Edgar Filing: Avago Technologies LTD

AVGO-08.03.2014-10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(MARK ONE)



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

For the quarterly period ended August 3, 2014



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

For the transition period from to

Commission File Number: 001-34428

Avago Technologies Limited

(Exact Name of Registrant as Specified in Its Charter)



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

(65) 6755-7888

(Registrant’s telephone number, including area code)

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

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

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



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

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

As of August 31, 2014 there were 252,899,199 of our ordinary shares, no par value per share, outstanding.

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AVAGO TECHNOLOGIES LIMITED

Quarterly Report on Form 10-Q

For the Quarterly Period Ended August 3, 2014

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	Page
PART I — FINANCIAL INFORMATION	3
Item 1. Condensed Consolidated Financial Statements — Unaudited	3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3. Quantitative and Qualitative Disclosures About Market Risk	47
Item 4. Controls and Procedures	48
PART II. OTHER INFORMATION	49
Item 1. Legal Proceedings	49
Item 1A. Risk Factors	49
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	72
Item 3. Defaults Upon Senior Securities	72
Item 4. Mine Safety Disclosures	72
Item 5. Other Information	72
Item 6. Exhibits	73
SIGNATURES	75

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PART I — FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements — Unaudited

AVAGO TECHNOLOGIES LIMITED

CONDENSED CONSOLIDATED BALANCE SHEETS — UNAUDITED

(in millions, except share amounts)



	August 3, 2014			November 3, 2013
ASSETS
Current assets:
Cash and cash equivalents	$	1,277		$	985
Trade accounts receivable, net	590			418
Inventory	482			285
Other current assets	462			130
Assets held-for-sale	1,029			—
Total current assets	3,840			1,818
Property, plant and equipment, net	1,016			661
Goodwill	1,458			391
Intangible assets, net	3,620			492
Other long-term assets	328			53
Total assets	$	10,262		$	3,415
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	459		$	278
Employee compensation and benefits	207			98
Other current liabilities	228			47
Current portion of long-term debt	46			—
Total current liabilities	940			423
Long-term liabilities:
Long-term debt	5,472			—
Pension and post-retirement benefit obligations	481			62
Other long-term liabilities	271			44
Total liabilities	7,164			529
Commitments and contingencies (Note 12)
Shareholders’ equity:
Ordinary shares, no par value; 252,693,532 shares and 249,100,178 shares issued and outstanding on August 3, 2014 and November 3, 2013, respectively	1,875			1,587
Retained earnings	1,230			1,305
Accumulated other comprehensive loss	(7		)	(6		)
Total shareholders’ equity	3,098			2,886
Total liabilities and shareholders’ equity	$	10,262		$	3,415

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

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AVAGO TECHNOLOGIES LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS — UNAUDITED

(in millions, except per share data)



	Fiscal Quarter Ended						Three Fiscal Quarters Ended
	August 3, 2014			August 4, 2013			August 3, 2014			August 4, 2013
Net revenue	$	1,269		$	644		$	2,679		$	1,782
Cost of products sold:
Cost of products sold	760			325			1,433			887
Amortization of intangible assets	105			14			141			42
Restructuring charges	11			1			16			1
Total cost of products sold	876			340			1,590			930
Gross margin	393			304			1,089			852
Research and development	240			101			461			289
Selling, general and administrative	137			57			278			162
Amortization of intangible assets	91			6			106			17
Restructuring charges	87			—			107			2
Total operating expenses	555			164			952			470
Income (loss) from operations	(162		)	140			137			382
Interest expense	(55		)	(1		)	(56		)	(2		)
Other income (expense), net	(2		)	5			(2		)	8
Income (loss) from continuing operations before income taxes	(219		)	144			79			388
Provision for (benefit from) income taxes	(99		)	2			(93		)	8
Income (loss) from continuing operations	(120		)	142			172			380
Loss from discontinued operations, net of income taxes	(44		)	—			(44		)	—
Net income (loss)	$	(164	)	$	142		$	128		$	380

Basic income (loss) per share:
Income (loss) per share from continuing operations	$	(0.48	)	$	0.57		$	0.69		$	1.54
Loss per share from discontinued operations, net of income taxes	$	(0.17	)	$	—		$	(0.18	)	$	—
Net income (loss) per share	$	(0.65	)	$	0.57		$	0.51		$	1.54

Diluted income (loss) per share:
Income (loss) per share from continuing operations	$	(0.48	)	$	0.56		$	0.65		$	1.51
Loss per share from discontinued operations, net of income taxes	$	(0.17	)	$	—		$	(0.17	)	$	—
Net income (loss) per share	$	(0.65	)	$	0.56		$	0.48		$	1.51

Weighted average shares:
Basic	252			248			251			246
Diluted	252			252			265			251

Cash dividends declared and paid per share	$	0.29		$	0.21		$	0.81		$	0.57

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

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AVAGO TECHNOLOGIES LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME — UNAUDITED

(in millions)



	Fiscal Quarter Ended					Three Fiscal Quarters Ended
	August 3, 2014			August 4, 2013		August 3, 2014			August 4, 2013
Net income (loss)	$	(164	)	$	142	$	128		$	380
Other comprehensive income (loss), net of tax:
Unrealized gain on post-retirement plan and defined benefit pension plans, net of tax	—			—		—			2
Impact of post-retirement benefit plan curtailment and settlement gain	—			—		(2		)	—
Impact of post-retirement benefit plan amendment	—			—		1			—
Change in net gain on available-for-sale investments	—			5		—			7
Other comprehensive income (loss)	—			5		(1		)	9
Total comprehensive income (loss)	$	(164	)	$	147	$	127		$	389

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

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AVAGO TECHNOLOGIES LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED

(in millions)



	Three Fiscal Quarters Ended
	August 3, 2014			August 4, 2013
Cash flows from operating activities:
Net income	$	128		$	380
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	375			129
Amortization of debt discount and debt issuance costs	7			—
Share-based compensation	109			55
Tax benefits from share-based compensation	—			6
Excess tax benefits from share-based compensation	—			(3		)
Gain from post-retirement medical plan curtailment and settlement	(3		)	—
Unrealized gain on trading securities	—			(5		)
Other	10			4
Changes in assets and liabilities, net of assets acquired and liabilities assumed in business acquisitions:
Trade accounts receivable, net	110			27
Inventory	199			(54		)
Accounts payable	(39		)	13
Employee compensation and benefits	18			14
Other current assets and current liabilities	30			(54		)
Other long-term assets and long-term liabilities	(150		)	(2		)
Net cash provided by operating activities	794			510
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired	(5,644		)	(409		)
Purchases of property, plant and equipment	(220		)	(179		)
Proceeds from sale of investments	14			—
Purchases of investments	—			(10		)
Net cash used in investing activities	(5,850		)	(598		)
Cash flows from financing activities:
Proceeds from term loan borrowings	4,600			—
Proceeds from issuance of convertible senior notes	1,000			—
Debt issuance costs	(124		)	—
Payment of capital lease obligations	(1		)	(1		)
Issuance of ordinary shares, net of issuance costs	86			60
Repurchases of ordinary shares	(12		)	(62		)
Excess tax benefits from share-based compensation	—			3
Dividend payments to shareholders	(203		)	(141		)
Proceeds from government grants	2			8
Net cash provided by (used in) financing activities	5,348			(133		)
Net increase (decrease) in cash and cash equivalents	292			(221		)
Cash and cash equivalents at the beginning of period	985			1,084
Cash and cash equivalents at end of period	$	1,277		$	863

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

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AVAGO TECHNOLOGIES LIMITED

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Overview, Basis of Presentation and Significant Accounting Policies

Overview

Avago Technologies Limited, or the “Company”, was organized under the laws of the Republic of Singapore in August 2005. We are a designer, developer and global supplier of a broad range of semiconductor devices with a focus on III-V based products and complex digital and mixed signal CMOS based devices. III-V semiconductor materials have higher electrical conductivity than silicon and thus tend to have better performance characteristics in radio frequency, or RF, and optoelectronic applications. III-V refers to elements from the 3rd and 5th groups in the periodic table of chemical elements, and examples of these materials are gallium arsenide, or GaAs, gallium nitride, or GaN, and indium phosphide, or InP. We offer products in four primary target markets: enterprise storage, wireless communications, wired infrastructure and industrial & other. Applications for our products in these target markets include smartphones, consumer appliances, data networking and telecommunications equipment, enterprise storage and servers, factory automation and industrial equipment.

We operate on a 52- or 53-week fiscal year ending on the Sunday closest to October 31. Our fiscal year ending November 2, 2014, or fiscal year 2014, is a 52-week fiscal year. The first quarter of our fiscal year 2014 ended on February 2, 2014, the second quarter ended on May 4, 2014 and the third quarter ended on August 3, 2014. Our fiscal year ended November 3, 2013, or fiscal year 2013, was a 53-week fiscal year, with our first fiscal quarter containing 14 weeks.

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

Basis of Presentation

On May 6, 2014, we completed our acquisition of LSI Corporation, or LSI, a company that designs semiconductors that accelerate storage and networking in data centers, mobile networks and client computing, for a purchase price of $6,518 million, which includes cash paid to LSI stockholders of $6,344 million, cash paid for fully vested stock options and restricted stock units of $154 million, and $20 million for the fair value of partially vested assumed equity awards. The unaudited condensed consolidated financial statements include the results of operations of LSI, commencing on the closing date of the acquisition.

On May 29, 2014, we entered into an agreement with Seagate Technology LLC, or Seagate, providing for the disposition of LSI's Flash Components Division and Accelerated Solutions Division, together referred to as the Flash Business, to Seagate for $450 million in cash. The transaction closed on September 2, 2014. On August 13, 2014, we entered into an agreement with Intel Corporation, or Intel, to dispose of LSI’s Axxia Networking Business and related assets, or the Axxia Business, for $650 million in cash. This transaction is expected to close in our fourth fiscal quarter of 2014. The financial results of the Flash Business and the Axxia Business are presented as "Loss from discontinued operations, net of income taxes" on the unaudited condensed consolidated statements of operations for the fiscal quarter and three fiscal quarters ended August 3, 2014 and the assets of the Flash Business and the Axxia Business to be disposed of are presented as "Assets held-for-sale" on the unaudited condensed consolidated balance sheet as of August 3, 2014.

