC,
270 Interim Reporting.
Revenue recognition. We recognize revenue, net
of trade discounts and allowances, provided that
(i) persuasive evidence of an arrangement exists,
(ii) delivery has occurred, (iii) the price is fixed
or determinable and (iv) collectibility is reasonably
assured. Delivery is considered to have occurred when title and
risk of loss have transferred to the customer. We consider the
price to be fixed or determinable when the price is not subject
to refund or adjustments or when any such adjustments are
accounted for. We evaluate the creditworthiness of our customers
to determine that appropriate credit limits are established
prior to the acceptance of an order. Revenue, including sales to
resellers and distributors, is reduced for estimated returns and
distributor allowances. We recognize revenue from sales of our
products to distributors upon delivery of products to the
distributors. An allowance for distributor credits covering
price adjustments and scrap allowances is made based on our
estimate of historical experience rates as well as considering
economic conditions and contractual terms. To date, actual
distributor claim activity has been materially consistent with
the provisions we have made based on our historical estimates.
69
We enter into development agreements with some of our customers
and recognize revenue from these agreements upon completion and
acceptance by the customer of contract deliverables or as
services are provided, depending on the terms of the
arrangement. Revenue is deferred for any amounts received prior
to completion or delivery of services. Costs related to these
arrangements are included in research and development expense.
These revenues, which are included in net revenue, totaled
$27 million, $31 million and $35 million in
fiscal years 2008, 2009 and 2010, respectively.
Cash and cash equivalents. We consider all
highly liquid investment securities with original or remaining
maturities of three months or less at the date of purchase to be
cash equivalents. We determine the appropriate classification of
our cash and cash equivalents at the time of purchase. As of
November 1, 2009 and October 31, 2010, $3 million
and $2 million, respectively, of our cash and cash
equivalents were restricted, primarily for collateral under
certain of our letter of credit arrangements.
Deferred Compensation Plan. Employee
contributions under the deferred compensation plan (See
Note 6. Retirement Plans and Post-Retirement
Benefits) are maintained in a rabbi trust and are not
readily available to us. Participants can direct the investment
of their deferred compensation plan accounts in the same
investments funds offered by the 401(k) plan. Although
participants direct the investment of these funds, they are
classified as trading securities and are included in other
current assets. The corresponding liability related to the
deferred compensation plan is recorded in other current
liabilities. Unrealized gain (loss) in connection with these
trading securities is recorded in other income (expense), net
with an offset for the same amount recorded in compensation
expense. We had deferred compensation plan assets of
$2 million and $3 million at November 1, 2009 and
October 31, 2010, respectively, which are included in other
current assets. Unrealized gain (loss) associated with these
trading securities was not material for fiscal years 2008, 2009
and 2010.
Trade accounts receivable, net. Trade accounts
receivable are recorded at the invoiced amount and do not bear
interest. Such accounts receivable have been reduced by an
allowance for doubtful accounts, which is our best estimate of
the amount of probable credit losses in our existing accounts
receivable. We determine the allowance based on customer
specific experience and the aging of such receivables, among
other factors. Accounts receivable are also recorded net of
sales returns and distributor allowances. These amounts are
recorded when it is both probable and estimable that discounts
will be granted or products will be returned. Aggregate accounts
receivable allowances at November 1, 2009 and
October 31, 2010 were $13 million and
$16 million, respectively.
Share-based compensation. For share-based
awards granted after November 1, 2006, we recognize
compensation expense based on the estimated grant date fair
value method required under the authoritative guidance using the
Black-Scholes valuation model with a straight-line amortization
method. Since the authoritative guidance requires that
share-based compensation expense be based on awards that are
ultimately expected to vest, estimated share-based compensation
for such awards has been reduced for estimated forfeitures.
Authoritative guidance requires forfeitures to be estimated at
the time of grant and revised if necessary in subsequent periods
if actual forfeitures differ from the estimate. For outstanding
share-based awards granted before November 1, 2006, we
continue to account for any portion of such awards under the
originally applied accounting principles, until such awards were
modified subsequent to the adoption of the authoritative
guidance.
For the years ended November 2, 2008, November 1, 2009
and October 31, 2010, we recorded $15 million,
$12 million and $25 million, respectively, of
compensation expense resulting from the application of the
authoritative guidance. We recognize a benefit from share based
compensation in equity if an incremental tax benefit is realized
by following the ordering provisions of the tax law.
Shipping and handling costs. Our shipping and
handling costs charged to customers are included in net revenue
and the associated expense is recorded in cost of products sold
in the statements of operations for all periods presented.
Goodwill and purchased intangible
assets. Goodwill represents the excess of
purchase price and related costs over the value assigned to the
net tangible and identifiable intangible assets of businesses
acquired. Our accounting complies with ASC 350
Intangibles-Goodwill and Other, or ASC 350.
Goodwill is not amortized but is reviewed annually (or more
frequently if impairment indicators arise) for impairment.
Purchased intangible assets
70
are carried at cost less accumulated amortization. Amortization
is computed using the straight-line method over the useful lives
of the respective assets, generally six months to 25 years.
