Edgar Filing: Avago Technologies LTD

AVGO-05.04.2014-10Q

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 May 4, 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 May 30, 2014 there were 251,717,174 shares of our ordinary shares, no par value per share, outstanding.

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AVAGO TECHNOLOGIES LIMITED

Quarterly Report on Form 10-Q

For the Quarterly Period Ended May 4, 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	25
Item 3. Quantitative and Qualitative Disclosures About Market Risk	37
Item 4. Controls and Procedures	38
PART II. OTHER INFORMATION	39
Item 1. Legal Proceedings	39
Item 1A. Risk Factors	39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	62
Item 3. Defaults Upon Senior Securities	62
Item 4. Mine Safety Disclosures	62
Item 5. Other Information	62
Item 6. Exhibits	63
SIGNATURES	65

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PART I — FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements — Unaudited

AVAGO TECHNOLOGIES LIMITED

CONDENSED CONSOLIDATED BALANCE SHEETS — UNAUDITED

(in millions, except share amounts)



	May 4, 2014			November 3, 2013 (1)
ASSETS
Current assets:
Cash and cash equivalents	$	1,278		$	985
Trade accounts receivable, net	319			418
Inventory	301			285
Other current assets	136			130
Total current assets	2,034			1,818
Property, plant and equipment, net	731			661
Goodwill	392			391
Intangible assets, net	441			492
Other long-term assets	73			53
Total assets	$	3,671		$	3,415
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	274		$	278
Employee compensation and benefits	86			98
Other current liabilities	56			47
Total current liabilities	416			423
Long-term liabilities:
Other long-term liabilities	101			106
Total liabilities	517			529
Commitments and contingencies (Note 12)
Shareholders’ equity:
Ordinary shares, no par value; 251,328,239 shares and 249,100,178 shares issued and outstanding on May 4, 2014 and November 3, 2013, respectively	1,694			1,587
Retained earnings	1,467			1,305
Accumulated other comprehensive loss	(7		)	(6		)
Total shareholders’ equity	3,154			2,886
Total liabilities and shareholders’ equity	$	3,671		$	3,415

__________________________________

(1) Amounts as of November 3, 2013 have been derived from audited consolidated financial statements as of that date.

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						Two Fiscal Quarters Ended
	May 4, 2014			May 5, 2013			May 4, 2014			May 5, 2013
Net revenue	$	701		$	562		$	1,410		$	1,138
Cost of products sold:
Cost of products sold	326			276			673			562
Amortization of intangible assets	18			14			36			28
Restructuring charges	—			—			5			—
Total cost of products sold	344			290			714			590
Gross margin	357			272			696			548
Research and development	114			95			221			188
Selling, general and administrative	67			52			141			105
Amortization of intangible assets	8			6			15			11
Restructuring charges	8			1			20			2
Total operating expenses	197			154			397			306
Income from operations	160			118			299			242
Interest expense	(1		)	(1		)	(1		)	(1		)
Other income, net	—			1			—			3
Income before income taxes	159			118			298			244
Provision for income taxes	1			5			6			6
Net income	$	158		$	113		$	292		$	238

Net income per share:
Basic	$	0.63		$	0.46		$	1.17		$	0.97
Diluted	$	0.61		$	0.45		$	1.14		$	0.95

Weighted average shares:
Basic	251			246			250			246
Diluted	258			251			256			251

Cash dividends declared and paid per share	$	0.27		$	0.19		$	0.52		$	0.36

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

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AVAGO TECHNOLOGIES LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME — UNAUDITED

(in millions)



	Fiscal Quarter Ended				Two Fiscal Quarters Ended
	May 4, 2014		May 5, 2013		May 4, 2014			May 5, 2013
Net income	$	158	$	113	$	292		$	238
Other comprehensive income (loss), net of tax:
Unrealized gains of 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 unrealized gain on available-for-sale investments	—		2		—			2
Other comprehensive income (loss)	—		2		(1		)	4
Total comprehensive income	$	158	$	115	$	291		$	242

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

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AVAGO TECHNOLOGIES LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED

(in millions)



	Two Fiscal Quarters Ended
	May 4, 2014			May 5, 2013 (1)
Cash flows from operating activities:
Net income	$	292		$	238
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	118			83
Share-based compensation	54			35
Loss on disposal of property, plant and equipment	—			1
Tax benefits from share-based compensation	12			—
Excess tax benefits from share-based compensation	(11		)	—
Gain from post-retirement medical plan curtailment and settlement	(3		)	—
Unrealized gain on trading securities	—			(1		)
Changes in assets and liabilities, net of acquisitions:
Trade accounts receivable, net	99			70
Inventory	(16		)	(34		)
Accounts payable	(16		)	2
Employee compensation and benefits	(12		)	(2		)
Other current assets and current liabilities	(13		)	(21		)
Other long-term assets and long-term liabilities	(24		)	2
Net cash provided by operating activities	480			373
Cash flows from investing activities:
Purchases of property, plant and equipment	(125		)	(114		)
Proceeds from the sale of investment	14			—
Purchases of investments	—			(9		)
Acquisition, net of cash acquired	—			(37		)
Net cash used in investing activities	(111		)	(160		)
Cash flows from financing activities:
Proceeds from government grants	2			8
Payments on capital lease obligations	—			(1		)
Issuance of ordinary shares, net of issuance costs	53			28
Repurchases of ordinary shares	(12		)	(24		)
Excess tax benefits from share-based compensation	11			—
Dividend payments to shareholders	(130		)	(89		)
Net cash used in financing activities	(76		)	(78		)
Net increase in cash and cash equivalents	293			135
Cash and cash equivalents at the beginning of period	985			1,084
Cash and cash equivalents at end of period	$	1,278		$	1,219

_____________________________

(1) The statement of cash flows data for the two quarters ended May 5, 2013 reflects a reclassification of $3 million of government grant reimbursements related to fixed assets from cash flows provided by operating activities to cash flows used in financing activities. As a result, net cash provided by operating activities and net cash used in financing activities for this period each decreased by a corresponding amount.

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 semiconductor devices with a focus on III-V based products. Through the fiscal quarter ended May 4, 2014, we offered products in three primary target markets: wireless communications, wired infrastructure and industrial & other. Applications for our products in these target markets include cellular phones, consumer appliances, data networking and telecommunications equipment, enterprise storage and servers, factory automation and display. 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

Fiscal Periods. 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, the third quarter will end on August 3, 2014 and the fourth quarter will end on November 2, 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.

Information. The unaudited condensed consolidated financial statements include the accounts of Avago Technologies Limited and all of its wholly-owned subsidiaries, and are prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. Intercompany transactions and balances have been eliminated in consolidation.

During fiscal year 2013, we completed our acquisition of CyOptics, Inc., or CyOptics. The unaudited condensed consolidated financial statements include the results of operations of CyOptics commencing as of the closing date of the acquisition. (See Note 3. "Acquisitions and Investment")

Interim information presented in the unaudited condensed consolidated financial statements has been prepared by management and, in the opinion of management, includes all adjustments of a normal recurring nature that are necessary for the fair statement of the financial position, results of operations, comprehensive income and cash flows for the periods shown, and is in accordance with GAAP. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the fiscal year ended November 3, 2013, or fiscal year 2013, included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or the SEC, on December 20, 2013.

The operating results for the fiscal quarter and two fiscal quarters ended May 4, 2014 are not necessarily indicative of the results that may be expected for fiscal year 2014, or for any other future period. The balance sheet data as of November 3, 2013 presented are derived from the audited consolidated financial statements as of that date.

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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and such differences could affect the results of operations reported in future periods.

Concentrations of credit risk and significant customers. Our cash, cash equivalents and accounts receivable are potentially subject to concentration of credit risk. Cash and cash equivalents may be redeemable upon demand and are maintained with several financial institutions that management believes are of high credit quality and therefore bear minimal credit risk. We seek to mitigate our credit risks by spreading such risks across multiple counterparties and monitoring the risk profile of these counterparties. Our accounts receivable are derived from revenue earned from customers located in the U.S. and internationally. We mitigate collection risks from our customers by performing regular credit evaluations of our customers' financial conditions, 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 19% and 10%, respectively, of our net accounts receivable balance at May 4, 2014. One direct customer accounted for 26% of our net accounts receivable balance at November 3, 2013. For the fiscal quarter ended May 4, 2014, two direct customers represented 14% and 13% of our net revenue, respectively. For the fiscal quarter ended May 5, 2013, two direct customers represented 16% and 10% of our net revenue, respectively. For the two fiscal quarters ended May 4, 2014, two direct customers represented 20% and 10% of our net revenue, respectively. For the two fiscal quarters ended May 5, 2013, one direct customer represented 18% of our net revenue.

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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. Warranty costs were not material for either of the fiscal quarter or the two quarters ended May 4, 2014 or May 5, 2013.

Net income per share. Basic net income per share is computed using the weighted-average number of ordinary shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of ordinary shares and potentially dilutive share equivalents outstanding during the period. Diluted shares outstanding includes the dilutive effect of in-the-money options (including market-based share options), restricted share units, or RSUs, and employee share purchase rights under the Avago Technologies Limited Employee Share Purchase Plan, or ESPP. The dilutive effect of such 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.

Diluted net income per share for the fiscal quarter and two fiscal quarters ended May 4, 2014 and the fiscal quarter and two fiscal quarters ended May 5, 2013 excluded the potentially dilutive effect of weighted-average outstanding equity awards (options, RSUs and ESPP rights) to acquire 1 million, 0 million, 2 million and 2 million ordinary shares, respectively, as their effect was antidilutive.

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



	Fiscal Quarter Ended				Two Fiscal Quarters Ended
	May 4, 2014		May 5, 2013		May 4, 2014		May 5, 2013
Net income (Numerator):
Net income	$	158	$	113	$	292	$	238
Shares (Denominator):
Basic weighted-average ordinary shares outstanding	251		246		250		246
Add incremental shares for:
Dilutive effect of share options, RSUs and ESPP rights	7		5		6		5
Shares used in diluted computation	258		251		256		251
Net income per share:
Basic	$	0.63	$	0.46	$	1.17	$	0.97
Diluted	$	0.61	$	0.45	$	1.14	$	0.95

Supplemental cash flow disclosures. At May 4, 2014 and November 3, 2013, we had $43 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 unaudited condensed consolidated statement of cash flows for 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. The amendments in this guidance supersede 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 our financial condition or results of operations.

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Recent Accounting Guidance Not Yet Adopted

In May 2014, the FASB and International Accounting Standards Board issued their converged standard on revenue recognition. The core principle of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and improve guidance for multiple-element arrangements. This guidance will be effective for the first quarter of our fiscal year 2018. The Company is currently evaluating the impact that this guidance will have on its financial condition and results of operations.