The accompanying unaudited condensed consolidated financial statements include the accounts of Avago Technologies and its wholly owned subsidiaries and have been prepared by us in accordance with accounting principles generally accepted in the United States of America, or GAAP, for interim financial information. This financial information reflects all adjustments which are, in the opinion of our management, of a normal recurring nature and necessary for a fair statement of the results for the periods presented. The November 3, 2013 condensed consolidated balance sheet data were derived from our audited consolidated financial statements included in our 2013 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, or SEC, but do not include all disclosures required by U.S. GAAP. Intercompany transactions and balances have been eliminated in consolidation.

The operating results for the fiscal quarter and three fiscal quarters ended August 3, 2014 are not necessarily indicative of the results that may be expected for fiscal year 2014, or for any other future period.

Significant Accounting Policies

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

Concentrations of credit risk and significant customers. Our cash, cash equivalents and accounts receivable are potentially subject to concentration of credit risk. Cash and cash equivalents may be redeemable upon demand and are maintained with several financial institutions that management believes are of high credit quality and therefore bear minimal credit risk. We seek to mitigate our credit risks by spreading such risks across multiple counterparties and monitoring the risk profile of these

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counterparties. Our accounts receivable are derived from revenue earned from customers located in the U.S. and internationally. We mitigate collection risks from our customers by performing regular credit evaluations of our customers' financial condition, and require collateral, such as letters of credit and bank guarantees, in certain circumstances.

We sell our products through our direct sales force, distributors and manufacturers' representatives. Two direct customers accounted for 17% and 11%, respectively, of our net accounts receivable balance at August 3, 2014. One direct customer accounted for 26% of our net accounts receivable balance at November 3, 2013.

For the fiscal quarters ended August 3, 2014 and August 4, 2013, one direct customer represented 15% and 16% of our net revenue, respectively. For the three fiscal quarters ended August 3, 2014 and August 4, 2013, one direct customer represented 17% of our net revenue.

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

The following table summarizes the changes in accrued warranty (in millions):



Balance as of November 3, 2013 — included in other current liabilities	$	2
Liabilities assumed in LSI acquisition	11
Charged to cost of products sold	1
Change in estimate - released to cost of products sold	(2		)
Utilized	(1		)
Balance as of August 3, 2014 — included in other current liabilities	$	11

Net income (loss) per share. Basic net income (loss) per share is computed using the weighted-average number of ordinary shares outstanding during the period. Diluted net income (loss) per share is computed using the weighted-average number of ordinary shares and potentially dilutive share equivalents outstanding during the period. Diluted shares outstanding include the dilutive effect of in-the-money options (including market-based share options), restricted share units, or RSUs, employee share purchase rights under the Avago Technologies Limited Employee Share Purchase Plan, or ESPP, and the 2.0% Convertible Senior Notes due 2021 issued by Avago Technologies Limited, or the Notes. The dilutive effect of equity awards is calculated based on the average share price for each fiscal period, using the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising share options and to purchase shares under the ESPP, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax benefits that would be recorded in an ordinary shares account when equity awards become deductible for income tax purposes are collectively assumed to be used to repurchase ordinary shares. The dilutive effect of the Notes is calculated using the treasury stock method. For the purpose of calculating the dilutive effect, we assumed that the Notes will be settled in cash which allows the Company to use the treasury method. In making this assumption, we considered our existing cash balance, future cash flows from operations and our ability to borrow and repay our existing term loans. The treasury stock method assumes that the carrying value of the Notes represents proceeds, since settlement of the Notes tendered for conversion may be settled with cash, ordinary shares or a combination of both. The resulting incremental ordinary shares attributable to the assumed conversion of the Notes are a component of diluted shares.

Diluted net income per share for the fiscal quarter and three fiscal quarters ended August 3, 2014 and the fiscal quarter and three fiscal quarters ended August 4, 2013 excluded the potentially dilutive effect of weighted-average outstanding equity awards (options, RSUs and ESPP rights) to acquire 2 million, 1 million, 2 million and 2 million ordinary shares, respectively, as their effect was antidilutive.

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



	Fiscal Quarter Ended					Three Fiscal Quarters Ended
	August 3, 2014			August 4, 2013		August 3, 2014			August 4, 2013
Net income (loss) (Numerator):
Income (loss) from continuing operations	$	(120	)	$	142	$	172		$	380
Loss from discontinued operations, net of income taxes	(44		)	—		(44		)	—
Net income (loss)	$	(164	)	$	142	$	128		$	380
Shares (Denominator):
Basic weighted-average ordinary shares outstanding	252			248		251			246
Add incremental shares for:
Dilutive effect of share options, RSUs and ESPP rights	—			4		7			5
Dilutive effect of Notes	—			—		7			—
Shares used in diluted computation	252			252		265			251

Basic income (loss) per share:
Income (loss) per share from continuing operations	$	(0.48	)	$	0.57	$	0.69		$	1.54
Loss per share from discontinued operations, net of income taxes	$	(0.17	)	$	—	$	(0.18	)	$	—
Net income (loss) per share	$	(0.65	)	$	0.57	$	0.51		$	1.54

Diluted income (loss) per share:
Income (loss) per share from continuing operations	$	(0.48	)	$	0.56	$	0.65		$	1.51
Loss per share from discontinued operations, net of income taxes	$	(0.17	)	$	—	$	(0.17	)	$	—
Net income (loss) per share	$	(0.65	)	$	0.56	$	0.48		$	1.51

Supplemental cash flow disclosures. At August 3, 2014 and November 3, 2013, we had $57 million and $31 million, respectively, of unpaid purchases of property, plant, and equipment included in accounts payable and other current liabilities. Amounts reported as unpaid purchases will be recorded as cash outflows from investing activities for purchases of property, plant, and equipment in the condensed consolidated statements of cash flows in the period in which they are paid.

Recently Adopted Accounting Guidance

In the first quarter of fiscal year 2014, we adopted guidance issued by the Financial Accounting Standards Board, or FASB, relating to reporting on reclassifications out of accumulated other comprehensive income (loss). This guidance seeks to improve the reporting of such reclassifications by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income (loss) on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. This guidance supersedes the presentation requirements for reclassifications out of accumulated other comprehensive income (loss) in previously issued guidance. The adoption of this guidance affected the presentation of comprehensive income, but did not have any impact on our financial condition or results of operations.

Recent Accounting Guidance Not Yet Adopted

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

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In May 2014, the FASB issued authoritative guidance that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The guidance is effective for the first quarter of our fiscal year 2018. Early adoption is not permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements.

In April 2014, the FASB issued authoritative guidance that raises the threshold for a disposal transaction to qualify as a discontinued operation and requires additional disclosures about discontinued operations and disposals of individually significant components that do not qualify as discontinued operations. This guidance will be effective prospectively for the first quarter of our fiscal year 2016, which will only affect any dispositions we may make after the effective date.

In July 2013, the FASB issued an amendment to the accounting guidance related to the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. The guidance requires an unrecognized tax benefit to be presented as a decrease in a deferred tax asset where a net operating loss, a similar tax loss or a tax credit carryforward exists and certain criteria are met. This guidance will be effective for the first quarter of our fiscal year 2015. The adoption of this guidance will affect the presentation of our unrecognized tax benefits but will not impact our financial condition or results of operations.

2. Balance Sheet Components

Inventory

Inventory consists of the following (in millions):



	August 3, 2014		November 3, 2013
Finished goods	$	140	$	53
Work-in-process	254		154
Raw materials	88		78
Total inventory	$	482	$	285

Other Current Assets

Other current assets consist of the following (in millions):



	August 3, 2014		November 3, 2013
Deferred income tax assets	$	234	$	32
Other	228		98
Total other current assets	$	462	$	130

3. Acquisitions and Investments

PLX Technology, Inc.

On August 12, 2014, we completed our acquisition of PLX Technology, Inc., or PLX, a provider of PCI Express, or PCIe, silicon and software connectivity solutions, in an all-cash transaction valued at approximately $310 million, or $293 million net of cash and debt acquired. Avago funded the transaction with available cash. With the acquisition of the core PLX PCIe silicon business, we intend to broaden our portfolio to better serve the enterprise storage and networking end markets.

We are currently evaluating the purchase price allocation following the consummation of the PLX acquisition. It is not practical to disclose the preliminary purchase price allocation for this transaction, given the short period of time between the acquisition date and the issuance of these unaudited condensed consolidated financial statements.

LSI Corporation

On May 6, 2014, we acquired LSI, a company that provides high-performance storage and networking semiconductors used in hard disk drives, solid state drives, communication systems, computer servers, storage systems and personal computers. With the acquisition of LSI, we intend to enhance our competitive position in the enterprise storage market. The acquisition expands Avago's product offerings and provides us with system-level expertise in the wired infrastructure market.

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Total consideration consisted of the following (in millions):




Cash paid to LSI stockholders	$	6,344
Cash paid for options and restricted stock units	154
Fair value of partially vested assumed equity awards	20
Total purchase price	6,518
Less: cash acquired	854
Total purchase price, net of cash acquired	$	5,664

In connection with the LSI acquisition, we assumed stock options and RSUs, originally granted by LSI, and converted them into Avago share options and RSUs. The portion of the fair value of partially vested equity awards associated with prior service of LSI employees represents a component of the total consideration for the LSI acquisition, as presented above. Stock options assumed were valued using the Black Scholes option pricing model based on the exercise behavior of Avago's employees. RSUs were valued based on Avago’s stock price as of the acquisition date.

We allocated the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. The fair value of identifiable intangible assets acquired was based on estimates and assumptions made by management at the time of acquisition. As additional information becomes available, such as finalization of the estimated fair values of tax accounts, we may revise our preliminary purchase price allocation during the remainder of the measurement period (which will not exceed 12 months from the acquisition date). Any such revisions or changes may be material.