On a quarterly basis, we monitor factors and changes in
circumstances that could indicate carrying amounts of long-lived
assets, including goodwill and intangible assets, may not be
recoverable. Factors we consider important which could trigger
an impairment review include (i) significant
underperformance relative to historical or projected future
operating results, (ii) significant changes in the manner
of our use of the acquired assets or the strategy for our
overall business, and (iii) significant negative industry
or economic trends. An impairment loss must be measured if the
sum of the expected future cash flows (undiscounted and before
interest) from the use and eventual disposition of the asset (or
asset group) is less than the net book value of the asset (or
asset group). The amount of the impairment loss will generally
be measured as the difference between the net book value of the
asset (or asset group) and their estimated fair value. We
perform an annual impairment review of goodwill during the
fourth fiscal quarter of each year, or more frequently if we
believe indicators of impairment exist. No impairment of
goodwill resulted from our most recent evaluation of goodwill
for impairment, which occurred in the fourth quarter of fiscal
year 2010. No impairment of goodwill resulted in any of the
periods presented.
Advertising. Business specific advertising
costs are expensed as incurred and amounted to $3 million,
$2 million and $4 million for the years ended
November 2, 2008, November 1, 2009 and
October 31, 2010, respectively.
Research and development. Costs related to
research, design and development of our products are charged to
research and development expense as they are incurred.
Taxes on income. We account for income taxes
under the asset and liability method, which requires the
recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been
included in the financial statements. Under this method,
deferred tax assets and liabilities are determined based on the
differences between the financial statements and tax basis of
assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse. The
effect of a change in tax rates on deferred tax assets and
liabilities is recognized in income in the period that includes
the enactment date.
We record net deferred tax assets to the extent we believe these
assets will more likely than not be realized. In making such
determination, we consider all available positive and negative
evidence, including scheduled reversals of deferred tax
liabilities, projected future taxable income, tax planning
strategies and recent financial operations. In the event we were
to determine that we would be able to realize our deferred
income tax assets in the future in excess of their net recorded
amount, we would make an adjustment to the valuation allowance
which would reduce the provision for income taxes. Likewise, if
we determine that we would not be able to realize all or part of
our net deferred tax assets, an adjustment would be charged to
earnings in the period such determination is made.
We account for uncertainty in income taxes in accordance with
ASC 740 Income Taxes, or ASC 740, which
was issued in July 2006 and clarifies the accounting for
uncertainty in income taxes. ASC 740 provides that a tax benefit
from an uncertain tax position may be recognized when it is more
likely than not that the position will be sustained upon
examination, including resolutions of any related appeals or
litigation processes, based on the technical merits. Income tax
positions must meet a more-likely-than-not recognition threshold
at the effective date to be recognized upon the adoption of
ASC 740 and in subsequent periods. This guidance also
provides provisions on measurement, derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. ASC 740 (with regard to
uncertain tax positions) is effective for fiscal years beginning
after December 15, 2006 and as a result, was effective for
us on November 1, 2007. See Note 11. Income
Taxes for additional information.
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 are placed with financial
institutions that management believes are of high credit
quality. Our accounts receivable are derived from revenue earned
from customers located in the U.S. and internationally.
Credit risk with respect to accounts receivable is generally
diversified due to the large number of entities comprising our
customer base and their dispersion across many different
industries and geographies. We perform ongoing credit
evaluations of our customers financial conditions, and
require collateral, such as letters of credit and bank
guarantees, in certain circumstances.
71
We sell our products through our direct sales force and
distributors. One customer accounted for 11% of our net accounts
receivable balance at November 1, 2009. No customer
accounted for 10% or more of our net accounts receivable balance
at October 31, 2010.
For the year ended November 2, 2008, one customer
represented 11% of net revenue. For the years ended
November 1, 2009 and October 31, 2010, no customer
represented 10% or more of net revenue.
Concentration of other risks. The
semiconductor industry is characterized by rapid technological
change, competitive pricing pressures and cyclical market
patterns. Our financial results are affected by a wide variety
of factors, including general economic conditions worldwide,
economic conditions specific to the semiconductor industry, the
timely implementation of new manufacturing technologies, the
ability to safeguard patents and intellectual property in a
rapidly evolving market and reliance on assembly and test
subcontractors, third-party wafer fabricators and independent
distributors. In addition, the semiconductor market has
historically been cyclical and subject to significant economic
downturns at various times. We are exposed to the risk of
obsolescence of our inventory depending on the mix of future
business.
Derivative instruments. We are subject to
foreign currency risks for transactions denominated in foreign
currencies, primarily Singapore Dollar, Malaysian Ringgit, Euro
and Japanese Yen. Therefore, we enter into foreign exchange
forward contracts to manage financial exposures resulting from
the changes in the exchange rates of these foreign currencies.
