Washington, D.C. 20549
Tim Score, phone: +44 1223 400 400, fax: +44 1223 400 700, tim.score@arm.com, 110 Fulbourn Road, Cambridge CB1 9NJ, England
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
The number of outstanding shares in the capital of ARM Holdings plc as of December 31, 2010:
Ordinary Shares of 0.05p each 1,344,055,696
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.
If “Other” has been checked to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
In this report, the term “US GAAP” refers to generally accepted accounting principles (“GAAP”) in the US and “IFRS” refers to International Financial Reporting Standards as issued by the International Accounting Standards Board (“IASB”).
We prepare our consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.
This annual report contains forward-looking statements. These forward-looking statements are not historical facts, but rather are based on our current expectations, estimates and projections about our industry, our beliefs and assumptions. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. These risks and uncertainties are described in “Item 3. Key Information—Risk Factors” and elsewhere in this annual report. We caution you not to place undue reliance on these forward-looking statements, which reflect our management’s view only as of the date of this annual report.
As used in this annual report, “we,” “us,” “our,” the “Company,” the “Group” and “ARM” refer to ARM Holdings plc and its subsidiaries, except where it is clear that such terms mean only ARM Holdings plc.
We publish our consolidated financial statements in pounds sterling. In this annual report, references to “pounds sterling,” “pounds,” “sterling,” “£,” “pence” and “p” are to the currency of the United Kingdom (“UK”) and references to “US dollars,” “dollars,” “$” or “c” are to the currency of the United States of America (“US”). See “Item 3. Key Information—Selected Financial Data—Exchange Rate Information” for historical information regarding the noon buying rates in The City of New York for cable transfers in pounds as certified for customs purposes by the Federal Reserve Bank of New York with respect to the pound. You should not construe these translations as representations that the pound amounts actually represent such US dollar amounts or could have been or could be converted into US dollars at the rates indicated or at any other rates.
This annual report includes product names and other trade names, logos and trademarks, either registered or with respect to which applications are pending, of ARM and of other companies. ARM, ARM Powered, AMBA, ARM7TDMI, ARM9TDMI, Artisan, Artisan Components, Cortex, Embedded-ICE, Integrator, Jazelle, Mali, Move, Multi-ICE, Multi-TRACE, OptimoDE, PrimeCell, PrimeXsys, Process-Perfect, RealView, SecurCore, StrongARM, The Architecture for the Digital World, Thumb, and TrustZone are registered trademarks of ARM Limited or its subsidiaries. Advantage, ARM Developer Suite, ARM7, ARM7EJ, ARM7EJ-S, ARM7TDMI-S, ARM720T, ARM9, ARM9TDMI-S, ARM9E, ARM9E-S, ARM9EJ-S, ARM920T, ARM922T, ARM926EJ-S, ARM940T, ARM946E-S, ARM966E-S, ARM10, ARM10E, ARM1020E, ARM1022E, ARM1026EJ-S, ARM11, ARM1136J-S, ARM1136JF-S, ARM1156T2F-S, ARM1156T2-S, ARM1176JZ-S, ARM1176JZF-S, Cortex-M0, Cortex-M1, Cortex-M3, Cortex-M4, Cortex-A8, Cortex-A9, Cortex-R4, Cortex-A5, Cortex-A9 MPCore, Cortex-A15, Cortex-A15 MPCore, CoreSight, ETM, Embedded Trace Macrocell, ETM10, ETM10RV, EmbeddedICE-RT, Keil, Microvision, Mali-55, Mali-200, Mali-JSR184, Mali-JSR226, Mali-JSR239, Mali-JSR287, Mali-JSR297, Mali-SVG-t, Metro, MPCore, Neon, SAGE-X, SAGE-HS, SAGE-HD, SC100, SC110, SC200, SC210, SC300 and Velocity are trademarks of ARM Limited. All other brands or product names are the property of their respective holders. “ARM” is used to represent ARM Holdings plc; its operating company ARM Limited; and the regional subsidiaries ARM Inc.; ARM KK; ARM Korea Limited; ARM Taiwan Limited; ARM France SAS; ARM Consulting (Shanghai) Co. Ltd.; ARM Belgium Services BVBA; ARM Germany GmbH; ARM Physical IP Asia Pacific Pte. Limited; ARM Embedded Technologies Pvt. Ltd.; ARM Norway AS and ARM Sweden AB.
Various amounts and percentages set out in this annual report have been rounded and accordingly may not total.
Not applicable.
Not applicable.
Our selected financial data at December 31, 2009 and 2010 and for the years ended December 31, 2008, 2009 and 2010 has been derived from our consolidated financial statements prepared in accordance with IFRS. Our consolidated financial statements have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm. Our summary financial data at and for the years ended December 31, 2006 and 2007 are also presented in accordance with IFRS and have been derived from our consolidated financial statements that are not included in this annual report. The following selected financial data should be read in conjunction with, and are qualified in their entirety by reference to, our consolidated financial statements and the notes thereto.
The following table sets forth, for the periods indicated, certain information concerning the exchange rate between pounds sterling and US dollars based on the noon buying rate (expressed as US dollars per pound sterling). Such rates are provided solely for the convenience of the reader and are not necessarily the exchange rates (if any) we used in the preparation of our consolidated financial statements included elsewhere in this annual report on Form 20-F. No representation is made that pounds sterling could have been, or could be, converted into US dollars at these rates or at any other rates.
On February 25, 2011 the noon buying rate was $1.6116.
You should carefully consider the risks described below as well as the other information contained in this annual report in evaluating us and our business. If any of the following risks actually occurs, our business, financial condition or results of future operations could be significantly harmed. In that case, the trading price of our shares and ADSs could decline and you may lose all or part of your investment. This annual report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of many factors, including the risks faced by us described below and elsewhere in this annual report. You should also refer to the other information in this annual report, including our consolidated financial statements and the related notes.
Our Quarterly Results May Fluctuate Significantly and Be Unpredictable – This Could Adversely Affect the Market Price of Our Shares
We have experienced, and may in the future experience, significant quarterly fluctuations in our results of operations. Our quarterly results may fluctuate because of a variety of factors. Such factors include:
| | · | the timing of entering into agreements with licensees; |
| | · | the financial terms and delivery schedules of our agreements with licensees; |
| | · | the demand for products that incorporate our technology; |
| | · | the mixture of license fees, royalties, revenues from the sale of development systems and fees from services; |
| | · | the introduction of new technology by us, our licensees or our competition; |
| | · | the timing of orders from and shipments to systems companies of ARM-based microprocessors from our semiconductor partners; |
| | · | sudden technological or other changes in the microprocessor industry; and |
| | · | new litigation or developments in current litigation. |
In future periods, our operating results may not meet the expectations of public market analysts or investors. In such an event the market price of our shares could be materially adversely affected. A more detailed description of how we earn revenues from license fees and royalties is set forth in the sections entitled “Item 18. Financial Statements—Notes to the Consolidated Financial Statements—Note 1b. Summary of significant accounting policies—Revenue recognition” and “Item 5. Operating and Financial Review and Prospects—Operating Results— Critical Accounting Policies and Estimates.”
We Are Dependent on Both Our Semiconductor Partners and Major Physical IP Licensees
We rely on our semiconductor partners to manufacture and market microprocessors based on our architecture in order to receive royalties in the future. We also depend on them to add value to our licensed architecture by providing complete ARM-based microprocessor solutions to meet the specific application needs of systems companies. However, the semiconductor partners are not contractually obliged to manufacture, distribute or sell microprocessors based on our technology or to market our microprocessor architecture on an exclusive basis. Some of our existing semiconductor partners design, develop and/or manufacture and market microprocessors based on competing architectures, including their own, and others may do so in the future.
We also rely on our major physical IP licensees to manufacture and market physical IP based on our libraries. We anticipate that our revenue will continue to depend on these major customers for the foreseeable future, although the companies considered to be major customers and the percentage of revenue represented by each major customer may vary from period to period depending on the addition of new contracts, the timing of work performed by us and the number of designs utilizing our products. None of our major physical IP licensees are contractually obliged to
license future generations of physical IP components or additional physical IP components from us, and we cannot be certain that any customer will license physical IP components from us in the future. Our revenue from these customers may be comprised of license fees and royalties. In addition, we cannot be certain that any of the integrated circuit manufacturers will produce products incorporating our physical IP components or that, if production occurs, they will generate significant royalty revenue for us.
If one or more of our semiconductor partners or major physical IP licensees stops licensing our microprocessors or physical IP components, reduces its orders, fails to pay license or royalty fees due or does not produce products containing our microprocessors or physical IP components, our operating results could be materially and negatively affected.
We cannot assure you that our semiconductor partners or our major physical IP licensees will dedicate the resources necessary to promote and further develop products based on our architecture and physical IP libraries respectively, that they will manufacture products based on our microprocessors or physical IP libraries in quantities sufficient to meet demand, that we will be successful in maintaining our relationships with our semiconductor partners and major physical IP licensees or that we will be able to develop relationships with new semiconductor partners or major physical IP licensees. Although we believe that our strategy of selecting multiple semiconductor partners and major physical IP licensees will expand the market for our architecture and physical IP libraries respectively and lead to more rapid acceptance of our architecture and physical IP libraries by assuring multiple reliable sources of microprocessors and physical IP libraries at competitive prices, such a strategy may also result in distribution channel conflicts. This could create disincentives to market our architecture aggressively and make it more difficult to retain our existing semiconductor partners and major physical IP licensees and to attract new partners and licensees.
Accurate prediction of the timing of inception of new licenses is difficult because the development of a business relationship with a potential licensee may frequently span a year or more. The fiscal period in which a new license agreement will be entered into, if at all, is difficult to predict, as are the financial terms of any such agreement. Engineering services are dependent upon the varying level of assistance desired by licensees and, therefore, the timing of revenue from these services is also difficult to predict.
With increasing complexity in each successive generation of integrated circuit products, we face the risk that the rate of adoption of smaller process geometries for integrated circuit manufacturing may slow or cease. We also face the risk that licensing revenue may suffer if current or former customers collaborate with each other regarding design standards for particular generations of integrated circuit products.
The royalties we receive on ARM-based microprocessors are based on the volumes and prices of microprocessors manufactured and sold by our semiconductor partners and the royalties we receive on physical IP libraries are based on volumes and prices of wafers, manufactured and sold by our major physical IP licensees. Our royalties are therefore influenced by many of the risks faced by the semiconductor market in general. These risks include reductions in demand for SoCs based on our microprocessors and physical IP libraries and reduced average selling prices. The semiconductor market is intensely competitive. It is also generally characterized by declining average selling prices over the life of a generation of microprocessors and physical IP libraries. The effect of these price decreases is compounded by the fact that royalty rates decrease as a function of volume. We cannot assure you that delays in licensing, poor demand for services, decreases in prices or in our royalty rates will not materially adversely affect our business, results of operations and financial condition.
We Depend Largely on a Small Number of Customers and Products – This May Adversely Affect Our Revenues
Our revenues depend largely on a small number of licensees and products. As regards revenues from licensees, our revenues in a particular period are generally concentrated in a small number of licensees. If we fail to achieve the performance required under a single license contract or if a single customer fails to make its milestone payments, our business, financial condition and results of operations could be materially adversely affected. In addition, any failure to develop successor products which offer significant competitive advantages to these customers in a timely manner or any decrease in demand for ARM microprocessors or for ARM’s range of physical IP libraries could materially adversely affect us.
Our Success Depends Substantially on Systems Companies
Our success depends substantially on the acceptance of our technology by systems companies, particularly those which develop and market high-volume electronic products in the wireless, consumer electronics and networking markets where demand may be highly cyclical. The reason for this dependence is that sales of ARM-based microprocessors by our semiconductor partners to systems companies directly affect the amount of royalties we receive. We are subject to many risks beyond our control that may influence the success or failure of a particular systems company. These risks include:
| | · | competition faced by the systems company in its particular industry; |
| | · | the engineering and marketing capabilities of the systems company; |
| | · | market acceptance of the systems company’s products; |
| | · | technical challenges unrelated to our technology faced by the systems company in developing its products; and |
| | · | the financial and other resources of the systems company. |
It can take a long time to persuade systems companies to accept our technology and, even if accepted, we cannot assure you that our technology will be used in a product that is ultimately brought to market. Furthermore, even if our technology is used in a product brought to market, we cannot assure you that such product will be commercially accepted or result in significant royalties to us. Demand for our intellectual property may also be affected by consolidation in the integrated circuit and related industries, which may reduce the aggregate level of purchases of our intellectual property components and services by the combined companies.
The revenue we generate from licensing activities depends in large part on the rate at which systems companies adopt new product generations, which, in turn, is affected by the level of demand for their integrated circuits and other products.
Rapid Technological Changes in Our Industry Are Difficult to Predict – Our Business May Be Adversely Affected if We Cannot Develop New Products on a Timely Basis
The market for our architecture is characterized by rapidly changing technology and end user needs. Our business, reputation and relationships with our partners could be adversely affected if we cannot develop technological improvements or adapt our architecture and physical IP libraries to technological changes on a timely basis. Whether we will be able to compete in the future will substantially depend on our ability to advance our technology to meet these changing market and user needs and to anticipate successfully or respond to technological changes in hardware, software and architecture standards on a cost-effective and timely basis.
We will have to make significant expenditures to develop our products. The long lead time from the initial design of our technology until it is incorporated into new end user applications will place significant strain on our research and development resources. Certain of our products have suffered delays in the past. We cannot assure you that the design of future products will be completed as scheduled, that we will be successful in developing and licensing new products, that we will not experience difficulties that delay or prevent the successful development, introduction and marketing of new products or that any new products that we may introduce will achieve market acceptance.
Our Architecture, Physical IP Libraries and Development Systems Tools May Not Continue to Be Accepted by the Market
There are competing microprocessor architectures in the market. We cannot assure you that the market will continue to accept our architecture. Market acceptance of our architecture by semiconductor and systems companies for use in a variety of embedded applications is critical for our success. While our microprocessor architecture has already been licensed by many semiconductor and systems companies for use in a variety of high-volume applications in the wireless, consumer electronics and networking markets, other microprocessor architectures have
a large installed base of embedded applications and are supported by a broad base of related software and development tools. A more detailed description of these competing architectures is set forth in the section entitled “Item 4. Information on the Company—Business Overview—Competition” below. It may be difficult for our architecture to succeed against incumbent architectures as systems companies that have used other microprocessor architectures would need to invest in additional training and development tools and convert software for existing embedded applications in order to change to a new architecture. Moreover, some competing microprocessor architectures have been developed by firms, including some of our semiconductor partners, that have substantially greater financial, technical and marketing resources than we do.
Our physical IP library products also face significant competition from the internal design groups of integrated circuit manufacturers that have expanded their manufacturing capabilities and portfolio of intellectual property components to participate in the system-on-a-chip market. Our physical IP library products also face competition from integrated circuit designers that have expanded their internal design capabilities and portfolio of intellectual property components to meet their internal design needs. Integrated circuit manufacturers and designers that license our physical IP components have historically had their own internal physical IP component design groups. These design groups continue to compete with ARM for access to the integrated circuit manufacturers’ or designers’ physical IP component requisitions and, in some cases, compete with ARM to supply physical IP components to third parties. Physical IP components developed by internal design groups of integrated circuit manufacturers are designed to utilize the qualities of their own manufacturing process, and may therefore benefit from capacity, informational, cost and technical advantages.
Foundry partners may be reluctant to rely on a single vendor for a broad array of IP components and RISC microprocessors and could select another vendor to provide them with products formerly supplied by us. Alternatively, Physical IP Foundry partners could also name another vendor as their vendor of choice to their customers.
Our development systems tools business faces significant competitors from both the open source community and third-party tools and software suppliers. In the event that market share is lost to such competitors, there could be a material adverse effect on our revenues.
The High Cost of Building Advanced Semiconductor Manufacturing Facilities May Limit the Number of Foundries as Potential Customers for our Physical IP Libraries
The cost of developing leading-edge manufacturing facilities and processes needed for building advanced chips is rising. Some of ARM’s current foundry customers may delay or cancel plans for developing new manufacturing processes. Without a new process, ARM will not have an opportunity to develop and sell Physical IP libraries for that process. This would reduce the licensing opportunity for ARM. In addition, the bargaining power of the remaining foundries with advanced manufacturing facilities would be increased. This could make it harder for ARM to win profitable licensing deals with these foundries, further reducing both licensing and royalty revenue.
Competition – We May Not Be Able to Compete Successfully in the Future
The markets for our products are intensely competitive and characterized by rapid technological change. We cannot assure you that we will have the financial resources, technical expertise or marketing or support capabilities to compete successfully in the future. Competition is based on a variety of factors including price, performance, features, product quality, software availability, marketing and distribution capability, customer support, name recognition and financial strength. Further, given our reliance on our semiconductor partners, our competitive position is dependent on their competitive position. In addition, our semiconductor partners do not license our architecture exclusively, and several of them also design, develop, manufacture and market microprocessors based on their own architectures or on other non-ARM architectures. A more detailed description of the competition we face from new technologies or products is set forth in the section entitled “Item 4. Information on the Company—Business Overview—Competition.”
Our Architecture and Physical IP Libraries May Face Strong Competition from Well Resourced Competitors
Some semiconductor companies have developed their own proprietary architecture for specific markets or applications. These companies may reuse their proprietary architecture to penetrate markets where ARM is currently the architecture of choice, or where ARM may be used in the future, making it harder for ARM to penetrate in the future. For example, Intel Corporation has developed the X86 architecture for use in PCs and laptops. With mobile phones becoming smarter, Intel is trying to capture the high-end smartphone market with a family of chips based on the X86 architecture. This could limit ARM’s market share in mobile phones and could prevent any further growth into mobile computing devices. Other semiconductor companies have proprietary architectures in other applications including, but not limited to, automotive, networking, digital television, electronic storage and mobile communications. These companies may have much larger engineering, marketing and sales resources than ARM, and if successful in displacing or impeding ARM, could reduce licensing opportunities and royalties, negatively affecting operating results.
Taiwan Semiconductor Manufacturing Company (“TSMC”), one of the largest integrated circuit manufacturing customers of ARM, has historically produced intellectual property components for use by third parties in designs to be manufactured at TSMC’s foundry. These components are designed to serve the same purpose as components produced by ARM. The intellectual property components developed by TSMC have competed and are expected to continue to compete with ARM’s products. We believe that TSMC is more aggressively developing and distributing these products to encourage its customers to use TSMC-developed IP rather than products containing ARM IP. TSMC has substantially greater financial, manufacturing and other resources, name recognition and market presence than the ARM business, and the internal design group at TSMC has greater access to technical information about TSMC’s manufacturing processes. Distribution partners selected by TSMC include Cadence Design Systems, Inc. (“Cadence”), Magma Design Automation, Inc., Synopsys, Inc. (“Synopsys”) and Virage Logic Corporation. Some of TSMC’s distribution partners, such as Cadence, may have greater resources, name recognition and distribution networks than we do. If TSMC is successful in its strategy, then we would lose TSMC license revenue and TSMC royalties, negatively affecting operating results.
The Availability of Development Tools, Systems Software, EDA Tools and Operating Systems Is Crucial to the Market Acceptance of Our Products
We believe that it is crucial for the market acceptance of our products that development tools, systems software, EDA software and operating systems compatible with our architecture be available. We currently work with systems software, EDA software and tools and development partners to offer development tools, systems software, EDA software and operating systems for our architecture. However, we cannot assure you that:
| | · | we will be able to attract additional tools and development, systems software and EDA tool partners; |
| | · | our existing partners will continue to offer development tools, systems software, EDA tools and operating systems compatible with our architecture; or |
| | · | the available development tools, systems software, EDA tools and operating systems will be sufficient to support customers’ needs. |
We May Incur Unanticipated Costs Because of Products That Could Have Technical Difficulties or Undetected Design Errors
Our products or technology could have a substantial technical difficulty or an undetected design error. This could result in unanticipated costs, including product liability litigation. The discovery of any design defect or any ensuing litigation could damage our results and reputation and our relationships with partners could be adversely affected.
We May Not Fully Realize the Anticipated Benefits (including Synergy Benefits) of the Artisan (now PIPD) Acquisition
The acquisition of Artisan involved the integration of two companies that previously operated independently. There can be no assurance, however, regarding when or the extent to which the combined company will be able to
realize the benefits anticipated to result from the acquisition, including increased revenues, cost savings or other benefits.
There May Be Risks Associated with any Strategic Investments or Acquisitions We May Make
We envisage making strategic investments or acquisitions where there is an opportunity to further the establishment of the ARM architecture and physical IP libraries. Exploring and implementing any investments or acquisitions may place strain upon our ability to manage our future growth and may divert management attention from our core design and licensing business. There are also other risks associated with this strategy. We cannot assure you that we will be able to make investments or acquire businesses on satisfactory terms or that any business acquired by us or in which we invest will be integrated successfully into our operations or be able to operate profitably.