Our preliminary allocation of the total purchase price, net of cash acquired, is as follows (in millions):



	Estimated Fair Value
Trade accounts receivable	$	282
Inventory	386
Other current assets	357
Assets held-for-sale	450
Property, plant and equipment	260
Goodwill	1,158
Intangible assets	3,865
Other long-term assets	178
Total assets acquired	6,936
Accounts payable	(207		)
Employee compensation and benefits	(91		)
Other current liabilities	(175		)
Pension and post-retirement benefit obligations	(446		)
Other long-term liabilities	(353		)
Total liabilities assumed	(1,272		)
Fair value of net assets acquired	$	5,664

Our results of continuing operations for the fiscal quarter and three fiscal quarters ended August 3, 2014 include $525 million of net revenue and $360 million of net loss attributable to LSI after May 6, 2014. Transaction costs of $21 million incurred in connection with this acquisition are included in selling, general and administrative expense in the unaudited condensed consolidated statements of operations for the fiscal quarter and three fiscal quarters ended August 3, 2014. Goodwill is primarily attributable to the assembled workforce of LSI, anticipated synergies and economies of scale expected from the operations of the combined company.

On May 29, 2014, we entered into an agreement with Seagate, pursuant to which we agreed to sell the Flash Business to Seagate for $450 million in cash. The Flash Business was classified as assets held-for-sale on the unaudited condensed consolidated balance sheet and carried at fair value less cost to sell as determined at the acquisition date. The expected cost to sell the Flash Business was not material. This transaction closed on September 2, 2014.

On August 13, 2014, we entered into an agreement with Intel, pursuant to which we agreed to sell the Axxia Business, for $650 million in cash. This transaction is expected to close in our fourth fiscal quarter of 2014. This transaction did not meet the criteria for assets held-for-sale under the relevant accounting guidance as of May 6, 2014 and therefore the assets of the Axxia

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Business have not been included in assets held-for-sale in the LSI purchase price allocation. As of August 3, 2014, the assets of the Axxia Business were classified as assets held-for-sale on the unaudited condensed consolidated balance sheet and carried at fair value less cost to sell.

Intangible Assets

Identified intangible assets acquired consisted of the following:



	Fair Value (in millions)		Weighted-Average Lives (in years)

Developed technology	$	1,961	10
Customer relationships	1,415		8
Trade names	178		8
Customer order backlog	106		1
Patents	11		8
In place lease	2		3
Total identified finite-lived intangible assets	3,673
In-process research and development	192
Total identified intangible assets	$	3,865

Developed technology relates to systems-on-a-chip, read channel, pre-amplifiers, redundant array of independent disk, or RAID, Syncro, Axxia design, standard and customized networking solutions technologies. We valued the developed technology that generates cash flows from sales of existing products using the multi-period excess earnings method under the income approach. The method reflects the present value of the projected cash flows that are expected to be generated by the developed technology less charges representing the contribution of other assets to those cash flows. The economic useful life was determined based on the technology cycle related to each developed technology as well as the cash flows over the forecast period.

Customer relationships represent the fair value of future projected revenue that will be derived from sales of products to existing customers of LSI. Customer relationships were valued using the with-and-without-method under the income approach. In this method, the fair value was measured by the difference between the present values of the cash flows from the sale with and without the existing customers in place over the period of time necessary to reacquire the customers. The economic useful life was determined based on the estimated customer product or program ramp-up period required to develop the similar existing customer revenue base.

Trade names relate to LSI's brands, and their fair values were determined by applying the relief-from-royalty method under the income approach. This valuation method is based on the application of a royalty rate to forecasted revenue under the respective trade name. The economic useful life was determined based on the expected life of the trade names, the history of the trade names, and the cash flows anticipated over the forecasted periods.

Customer order backlog represents business under existing contractual obligations as of the acquisition date. The fair value of backlog was determined using the multi-period excess earnings method under the income approach based on expected operating cash flows from future contractual revenue. The economic useful life was determined based on the expected life of the backlog and the cash flows over the forecast period.

Patents represent issued patents and patent applications worldwide, and existing licensing contracts. We valued the existing patents associated with new IP licensing contracts using the multi-period excess earnings method under the income approach. The method reflects the present value of the projected cash flows that are expected to be generated by the patents less charges representing the contribution of other assets to those cash flows. We valued the existing IP licensing contracts using the discounted cash flow method under the income approach. The method reflects the present value of the projected cash flows that are expected to be generated by the licensing contracts. The economic useful life was determined based on the actual contractual terms of the existing patents and licensing contracts and the cash flows over the forecasted periods.

The fair value of in-process research and development, or IPR&D, was determined using the multi-period excess earnings method under the income approach. This method reflects the present value of the projected cash flows that are expected to be generated by the IPR&D less charges representing the contribution of other assets to those cash flows.

We believe the amount of purchased intangible assets recorded as developed technology, customer relationships, trade names, customer order backlog, patents, in place lease and IPR&D, represent the fair value of and approximate the amount a market participant would pay for these intangible assets as of the acquisition date.

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Unaudited Pro Forma Information

The following unaudited pro forma financial information presents combined results of operations for each of the periods presented, as if LSI had been acquired as of the beginning of fiscal year 2013. The pro forma information excludes results of operations of LSI's Flash Business and Axxia Business and related transaction costs, and includes adjustments to amortization and depreciation for intangible assets and property, plant and equipment acquired, adjustments to share-based compensation expense, and interest expense for the additional indebtedness incurred to complete the acquisition. The pro forma results for the three fiscal quarters ended August 4, 2013 also include amortization of the purchase accounting effect on inventory acquired from LSI. The pro forma data are for informational purposes only and are not necessarily indicative of the consolidated results of operations of the combined business had the merger actually occurred at the beginning of fiscal year 2013 or of the results of future operations of the combined business. Consequently, actual results will differ from the unaudited pro forma information presented below (in millions, except for per share amounts):



	Fiscal Quarter Ended				Three Fiscal Quarters Ended
	August 3, 2014		August 4, 2013		August 3, 2014		August 4, 2013
Pro forma net revenue	$	1,269	$	1,165	$	3,687	$	3,299
Pro forma income (loss) from continuing operations	$	265	$	28	$	375	$	(254	)
Pro forma income (loss) per share from continuing operations - basic	$	1.05	$	0.11	$	1.49	$	(1.03	)
Pro forma income (loss) per share from continuing operations - diluted	$	0.99	$	0.11	$	1.39	$	(1.03	)

CyOptics

On June 28, 2013, we acquired CyOptics, a U.S.-based company that manufactures and sells Indium Phosphide, or InP, optical chip and component technologies for the data communications and telecommunications markets. CyOptics has front-end manufacturing operations in the U.S. and back-end manufacturing operations in Mexico. The aggregate consideration for the acquisition was approximately $377 million of which $373 million was paid in cash, net of $3 million in cash acquired. We have also recorded a $4 million liability representing additional deferred consideration to the previous shareholders of CyOptics. We expect to pay this amount in the fourth quarter of fiscal year 2014.

In addition, approximately $27 million was payable to key employees of CyOptics as part of a retention bonus plan, of which $17 million has been paid as of August 3, 2014. This amount was paid into escrow, will be paid to those employees over a three-year period subsequent to the acquisition date and is being recognized as compensation expense in operating results over the same period. For eligible CyOptics employees whose employment is involuntarily terminated by the Company, retention bonus payments are accelerated and due in full upon such termination in accordance with the provisions of the plan. During the three fiscal quarters ended August 3, 2014, we recorded compensation expense of $10 million due to the departure of certain plan participants. The amount of such compensation expense incurred during the fiscal quarter ended August 3, 2014 was immaterial.

Our allocation of the total purchase price, net of cash acquired, is as follows (in millions):



	Fair Value
Trade accounts receivable	$	51
Inventory	35
Other current assets	2
Property, plant and equipment	44
Goodwill	190
Intangible assets	141
Total assets acquired	463
Accounts payable	(25		)
Employee compensation and benefits	(5		)
Other current liabilities	(2		)
Long-term deferred tax liabilities (included in other long-term liabilities)	(54		)
Total liabilities assumed	(86		)
Fair value of net assets acquired	$	377

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There were no significant contingencies assumed as part of the acquisition. As of August 3, 2014, we had a $12 million indemnification receivable in other long-term assets for tax positions related to CyOptics' value-added tax and income taxes payable existing prior to the acquisition.

Intangible Assets

Identified intangible assets acquired consisted of the following:



	Fair Value (in millions)		Estimated Useful Lives (in years)
Purchased technology - base product	$	98	8
Purchased technology - packaging	3		5
Customer relationships	32		7
Other - customer backlog	4		1
Total identified finite-lived intangible assets	137
In-process research and development	4
Total identified intangible assets	$	141

Developed technology represents base product technology and packaging technology. We valued the base product technology that generates cash flows from sales of the existing products using the income approach, specifically the multi-period excess earnings method which calculates the value based on the risk-adjusted present value of the cash flows specific to the products, allowing for a reasonable return. The useful life of 8 years was determined based on the technology cycle related to the base product technology as well as the life of current legacy products.

Packaging technology was valued utilizing the relief-from-royalty method, a form of the income approach. The relief-from-royalty method estimates the cost savings that accrue to the owner of an intangible asset that would otherwise be payable as royalties or license fees on revenues earned through the use of the asset. The royalty rate was based on an analysis of empirical, market-derived royalty rates for intangible assets.

Customer relationships represent the fair value of future projected revenue that was expected to be derived from sales of products to existing customers of CyOptics. Customer relationships were valued using the with-and-without-method, a form of the income approach. In this method, fair value is measured by the lost profits associated with the period of time necessary to reacquire the customers. The method involves a comparison of the cash flows assuming the customer relationships were in place to cash flows that would be generated if customer relationships were newly created. There are additional considerations related to the build-in time for certain product lines and the qualification periods included in the valuation model. This method also assumes that all other assets, know-how and technology were easily available in both scenarios.