These contracts are designated at inception as hedges of the
related foreign currency exposures, which include committed and
anticipated transactions that are denominated in currencies
other than the functional currency of the subsidiary which has
the exposure. We exclude time value from the measurement of
effectiveness. To achieve hedge accounting, contracts must
reduce the foreign currency exchange rate risk otherwise
inherent in the amount and duration of the hedged exposures and
comply with established risk management policies; hedging
contracts generally mature within three to six months. We do not
use derivative financial instruments for speculative or trading
purposes.
We designate our forward contracts as either cash flow or fair
value hedges. All derivatives are recognized on the balance
sheet at their fair values. For derivative instruments that are
designated and qualify as a fair value hedge, changes in value
of the derivative are recognized in income in the current
period. Such hedges are recorded in net income (loss) and are
offset by the changes in fair value of the underlying assets or
liabilities being hedged. For derivative instruments that are
designated and qualify as a cash flow hedge, changes in the
value of the effective portion of the derivative instrument are
recognized in accumulated comprehensive income (loss), a
component of shareholders equity. These amounts are then
reclassified and recognized in income when either the forecasted
transaction occurs or it becomes probable the forecasted
transaction will not occur. Changes in the fair value of the
ineffective portion of derivative instruments are recognized in
earnings in the current period, which have not been significant
to date. Separate disclosures required for derivative
instruments and hedging were not presented because the impact of
derivative instruments is immaterial to our results of
operations and financial position.
Inventory. We value our inventory at the lower
of the actual cost of the inventory or the current estimated
market value of the inventory, with cost being determined under
the
first-in,
first-out method. We record a provision for excess and obsolete
inventory based primarily on our estimated forecast of product
demand and production requirements. The excess balance
determined by this analysis becomes the basis for our excess
inventory charge and the written-down value of the inventory
becomes its cost. Written-down inventory is not written up if
market conditions improve.
Investments. Our minority investments in
privately held companies are accounted for using the cost method
and evaluated for impairment quarterly. Such analysis requires
significant judgment to identify events or circumstances that
would likely have a significant other than temporary adverse
effect on the carrying value of the investment. At
November 1, 2009 and October 31, 2010, we had
$1 million and $3 million of carrying value cost
method investment, which was included in other long-term assets.
Property, plant and equipment. Property, plant
and equipment are stated at cost less accumulated depreciation.
Additions, improvements and major renewals are capitalized, and
maintenance, repairs and minor renewals are expensed as
incurred. When assets are retired or disposed of, the assets and
related accumulated depreciation and amortization are removed
from our records and the resulting gain or loss is reflected in
the statement of
72
operations. Buildings and leasehold improvements are generally
depreciated over 15 to 40 years, or over the lease period,
whichever is shorter, and machinery and equipment are generally
depreciated over 3 to 10 years. We use the straight-line
method of depreciation for all property, plant and equipment.
Net income (loss) per share. Basic net income
(loss) per share is computed by dividing net income
(loss) the numerator by the weighted
average number of shares outstanding the
denominator during the period excluding the dilutive
effect of options and other employee plans. Diluted net income
(loss) per share gives effect to all potentially dilutive
ordinary share equivalents outstanding during the period. In
computing diluted net income (loss) per share under the treasury
stock method, the average share price for the period is used in
determining the number of shares assumed to be purchased from
the proceeds of option exercises.
Diluted net income per share for fiscal years 2008 and 2010 both
excluded the potentially dilutive effect of weighted average
options to purchase 5 million ordinary shares, as their
effect was antidilutive.
The following is a reconciliation of the numerators and
denominators of the basic and diluted net income (loss) per
share computations for the periods presented (in millions,
except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
November 2,
|
|
|
November 1,
|
|
|
October 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Net income (Numerator):
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
57
|
|
|
$
|
(44
|
)
|
|
$
|
415
|
|
Income from and gain on discontinued operations, net of income
taxes
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
83
|
|
|
$
|
(44
|
)
|
|
$
|
415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (Denominator):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average ordinary shares outstanding
|
|
|
214
|
|
|
|
219
|
|
|
|
238
|
|
Add: Incremental shares for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of share options
|
|
|
5
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in diluted computation
|
|
|
219
|
|
|
|
219
|
|
|
|
246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.27
|
|
|
$
|
(0.20
|
)
|
|
$
|
1.74
|
|
Income from and gain on discontinued operations, net of income
taxes
|
|
$
|
0.12
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
0.39
|
|
|
$
|
(0.20
|
)
|
|
$
|
1.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.26
|
|
|
$
|
(0.20
|
)
|
|
$
|
1.69
|
|
Income from and gain on discontinued operations, net of income
taxes
|
|
$
|
0.12
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
0.38
|
|
|
$
|
(0.20
|
)
|
|
$
|
1.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency remeasurement. We operate in
a U.S. dollar functional currency environment. As such,
foreign currency assets and liabilities are remeasured into
U.S. dollars at current exchange rates except for
non-monetary items such as inventory and property, plant and
equipment, which are remeasured at historical exchange rates.
Net income (loss) for fiscal years 2008, 2009 and 2010 included
net foreign currency losses of $6 million, $3 million
and $4 million, respectively.