Our International Operations Expose Us to Risks
We currently have operations in various jurisdictions around the world and may in the future expand our operations either within these jurisdictions or to new jurisdictions. Some risks associated with these international operations are exposure to exchange rate fluctuations, political, economic and financial conditions and unexpected changes in regulatory environments. Another risk we face is that, particularly with respect to intellectual property, we are exposed to different legal jurisdictions. In addition, we could face potentially adverse tax consequences and difficulties in staffing and managing operations. With respect to foreign exchange, a large proportion of our revenues are in US dollars, while our costs reflect the geographic spread of our operations with in excess of 50% of our costs being in pounds sterling. This mismatch will result in gains or losses with respect to movements in foreign exchange rates and may be material. To mitigate this effect, we engage in currency hedging transactions. A more detailed description of these hedging transactions is set forth in the section entitled “Item 5. Operating and Financial Review and Prospects— Operating Results—Foreign Currency Fluctuations.” Although we have not to date experienced any material adverse effects with respect to our foreign operations arising from such factors, we cannot assure you that such problems will not arise in the future. Finally, managing operations in multiple jurisdictions will place further strain on our ability to manage overall growth.
Our Business Will Be Adversely Affected if We Cannot Manage the Significant Changes in the Number of Our Employees and the Size of Our Operations
Either through acquisition or organic growth, from time to time we may significantly increase the number of our employees and the size of our operations. These changes in head count may place a significant strain on our management and other resources. We will face challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs in different jurisdictions.
If we are unable to manage growth in our head count, expenses, technological integration and the scope of operations effectively, the cost and quality of our products may suffer and we may be unable to attract and retain key personnel and develop and market new products. Further, the inability to successfully manage the substantially larger and geographically more diverse organization could have a material adverse effect on the Company and, as a result, on the market prices of our ADSs and our ordinary shares.
We May Not Operate Disaster Recovery Plans Which Adequately Mitigate the Effects of an Event Over Which We Do Not Have Direct Control
Our business depends on the efficient and uninterrupted operation of our computer and communications software and hardware systems and other information technology. If such systems were to fail for any reason or if we were to experience any unscheduled downtimes, even for only a short period, our operations and financial results could be adversely affected. Our systems could be damaged or interrupted by earthquake, fire, flood, hurricanes, power loss, telecommunications failure, break-ins or similar events. We have formal disaster recovery plans in place. However, these plans may not be entirely successful in preventing delays or other complications that could arise from information systems failure, and, if they are not successful, our business interruption insurance may not adequately compensate us for losses that may occur, negatively affecting operating results.
We Are Dependent on Our Senior Management Personnel and on Hiring and Retaining Both Qualified Engineers and Experienced Sales and Marketing Personnel
If we lose the services of any of our senior management personnel or a significant number of our engineers or sales and marketing personnel, it could be disruptive to our development efforts or business relationships and could have a material adverse effect on our business, financial condition and results of operations. As our future success depends on whether we can continue to enhance and introduce new generations of our technology, we are particularly dependent upon our ability to identify, attract, motivate and retain qualified engineers with the requisite educational background and industry experience. Competition for qualified engineers, particularly those with significant industry experience, is intense. We are also dependent upon our senior management personnel. In addition, whether we can successfully expand geographically will depend on our ability to attract and retain sales and marketing personnel. In certain geographic regions, there is fierce competition for such personnel.
Our Business and Future Operating Results May Be Adversely Affected by General Economic Conditions and Other Events Outside of Our Control
We are subject to risks arising from adverse changes in global economic conditions. Due to economic uncertainties in many of our key markets, many industries may delay or reduce technology purchases and investments. The impact of this on us is difficult to predict, but if businesses defer licensing our technology, require fewer services or development tools, or if consumers defer purchases of new products which incorporate our technology, our revenue could decline. A decline in revenue would have an adverse effect on our results of operations and could have an adverse effect on our financial condition.
Our business and operating results will also be vulnerable to interruption by other events outside of our control, such as earthquakes, fire, power loss, telecommunications failures, political instability, pandemics, military conflict and uncertainties arising out of terrorist attacks, including a global economic slowdown, the economic consequences of additional military action or additional terrorist activities and associated political instability, and the effect of heightened security concerns on domestic and international travel and commerce.
Claims May Be Made for Which We Do Not Have Adequate Insurance
Since 2001, the insurance industry has faced unprecedented and escalating global events compounded by international economic uncertainty. As a result of these and other pressures, many insurers have withdrawn from certain market sectors. We have continued with our philosophy of only placing coverage with secure underwriters with programs arranged individually to suit our needs. We currently have global insurance policies including coverage for the following significant risks: business interruption, public and products liability, directors’ and officers’ liability. We do not insure against claims concerning patent litigation or other intellectual property infringement claims and potential related indemnification obligations, because we are of the view that any limited coverage that could be obtained is prohibitively expensive. Our results of operations could be materially adversely affected by the occurrence of a catastrophic event, to the extent that any resulting loss or claim is not covered under the terms of our then existing insurance policies.
We May Be Unable to Protect and Enforce Our Proprietary Rights
Our ability to compete may be affected by whether we can protect our technology and enforce our proprietary rights. We take great care to protect our technology and innovations with patents, agreements with licensees, employees and consultants and other security measures. We also rely on copyright, trademarks and trade secret laws to protect our technology and innovations.
However, despite our efforts, we cannot assure you that others will not gain access to our trade secrets, or that we can meaningfully protect our technology and innovations. In addition, effective trade secret protection may be unavailable or limited in certain countries. Although we intend to protect our technology and innovations vigorously, there can be no assurance that such measures will be successful.
A more detailed description of how we protect our intellectual property is set forth in the section entitled “Item 4. Information on the Company—Business Overview—Patent and Intellectual Property Protection.”
We May Have to Defend Ourselves Against Third Parties Who Claim That We Have Infringed Their Proprietary Rights
We take great care to establish and maintain the integrity of our products. We focus on designing and implementing our products without the use of intellectual property belonging to third parties, except under strictly maintained procedures and with the benefit of appropriate license rights. In the event that a third party successfully proves that it has intellectual property rights covering a product that we have licensed to customers, we will take steps to either purchase a license to use the relevant technology or work around the technology by developing our own solution so as to avoid infringement of that third party’s intellectual property rights.
An Infringement Claim or a Significant Damage Award Would Adversely Impact Our Operating Results
The semiconductor industry is characterized by frequent litigation regarding patent and other intellectual property rights. From time to time, third parties, including our competitors, may assert patent, copyright and other intellectual property rights to technologies that are important to our business. We cannot be certain that we would ultimately prevail in any dispute or be able to license any valid and infringed patents from third parties on commercially reasonable terms. Any infringement claim brought against us, regardless of the duration, outcome or size of the damage award, could:
| | · | result in substantial cost to us; |
| | · | divert management’s attention and resources; |
| | · | be time-consuming to defend; |
| | · | result in substantial damage awards; |
| | · | cause product shipment delays; or |
| | · | require us to seek to enter into royalty or other licensing agreements. |
Any infringement claim or other litigation against or by us could have a material negative affect on our business.
Any assertion of intellectual property rights by a third party against our technology could result in our licensees becoming the target of litigation and we may be bound to indemnify such licensees under the terms of our license agreements. Although our indemnification obligations are generally subject to a maximum amount, such obligations could nevertheless result in substantial expenses to us, which could have a material adverse effect on our business, financial condition and results of operations. In addition to the time and expense required for us to indemnify our licensees, a licensee’s development, marketing and sales of ARM architecture-based products could be severely disrupted or discontinued as a result of litigation, which in turn could also have a material adverse effect on our business, financial condition and results of operations.
In addition to the time and expense required for us to satisfy our support and indemnification obligations to our customers and strategic partners, any litigation could severely disrupt or shut down the business of our customers and strategic partners, which in turn could damage our relations with them and have a material adverse effect on our business, financial condition and results of operations.
Our Future Capital Needs May Require Us to Seek Debt Financing or Additional Equity Funding Which, if Not Available, Could Cause Our Business to Suffer
From time to time, we may be required to raise additional funds for our future capital needs through public or private financing, strategic relationships or other arrangements. There can be no assurance that the funding, if needed, will be available on attractive terms, or at all. Furthermore, any additional financing arrangements may be dilutive to shareholders, and debt financing, if available, may involve restrictive covenants. Strategic arrangements, if necessary to raise additional funds, may require us to relinquish our rights to certain of our technologies or products. Our failure to raise capital when needed could have a material adverse effect on our business.
HISTORY AND DEVELOPMENT OF ARM HOLDINGS PLC
History
ARM Holdings plc is a public limited company incorporated under the laws of England and Wales. The Company was formed on October 16, 1990 as a joint venture between Apple Computer (UK) Limited, Acorn Computers Limited and VLSI Technology, Inc. and operated under the name Advanced RISC Machines Holdings Limited.
In 1998, the Company re-registered as a public company under the name ARM Holdings plc when it completed its initial public offering of shares and listed its shares for trading on the London Stock Exchange and for quotation on the NASDAQ National Market. In 2004, ARM Holdings plc acquired Artisan Components, Inc., a publicly held physical IP company based in Sunnyvale, California.
Our principal executive offices are at 110 Fulbourn Road, Cambridge, CB1 9NJ, UK, and our telephone number is +44 (0)1223 400400. ARM, Inc., our US subsidiary, is located at 150 Rose Orchard Way, San Jose, CA 95134-1358, USA and its telephone number is +1 408 576 1500.
Capital Expenditures
For a discussion of the Company’s capital expenditures see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources.”
BUSINESS OVERVIEW
ARM designs microprocessors, physical IP and related technology and software, and sells development tools to enhance the performance, cost-effectiveness and energy-efficiency of high-volume embedded applications. ARM licenses and sells its technology and products to leading international electronics companies, which in turn manufacture, market and sell microprocessors, application-specific integrated circuits (“ASICs”) and application-specific standard processors (“ASSPs”) based on ARM’s technology to systems companies for incorporation into a wide variety of end products. By creating a network of Partners, and working with them to best utilize ARM’s technology, ARM is establishing its processor architecture and physical IP for use in many high-volume embedded microprocessor applications, including cellular phones, digital televisions and PC peripherals and for potential use in many growing markets, including smart cards and microcontrollers. ARM also licenses and sells development tools directly to systems companies and provides support services to its licensees, systems companies and other systems designers. ARM’s principal geographic markets are Europe, the US and Asia Pacific.
Industry Background
The semiconductor industry has been in place for many decades and provides the world’s digital electronics market with a growing variety of products. Over the life of the semiconductor industry, continuous technology developments have enabled miniaturization and given rise to an increasing level of design complexity. This increased complexity has had the effect of increasing structural costs; thus, the semiconductor industry has had to find ways to mitigate this. To this end, the industry has transitioned from being highly vertically integrated to being an industry that looks for horizontal specialization to alleviate structural cost. This in turn has given way to the creation of a sub-sector, semiconductor IP, which serves the needs of semiconductor companies by enabling them to outsource the cost of technology development where there is an inequality between the economic benefit of the development versus the differentiation that the company can achieve for the development. Specific areas where this outsourcing has occurred in a significant manner are in embedded microprocessors and physical IP.
Microprocessors are embedded in a wide variety of high-volume electronic products, ranging from video games to automotive control systems to digital cellular phones. While most of these microprocessors are invisible and inaccessible to the end user, product designers use the computational capabilities of these embedded
microprocessors to implement the operating features of electronic products and control systems. “Embedded microprocessor” is a general term that refers to microprocessors other than the central processing unit (“CPU”) in traditional desktop personal computers (“PCs”).
The embedded microprocessor market has grown to support new electronic products as well as new capabilities and features in existing products. New products with easier user interfaces, such as mobile phones and audio players, all depend on embedded microprocessors. At the same time, new capabilities and features also drive the need for new and more powerful embedded microprocessors in products such as smartphones and digital televisions. As consumers demand electronic products and control systems with more features, capabilities and portability, systems companies which manufacture these products and control systems are demanding embedded microprocessors that support increasingly complex functions at low cost, that use energy efficiently, that can be rapidly implemented to shorten time to market and that are available in volume from multiple sources.
To shorten time to market and lower development costs, system designers need technology solutions that can be rapidly implemented, both from a hardware and software standpoint, to meet varying design needs for performance, power consumption and cost. Typically, a system designer will create a system-on-chip (“SoC”) integrating one or more microprocessor cores with other processing engines and peripherals. Product designers need an open microprocessor architecture that can be rapidly implemented, used in a variety of hardware formats and easily combined with differentiating technology suited to different applications.
These designs are highly complex, containing, in some cases, hundreds of millions of transistors. SoC designers incorporate functional blocks in the form of standard physical IP libraries that translate the circuit design of the SoC into the physical layout of transistors on a silicon wafer. The SoC will typically be fabricated either at the in-house facility of the designer’s semiconductor company or at one of the industry’s foundry manufacturing companies. As process node geometries continue to shrink, the increasing complexity of developing physical IP libraries is rendering the in-house development of such technology increasingly expensive and economically unattractive, as compared to the product differentiation derived from the optimization to the designer’s semiconductor manufacturing process. The Company believes that over the long term, there will be an ever-increasing need for companies to outsource this activity in order to meet the demand of increased functionality within digital devices while remaining at a reasonable price.
As electronic products and control systems have grown more complex, the software used to implement these products and systems has also grown in complexity, forming an increasingly important component of the overall embedded microprocessor solution and contributing a significant portion of the overall development time and cost. In addition, to implement embedded microprocessor solutions efficiently, effective hardware and software development tools must be available to product designers. Using the industry-leading embedded microprocessor architecture permits a common set of software development tools to be used for application development and preserves software investments by permitting developers to reuse software across a variety of hardware implementations of the same architecture, saving considerable development resources for each new product.
ARM Solution
ARM addresses the needs of the semiconductor industry by designing and licensing microprocessors, physical IP, system components and software and development tools which enable the rapid design of embedded microprocessor solutions for use across a wide variety of applications. ARM offers systems designers a family of powerful, low-cost, energy-efficient microprocessor “cores” based on a common architecture and spanning a wide performance range. The design of these microprocessor cores (the “IP”) is then incorporated by ARM partners with other functional and computational blocks to develop semiconductor chips which are then incorporated into digital electronics products.
ARM also offers high-performance and low-power physical library solutions (“physical IP”) on a variety of processes that can be used independently for designs that may or may not contain ARM microprocessor cores. By using physical library components from ARM, users are able to design their systems around standard libraries and then have those designs fabricated at both internal and independent semiconductor manufacturing facilities.
In addition, the Company provides the necessary development boards, software development toolkits and software debug tools, which facilitate system design and rapid development of system solutions. Finally, to further support the Company’s architecture, the Company continues to grow its on-chip fabric IP, graphics IP, video IP and embedded software business units and also provides training and support services.
ARM believes that worldwide support from its semiconductor, software, design and tools partners provides systems companies with a microprocessor architecture and physical library components which are available from multiple sources and which, due to the flexibility offered by a common architecture, enables semiconductor partners and systems designers rapidly to design chips based on the ARM architecture and facilitates ongoing design and maintenance efforts at cost-competitive prices.
The Company Believes That Key Benefits of the ARM Solution are:
Maximum flexibility of performance, cost and power. The Company offers a wide range of high-performance, low-cost solutions which enable systems designers to make the appropriate performance/price trade-offs for use in a particular application. The ARM architecture offers designers the flexibility to select an ARM processor with performance, die area (chip size) and power consumption characteristics appropriate for a specific application. ARM believes that its microprocessor architecture offers designers the opportunity to design embedded microprocessors at leading price/performance ratios. ARM believes that incorporating the ARM physical IP libraries for high performance or low power gives the designer a further advantage in using the ARM solution. By minimizing the die size of ARM cores and microprocessors, maximizing the energy efficiency, and maximizing the performance through the combination of the microprocessor core and physical IP system, designers receive an unparalleled advantage by usage of the ARM portfolio of products.
Standards, re-use, and broad support enable rapid system design. As systems become more complex, use and re-use of proven hardware and software intellectual property are essential to achieve time to market and cost goals. ARM provides a set of IP that enables system designers to standardize portions of their semiconductor chip design and development which enables significant reductions in development time and costs. In addition, ARM offers a means of creating flexible system designs through its range of fabric IP based on the AMBA standard. This allows the designer to concentrate on application-specific portions of the system design, where they add real value. By deploying standard solutions across its range of cores and platforms, and making them widely available via its partnership business model, ARM attracts strong third -party support in the form of EDA modeling tools, software development tools, debug tools, operating system and real-time operating system ports, software intellectual property and peripherals.
Global partner network. ARM’s global network of partners assures systems companies of sufficient availability for high-volume products and, together with ARM’s international presence, gives systems designers global support for their design development. At December 31, 2010, ARM’s technology has been licensed to more than 250 semiconductor companies, including the majority of leading semiconductor companies worldwide. ARM’s broad semiconductor partner base provides systems companies with a wide range of suppliers, thus reducing the dependence of systems companies on any one supplier and producing price competition helping to contain costs of ARM-based microprocessors. ARM’s various partners build their own solutions using ARM technology; there are a growing number of ARM-based ASSPs and microcontrollers available for use by systems companies, thus facilitating their use of the ARM architecture. The Company works with numerous, industry leading software systems and tools and development partners, including Adobe, Symbian, Microsoft Corporation, Google, Mozilla, Sun Microsystems, and many others who provide the third-party support needed to facilitate the use of ARM technology in a wide variety of applications.
Development of software tools and platforms. ARM designs and manufactures its own RealView family of tools that span the complete development process from concept to final product deployment. Each product within the RealView portfolio has been developed closely alongside ARM cores ensuring it maximizes the cores’ performance. The RealView family of embedded software tools and hardware platforms enables validated support for device development. Support for ARM cores is provided in the RealView Development Suite at an early stage when lead partners are just starting to develop designs incorporating new ARM cores. For ARM partners producing microcontrollers, ARM has a single solution for their end-users with the RealView Microcontroller Development
Kit, based on the industry leading Keil microcontroller tools, that facilitates end-users migration from 8- to 32-bit MCUs.
ARM Strategy and Business Model
ARM’s strategy is to create technology that resides at the heart of advanced digital products. It is ARM’s strategy for its IP to be used by the world’s leading semiconductor providers to create these digital products. Therefore, ARM has taken the approach of designing and licensing its IP for which it receives an initial license fee and an ongoing royalty each time ARM’s IP is incorporated into a semiconductor chip. This type of arrangement represents the manner in which the majority of ARM revenue is generated. There is typically a delay of two to four years between the licensing of ARM technology and the time at which royalties are received. ARM’s royalties are generally based on a percentage of the revenues received by licensees on their sales of chips based on ARM technology and are normally payable by a licensee on sales occurring during the life of the ARM technology being licensed. Accordingly, ARM could continue to receive royalties in relation to specific technology even if such technology is no longer licensed to new customers. The Company believes that as ARM technology becomes more widely accepted, the revenues from royalties, as a percentage of total revenues, will increase.
The Company also intends to generate a diversified revenue base beyond license fees and royalties through support, maintenance and training, and from sales and licensing of toolkits, development boards and systems software. In addition, the Company believes that revenues from support and maintenance, the sale and licensing of development tools and system and physical IP will increase as the ARM architecture continues to become more established across a broader range of markets.
To help designers to design systems based on ARM technology and develop software for ARM-based microprocessors, ARM also provides compilers, debuggers and development boards. These tools enable optimal software to be created and improve productivity for system and software developers. These products are sold as a one-time cost to the customer and do not typically include a royalty.
Leverage partner alliances. ARM’s semiconductor partners help grow the total ARM market by integrating their own intellectual property in conjunction with ARM technology, thus combining their own particular strengths with those of ARM to provide an extensive array of ARM-based solutions. ARM’s business model also enables the Company to benefit from the extensive manufacturing, marketing and distribution networks of its semiconductor partners. The marketing and direct selling of semiconductors to systems companies is undertaken by ARM’s partners. ARM’s ability to manage its partnerships effectively has been and will continue to be a major challenge and a key factor in its success. See “Item 3. Key Information—Risk Factors—We Are Dependent on Both Our Semiconductor Partners and Major Physical IP Licensees.”