The fair value of IPR&D was determined using the multi-period excess earnings method, a form of the income approach. Under the income approach, the expected future cash flows from each project under development are estimated and discounted to their net present values at an appropriate risk-adjusted rate of return.

We believe the amount recorded as developed technology, IPR&D and customer relationships, represent the fair value of and approximate the amount a market participant would pay for these intangible assets as of the acquisition date.

Unaudited Pro Forma Information

The following table presents certain unaudited pro forma financial information for each of the fiscal years ended November 3, 2013 and October 28, 2012 as if CyOptics had been acquired as of the beginning of the fiscal year 2012. The unaudited estimated pro forma information combines the historical results of CyOptics with our consolidated historical results and includes fair value adjustments reflecting the estimated impact of amortization of intangible assets acquired and depreciation of acquired property, plant and equipment for the respective periods. The pro forma data are for informational purposes only and are not necessarily indicative of the consolidated results of operations of the combined business had the acquisition actually occurred at the beginning of our fiscal year 2012 or of the results of future operations of the combined business. Consequently, actual results will differ from the unaudited pro forma information presented below (in millions, except for per share amounts):

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	Fiscal Year Ended
	November 3, 2013		October 28, 2012
Pro forma net revenue	$	2,663	$	2,578
Pro forma net income	$	547	$	551
Pro forma net income per share-basic	$	2.21	$	2.25
Pro forma net income per share-diluted	$	2.17	$	2.20

Investments

In fiscal year 2013, we made a minority equity investment of $9 million in the common stock of a U.S. publicly-traded company, which we accounted for as a trading security. In the fiscal quarter ended May 4, 2014, we disposed our investment in this company. There was no significant impact on our unaudited condensed consolidated financial statements from the disposal of this investment.

As a result of the acquisition of LSI on May 6, 2014, we acquired a 51% equity interest in a joint venture, Silicon Manufacturing Partners Pte Ltd., or SMP, owned by us and GLOBALFOUNDRIES, a manufacturing foundry for integrated circuits. SMP operates an integrated circuit manufacturing facility in Singapore. We account for our ownership position in SMP under the equity method of accounting. As of August 3, 2014, the carrying amount of our equity interest was $22 million. The equity interest is reported in other long-term assets on the unaudited condensed consolidated balance sheet.

4. Goodwill and Intangible Assets

Goodwill

Goodwill activity for the first three quarters of fiscal year 2014 was as follows (in millions):



Balance as of November 3, 2013	$	391
LSI acquisition	1,158
Reclassification of goodwill related to Axxia assets held-for-sale	(91		)
Balance as of August 3, 2014	$	1,458

Intangible Assets

Intangible assets consist of the following (in millions):



	Gross Carrying Amount		Accumulated Amortization			Net Book Value
As of August 3, 2014:
Purchased technology	$	2,557	$	(603	)	$	1,954
Customer and distributor relationships	1,558		(245		)	1,313
Other ⁽¹⁾	278		(51		)	227
Intangible assets subject to amortization	4,393		(899		)	3,494
In-process research and development	126		—			126
Total	$	4,519	$	(899	)	$	3,620
⁽¹⁾ Represents the carrying value of trademarks, patents, customer order backlog and net in place lease.

As of November 3, 2013:
Purchased technology	$	843	$	(462	)	$	381
Customer and distributor relationships	289		(186		)	103
Other	8		(4		)	4
Intangible assets subject to amortization	1,140		(652		)	488
In-process research and development	4		—			4
Total	$	1,144	$	(652	)	$	492

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Amortization expense of purchased intangible assets is as follows (in millions):



	Fiscal Quarter Ended				Three Fiscal Quarters Ended
	August 3, 2014		August 4, 2013		August 3, 2014		August 4, 2013
Cost of products sold	$	105	$	14	$	141	$	42
Operating expenses	91		6		106		17
Total amortization of intangible assets	$	196	$	20	$	247	$	59

During the third quarter of fiscal year 2014, we recorded $3,253 million of intangible assets subject to amortization with a weighted-average amortization period of 9 years, in connection with the LSI acquisition.

Expected amortization expense for each of the next five fiscal years and thereafter is as follows (in millions):



Fiscal Year	Amount
2014 (remainder)	$	197
2015	660
2016	598
2017	533
2018	413
2019	352
Thereafter	741
	$	3,494

The weighted-average remaining amortization period for each intangible asset category at August 3, 2014 is as follows (in years):



Amortizable intangible assets:
Purchased technology	9
Customer and distributor relationships	8
Other	6

5. Pension, Retirement Plans and Post-Retirement Benefits

Plans Assumed in LSI Acquisition

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

We also maintain a non-qualified supplemental pension plan in the U.S. that principally provides benefits based on compensation in excess of amounts that can be considered under the management plan.

In addition, we provide post-retirement life insurance coverage under a group life insurance plan for certain U.S. employees. and maintain pension plans covering certain international employees.

U.S. Post-retirement Medical Benefit Plan

Effective January 1, 2014 we amended our U.S. post-retirement medical benefit plan. This plan was transferred to us from Agilent Technologies, Inc., or Agilent, as part of the Semiconductor Products Group, or SPG, acquisition on December 1, 2005. The amendment affected active, eligible employees and had no impact on existing retirees. As a result of the amendment, employees who were previously eligible for the medical benefit spending account of $40,000 upon retirement received a cash settlement based on age and years of service and have ceased to be eligible for post-retirement medical benefits under the program. During the first three quarters of fiscal year 2014, we paid an aggregate of $6 million in cash into these employees' 401(k) accounts. For employees who were previously eligible for the medical benefit spending account of $55,000 upon retirement, we extended the maximum age to use, as retirees, the spending account to pay premiums for medical coverage from

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65 to 75. Employees who were previously eligible for the traditional retiree medical plan upon retirement are no longer eligible to participate in such a plan and will, instead, only be eligible for the extended $55,000 retiree medical account program described above. As a result of the above plan amendment, a curtailment gain of $1 million and a settlement gain of $2 million were recorded in the unaudited condensed consolidated financial statements for the fiscal quarter ended February 2, 2014. As of August 3, 2014, there were $14 million of remaining liabilities under the U.S. post-retirement medical benefit plan.

Non-U.S. Defined Benefit Plan

During the fiscal quarter ended May 4, 2014, a plan amendment, effective March 1, 2014 was made to the defined benefit plan of a non-U.S. subsidiary. This amendment resulted in a cash settlement of $7 million being paid into the new defined contribution plan, of which $2 million was paid from the plan assets during the fiscal quarter ended May 4, 2014. The plan amendment eliminated the plan's $5 million benefit obligation. The settlement did not result in a significant gain or loss.

The following table summarizes the components of the net periodic benefit cost (credit) (in millions):



	Fiscal Quarter Ended
	August 3, 2014						August 4, 2013
	Pension Benefits			Post-retirement Benefits			Pension Benefits		Post-retirement Benefits
Service cost	$	—		$	—		$	1	$	—
Interest cost	16			1			—		—
Expected return on plan assets	(18		)	(1		)	—		—
Total benefit cost (credit)	$	(2	)	$	—		$	1	$	—



	Three Fiscal Quarters Ended
	August 3, 2014						August 4, 2013
	Pension Benefits			Post-retirement Benefits			Pension Benefits		Post-retirement Benefits
Service cost	$	2		$	—		$	2	$	—
Interest cost	16			1			1		1
Expected return on plan assets	(19		)	(1		)	—		—
Net actuarial loss and prior service cost amortization	1			—			1		—
Total benefit cost	$	—		$	—		$	4	$	1

During the fiscal quarter ended August 3, 2014, we contributed $13 million to our pension plans. We expect to contribute an additional $41 million to our pension plans during the remainder of fiscal year 2014. We do not expect to contribute to our post-retirement benefit plan in fiscal year 2014.

6. Borrowings

Senior Credit Facilities

2013 Revolving Credit Facility

Prior to May 6, 2014, we had an unsecured, revolving credit facility, or the 2013 revolving credit facility, in the amount of $575 million, which included borrowing capacity available for letters of credit. In connection with the completion of our acquisition of LSI, on May 6, 2014, we terminated the 2013 revolving credit facility and related credit agreement, referred to as the 2013 credit agreement. The remaining balance of debt issuance costs for the 2013 revolving credit facility is being amortized as a component of interest expense over the term of our new revolving credit facility, as discussed below.

Term Loans and Revolving Credit Facilities

On May 6, 2014, concurrent with the termination of the 2013 credit agreement, Avago Technologies Finance Pte. Ltd., or AT Finance, and certain other subsidiaries of the Company, referred to as the Borrowers, entered into a new credit agreement, referred to as the 2014 Credit Agreement, with a syndicate of financial institutions. The 2014 Credit Agreement provides for a term loan facility of $4.6 billion, all of which was drawn and used to fund our acquisition of LSI, and a revolving credit facility, referred to as the 2014 revolving credit facility, which permits certain of our subsidiaries to borrow loans from time to time in an aggregate principal amount of up to $500 million for general corporate purposes, swingline loans of up to $75 million and for the issuance of letters of credit of up to $100 million, which, in the case of swingline loans and letters of credit reduce the

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available borrowing capacity under the revolving credit facility on a dollar for dollar basis. The Borrowers’ obligations under the 2014 Credit Agreement are guaranteed by AT Finance and certain of its subsidiaries. The term loan has a term of 7 years and the revolving credit facility has a term of 5 years.

Loans under the 2014 Credit Agreement will bear interest at a rate per annum equal to, at our option:

(i) the greatest of (a) the rate of interest per annum publicly announced from time-to-time by Deutsche Bank AG New York Branch as its prime rate in effect at its principal office in New York City, (b) the Federal Funds Effective Rate (as defined in the 2014 Credit Agreement) in effect on the relevant day plus 1/2 of 1% per annum, (c) the Adjusted LIBO Rate (as defined in the 2014 Credit Agreement) on the relevant day for a deposit in dollars with a maturity of one month plus 1% per annum and (d), with respect to term loans, 1.75%; or

(ii) the interest rate per annum equal to the greater of (a) (x) the LIBO Rate for the Interest Period (as defined in the 2014 Credit Agreement) multiplied by (y) the Statutory Reserve Rate (as defined in the 2014 Credit Agreement) and (b) with respect to term loans, 0.75% per annum.