Capitalized software development costs. We
capitalize eligible costs related to the application development
phase of software developed internally or obtained for internal
use in accordance with ASC 350 Intangibles-Goodwill
and Others, or ASC 350. The capitalization of
software development costs during the years ended
73
November 2, 2008, November 1, 2009 and
October 31, 2010 was not material. We begin amortizing the
costs associated with software developed for internal use at the
time the software is ready for its intended use over its
estimated useful life of three to five years.
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 the products
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.
The following table summarizes the changes in accrued warranty
(in millions):
|
|
|
|
|
Balance as of November 2, 2008 included in
other current liabilities
|
|
$
|
1
|
|
Charged to cost of products sold
|
|
|
8
|
|
Utilized
|
|
|
(2
|
)
|
|
|
|
|
|
Balance as of November 1, 2009 included in
other current liabilities
|
|
$
|
7
|
|
Charged to cost of products sold
|
|
|
12
|
|
Warranty accrual assumed during the period in connection with an
acquisition
|
|
|
1
|
|
Utilized
|
|
|
(3
|
)
|
|
|
|
|
|
Balance as of October 31, 2010 included in
other current liabilities
|
|
$
|
17
|
|
|
|
|
|
|
During the years ended November 1, 2009 and
October 31, 2010, we recorded warranty related charges of
$5 million and $11 million, respectively, based on two
specific quality issues. See Note 17. Commitments and
Contingencies for further details.
Accumulated other comprehensive income
(loss). Accumulated other comprehensive income
(loss) includes certain transactions that have generally been
reported in the consolidated statements of shareholders
equity and comprehensive income (loss). The components of
accumulated other comprehensive income (loss) at
November 2, 2008, November 1, 2009 and
October 31, 2010 consisted of net unrecognized prior
service credit and actuarial gain (loss) on defined benefit
pension plans and post-retirement medical benefit plans and
unrealized gain (loss) on derivative instruments.
Recently
Adopted Accounting Guidance
In fiscal year 2010, we adopted the guidance issued by the
Financial Accounting Standards Board, or FASB, on fair value
measurements and disclosures. The guidance requires new
disclosures about transfers in and out of Levels 1 and 2
fair value measurements, fair value measurements disclosures for
each class of assets and liabilities, and disclosures about the
valuation techniques and inputs used to measure fair value for
both recurring and non-recurring fair value measurements for
Level 2 and Level 3 fair value measurements. Other
than requiring additional disclosures in our financial
statements, the adoption of this guidance did not have a
significant impact on our results of operations and financial
position.
In fiscal year 2010, we adopted the guidance issued by the FASB
that amends the disclosure requirements relating to subsequent
events. The amendment includes definition of an SEC filer,
requires an SEC filer to evaluate subsequent events through the
date the financial statements are issued, and removes the
requirement for an SEC filer to disclose the date through which
subsequent events have been evaluated. This guidance was
effective upon issuance. The adoption of this guidance did not
have a material impact on our results of operations, financial
position and financial statement disclosures.
In fiscal year 2010, we adopted the guidance issued by the FASB
on business combinations, which significantly changes current
practices regarding business combinations. Among the more
significant changes, the guidance expands the definition of a
business and a business combination; requires the acquirer to
recognize the assets acquired, liabilities assumed and
noncontrolling interests (including goodwill), measured at fair
value at the acquisition date; requires acquisition-related
expenses and restructuring costs to be recognized separately
from the business combination; requires assets acquired and
liabilities assumed to be recognized at their acquisition-date
fair values with subsequent changes recognized in earnings; and
requires in-process research and development to be
74
capitalized at fair value as an indefinite-lived intangible
asset. The adoption of this guidance changes our accounting
treatment for business combinations on a prospective basis and
the nature and magnitude of the specific impact depends upon the
nature, terms and size of the acquisitions consummated after the
date of our adoption of this guidance. See
Note 3.Acquisitions and Investments, for
additional information.
In fiscal year 2010, we adopted the guidance issued by the FASB
on accounting for noncontrolling interests in consolidated
financial statements. This guidance changes the accounting and
reporting for minority interests, reporting them as equity
separate from the parent entitys equity, as well as
requiring expanded disclosures. The adoption of this guidance
did not have any impact on our results of operations and
financial position.
In fiscal year 2010, we adopted the guidance issued by the FASB
for determination of the useful life of intangible assets. This
guidance amends the factors that should be considered in
developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under
authoritative accounting guidance for goodwill and other
intangible assets. Any future transactions involving intangible
assets may be affected by this guidance. See Note 5.
Goodwill and Intangible Assets, for additional
information.
During fiscal year 2010, we adopted new guidance issued by the
FASB that specifies the way in which fair value measurements
should be made for non-financial assets and non-financial
liabilities that are not measured and recorded at fair value on
a recurring basis, and specifies additional disclosures related
to these fair value measurements. The adoption of this new
guidance did not have a significant impact on our results of
operations and financial position.