Increased availability of third-party support of ARM technology. ARM has established partnerships to develop software, tools, operating systems and designs to maximize the level of support for ARM’s technology and provide an efficient environment for system designers. Increasing acceptance and implementation of ARM technology has led to various third parties adapting software programs and development tools to ARM’s architecture. To the extent that such acceptance continues, it should drive even broader acceptance of the ARM technology by systems companies and end users. See “Item 3. Key Information—Risk Factors—The Availability of Development Tools, Systems Software, EDA Tools and Operating Systems Is Crucial to the Market Acceptance of Our Products” for a discussion of the Company’s reliance on the availability of systems software and development tools compatible with the ARM architecture.
Focus on needs of systems companies. ARM is committed to providing technology solutions responsive to the requirements of end users in a variety of markets. The Company works with systems companies either directly or in tandem with its semiconductor partners to aid the systems companies’ customization of the ARM architecture to perceived market needs. ARM also aims to simplify and shorten the design process for systems companies. See “Item 3. Key Information—Risk Factors—Our Success Depends Substantially on Systems Companies.”
Strategic involvement in related products and services. ARM will continue to analyze its market and communicate with its partner network to identify opportunities for product innovation and new product creation, including with respect to features such as low power, high performance media and graphics, security, the creation of
efficient code and platform execution environments. ARM will also continue to develop products and encourage and support industry standardization efforts to address the challenges that result from shrinking semiconductor process geometries and the increasing cost and complexity of semiconductor chip design. ARM maintains an ongoing five-year strategy plan for the development and growth of the business and constantly monitors its marketplace and evaluates new business, investment and acquisition opportunities.
Target Markets
ARM is continuing to see the convergence of the consumer electronics and telecommunications IT markets. This is being driven by a need for low-power, high-performance, secure components which need to be easy to both design and use. The Company’s five market segments (Home Solutions, Mobile Solutions, Enterprise Solutions, Embedded Solutions and Emerging Applications) each demonstrate some or all of these requirements but differ in their applications. The Company continues to evolve from focusing on digital products to focusing on the way people use digital products and also on the solutions the Company provides to meet this demand worldwide.
Home Solutions. In the home solutions market, the management and display of audio-visual content are the foremost concerns of consumers. Within this market, applications like digital TVs, set-top boxes, digital still cameras and gaming devices deliver visual content to the home. ARM is well placed in this market with its scalable architecture performance up to 2 GHz, application-accelerating features for Java (Jazelle), graphics (Mali) and physical IP libraries.
Mobile Solutions. The mobile market comprises a wide variety of mobile communication and portable computing devices, each with their own characteristics and needs. The applications include wireless handsets, mobile computers, portable media players and bluetooth devices. For each of these products, mobility (being able to use them while on the go) is the key concern to consumers. With ARM’s high performance/low power architecture, ARM’s customers can balance performance and power with cost, so that ARM ultimately provides the best solution to end users. With the acceleration of applications becoming critical, NEON and Jazelle are well placed to meet the demands of this market. Security is becoming increasingly important as mobile devices are used to carry out financial transactions, generating industry interest in products such as TrustZone. As low power is critical in mobile devices in order to extend battery life, products such as video and graphics processors, and physical IP libraries are well positioned.
Enterprise Solutions. In today’s world, having the data you need at your fingertips is key. In the Enterprise Solutions market, ARM focuses on the way data is handled through devices such as storage devices, printers and wireless and wired networking. ARM’s range of microprocessor performance, development systems and data efficient architecture give ARM a competitive advantage in this market space.
Embedded Solutions. The world of embedded processors is growing in multiple areas, including anti-lock braking systems, smartcards and industrial control applications. This market has the potential to grow substantially, especially as existing 8- and 16-bit applications need to migrate to 32-bit processors. The reliability and software reusability of the ARM architecture positions ARM to penetrate this market. In addition, the introduction of products such as the Cortex-M class of processors, with their low gate count, small size and capabilities for high code density, together with Keil’s complementary MCU tools, positions ARM for taking design slots once owned by 8-and 16-bit processors.
Emerging applications. As innovative products are designed, they face fleeting windows of market opportunity that only reward rapidly developed solutions with leading functionality and cost characteristics. With ARM’s proven technology and innovative feature set, ARM is well positioned to take advantage of these opportunities, as emerging applications such as servers, medical devices and mesh networks become available.
For a breakdown of total revenues by geographic market, see Note 2 to the Consolidated Financial Statements.
ARM’s Products and Services
ARM’s comprehensive product offering includes the following:
| | · | Microprocessor Cores: 16/32-bit RISC microprocessors cores, including specific functions such as video and graphics IP and on-chip fabric IP; |
| | · | Support and maintenance services. |
Processor Cores
Traditionally, microprocessor designers concentrated on maximizing performance, with cost and size as secondary concerns. Anticipating the growth in portable and embedded markets, ARM has always focused on producing low-cost microprocessor cores that offer the higher performance that increasingly complex applications demand, yet operate within the power constraints of portable devices. This emphasis on low power consumption and low chip and system cost has made ARM’s products suitable for a broad range of applications.
Low power consumption has wider benefits in a broad range of markets. In addition to its clear advantage for battery operated devices, it enables the use of lower cost packaging, lower cost power supply components, and it allows more electronics to be packed into a small space without requiring the expense of cooling by fan or air-conditioning.
ARM microprocessors are designed to allow high performance at a low total system cost. Two key features that help achieve this are small die area (chip size), and high code density. Code density is a measure of the amount of memory required to hold program code. High code density reduces the system cost by reducing the size of the main memory and bandwidth it must deliver.
ARM Architecture
The foundation of the ARM family of processors is its efficient RISC instruction set. The design of the instruction set has two aims: high code density and easy instruction decoding. Older CISC processors use complex instructions to reduce the number of instructions necessary to code a program, resulting in high code density, but also in complex, power-hungry processor designs. RISC processors, on the other hand, use simple instruction sets but usually code less densely than CISC processors. Code compiled for ARM RISC processors, however – particularly when using the Thumb or Thumb-2 instruction sets – is generally more dense than code for 32-bit CISC processors, delivering the memory cost advantages of high code density, with the performance, power, and die size advantages of RISC processors.
Architectural Extensions
ARM’s strategy is to develop products incorporating additional features and instruction set enhancements appropriate to application needs, while maintaining a common, general purpose RISC instruction set which provides code compatibility. Architectural extensions are introduced in subsequent versions of the ARM architecture, building on the previous architectures, thus adding backwards code compatibility of new processor cores with older generations. This section describes these architectural extensions in more detail.
Thumb. The Thumb instruction set is a subset of the most commonly used 32-bit ARM instructions which have been compressed into 16-bit wide instructions, reducing memory use by up to one-third and thereby minimizing system cost. Software designers can use both 16-bit Thumb and 32-bit ARM instruction sets, and therefore have the flexibility to emphasize performance or code size at a subroutine level as their applications require. The “Thumb-aware” core is a standard ARM decode/decompression processor in the instruction pipeline, offering the underlying power of the 32-bit ARM architecture and the high code density of the Thumb architecture from an 8/16-bit system. The Thumb architecture is well-suited for use in digital cellular telephones, hard disk drives, and any high-volume consumer product where memory cost considerations are paramount.
Thumb-2. The Thumb-2 instruction, introduced in 2003, is a second generation of the Thumb instruction set. It is a blended 32-bit and 16-bit instruction set that gives the designer more performance than the Thumb instruction set but achieves similar code density. This instruction set is supported in the ARM11-family and the Cortex-family of processors.
EmbeddedICE. EmbeddedICE is a software debug capability, which allows a programmer to debug code running on an ARM processor deeply embedded within a larger system-on-chip or chip. The ARM software development toolkit running on a PC communicates with EmbeddedICE logic within the processor core via an interface. This capability was developed by ARM specifically to address debugging issues unique to integrated processor cores. CoreSight extends the capability of EmbeddedICE to allow debugging of multiple processor cores.
Embedded Trace. ARM has developed Trace products for real-time observation of software running on its cores. Trace products provide the capability to visualize the software execution and data modifications within the core in real-time and at maximum processor speed. The data is compressed and passed directly off-chip for further processing or retained in a local embedded trace buffer for subsequent retrieval.
DSP Extensions. ARM cores can be used with a separate DSP in markets where the integration of DSP functionality with microprocessor control functionality is critical, such as: modems, digital audio equipment, pagers and other communications products. Currently, most solutions use separate, incompatible development tool chains for the microprocessor and the DSP. In response to customer demand for DSP functionality with general purpose control capability in one integrated processor, and with a unified development environment, ARM introduced the “E” extensions to the ARM9 family to provide enhanced performance in fixed point DSP applications. These extensions further enhance the multiply-accumulate capability, and add efficient support for saturating arithmetic. This gives a single combined microprocessor and signal processor engine, offering a simpler system design, lower cost, and improved time to market. The extensions are incorporated in the ARM9, and subsequent families of processors.
VFP. Vector Floating Point coprocessors have been developed for the ARM9 and ARM11 families of processors. Capable of operating on single and double precision floating point values, combined with a small amount of software, they provide complete support for the IEEE754 floating point standard.
Jazelle. ARM Jazelle technology is incorporated into a range of products including the ARM9-family and ARM11-family and the ARM JTEK (“Java Technology Evaluation Kit”) software for enabling application developers to build Java compatible products offering high efficiency and low cost. ARM Jazelle technology allows a single microprocessor to execute applications written in Java, and in conventional languages such as ANSI C and C++ without requiring an additional coprocessor – thus reducing system complexity and time-to-market. For a typical application, a Jazelle enabled processor will execute most Java byte codes directly, speeding Java program execution and delivering significant performance acceleration for applications written in Java programming language. Systems enabled with ARM Jazelle technology achieve significantly higher performance than software emulation systems and do not suffer from the high memory requirements associated with just-in-time compilation techniques.
NEON. The NEON technology is an extension developed to address the increasing media and digital signal processing requirements of future products. The NEON technology is able to efficiently process audio, video, signal processing and floating point algorithms and it will be implemented in selected members of the ARM Cortex family of processors. It has been designed to ensure that the engine is a good target for software compiler technology. Our aim is to reduce the time taken to develop complex software algorithms.
The ARM Microprocessor Families
ARM architecture processors offer a wide range of performance options in the ARM7 family, ARM9 family, ARM11 family, ARM Cortex family and ARM SecurCore family. Scalability, the ability to match processing power to the application, is an important consideration when designers select a microprocessor family. The ARM architecture gives systems designers a wide choice of processor cores at different performance/price points, yet all ARM microprocessors use substantially the same instruction set and are capable of running the same software. This protects the investments ARM’s customers make in software development, software tools and staff training. The
ARM product roadmap offers customers a proven RISC architecture and intends to deliver innovative, powerful and cost-effective solutions to industry needs in future generations, while maintaining a high degree of compatibility.
ARM offers a range of processor cores integrated with memory system solutions such as Cache Memories, Memory Protection Units, and Memory Management Units. Many ARM processor cores can be extended using the coprocessor interface and coprocessor instruction set space to add more functionality.
ARM7 family. The ARM7 family comprises low power, general purpose 32-bit RISC microprocessor cores particularly suitable where strict die area and power constraints must be satisfied while maintaining reasonably high performance, as in portable telecommunications. Each processor uses the ARMv4T instruction set with Thumb extension, enhanced Multiply, and EmbeddedICE extensions integrated within the core. See “— Architectural Extensions” above. The ARM7 offers 32-bit architecture capable of operating from 8/16-bit memory on an 8/16-bit bus for low system cost through the implementation of the Thumb instruction set. It is used in cost-sensitive embedded control applications and has been highly successful in the digital cellular telephone market.
ARM9 family. The ARM9 family comprises a range of microprocessors in the 150-250MHz range. Each processor has been designed for a specific application or function, such as an application processor for a feature phone or running a WiFi protocol stack. Therefore each has differentiating features appropriate for that application, such as support for real-time or complex operating systems, direct DMA access to memory, and additional DSP instructions for faster mathematical calculations.
ARM11 family. The ARM11 family comprises a range of microprocessors in the 300-600MHz range. Each processor has been designed for a specific application or function such as an application processor for a smart phone or controlling the engine management system in a car. Therefore, each has differentiating features appropriate for that application, such as support for fast interrupt response time, multiprocessing support and additional instructions for decoding video streams.
ARM Cortex family. This is ARM’s newest family of processor cores based on version 7 of the ARM Architecture. The family is split into three series:
| | · | A Series targeting applications processors running complex operating systems; |
| | · | R Series targeting realtime deeply embedded markets and running Real Time Operating Systems (“RTOSs”); and |
| | · | M Series addressing the needs of the low cost microcontroller markets. |
By ensuring software compatibility across the three series, ARM has enabled the re-use of software, tools and engineering knowledge.
Graphics IP
In May 2006, ARM acquired Falanx Microsystems AS, a Norwegian 3D Graphics IP company. Falanx develops graphics accelerator IP and software for semiconductor system-on-chip (“SoC”) vendors that deliver high-quality multimedia images without compromising performance, power consumption or system cost. The acquisition enhances ARM’s ability to enable industry-leading 3D graphics solutions on mobile phones, portable media players, set-top boxes, handheld gaming devices and infotainment systems (including automotive), providing us with full control over the development of our future 3D graphics solutions.
Video IP
In December 2008, ARM acquired Logipard AB, a leading video processor and imaging technology company, from Anoto Group AB. The acquisition of video processor technology builds on the success of the ARM’s 3D graphics processor, and enables ARM to provide customers with an integrated multimedia platform, which is becoming increasingly important in devices such as mobile computers, portable media players and digital TVs.
Physical IP
Acquisition of Artisan Components
In December 2004, ARM acquired the entire share capital of Artisan Components, Inc. (“Artisan”), a leading provider of physical IP components for the design and manufacture of complex SoC integrated circuits (“ICs”). In January 2005, Artisan became ARM’s Physical IP Division (“PIPD”) and was merged into ARM, Inc. on January 1, 2007.
Management believes that the strategic benefits of the combination include:
| | · | Enabling ARM to deliver one of the industry’s broadest portfolios of SoC IP to their extensive, combined customer base; |
| | · | Better positioning ARM to take advantage of growth opportunities across multiple industries as system design complexity increases in the sub-micron age; |
| | · | Combining highly complementary sales channels, aligning ARM’s channel to silicon manufacturers with PIPD’s channel to more than 2,000 companies; and |
| | · | Strengthening the links between key aspects of SoC development, enabling ARM to deliver solutions that are further optimized for power and performance. |
PIPD
Following the acquisition of Artisan, ARM has become a leading provider of physical IP components for the design and manufacture of integrated circuits, including SoCs. ARM’s products include embedded memory, standard cell, input/output components and analog and mixed-signal products, which are designed to achieve the best combination of performance, density, power and yield for a given manufacturing process. ARM’s physical IP components are developed for a variety of process geometries ranging from 20nm – 250nm design and are tested by producing them in silicon to ensure that they perform to specification, reducing the risk of design failure and gaining valuable time to market. ARM licenses its products to customers for the design and manufacture of integrated circuits used in complex, high-volume applications, such as portable computing devices, communication systems, cellular phones, consumer multimedia products, automotive electronics, personal computers and workstations.
ARM’s physical IP components are developed and delivered using a proprietary methodology called “Process-Perfect™” that includes a set of commercial and proprietary electronic design automation tools and techniques. This methodology ensures that ARM’s intellectual property components are designed to achieve the best combination of performance, density, power and yield for a given manufacturing process in the shortest period of time possible. These components and ARM’s methodology are its core technology and are easily integrated into a variety of customer design methodologies and support industry standard IC design tools, including those from EDA tool vendors such as Cadence, Magma, Mentor Graphics and Synopsys, as well as customers’ proprietary IC design tools. To support these various IC design tool environments, each of ARM’s products includes a comprehensive set of verified tool models.
Physical IP Products
Memory products. ARM’s embedded memory components include random access memories, read only memories and register files. ARM’s high -speed, high-density and low-power components include single- and dual-port random access memories, read only memories, and single- and two-port register files. ARM’s embedded memory components are configurable and vary in size to meet the customer’s specification. For example, ARM’s memory components will support sizes from 2- to 128-bits wide and from 8 to 16,384 words. All of ARM’s memory components include features such as a power-down mode, low-voltage data retention and fully static operation. In addition, ARM’s memory components may include built-in test interfaces that support popular test methodologies. ARM offers an additional feature for its memory components, known as Flex-Repair ™ that includes redundant storage elements which may help increase the manufacturing yield of integrated circuit designs containing large memories.
ARM’s memory components are designed to enable the chip designer maximum flexibility to achieve the optimum power, performance, and density trade-off. ARM’s high-density memory components are designed for applications where achieving the lowest possible manufacturing cost is critical. These are typically consumer applications with high manufacturing volumes. To achieve the lowest possible manufacturing cost for these products, ARM utilizes proprietary circuit and layout techniques to reduce the overall area of the memories. In addition, ARM uses specific design and analysis techniques to enhance production yield. ARM’s low-power memory components are designed to prolong battery life when used in battery-powered electronic systems. These physical IP components achieve low power through a combination of proprietary design innovations that include latch-based sense amplifiers, a power efficient banked memory architecture, precise core cell balancing and unique address decoder and driver circuitry.
Logic products. Standard cell libraries map the logic functions of a design to the physical functions of the design, an essential function for all integrated circuits. ARM’s standard cell products are optimized for each customer’s preferred manufacturing process and integrated circuit design tool environment, resulting in greater density as compared to competitive standard cell components. ARM offers standard cell components that are optimized for high performance, high density or ultra high density to meet the needs of different markets.
ARM logic products deliver optimal performance, power and area when building ARM Processors, Graphics, Video and Fabric IP along with general SoC subsystem implementation, designed to deliver highest yield through extensive manufacturing optimization.
High-speed interface products. ARM delivers physical interface and analog timing products for a broad range of SDRAM DDR (double-data rate) applications ranging from high-speed mission critical applications to low-power memory sub-systems. These interface products have been optimized for high data bandwidth, low power and enhanced signaling integrity features to enable support for a wide range of applications from high-end graphics and high-speed communications to low-power handsets thereby completing ARM’s Processor to pads physical IP offerings.
Silicon on Insulator (“SOI”) products. ARM’s line of SOI physical IP products have been derived from the acquisitions of Soisic SA (“Soisic”) in October 2006. SOI is an alternative methodology to traditional semiconductor fabrication techniques that enables higher performance and lower power designs than today’s more common bulk silicon process. It is ARM’s belief that SOI will become an increasing proportion of the substrate market over time. The acquisition of Soisic will enable ARM to provide SOI technology to the ARM customer base, and will facilitate the development of the necessary ecosystem of tool and technology providers to enable further adoption of the technology.
System Design
RealView® software development tools help a software design engineer deliver proven products right the first time. Engineers use these tools in the design and deployment of code, from applications running on open operating systems right through to low-level firmware.
The RealView Development Suite is complemented by hardware components that allow the software designer to connect to a real target system and control the system for the purposes of finding errors in the software. The RealView ICE unit allows the software developer to control the software running on the prototype product and examine the internal state of the prototype product, which is an essential part of debugging software. The RealView Trace unit allows the software developer to capture the way that the software executes on the product in real-time and provides feedback on the prototype product performance.
RealViewHardware Platforms are ideal systems for prototyping ARM-based products. This enables the function of the product to be confirmed in advance of building a silicon chip with a foundry or with a silicon partner. Building a silicon chip is an expensive process which requires a high degree of certainty in the prototype product function. There are three families of boards within the RealView Hardware Platforms: Versatile Express , Versatile and Soft Macrocell Models. The RealView Versatile Express product family allows prototypes of the product to be built with a range of ARM cores provided as part of the system. The RealView Versatile family allows software to be executed at a higher speed to check the interaction of the software and the hardware at speeds close to those that
are used in the final product. RealView Hardware Platforms are ideal systems for prototyping ARM-based products. They are suitable for architecture and CPU evaluation, hardware and software design, and chip emulation.
Following the acquisition of Keil Elektronik GmbH and Keil Software, Inc. in October 2005, ARM has introduced the RealView Microcontroller Development Kit for the ARM microcontroller family which supports ARM-based microcontrollers and 8051-based microcontrollers from companies such as Analog Devices, Atmel, NXP, Samsung, Sharp,STMicroelectronics and Texas Instruments. The RealView Microcontroller Development Kit is used by developers who are building products and writing software using standard off-the-shelf microcontrollers.
Support and Maintenance Services
Support, maintenance and training. ARM provides support and maintenance services under its license agreements to its semiconductor partners as well as ARM product-related training. See “—License Agreements” and “Item 5. Operating and Financial Review and Prospects—Operating Results—Overview— Service Revenues— Support and maintenance.” In order to serve its partners better, ARM has expanded the range of support, maintenance and training services, and now provides such services from its overseas offices, local to our customers’ engineering teams. To this end ARM has Technical Support staff in its Bangalore, India and China offices. See “Item 3. Key Information—Risk Factors—Our International Operations Expose Us to Risks” for a discussion of certain risks inherent in our international operations.