The 2014 Credit Agreement includes (i) financial covenants requiring AT Finance to, at any time the revolving credit facility is drawn by more than 30%, maintain a maximum first lien leverage ratio; (ii) customary restrictive covenants (subject, in each case, to certain exceptions and amounts) that limit AT Finance and its subsidiaries’ ability to, among other things, incur indebtedness, create liens, merge or consolidate with and into other persons, make acquisitions and sell assets; (iii) customary events of default, upon the occurrence of which, after any applicable grace period, the lenders will have the ability to accelerate all outstanding loans thereunder and terminate the commitments; and (iv) customary representations and warranties. In addition, AT Finance has the ability, at any time, to increase the aggregate term loans and revolving credit commitments under the 2014 Credit Agreement from $5.1 billion to $6.7 billion, subject to the condition that no default or event of default shall have occurred and be continuing and other terms and conditions set forth in the 2014 Credit Agreement, and the receipt of sufficient commitments for such increase from the lenders. The Borrowers have agreed to pay the lenders a commitment fee at a rate per annum that varies based on total leverage ratio. The Borrowers and certain other subsidiaries also entered into collateral and related agreements ancillary to the 2014 Credit Agreement.

The effective interest rate at August 3, 2014 for the term loans was 4.15%. As of August 3, 2014, $4.6 billion in term loans were outstanding. We had no borrowings outstanding under the revolving credit facility. At August 3, 2014, we were in compliance with the covenants described in the 2014 Credit Agreement.

Unamortized debt issuance costs associated with our term loans and revolving credit facilities were $119 million at August 3, 2014 and are included in other current assets and other long-term assets on the unaudited condensed consolidated balance sheets.

For the fiscal quarter and three fiscal quarters ended August 3, 2014, amortization of debt issuance costs related to the term loan and revolving credit facilities was $3 million and $1 million, respectively, and is reported as a component of interest expense in the unaudited condensed consolidated statements of operations.

Convertible Senior Notes

On May 6, 2014, we completed our private placement of $1 billion in aggregate principal amount of 2.0% Convertible Senior Notes due 2021, or the Notes, to investment funds affiliated with Silver Lake Partners, or SLP. All of the $1 billion in cash proceeds were used to fund the LSI acquisition. The Notes are the Company’s unsecured senior obligations. The Notes will mature on August 15, 2021, unless repurchased, redeemed or converted in accordance with their terms prior to such date. The Notes will pay interest semi-annually at a rate of 2.0% per year, payable in arrears on May 1 and November 1 of each year, beginning on November 1, 2014, and on the maturity date. Subject to any limitations set forth in the Indenture dated as of May 6, 2014 between the Company and U.S. Bank National Association relating to the Notes, or the Indenture, the Notes will be convertible at any time until the close of business on the scheduled trading day immediately preceding the maturity date. Upon conversion, the Notes may be settled in the Company's ordinary shares, cash or a combination of cash and ordinary shares, at the Company’s option. The Notes were convertible at an initial conversion rate of 20.8160 ordinary shares per $1,000 principal amount of the Notes, which is equivalent to an initial conversion price of approximately $48.04 per ordinary share, and is subject to adjustment under the terms of the Notes (including adjustments for quarterly cash dividends paid on the Company's ordinary shares to the extent they exceed $0.27 per share). Holders of the Notes will have the right to require the Company to repurchase all or some of their Notes at 100% of their principal amount, plus any accrued and unpaid interest, upon the occurrence of a fundamental change (as defined in the Indenture). In addition, upon the occurrence of a make-whole fundamental change (as defined in the Indenture), the Company may be required to increase the conversion rate for the Notes converted in connection with such a make-whole fundamental change. Prior to May 6, 2019, the Company may not redeem the Notes. Beginning May 6, 2019, the Company may, at its option, redeem the Notes, in whole or in part if the closing sale price (as defined in the Indenture) of the ordinary shares for 20 or more trading days (as defined in the Indenture) in the period of 30 consecutive trading days ending on the trading day immediately prior to the date on which the Company provides notice of such redemption exceeds 150% of the applicable conversion price in effect on each such trading day, at a redemption price

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equal to 100% of the principal amount of notes being redeemed, together with accrued and unpaid interest to, but not including, the redemption date (as defined in the Indenture).

As a result of a quarterly dividend paid in excess of $0.27 per share on our ordinary shares after the date of issuance of the Notes, as of August 3, 2014, the conversion rate was adjusted as required above to 20.8218 ordinary shares per $1,000 principal amount of the Notes, which is equivalent to a conversion price of approximately $48.03 per ordinary share.

In accordance with the authoritative accounting guidance, we classified $85 million, representing a portion of the proceeds from the Notes, as ordinary shares within shareholders' equity. The $915 million carrying value of the long-term debt as of May 6, 2014 was calculated as the present value of its contractual payment obligations using a discount rate of 3.32%. The difference between the principal amount of the Notes and the carrying value of the long-term debt, represents a debt discount on the issuance date. The debt discount is amortized as interest expense using the effective interest method through the contractual maturity date. During the fiscal quarter ended August 3, 2014, the interest expense related to the Notes' coupon interest rate of 2.0% and the amortization of the debt discount was $5 million and $3 million, respectively.

The carrying value of the components of the Notes as of August 3, 2014 is as follows (in millions):



	August 3, 2014
Principal balance	$	1,000
Less: unamortized debt discount (1)	82
Net carrying amount	$	918

(1) The unamortized debt discount will be amortized over a remaining period of 7 years.

At August 3, 2014, the outstanding principal amount of the Notes was $1 billion. The estimated fair value of the Notes as of August 3, 2014 was $899 million, which was determined based on inputs that are observable in the market under Level 2 of the fair value hierarchy. At August 3, 2014, we were in compliance with the covenants relating to the Notes.

At August 3, 2014, future principal payments for our outstanding $4.6 billion term loan and the Notes, including the current portion, are summarized as follows (in millions):



	August 3, 2014
Fiscal Year
2014 (remainder)	$	12
2015	46
2016	46
2017	46
2018	46
Thereafter	5,404
Total	$	5,600

7. Fair Value

Fair value is defined as the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three level hierarchy is applied to prioritize the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

The three levels of the fair value hierarchy under the guidance for fair value measurements are described below:

Level 1—Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Our Level 1 assets include but are not limited to cash equivalents, bank acceptances, trading securities investments and investment funds (i.e., deferred compensation plan assets). We measure trading securities investments and investment funds at quoted market prices as they are traded in an active market with sufficient volume and frequency of transactions.

Level 2—Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be

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observable for substantially the full term of the asset or liability. We consider our Notes as a Level 2 liability in the fair value hierarchy, as the estimated fair value is measured based on the market prices observable for similar instruments.

Level 3—Level 3 inputs are unobservable inputs for the asset or liability in which there is little, if any, market activity for the asset or liability at the measurement date. Level 3 assets and liabilities include cost method investments, goodwill, amortizable intangible assets, and property, plant and equipment, which are measured at fair value using a discounted cash flow approach when they are impaired. Quantitative information for Level 3 assets and liabilities reviewed at each reporting period includes indicators of significant deterioration in the earnings performance, credit rating, asset quality, business prospects of the investee, and financial indicators of the investee's ability to continue as a going concern.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The tables below set forth our financial assets and liabilities by level that were accounted for at fair value as of August 3, 2014 and November 3, 2013. The tables do not include cash on hand and also do not include assets that are measured at historical cost or any basis other than fair value (in millions).



	As of August 3, 2014
	Portion of Carrying Value Measured at Fair Value		Fair Value Measurement Using Quoted Prices In Active Market For Identical Assets (Level 1)		Fair Value Measurement Using Significant Other Inputs (Level 2)		Fair Value Measurement Using Unobservable Inputs (Level 3)
Assets (1):
Deferred compensation plan assets	$	23	$	23	$	—	$	—
Bank acceptances	1		1		—		—
Total assets measured at fair value	$	24	$	24	$	—	$	—
Liabilities (2):
Deferred compensation plan liabilities	$	22	$	—	$	22	$	—


(1)	Included in other current assets and other long-term assets on our unaudited condensed consolidated balance sheets.


(2)	Included in other current and long-term liabilities on our unaudited condensed consolidated balance sheets.



	As of November 3, 2013
	Portion of Carrying Value Measured at Fair Value		Fair Value Measurement Using Quoted Prices In Active Market For Identical Assets (Level 1)		Fair Value Measurement Using Significant Other Inputs (Level 2)		Fair Value Measurement Using Unobservable Inputs (Level 3)
Assets (1):
Trading securities	$	14	$	14	$	—	$	—
Deferred compensation plan assets	9		9		—		—
Bank acceptances	1		1		—		—
Total assets measured at fair value	$	24	$	24	$	—	$	—
Liabilities (2):
Deferred compensation plan liabilities	$	9	$	—	$	9	$	—

_________________________________


(1)	Included in other current assets on our unaudited condensed consolidated balance sheets.


(2)	Included in other current liabilities on unaudited our condensed consolidated balance sheets.

Our non-marketable equity securities are recorded at fair value only if an impairment charge is recognized. During the fiscal quarter ended August 3, 2014, certain non-marketable equity investments have been measured and recorded at fair value due to events or circumstances that significantly impacted the fair value of those investments, resulting in other-than-temporary impairment charges of $8 million. These charges were included in other income (expense), net, in the condensed consolidated statements of operations. As of August 3, 2014, the aggregate carrying value of our non-marketable equity securities was $40 million and was included in other long-term assets on the unaudited condensed consolidated balance sheet.