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. Early adoption is permitted, but only for disposals that have not been reported in financial statements previously issued. The Company is evaluating the impact, if any, that this guidance will have on its financial condition or results of operations.

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 the Company's financial condition or results of operations.

2. Inventory

Inventory consists of the following (in millions):



	May 4, 2014		November 3, 2013
Finished goods	$	60	$	53
Work-in-process	156		154
Raw materials	85		78
Total inventory	$	301	$	285

3. Acquisitions and Investment

LSI Corporation

On May 6, 2014, subsequent to the end of our second fiscal quarter, which ended on May 4, 2014, we completed our previously announced acquisition of all of the issued and outstanding shares of common stock of LSI Corporation, or LSI, a U.S. publicly traded company that designs semiconductors that accelerate storage and networking in data centers, mobile networks and client computing, for an aggregate acquisition consideration of approximately $6.5 billion in cash, or $11.15 in cash per share of LSI common stock. (See Notes 6. "Borrowings" and 15. "Subsequent Events" for further details.)

CyOptics

On June 28, 2013, we completed our acquisition of all of the outstanding shares of capital stock of 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. As a result of the CyOptics acquisition, we acquired approximately 1,100 additional employees, with 745 of these employees located 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 also agreed to pay additional deferred consideration to the previous shareholders of CyOptics in the amount of $4 million one year subsequent to the acquisition date, which was recorded in other current liabilities.

An additional approximately $27 million is payable to key employees of CyOptics as part of a retention bonus plan. This amount was paid into escrow and 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

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whose employment is involuntarily terminated by the Company, their retention bonus payments are accelerated and due in full upon such termination in accordance with the provisions of the plan. During the fiscal quarter and two fiscal quarters ended May 4, 2014, we recorded a compensation expenses of $1 million and $10 million, respectively, due to the departures of certain plan participants.

We have preliminarily estimated the fair value of the acquired assets and liabilities for CyOptics. We allocated the purchase price to tangible assets, liabilities and identifiable intangible assets acquired based on their estimated fair values. The excess of the purchase price over the aggregate fair values was recorded as goodwill. The fair value assigned to 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 negotiations of working capital adjustments and tax related matters, we have revised and may continue to revise our preliminary purchase price allocation.

Our allocation of the total purchase price for CyOptics and the purchased intangible assets as of May 4, 2014 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		)
Purchase price allocation	$	377

There were no significant contingencies assumed as part of the acquisition. As of May 4, 2014, we have a $12 million indemnification receivable in other long-term assets for tax positions related to CyOptics' value-added tax and income tax payables existing prior to the acquisition.



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

Purchased Intangible Assets. 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 is 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 is based on an analysis of empirical, market-derived royalty rate for guideline intangible assets.

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Customer relationships represent the fair value of future projected revenue that will 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 versus as if the customer relationships were to be created "from scratch." 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 in-process research and development, or IPR&D, from the CyOptics acquisition 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 projects as of the acquisition date.

The purchased intangible assets are being amortized over their estimated useful lives of 1 year to 8 years. (See Note 4. Goodwill and Intangible Assets)

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 prior to the acquisition date. The unaudited estimated pro forma information combines the historical results of CyOptics with our consolidated historical results and includes certain fair value adjustments reflecting the estimated impact of amortization of purchased intangible assets 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):



	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

Investment

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 completely exited our investment in the shares of this company. As a result, for the quarter and two fiscal quarters ended May 4, 2014, we realized an immaterial loss from the sale of the shares which was recorded in other income, net in the unaudited condensed consolidated statements of operations.

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4. Goodwill and Intangible Assets

Goodwill

There was no material change in the goodwill balance for the period ended May 4, 2014.

Intangible Assets

Purchased intangibles consist of the following (in millions):



	Gross Carrying Amount		Accumulated Amortization			Net Book Value
As of May 4, 2014:
Purchased technology	$	843	$	(498	)	$	345
Customer and distributor relationships	289		(199		)	90
Other	8		(6		)	2
Intangible assets subject to amortization	1,140		(703		)	437
In-process research and development	4		—			4
Total	$	1,144	$	(703	)	$	441

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

The following table presents the amortization expense of purchased intangible assets (in millions):



	Fiscal Quarter Ended				Two Fiscal Quarters Ended
	May 4, 2014		May 5, 2013		May 4, 2014		May 5, 2013
Cost of products sold	$	18	$	14	$	36	$	28
Operating expenses	8		6		15		11
Total amortization expense	$	26	$	20	$	51	$	39

Based on the amount of intangible assets subject to amortization at May 4, 2014, the expected amortization expense for each of the next five fiscal years and thereafter is as follows (in millions):



Fiscal Year	Amount
2014 (remainder)	$	49
2015	95
2016	78
2017	68
2018	33
2019	29
Thereafter	85
	$	437

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The weighted-average amortization periods remaining by intangible asset category at May 4, 2014 were as follows (in years):



Amortizable intangible assets:
Purchased technology	7
Customer and distributor relationships	6
Other	13

5. Retirement Plans and Post-Retirement Benefits

An amendment was made to our U.S. post-retirement medical benefit plan with an effective date of January 1, 2014. 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 two quarters of fiscal year 2014, we paid an aggregate of $6 million in cash into these employees' 401(k) accounts. Employees who were previously eligible for the medical benefit spending account of $55,000 upon retirement have had the period during which they, as retirees, may use the spending account to pay premiums paid for medical coverage extended from age 65 to 75. Employees who were previously eligible for the traditional retiree medical plan upon retirement have ceased to be 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 May 4, 2014, the U.S. post-retirement medical benefit plan's remaining liability balance was $14 million, which is primarily included in other long-term liabilities in our unaudited condensed consolidated balance sheet.

During the fiscal quarter ended May 4, 2014, a plan amendment, effective March 1, 2014 was made to the non-U.S. defined benefit plan for Korea. 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 impact recorded in results from operations was immaterial.

6. Borrowings

Senior Credit Facilities

As of May 4, 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. As of May 4, 2014, we had no borrowings outstanding under this revolving credit facility, and we were in compliance with the covenants under the related credit agreement, or the 2013 credit agreement. The 2013 credit agreement was terminated in connection, and simultaneously with the completion of our acquisition of LSI, on May 6, 2014. Subsequent to our second fiscal quarter, which ended on May 4, 2014, on May 6, 2014, in connection with the completion of our acquisition of LSI, we entered into a senior collateralized credit agreement, or the 2014 credit agreement, with a syndicate of banks, which provides for a term loan facility in the aggregate principal amount of $4.6 billion (all of which was drawn and used to fund our acquisition of LSI) and a revolving credit facility that 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. See Note 15. "Subsequent Events" for additional details.

Convertible Senior Notes

On May 6, 2014, also in connection with the completion of our acquisition of LSI, we completed our previously announced 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, all of the proceeds of which were used to fund the LSI acquisition. See Note 11. "Related Party Transactions" and Note 15. "Subsequent Events" for additional details.

Debt Issuance Costs

Unamortized debt issuance costs associated with our 2013 revolving credit facility were $2 million at May 4, 2014. These unamortized debt issuance costs are included in other current assets and other long-term assets on the unaudited condensed consolidated balance sheets. Amortized debt issuance costs associated with our 2013 revolving credit facility are classified as interest expense in the unaudited condensed consolidated statements of operations. Prepaid debt issuance costs associated with our 2014 credit agreement were $5 million at May 4, 2014.

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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 bank acceptances, and investment funds (i.e., deferred compensation plan assets). We measure 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 observable for substantially the full term of the asset or liability.

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.

We did not have any Level 3 asset or liability activities during the fiscal quarter and the two fiscal quarters ended May 4, 2014.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The table below sets forth by level our financial assets and liabilities that were accounted for at fair value as of May 4, 2014. The table does not include cash on hand and also does not include assets that are measured at historical cost or any basis other than fair value (in millions).



	As of May 4, 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:
Investment funds — deferred compensation plan assets (1)	$	12	$	12	$	—	$	—
Bank acceptances (1)	1		1		—		—
Total assets measured at fair value	$	13	$	13	$	—	$	—
Liabilities:
Deferred compensation plan liabilities (2)	$	12	$	—	$	12	$	—

_________________________________


(1)	Included in other current assets in our unaudited condensed consolidated balance sheet


(2)	Included in other current liabilities in our unaudited condensed consolidated balance sheet

During the fiscal quarter and two fiscal quarters ended May 4, 2014, there were no material transfers between Level 1, Level 2 or Level 3 fair value instruments.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

There were no non-financial assets or liabilities measured at fair value as of May 4, 2014.

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Fair Value of Other Financial Instruments

The fair values of cash equivalents, trade accounts receivable, accounts payable, other current assets, employee compensation and benefits and other current liabilities, to the extent the underlying liability will be settled in cash, approximate carrying values because of the short-term nature of these instruments.

8. Shareholders’ Equity

Share Repurchase Program

Under the 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 two fiscal quarters ended May 4, 2014. There were no shares repurchased during the fiscal quarter ended May 4, 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, referred to as the 2014 share purchase mandate. As of the date of this Quarterly Report on Form 10-Q, the Board had not approved any repurchases of the Company's ordinary shares pursuant to the 2014 share purchase mandate.

Dividends

We paid a cash dividend of $0.27 and $0.19 per ordinary share of the Company, or $68 million and $47 million in total, during the fiscal quarters ended May 4, 2014 and May 5, 2013, respectively. We paid aggregate cash dividends of $130 million and $89 million during the two fiscal quarters ended May 4, 2014 and May 5, 2013, respectively.

Share-Based Compensation Expense

The following table summarizes share-based compensation expense related to share-based awards granted to employees, directors, and non-employees for the fiscal quarter and two fiscal quarters ended May 4, 2014 and May 5, 2013 (in millions):



	Fiscal Quarter Ended				Two Fiscal Quarters Ended
	May 4, 2014		May 5, 2013		May 4, 2014		May 5, 2013
Cost of products sold	$	3	$	2	$	6	$	4
Research and development	10		7		18		14
Selling, general and administrative	17		8		30		17
Total share-based compensation expense	$	30	$	17	$	54	$	35

The fair values of our time-based options and ESPP rights were estimated using the Black-Scholes option pricing model. Certain stock options granted in the fiscal quarter and two fiscal quarters ended May 4, 2014 and May 5, 2013, respectively, included both service and market conditions. The fair value of those market-based stock options was estimated using Monte Carlo simulation techniques.