ARM Partner Network
Semiconductor partners. ARM licenses its technology on a worldwide and non-exclusive basis to semiconductor partners that manufacture and sell ARM-based chip solutions to systems companies. At December 31, 2010, ARM’s technology has been licensed to more than 250 semiconductor companies, including many of the leading semiconductor companies worldwide. ARM serves this geographically diverse base from offices in the UK, P.R. China, France, Germany, Belgium, Israel, Japan, South Korea, Taiwan, India, Singapore and the United States.
Tools and development partners. ARM enables its tools and development partners to design tools that help ARM’s semiconductor partners and customers design ARM-based systems. ARM provides IP and support to these tools and development partners to give end customers of the ARM architecture the widest possible range of tools support.
Design partners. There are many design companies who develop ARM-based solutions for specific customer needs. Tasks for the system designers range from developing World Wide Web browser software for ARM-based platforms to offering turnkey product design services. The Company has also introduced the ARM Approved Design Center Program whereby design houses, which pass our strict qualification process, are able to access ARM technologies to enable them to undertake ARM-based designs for third parties.
License Agreements
ARM is the owner of IP in the field of microprocessor architecture and implementation for embedded signal processing, graphics IP, video IP, system platforms, peripherals, system software and software development and debug tools and physical IP components. ARM creates innovative technology which incorporates such IP. ARM grants licenses to such technology to semiconductor manufacturers, IDMs and fabless companies, original equipment manufacturers and chip design houses to enable such licensees to design, manufacture and distribute silicon chips which combine such technology with licensees’ own differentiating proprietary technology. The licenses are granted under written agreements which contain contractual terms and conditions to protect the technology and the intellectual property embodied therein and to limit ARM’s liability in respect of licensees’ use of the technology. There are a number of different forms of license offered by ARM which are structured to address different licensee requirements and different intellectual property protection issues. In all forms of license, ARM strictly controls the modification rights which it grants to its technology and mandates, in order to protect the integrity of the ARM architecture, that the technology is verified by reference to ARM specified tests prior to distribution in licensee products.
Fees and royalties. With regard to microprocessors, ARM typically charges a license fee for access to its technology and a royalty for each unit of silicon which incorporates ARM’s technology and is distributed by the licensee. ARM licenses its physical IP components on a non-exclusive, worldwide basis to major IC manufacturers and IC design teams that are customers of such manufacturers.
License fees are invoiced in accordance with an agreed set of milestones. Revenue generated in the form of license fees is recognized in accordance with IFRS. Royalties are invoiced and recognized quarterly in arrears.
License Programs in respect of the Processor Division
The Processor Division’s licenses generally fall under three broad programs: Architecture, Implementation and Foundry. The Architecture License Program is associated with Architecture Licenses. The Implementation License Program encompasses the Implementation License, the Term License, the Per-Use License and the Subscription License. The Foundry License Program is made up of Foundry Licenses and Single Use Design Licenses. Each of these licenses is described below.
The Architecture License provides the licensee with the flexibility to differentiate its ARM-based products by creating alternative implementations of the licensed architecture, while retaining instruction set compatibility.
The Implementation License is a license with the objective of producing a specific ARM-based end product. The licensee has perpetual design and manufacturing rights for the licensed product.
The Term License has the same objectives as the Implementation License. The difference is in the design right license grant, as the design rights are only granted for a limited period of generally three years for the licensed product.
The Per-Use License has the same objectives as the Implementation License. The difference is in the design rights, as these are granted for design of one ARM-based end product.
The Subscription License allows a partner access to a selected set of ARM products, including unspecified future products, over a defined time period for a set annual fee. Design rights are granted for the subscription period, and manufacturing rights are perpetual for ARM-based products designed during that period.
The Foundry Program effectively splits an Implementation License into two parts. The Foundry License is a manufacturing license held by the foundry, which gives the foundry the right to manufacture ARM products but only for a partner who has the corresponding Single Use Design License. The Single Use Design License is held by the partner and gives it the right to design products using the specified ARM product. The Single Use Design Licensee only has access to a design kit and does not get access to the layout of the core. The Single Use Design Licensee will ship the design of the ARM-compliant product to the foundry quoting a design identification and the foundry will only accept the design if the correct design identification is quoted. At the foundry, the full layout of the ARM product is merged into the ARM-compliant product prior to manufacture. All royalties are payable by the Single Use Design Licensee.
License Programs in respect of Physical IP
ARM charges manufacturers a license fee that gives them the right to manufacture ICs containing physical IP components ARM has developed for its manufacturing process. Manufacturers also agree to pay ARM royalties based on the selling prices of ICs or wafers that contain ARM’s physical IP components. Generally, ARM credits a small portion of the royalty payments to the manufacturer’s account to be applied against license fees for any future orders placed with ARM within a certain time period, if any, payable by the manufacturer. The portion of the royalty payment that is credited to a manufacturer’s account to be applied against future license fees, if any, is based on negotiations at the time the license arrangement is signed.
ARM provides the design rights to use ARM’s physical IP from the majority of libraries developed for the manufacturing facilities free of charge. This enables small fabless design companies to easily gain access to the ARM physical IP technology and have their design manufactured at a variety of foundry companies. In some cases, ARM will charge a license fee to the design company for optimized libraries for specific process technologies and
process variants. The royalties for these designs are then subsequently collected from the facility where they were manufactured.
Competition
The markets for the Company’s products are intensely competitive and are characterized by rapid technological change. These changes result in frequent product introductions, short product life cycles and increased product capabilities typically representing significant price/performance improvements. Competition is based on a variety of factors including price, performance, product quality, software availability, marketing and distribution capability, customer support, name recognition and financial strength. Further, given the Company’s reliance on its semiconductor partners, the Company’s competitive position is dependent on its partners’ competitive positions. In addition, ARM’s semiconductor partners do not license ARM technology exclusively, and several of them also design, develop, manufacture and market microprocessors based on their own architectures or on other non-ARM architectures and develop their own physical IP in-house. They often compete with each other and with ARM in various applications.
Many of the Company’s direct and indirect competitors, including some of ARM’s semiconductor partners, are major corporations with substantially greater technical, financial and marketing resources and name recognition than ARM. Many of these competitors have a much larger base of application software and have a much larger installed customer base than ARM. There can be no assurance that ARM will have the financial resources, technical expertise, marketing or support capabilities to compete successfully in the future.
The Company believes that the ARM architecture is the leading independent microprocessor technology openly licensed to other companies and that the broad presence afforded to the Company through its established worldwide network of partners gives it an advantage over other companies which license microprocessor-related technology. The Company believes that its products offer high performance at competitive prices, and compete favorably in the embedded market by providing an open compatible architecture that is scalable from high-performance multimedia applications to small battery operated devices. However, there can be no assurance that the Company will be successful in the face of increasing competition from new technologies or products introduced by existing competitors and by new companies entering the market. See “Item 3. Key Information—Risk Factors— Competition—We May Not Be Able to Compete Successfully in the Future” and “Item 3. Key Information—Risk Factors—Our Architecture, Physical IP Libraries and Development Systems Tools May Not Continue to Be Accepted by the Market.”
Patent and Intellectual Property Protection
The Company has an active program of protecting its proprietary technology through the filing of patents. The Company currently holds 578 US patents in various aspects of its technology, and 878 non-US patents with expiration dates ranging from 2012 to 2031. In addition, the Company has 453 patent applications pending in the United States and an additional 690 patent applications pending in the United Kingdom and various other jurisdictions. The Company’s US patents do not prevent the manufacture or sale of ARM-based products outside of the United States. There can be no assurance that the Company’s pending patent applications or any future patent applications will be approved or will not be challenged successfully by third parties, that any issued patents will protect the Company’s technology or will not be challenged by third parties, or that the patents of others will not have an adverse effect on the Company’s ability to do business. Furthermore, there can be no assurance that others will not independently develop similar or competing technology or design around any patents that have been or may be issued to the Company.
The Company attempts to protect its trade secrets and other proprietary information through agreements with licensees and systems companies, proprietary information agreements with employees and consultants and other security measures. The Company also relies on trademarks, copyright and trade secret laws to protect its technology. Despite these efforts, there can be no assurance that others will not gain access to the Company’s trade secrets, or that the Company can meaningfully protect its technology. In addition, effective trademark, copyright and trade secret protection may be unavailable or limited in certain foreign countries. Although the Company intends to protect its rights vigorously, there can be no assurance that such measures will be successful.
Certain of the Company’s license agreements require licensees to grant back to ARM a royalty-free non-exclusive license to patented licensee modifications to the ARM technology. Such licenses permit ARM to sublicense to other licensees.
The semiconductor industry is characterized by frequent litigation regarding patent and other intellectual property rights. See “Item 8. Financial Information—Legal Proceedings” for details of current litigation. Further litigation may be necessary in the future to enforce the Company’s patents and other intellectual property rights, to protect the Company’s trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity, and there can be no assurance that other parties in any such litigation would not be able to devote substantially greater financial resources to such litigation proceedings or that the Company would prevail in any future litigation. Any such litigation, whether or not determined in the Company’s favor or settled by the Company, would be costly and would divert the efforts and attention of the Company’s management and technical personnel from normal business operations, which could have a material adverse effect on the Company’s business, financial condition and results of operations.
Any adverse determinations in litigation could result in the loss of the Company’s proprietary rights, subject the Company to significant liabilities, require the Company to seek licenses from third parties or prevent the Company from licensing its technology, any of which could have a material adverse effect on the Company’s business, financial condition and results of operations. Moreover, the laws of certain countries in which the Company’s technology is or may in the future be licensed may not protect the Company’s intellectual property rights to the same extent as laws in the United Kingdom or the United States, thus reducing the enforceability of the Company’s intellectual property in those countries.
In any potential dispute involving the Company’s patents or other intellectual property, the Company’s licensees could also become the target of litigation and the Company may be bound to indemnify such licensees under the terms of its license agreements. Although ARM’s indemnification obligations are generally subject to a maximum amount, such obligations could nevertheless result in substantial expenses to the Company. In addition to the time and expense required for the Company to indemnify its licensees, a licensee’s development, marketing and sales of ARM architecture-based products could be severely disrupted or discontinued as a result of litigation, which in turn could have a material adverse effect on the Company’s business, financial condition and results of operations. See “Item 3. Key Information Risk Factors We May Be Unable to Protect and Enforce Our Proprietary Rights and We May Have to Defend Ourselves Against Third Parties Who Claim That We Have Infringed Their Proprietary Rights.”
Marketing and Distribution
In order to speed global acceptance of ARM technology, ARM seeks partners with diverse geographic locations and a broad base of systems company relationships. The Company markets its architecture and technology directly to its semiconductor partners and other customers from its offices in Cambridge, Maidenhead, Sheffield and Blackburn in the United Kingdom and also from offices in Japan, South Korea, France, Germany, Norway, Taiwan, P.R. China, Israel, Slovenia, India, Singapore, and in California, Texas, Massachusetts, North Carolina and Michigan in the United States. The Company’s architecture and technology are marketed on the basis of a number of factors including high performance/low power and price/performance, rapid time-to-market and the availability of third-party support. ARM also capitalizes on the extensive marketing and distribution networks of its semiconductor partners who market and distribute ARM core-based products directly to systems companies. As part of the Company’s strategy to increase ARM’s visibility, the Company’s license agreements generally require its partners to display an ARM logo on the ARM core-based products that they distribute. The Company believes that to the extent ARM technology becomes more widely accepted, the ARM “brand” will become increasingly important to potential partners and will drive the Company’s expansion into related software, development tools and system design. ARM believes that the availability of its marketing, sales and support services to all of its partners worldwide is critical to the success of the ARM architecture.
Research and Development
The ability of the Company to compete in the future will be substantially dependent on its ability to advance its technology in order to meet changing market needs. To this end, Company engineers are involved in researching and
developing new versions of ARM microprocessor cores and physical IP technology as well as related software and tools applications. The Company is also involved in collaborative research with selected universities to leverage the technological expertise available at those universities. The Company has acquired certain patents from these collaborations.
As of December 31, 2010, ARM had 1,274 full-time research and development staff located at offices in Cambridge, Maidenhead, Sheffield and Blackburn in the United Kingdom; Sophia Antipolis and Grenoble, France; Grasbrunn, Germany; Trondheim, Norway; Sentjernej, Slovenia; Austin, Texas, USA; Sunnyvale, Irvine and San Diego, California, USA; Olympia, Washington, USA; and Bangalore, India.
In 2008, 2009 and 2010, research and development costs were approximately £87.6 million, £112.2 million and £139.8 million, respectively. Costs in 2008, 2009 and 2010 included £10.3 million, £11.4 million and £16.3 million, respectively, of share-based payments charges in accordance with IFRS 2. Excluding these charges, research and development costs were 26%, 33% and 30% of total revenues in 2008, 2009 and 2010, respectively.
Acquisitions
ARM made no acquisitions in 2010.
ORGANIZATIONAL STRUCTURE
ARM Holdings plc is the holding company for a number of subsidiaries. The following is a list of our significant subsidiaries at December 31, 2010. Not all subsidiaries are included, as the list would be excessive in length. Unless stated otherwise, each subsidiary is wholly owned.
| | Jurisdiction of Incorporation |
ARM, Inc. | | United States |
ARM Germany GmbH | | Germany |
ARM KK | | Japan |
ARM Korea Limited | | South Korea |
ARM Limited | | England and Wales |
ARM Taiwan Limited | | Taiwan |
ARM France SAS | | France |
ARM Consulting (Shanghai) Co. Ltd. | | P.R. China |
ARM Norway AS | | Norway |
ARM Sweden AB (formerly Logipard AB) | | Sweden |
ARM Embedded Technologies Pvt. Ltd. | | India |
ARM Physical IP Asia Pacific Ptc. Ltd. | | Singapore |
PROPERTIES
The Company leases land and buildings for its executive offices, engineering, marketing, administrative and support operations and design centers. The following table summarizes certain information with respect to the principal facilities leased by the Company:
| | | | Lease Term and Commencement Date | | Approximate Area (square feet) | | |
| Cambridge, UK (110 Fulbourn Road) | | Leasehold | | 20 years September 20, 1999 | | 45,000 | | Executive offices and engineering, marketing and administrative operations |
| Cambridge, UK (130 Fulbourn Road) | | Leasehold | | 20 years March 28, 2002 | | 35,000 | | Executive offices and engineering, marketing and administrative operations |
| | | | Lease Term and Commencement Date | | Approximate Area (square feet) | | |
| Cambridge, UK (90 Fulbourn Road) | | Leasehold | | 20 years December 25, 1993 | | 10,000 | | Executive offices and engineering, marketing and administrative operations |
| Cambridge, UK (100 Fulbourn Road) | | Leasehold | | 13 years October 4, 2010 | | 30,000 | | Executive offices and engineering, marketing and administrative operations |
Maidenhead, UK | | Leasehold | | 25 years July 28, 1998 | | 20,000 | | Executive offices and design center |
San Jose, California, USA | | Leasehold | | 7 years August 1, 2008 | | 92,000 | | Executive offices and engineering, marketing and administrative operations |
Austin, Texas, USA | | Leasehold | | 7 years August 1, 2009 | | 42,000 | | Design center, marketing and support operations |
Bangalore, India | | Leasehold | | 5 years July 15, 2007 | | 63,500 | | Executive offices and engineering, marketing and administrative operations |
In addition, the Company leases offices in Sheffield, England; Blackburn, England; Vilvoorde, Belgium; Grasbrunn, Germany; Trondheim, Norway; Lund, Sweden; Sophia Antipolis and Grenoble, France; Sentjernej, Slovenia; Irvine, California, USA; Plano, Texas, USA; and Olympia, Washington, USA that are used for engineering and administrative purposes as well as in Shin-Yokohama, Japan; Taipei, Taiwan; and Seoul, South Korea which are used for marketing and support operations. Company personnel based in Boston, Massachusetts, USA; Detroit, Michigan, USA; Salem, New Hampshire, USA; San Diego, California, USA; Shanghai, Shenzhen and Beijing, P.R. China; Munich, Germany; Paris, France; Singapore and Kfar Saba, Israel have office space available to them.
None.
OPERATING RESULTS
The following discussion should be read in conjunction with the consolidated financial statements of ARM Holdings plc and notes thereto included elsewhere in this document which have been prepared in accordance with IFRS, which differ in certain respects from U.S. GAAP, and with the discussion of certain risk factors set forth under “Item 3. Key Information—Risk Factors” that might materially affect the Company’s operating results and financial condition.
We have decided to report under IFRS, with effect from January 1, 2008, and have prepared our financial statements according to IFRS, including comparatives.
Within the review of the Operating Results we have included certain non-IFRS measures, specifically we present (i) research and development costs, (ii) sales and marketing expenditure, (iii) general and administrative costs, (iv) operating costs for each of the segments and (v) profit/loss before tax for each of the segments, adjusted in each case to exclude share-based compensation charges including payroll taxes, amortization of intangibles acquired with business combinations, investment-related charges and restructuring charges. Where such non-IFRS measures are presented, we also present the reconciling items (share-based compensation charges including payroll taxes, amortization of intangibles acquired with business combinations, investment-related charges and restructuring charges) and amount thereof, to the most directly comparable IFRS measures of research and development costs, sales and marketing expenditure, general and administrative and operating costs and profit/loss before tax for each of the segments, respectively.
We believe that disclosing such non-IFRS measures enables investors to isolate and evaluate clearly the impact of certain items (share-based compensation charges including payroll taxes, amortization of intangibles acquired with business combinations, investment-related charges and restructuring charges) separately from the underlying financial performance of the Company. We believe this also allows for a clearer comparison of performance from year to year (including of our research and development costs, sales and marketing expenditure, general and administrative costs, and operating costs and profit/loss before tax for each of the segments). Management believes that this provides analysts and investors with valuable additional information which gives them an improved insight into the business.
It should be noted that the non-IFRS measures presented are adjusted items and that all items for which the non-IFRS measures are adjusted are included in our reported financial information because they represent real costs of our business in the periods presented. As a result, non-IFRS measures merely allow investors to differentiate among different kinds of costs and they should not be used in isolation. Our determination of non-IFRS measures, together with our presentation of them within this financial information, may differ from similarly titled non-IFRS measures of other companies.
Overview
ARM designs the technology that lies at the heart of advanced digital products, from wireless, networking and consumer entertainment solutions to imaging, automotive, security and storage devices. ARM’s comprehensive product offering includes 16/32-bit RISC microprocessors, data engines, graphics processors, digital libraries, embedded memories, peripherals, software and development tools, as well as analog functions and high-speed connectivity products. The Company licenses this technology to semiconductor companies which, in turn, manufacture, market and sell microprocessors and related products. ARM has developed an innovative, intellectual property-centered and market-driven business model in which it neither manufactures nor sells the products incorporating ARM technology, but concentrates on the research and development, design and support of the ARM architecture and supporting development tools and software. ARM provides a total system solution that offers a fast, reliable path to market for leading electronics companies.
The Company’s revenues in 2010 increased in US dollars, being the primary currency of revenues generated, by approximately 29% whilst the semiconductor industry US dollar revenues as a whole increased by about 23% during the period October 1, 2009 to September 30, 2010. This period is, in the Company’s opinion, relevant for comparison purposes because the Company’s royalty revenues are recognized when the Company receives notification from the customer of product sales, and such notification is typically received in the quarter following shipment of the product by the customer. Looking ahead to 2011, semiconductor industry revenues are generally anticipated to grow by approximately 8% compared to 2010 and the Company is well positioned to continue to outperform the industry.
The Company has remained both profitable and cash generative (before investing activities). On operating profits of £107.0 million, cash inflows from operating activities were £176.9 million, resulting in cash being returned to shareholders through dividends of £34.3 million and a year-end cash, cash equivalents, short- and long-term deposits, net of accrued interest and marketable securities balance of £290.1 million.
Revenues
The Company’s revenues are classified as either “Product Revenues,” consisting of license fees, sales of development systems and royalties, or “Service Revenues,” consisting of revenues from support, maintenance and training. The most significant component of ARM’s total revenues are license fees and royalty income which accounted for approximately 84%, 83% and 86% of total revenues in 2008, 2009 and 2010, respectively.
License fees as a percentage of total revenues will be affected by fluctuations in royalties and in demand for ARM’s development systems and support and maintenance services. These products and services complement ARM’s basic licenses by supporting ARM’s traditional semiconductor partners in their efforts to reduce time to market. In addition, they provide ARM with a way to support systems companies who purchase finished ARM technology-based products from semiconductor companies as well as certain software vendors whose software runs on ARM microprocessors. Growth in these complementary products and services will depend on continued success
in demonstrating to semiconductor companies, systems companies and software vendors the enhanced implementation possibilities which such products and services provide for ARM technology-based products and, more generally, on continued market acceptance of the ARM architecture. Growth in these complementary products and services will also depend on whether the Company can devote sufficient engineering staff to support growth in services. Revenues from development systems and support and maintenance services was approximately 16%, 17% and 14% of total revenues in 2008, 2009 and 2010, respectively.