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8. Shareholders’ Equity

Share Repurchase Program

Under our 2013 share repurchase program, the Company repurchased 0.3 million shares for an aggregate purchase price of $12 million in cash at a weighted-average purchase price per share of $43.50 during the three fiscal quarters ended August 3, 2014. The 2013 share repurchase program expired on April 8, 2014. At the Company's 2014 annual general meeting of shareholders on April 9, 2014, shareholders approved the Company's 2014 share purchase mandate pursuant to which the Company is authorized, upon the approval of the Company's board of directors, or the Board, to repurchase up to approximately 25 million of its ordinary shares in open market transactions or pursuant to equal access schemes, up to the date on which the Company's 2015 annual general meeting of shareholders is held or required by law to be held. As of the date of this Quarterly Report on Form 10-Q, the Board had not approved any repurchases of the Company's ordinary shares pursuant to the 2014 share purchase mandate. No shares were repurchased during the fiscal quarter ended August 3, 2014.

Dividends

We paid cash dividends of $0.29 and $0.21 per ordinary share, or $73 million and $52 million in total, during the fiscal quarters ended August 3, 2014 and August 4, 2013, respectively. We paid aggregate cash dividends of $0.81 and $0.57 per ordinary share, or $203 million and $141 million in total, during the three fiscal quarters ended August 3, 2014 and August 4, 2013, respectively.

Share-Based Compensation Expense

The following table summarizes share-based compensation expense reported in continuing operations related to share-based awards granted to employees, directors, and non-employees for the fiscal quarter and three fiscal quarters ended August 3, 2014 and August 4, 2013 (in millions):



	Fiscal Quarter Ended				Three Fiscal Quarters Ended
	August 3, 2014		August 4, 2013		August 3, 2014		August 4, 2013
Cost of products sold	$	6	$	3	$	12	$	7
Research and development	20		8		38		22
Selling, general and administrative	24		9		54		26
Total share-based compensation expense	$	50	$	20	$	104	$	55

The fair values of our time-based options and ESPP rights were estimated using the Black-Scholes option pricing model. Certain share options granted in the fiscal quarter and three fiscal quarters ended August 3, 2014 and August 4, 2013 included both service and market (share price) conditions. The fair value of those market-based options was estimated using Monte Carlo simulation techniques.

In connection with the LSI acquisition, we assumed stock options and RSUs originally granted by LSI. Share-based compensation expense in the third quarter of 2014 included $11 million related to assumed LSI stock options and RSUs.

The weighted-average assumptions utilized for our time-based options, ESPP rights and share price performance options, also referred to as market-based options, granted during the fiscal quarter and three fiscal quarters ended August 3, 2014 and August 4, 2013, are shown in the table below. The lower end of the ranges presented for these assumptions in the Time-Based Options table below represent the risk-free interest rate and expected term of time-based stock options assumed in the LSI acquisition. There was no significant difference in the assumed dividend yield or volatility for these options.



	Time-Based Options
	Fiscal Quarter Ended				Three Fiscal Quarters Ended
	August 3, 2014		August 4, 2013		August 3, 2014		August 4, 2013
Risk-free interest rate	0.5% - 1.4%		1.4	%	0.5% - 1.3%		1.0	%
Dividend yield	1.6	%	2.2	%	1.7	%	2.0	%
Volatility	35.0	%	47.0	%	35.0	%	48.0	%
Expected term (in years)	1.9 - 4.3		5		1.9 - 4.3		5

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	ESPP Rights
	Fiscal Quarter Ended				Three Fiscal Quarters Ended
	August 3, 2014		August 4, 2013		August 3, 2014		August 4, 2013
Risk-free interest rate	0.1	%	0.1	%	0.1	%	0.1	%
Dividend yield	1.7	%	2.1	%	1.9	%	2.0	%
Volatility	31.0	%	46.0	%	33.0	%	46.0	%
Expected term (in years)	0.5		0.5		0.5		0.5



	Market-Based Options
	Fiscal Quarter Ended		Three Fiscal Quarters Ended
	August 3, 2014		August 3, 2014		August 4, 2013
Risk-free interest rate	2.2	%	2.3	%	1.4	%
Dividend yield	1.6	%	1.8	%	1.9	%
Volatility	45.0	%	45.0	%	50.0	%
Expected term (in years)	7		7		7

The dividend yields for the fiscal quarters and the three fiscal quarters ended August 3, 2014 and August 4, 2013 are based on the dividend yield as of the respective award grant dates. For the three fiscal quarters ended August 3, 2014, expected volatility for time-based and market-based options is based on our own historical share price volatility or combining historical volatility of guideline publicly-traded companies and our own historical share price volatility over the period commensurate with the expected life of the awards and the implied volatility from our own traded ordinary shares with a term of 180 days measured at a specific date. Prior to fiscal year 2014, expected volatility was based on the combination of historical volatility of guideline publicly-traded companies and our own historical share price volatility over the period commensurate with the expected life of the awards and the implied volatility from traded options in guideline publicly-traded companies and our own shares with a term of 720 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 the fiscal quarter and three fiscal quarters ended August 3, 2014, the expected term for time-based options was based on a weighted-average combining the average life of options that have already been exercised or cancelled with the expected life of all unexercised options. The expected life for unexercised options is calculated assuming that the options will be exercised at the midpoint of the vesting date (if unvested) or the valuation date (if vested) and the full contractual term. Our computations of expected term for time-based options prior to fiscal year 2014 were based on data, such as the data of peer companies and company-specific attributes, which we believe could affect employees’ exercise behavior.

The expected life of market-based share options valued using Monte Carlo simulation techniques is based upon the vesting dates forecasted by the simulation and then assuming that options which vest, and for which the market condition has been satisfied, are exercised at the midpoint between the forecasted vesting date and their expiration.

Based on the above assumptions, and not including options assumed as a result of the LSI acquisition, the weighted-average per share fair values of the time-based options granted under the Company's 2009 Equity Incentive Award Plan, or the 2009 Plan, for the fiscal quarters ended August 3, 2014 and August 4, 2013 were $18.97 and $13.02, respectively, and $17.16 and $12.76 for the three fiscal quarters ended August 3, 2014 and August 4, 2013, respectively. The weighted average fair value of time-based options assumed on May 6, 2014 from the LSI acquisition was $17.46 per share.

The weighted-average per share fair values of the market-based options granted under the Company's 2009 Plan for the fiscal quarter ended August 3, 2014 was $26.22. There were no market-based options granted in the fiscal quarter ended August 4, 2013. The weighted-average per share fair values of the market-based options granted in the three fiscal quarters ended August 3, 2014 and August 4, 2013 were $22.68 and $13.34, respectively.

The weighted-average per share fair values of the rights to purchase shares in the ESPP for the fiscal quarters ended August 3, 2014 and August 4, 2013 were $18.96 and $11.90, respectively, and $15.06 and $11.72 for the three fiscal quarters ended August 3, 2014 and August 4, 2013, respectively.

Excluding RSUs assumed in the LSI acquisition, the weighted-average per share fair values of RSUs granted in the fiscal quarters ended August 3, 2014 and August 4, 2013 were $68.40 and $36.35, respectively, and $64.00 and $35.47 for the three fiscal quarters ended August 3, 2014 and August 4, 2013, respectively. The weighted average per share fair value of RSUs assumed on May 6, 2014 from the LSI acquisition was $35.22.

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The total unrecognized compensation expense of time and market-based options granted but not yet vested as of August 3, 2014 was $273 million, which is expected to be recognized over the remaining weighted-average service period of 3 years.

The total grant date fair values of time and market-based options vested during the fiscal quarters ended August 3, 2014 and August 4, 2013 were $16 million and $13 million, respectively. The total grant-date fair values of options that vested during the three fiscal quarters ended August 3, 2014 and August 4, 2013 were $59 million and $39 million, respectively.

Total unrecognized compensation cost related to the ESPP rights as of August 3, 2014 was immaterial and is expected to be recognized over the remaining portion of the current offering period in our fourth fiscal quarter of 2014.

Total unrecognized compensation cost related to unvested RSUs as of August 3, 2014 was $171 million, which is expected to be recognized over the remaining weighted-average service period of 3 years. The total grant-date fair values of RSUs that vested during the fiscal quarters ended August 3, 2014 and August 4, 2013 were $3 million and $1 million, respectively. The total grant-date fair values of RSUs that vested during the three fiscal quarters ended August 3, 2014 and August 4, 2013 were $16 million and $2 million, respectively.

Equity Incentive Award Plans

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



	Option Awards Outstanding
	Number Outstanding		Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value
Balance as of November 3, 2013	22		$	29.81
Assumed in LSI acquisition	1		$	40.26
Granted	12		$	65.01
Exercised	(3	)	$	25.44
Cancelled	(1	)	$	41.94
Balance as of August 3, 2014	31		$	44.08	5.66	$	836
Fully vested as of August 3, 2014	9		$	24.42	4.63	394
Fully vested and expected to vest as of
August 3, 2014	29		$	43.22	5.62	808

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



	RSU Awards Outstanding
	Number Outstanding			Weighted- Average Grant Date Fair Market Value		Weighted- Average Remaining Contractual Life (in years)
Balance as of November 3, 2013	2			$	34.38
Assumed in LSI acquisition	3			$	35.22
Granted	1			$	63.89
Vested	(1	)		$	31.00
Forfeited	—		*	$	20.23
Balance as of August 3, 2014	5			$	44.19	2.88

* Actual RSU forfeitures for the three fiscal quarters ended August 3, 2014 were 0.4 million shares.

As of November 3, 2013, there were 10 million shares available for grant under the 2009 Plan. Pursuant to the terms of the 2009 Plan, an additional 6 million shares were approved for issuance on the first day of fiscal year 2014. In connection with the LSI acquisition, we assumed the LSI Corporation 2003 Equity Incentive Plan, or the LSI Plan. As of May 6, 2014, there were 8 million shares available for grant under the LSI Plan. As of August 3, 2014, there were 9 million shares that remained available for grant under the two combined plans.

A total of 4 million shares of Avago ordinary shares were reserved for future issuance under the assumed LSI Plan upon exercise of options and RSUs assumed in the LSI acquisition. Those options and RSUs are included in the preceding tables. The options vest over four years from the original issuance date and have seven year terms. The RSUs vest over four years from the original issuance date.