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 two fiscal quarters ended May 4, 2014 and May 5, 2013 were as follows:



	Time-Based Options
	Fiscal Quarter Ended				Two Fiscal Quarters Ended
	May 4, 2014		May 5, 2013		May 4, 2014		May 5, 2013
Risk-free interest rate	1.3	%	0.9	%	1.3	%	0.9	%
Dividend yield	1.7	%	1.9	%	1.8	%	1.9	%
Volatility	35.0	%	48.0	%	35.0	%	49.0	%
Expected term (in years)	4.3		5		4.2		5

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	ESPP Rights
	Fiscal Quarter Ended				Two Fiscal Quarters Ended
	May 4, 2014		May 5, 2013		May 4, 2014		May 5, 2013
Risk-free interest rate	0.1	%	0.1	%	0.1	%	0.1	%
Dividend yield	1.7	%	2.1	%	2.0	%	2.0	%
Volatility	31.0	%	46.0	%	34.0	%	45.0	%
Expected term (in years)	0.5		0.5		0.5		0.5



	Market-Based Options
	Fiscal Quarter Ended				Two Fiscal Quarters Ended
	May 4, 2014		May 5, 2013		May 4, 2014		May 5, 2013
Risk-free interest rate	2.3	%	1.4	%	2.3	%	1.4	%
Dividend yield	1.7	%	1.9	%	1.8	%	1.9	%
Volatility	45.0	%	50.0	%	45.0	%	50.0	%
Expected term (in years)	7		7		7		7

The dividend yields for the fiscal quarters and the two fiscal quarters ended May 4, 2014 and May 5, 2013 are based on the dividend yield as of the respective award grant dates. For the two fiscal quarters ended May 4, 2014, expected volatility for time-based and market-based options is based on our own historical share price volatility and 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 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 two fiscal quarters ended May 4, 2014, the expected term for time-based options was based on a weighted-average combining the average life of options that have already been exercised or cancelled with the expected life of all unexercised options. The expected life for unexercised options 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, that we believe could affect employees’ exercise behavior.

The expected life of market-based stock 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, the weighted-average fair values of the time-based options granted under the Company's equity incentive award plan for the fiscal quarters ended May 4, 2014 and May 5, 2013 were $16.04 and $12.53, respectively and $15.56 and $12.65 for the two fiscal quarters ended May 4, 2014 and May 5, 2013, respectively.

The weighted-average fair values of the market-based options granted under the Company's equity incentive award plan for the fiscal quarter ended May 4, 2014 and May 5, 2013 were $22.33 and $13.34, respectively and $20.79 and $13.34 for the two fiscal quarters ended May 4, 2014 and May 5, 2013, respectively.

The weighted-average fair values of the rights to purchase shares in the ESPP for the fiscal quarters ended May 4, 2014 and May 5, 2013 were $14.61 and $11.73, respectively and $13.44 and $11.63 for the two fiscal quarters ended May 4, 2014 and May 5, 2013, respectively.

The weighted-average fair values of RSUs granted in the fiscal quarters ended May 4, 2014 and May 5, 2013 were $62.06 and $35.46, respectively and $59.03 and $35.34 for the two fiscal quarters ended May 4, 2014 and May 5, 2013, respectively.

The total compensation expense of time and market-based options granted but not yet vested as of May 4, 2014 was $230 million, which is expected to be recognized over the remaining weighted-average service period of 3 years.

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The total grant date fair values of time and market-based options vested during the fiscal quarters ended May 4, 2014 and May 5, 2013 were $32 million and $19 million, respectively. The total grant-date fair values of options that vested during the two fiscal quarters ended May 4, 2014 and May 5, 2013 were $42 million and $27 million, respectively.

Total unrecognized compensation cost related to the ESPP rights as of May 4, 2014 was $1 million and is expected to be recognized over the remaining portion of the current offering period under the ESPP, which ends on September 14, 2014.

Total compensation cost related to unvested RSUs as of May 4, 2014 was $62 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 May 4, 2014 and May 5, 2013 were $12 million and $1 million, respectively. The total grant-date fair values of RSUs that vested during the two fiscal quarters ended May 4, 2014 and May 5, 2013 were $13 million and $1 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
	Shares Available for Grant		Number Outstanding		Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value
Balance as of November 3, 2013	10		22		$	29.81
Annual increase in shares available for issuance, per equity incentive plan terms	6
Granted	(7	)	7		59.56
Exercised	—		(2	)	24.28
Cancelled	—		—		36.67
Balance as of May 4, 2014	9		27		37.82		5.65	$	705
Fully vested as of May 4, 2014			8		23.70		4.82	339
Fully vested and expected to vest as of
May 4, 2014			25		37.14		5.61	682

As of November 3, 2013, there were 10 million shares available for grant under the 2009 Equity Incentive Plan. Per the terms of the 2009 Equity Incentive Plan, an annual increase of 6 million shares was approved for issuance on the first day of fiscal year 2014. As of the quarter ended May 4, 2014, there were 9 million shares that remained available for grant.

The total intrinsic values of options exercised during the fiscal quarters ended May 4, 2014 and May 5, 2013 were $46 million and $17 million, respectively. The total intrinsic values of options exercised during the two fiscal quarters ended May 4, 2014 and May 5, 2013 were $69 million and $42 million, respectively.

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



	RSU Awards Outstanding
	Number Outstanding		Weighted- Average Grant Date Fair Market Value		Weighted- Average Remaining Contractual Life (in years)
Balance as of November 3, 2013	2		$	34.38
Granted	1		59.02
Vested	(1	)	33.89
Forfeited	—		39.04
Balance as of May 4, 2014	2		43.05		3.16

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The following table summarizes the ranges of outstanding and exercisable option awards as of May 4, 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
$0.00-$10.00	1	4.06	$	8.47	1	$	8.49
$10.01-$20.00	2	4.55	13.31		2	13.33
$20.01-$30.00	2	6.16	21.00		1	20.86
$30.01-$40.00	15	5.34	35.48		4	34.19
$40.01-$50.00	1	6.47	45.56		—	—
$50.01-$60.00	1	6.69	53.57		—	—
$60.01-$63.18	5	6.84	62.01		—	—
Total	27	5.65	37.82		8	23.70

Employee Share Purchase Plan

0.1 million shares were issued under the ESPP during each of the fiscal quarter and two fiscal quarters ended May 4, 2014 and May 5, 2013. At May 4, 2014, 9.2 million shares remained available for issuance under the ESPP.

9. Income Taxes

For the fiscal quarter and two fiscal quarters ended May 4, 2014, we recorded an income tax provision of $1 million and $6 million, respectively, compared to $5 million and $6 million for the fiscal quarter and two fiscal quarters ended May 5, 2013, respectively. The tax expense for the fiscal quarter and two fiscal quarters ended May 4, 2014 included a benefit of $10 million and $14 million, respectively, from the recognition of previously unrecognized tax benefits as a result of lapses in statutes of limitations for various audit periods. The tax expense for the two fiscal quarters ended May 5, 2013 included a benefit of $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. The remaining changes in tax provisions for all periods presented were mainly due to changes in the jurisdictional mix of income and expense.

Pursuant to Accounting Standards Codification (“ASC”) 740-10-25-3(e) (Income Taxes) and ASC 810-10-45-8 (Consolidation), during the fiscal quarter ended February 2, 2014, we recorded a deferred charge for the deferral of income tax expense on certain intercompany asset transactions that occurred in the quarter. The deferred charge of approximately $32 million, with $4 million included in other current assets and $28 million included in other long-term assets on our unaudited condensed consolidated balance sheets. The deferred charge will be amortized on a straight-line basis and will be included as a component of income tax expense over the life of the underlying assets, which has been estimated to be seven years.

Unrecognized Tax Benefits

As of November 3, 2013, the amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate was approximately $35 million, including accrued interest and penalties.

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 $3 million of our existing unrecognized tax benefits within the next 12 months as a result of lapses of statute of limitations for certain audit periods.

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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. We completed the CyOptics acquisition in the third quarter of fiscal year 2013 and have fully integrated CyOptics into Avago's organization structure and business model. Therefore, we have concluded that we continue to have one reportable segment based on the following factors: sales of semiconductors represents our only material source of revenue; substantially all products offered incorporate analog functionality and are manufactured under similar manufacturing processes; we use an integrated approach in developing our products in that discrete technologies developed are frequently integrated across many of our products; and we use a common order fulfillment process and similar distribution approach for our products. Broad distributor networks are typically used to distribute our products, with large accounts being serviced by a direct sales force. The Chief Executive Officer has been identified as the Chief Operating Decision Maker, as defined by ASC 280.

11. Related Party Transactions

During the fiscal quarter and the two fiscal quarters ended May 4, 2014 and May 5, 2013, in the ordinary course of business, the Company purchased from, or sold to, several entities where one of the Company's directors also serves or served as a director or executive officer of that entity, including eSilicon Corporation (ceased to be a related party after the quarter ended May 5, 2013), KLA-Tencor Corporation, Kulicke & Soffa Industries, Inc. and Wistron Corporation (ceased to be a related party after the quarter ended August 4, 2013). Management believes that such transactions are at arm's length and on similar terms as would have been obtained from unaffiliated third parties.

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					Two Fiscal Quarters Ended
	May 4, 2014			May 5, 2013		May 4, 2014			May 5, 2013
Total net revenue (1) (2)	$	—		$	10	$	—		$	16
Total costs and expenses (2)	—		*	1		—		*	2



	May 4, 2014			November 3, 2013
Total receivables	$	—		$	—	*
Total payables	—		*	—		*

_________________________________

* Represent amounts less than $0.5 million.

(1) Amounts include net revenue for related party transactions with Wistron Corporation through the fiscal quarter ended May 5, 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 after the fiscal quarter May 5, 2013.

Convertible Senior Notes

On December 15, 2013, in connection with our acquisition of 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 $1 billion aggregate principal amount of the Company's 2.0% Convertible Senior Notes due 2021. Silver Lake Partners IV an investment fund affiliated with Silver Lake Partners, of which Kenneth Hao, one of our directors, is a Managing Director. Mr. Hao disclaims all beneficial interest in the Notes, except to the extent of his pecuniary interest therein. We completed the private placement of the Notes on May 6, 2014, in connection with the completion of the acquisition of LSI. See Note 6. "Borrowings" for additional details.

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12. Commitments and Contingencies

Commitments

The following table sets forth changes in our commitments as of May 4, 2014 for the fiscal periods noted (in millions):



	Total		2014 (remainder)		2015		2016		2017		2018		2019		Thereafter
Purchase Commitments	$	216	$	216	$	—	$	—	$	—	$	—	$	—	$	—
Other Contractual Commitments	$	50	$	11	$	16	$	13	$	6	$	4	$	—	$	—

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 $67 million in cancelable and non-cancelable outstanding purchase obligations under such purchase orders as of May 4, 2014.