Revenues from royalties accounted for approximately 49%, 51% and 54% of total revenues in 2008, 2009 and 2010, respectively. The Company believes royalty revenue will continue to contribute a significant portion of total revenue going forward as the total number of partners and licenses increases.
As of December 31, 2010, the Company had more than 250 semiconductor licensees who, in turn, provide access to many other customers worldwide.
Product Revenues
License fees. Most licenses are designed to meet the specific requirements of the particular customer and can vary from rights to embed ARM technology into a customer’s own application specific product to the complete design of a “system-on-chip.” See “Item 4. Information on the Company—Business Overview—License Agreements.” Over the term of a license, contractual payments can range from hundreds of thousands of dollars to several millions of dollars. The intellectual property licensed by the Company consists of software and related documentation which enable a customer to design and manufacture microprocessors and related technology and software. A license may be perpetual or time-limited in its application. In general, the time between the signing of a license and final customer validation of the ARM technology is between 6 and 15 months with most time allocated to the period between delivery and validation of the technology. Delivery generally occurs within a short time period after the signing of a license. The licensee obtains license rights to the intellectual property at the time of signing. In addition, the licensee obtains ownership of the licensed rights to the in-process customization as well as the completed customization. License fees are invoiced according to an agreed schedule. Typically, the first invoice is generated on signing of the contract, the second is generated on delivery of the customized intellectual property (being the intellectual property and other technical information relating to the product licensed) and the third is a date-based milestone, usually within nine months of signature of the license. No upgrades or modifications to the licensed intellectual property are provided, except those updates and upgrades provided on a when-and-if-available basis under post-delivery service support. Following licensee validation of the ARM technology, the Company has no further obligations under the license agreement, except those under a valid post-delivery service support arrangement as mentioned above.
In addition to the license fees, contracts generally contain an agreement to provide post-delivery service support (support, maintenance and training) which consists of an identified customer contact at the Company and telephonic or e-mail support. Fees for post-delivery service support, which take place after customer acceptance, are specified in the contract. Revenues from post-delivery service support are shown within Service Revenues and are discussed further below under “—Service Revenues—Support and maintenance.”
Development systems. Dollar revenues from sales of development boards and tool kits fluctuate with demand from licensees, systems companies and certain software vendors whose software runs on ARM microprocessors.
Royalties. Royalties are either set as a percentage of the licensee’s net sale price per chip or, less frequently, as a fixed amount per chip. In both cases, royalty rates decline as the total volume of ARM-compliant products shipped increases before typically flattening out at an agreed volume level. Royalty payment schedules in individual contracts vary depending on the nature of the license and the degree of market acceptance of ARM architecture prevailing at the contract date. The average royalty rate reported in any period will also depend on the mix of end products into which ARM-based chips have been designed in the period. ARM technology is designed into a wide range of end products which incorporate chips with a broad spectrum of selling prices. Royalties are payable by licensees when they have manufactured and sold the resulting ARM-compliant microprocessors and peripherals to systems companies. The license contracts provide for reports to be issued to ARM with details of such sales and, in certain cases, with forecasts of sales for periods in the near future.
Systems software. The Company earns additional product revenues with the sale of systems software. Revenue is recognized on customer acceptance.
Service Revenues
Support and maintenance. ARM generally requires its licensees to pay an annual fee for support and maintenance for a minimum of one year. The fair value of this post-delivery service support is determined by reference to the consideration the customer is required to pay when it is sold separately, and the service portion is recognized ratably over the term of the support arrangement. Revenue related to post-delivery service support is recognized based on fair value, which is determined with reference to contractual renewal rates.
Costs of Revenues
Product costs. Product costs are limited to variable costs of production, such as the costs of manufacture of development systems, amortization of the Company’s third-party technology licenses, cross-license payments to collaborative parties and the time spent by engineers on developing Physical IP products.
Service costs. Service costs include the costs of support and maintenance services to licensees of ARM technology.
Critical Accounting Policies and Estimates
Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements. We believe our most critical accounting policies include revenue recognition and cost estimation on certain contracts for which we use a percentage-of-completion method of accounting, impairment of purchased goodwill and trade receivables and intangible assets and loss provisions.
The impact and any associated risks related to these policies on our business operations are discussed throughout this section where such policies affect our reported and expected financial results. Note that the preparation of the financial statements included in this annual report on Form 20-F requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.
Revenue Recognition
The Company follows the principles of IAS 18, “Revenue recognition”, in determining appropriate revenue recognition policies. Revenue associated with the sale of goods is recognized when all of the following conditions have been satisfied:
| | · | the Company has transferred to the buyer the significant risks and rewards of ownership of the goods; |
| | · | the Company does not retain either continuing managerial involvement to the degree usually associated with ownership or effective control over the goods sold; |
| | · | the amount of revenue can be measured reliably; |
| | · | it is probable that the economic benefits associated with the transaction will flow to the Company; and |
| | · | the costs incurred or to be incurred in respect of the sale can be measured reliably. |
Revenue associated with the rendering of services is recognized when all of the following conditions have been satisfied:
| | · | the amount of revenue can be measured reliably; |
| | · | it is probable that the economic benefits associated with the transaction will flow into the Company; |
| | · | the stage of completion of the transaction at the end of the reporting period can be measured reliably; and |
| | · | the costs incurred for the transaction and the costs to complete the transaction can be measured reliably. |
Revenue is shown net of value-added tax, returns, rebates and discounts, and after eliminating sales within the Company.
Revenue comprises the value of sales of licenses to ARM technology, royalties arising from the resulting sale of licensees’ ARM technology-based products, revenues from support, maintenance and training, consulting contracts and the sale of development boards and software toolkits.
Revenue from standard license products which are not modified to meet the specific requirements of each customer is recognized when the all of the conditions relevant to revenue associated with the sale of goods have been satisfied:
| | · | the significant risks and rewards of ownership are transferred when a license arrangement has been agreed and the goods have been delivered to the customer; |
| | · | continuing managerial involvement and effective control over goods sold is relinquished at the point at which goods are delivered to the customer; |
| | · | revenue is recognized to the extent that it is reliably measurable; any consideration due under the licensing arrangement that is not deemed to be reliably measurable is deferred until it can be measured reliably; and |
| | · | revenue is recognized to the extent that it is probable that the economic benefits associated with the transaction will flow to the Company; any economic benefits of the transaction that are deemed unlikely to flow to the Company are deferred until it becomes probable that they will flow to the Company. |
The majority of the Company’s revenues come from the licensing of intellectual property and there are therefore very few direct costs associated with the sale of goods; where there are direct costs of sale, these are measured with reference to the purchasing agreements in place with the Company’s suppliers.
Many license agreements are for products which are designed to meet the specific requirements of each customer. Revenue from the sale of such licenses is recognized on a percentage-of-completion basis over the period from signing of the license to customer acceptance. Under the percentage-of-completion method, provisions for estimated losses on uncompleted contracts are recognized in the period in which the likelihood of such losses is determined. The percentage-of-completion is measured by monitoring progress using records of actual time incurred to date in the project compared with the total estimated project requirement, which approximates to the extent of performance.
Where invoicing milestones on license arrangements are such that the receipts fall due significantly outside the period over which the customization is expected to be performed or significantly outside its normal payment terms for standard license arrangements, the Company evaluates whether it is probable that economic benefits associated with these milestones will flow to the Company and therefore whether these receipts should initially be included in the arrangement consideration.
In particular, it considers:
| | · | Whether there is sufficient certainty that the invoice will be raised in the expected timeframe, particularly where the invoicing milestone is in some way dependent on customer activity; |
| | · | Whether it has sufficient evidence that the customer considers that the Company’s contractual obligations have been, or will be, fulfilled; |
| | · | Whether there is sufficient certainty that only those costs budgeted to be incurred will indeed be incurred before the customer will accept that a future invoice may be raised; and |
| | · | The extent to which previous experience with similar product groups and similar customers supports the conclusions reached. |
Where the Company considers that there is insufficient evidence that it is probable that the economic benefits associated with such future milestones will flow to the Company, taking into account these criteria, such milestones are excluded from the arrangement consideration until there is sufficient evidence that it is probable that the economic benefits associated with the transaction will flow into the Company. The Company does not discount future invoicing milestones, as the effect of doing so would be immaterial.
Where agreements involve several components, the entire fee from such arrangements is allocated to each of the individual components based on each component’s fair value, where fair value is the price that is regularly charged for an item when sold separately. Where a component in a multiple-component agreement has not previously been sold separately, the assessment of fair value for that component is based on other factors, including, but not limited to, the price charged when it was sold alongside other items and the book price of the component relative to the book prices of the other components in the agreement. If fair value of one or more components in a multiple-component agreement is not determinable (where such component is not considered incidental to the overall arrangement), the entire arrangement fee is deferred until such fair value is determinable, or the component has been delivered to the licensee. Where, in substance, two or more elements of a contract are linked and fair values cannot be allocated to the individual components, the revenue recognition criteria are applied to the elements as if they were a single element.
Agreements including rights to unspecified future products (as opposed to unspecified upgrades and enhancements) are accounted for using subscription accounting, with revenue from the arrangement being recognized on a straight-line basis over the term of the arrangement, or an estimate of the economic life of the products offered if no term is specified, beginning with the delivery of the first product.
In addition to the license fees, contracts generally contain an agreement to provide post-delivery service support, in the form of support, maintenance and training which consists of the right to receive services and/or unspecified product upgrades or enhancements that are offered on a when-and-if-available basis. Fees for post-delivery service support are generally specified in the contract. Revenue related to post-delivery service support is recognized based on fair value, which is determined with reference to contractual renewal rates. If no renewal rates are specified, and fair value of the post-delivery support service cannot be determined by other methods, the entire fee under the transaction is amortized and recognized on a straight-line basis over the contractual post-delivery service support period. Where renewal rates are specified, revenue for post-delivery service support is recognized on a straight-line basis over the period for which support and maintenance is contractually agreed by the Company with the licensee.
If the amount of revenue recognized exceeds the amounts invoiced to customers, the excess amount is recorded as amounts recoverable on contracts within accounts receivable.
The excess of license fees and post-delivery service support invoiced over revenue recognized is recorded as deferred revenue.
Sales of software, including development systems, which are not specifically designed for a given license (such as off-the-shelf software) are recognized upon delivery, when the significant risks and rewards of ownership have been transferred to the customer. At that time, the Company has no further obligations except that, where necessary, the costs associated with providing post-delivery service support have been accrued. Services (such as training) that the Company provides which are not essential to the functionality of the IP are separately stated and priced in the contract and, therefore, accounted for separately. Revenue is recognized as services are performed and it is probable that the economic benefits associated with the transaction will flow into the Company.
Royalty revenues are earned on sales by the Company’s customers of products containing ARM technology. Royalty revenues are recognized when it is probable that the economic benefits associated with the transaction will flow to the Company and the amount of revenue can be reliably measured. Revenues are recognized when the Company receives notification from the customer of product sales, or receives payment of any fixed royalties. Notification is typically received in the quarter following shipment of the products by the customer.
Certain products have been co-developed by the Company and a collaborative partner, where both parties had the right to sell licenses to the product. In those cases where the Company receives royalty revenues from the sale of these products, the total value of the royalty is recorded as revenue and the amount payable to the collaborative partner is recorded as cost of sales. Where the collaborative partner collects royalties on the sales of these products, the Company records as revenue the commission it is due when informed by the collaborative partner that a sale has been made.
As disclosed above, in accordance with IAS 8, “Accounting policies, changes in accounting estimates and errors,” the Company makes significant estimates in applying its revenue recognition policies. In particular, as discussed in detail above, estimates are made in relation to the use of the percentage-of-completion accounting method, which requires that the extent of progress toward completion of contracts may be anticipated with reasonable certainty. The use of the percentage-of-completion method is itself based on the assumption that, at the outset of license agreements, there is an insignificant risk that customer acceptance may not be obtained. The Company also makes assessments, based on prior experience, of the extent to which future milestone receipts represent a probable future economic benefit to the Company. In addition, when allocating revenue to various components of arrangements involving several components, it is assumed that the fair value of each element is reflected by its price when sold separately. The complexity of the estimation process and issues related to the assumptions, risks and uncertainties inherent with the application of the revenue recognition policies affect the amounts reported in the financial statements. If different assumptions were used, it is possible that different amounts would be reported in the financial statements.
Purchased Goodwill and Intangible Assets
Goodwill. Goodwill represents the excess of the fair value of the consideration paid on acquisition of a business over the fair value of the assets, including any intangible assets identified and liabilities acquired. Goodwill is not amortized but is measured at cost less impairment losses. In determining the fair value of consideration, the fair value of equity issued is the market value of equity at the date of completion, the fair value of share options assumed is calculated using the Black-Scholes valuation model, and the fair value of contingent consideration is based upon whether the directors believe any performance conditions will be met and thus whether any further consideration will be payable.
Other intangible assets. Computer software, purchased patents and licenses to use technology are capitalized at cost and amortized on a straight-line basis over a prudent estimate of the time that the Company is expected to benefit from them, which is typically three to ten years. Costs that are directly attributable to the development of new business application software and which are incurred during the period prior to the date that the software is placed into operational use, are capitalized. External costs and internal costs are capitalized to the extent they enhance the future economic benefit of the asset.
Although an independent valuation is made of any intangible assets purchased as part of a business combination, the directors are primarily responsible for determining the fair value of intangible assets. Developed technology, existing agreements and customer relationships, core technology, trademarks and tradenames, and order backlog are capitalized and amortized over a period of one-to-ten years, being a prudent estimate of the time that the Company is expected to benefit from them.
In-process research and development projects purchased as part of a business combination may meet the criteria set out in IFRS 3, “Business combinations,” for recognition as intangible assets other than goodwill. The directors track the status of in-process research and development intangible assets such that their amortization commences when the assets are brought into use. This typically means a write-off period of one-to-five years.
Amortization is calculated so as to write off the cost of intangible assets, less their estimated residual values, which are adjusted, if appropriate, at each balance sheet date, on a straight-line basis over the expected useful economic lives of the assets concerned. The principal economic lives used for this purpose are:
Computer software | Three to five years |
Patents and licenses | Three to ten years |
In-process research and development | One to five years |
Developed technology | One to five years |
Existing agreements and customer relationships | Two to ten years |
Core technology | Five years |
Trademarks and tradenames | Four to five years |
Order backlog | One year |
Impairment of non-financial assets
Assets that have an indefinite useful life, for example goodwill, are not subject to amortization but are tested annually for impairment.
Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. Further discussion of the assumptions used in these impairment tests is included in Note 15 to the Consolidated Financial Statements.
At the annual tests in 2008, 2009 and 2010, impairment tests showed there was no impairment with respect to goodwill. Furthermore, no trigger events have been identified that would suggest the impairment of any of the Company’s other intangibles.
Provisions
Over recent years, as we have established an increasing number of partners, as our intellectual property has become more widely accepted and as our balance sheet has become stronger, we have become involved in more litigation and claims have been asserted against us more frequently.
Provisions for restructuring costs and legal claims are recognized when: the Company has a present legal or constructive obligation as a result of past events; it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount of the outflow can be reliably estimated.
Application of these accounting principles to potential losses that could arise from intellectual property disputes is inherently difficult given the complex nature of the facts and law involved. Deciding whether or not to provide for loss in connection with such disputes requires management to make determinations about various factual and legal matters beyond the Company’s control. To the extent management’s determinations at any time do not reflect subsequent developments or the eventual outcome of any dispute, future income statements and balance sheets may be materially affected with an adverse impact upon our results of operation and financial position. Among the factors that the Company considers in making decisions on provisions are the nature of the litigation, claim, or assessment, the progress of the case (including progress after the date of the financial statements but before those statements are issued), the opinions or views of legal counsel and other advisers, the experience of the Company in similar cases, and any decision of the Company’s management as to how the Company intends to respond to the litigation, claim, or assessment. The fact that legal counsel is unable to express an opinion that the outcome will be favorable to the Company does not necessarily mean that the above conditions for accrual of a loss are met.
Results of Operations
The following table sets forth, for the periods indicated, the percentage of total revenues represented by certain items reflected in the Company’s consolidated statements of operations.
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| Revenues | | | | | | | | | |
Product revenues | | | 94.5 | | | | 94.0 | | | | 95.0 | |
Service revenues | | | 5.5 | | | | 6.0 | | | | 5.0 | |
Total revenues | | | 100.0 | | | | 100.0 | | | | 100.0 | |
| Cost of revenues | | | | | | | | | | | | |
Product costs | | | 8.2 | | | | 5.5 | | | | 3.9 | |
Service costs | | | 2.8 | | | | 2.9 | | | | 2.5 | |
Total cost of revenues | | | 11.0 | | | | 8.4 | | | | 6.4 | |
Gross profit | | | 89.0 | | | | 91.6 | | | | 93.6 | |
| Operating expenses | | | | | | | | | | | | |
Research and development | | | 29.3 | | | | 36.8 | | | | 34.4 | |
Sales and marketing | | | 19.2 | | | | 20.2 | | | | 17.2 | |
General and administrative | | | 20.4 | | | | 19.7 | | | | 15.7 | |
Profit on disposal of available for sale security | | | – | | | | – | | | | | |
Total operating expenses | | | 68.9 | | | | 76.7 | | | | 67.3 | |
Profit from operations | | | 20.1 | | | | 14.9 | | | | 26.3 | |
Investment income | | | 1.0 | | | | 0.6 | | | | 0.9 | |
Interest payable | | | 0.0 | | | | 0.0 | | | | 0.1 | |
Profit before tax | | | 21.1 | | | | 15.5 | | | | 27.1 | |
Tax | | | 6.5 | | | | 2.2 | | | | 5.9 | |
Profit for the year | | | 14.6 | | | | 13.3 | | | | 21.2 | |
Total revenues for the year ended December 31, 2010 were £406.6 million, an increase of 33% from £305.0 million in 2009, which was an increase of 2% from £298.9 million in 2008. Dollar revenues were $631.3 million in 2010, an increase of 29% from $489.5 million in 2009, which was a decrease of 10% from $546.2 million in 2008. The actual average dollar exchange rate in 2010 was $1.55 compared with $1.60 in 2009 and $1.84 in 2008.
Management analyzes product revenues in the categories of royalties, licenses and development systems. Service revenues consist of support, maintenance and training income. The following table sets forth, for the periods indicated, the amount of total revenues represented by each component of revenue:
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| | | (in thousands) | |
| Product Revenues | | | | | | | | | |
Royalties | | £ | 147,728 | | | £ | 155,447 | | | £ | 217,624 | |
Licenses | | | 103,506 | | | | 98,446 | | | | 132,528 | |
Development Systems | | | 31,148 | | | | 32,941 | | | | 35,993 | |
| | | | 282,382 | | | | 286,834 | | | | 386,145 | |
| Service Revenues | | | | | | | | | | | | |
Support, Maintenance and Training | | £ | 16,552 | | | £ | 18,188 | | | £ | 20,450 | |
Total Revenues | | | 298,934 | | | | 305,022 | | | | 406,595 | |
Product revenues. Product revenues consist of license fees, sales of development systems and royalties. Product revenues for 2008, 2009 and 2010 were £282.4 million, £286.8 million and £386.1 million, respectively, representing 94%, 94% and 95% of total revenues in 2008, 2009 and 2010, respectively. Product revenues in US dollars, being the primary currency of revenues generated, decreased from $514.3 million in 2008 to $460.0 million in 2009 and increased to $598.9 million in 2010.
License revenues decreased from £103.5 million in 2008 to £98.4 million in 2009 and increased to £132.5 million in 2010, representing approximately 35%, 32% and 33% of total revenues in 2008, 2009 and 2010, respectively. License revenues in US dollars decreased from $189.7 million in 2008 to $164.1 million in 2009 and increased to $208.2 million in 2010.
Processor Division (PD) dollar license revenues decreased by 12% in 2009 and increased by 30% in 2010. Licensing revenues are driven by customers’ on-going R&D programs. Thus, the increased demand for the Company’s products in 2010 led to significantly higher license revenues, following a year affected by the difficult economic climate in 2009.
The portfolio of licensable products comprises a rich mix of proven ARM technology, such as the ARM7, ARM9 and ARM11 families of products and newer technology such as the Cortex family of products and the Mali 3D graphics processors.