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The total intrinsic values of options exercised during the fiscal quarters ended August 3, 2014 and August 4, 2013 were $52 million and $35 million, respectively. The total intrinsic values of options exercised during the three fiscal quarters ended August 3, 2014 and August 4, 2013 were $121 million and $78 million, respectively.

The following table summarizes the ranges of outstanding and exercisable option awards as of August 3, 2014 (in millions, except years and per share amounts):



	Option Awards Outstanding				Option Awards Exercisable
Exercise Prices	Number Outstanding	Weighted- Average Remaining Contractual Life (in years)	Weighted-Average Exercise Price Per Share		Number Exercisable	Weighted-Average Exercise Price Per Share
$1.25-$20.00	3	4.27	$	11.46	3	$	11.69
$20.01-$30.00	2	5.90	$	21.03	2	$	20.87
$30.01-$40.00	14	5.07	$	35.53	4	$	34.31
$40.01-$60.00	2	6.20	$	50.27	—	$	43.29
$60.01-$70.00	5	6.59	$	62.14	—	$	—
$70.01-$74.49	5	6.85	$	71.89	—	$	74.49
Total	31	5.66	$	44.08	9	$	24.42

Employee Share Purchase Plan

No shares were issued under the ESPP during the fiscal quarters ended August 3, 2014 or August 4, 2013. A total of 0.1 million shares were issued under the ESPP during both the three fiscal quarters ended August 3, 2014 and August 4, 2013. At August 3, 2014, 9.2 million shares remained available for issuance under the ESPP.

9. Income Taxes

For the fiscal quarter and three fiscal quarters ended August 3, 2014, we recorded an income tax benefit of $99 million and $93 million, respectively, compared to an income tax provision of $2 million and $8 million for the fiscal quarter and three fiscal quarters ended August 4, 2013, respectively. The income tax benefit of $99 million and $93 million for the fiscal quarter and three fiscal quarters ended August 3, 2014 is largely due to the reversal of net deferred tax liabilities resulting from the amortization of acquired intangible assets and the recognition of previously unrecognized tax benefits as a result of lapses in statutes of limitations.

In connection with our acquisition of LSI during the quarter, net deferred tax liabilities were established on the acquired identifiable intangible assets and on the excess of financial reporting over the tax basis of acquired investments in certain foreign subsidiaries that have not been indefinitely reinvested. Upon finalization of our combined company legal structure, additional adjustments to our net deferred taxes may be required.

The income tax expense for the three fiscal quarters ended August 4, 2013 included a benefit of $2 million from the recognition of previously unrecognized tax benefits as a result of the expiration of the statute of limitations for certain audit periods, and $3 million from the enactment of the American Taxpayer Relief Act of 2012, which was signed into law on January 2, 2013, retroactively extending the U.S. Federal Research and Development tax credit from January 1, 2012 to December 31, 2013.

Pursuant to the authoritative accounting guidance, during the fiscal quarter ended February 2, 2014, we recorded a deferred charge of $32 million for the deferral of income tax expense on certain intercompany asset transactions, with $4 million included in other current assets and $28 million included in other long-term assets on our condensed consolidated balance sheets. The deferred charge will be amortized on a straight-line basis and will be included as a component of income tax expense over the life of the underlying assets, which has been estimated to be seven years.

Our estimated annual effective tax rate does not reflect the tax effects of future internal restructuring and reorganizations. Subsequent restructuring may materially affect our tax expense for the full year fiscal 2014.

Unrecognized Tax Benefits

During the three fiscal quarters ended August 3, 2014, gross unrecognized tax benefits increased by $321 million, net of $11 million of decreases from lapses of statues of limitations. The balance of gross unrecognized tax benefits was $358 million as of August 3, 2014. The increase in the gross unrecognized tax benefits is primarily a result of our acquisition of LSI. Uncertain tax positions assumed in connection with our acquisitions are initially estimated as of the acquisition date. We continue to reevaluate these items with any adjustments to our preliminary estimates being recorded to goodwill provided that we are within the measurement period and we continue to collect information in order to determine their estimated values.

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We recognize interest and penalties related to unrecognized tax benefits in the provision for (benefit from) income taxes on the unaudited condensed consolidated statements of operations. We recognized approximately $1 million of expense related to interest and penalties for the fiscal quarter and three fiscal quarters ended August 3, 2014. Accrued interest and penalties are included in other long-term liabilities on the condensed consolidated balance sheets. As of August 3, 2014 and November 3, 2013, the combined amount of cumulative accrued interest and penalties was approximately $22 million and $4 million, respectively. The increase in cumulative accrued interest and penalties is primarily a result of our acquisition of LSI.

A portion of our unrecognized tax benefits will affect our effective tax rate if they are recognized upon favorable resolution of the uncertain tax positions. As of August 3, 2014 and November 3, 2013, approximately $366 million and $35 million, respectively, of the unrecognized tax benefits including accrued interest and penalties would affect our effective tax rate. During the three fiscal quarters ended August 3, 2014, we recognized $11 million of previously unrecognized tax benefits as a result of the expiration of the statute of limitations for certain audit periods.

We are subject to Singapore income tax examinations for the years ended November 1, 2009 and later, and in major jurisdictions outside Singapore for the years ended October 31, 2008 and later. However, we are not under Singapore income tax examination at this time. We believe it is possible that we may recognize up to $13 million of our existing unrecognized tax benefits within the next 12 months as a result of lapses of the statute of limitations for certain audit periods.

10. Segment Information

ASC 280 “Segment Reporting,” or ASC 280, establishes standards for the way public business enterprises report information about operating segments in annual consolidated financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. ASC 280 also establishes standards for related disclosures about products and services, geographic areas and major customers. The Chief Executive Officer has been identified as the Chief Operating Decision Maker, as defined by ASC 280.

Through the third quarter of our fiscal year 2014, we have presented our results in one reportable segment. We completed the LSI acquisition in the third quarter of fiscal 2014 and are in the process of fully integrating LSI into our existing organization structure and business model and will review the impact, if any, on segment reporting under the guidance of ASC 280.

11. Related Party Transactions

During the fiscal quarter and the three fiscal quarters ended August 3, 2014 and August 4, 2013, in the ordinary course of business, the Company borrowed from, purchased from, or sold to, certain entities for which one of the Company's directors also serves or served as a director or executive officer of that entity, including Silver Lake Partners, KLA-Tencor Corporation, Qlogic Corporation, Kulicke & Soffa Industries, Inc., eSilicon Corporation and Wistron Corporation.

2% Convertible Senior Notes due 2021

On December 15, 2013, in connection with our agreement to acquire LSI, the Company entered into a Note Purchase Agreement with Silver Lake Partners IV, L.P, or SLP IV, as the Purchaser, and Deutsche Bank, A.G., Singapore Branch, as Lead Manager, referred to as the Note Purchase Agreement, in connection with the private placement of the Notes. SLP IV is an investment fund affiliated with Silver Lake Partners, of which Kenneth Hao, one of our directors, is a Managing Director. We completed the private placement of the Notes on May 6, 2014, in connection with the completion of the acquisition of LSI.

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Silicon Manufacturing Partners Pte. Ltd.

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

The following tables provide information regarding the aggregate amounts involved in the transactions with these parties for the indicated periods (for the portion of such period that they were considered related) (in millions):



	Fiscal Quarter Ended					Three Fiscal Quarters Ended
	August 3, 2014		August 4, 2013			August 3, 2014		August 4, 2013
Total net revenue (1) (2)	$	3	$	5		$	3	$	21
Total costs and expenses including inventory purchases (2) (3)	$	21	$	—	*	$	21	$	2



	August 3, 2014		November 3, 2013
Total receivables	$	2	$	—	*
Total payables (3)	$	4	$	—	*
Carrying value of the Notes and accrued interest	$	923	$	—

_________________________________

* Represents amounts less than $0.5 million.

(1) Amounts include net revenue for related party transactions with Wistron Corporation through the fiscal quarter ended August 4, 2013. Wistron Corporation ceased to be a related party after the fiscal quarter ended August 4, 2013.

(2) Amounts include net revenue, cost and expenses for related party transactions with eSilicon Corporation through the fiscal quarter ended May 5, 2013. eSilicon Corporation ceased to be a related party subsequent to the fiscal quarter ended May 5, 2013.

(3) The Company purchased $16 million of inventory from SMP for the fiscal quarter ended August 3, 2014. As of August 3, 2014, the amount payable to SMP was $4 million.

12. Commitments and Contingencies

Commitments

The following table sets forth our contractual obligations and commitments as of August 3, 2014 (in millions):



	Total		2014 (remainder)		2015			2016			2017			2018			2019			Thereafter
Debt Principal, Interest and Fees	$	6,942	$	86	$	243		$	242		$	238		$	237		$	234		$	5,662
Purchase Commitments	$	624	$	526	$	79		$	12		$	7		$	—		$	—		$	—
Other Contractual Commitments	$	180	$	12	$	48		$	40		$	32		$	31		$	17		$	—
Operating Lease Obligations	$	142	$	8	$	25		$	17		$	14		$	12		$	10		$	56
Pension Plan Contributions	$	41	$	41	$	—	*	$	—	*	$	—	*	$	—	*	$	—	*	$	—	*

_________________________________

* We have pension plans covering certain U.S. and international employees. Although additional future contributions will be required, the amount and timing of these contributions will be affected by actuarial assumptions, the actual rate of return on plan assets, the level of market interest rates, legislation changes and the amount of voluntary contributions to the plans. The amount shown in the table represents our planned contributions to our pension plans within a year. Because any contributions for 2015 and later will depend on the value of the plan assets in the future and thus are uncertain, we have not included any amounts for 2015 and beyond in the above table.

Debt Principal, Interest and Fees. Represents principal, interest and commitment fees payable on borrowings and credit facilities under the 2014 Credit Agreement and principal and interest payable on the Notes.

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

We also make purchases from a variety of vendors in connection with the expansion of our Fort Collins internal fabrication facility. These purchases are typically conducted on a purchase order basis and the purchase commitments amount shown in the table above includes $114 million in cancelable and non-cancelable outstanding purchase obligations under such purchase orders as of August 3, 2014.