In December 2008, the FASB issued guidance on an employers
disclosures about plan assets of a defined benefit pension or
other postretirement plan. This guidance requires disclosures
surrounding how investment allocation decisions are made,
including the factors that are pertinent to an understanding of
investment policies and strategies. Additional disclosures
include (a) the major categories of plan assets,
(b) the inputs and valuation techniques used to measure the
fair value of plan assets, (c) the effect of fair value
measurements using significant unobservable inputs
(Level 3) on changes in plan assets for the period and
(d) the significant concentrations of risk within plan
assets. This guidance does not change the accounting treatment
for postretirement benefit plans. We adopted this guidance in
fiscal year 2010. The adoption of this guidance changed our
disclosure about pension plans beginning with this Annual Report
on
Form 10-K
for fiscal year 2010. See Note 6. Retirement Plans
and Post-Retirement Benefits.
Recent
Accounting Guidance Not Yet Adopted
In March 2010, the FASB issued new guidance on the milestone
method of revenue recognition. The new guidance recognizes the
milestone method as an acceptable revenue recognition method for
substantive milestones in research or development transactions.
A milestone is substantive when the consideration earned from
achievement of the milestone is commensurate with either
(a) the vendors performance to achieve the milestone
or (b) the enhancement of the value of the delivered
item(s) as a result of a specific outcome resulting from the
vendors performance to achieve the milestone and the
consideration earned from the achievement of a milestone relates
solely to past performance and is reasonable relative to all of
the deliverables and payment terms (including other potential
milestone consideration) within the arrangement. This new
guidance will be effective for our fiscal year ending
October 30, 2011, or fiscal year 2011, and its interim
periods, with early adoption permitted. The guidance may be
applied retrospectively to all arrangements or prospectively to
milestones achieved after the effective date. We believe the
adoption of this new guidance will not have a significant impact
on our results of operations and financial position.
In February 2010, the FASB issued updated guidance which amends
the requirements for evaluating whether a decision maker or
service provider has a variable interest to clarify that a
quantitative approach should not be the sole consideration in
assessing the criteria. It also clarifies that related parties
should be considered in applying all of the decision maker and
service provider criteria. This is in addition to the
authoritative guidance the FASB issued in June 2009 that applies
to determining whether an entity is a variable interest entity
and requiring an enterprise to perform an analysis to determine
whether the enterprises variable interest or interests
give it a controlling financial interest in a variable interest
entity. This new guidance eliminates the exceptions to
consolidating qualifying special-purpose entities, contains new
criteria for determining the primary beneficiary, and increases
the frequency
75
of required reassessments to determine whether a company is the
primary beneficiary of a variable interest entity. The guidance
also contains a new requirement that any term, transaction, or
arrangement that does not have a substantive effect on an
entitys status as a variable interest entity, a
companys power over a variable interest entity, or a
companys obligation to absorb losses or its right to
receive benefits of an entity must be disregarded in applying
the existing provisions. The elimination of the qualifying
special-purpose entity concept and its consolidation exceptions
means more entities will be subject to consolidation assessments
and reassessments. This guidance will be effective for our
fiscal year 2011. We believe the adoption of this new guidance
will not have a significant impact on our results of operations
and financial position.
In January 2010, the FASB issued updated guidance related to
fair value measurements and disclosures, which requires separate
disclosures about purchases, sales, issuances, and settlements
relating to Level 3 fair value measurements (see
Note 8. Fair Value Measurements for further
discussion of fair value measurements). This guidance will be
effective for our fiscal year ending October 28, 2012, and
its interim periods. Other than requiring additional disclosures
in our financial statements, we believe the adoption of this
guidance will not have a significant impact on our results of
operations and financial position.
In October 2009, the FASB issued guidance on revenue recognition
that addresses how to determine whether an arrangement involving
multiple deliverables contains more than one unit of accounting
and how the arrangement consideration should be allocated among
the separate units of accounting. This guidance will be
effective for our fiscal year 2011 with early adoption
permitted. The guidance may be applied retrospectively or
prospectively for new or materially modified arrangements. We
believe the adoption of this guidance will not have a
significant impact on our results of operations and financial
position.
In October 2009, the FASB issued guidance that modifies the
scope of the software revenue recognition guidance to exclude
(a) non-software components of tangible products and
(b) software components of tangible products that are sold,
licensed or leased with tangible products when the software
components and non-software components of the tangible product
function together to deliver the tangible products
essential functionality. This guidance will be effective for our
fiscal year 2011 with early adoption permitted. The guidance may
be applied retrospectively or prospectively for new or
materially modified arrangements. We believe the adoption of
this new guidance will not have a significant impact on our
results of operations and financial position.
|
|
3.
|
Acquisitions
and Investments
|
Acquisitions
During fiscal year 2008, we completed the acquisition of a
privately-held manufacturer of motion control encoders for
$29 million (net of cash acquired of $2 million) plus
$9 million repayment of existing debt. The purchase price
was allocated to the acquired net assets based on estimates of
fair values as follows: total assets of $51 million,
including intangible assets of $11 million, goodwill of
$27 million, and total liabilities of $11 million
(which includes a $2 million loan secured by land and
building in Italy). The intangible assets are being amortized
over their useful lives ranging from 1 to 7 years.