91 new licenses were signed in 2010 compared to 87 in 2009 and 61 in 2008. Revenues from Cortex family products accounted for 48% of PD license revenues in 2010, compared to 42% in 2009 and 37% in 2008. Cortex products started generating revenue in 2005. ARM11 accounted for 7% of PD license revenues in 2010, compared to 9% in 2009 and 14% in 2008. Revenues from long-term licenses with certain strategic customers accounted for 18% of PD license revenues in 2010, compared to 10% in 2009 and 9% in 2008. 27 companies became new ARM Partners in 2010, bringing the total number of semiconductor partners to more than 250 at the end of the year. This total number of semiconductor partners was net of those companies that have signed licenses with ARM in the past but have since been acquired by other companies or who no longer have access to ARM technology for other reasons.
During 2010, 59 Cortex family licenses were signed, bringing the accumulated total of Cortex family licenses to 161. 10 licenses to ARM’s Mali 3D graphics processors were signed in 2010, bringing the accumulated total of Mali licenses to 39.
License revenues from non-core products, covering items such as platforms, peripherals, embedded trace modules, embedded software, data engines, models and sub-systems were £12.7 million in 2010, compared to £9.8 million in 2009 and £13.4 million in 2008, representing approximately 12% of processor license revenues in 2010, 13% in 2009 and 17% in 2008, respectively.
Licensing momentum for ARM’s advanced physical IP products continued and by the end of 2010, ARM had signed a total of 28 royalty bearing platform licenses at 65nm and below, compared with 23 at the end of 2009. ARM’s Physical IP Division (PIPD) reported license revenues of £26.6 million in 2010 (2009: £22.0 million; 2008: £24.2 million), representing approximately 20% of total license revenues in 2010 (2009: 22%; 2008: 23%).
In 2010, ARM maintained progress in achieving the long term strategic goal of providing ARM’s physical IP to leading Integrated Device Manufacturers (“IDM”) and Fabless semiconductor companies and continued to sign synergistic licenses that have been enabled by the combination of ARM and Artisan. Cortex-A class processors benefit from physical IP optimized for high-performance and low-power on advance process nodes; and Cortex-M class processors benefit from physical IP optimized for low-performance and low-power on mature process nodes. Eight licenses were signed for processor optimization packages in 2010, bringing the total number of licenses for this technology to ten.
Revenues from the sale of development systems increased from £31.1 million in 2008 to £32.9 million in 2009 and further to £36.0 million in 2010, representing approximately 10% of total revenues in 2008, 11% in 2009 and 9% in 2010. Development systems revenues in US dollars decreased from $57.8 million in 2008 to $51.6 million in 2009 and increased to $55.4 million in 2010. The increase in 2010 is due to the return of demand for these products following the decrease in 2009 due to the overall industry and economic conditions. The System Design Division has continued to enter into more multi-year contracts for larger product volumes which improves the visibility of business going forward and builds a good customer base from which to drive new innovation.
Royalties are either set as a percentage of the licensee’s average selling price (“ASP”) per chip or, less frequently, as a fixed amount and are recognized when the Company receives notification from the customer of
product sales. In effect, this means that it is normally in the quarter following the shipments that data is received and so royalty data for a year reflects actual shipments made from the beginning of October of the previous year to the end of September of the current year. As the penetration of ARM technology-based chips grows across a wide range of end-market applications, the range of ASPs gets wider.
Royalties increased from £147.7 million in 2008 to £155.4 million in 2009 and further to £217.7 million in 2010, representing 49%, 51% and 54% of total revenues in 2008, 2009 and 2010, respectively. US dollar royalty revenues decreased from $266.8 million in 2008 to $244.4 million in 2009 and increased to $335.3 million in 2010. Royalty revenues in 2010 comprised £189.3 million from PD and £28.3 million from PIPD. PD volume shipments decreased slightly from 4.0 billion units in 2008 to 3.9 billion in 2009. Total unit shipments of mobile handsets worldwide declined by 10% in 2009, but as more ARM technology is typically incorporated into more feature-rich handsets, the Company benefited from the higher proportion of smartphones shipped in the year. Beyond mobile, the Company continued to gain share in all target end-markets including digital televisions, hard disk drives and microcontrollers.
Total unit shipments by the Company’s customers in 2010 of 6.1 billion represented an increase of 55% compared to 2009. This increase is mainly due to the increase in market share in various markets, particularly in microcontrollers as well as an improvement in the general economic conditions. The Company expects royalty revenues to grow year-on-year although they may be subject to significant fluctuations from quarter to quarter. The total number of partners shipping ARM technology-based products at the end of 2010 was 107 after taking into account corporate activity within the ARM partnership. 30 companies were paying meaningful royalties for physical IP products at the end of the year.
Service revenues. Service revenues consist of support, maintenance and training. Service revenues increased from £16.6 million in 2008 to £18.2 million in 2009, and further to £20.4 million in 2010, representing 5% of total revenues in 2010 (2009: 6%, 2008: 6%). Service revenues in US dollars, being the primary currency of revenues generated, declined from $31.9 million in 2008 to $29.4 million in 2009 and increased to $32.4 million in 2010.
Geographic analysis. The Company earns revenues from customers who are based in many geographies. The following table sets forth, for the periods indicated, revenue by geographic destination as a percentage of total revenue per the Company’s consolidated financial statements. The proportion of revenues from the Asia Pacific region (excluding Japan) is increasing as the level of licensing and royalty shipments from customers based in China, South Korea and Taiwan increases.
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| Revenue by destination: | | | | | | | | | |
North America | | | 38 | | | | 36 | | | | 40 | |
Japan | | | 18 | | | | 16 | | | | 11 | |
Asia Pacific, excluding Japan | | | 27 | | | | 33 | | | | 35 | |
Europe | | | 17 | | | | 15 | | | | 14 | |
Total | | | 100 | | | | 100 | | | | 100 | |
Product costs. Product costs are limited to variable costs of production such as the costs of manufacture of development systems, amortization of third-party technology licenses, cross-license payments to collaborative partners and time of engineers on PIPD projects. Product costs were £24.5 million in 2008, £16.6 million in 2009 and £15.8 million in 2010, representing 8%, 5% and 4% of total revenues in 2008, 2009 and 2010, respectively. Product costs decreased in 2010 due to the lower costs of cross-license payments to third parties as the Company’s own products increasingly replace these technologies. Product costs decreased in 2009 due to the rebalancing of PIPD resources between customized work and platform development work resulting in more effort being classified as research and development expenditure. In 2008 and 2009, the proportion of development systems costs was approximately 15% and 20%, respectively, with PIPD direct costs of approximately 55% and the balance third-party licenses and cross-license payments to collaborative partners. In 2010, development systems costs made up approximately 20% of total product costs, PIPD direct costs accounting for approximately 60% and the balance
relating to third-party licenses and cross-license payments. Product gross margin in 2010 was 96%, compared to 94% in 2009 and to 91% in 2008.
Service costs. Service costs include the costs of support and maintenance services to licensees of ARM technology. Cost of services was £8.3 million in 2008, £8.8 million in 2009 and £10.3 million in 2010. The gross margins earned on service revenues were approximately 50% in 2008, 51% in 2009 and 50% in 2010. Costs increased in 2009 as the business invested more in the engineering departments, a proportion of which is allocated to services costs. In 2010, the increase in costs was largely due to the rise in stock-based compensation including payroll taxes included within service costs to £2.8 million, compared to £1.1 million and £1.7 million in 2008 and 2009, respectively.
Performance indicators. The Company’s management uses several performance indicators in assessing the Company’s performance, of which revenues and earnings per share are the most important. Revenues are discussed in further detail in “—Results of Operations” above. Earnings per share are disclosed in our financial statements filed herewith. Another performance indicator for the business is backlog, defined as the aggregate value of contracted business not yet recognized as revenue in the profit and loss account. Period-end backlog excludes royalty revenue, which is recognized upon receipt of the royalty reports from our partners and consequently passes into backlog and is immediately released when invoiced.
The Company discloses the quarterly trend in backlog along with the maturity profile (how much is expected to be recognized as revenue in the next two quarters, in the subsequent two quarters, and over more than one year), and its composition is split between the main component parts.
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Maturity profile of backlog | | | | | | |
Next two quarters (Q1 2011 and Q2 2011) | | | 29 | % | | | 25 | % |
Subsequent two quarters (Q3 2011 and Q4 2011) | | | 28 | % | | | 22 | % |
Greater than twelve months | | | 43 | % | | | 53 | % |
Total | | | 100 | % | | | 100 | % |
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Processors | | | 60 | % | | | 71 | % |
Physical IP | | | 18 | % | | | 14 | % |
Support & Maintenance and Others | | | 22 | % | | | 15 | % |
Total | | | 100 | % | | | 100 | % |
At the end of 2010, backlog was 73% higher than at the beginning of the year due to the signing of some large long-term licensing deals where revenue is expected to be recognized over a number of accounting periods.
Another performance indicator is the number of patent applications submitted by ARM employees. ARM incentivizes its employees to submit patent applications by awarding patent bonuses. The number of proposed patent applications submitted by ARM employees was 185 in 2010, 193 in 2009 and 143 in 2008.
Research and development costs. Research and development costs increased from £87.6 million in 2008 to £112.2 million in 2009 and further to £139.8 million in 2010, representing 29%, 37% and 34% of total revenues in 2008, 2009 and 2010, respectively. Costs in 2008, 2009 and 2010 included £10.7 million, £14.8 million and £25.2 million of share-based compensation charges including payroll taxes, £11.1 million, £7.7 million and £3.5 million of amortization of intangible assets acquired with business combinations, respectively. Costs in 2010 also included £3.4 million of investment-related charges. Investment-related charges include amounts written off investments and charges related to associated undertakings. Excluding these charges, research and development costs were £65.8 million, £89.7 million and £107.6 million representing 22%, 29% and 26% of total revenues in 2008, 2009 and 2010, respectively. Continued investment in research and development remains an essential part of the Company’s strategy as the development of new products to license is key to its ongoing success.
Average engineering headcount increased from 1,115 in 2008 to 1,141 in 2009 and to 1,208 in 2010. Staff costs increased as a result of the growth in headcount as well as the bonuses payable on the achievement of financial performance targets in 2010 being higher than those in 2009.
Typically, when a new product is in development, the Company seeks to work with a small number of potential customers interested in licensing the product prior to the completion of its development. Once the customers are identified, further work is undertaken to complete the product’s fundamental design, after which it is transferred to the customers’ semiconductor process so that a series of test chips may be manufactured and validated. The Company cannot determine whether the product can be manufactured in accordance with its design specifications, including functions, features, and technical performance requirements, until the end of this process. Since all design, coding, and testing activities must be completed before technological feasibility is established, the Company does not capitalize any product development costs.
Sales and marketing. Sales and marketing expenditure increased from £57.4 million in 2008 to £61.7 million in 2009 and to £70.1 million in 2010, representing 19%, 20% and 17% of total revenues in 2008, 2009 and 2010, respectively. Costs in 2008, 2009 and 2010 included £2.0 million, £4.7 million and £8.0 million of share-based compensation charges including payroll taxes, £8.1 million, £8.5 million and £7.9 million of amortization of intangibles acquired with business combinations and in 2010 included £0.1 million of investment-related charges, respectively. Excluding these charges, sales and marketing costs were £47.3 million, £48.5 million and £54.1 million, representing 16%, 16% and 13% of total revenues in 2008, 2009 and 2010, respectively. Average headcount in this area decreased from 350 in 2008 to 334 in 2009 and increased slightly to 337 in 2010. Overall sales and marketing costs have increased in 2009 and 2010 due to increased staff bonuses and sales commissions.
General and administrative. General and administrative costs were £61.1 million in 2008, £60.0 million in 2009 and £63.7 million in 2010, representing 20%, 20% and 16% of total revenues in 2008, 2009 and 2010, respectively. Costs included £2.1 million, £3.4 million and £5.9 million relating to share-based compensation charges including payroll taxes, £0.8 million, less than £0.1 million and £nil of amortization of intangibles acquired with business combinations and £nil, £0.2 million and £0.9 million of investment related charges in 2008, 2009 and 2010, respectively. Furthermore, these costs included £1.9 million in 2008, £8.5 million in 2009 of restructuring charges and a credit in respect of restructuring of £0.4 million in 2010. Excluding these items, general and administrative costs were £56.3 million, £47.9 million and £57.3 million, representing 19%, 16% and 14% of total revenues in 2008, 2009 and 2010, respectively.
General and administrative average headcount in 2010 was 254, slightly up from 248 in 2009 and 246 in 2008.
Unrealized future foreign exchange losses on certain committed but not yet invoiced future revenue streams of £0.2 million (2009: £9.8 million; 2008: gains of £12.5 million) were recorded in 2010. There were other foreign exchange charges of £15.6 million in 2008, gains of £17.1 million in 2009 and gains of £1.7 million in 2010. The foreign exchange rate between the US dollar and sterling has been relatively stable during 2010. The gains in 2009 were predominantly due to the weakening of the dollar during the year resulting in a combination of the reversal of some of the currency exchange contracts’ mark-to-market provisions made in 2008 and the revaluation of the embedded derivatives noted above once invoiced. The overall net charge or gain depends upon the mix and quantum of non-sterling denominated monetary assets (including cash, accounts receivable and accounts payable), embedded derivatives and currency exchange contracts.
Restructuring costs. During 2010, there was a small reversal of the provisions made for restructuring costs in previous years of £0.4 million. Restructuring costs were £8.5 million in 2009 and £1.9 million in 2008, primarily relating to staff severance costs. The majority of the 2009 restructuring costs relate to the closure of the Belgian operation.
Amortization of intangible assets. Licenses to use third party technology are capitalized and amortized over the useful economic period that the Company is expected to gain benefit from them (generally between three and ten years). Licenses totaling £5.9 million were purchased during 2001 to 2006, with further licenses for £7.0 million being purchased in 2008 and £nil million in 2009 and 2010. Amortization of these licenses amounted to £1.6 million in 2010 (2009: £1.8 million; 2008: £0.5 million). At December 31, 2010, the net book value of these assets was £5.8 million which will be amortized over the next six years.
During 2004, the Company purchased Axys Design Automation, Inc. and Artisan Components, Inc. (now part of ARM, Inc.). Intangibles acquired and capitalized as part of these business combinations (including developed and core technology, customer relationships, trademarks and in-process research and development) totaled £2.3 million and £74.4 million, respectively, and were amortized over five years and between one and six years. The total charge for Axys and Artisan, respectively, was £0.4 million and £14.8 million in 2008 and £0.3 million and £10.9 million in 2009. In 2010, the charge was £nil and £7.3 million, respectively. At December 31, 2010, the net book value of these assets was £nil.
During 2005, the Company purchased Keil Elektronik GmbH and Keil Software, Inc. Intangibles acquired and capitalized consisted of developed technology, customer relationships and trade names and totaled £8.7 million. These intangibles were amortized between two and five years and the amortization was £1.8 million in 2008, £1.0 million in 2009 and £0.8 million in 2010. At December 31, 2010, the net book value of these assets was £nil.
During 2006, the Company purchased Falanx Microsystems AS, a graphics IP company in Norway. Intangibles acquired and capitalized consisted of developed technology and customer relationships and totaled £5.3 million. These are being amortized over three to five years and the charge in 2008 was £1.2 million, £1.0 million in 2009 and in 2010 was £0.8 million. The Company also purchased Soisic SA, an IP company based in France and the US. Intangibles acquired and capitalized were all developed technology and totaled £4.3 million. This is being amortized over five years with £1.0 million being charged in 2008, £1.1 million being charged in 2009 and £1.1 million in 2010. The Company also purchased certain assets of PowerEscape Inc., giving rise to £1.0 million of in-process research and development. This is being amortized over three years with £0.3 million, £0.2 million and £nil charged to the income statement in 2008, 2009 and 2010, respectively. At December 31, 2010, the net book value of these assets was £1.2 million.
During 2008, the Company purchased Logipard AB, a video IP company in Sweden. Intangibles acquired and capitalized consisted of developed technology, customer relationships and in-process research and development and totaled £5.0 million. These are being amortized over three to five years and the charge in 2008 was £nil since the acquisition occurred close to the end of the year, in 2009 was £1.2 million and in 2010 was £0.9 million. As part of the acquisition, the Company also acquired some contracts from the parent company of Logipard. The value of these contracts is £1.8 million which has been capitalized and will be amortized over their useful economic lives and the charge in 2009 and 2010 was £0.5 million. At December 31, 2010, the net book value of these assets was £3.7 million.
Profit on disposal of available-for-sale security. The Company disposed of its entire investment in Superscape Group plc in 2008 for nil profit or loss following the write down to the carrying value in 2007.
Interest. Net investment income decreased from £3.2 million in 2008 to £1.6 million in 2009 and increased to £3.1 million in 2010. The decrease in 2009 was due mainly to the low bank base rates for the whole of the year. The Company invested cash balances over periods of up to one year during 2009, although typically for periods of less than six months. The increase in 2010 was due to significantly higher cash balances throughout the year. Cash was invested for periods of up to two years although typically for periods of less than one year. Offset against the investment income in 2010 is an amount of £0.6 million relating to a charitable interest free loan made by the Company in 2010.
Profit before tax. Profit before tax was £63.2 million in 2008, £47.3 million in 2009 and £110.0 million in 2010, representing 21%, 15% and 27% of total revenues, respectively. In 2009, the strength of the US dollar resulted in sterling revenues being higher than for the previous year, although the strength of the US dollar was also largely responsible for an increase in operating expenses, which combined with an increase in share-related and restructuring charges resulted in lower overall profits. In 2010, revenues were higher as a result of increased licensing activity as well as higher royalty revenues following a 55% increase in shipments by the Company’s partners. The higher revenues also gave rise to increased performance-based bonuses which has had the effect of increasing costs. The overall impact of these effects is a 133% increase in profit before tax.
Tax charge. The Company’s effective tax rates were 31% in 2008, 14% in 2009 and 22% in 2010. The rate was higher than normal in 2008 as changes in the Company’s share price impacted the deferred tax assets on share-based awards (as the lower the share price, the lower the asset). In 2009, the increase in the share price reversed the impact on the deferred tax assets on share-based awards resulting in a significantly lower tax rate. In 2010, the tax rate has been impacted by the utilization of certain US deferred tax assets and continues to be lower than the tax rates of the
main countries in which the Company operates as a result of the research and development tax credits available in those countries.
Segment Information
At December 31, 2010, the Company was organized on a worldwide basis into three business segments, namely the Processor Division (“PD”), the Physical IP Division (“PIPD”) and the System Design Division (“SDD”). This was based upon the Company’s internal organization and management structure and was the primary way in which the Chief Operating Decision Maker (“CODM”) and the rest of the board were provided with financial information. Whilst revenues were reported into four main revenue streams (namely licensing, royalties, development systems and services), the costs, operating results and balance sheets were only analyzed by the three segments.
PD primarily comprises the ARM processor and services businesses. Recent acquisitions have been allocated to the various divisions as follows: Falanx in 2006 and Logipard in 2008 to PD and Soisic in 2006 to PIPD. Goodwill on each acquisition has also been allocated to these divisions, except for Artisan where the goodwill arising was allocated between PD and PIPD. See Note 15 to the Consolidated Financial Statements for the allocation of goodwill by segment.
Processor Division (PD)
The Processor Division encompasses those resources that are centered around microprocessor cores, including specific functions such as graphics and video IP, fabric IP, embedded software IP and configurable digital signal processing (“DSP”) IP.
Revenues. Total PD revenues for 2008, 2009 and 2010 were £221.4 million, £227.2 million and £315.7 million, respectively.
License revenues decreased from £79.3 million in 2008, to £76.5 million in 2009, and increased to £105.9 million in 2010, representing approximately 36%, 34% and 34% of total PD revenues in 2008, 2009 and 2010, respectively. License revenues in US dollars decreased from $145.1 million in 2008 to $128.2 million in 2009 and increased to $166.9 million in 2010. Licensing revenues are driven by customers’ on-going R&D programs. Despite the difficult economic climate, these programs continued during 2009, but with limited budgets with the result that ARM signed more licenses with a lower up-front cost, but higher expected future royalties. In 2010, customers were able to make greater investment in the technology and revenues increased accordingly. The portfolio of licensable products comprises a rich mix of proven ARM technology, such as the ARM7, ARM9 and ARM11 families of products, and newer technology such as the Cortex family of products and the Mali 3D graphics processors. See “—Results of Operations—Product revenues” above for further details. Optimized versions of certain processor cores were able to command higher prices which contributed to revenue growth in 2010. This optimization has been achieved by the combination of the Company’s physical IP with Cortex processor cores.