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

Other Contractual Commitments. Represents amounts payable pursuant to agreements related to outsourced IT, human resources, financial infrastructure outsourcing services and other services agreements.

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

Pension Plan Contributions. Represents our planned minimum contributions to pension plans assumed by us in connection with the LSI acquisition.

Standby Letters of Credit

As of August 3, 2014, we had outstanding obligations relating to standby letters of credit of $6 million. Standby letters of credit are financial guarantees provided by third parties for leases, customs, taxes and certain self-insured risks. If the guarantees are called, we must reimburse the provider of the guarantees. The fair values of the letters of credit approximate the contract amounts. The standby letters of credit generally renew annually.

Contingencies

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

Lawsuits Relating to the Acquisition of PLX Technology Inc.

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

Also in June and July 2014, five lawsuits were filed in the Delaware Court of Chancery. On July 21, 2014, the court consolidated these Delaware actions under the caption In re PLX Technology, Inc. Stockholders Litigation, Consol. C.A. 9880-VCL (Del. Ch.), appointed lead plaintiffs and lead counsel, and designated an operative complaint for the consolidated action. The operative complaint alleges, among other things, that PLX’s directors breached their fiduciary duties to PLX’s stockholders by seeking to sell PLX for an inadequate price, pursuant to an unfair process, and by agreeing to preclusive deal protections in the merger agreement. Plaintiffs also allege that PLX, Potomac Capital Partners II, L.P., Avago Technologies Wireless (U.S.A.) Manufacturing, Inc. and the acquisition subsidiary aided and abetted the alleged fiduciary breaches. Plaintiffs also allege that PLX’s 14D-9 recommendation statement contains false and misleading statements and/or omits material information necessary to inform the shareholder vote. The complaint seeks, among other things, equitable relief to enjoin and/or rescind the consummation of the acquisition, and attorneys’ fees and costs.

On July 31, 2014, counsel for lead plaintiffs in Delaware informed the court that they would not seek a preliminary injunction, but intend to seek damages and pursue monetary remedies through post-closing litigation. Our acquisition of PLX closed on August 12, 2014. The Delaware class litigation is on-going.

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Lawsuits Relating to the Acquisition of LSI

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

On March 7, 2014, the parties to the Delaware Action reached an agreement in principle to settle the Delaware Action on a class wide basis, and negotiated a stipulation of settlement that was presented to the Delaware Court of Chancery on March 10, 2014. On March 12, 2014, the parties to the California Actions entered into a stipulation staying the California Actions pending resolution of the Delaware Action. On May 16, 2014, the plaintiffs in the Delaware Action filed a motion for final approval of the proposed settlement and award of attorneys’ fees and expenses with the Delaware Court of Chancery. On June 10, 2014, the Delaware court approved the settlement, including the payment of $2 million to counsel for the stockholders, entered final judgment and dismissed the case (the “Order and Final Judgment”). On July 10, 2014, a class member of the Delaware Action filed a notice of appeal from the Order and Final Judgment. We and our Board believe the appeal and underlying claims are entirely without merit and, in the event the settlement is not approved, we intend to vigorously defend these actions.

Other Matters

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

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

During the periods presented we have not recorded any accrual for loss contingencies associated with any legal proceedings, nor determined that an unfavorable outcome is probable or reasonably possible. As a result, no amounts have been accrued or disclosed in the accompanying unaudited condensed consolidated financial statements with respect to these legal proceedings, as potential losses for such matters are not considered probable and ranges of losses are not reasonably estimable. However, because such matters are subject to many uncertainties, the ultimate outcomes are not predictable and there can be no assurances that the actual amounts required to satisfy any liabilities arising from the matters described above will not have a material adverse effect on our results of operations, financial position or cash flows.

Warranty

Except for changes disclosed in the warranty section of Note 1. "Overview Basis of Presentation and Significant Accounting Practices" there were no material changes to our warranty accrual during the fiscal quarter or the three fiscal quarters ended August 3, 2014.

Indemnifications to Hewlett-Packard and Agilent

Agilent gave 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. We are the successor to the SPG business of Agilent, which we acquired on December 1, 2005 in the SPG Acquisition. As the successor to the SPG business of Agilent, we have acquired responsibility for indemnifications related to assigned intellectual property agreements. Additionally, when we completed the SPG Acquisition we provided indemnities to Agilent with regard to Agilent’s conduct of the SPG business prior to the SPG Acquisition. In our opinion, the fair value of these indemnifications is not material and no amount has been accrued in the accompanying condensed consolidated financial statements with respect to these indemnification obligations.

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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.

13. Restructuring Charges

LSI Integration-Related Restructuring Plan

In April 2014, we began the implementation of planned cost reduction and restructuring activities in connection with the acquisition of LSI. As part of this plan, we expect to eliminate approximately 1,100 positions from the combined workforce across all business and functional areas on a global basis. We recognized approximately $82 million and $10 million of employee termination costs related to this cost reduction plan in operating expenses and cost of products sold, respectively, for the fiscal quarter ended August 3, 2014 and $88 million and $10 million of employee termination costs in operating expenses and cost of products sold, respectively, for the three fiscal quarters ended August 3, 2014. In addition, we recognized lease exit costs of $4 million in operating expenses and $1 million in cost of products sold for the fiscal quarter and the three fiscal quarters ended August 3, 2014, respectively.

Fabrication Facility Closure in Italy

In January 2014, we committed to a restructuring plan to close a fabrication facility as a result of the integration of the CyOptics business. The plan was substantially completed in the fiscal quarter ended August 3, 2014. We recorded $8 million and $5 million in operating expenses and costs of products sold, respectively, for the three fiscal quarters ended August 3, 2014, related to employment termination costs. In addition, we recognized $1 million and $2 million in operating expenses for the fiscal quarter and three fiscal quarters ended August 3, 2014, respectively, related to lease exit costs and asset impairment charges.

Other Restructuring Expenses

We also incurred restructuring charges of $5 million in operating expenses primarily as a result of rationalizing research and development programs and continued alignment of our global manufacturing operations for the first three quarters of fiscal year 2014.

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The following table summarizes items included in restructuring expenses (in millions):



	Fiscal Quarter Ended				Three Fiscal Quarters Ended
	August 3, 2014		August 4, 2013		August 3, 2014		August 4, 2013
Leases and other exit costs	$	6	$	—	$	9	$	—
Employee termination costs	92		1		114		3
Total restructuring charges	$	98	$	1	$	123	$	3

In connection with the sale of the Flash and the Axxia Businesses, we recorded $8 million of employee termination costs, which are included in the loss from discontinued operations in the condensed consolidated statements of operations.

The following table summarizes the significant activities within, and components of, the restructuring charges during the first three quarters of fiscal year 2014 (in millions):



	Employee Termination Costs			Leases and Other Exit Costs			Total
Balance as of November 3, 2013	$	—		$	—		$	—
Liabilities assumed in LSI acquisition	5			4			9
Expense (a)	122			9			131
Utilization (a)	(99		)	(6		)	(105		)
Balance as of August 3, 2014 (b)	$	28		$	7		$	35

(a) Includes $2 million of non-cash items.

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

14. Accumulated Other Comprehensive Loss

The change in accumulated other comprehensive loss by component and related tax effects is as follows (in millions):



	Prior Service Credits (Cost)			Actuarial Gains (Losses)			Total
Balance as of November 3, 2013	$	(1	)	$	(5	)	$	(6	)
Other comprehensive income before reclassifications	1			—			1
Amounts reclassified out of accumulated other comprehensive loss	(1		)	(2		)	(3		)
Tax effects	—			1			1
Other comprehensive loss	—			(1		)	(1		)
Balance as of August 3, 2014	$	(1	)	$	(6	)	$	(7	)

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The amounts reclassified out of accumulated other comprehensive loss into the unaudited condensed consolidated statements of operations, together with the corresponding classification, during each period were as follows (in millions):



	Fiscal Quarter Ended					Three Fiscal Quarters Ended
Comprehensive Income Components	August 3, 2014			August 4, 2013		August 3, 2014			August 4, 2013		Classified to:
Post-retirement benefit amendment, curtailment and settlement gain, net	$	—		$	—	$	1		$	—	Cost of products sold
Post-retirement benefit amendment, curtailment and settlement gain, net	—			—		1			—		Research and development
Post-retirement benefit amendment, curtailment and settlement gain, net	—			—		1			—		Selling, general and administrative
Total post-retirement benefit amendment, curtailment and settlement gain, net	—			—		3			—
Amortization of actuarial loss on pension benefit plan	(1		)	—		(1		)	—		Selling, general and administrative
Amortization of actuarial gain on post-retirement benefit plan	1			—		1			—		Research and development
Total pension and post-retirement benefits, net	—			—		—			—
Total amounts reclassified out of accumulated other comprehensive loss	$	—		$	—	$	3		$	—

15. Discontinued Operations

Sale of the Flash and Axxia Businesses

On May 29, 2014, we entered into an agreement to sell the Flash Business to Seagate for $450 million in cash. The transaction closed on September 2, 2014.

On August 13, 2014, we entered into an agreement to sell the Axxia Business to Intel for $650 million in cash. The transaction is expected to close in the fourth quarter of fiscal year 2014.

As part of these transactions, we will provide transitional services to Seagate and Intel for a period of up to six months. The purpose of these services is to provide short-term assistance to the buyers in assuming the operations of the purchased businesses.

The following table summarizes the results of operations of the Flash and Axxia Businesses included in discontinued operations in our unaudited condensed consolidated statements of operations for the fiscal quarter ended August 3, 2014 (in millions):



	For the period from May 6, 2014 to August 3, 2014
Net revenue	$	104
Loss from discontinued operations, net of income taxes	$	(44	)

Assets classified as held for sale as of August 3, 2014 related to discontinued operations were as follows (in millions):



	August 3, 2014
Inventory	$	15
Property, plant and equipment, net	18
Goodwill	91
Intangible assets, net	475
Total Axxia Business	599
Flash Business	430
Total assets held for sale of discontinued operations	$	1,029