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

There were no other substantial changes to our contractual commitments during the first two quarters of fiscal year 2014 from those disclosed in our Annual Report on Form 10-K for fiscal year 2013.

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 LSI

Fifteen purported class action complaints have been filed by alleged 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 allege 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 are unfair. Among other remedies, the lawsuits seek to enjoin the merger, or in the event that an injunction is not entered and the merger closes, 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. We and our Board believe these 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.

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While there can be no assurance, we do not believe that we are involved in any pending legal proceedings that would be reasonably possible to have a material adverse effect on our financial condition, results of operations or cash flows. 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.

Warranty

There were no material changes to our warranty accrual during the fiscal quarter and two fiscal quarters ended May 4, 2014.

Indemnifications to Hewlett-Packard and Agilent

Agilent, has given multiple indemnities to Hewlett-Packard Company in connection with its activities prior to its spin-off from Hewlett-Packard Company in June 1999 for the businesses that constituted Agilent prior to the spin-off. We are the successor to the SPG, of Agilent, which we acquired on December 1, 2005, which we refer to as 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 acquisition from Agilent in December 2005, 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 unaudited condensed consolidated financial statements with respect to these indemnification obligations.

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 Acquisition-Related Restructuring Plan

In April 2014, in order to achieve annual cost savings from the LSI acquisition, we identified approximately 120 employees in Avago's pre-acquisition workforce whose employment will be terminated. We recorded approximately $6 million of employee termination costs related to this cost reduction plan in operating expenses during the fiscal quarter and two fiscal quarters ended May 4, 2014 and expect to record the remaining $8 million of employee termination costs over the remaining retention periods that these employees are expected to provide employment services until their respective exits in the future fiscal quarters. See Note 15. "Subsequent Events" for additional details.

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 is expected to be substantially completed in the third quarter of fiscal year 2014. We recorded $8 million and $5 million in operating expenses and costs of products sold, respectively, during the two fiscal quarters ended May 4, 2014, related to employment termination costs. As we previously established a pattern for a restructuring plan in the same location, for which similar termination packages were offered, we are therefore required to record the employment termination cost for the current restructuring plan in the period in which the plan was approved by our management in accordance with relevant accounting guidance. As of May 4, 2014, none of this accrued charge has been paid and the remaining balance will be paid during fiscal year 2014 as the employees exit the Company. In addition, we also recorded an impairment of fixed assets of $1 million in operating expenses during the fiscal quarter and two fiscal quarters ended May 4, 2014. Other remaining costs, including impairment of fixed assets and lease termination expenses of approximately $4 million, will be recorded in future quarters pursuant to the relevant accounting guidance.

Others

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 during the first two quarters of fiscal year 2014.

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The following table sets forth significant activities within and components of the restructuring charges during the two fiscal quarters of fiscal 2014 (in millions):



	Employee Termination Cost		Asset Abandonment Costs		Other		Total
Balance as of November 3, 2013	$	—	$	—	$	—	$	—
Cost of product sold	5		—		—		5
Operating expenses	17		2		1		20
Less: Non-cash portion	—		2		—		2
Less: Cash payments	4		—		1		5
Accrued balance as of May 4, 2014 - included in Other current liabilities	$	18	$	—	$	—	$	18

14. Accumulated Other Comprehensive Income (Loss)

The change in accumulated other comprehensive income (loss) by component and related tax effects for the period below 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 (loss) 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 May 4, 2014	$	(1	)	$	(6	)	$	(7	)

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



	Fiscal Quarter Ended				Fiscal Two Quarters Ended
Comprehensive Income Components	May 4, 2014		May 5, 2013		May 4, 2014		May 5, 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 amounts reclassified out of accumulated other comprehensive income (loss)	$	—	$	—	$	3	$	—

15. Subsequent Events

LSI Acquisition

On May 6, 2014, we completed our acquisition of all of the issued and outstanding shares of common stock of LSI, pursuant to the terms of the Agreement and Plan of Merger, dated as of December 15, 2013, or the Merger Agreement, by and among the Company, LSI and the other parties named therein. Pursuant to the Merger Agreement, the acquisition was structured as a merger of an indirect wholly-owned subsidiary of the Company with and into LSI, or the Merger, with LSI surviving the Merger and continuing as an indirect wholly-owned subsidiary of the Company. The aggregate consideration for the acquisition was approximately $6.5 billion in cash, or $11.15 in cash per share of LSI common stock. We funded the transaction with the

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net proceeds from the issuance of $1 billion of our Convertible Senior Notes, $4.6 billion in term loans under our 2014 Credit Agreement, each discussed in more detail below, as well as $1 billion in cash on hand of the combined companies.

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

Convertible Senior Notes

In connection with the completion of the acquisition of LSI on May 6, 2014, the Company completed its previously announced private placement of $1 billion in aggregate principal amount of 2.0% Convertible Senior Notes due 2021 or Notes, to investment funds affiliated with Silver Lake Partners, together referred to as the Purchasers, pursuant to the terms of the Note Purchase Agreement among the Company, SLP IV (whose rights and obligations under the Note Purchase Agreement were thereafter assigned to and assumed by the Purchasers) and Deutsche Bank AG, Singapore Branch, as lead manager.

The Notes were issued pursuant to an Indenture, dated May 6, 2014, or the Indenture, between the Company and U.S. Bank National Association, as trustee. The Indenture includes customary terms and covenants, including certain events of default after which the Notes may be due and payable immediately. The Notes are the Company’s uncollateralized senior obligations. The Notes will mature on August 15, 2021, unless repurchased, redeemed or converted in accordance with their terms prior to such date. The Notes will pay interest semi-annually at a rate of 2.0% per year, payable in arrears on May 1 and November 1 of each year, beginning on November 1, 2014, and on the maturity date. Subject to any limitations set forth in the Indenture, the Notes will be convertible at any time until the close of business on the scheduled trading day immediately preceding the maturity date. Upon conversion, the Notes may be settled in the Company's ordinary shares, cash or a combination of cash and ordinary shares, at the Company’s option. The Notes will be convertible at an initial conversion rate of 20.8160 ordinary shares per $1,000 principal amount of the Notes, which is equivalent to an initial conversion price of approximately $48.04 per ordinary share, and is subject to adjustment under the terms of the Notes (including adjustments for quarterly cash dividends paid on the Company's ordinary shares to the extent they exceed $0.27 per share). Holders of the Notes will have the right to require the Company to repurchase all or some of their Notes at 100% of their principal amount, plus any accrued and unpaid interest, upon the occurrence of a fundamental change (as defined in the Indenture). In addition, upon the occurrence of a make-whole fundamental change (as defined in the Indenture), Avago may be required to increase the conversion rate for the Notes converted in connection with such a make-whole fundamental change. Prior to May 6, 2019, the Company may not redeem the Notes. Beginning May 6, 2019, the Company may, at its option, redeem the Notes, in whole or in part if the closing sale price (as defined in the Indenture) of the ordinary shares for 20 or more trading days (as defined in the indenture) in the period of 30 consecutive trading days ending on the trading day immediately prior to the date on which the Company provides notice of such redemption exceeds 150% of the applicable conversion price in effect on each such trading day, at a redemption price equal to 100% of the principal amount of notes being redeemed, together with accrued and unpaid interest to, but not including, the redemption date (as defined in the Indenture).

In connection with the sale of the Notes, the Company entered into a registration rights agreement, dated as of May 6, 2014, with the Purchasers, or the Registration Rights Agreement, providing for customary resale registration rights with respect to the Notes and the ordinary shares issuable upon conversion of the Notes, if any.

Term Loan and Revolving Credit Facility

In connection with the completion of our acquisition of LSI on May 6, 2014, our subsidiaries Avago Technologies Finance Pte. Ltd., or AT Finance, Avago Technologies Cayman Ltd., or AT Cayman, Avago Technologies Holdings Luxembourg S.àr.l ("AT Luxco" and, together with AT Cayman, the "Borrowers"), together a group of lenders, including Deutsche Bank AG New York Branch as the Administrative Agent, entered into the 2014 Credit Agreement. The 2014 Credit Agreement provides for a term loan facility in the aggregate principal amount of $4.6 billion and a revolving credit facility that permits the Borrowers to borrow loans from time to time in an aggregate principal amount of up to $500 million, for general corporate purposes, for swingline loans of up to $75 million in the aggregate and for the issuance of letters of credit of up to $100 million in the aggregate, which, in the case of swingline loans and letters of credit, reduce the available borrowing capacity under the revolving credit facility on a dollar for dollar basis. The Borrowers’ obligations under the 2014 Credit Agreement are guaranteed by AT Finance and certain of its subsidiaries, or the Subsidiary Guarantors, and are collateralized, subject to certain exceptions, by all the assets of AT Finance, each Borrower, and each Subsidiary Guarantor. The term loan facility has a term of 7 years and the revolving credit facility has a term of 5 years.

Loans under the 2014 Credit Agreement will bear interest at a rate per annum equal to (i) to 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 such day plus 1/2 of 1% per annum, (c) the Adjusted LIBO Rate (as defined in the Credit Agreement) on such 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

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rate per annum equal to the greater of (a) (x) the LIBO Rate for such Interest Period 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 also entered into collateral and related agreements ancillary to the 2014 Credit Agreement.

LSI Acquisition-Related Restructuring Plan

On May 13, 2014, we began the implementation of planned cost reduction and restructuring activities following 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.

Pending Sale of the LSI Flash Component Division and Accelerated Solutions Division

On May 29, 2014, our subsidiary LSI Corporation entered into an Asset Purchase Agreement with Seagate Technology LLC, or Seagate, pursuant to which LSI Corporation has agreed to sell its Flash Components Division and Accelerated Solutions Division to Seagate for $450 million in cash. Each of the parties has made customary representations and warranties in the Asset Purchase Agreement. Consummation of the transaction is subject to the satisfaction or waiver of customary closing conditions and receipt of certain regulatory approvals, including the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The transaction is presently expected to close in the third calendar quarter of 2014.