Royalties are either set as a percentage of the licensee’s average selling price (“ASP”) or, less frequently, as a fixed amount and are recognized when the Company receives notification from the customer of product sales. In effect, this means that it is normally in the quarter following the shipments that data is received and so royalty data for a year reflects actual shipments made from the beginning of October of the previous year to the end of September of the current year.
PD royalties increased from £125.5 million in 2008 to £132.5 million in 2009 and increased to £189.4 million in 2010, representing 57%, 58% and 60% of total PD revenues in 2008, 2009 and 2010, respectively. Royalty revenues in US dollars were $226.5 million, $208.1 million and $291.5 million in 2008, 2009 and 2010, respectively. PD volume shipments decreased slightly from 4.0 billion units in 2008 to 3.9 billion units in 2009, and increased to 6.1 billion units in 2010, representing an increase of 38%, a decrease of 2% and an increase of 55% in 2008, 2009 and 2010, respectively. Royalty revenues when reported in US dollars decreased in 2009 by a greater amount than the decline in units shipped due to a decrease in overall average royalty per chip as the Company’s products get designed into a wider range of end-products such as microcontrollers and Bluetooth which have a lower selling price. This trend of reducing royalty rates continued in 2010, but the significantly greater number of shipments resulted in much higher revenues.
Service revenues consist of design consulting services and revenues from support, maintenance and training. Service revenues increased from £16.6 million in 2008 to £18.2 million in 2009, and increased further to £20.4 million in 2010, representing 7%, 8% and 6% of total PD revenues in 2008, 2009 and 2010, respectively. Service revenues in US dollars were $31.9 million in 2008, $29.5 million in 2009 and $32.4 million in 2010.
Operating costs. Operating costs for 2008, 2009 and 2010 were £124.6 million, £148.8 million and £179.2 million, respectively. Operating costs include cost of sales (comprising products costs and service costs), research and development costs, sales and marketing costs and general and administrative costs. Included within these costs were £9.2 million, £13.9 million and £25.0 million of share-based compensation charges including payroll taxes, £1.3 million, £2.6 million and £2.2 million of amortization of intangibles and other charges relating to business combinations and £nil million, £0.2 million and £4.4 million of investment-related charges, respectively. Furthermore, operating costs in 2008, 2009 and 2010 included restructuring costs of £nil million, £7.3 million, relating primarily to the closure of the Belgium office and a credit of £0.4 million, respectively. Excluding these share-based compensation, amortization of intangibles and other charges related to business combinations and restructuring charges, PD operating costs were £114.1 million, £124.8 million and £148.0 million in 2008, 2009 and 2010, respectively. The increase in costs was partly due to the continued strength of the US dollar in 2010 as well as an increase in investment in the media processing part of the division.
Profit before tax. Profit before tax was £96.8 million in 2008, £78.4 million in 2009 and £136.5 million in 2010, representing 44%, 34% and 43% of total PD revenues, respectively. Excluding the charges noted above, margins in 2008, 2009 and 2010 were 48%, 45% and 53%, respectively.
Capital expenditure. Capital expenditure represents additions of property, equipment and software. In 2008, 2009 and 2010 such expenditure was £3.4 million, £2.9 million and £3.9 million, respectively.
Total assets, total liabilities and net assets. Total assets in 2008, 2009 and 2010 were £235.9 million, £215.3 million and £239.9 million, respectively. Total assets were lower at the end of 2009 largely as a result of the weaker US dollar compared with the end of 2008, decreasing the value of US dollar assets, particularly goodwill and other intangibles. Total assets increased at the end of 2010, largely due to the increased sales activity leading to higher receivables. Total liabilities in 2008, 2009 and 2010 were £41.7 million, £54.5 million and £115.8 million, respectively. Liabilities increased in 2009 and 2010 due to the increasing level of accruals at the end of each year for bonuses and as well as the increase in deferred revenue due to amounts invoiced on a number of high-value deals for products, the revenue for which will be recognized over a number of accounting periods. PD had net assets of £194.2 million, £160.8 million and £124.1 million in 2008, 2009 and 2010, respectively.
Goodwill. Management is of the opinion that a portion of the goodwill arising on the acquisition of Artisan in December 2004 is attributable to PD. The directors believe that revenue will accrue to PD as a result of the ownership of PIPD for the following reasons:
| | · | the development of faster and more power-efficient microprocessors as a result of collaboration between PD and PIPD engineering teams. This is expected to generate more PD licensing deals at higher prices; |
| | · | the potential for PD to win more microprocessor licensing business as a result of ARM being able to offer both processor and physical IP in-house; and |
| | · | the improvement in PD operating margins as a result of being able to transfer a number of engineering tasks to the Bangalore design centre acquired with Artisan. |
Goodwill decreased from £143.6 million in 2008 to £135.7 million in 2009 and increased to £139.6 million in 2010. The movements in goodwill are purely as a result of fluctuations in the year-end currency exchange rates.
Physical IP Division (PIPD)
Revenues. Total PIPD revenues in 2008, 2009 and 2010 were £46.4 million, £44.9 million and £54.9 million, respectively. In 2008, 2009 and 2010, PIPD’s license revenues were £24.2 million, £22.0 million and £26.6 million, respectively; and its royalty revenues were £22.2 million, £22.9 million and £28.3 million, respectively. In US dollar terms, licensing revenue decreased from $44.6 million in 2008 to $35.9 million in 2009 and increased to $41.3
million in 2010, and royalty revenue decreased from $40.2 million in 2008 to $36.2 million in 2009 and increased to $43.8 million in 2010. Both licensing and royalty revenues were lower in 2009 as a result of foundries cutting capacity due to the difficult economic conditions. In 2010, foundry utilization was higher, resulting in increased royalty revenues. In addition, a number of licenses were signed for the latest technologies resulting in an improvement in license revenue.
Operating costs. Operating costs for 2008, 2009 and 2010 were £73.2 million, £81.1 million and £82.5 million, respectively. Operating costs include product cost of sales, service cost of sales, research and development costs, sales and marketing costs and general and administrative costs. Included within these costs were £3.8 million, £6.5 million and £9.9 million of share-based compensation charges including payroll taxes and £16.1 million, £12.1 million and £8.4 million of amortization of intangibles and other charges relating to business combinations, respectively. Furthermore, operating costs included restructuring costs of £1.4 million, £0.3 million and £nil in 2008, 2009 and 2010, respectively, primarily related to staff severance costs. Excluding these share-based compensation, amortization and other charges relating to business combinations and restructuring charges , PIPD operating costs were £51.9 million, £62.2 million and £64.2 million in 2008, 2009 and 2010, respectively.
Total average PIPD headcount was 532, 512 and 496 in 2008, 2009 and 2010, respectively. The headcount decreased in 2010 as part of the strategic cost management of the division. The increase in the sterling value of costs in 2009 was largely due to the strengthening of the US dollar. Costs were higher in 2010 largely due to the increase in performance-related bonuses.
Loss before tax. PIPD recorded a loss before tax of £26.7 million, £36.2 million and £27.7 million in 2008, 2009 and 2010, respectively. Excluding the share-based compensation, amortization and other charges relating to business combinations and restructuring charges noted above, PIPD recorded a loss before income tax of £5.4 million, a loss of £17.3 million and a loss of £9.3 million in 2008, 2009 and 2010, respectively. The increased loss in 2009 is due primarily to the difficult trading conditions and the resulting decrease in revenues. Costs were higher mainly due to the comparative strength of the US dollar throughout the year. In 2010, revenues and margins recovered from the short-term impact of the recession with both licensing and royalty revenues increasing.
Capital expenditure. Capital expenditure represents additions of property, equipment and software. In 2008, 2009 and 2010 such expenditure was £4.5 million, £3.4 million and £2.8 million, respectively.
Total assets, total liabilities and net assets. Total assets in 2008, 2009 and 2010 were £463.3 million, £402.2 million and £414.9 million, respectively, with the movements in all three years being largely attributable to foreign exchange differences on goodwill and other intangibles arising on the Artisan acquisition, and amortization of the intangibles. Total liabilities in 2008, 2009 and 2010 were £20.2 million, £24.8 million and £38.6 million, respectively. Liabilities were higher in 2010 as a result of the increased bonuses and deferred revenue. PIPD had net assets of £443.1 million, £377.4 million and £376.4 million in 2008, 2009 and 2010, respectively.
Goodwill. Goodwill in 2008, 2009 and 2010 was £407.9 million, £366.3 million and £377.8 million, respectively. The increase in 2010 and the decrease in 2009 were due to foreign exchange movements. Part of the goodwill in respect of the Artisan acquisition has been allocated to PD (see above).
System Design Division (SDD)
Revenues. SDD revenues increased from £31.1 million in 2008 to £32.9 million in 2009 and to £36.0 million in 2010. US dollar revenues for the division were $57.8 million in 2008, $51.6 million in 2009 and $55.4 million in 2010. The decrease in US dollar revenues in 2009 was due to the overall industry and economic conditions. SDD has continued to enter into more multi-year contracts for larger product volumes which improves the visibility of business going forward and builds a good customer base from which to drive innovation. The increase in 2010 was due to a return to more beneficial economic conditions.
Operating costs. Operating costs for 2008, 2009 and 2010 were £38.2 million, £37.0 million and £39.5 million, respectively. Operating costs include cost of sales, research and development costs, sales and marketing costs and general and administrative costs. Included within these costs were share-based compensation charges of £2.9 million, £4.3 million and £7.0 million and amortization of intangibles purchased through business combinations of
£2.5 million, £1.5 million and £0.8 million in 2008, 2009 and 2010, respectively. Furthermore in 2008, 2009 and 2010, there were charges relating to the restructuring of the division of £0.5 million, £0.8 million and less than £0.1 million, respectively, which were predominantly in respect of staff severance costs. Excluding these charges, operating costs were £32.3 million, £30.4 million and £31.7 million, respectively.
Total costs were lower in 2009 due to the restructuring and reduced headcount, but also due to obtaining better prices from suppliers for the products sold. In 2010, costs have risen slightly, mostly due to increased performance related bonuses.
Loss before tax. SDD recorded a loss before income tax of £7.0 million, £4.1 million and £3.5 million in 2008, 2009 and 2010, respectively. Excluding the charges for share-based compensation, amortization and restructuring noted above, SDD made a loss of £1.1 million, a profit of £2.6 million and a profit of £4.3 million in 2008, 2009 and 2010, respectively.
Capital expenditure. Capital expenditure represents additions of property, equipment and software. In 2008, 2009 and 2010 such expenditure was £0.8 million, £0.6 million and £0.7 million, respectively.
Total assets, total liabilities and net assets. Total assets in 2008, 2009 and 2010 were £32.1 million, £28.1 million and £29.8 million, respectively. The decreases in 2010 and 2009 were primarily due to the amortization of the acquired intangibles. Total liabilities in 2008, 2009 and 2010 were £10.6 million, £9.2 million and £14.6 million, respectively. Liabilities were higher in 2010 largely due to increased performance related bonuses. SDD had net assets of £21.5 million, £18.9 million and £15.2 million in 2008, 2009 and 2010, respectively.
Goodwill. Goodwill in 2008, 2009 and 2010 was £16.3 million, £14.8 million and £15.0 million, respectively. The fluctuations are primarily due to the impact of foreign exchange difference on the Axys and KSI goodwill which is denominated in dollars and KEG goodwill which is denominated in euros.
Foreign Currency Fluctuations
Foreign currency fluctuations. The Company’s earnings and liquidity are affected by fluctuations in foreign currency exchange rates, principally the US dollar rate, as most of the Company’s revenues and cash receipts are denominated in US dollars while a high proportion of its costs are in sterling.
The Company hedges its exposure using forward contracts for the sale of US dollars, which are entered into with major banks. The Company also uses currency options for a limited proportion of its dollar exposure. The fair values of the currency exchange contracts outstanding at December 31, 2008, 2009 and 2010 are disclosed in Note 1c to the Consolidated Financial Statements. The settlement period of the forward contracts outstanding at December 31, 2010 was between January 6, 2011 and March 30, 2011. The settlement period of the option contracts outstanding at December 31, 2010 was between January 18, 2011 and December 30, 2011.
Contingencies and Loss Provisions
The accounting policy with respect to loss provisions is described in “—Operating Results—Critical Accounting Policies and Estimates—Provisions” above. Intellectual property disputes to which we are party are described in “Item 8. Financial Information—Legal Proceedings.” There was a £1.0 million provision for such disputes as of December 31, 2010 (2009: £0.9 million; 2008: £nil) as, based on the facts and circumstances surrounding any disputes, the Company believes these costs are likely to be incurred in resolving the disputes.
Risk Factors
For a discussion of the risks faced by the Company, see “Item 3. Key Information—Risk Factors.”
Recently Issued Accounting Announcements
IFRS Accounting Standards and Pronouncements
For a description of newly published IFRS accounting standards see Note 1 to the Consolidated Financial Statements. There are no significant amendments to accounting policies during the year as a result of new accounting standards.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily through cash generated from operations. Over the previous three years we have received £48.7 million in cash from the issuance of shares and transfers of treasury shares to employees who have exercised options in the Company.
The Company’s operating activities provided net cash of £100.5 million, £96.6 million and £176.9 million in 2008, 2009 and 2010, respectively.
Accounts receivable increased by £6.4 million in 2008, decreased by £9.5 million in 2009, and increased by £39.9 million in 2010. Days’ sales outstanding were 49 at December 31, 2008, were 46 at December 31, 2009 and were 41 at December 31, 2010. In 2009, accounts receivable were lower due to the comparatively weaker US dollar and reduced revenues in the final quarter of the year compared to 2008. In 2010, revenue and deferred revenue were much higher throughout the year, but particularly so in the fourth quarter resulting in the much higher debtor balance. Included within accounts receivable are amounts recoverable on contracts as discussed within deferred revenue below. Prepaid expenses and other assets increased by £21.4 million in 2008, increased by £10.2 million in 2009, and decreased by £4.9 million in 2010. The substantial rise in 2008 was mainly due to the fair-value of embedded derivatives increasing, further upfront EDA tools payments and amounts receivable in relation to R&D credits. The decreases in 2009 and 2010 were primarily as a result of the decrease in the fair-value of embedded derivatives as noted above. Inventories in 2009 and 2010 remained at similar levels to 2008. There have been no other significant movements in other current assets.
Accounts payable increased by £4.7 million in 2008, decreased by £4.7 million in 2009 and increased by £2.0 million in 2010. Movements in the accounts payable balance reflect the timing of receipt of invoices from suppliers. Accrued and other liabilities increased by £6.8 million in 2008, increased by £14.6 million in 2009 and increased again by £25.3 million in 2010. The main increase in 2008 was as a result of increased staff bonus and sales commission provisions following improved overall Company results in 2008. The increase in 2009 was as a result of higher sales and staff bonuses, restructuring provisions in Belgium and Germany and an increase in provisions for personnel taxes on share options due to the increased share price. The increase in 2010 was due to an accrual for share-based payment taxes as a result of the appreciation in the share price as well as higher performance-related bonuses which are payable in 2011.
At December 31, 2010, the Company recorded approximately £92.7 million of deferred revenues which represented cash or receivables scheduled to be recognized as revenues in varying amounts after December 31, 2010. At December 31, 2008 and 2009, the Company recorded approximately £29.9 million and £39.6 million of deferred revenues, respectively. Deferred revenues are an element of customer backlog, and represent amounts invoiced to customers not yet recognized as revenues in the income statement. Similarly, the Company recorded £8.7 million of amounts recoverable on contracts (“AROC”) at December 31, 2010, compared to £17.9 million and £12.4 million at December 31, 2008 and 2009, respectively. AROC represents amounts that have been recognized as revenue in the income statement but are yet to be invoiced to customers. Both deferred revenue and AROC fluctuate due to the maturity profile of ARM’s products, and invoicing milestones within contracts. Deferred revenue has been particularly affected by a number of long-term license deals with certain strategic partners where the revenue will be recognized over a number of accounting periods. At December 31, 2010, £20.7 million of deferred revenue is expected to be recognized after more than one year.
The Company believes that, given its current level of business, it has sufficient working capital for the foreseeable future.
Cash flow from operations has been used to fund the working capital requirements of the Company as well as capital expenditure. Cash outflow from capital expenditure in 2010 was £6.2 million for property, plant and equipment, and £1.2 million for other intangible assets, compared with £6.0 million and £3.9 million in 2009 and £8.1 million and £5.9 million in 2008, respectively. Capital expenditure on property, plant and equipment was higher in 2008 primarily due to the outfitting of the new San Jose office, as well as the ongoing replacement of IT equipment. Other intangible assets comprised software, technology and assigned contracts in relation to the acquisition of Logipard AB in 2008 as well as other third party technology licenses.
In 2008, the Company acquired Logipard AB (now ARM Sweden AB) for cash consideration of £5.6 million. Contingent consideration payments relating to the acquisitions of Keil and Soisic, amounting to £0.9 million and £0.8 million respectively, were also made in 2008.
The Company made no acquisitions in 2009 but made additional payments in respect of the Soisic and Logipard acquisitions of £0.6 million. The Company made no acquisitions or additional payments in 2010.
The Company envisages making further strategic investments in the future in situations where the Company can broaden its product portfolio, where it can obtain skilled engineering resources and where the potential for furthering ARM core-based design wins is improved significantly.
In 2007, £2.5 million was invested via convertible loan notes in W&W Communications Inc., an unlisted US company. This loan note earned interest at 10% per annum and would have converted to a maximum holding of 14.99% upon further fundraising by the company. An additional £1.0 million was invested in W&W in 2008, but the entire loan note, including accrued interest, was repaid before the end of the year.
The Company sold its investment in Superscape Group plc in 2008 for £1.5 million. Other investment proceeds in 2008 came from the repayment of the W&W loan notes as noted above.
In 2009, the Company invested £0.9 million in Esol Co Ltd, an embedded software company in Japan, £2.1 million in Ideaworks 3D Limited, a UK software company, £0.4 million in Smooth-stone, Inc., a US company specializing in low-power server technology, £0.4 million in Triad Semiconductor inc, a US company specializing in mixed signal ASICs, £0.1 million in Cyclos Semiconductor Inc, a US company specializing in on-chip energy harvesting, £0.7 million in Arteris Holdings Inc, a US network-on-chip company and £4.6 million in Cognovo Limited, a UK company specializing in software-defined modem techniques and solutions.
In 2010, the Company made further investments in Cognovo Limited of £3.5 million, Ideaworks 3D Limited of £1.0 million, Smooth-stone, Inc. of £3.7 million (Smooth-stone changed its name to Calxeda Inc. during 2010), Cyclos Semiconductor Inc. of less than £0.1 million and Arteris Holdings Inc. of less than £0.1 million. In addition, the Company invested £2.4 million in Nethra Imaging, Inc., a US chip company specializing in imaging solutions and £0.2 million in Ambiq Micro Inc., a US company specializing in ultra low-power microcontrollers.
From time to time the Company has bought back shares in order to supplement dividends in returning surplus funds to shareholders. During 2008 the Company bought back 41.2 million shares at a total cost of £40.3 million. The Company did not buy back any shares during 2009 or 2010. Dividends totaling £34.3 million were paid to shareholders in 2010 (2009: £29.0 million; 2008: £26.4 million). In aggregate, the Company has returned over £400 million since 2004 through buy-backs and dividends. Share option exercises in 2010 gave rise to a £24.0 million cash inflow to the Company compared to £19.1 million in 2009 and £5.6 million in 2008.
Cash, cash equivalents, short- and long-term deposits, net of accrued interest and marketable securities balances at December 31, 2010 were £290.1 million compared to £141.8 million at December 31, 2009 and £78.8 million at December 31, 2008.
Our cash requirements depend on numerous factors, including: our ability to generate revenues from new and existing licensing and other agreements; expenditures in connection with ongoing research and development and acquisitions and disposals of and investments in complementary technologies and businesses; competing technological and market developments; the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights; the purchase of additional capital equipment; fluctuations in foreign exchange rates; and capital expenditures required to expand our facilities. Changes in our research and development plans or
other changes affecting our operating expenses may result in changes in the timing and amount of expenditures of our capital resources.
RESEARCH AND DEVELOPMENT
Research and development is of major importance and, as part of its research activities, the Company collaborates closely with universities worldwide, and plans to continue its successful engagement with the University of Michigan. Key areas of product development for 2011 include the development of further energy-efficient, high-performance engines for both data and control applications such as ARM cores based on symmetric multiprocessor and superscalar technology. The Company is investing in future physical IP development, including lower-power, low-leakage technologies for both bulk CMOS and SOI processes to ensure leadership in this market. In addition, the Company will deliver development tools, graphics processors and fabric IP to enable its customers to design and program system-on-chip products.