In fiscal year 2008, we completed the acquisition of a
privately-held developer of low-power wireless devices for
$6 million. The purchase consideration of $6 million
was allocated to the acquired net assets based on estimated fair
values as follows: total assets of $7 million (primarily
goodwill), and total liabilities of $1 million. In
connection with the acquisition, we agreed to pay up to
$3 million in cash contingent upon the achievement of
certain development, product, or other milestones, and upon the
continued employment with the Company of certain employees of
the acquired entity. During each of the years ended
November 2, 2008 and November 1, 2009, we recognized
$1 million in compensation expense, related to the
continued employment of certain employees of the acquired
entities. We recognized less than $1 million cash
contingent payment to the founders of the acquired entity upon
the achievement of the first milestone as a purchase price
adjustment during the year ended November 2, 2008. During
the year ended November 1, 2009, we paid less than
$1 million in cash to shareholders of one of the acquired
entities, based on the achievement of certain defined
milestones, which was recorded to goodwill as additional
purchase consideration.
76
In fiscal year 2008, we acquired the Bulk Acoustic Wave Filter,
or BAW, business of Infineon Technologies AG for
$32 million in cash. The purchase price was allocated to
the acquired net assets based on estimated fair values as
follows: total assets of $33 million, including intangible
assets of $12 million and goodwill of $13 million, and
total liabilities of $1 million. The intangible assets are
being amortized over their useful lives ranging from 8 to
15 years. In addition, during the first quarter of fiscal
year 2009, we recorded less than $1 million of additional
transaction costs to goodwill related to the BAW acquisition.
During fiscal year 2009, we completed the acquisition of a
manufacturer of motion control encoders from a Japan-based
company for $7 million in cash, net of cash acquired. The
purchase price was allocated to the acquired net assets based on
estimates of fair values as follows: total assets of
$11 million, including intangible assets of
$4 million, goodwill of $1 million and total
liabilities of $4 million. The intangible assets are being
amortized over their useful lives ranging from 17 to
25 years.
During fiscal year 2010, we acquired certain assets and assumed
certain liabilities of a China-based company engaged in the
manufacturing of motion control encoder products for
$8 million in cash. We have adopted the new authoritative
guidance on business combinations during the first quarter of
fiscal year 2010, and the acquisition was accounted for in
accordance with this guidance. The purchase price was allocated
to the acquired net assets based on estimates of fair values as
follows: total assets of $11 million, including intangible
assets of $5 million, goodwill of $1 million, and
total liabilities of $3 million. The intangible assets are
being amortized over their useful lives ranging from 9 to
25 years.
The consolidated financial statements include the results of
operations of the acquired companies commencing on their
respective acquisition dates. Pro forma results of operations
for the acquisitions completed in the fiscal years ended
November 2, 2008, November 1, 2009 and
October 31, 2010 have not been presented because the
effects of the acquisitions, individually or in the aggregate,
were not material to our consolidated financial statements.
Investments
We record at cost non-marketable investments where we do not
have the ability to exercise significant influence or control
and periodically review them for impairment. During the fiscal
year 2008, we made an investment of $2 million in a
privately-held company. This investment is accounted for under
the cost method and is included on the balance sheet in other
long-term assets. This investment was impaired during the year
ended November 1, 2009.
During fiscal year 2010, we made another investment of
$2 million in a privately-held company. The investment is
accounted for under the cost method and is included on the
balance sheet in other long-term assets.
|
|
4.
|
Balance
Sheet Components
|
Inventory
Inventory consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
November 1,
|
|
|
October 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
Finished goods
|
|
$
|
70
|
|
|
$
|
61
|
|
Work-in-process
|
|
|
70
|
|
|
|
96
|
|
Raw materials
|
|
|
22
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
Total inventory
|
|
$
|
162
|
|
|
$
|
189
|
|
|
|
|
|
|
|
|
|
|
During the fiscal year ended October 31, 2010, we recorded
write-downs to inventories of $15 million, associated with
reduced demand assumptions, compared to write-downs to
inventories of $23 million recorded during the fiscal year
ended November 1, 2009.
77
Other
Current Assets
Other current assets consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
November 1,
|
|
|
October 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
Prepayments
|
|
$
|
17
|
|
|
$
|
13
|
|
Deferred income tax assets
|
|
|
10
|
|
|
|
18
|
|
Non-U.S.
transaction tax receivable
|
|
|
5
|
|
|
|
5
|
|
Other
|
|
|
12
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
Total other current assets
|
|
$
|
44
|
|
|
$
|
52
|
|
|
|
|
|
|
|
|
|
|
Property,
Plant and Equipment, Net
Property, plant and equipment, net consist of the following (in
millions):
|
|
|
|
|
|
|
|
|
|
|
November 1,
|
|
|
October 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
Land
|
|
$
|
11
|
|
|
$
|
11
|
|
Buildings and leasehold improvements
|
|
|
128
|
|
|
|
130
|
|
Machinery and equipment
|
|
|
419
|
|
|
|
499
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment
|
|
|
558
|
|
|
|
640
|
|
Accumulated depreciation and amortization
|
|
|
(294
|
)
|
|
|
(359
|
)
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment, net
|
|
$
|
264
|
|
|
$
|
281
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $74 million, $81 million and
$80 million, for the years ended November 2, 2008,
November 1, 2009 and October 31, 2010, respectively.