Cash Dividends

On June 4, 2014, the Board declared an interim cash dividend on the Company’s ordinary shares of $0.29 per share, payable on June 30, 2014 to shareholders of record at the close of business (5:00 p.m.), Eastern Time, on June 19, 2014.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the fiscal year ended November 3, 2013, or fiscal year 2013, included in our Annual Report on Form 10-K for fiscal year 2013, or 2013 Annual Report on Form 10-K. References to “Avago,” "the Company," “we,” “our” and “us” are to Avago Technologies Limited and its consolidated subsidiaries, unless otherwise specified or the context otherwise requires. This Quarterly Report on Form 10-Q may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, which are made under the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements may include projections of financial information; statements about historical results that may suggest trends for our business; statements of the plans, strategies, and objectives of management for future operations, including merger, acquisition and divestiture and related activities; statements of expectation or belief regarding future events, technology developments, our products, product sales, expenses, liquidity, cash flow and growth rates, or enforceability of our intellectual property rights; and the effects of seasonality on our results of operations. Such statements are based on current expectations, estimates, forecasts and projections of our or industry performance and macroeconomic conditions, based on management’s judgment, beliefs, current trends and market conditions, and involve risks and uncertainties that may cause actual results to differ materially from those contained in the forward-looking statements. We derive most of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Accordingly, we caution you not to place undue reliance on these statements. For example, there can be no assurance that our product sales efforts, revenues or expenses will meet any expectations or follow any trend(s), that our ability to compete effectively will be successful or yield anticipated results, or that we will realize the expected benefits of our recent acquisition of LSI Corporation, or LSI. Important factors that could cause actual results to differ materially from our expectations are disclosed under “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q, and in other documents we file from time to time with the Securities and Exchange Commission, or SEC. All of the forward-looking statements in this Quarterly Report on Form 10-Q are qualified in their entirety by reference to the factors listed above and those discussed under the heading “Risk Factors” below. We undertake no intent or obligation to publicly update or revise any of these forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Overview

We are a leading designer, developer and global supplier of a broad range of semiconductor devices with a focus on III-V based products. III-V semiconductor materials have higher electrical conductivity than silicon and thus tend to have better performance characteristics in radio frequency, or RF, and optoelectronic applications. III-V refers to elements from the 3rd and 5th groups in the periodic table of chemical elements, and examples of these materials are gallium arsenide, or GaAs, gallium nitride, or GaN, and indium phosphide, or InP. We differentiate ourselves through our high performance design and integration capabilities. Through the fiscal quarter ended May 4, 2014, we served three primary target markets: wireless communications, wired infrastructure and industrial & other. Our product portfolio is extensive and includes thousands of products. Applications for our products in these target markets include smartphones, consumer appliances, data networking and telecommunications equipment, enterprise storage and servers, factory automation and industrial equipment. Starting in the third quarter of fiscal year 2014, as a result of our acquisition of LSI Corporation, or LSI, on May 6, 2014, we will serve four primary target markets: enterprise storage, wireless communications, wired infrastructure and industrial & other.

During the first two quarters of fiscal year 2014, our net revenue increased significantly compared to the first two quarters of fiscal year 2013. Net revenue from each of our three target markets increased during this period compared to the first two quarters of fiscal year 2013, mainly due to revenue contribution from the acquired CyOptics business in the wired infrastructure target market and content growth in two large smartphone original equipment manufacturer, or OEM, customers in the wireless communications target market. Our fiscal year ended November 3, 2013, or fiscal year 2013, was a 53-week fiscal year, with the first fiscal quarter consisting of 14 weeks.

Recent Developments

Acquisition of LSI Corporation

On May 6, 2014, we completed our acquisition of all of the issued and outstanding shares of common stock of LSI pursuant to the terms of the Agreement and Plan of Merger, dated as of December 15, 2013, or the Merger Agreement, by and among the Company, LSI and the other parties named therein. Pursuant to the Merger Agreement, the acquisition was structured as a merger of an indirect wholly-owned subsidiary of the Company with and into LSI, or the Merger, with LSI surviving the Merger and continuing as an indirect wholly-owned subsidiary of the Company. The aggregate consideration for the acquisition was approximately $6.5 billion in cash, or $11.15 in cash per share of LSI common stock. We funded the transaction with the

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net proceeds from the issuance of $1 billion in aggregate principal amount of our 2.0% Convertible Senior Notes due 2021, or the Notes, the net proceeds from $4.6 billion in term loans under a new, senior collateralized credit facility that we entered into at the time of the closing of the transaction (discussed in more detail under "Indebtedness" below), as well as cash on hand of the combined companies. The financial results for the fiscal quarter and the two fiscal quarters ended May 4, 2014 provided in this Quarterly Report on Form 10-Q do not include any operating results of LSI.

LSI Acquisition-Related Restructuring Plan

On May 13, 2014, we began the implementation of our cost reduction activities associated with our recently completed 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. In connection with this action, we expect to take aggregate charges of between approximately $120 million and $140 million over our next six fiscal quarters.

Pending Sale of LSI's Flash Components Division and Accelerated Solutions Division

Acquisition

CyOptics

On June 28, 2013, we completed our acquisition of CyOptics, Inc., or CyOptics, a U.S.-based company that manufactures and sells 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, to acquire all of the outstanding shares of capital stock of CyOptics. We also agreed to pay additional deferred consideration to the previous shareholders of CyOptics in the amount of $4 million one year subsequent to the acquisition date, which was recorded in other current liabilities.

In addition, approximately $27 million is payable to key employees of CyOptics as part of a retention bonus plan. This amount was paid into escrow and will be paid over a three-year period subsequent to the acquisition date and is being recognized as compensation expense in operating results over the same period. For eligible CyOptics employees whose employment is involuntarily terminated by the Company, their retention bonus payments are accelerated and due in full upon such termination in accordance with the provisions of the plan. During the fiscal quarter and the two fiscal quarters ended May 4, 2014, we recorded compensation expense of $1 million and $10 million, respectively, due to the departures of certain plan participants.

See Note 3. "Acquisitions and Investment" to the Unaudited Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with generally accepted accounting principles in the United States, or GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates. Our critical accounting policies are those that affect our historical financial statements materially and involve difficult, subjective or complex judgments by management. Those policies include revenue recognition, accounting for business combinations, valuation of long-lived assets, intangible assets and goodwill, inventory valuation and warranty reserves, accounting for income taxes, retirement and post-retirement benefit plan assumptions, share-based compensation, and employee bonus programs.

There were no significant changes in our critical accounting policies during the two fiscal quarters ended May 4, 2014 compared to those previously disclosed in “Critical Accounting Policies and Estimates” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2013 Annual Report on Form 10-K.

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Results from Operations

Fiscal Quarter and Two Fiscal Quarters Ended May 4, 2014 Compared to Fiscal Quarter and Two Fiscal Quarters Ended May 5, 2013

The following table sets forth our results of operations for the fiscal quarter and two fiscal quarters ended May 4, 2014 and May 5, 2013.



	Fiscal Quarter Ended
	May 4, 2014			May 5, 2013			May 4, 2014		May 5, 2013
	(In millions)						(As a percentage of net revenue)
Statements of Operations Data:
Net revenue	$	701		$	562		100	%	100	%
Cost of products sold:
Cost of products sold	326			276			46		49
Amortization of intangible assets	18			14			3		3
Total cost of products sold	344			290			49		52
Gross margin	357			272			51		48
Research and development	114			95			16		17
Selling, general and administrative	67			52			10		9
Amortization of intangible assets	8			6			1		1
Restructuring charges	8			1			1		—
Total operating expenses	197			154			28		27
Income from operations	160			118			23		21
Interest expense	(1		)	(1		)	—		—
Other income, net	—			1			—		—
Income before income taxes	159			118			23		21
Provision for income taxes	1			5			—		1
Net income	$	158		$	113		23	%	20	%

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	Two Fiscal Quarters Ended
	May 4, 2014			May 5, 2013			May 4, 2014		May 5, 2013
	(In millions)						(As a percentage of net revenue)
Statements of Operations Data:
Net revenue	$	1,410		$	1,138		100	%	100	%
Cost of products sold:
Cost of products sold	673			562			48		49
Amortization of intangible assets	36			28			3		3
Restructuring charges	5			—			—		—
Total cost of products sold	714			590			51		52
Gross margin	696			548			49		48
Research and development	221			188			16		17
Selling, general and administrative	141			105			10		9
Amortization of intangible assets	15			11			1		1
Restructuring charges	20			2			1		—
Total operating expenses	397			306			28		27
Income from operations	299			242			21		21
Interest expense	(1		)	(1		)	—		—
Other income, net	—			3			—		—
Income before income taxes	298			244			21		21
Provision for income taxes	6			6			—		—
Net income	$	292		$	238		21	%	21	%

Net revenue. Net revenue was $701 million for the fiscal quarter ended May 4, 2014, compared to $562 million for the fiscal quarter ended May 5, 2013, an increase of $139 million, or 25%. Net revenue was $1,410 million for the two fiscal quarters ended May 4, 2014, compared to $1,138 million for the two fiscal quarters ended May 5, 2013, an increase of $272 million, or 24%. The two fiscal quarters ended May 4, 2014 consisted of 26 weeks compared to 27 weeks in the two fiscal quarters ended May 5, 2013. The increase in net revenue for the two fiscal quarters ended May 4, 2014 compared to the two fiscal quarters ended May 5, 2013 was primarily due to the continued strong growth in wired infrastructure and wireless communications target markets. Wired infrastructure increase in revenue was mainly due to revenue contribution from the CyOptics business that we acquired in the third quarter of fiscal year 2013. Wireless communications increase in revenue resulted from strong sales to two large smartphone OEMs.

During the periods presented, our three primary target markets were wireless communications, wired infrastructure and industrial & other. The percentage of total net revenue generated by sales in each of our target markets varies from quarter to quarter, due largely to fluctuations in end-market demand, including the effects of seasonality. The first fiscal quarter has historically been our lowest revenue and cash generating quarter due, in part, to holiday shutdowns at many OEM, customers and distributors, and the first half of the fiscal year has tended to generate lower revenue than the second half. However, in recent periods, typical seasonality and industry cyclicality have been increasingly overshadowed by other factors such as wider macroeconomic effects, the timing of significant product transitions and launches by large OEMs, particularly in the wireless communications target market, and new product launches by our competitors.

Historically, a relatively small number of customers have accounted for a significant portion of our net revenue. During the fiscal quarter ended May 4, 2014, direct sales to Foxconn Technology Group companies, or Foxconn, and Samsung Group companies, or Samsung accounted for 14% and 13% respectively, of our net revenue. During the fiscal quarter ended May 5, 2013, direct sales to Foxconn, and Samsung accounted for 16% and 10% of our net revenue, respectively. During the two fiscal quarters ended May 4, 2014, direct sales to Foxconn and Samsung accounted for 20% and 10%, respectively. During the two fiscal quarters ended May 5, 2013, direct sales to Foxconn accounted for 18% of our net revenue.