At November 1, 2009 and October 31, 2010, machinery
and equipment included $41 million and $50 million of
software costs, respectively, and accumulated amortization
included $29 million and $36 million, respectively.
At November 1, 2009 and October 31, 2010, we had
$11 million and $14 million of gross carrying amount
of assets under capital leases, respectively, and accumulated
amortization of $6 million and $8 million,
respectively.
At November 1, 2009, property, plant and equipment held for
sale with the gross carrying amount of $1 million and
accumulated depreciation of less than $1 million were
included in property, plant and equipment. At October 31,
2010, no property, plant and equipment was held for sale.
Other
Current Liabilities
Other current liabilities consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
November 1,
|
|
|
October 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
Income and other taxes payable
|
|
$
|
1
|
|
|
$
|
6
|
|
Deferred revenue
|
|
|
5
|
|
|
|
7
|
|
Supplier liabilities
|
|
|
3
|
|
|
|
3
|
|
Restructuring charges
|
|
|
3
|
|
|
|
|
|
Warranty
|
|
|
7
|
|
|
|
17
|
|
Other
|
|
|
14
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
Total other current liabilities
|
|
$
|
33
|
|
|
$
|
41
|
|
|
|
|
|
|
|
|
|
|
78
|
|
5.
|
Goodwill
and Intangible Assets
|
Goodwill
The following table summarizes changes in goodwill (in millions):
|
|
|
|
|
Balance as of November 2, 2008
|
|
$
|
169
|
|
2009 acquisitions (Note 3. Acquisitions and
Investments)
|
|
|
2
|
|
|
|
|
|
|
Balance as of November 1, 2009
|
|
|
171
|
|
2010 acquisitions (Note 3. Acquisitions and
Investments)
|
|
|
1
|
|
|
|
|
|
|
Balance as of October 31, 2010
|
|
$
|
172
|
|
|
|
|
|
|
Intangible
Assets
Amortizable purchased intangibles consist of the following (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net Book Value
|
|
|
As of November 1, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased technology
|
|
$
|
727
|
|
|
$
|
(231
|
)
|
|
$
|
496
|
|
Customer and distributor relationships
|
|
|
249
|
|
|
|
(99
|
)
|
|
|
150
|
|
Other
|
|
|
3
|
|
|
|
(2
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
979
|
|
|
$
|
(332
|
)
|
|
$
|
647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased technology
|
|
$
|
727
|
|
|
$
|
(290
|
)
|
|
$
|
437
|
|
Customer and distributor relationships
|
|
|
254
|
|
|
|
(120
|
)
|
|
|
134
|
|
Other
|
|
|
4
|
|
|
|
(2
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
985
|
|
|
$
|
(412
|
)
|
|
$
|
573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the amortization of purchased
intangible assets (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
November 2,
|
|
|
November 1,
|
|
|
October 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Cost of products sold
|
|
$
|
57
|
|
|
$
|
58
|
|
|
$
|
58
|
|
Operating expenses
|
|
|
28
|
|
|
|
21
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
85
|
|
|
$
|
79
|
|
|
$
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended November 2, 2008, we recorded
$11 million and $12 million of intangible assets with
weighted average amortization period of 7 years and
12 years, respectively, in connection with acquisitions in
2008. During the same period, we also acquired $6 million
of intangible assets from a third-party with weighted-average
amortization period of 18 years. During the fiscal year
ended November 1, 2009, we recorded $4 million in
intangible assets with weighted average amortization period of
19 years in conjunction with an acquisition. During the
same period, we also acquired $1 million of intangible
assets from a third-party with weighted average amortization
period of 17 years. During the fiscal year ended
October 31, 2010, we recorded $5 million of intangible
assets with weighted average amortization period of
11 years in conjunction with an acquisition completed
during fiscal year 2010. See Note 3. Acquisitions and
Investments.
79
Based on the amount of intangible assets subject to amortization
at October 31, 2010, the expected amortization expense for
each of the next five fiscal years and thereafter is as follows
(in millions):
|
|
|
|
|
Fiscal Year
|
|
Amount
|
|
|
2011
|
|
$
|
77
|
|
2012
|
|
|
77
|
|
2013
|
|
|
77
|
|
2014
|
|
|
77
|
|
2015
|
|
|
76
|
|
Thereafter
|
|
|
189
|
|
|
|
|
|
|
|
|
$
|
573
|
|
|
|
|
|
|
The weighted average amortization periods remaining by
intangible asset category at October 31, 2010 were as
follows (in years):
|
|
|
|
|
|
|
|
|
|
|
November 1,
|
|
October 31,
|
|
|
2009
|
|
2010
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
Purchased technology
|
|
|
10
|
|
|
|
9
|
|
Customer and distributor relationships
|
|
|
8
|
|
|
|
8
|
|
Other
|
|
|
25
|
|
|
|
22
|
|
|
|
6.
|
Retirement
Plans and Post-Retirement Benefits
|
Non-U.S. Defined
Benefit Plans. We have defined benefit plans in
Taiwan, Korea, Japan, Germany, Italy and France.
401(k) Defined Contribution Plan. Our
U.S. eligible employees participate in the Avago
Technologies U.S. Inc. 401(k) Plan, or the 401(k) Plan.
Enrollment in the 401(k) Plan is automatic for employees who
meet eligibility requirements unless they decline participation.
Under the 401(k) Plan, we provide matching contributions to
employees up to a maximum of 4% of an employees annual
eligible compensation. The maximum contribution to the 401(k)
Plan is 50% of an employees annual eligible compensation,
subject to regulatory and plan limitations. The 401(k) Plan
expense is included in the corporate employee overhead rate
allocation.
U.S. Deferred Compensation Plan. We also
have a deferred compensation plan, which allows highly
compensated employees (as defined by IRS regulations) to defer
greater percentages of compensation than would otherwise be
permitted under the salary deferral 401(k) plan and IRS
regulations. The deferred compensation plan is a non-qualified
plan of deferred compensation maintained in a rabbi trust.
Participants can direct the investment of their deferred
compensation plan accounts in the same investment funds offered
by the 401(k) plan.
U.S. Post-Retirement Medical Benefit
Plans. A portion of our U.S. employees who
meet retirement eligibility requirements as of their termination
dates may receive post-retirement medical benefits under our
retiree medical account program. Under our retiree medical
account program, eligible retirees are allocated a spending
account of either $40,000 or $55,000, depending on the
retirees age at January 1, 2005, from which the
retiree can receive reimbursement for premiums paid for medical
coverage to age 65. Certain U.S. employees who were
age 50 or over on January 1, 2005 may be eligible
for our traditional retiree medical plan upon meeting certain
eligibility requirements and certain service criteria. Once
participating in the traditional retiree medical plan, retirees
are provided with access to both pre-65 medical coverage and
supplemental Medicare coverage with medical premiums based on
the type of coverage chosen and service criteria. Retirees in
this group are also given the option to choose the $55,000
retiree medical account program instead of the traditional
retiree medical plan.
Non-U.S Retirement Benefit Plans. In addition
to the defined benefit plan for certain employees in Taiwan,
Korea, Japan, France, Italy and Germany, other eligible
employees outside of the U.S. receive retirement benefits
under various defined contribution retirement plans. Eligibility
is generally determined based on the terms of our plans and
local statutory requirements.
80
The net pension plan costs of our non-U.S defined benefit plans
for the years ended November 2, 2008, November 1, 2009
and October 31, 2010 were $3 million, $2 million
and $3 million, respectively. The net pension plan costs
for the year ended November 1, 2009 is net of
$1 million of curtailment gain, related to our
restructuring activities. See Note 10. Restructuring
Charges. The net pension plan costs of our post-retirement
medical plan for the years ended November 2, 2008,
November 1, 2009 and October 31, 2010 were
$1 million each.
For the year ended November 2, 2008, we recognized
$3 million in accumulated other comprehensive income (net
of tax of $1 million), related to our non U.S. defined
benefit plans, which consists of unrealized net actuarial gains,
of which we recognized less than $1 million as components
of net periodic benefit costs over fiscal year ended
November 1, 2009. We also recognized $2 million in
accumulated other comprehensive income (net of tax of
$1 million) for the year ended November 2, 2008,
related to our U.S. post-retirement benefit plans, which
consists of unrealized net actuarial gains, of which we
recognized $1 million as components of net periodic benefit
costs over fiscal year 2009. During the year ended
November 1, 2009, we recognized $6 million of
unrealized net actuarial losses in accumulated other
comprehensive income (net of tax of $1 million), related to
our U.S. post-retirement benefit plans. During the year
ended October 31, 2010, we recognized $1 million of
unrealized net actuarial losses in accumulated other
comprehensive loss (net of tax of $1 million), related to
our U.S. post-retirement medical plans. Of the unrealized
prior service cost included in accumulated other comprehensive
loss, related to our U.S. post-retirement medical plans, we
expect to recognize less than $1 million in fiscal year
2011. For the year ended October 31, 2010, we recognized
$6 million of unrealized net actuarial losses in
accumulated other comprehensive loss (net of tax of
$1 million), related to our non U.S. defined benefit
plans. Of the unrealized net actuarial losses included in
accumulated other comprehensive loss, related to our non
U.S. defined benefit plans, we expect to recognize less
than $1 million in fiscal year 2011. Other long-term assets
include deferred tax assets relating to pension liabilities and
post-retirement medical benefit plan liabilities.
Funded Status. The funded status of the
U.S. post-retirement medical benefit plans and
non-U.S. defined
benefit plans was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. Defined Benefit Plans
|
|
|
U.S. Post Retirement Medical Plans
|
|
|
|
November 1,
|
|
|
October 31,
|
|
|
November 1,
|
|
|
October 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|