Our top 10 direct customers for the fiscal quarter and two fiscal quarters ended May 4, 2014, which included four distributors, collectively accounted for 60% and 61% of our net revenue, respectively. We believe our aggregate sales to Apple Inc. and Samsung, when direct sales are combined with indirect sales through the contract manufacturers that they utilize, accounted for more than 10% of our net revenues for the fiscal quarter and two fiscal quarters ended May 4, 2014.

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Net revenue by target market data is derived from our understanding of our end customers’ primary markets. Net revenue by target market was as follows:



	Fiscal Quarter Ended						Two Fiscal Quarters Ended
% of net revenue	May 4, 2014		May 5, 2013		Change		May 4, 2014		May 5, 2013		Change
Wireless communications	50	%	50	%	—	%	49	%	52	%	(3	)%
Wired infrastructure	31	%	27	%	4	%	32	%	26	%	6	%
Industrial & other	19	%	23	%	(4	)%	19	%	22	%	(3	)%
Total net revenue	100	%	100	%			100	%	100	%



	Fiscal Quarter Ended						Two Fiscal Quarters Ended
Net revenue (in millions)	May 4, 2014		May 5, 2013		Change		May 4, 2014		May 5, 2013		Change
Wireless communications	$	348	$	279	$	69	$	697	$	587	$	110
Wired infrastructure	$	219	$	153	$	66	$	447	$	296	$	151
Industrial & other	$	134	$	130	$	4	$	266	$	255	$	11
Total net revenue	$	701	$	562	$	139	$	1,410	$	1,138	$	272

Net revenue from our wireless communications target market increased by $69 million, or 25%, and $110 million, or 19%, in the fiscal quarter and the two fiscal quarters ended May 4, 2014, compared with the corresponding prior year periods, due to continued strength in mobile smartphone sales resulting from sustained demand from two large smartphone OEM customers and strong demand from LTE enabled Chinese OEMs. Unit sales of smartphones containing our products, the amount of our product content in those phones as well as increasing radio frequency, or RF, content in handsets, are key drivers of our revenue increase from this target market. Improvements in our product content in a number of new smartphone platforms as well as continued high demand for our film bulk acoustic resonator, or FBAR, technology products helped drive revenue growth during the second fiscal quarter and the first two quarters of fiscal year 2014.

Net revenue from our wired infrastructure target market increased by $66 million, or 43%, and $151 million, or 51%, in the fiscal quarter and the two fiscal quarters ended May 4, 2014, compared with the corresponding prior fiscal year periods. The increases were largely due to $56 million and $120 million, respectively, of revenue contribution from our CyOptics component sales and the remaining increases primarily from higher enterprise and storage revenue.

Net revenue from our industrial & other target market increased by $4 million, or 3%, and $11 million, or 4%, in the fiscal quarter and the two fiscal quarters ended May 4, 2014, compared with the corresponding prior fiscal year periods. This slight increase was due primarily to a recovery in overall end market demand in this target market.

From time to time, some of our key customers, particularly in our wireless communications target market, place large orders causing our quarterly net revenue to fluctuate significantly. We expect that these fluctuations will continue and that they may be exaggerated by the launches of, and seasonal variations in sales of, consumer products such as mobile handsets, as well as changes in the overall economic environment.

Gross margin. Gross margin was $357 million for the fiscal quarter ended May 4, 2014 compared to $272 million for the fiscal quarter ended May 5, 2013, an increase of $85 million. As a percentage of net revenue, gross margin were 51% and 48%, respectively, for the fiscal quarter ended May 4, 2014 and May 5, 2013.

The increase in gross margin dollars for the fiscal quarter ended May 4, 2014 compared to the corresponding prior year period was due primarily to an increase in net revenue from, and improved product mix in, our wireless communication target market, as well as additional gross margin contributions from the CyOptics products, which we acquired during the third quarter of fiscal year 2013. The increase in gross margin as a percentage of revenue for the fiscal quarter ended May 4, 2014 compared to the fiscal quarter ended May 5, 2013 was due primarily to significant improved gross margin in our wireless communications target market due to the improved utilization of our internal manufacturing fabrication facility and product mix.

Gross margin was $696 million and $548 million respectively, for the two fiscal quarters ended May 4, 2014 and May 5, 2013, respectively. As a percentage of net revenue, gross margin was 49% and 48%, respectively, for each of the two fiscal quarters ended May 4, 2014 and May 5, 2013. The increase in gross margin dollars for the two fiscal quarter ended May 4, 2014 compared to the corresponding prior year period was due primarily to an increase in net revenue in the wireless communication with improved product mix in our wireless communications target market and additional gross margin contributions from the CyOptics business, which we acquired during the third quarter of fiscal year 2013. These increases were partially offset by increases in amortization of intangible assets and increases in restructuring expense related to efforts to

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improve efficiency, including the planned closure of a fabrication facility and employee termination costs relating to Avago employees whose employment will be terminated following the LSI acquisition (see Note 13. "Restructuring Charges" to the Unaudited Condensed Consolidated Financial Statements).

Research and development. Research and development expense was $114 million for the fiscal quarter ended May 4, 2014, compared to $95 million for the fiscal quarter ended May 5, 2013, an increase of $19 million, or 20%. As a percentage of net revenue, research and development expenses decreased to 16% for the fiscal quarter ended May 4, 2014, compared to 17% for the fiscal quarter ended May 5, 2013. The overall dollar increase in research and development expense was attributable to a $6 million increase in salaries and employee benefits expense due to annual merit-based salary increases and additional headcount due to the CyOptics acquisition, a $7 million increase in accrued incentive expense, a $3 million increase in share-based compensation expense attributable to annual focal employee equity awards at higher grant-date fair values, a $4 million increase in depreciation of fixed assets and a $2 million increase in retention compensation expense primarily related to CyOptics acquisition. These increases were partially offset by a $2 million decrease in research and development project expenses such as consumables.

Research and development expense was $221 million for the two fiscal quarters ended May 4, 2014, compared to $188 million for the two fiscal quarters ended May 5, 2013, an increase of $33 million, or 18%. As a percentage of net revenue, research and development expenses decreased to 16% for the two fiscal quarters ended May 4, 2014, compared to 17% for the two fiscal quarters ended May 5, 2013. The majority of this increase, in absolute dollars, resulted from continued investments in our wired infrastructure and wireless communications solutions. The increase was attributable to a $8 million increase in accrued incentive compensation expense, a $4 million increase in share-based compensation expense attributable to grants of share-based awards, an $11 million increase in salaries and employee benefits expense, a $7 million increase in depreciation of fixed assets, a $3 million increase in retention compensation expense primarily related to CyOptics acquisition, and a $2 million increase external services services. These increases were partially offset by a $1 million decrease in computer software and support expense compared to the two fiscal quarters ended May 5, 2013.

Selling, general and administrative. Selling, general and administrative expense was $67 million for the fiscal quarter ended May 4, 2014, compared to $52 million for the fiscal quarter ended May 5, 2013, an increase of $15 million, or 29%. As a percentage of net revenue, selling, general and administrative expense increased to 10% for the fiscal quarter ended May 4, 2014, compared to 9% for the fiscal quarter ended May 5, 2013. The primary increase in selling, general and administrative expense for the fiscal quarter ended May 4, 2014 consisted of a $9 million increase in share-based compensation primarily attributable to a special, long-term compensation and retention equity award made to our President and Chief Executive Officer and to our annual focal employee equity awards at higher grant-date fair values and a $5 million increase in variable and bonus compensation expense due to annual merit-based salary increases and additional headcount due to the CyOptics acquisition.

Selling, general and administrative expense was $141 million for the two fiscal quarters ended May 4, 2014, compared to $105 million for the two fiscal quarters ended May 5, 2013, an increase of $36 million, or 34%. Changes in components of selling, general and administrative expense for the two fiscal quarters ended May 4, 2014 consisted of a $13 million increase in share-based compensation attributable to grants of share-based awards, a $9 million increase in retention bonuses related to the CyOptics acquisition, a $6 million increase in variable and bonus compensation expense due to annual merit-based salary increases and additional headcount due to the CyOptics acquisition, a $2 million increase in salaries and employee benefits expense, a $2 million increase in fees for audit and accounting services and a $2 million increase in professional external services.

Amortization of intangible assets. Total amortization of intangible assets incurred was $26 million and $20 million for the fiscal quarters ended May 4, 2014 and May 5, 2013, respectively. Total amortization of intangible assets incurred was $51 million and $39 million for the two fiscal quarters ended May 4, 2014 and May 5, 2013, respectively. The increase in amortization expense for the fiscal quarter and two fiscal quarters ended May 4, 2014 was attributable to the increase in amortizable intangible assets from the CyOptics and Javelin Semiconductor Inc. acquisitions completed in fiscal year 2013. We anticipate our amortization expense will be substantially higher in future periods, primarily as a result of increases in amortizable intangible assets from acquisitions we completed in fiscal year 2013 as well as from completing the acquisition of LSI which closed on May 6, 2014.

Restructuring charges. We incurred $8 million in restructuring charges for the fiscal quarter ended May 4, 2014, compared to restructuring charges of $1 million for the fiscal quarter ended May 5, 2013, which was recorded in operating expenses. We incurred $25 million in restructuring charges for the two fiscal quarters ended May 4, 2014, compared to restructuring charges of $2 million for the two fiscal quarter ended May 5, 2013, of which $5 million and $20 million were recorded in costs of products sold (see "Gross Margin" above) and in operating expenses, respectively. These restructuring charges were due primarily to the planned closure of a fabrication facility as a result of the integration of the CyOptics business and the employee termination costs relating to Avago employees whose employment will be terminated following the LSI acquisition. We expect to incur additional restructuring charges in future periods as a result of further integration and alignment of completed acquisitions and acquisitions that we may make in the future, including the LSI acquisition which closed May 6, 2014.

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Interest expense. Interest expense was $1 million for each fiscal quarter and $1 million for each of the two fiscal quarters ended May 4, 2014 and May 5, 2013, respectively. Interest expense represents ongoing commitment fees related to our 2013 revolving credit facility. We expect to incur significantly higher interest charges in future periods as a result of $5.6 billion in borrowings incurred to complete the all cash acquisition of LSI which closed May 6, 2014. See Note 15. "Subsequent Events" and Note 6. "Borrowings" to the Unaudited Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q for additional details. Future interest charges will include amortization of the debt issuance costs associated with the aggregate $5.6 billion of term loan and convertible debt we incurred in connection with the LSI acquisition, as well as our new $500 million senior secured revolving credit facility. These costs total approximately $120 million in the aggregate and will be allocated and amortized using the effective interest method over the respective lives of the term loan, the convertible notes term and the revolver facility commitment term, as applicable.

Other income, net. Other income, net includes realized and unrealized gains or losses on trading securities and investment funds, interest income, foreign currency gains (losses) on balance sheet remeasurement and other miscellaneous items. Other income, net was not material for either the fiscal quarter or the two fiscal quarters ended May 4, 2014, compared to other income, net of $1 million and $3 million, respectively, for the fiscal quarter and two fiscal quarters ended May 5, 2013.

Provision for income taxes. For the fiscal quarter and two fiscal quarters ended May 4, 2014, we recorded an income tax provision of $1 million and $6 million, respectively, compared to $5 million and $6 million for the fiscal quarter and two fiscal quarters ended May 5, 2013, respectively. The tax expense for the fiscal quarter and two fiscal quarters ended May 4, 2014 included a benefit of $10 million and $14 million respectively, from the recognition of previously unrecognized tax benefits as a result of lapses in applicable statutes of limitations. The tax expense for the two fiscal quarters ended May 5, 2013 included a benefit of $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. The remaining changes in tax provisions for all periods presented were mainly due to changes in the jurisdictional mix of income and expense.

Pursuant to Accounting Standards Codification (“ASC”) 740-10-25-3(e) (Income Taxes) and ASC 810-10-45-8 (Consolidation), during the fiscal quarter ended February 2, 2014, we recorded a deferred charge for the deferral of income tax expense on certain intercompany asset transactions that occurred in the quarter. The deferred charge of approximately $32 million, 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.

Backlog

Our sales are generally made pursuant to short-term purchase orders. These purchase orders are made without deposits and may be rescheduled, cancelled or modified on relatively short notice, and in most cases without substantial penalty. Therefore, we believe that purchase orders or backlog are not a reliable indicator of future sales.

Seasonality

We have historically been affected by seasonal trends in the semiconductor and related industries. Our net revenue in the second half of the fiscal year has typically been higher than our net revenue in the first half of the fiscal year due to seasonality in our wireless communications target market. This target market historically tended to experience seasonality due to the calendar year-end holiday selling seasons. From time to time, some of our key customers, particularly in our wireless communications target market, place large orders causing our quarterly net revenue to fluctuate significantly. We expect that these fluctuations will continue and that they may be exaggerated by the launches of, and seasonal variations in sales of, consumer products such as mobile handsets, as well as changes in the overall economic environment. These fluctuations combined with other factors have increasingly overshadowed these seasonal effects in recent periods.

Liquidity and Capital Resources

Our primary sources of liquidity as of May 4, 2014 consisted of: (1) approximately $1,278 million in cash and cash equivalents, (2) cash we expect to generate from operations and (3) our then outstanding $575 million unsecured revolving credit facility, or the 2013 revolving credit facility, which was committed until October 28, 2018, and all of which was available to be drawn as at May 4, 2014. This facility was terminated in connection with the completion of the LSI acquisition.

Our short-term and long-term liquidity requirements primarily arise from: (i) interest and principal payments related to the debt obligations we incurred in connection with the acquisition of LSI, (ii) working capital requirements, (iii) research and development and capital expenditure needs, including acquisitions and investments we may make from time to time, (iv) quarterly dividend payments (if and when declared by our board of directors, or the Board), and (v) any share repurchases we may choose to make. Our ability to fund these requirements will depend on our future cash flows, which are determined by future operating performance and are, therefore, subject to prevailing global macroeconomic conditions and financial, business and other factors, some of which are beyond our control.

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LSI Acquisition

On May 6, 2014, we completed our previously announced acquisition of all of the issued and outstanding shares of common stock of LSI for an aggregate acquisition consideration of approximately $6.5 billion in cash, or $11.15 in cash per share of LSI common stock. We funded the transaction with $1 billion of cash from the combined balance sheets of the two companies, the net proceeds from $4.6 billion in senior collateralized term loan borrowings from a syndicate of banks and the net proceeds from the private placement of $1 billion in aggregate principal amount of our 2.0% Convertible Senior Notes due 2021, or the Notes, (each discussed in more detail under "Indebtedness" below), all of which significantly increase our short-term and long-term liquidity requirements in future periods. The credit agreement pursuant to which the terms loans were made also provides for a new, senior collateralized revolving credit facility in an aggregate amount of $500 million, none of which was drawn in connection with the acquisition.

Share Repurchases

On April 10, 2013, the Company's board of directors, or the Board, authorized the Company to repurchase up to 20 million of its ordinary shares in open market transactions, referred to as the 2013 share repurchase program. The 2013 share repurchase program expired on April 8, 2014. Under the 2013 share repurchase program, the Company repurchased and retired 0.3 million shares for an aggregate purchase price of $12 million in cash during the two fiscal quarters ended May 4, 2014.

At the Company's 2014 annual general meeting of shareholders on April 9, 2014, shareholders approved the Company's 2014 share purchase mandate pursuant to which, the Company is authorized, upon Board approval, to repurchase up to approximately 25 million of its ordinary shares in open market transactions or pursuant to equal access schemes, up to the date on which the Company's 2015 annual general meeting of shareholders is held or required by law to be held, referred to as the 2014 share purchase mandate. As at the date of this Quarterly Report on Form 10-Q, the Board had not approved any repurchases of the Company's ordinary shares pursuant to the 2014 share purchase mandate. The timing and amount of any future share repurchases will depend on a variety of factors including price, market conditions, the requirements of our 2014 credit agreement and applicable legal requirements.

Dividends

Summary

Our cash and cash equivalents increased by $293 million to $1,278 million at May 4, 2014 from $985 million at November 3, 2013. The increase was largely due to $480 million in cash provided by operating activities, $53 million in cash received from the issuance of ordinary shares upon exercises of options, $14 million in cash received from the sale of equity investments and $2 million in cash received from government grants, partially offset by $130 million in dividends paid to our shareholders, $125 million in cash paid for capital expenditures and $12 million of cash paid to repurchase 0.3 million of our ordinary shares.

We believe that our cash and cash equivalents on hand and cash flows from operations, combined with current availability under our new $500 million senior collateralized revolving credit facility, will provide sufficient liquidity to fund our current obligations, projected working capital requirements, capital spending, quarterly cash dividends (if and when declared by our Board) and any share repurchases we may choose to make for at least the next 12 months. We believe that, after giving effect to the acquisition of LSI, we will have cash on hand sufficient to run our business and satisfy our current obligations.

We anticipate that our capital expenditures for fiscal year 2014 will be higher than for fiscal year 2013, due primarily to spending on capacity expansion in our Fort Collins internal fabrication facility, LSI acquisition and campus rationalization.

From time to time, we engage in discussions with third parties regarding potential acquisitions of, or investments in, businesses, technologies and product lines, such as our recently completed $6.5 billion acquisition of LSI. Any such transaction could require significant use of our cash and cash equivalents, require us to issue debt or equity securities and require us to borrow under our revolving credit facility or arrange new financing to fund the transaction. If we do not have sufficient cash to fund our operations or finance growth opportunities, including acquisitions, or unanticipated capital expenditures, our business and financial condition could suffer. In such circumstances we may also seek to obtain debt or equity financing in the future. However, we cannot assure that such additional financing will be available on terms acceptable to us or at all. Our ability to service any indebtedness we may incur, including under our senior secured revolving credit facility, will depend on our ability to generate cash in the future. We could also reduce certain expenditures such payment of our quarterly cash dividend and repurchases of our ordinary shares.

In addition, even though we may not need additional funds, we may still elect to sell additional debt or equity securities or increase our current senior secured revolving credit facility for other reasons.

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Cash Flows for the Two Fiscal Quarters Ended May 4, 2014 and May 5, 2013

Our cash flows for the two fiscal quarters ended May 4, 2014 and May 5, 2013 were as follows (in millions):



	Two Fiscals Quarter Ended
	May 4, 2014			May 5, 2013
Net cash provided by operating activities	$	480		$	373
Net cash used in investing activities	(111		)	(160		)
Net cash used in financing activities	(76		)	(78		)
Net increase in cash and cash equivalents	$	293		$	135

Operating Activities

Net cash provided by operating activities during the two fiscal quarters ended May 4, 2014 was $480 million. The net cash provided by operating activities was principally due to net income of $292 million, which includes non-cash charges of $170 million and changes in operating assets and liabilities of $18 million. The non-cash charges of $170 million included $118 million for depreciation and amortization and $54 million of non-cash, share-based compensation.

Accounts receivable decreased to $319 million at May 4, 2014 from $418 million at the end of fiscal year 2013. The number of days sales outstanding decreased to 42 days at May 4, 2014 from 52 days at November 3, 2013 due to the linearity of revenue during the quarter and timing of collections. We use the current fiscal quarter revenue and accounts receivable at fiscal quarter end in our calculation of number of days sales outstanding.

Inventory increased to $301 million at May 4, 2014 from $285 million at the end of fiscal year 2013. The number of days of inventory on hand increased to 84 days at May 4, 2014 compared to 69 days at November 3, 2013, due primarily to a planned increase in inventory to prepare for an anticipated increase in demand from our wireless communication target markets, as well as significant lifetime purchases of certain wafers and other materials in fiscal quarter ended May 4, 2014. Of the 84 and 69 days of inventory on hand as at May 4, 2014 and November 3, 2013, respectively, 10 and 9 days, respectively, were attributable to the lifetime purchases. We use the current quarter cost of products sold and inventory at fiscal quarter end in our calculation of days on hand of inventory.

Other current assets increased to $136 million at May 4, 2014 from $130 million at the end of fiscal year 2013, primarily due to a $7 million increase in receivables from our contract manufacturers for materials purchased by us on their behalf to secure pricing, a $5 million increase in receivables from development arrangements and intellectual property-related revenue, a $3 million increase in distributor deposits under our distributor stock return and price adjustment programs and increase in receivables from government grant, a $4 million increase in deferred tax charges, a $2 million increase in the non-US transfer tax receivable, and a $3 million increase in prepaid expenses. These increases were partially offset by a $11 million decrease due to the sale of our investment in common stock of a U.S. publicly traded company and $7 million decrease in current deferred tax assets.

Other long-term assets increased to $73 million at May 4, 2014 from $53 million at the end of fiscal year 2013, primarily due to a $27 million increase in long-term deferred tax charge, partially offset by a $7 million decrease in long-term prepaid expenses primarily attributable to the acceleration of retention bonus payments to certain CyOptics employees due to their employment was involuntarily terminated by the Company, in accordance with the provisions of the CyOptics retention bonus plan.

Current liabilities decreased to $416 million at May 4, 2014 from $423 million at the end of fiscal year 2013, primarily due to decreases in employee compensation and benefits accruals and accounts payable. Employee compensation and benefits accruals decreased to $86 million at May 4, 2014 compared to $98 million at the end of fiscal year 2013 primarily due to payments made under our employee cash bonus plan in respect of our fiscal year 2013 performance. Accounts payable decreased to $274 million at May 4, 2014 from $278 million at the end of fiscal year 2013 mainly due to timing of disbursements. Other current liabilities increased to $56 million at May 4, 2014 from $47 million at the end of fiscal year 2013 due to a $18 million increase in accrued restructuring charges partially offset by a $4 million decrease in accrued current liabilities primarily due to the tax refund payment to CyOptics shareholders, a $2 million decrease in income sales and use tax payables and a $1 million decrease in accrued sales commissions.

Other long-term liabilities decreased to $101 million at May 4, 2014 from $106 million at the end of fiscal year 2013, primarily due to a $10 million decrease in long-term pension liabilities resulting from an amendment to our U.S. post-retirement medical benefit plan and an amendment to change our Korean pension plan from a defined benefit plan into a defined contribution plan partially offset by a net $7 million increase in deferred tax liabilities.

Net cash provided by operating activities during the two fiscal quarters ended May 5, 2013 was $373 million. The net cash provided by operating activities was principally due to net income of $238 million, which includes non-cash charges of $118

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million that were partially offset by changes in operating assets and liabilities of $17 million. The non-cash charges of $118 million included $83 million for depreciation and amortization and $35 million of non-cash, share-based compensation.

Accounts receivable decreased to $271 million at May 5, 2013 from $341 million at the end of fiscal year 2012. The number of days sales outstanding decreased to 44 days at May 5, 2013 from 51 days at October 28, 2012 due to linearity of revenue and timing of collections. We use the current quarter revenue and accounts receivable at quarter end in our calculation of number of days sales outstanding.

Inventory increased to $229 million at May 5, 2013 from $194 million at the end of fiscal year 2012. The number of days of inventory on hand increased to 76 days at May 5, 2013 compared to 58 days at October 28, 2012, due primarily to an increase in inventory to prepare for an anticipated increase in demand from our wireless target market, as well as significant lifetime purchases of certain wafers and other materials in the two fiscal quarters ended May 5, 2013. Of the 76 days and 58 days of inventory on hand as at May 5, 2013 and October 28, 2012, respectively, 11 days and 8 days, respectively, were attributable to these lifetime purchases. We use the current quarter cost of products sold and inventory at quarter end in our calculation of days on hand of inventory.

Other current assets increased to $99 million at May 5, 2013 from $72 million at the end of fiscal year 2012, primarily due to $10 million in fair market value of trading securities purchased during the first two quarters of fiscal year 2013 (of which $9 million in purchase cost is presented as cash flow used in investing activities), a $10 million increase in current deferred tax assets attributable to the Javelin acquisition and which is presented as cash flow used in investing activities, a $7 million increase in advances made to certain of our existing distributors for anticipated distributor price adjustments, a $2 million increase in prepaid expenses and a $2 million increase in receivables from our contract manufacturers for materials purchased by us on their behalf to secure pricing, partially offset by a $3 million decrease in receivables from intellectual property-related revenue and a $2 million decrease in receivables from government grants.

Current liabilities decreased to $330 million at May 5, 2013 from $346 million at the end of fiscal year 2012, primarily due to decreases in other current liabilities and accounts payable. Other current liabilities decreased due to a $5 million decrease in income, sales and use tax payables, a $1 million decrease in accrued sales commissions and a $1 million decrease in accrued warranty. Accounts payable decreased to $240 million from $248 million at the end of fiscal year 2012 mainly due to timing of disbursements.

Investing Activities

Net cash used in investing activities for the two fiscal quarters ended May 4, 2014 was $111 million, primarily due to $125 million purchases of property, plant and equipment in connection with the continued expansion of our manufacturing facility in Fort Collins, Colorado, partially offset by $14 million in cash proceeds from the sale of an investment in trading securities.

Net cash used in investing activities for the two fiscal quarters ended May 5, 2013 was $160 million, primarily due to $114 million in purchases of property, plant and equipment in connection with the continued expansion of our manufacturing facility in Fort Collins, Colorado, $37 million related to the acquisition of Javelin and $9 million in purchases of trading securities.

Financing Activities

Net cash used in financing activities for the two fiscal quarters ended May 4, 2014 was $76 million. The net cash used in financing activities was principally due to an aggregate of $130 million in payments of cash dividends to shareholders and the payment of an aggregate of $12 million to repurchase and cancel 0.3 million of our ordinary shares under our 2013 share repurchase program. This was partially offset by $53 million in net proceeds provided by the exercise of options and purchases under our ESPP, an excess tax benefit of $11 million and proceeds from research and development grants of $2 million .

Net cash used in financing activities for the two fiscal quarters ended May 5, 2013 was $78 million. The net cash used in financing activities was principally due to an aggregate of $89 million in payments of cash dividends to shareholders, the payment of an aggregate of $24 million to repurchase and cancel 0.7 million shares of our ordinary shares under our 2012 share repurchase program. This was offset by $28 million in net proceeds provided by the exercise of options and purchases under our ESPP and proceeds from research and development grants of $8 million.

Indebtedness

As of May 4, 2014, we had a total of $2 million of capital lease obligations. We had no borrowings outstanding, and were in compliance with our covenants, under our 2013 revolving credit facility as of May 4, 2014. At such date, we also had $575 million of borrowing capacity available under our then-outstanding 2013 revolving credit facility. Our 2013 revolving credit facility and the related Credit Agreement, dated as of October 28, 2013, by and among AT Finance, Avago Technologies Holding Pte. Ltd., Avago Technologies International Sales Pte. Limited, Avago Technologies U.S. Inc., Avago Technologies General IP (Singapore) Pte. Ltd., the lenders named therein and Citicorp International Limited, as administrative agent, were terminated in connection, and simultaneously with, the completion of our acquisition of LSI on May 6, 2014. There were no outstanding loan borrowings under the 2013 Credit Agreement at the time of its termination.

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Term Loans and Revolving Credit Facilities

In connection with the completion of the acquisition of LSI on May 6, 2014, our subsidiaries Avago Technologies Finance Pte. Ltd., or AT Finance, Avago Technologies Cayman Ltd., or AT Cayman, and Avago Technologies Holdings Luxembourg S.àr.l, or AT Luxco and together with AT Cayman, referred to as the Borrowers, together with a group of lenders, including Deutsche Bank AG New York Branch as the Administrative Agent, entered into a new Credit Agreement, dated May 6, 2014, referred to as the 2014 Credit Agreement. The 2014 Credit Agreement provides for a term loan facility in the aggregate principal amount of $4.6 billion and a revolving credit facility that permits the Borrowers to borrow loans from time to time in an aggregate principal amount of up to $500 million, for general corporate purposes, for swingline loans of up to $75 million in the aggregate and for the issuance of letters of credit of up to $100 million in the aggregate, which, in the case of swingline loans and letters of credit, reduce the available borrowing capacity under the revolving credit facility on a dollar for dollar basis. The Borrowers’ obligations under the Credit Agreement are guaranteed by AT Finance and certain of its subsidiaries, or the Subsidiary Guarantors, and are collateralized, subject to certain exceptions, by all the assets of AT Finance, each Borrower, and each Subsidiary Guarantor. The term loan facility has a term of 7 years and the revolving credit facility has a term of 5 years. The $4.6 billion of available term loans available under the 2014 Credit Agreement were fully drawn at the time of, and the proceeds used to fund, the completion of the LSI acquisition.

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

(i) to 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 such day plus 1/2 of 1% per annum, (c) the Adjusted LIBO Rate (as defined in the Credit Agreement) on such 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 such Interest Period 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.

Convertible Senior Notes

In connection with the completion of the acquisition of LSI on May 6, 2014, the Company completed its previously announced 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 the Purchasers, pursuant to the terms of the Note Purchase Agreement among the Company, Silver Lake Partners IV, L.P. (whose rights and obligations under the Note Purchase Agreement were thereafter assigned to and assumed by the Purchasers), and Deutsche Bank AG, Singapore Branch, as lead manager. All of the net proceeds of issuance of the Notes were used to fund the LSI acquisition.

The Notes were issued pursuant to an Indenture, dated May 6, 2014, or the Indenture, between the Company and U.S. Bank National Association, as trustee, or the Indenture. The Indenture includes customary terms and covenants, including certain events of default after which the Notes may be due and payable immediately. The Notes are the Company’s unsecured senior obligations. The Notes will mature on August 15, 2021, unless repurchased, redeemed or converted in accordance with their terms prior to such date. The Notes will pay interest semi-annually at a rate of 2.0% per year, payable in arrears on May 1 and November 1 of each year, beginning on November 1, 2014, and on the maturity date. Subject to any limitations set forth in the Indenture, the Notes will be convertible at any time until the close of business on the scheduled trading day immediately preceding the maturity date. Upon conversion, the Notes may be settled in the Company's ordinary shares, cash or a combination of cash and ordinary shares, at the Company’s option. The Notes will be 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

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Notes will have the right to require the Company to repurchase all or some of their Notes at 100% of their principal amount, plus any accrued and unpaid interest, upon the occurrence of a fundamental change (as defined in the Indenture). In addition, upon the occurrence of a make-whole fundamental change (as defined in the Indenture), Avago may be required to increase the conversion rate for the Notes converted in connection with such a make-whole fundamental change. Prior to May 6, 2019, the Company may not redeem the Notes. Beginning May 6, 2019, the Company may, at its option, redeem the Notes, in whole or in part if the closing sale price (as defined in the Indenture) of the ordinary shares for 20 or more trading days (as defined in the indenture) in the period of 30 consecutive trading days ending on the trading day immediately prior to the date on which the Company provides notice of such redemption exceeds 150% of the applicable conversion price in effect on each such trading day, at a redemption price equal to 100% of the principal amount of notes being redeemed, together with accrued and unpaid interest to, but not including, the redemption date (as defined in the Indenture).

Contractual Commitments

See Note 12 to the Unaudited Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

There were no other substantial changes to our contractual commitments during the first two quarters of fiscal year 2014 from those disclosed in our 2013 Annual Report on Form 10-K.

Off-Balance Sheet Arrangements

We had no material off-balance sheet arrangements at May 4, 2014 as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Indemnifications

See Note 12 to the Unaudited Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Accounting Changes and Recent Accounting Standards

For a description of accounting changes and recent accounting standards, including the expected dates of adoption and estimated effects, if any, on our unaudited condensed consolidated financial statements, see Note 1 to the Unaudited Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.