The Company incurred research and development costs of £139.8 million in 2010, £112.2 million in 2009 and £87.6 million in 2008. See “Item 4. Information on the Company—Business Overview—Research and Development” and “—Operating Results—Results of Operations—Research and development costs” above.
OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS
Our major outstanding contractual commitments relate to rental of office facilities and certain equipment under non-cancelable operating lease agreements which expire at various dates through 2023. Our contractual commitments as of December 31, 2010 were as follows:
| | | Payments due by period (£’000) | |
| | | | | | | | | | | | | | | | |
Operating leases | | | 46,522 | | | | 20,218 | | | | 12,302 | | | | 6,817 | | | | 7,185 | |
| Capital purchase commitments | | | 694 | | | | 694 | | | | — | | | | — | | | | — | |
| Other financial commitments (expenditure on investments) | | | 3,044 | | | | 3,044 | | | | — | | | | — | | | | — | |
Total | | | 50,260 | | | | 23,956 | | | | 12,302 | | | | 6,817 | | | | 7,185 | |
The Company does not have any off-balance sheet arrangements with unconsolidated entities or other persons.
DIRECTORS AND SENIOR MANAGEMENT
Directors
The directors of the Company (each, a “director,” together, the “directors”) at February 25, 2011 were as follows:
| | | |
Doug Dunn OBE | 66 | 2011 | Chairman |
Warren East | 49 | 2011 | Chief Executive Officer; Director |
Tim Score | 50 | 2011 | Chief Financial Officer; Director |
Tudor Brown | 52 | 2011 | President, Director from July 1, 2008, previously Chief Operating Officer; Director |
Mike Inglis | 51 | 2011 | EVP and General Manager, Processor Division, from July 1, 2008, previously EVP Sales and Marketing; Director |
Mike Muller | 52 | 2011 | Chief Technology Officer; Director |
Simon Segars | 43 | 2011 | EVP and General Manager, Physical IP Division; Director |
Kathleen O’Donovan | 53 | 2013 | Senior Independent Director (Non-Executive) |
| | | |
Young Sohn | 55 | 2013 | Independent Non-Executive Director |
Philip Rowley | 58 | 2011 | Independent Non-Executive Director |
John Scarisbrick | 58 | 2011 | Non-Executive Director |
| Janice Roberts | 55 | 2014 | Independent Non-Executive Director |
| Larry Hirst | 59 | 2014 | Independent Non-Executive Director |
| Andy Green | 55 | 2014 | Independent Non-Executive Director |
| (1) | The address for each listed director is c/o ARM Holdings plc, 110 Fulbourn Road, Cambridge CB1 9NJ, UK. |
Doug Dunn, age 66, OBE, Chairman. Doug Dunn joined the board as an independent non-executive director in December 1998 and became non-executive Chairman on October 1, 2006. He was previously President and Chief Executive Officer of ASM Lithography Holding N.V. until his retirement in December 2004. Before joining ASML, he was Chairman and Chief Executive Officer of the Consumer Electronics Division of Royal Philips Electronics N.V. and a member of the board. He was previously Managing Director of the Semiconductor divisions of Plessey and GEC and held several engineering and management positions at Motorola. He was awarded an OBE in 1992. He is a non-executive director of ST Microelectronics N.V., Soitec S.A., TomTom N.V. and B E Semiconductor Industries N.V.
Warren East, age 49, Chief Executive Officer. Warren East joined ARM in 1994 to set up ARM’s consulting business. He was Vice President, Business Operations from February 1998. In October 2000 he was appointed to the board as Chief Operating Officer and in October 2001 was appointed Chief Executive Officer. Before joining ARM he was with Texas Instruments. He is a chartered engineer, Fellow of the Institution of Engineering and Technology, Fellow of the Royal Academy of Engineering and a Companion of the Chartered Management Institute. He is a non-executive director and Chairman of the Audit Committee of De La Rue plc.
Tim Score, age 50, Chief Financial Officer. Tim Score joined ARM as Chief Financial Officer and director in March 2002. Before joining ARM, he was Finance Director of Rebus Group Limited. He was previously Group Finance Director of William Baird plc, Group Controller at LucasVarity plc and Group Financial Controller at BTR plc. He is a non-executive director and Chairman of the Audit Committee of National Express Group plc.
Tudor Brown, age 52, President. Tudor Brown was one of the founders of ARM. Before joining the Company, he was at Acorn Computers where he worked on the ARM R&D program. He joined the Board in 2001 and became President in 2008 with responsibility for developing high-level relationships with industry partners and governmental agencies and for regional development. His previous roles include Engineering Director and Chief Technology Officer, EVP Global Development and Chief Operating Officer. He is a Fellow of the Institution of Engineering and Technology and is a non-executive director of ANT plc. He currently sits on the UK Government Asia Task Force.
Mike Inglis, age 51, EVP and General Manager, Processor Division. Mike Inglis joined ARM in 2002 and became EVP and General Manager of the Processor Division in July 2008, having previously been EVP, Sales and Marketing. Before joining ARM, he worked in management consultancy with A.T. Kearney and held a number of senior operational and marketing positions at Motorola, Texas Instruments, Fairchild and BIS Macintosh and gained his initial industrial experience with GEC Telecommunications. He is a chartered engineer and a Member of the Chartered Institute of Marketing. He is a non-executive director of Pace plc.
Mike Muller, age 52, Chief Technology Officer. Mike Muller was one of the founders of ARM. Before joining the Company, he was responsible for hardware strategy and the development of portable products at Acorn Computers. He was previously at Orbis Computers. At ARM he was VP, Marketing from 1992 to 1996 and EVP, Business Development until October 2000 when he was appointed Chief Technology Officer. He was appointed to the board in October 2001. He is a director of Linaro Limited.
Simon Segars, age 43, EVP and General Manager, Physical IP Division. Simon Segars joined the board in January 2005 and was appointed General Manager of the Physical IP Division in September 2007. He has previously been EVP, Engineering, EVP, Worldwide Sales and latterly EVP, Business Development. He joined
ARM in early 1991 and has worked on many of the ARM CPU products since then. He led the development of the ARM7 and ARM9 Thumb® families. He holds a number of patents in the field of embedded CPU architectures. He is a director of the SOI Industry Consortium and the EDA consortium.
Andy Green, age 55, Independent Non-Executive Director. Andy Green joined the board in February 2011. He has been CEO of Logica plc, a £3.7 billion business and technology service company employing 39,000 people, since 2008. He is a former CEO of BT Global Services and a former CEO of Group Strategy and Operations at BT plc and was CEO of BT Openworld. He is Chair of e-Skills UK (the UK Sector Skills Council for Business and Information Technology), is on the board and the Presidents Committee of the CBI and is a Companion of the Chartered Management Institute.
Larry Hirst, age 59, Independent Non-Executive Director. Larry Hirst joined the board in January 2011. He is the former Chairman of IBM Europe, Middle East and Africa. He retired from IBM in 2010 having previously held a wide range of senior positions since joining the company in 1977. He is also a Commissioner at the UK Government’s Commission for Employment and Skills and Chairman of the UK Trade and Investment Executive Board, responsible for driving the UK’s trade and investment objectives in the telecoms and IT sections. He is a non-executive director of MITIE Group plc. He was awarded a CBE in 2007.
Kathleen O’Donovan, age 53, Senior Independent Non-Executive Director. Kathleen O’Donovan joined the board in December 2006. She is a non-executive director of Prudential plc, a non-executive director and Chairman of the Audit Committee of Trinity Mirror plc, Chairman of the Invensys Pension Scheme and a non-executive director of International Rescue Committee UK. Previously she was a non-executive director and Chairman of the Audit Committees of the Court of the Bank of England, Great Portland Estates plc, EMI Group plc and a non-executive director of a O2 plc. Prior to that, she was Chief Financial Officer of BTR plc and Invensys plc and before that she was a partner at Ernst & Young.
Janice Roberts, age 55, Independent Non-Executive Director. Janice Roberts joined the board in January 2011. She has been a Managing Director at Mayfield Fund since 2000, a Silicon Valley-based venture capital firm with approximately $3 billion under management, where she focuses on the mobile, wireless communications and consumer technology industries. Prior to that, she held various executive positions at 3Com Corporation including President Palm Computing, President 3Com Ventures and Senior Vice President, Business Development and Global Marketing. She is a director of RealNetworks, Inc and several private technology companies.
Philip Rowley, age 58, Independent Non-Executive Director. Philip Rowley joined the board in January 2005. He was Chairman and CEO of AOL Europe, the interactive services, web brands, internet technologies and e-commerce provider until February 2007. He is a qualified chartered accountant and was Group Finance Director of Kingfisher plc from 1998 to 2000 and Deputy CEO and CFO of the General Merchandise Division until 2001. Prior to that, his roles included EVP and Chief Financial Officer of EMI Music Worldwide. He is a non-executive director of HMV Group plc, Misys plc and Promethean World plc and Chairman of Livestation Limited.
John Scarisbrick, age 58, Non-Executive Director. John Scarisbrick joined the board in August 2001. He was CEO of CSR plc from June 2004 until October 2007 and previously worked for 25 years at Texas Instruments (TI) in a variety of roles including as SVP responsible for TI’s $5 billion ASP chip business, President of TI Europe and leader of the team that created TI’s DSP business in Houston, Texas. Before joining TI, he worked in electronics systems design roles at Rank Radio International and Marconi Space and Defence Systems in the UK. He is a non-executive director of Innovative Silicon, Inc. and executive Chairman of Netronome Systems, Inc.
Young Sohn, age 55, Independent Non-Executive Director. Young Sohn joined the board in April 2007. He has extensive experience in the semiconductor industry both in Silicon Valley and in Asia. He is CEO of Inphi Corporation, Inc, a director of Cymer, Inc. and an adviser to Panorama Capital, a Silicon Valley based venture capital firm. Previously he was President of the semiconductor products group at Agilent Technology, Inc. and Chairman of Oak Technology, Inc. Prior to that, he was President of the hard drive business of Quantum Corporation and, before that, Director of Marketing at Intel Corporation.
Election and re-election of Directors
Janice Roberts and Larry Hirst joined the board as independent non-executive directors on January 25, 2011 and Andy Green joined the board as an independent nonexecutive director on February 25, 2011. All will be standing for election at the 2011 AGM. In line with the provisions of the UK Corporate Governance Code 2010, all directors will stand for election or re-election annually. (see “—Directors and Senior Management” above for the directors’ biographies).
Executive Officers
| | |
Warren East | 49 | Chief Executive Officer; Director |
Tim Score | 50 | Chief Financial Officer; Director |
Tudor Brown | 52 | President; Director |
Mike Inglis | 51 | Executive Vice President and General Manager, Processor Division; Director |
Simon Segars | 43 | Executive Vice President and General Manager, Physical IP Division; Director |
Mike Muller | 52 | Chief Technology Officer; Director |
| (1) | The address for each listed executive officer is c/o ARM Holdings plc, 110 Fulbourn Road, Cambridge CB1 9NJ, UK. |
COMPENSATION
The aggregate compensation (including pension contributions) paid by the Company to all persons who served in the capacity of director or executive officer in 2010 (13 persons) was £6.6 million. This includes £1.7 million of share-based compensation. This does not include expenses reimbursed to officers (including business travel, professional and business association dues and expenses) but includes amounts expended by the Company for automobiles made available to its officers and other benefits commonly reimbursed or paid by companies in the UK. Each executive officer participates in the Company’s Deferred Annual Bonus Plan under which he may receive a bonus of up to 125% of the executive’s fixed salary, 50% of which is compulsorily deferred into shares and an equity match of up to 2:1 if certain targets (determined by agreement between the executive and the Remuneration Committee) are exceeded. The aggregate amount accrued by the Company during 2010 to provide pension, retirement or similar benefits for directors and executive officers was £226,000.
Directors’ emoluments
The emoluments of the executive directors of the Company in respect of services to the Company were paid through its wholly-owned subsidiary, ARM Limited, as were non-executive directors, with the exception of Lucio Lanza and Young Sohn who were paid through ARM, Inc., and were as follows:
| | | | | | | | | | | | | | | | | Pension contributions 2010 | | | Share-based payments 2010 (3) | | | | | | | | | Pension contributions 2009 | | | Share-based payments 2009 (3) | | | | |
| | | £ | | | £ | | | £ | | | £ | | | £ | | | £ | | | £ | | | £ | | | £ | | | £ | | | £ | | | £ | |
| Executive | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Warren East | | | — | | | | 430,000 | | | | 537,500 | | | | 14,891 | | | | 982,391 | | | | 49,089 | | | | 404,617 | | | | 1,436,097 | | | | 778,491 | | | | 46,480 | | | | 391,345 | | | | 1,216,316 | |
Tim Score | | | — | | | | 370,000 | | | | 462,500 | | | | 24,167 | | | | 856,667 | | | | 39,183 | | | | 349,822 | | | | 1,245,672 | | | | 688,307 | | | | 37,800 | | | | 335,419 | | | | 1,061,526 | |
Tudor Brown | | | — | | | | 218,000 | | | | 272,500 | | | | 11,391 | | | | 501,891 | | | | 40,022 | | | | 236,904 | | | | 778,817 | | | | 403,195 | | | | 32,735 | | | | 241,273 | | | | 677,203 | |
Mike Inglis | | | — | | | | 260,000 | | | | 325,000 | | | | 14,575 | | | | 599,575 | | | | 29,068 | | | | 244,504 | | | | 873,147 | | | | 474,574 | | | | 27,500 | | | | 237,037 | | | | 739,111 | |
Mike Muller | | | — | | | | 255,000 | | | | 318,750 | | | | 14,891 | | | | 588,641 | | | | 40,651 | | | | 238,299 | | | | 867,591 | | | | 466,691 | | | | 31,172 | | | | 230,858 | | | | 728,721 | |
Simon Segars | | | — | | | | 258,000 | | | | 322,500 | | | | 117,631 | | | | 698,131 | | | | 28,380 | | | | 242,222 | | | | 968,733 | | | | 620,348 | | | | 27,500 | | | | 230,980 | | | | 878,828 | |
Total | | | | | | | 1,791,000 | | | | 2,238,750 | | | | 197,546 | | | | 4,227,296 | | | | 226,393 | | | | 1,716,368 | | | | 6,170,057 | | | | 3,431,606 | | | | 203,187 | | | | 1,666,912 | | | | 5,301,705 | |
| Non-executive | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Doug Dunn | | | 168,000 | | | | — | | | | — | | | | — | | | | 168,000 | | | | — | | | | — | | | | 168,000 | | | | 160,000 | | | | — | | | | — | | | | 160,000 | |
Lucio Lanza | | | 15,581 | | | | — | | | | — | | | | — | | | | 15,581 | | | | — | | | | — | | | | 15,581 | | | | 40,000 | | | | — | | | | — | | | | 40,000 | |
| Kathleen O’Donovan | | | 42,000 | | | | — | | | | — | | | | — | | | | 42,000 | | | | — | | | | — | | | | 42,000 | | | | 40,000 | | | | — | | | | — | | | | 40,000 | |
Philip Rowley | | | 47,500 | | | | — | | | | — | | | | — | | | | 47,500 | | | | — | | | | — | | | | 47,500 | | | | 45,000 | | | | — | | | | — | | | | 45,000 | |
| John Scarisbrick | | | 42,000 | | | | — | | | | — | | | | — | | | | 42,000 | | | | — | | | | — | | | | 42,000 | | | | 40,000 | | | | — | | | | — | | | | 40,000 | |
| Jeremy Scudamore | | | 47,500 | | | | — | | | | — | | | | — | | | | 47,500 | | | | — | | | | — | | | | 47,500 | | | | 45,000 | | | | — | | | | — | | | | 45,000 | |
Young Sohn | | | 42,000 | | | | — | | | | — | | | | — | | | | 42,000 | | | | — | | | | — | | | | 42,000 | | | | 40,000 | | | | — | | | | — | | | | 40,000 | |
Total | | | 404,581 | | | | | | | | | | | | | | | | 404,581 | | | | | | | | | | | | 404,581 | | | | 410,000 | | | | — | | | | — | | | | 410,000 | |
Total | | | 404,581 | | | | 1,791,000 | | | | 2,238,750 | | | | 197,546 | | | | 4,631,877 | | | | 226,393 | | | | 1,716,368 | | | | 6,574,638 | | | | 3,841,606 | | | | 203,187 | | | | 1,666,912 | | | | 5,711,705 | |
| (1) | The bonus payments above represent the full bonus earned during 2010. According to the terms of the deferred annual bonus, 50% of this bonus is not paid in cash, but is deferred and becomes payable in shares after three years. Details of the awards made in February 2011 in respect of these deferrals are detailed in “—Share Ownership—The Deferred Annual Bonus Plan” below. |
| (2) | All the executive directors receive family healthcare and annual travel insurance as part of their benefits in kind. In addition, Tim Score has the use of a company car and Warren East, Tudor Brown, Mike Inglis and Mike Muller receive a car and petrol allowance. Simon Segars also receives living, transportation and other allowances as part of his placement in the US. |
| (3) | Share based payments represent each director’s individual compensation charge as calculated under IFRS 2, which the Company adopted from January 1, 2005. Further details of this are given in Note 22 of the Consolidated Financial Statements. |
It is the Company’s policy to allow executive directors to hold non-executive positions at other companies and receive remuneration for their services. The board believes that experience of the operations of other companies and their boards and committees is valuable to the development of the executive directors. Details of executive’s roles within other companies and their remuneration are as follows:
Warren East is a non-executive director of De La Rue plc and he received remuneration totaling £47,000 up to December 31, 2010 (2009: £45,250). He was also a director of Reciva Limited until June 30, 2010. The options over Reciva shares that were previously awarded lapsed on his resignation and he received no other remuneration. The Company holds less than 1% of the issued share capital of Reciva Limited. Tudor Brown is a non-executive director of ANT plc. In this capacity he received remuneration totaling £22,500 up to December 31, 2010 (2009: £25,625). Mike Inglis is a non-executive director of Pace plc and in this capacity he received remuneration totaling £42,000 up to December 31, 2010 (2009: £33,000) . Tim Score is a non-executive director of National Express Group plc. In this capacity he received remuneration totaling £56,000 up to December 31, 2010 (2009: £72,000 including an additional fee for acting as interim chairman for Q1 2009). Simon Segars was a non-executive director of Plastic Logic Limited until December 31, 2010 and in this capacity he received remuneration totaling £15,000 (2009: £15,000). He holds options over 49,400 Plastic Logic shares at an option price of US$ 0.065 which are exercisable until March 2, 2011. All the executive directors are accruing benefits under a money purchase pension scheme as a result of their services to the Company, contributions for which were all paid during the year.
Directors’ Interests
Save as disclosed in “—Share Ownership” below none of the directors has any interest in the issued share capital of the Company which is required to be notified to the Company pursuant to the UK Listing Authority’s rules (LR 9.8.6R(1)).
BOARD PRACTICES
Corporate Governance
Compliance with the Combined Code and the Sarbanes-Oxley Act:
The Company’s corporate governance framework is built around three pillars:
| | · | organization and structure, |
| | · | the internal control framework and |
ARM highly values corporate governance and this is reflected in our governance principles, policies and practices and our everyday working processes. This approach is backed by continuous improvement based on measurement against internal objectives, external audits and benchmarking and a rigorous approach to risk management.
During 2010, the Company complied with the Combined Code on Corporate Governance 2008, with the following exceptions:
| | · | John Scarisbrick completed 9 years' service as an independent non-executive director in August 2010. The board continues to regard him as independent through his conduct and the challenging contributions he makes both at and between board meetings. He stepped down from the Remuneration Committee on December 16, 2010 and is no longer included in the number of independent non-executive directors for the purposes of assessing board balance. He will retire from the board at the 2011 AGM. |
| | · | Between the retirement of Lucio Lanza at the AGM on May 14, 2010 and January 25, 2011 there were five non-executive directors (all of whom were regarded as independent until August 2010 when John Scarisbrick reached his ninth anniversary) and six executive directors. |
We note the provisions of the UK Corporate Governance Code 2010 which is applicable for accounting periods beginning on or after June 29, 2010. To the extent that the Company does not already comply with its provisions and as, new regulations and guidance are published the Company will aim to comply fully with any changes and best practice principles within a reasonable timescale.
The Company continued to comply with the requirements of the Sarbanes-Oxley Act.
The board's core activities include:
| | · | providing leadership for the Company; |
| | · | active engagement in developing the Company’s long-term strategy; |
| | · | monitoring executive actions, standards of conduct, performance against business plans and budgets and ensuring that the necessary financial and human resources are in place for it to meet its objectives; |
| | · | obtaining assurance that material risks to the Company are identified and appropriate systems of risk management and control exist to mitigate such risks and defining the Company's appetite for risk; and |
| | · | board and executive management succession. |
All directors and employees are required to act fairly, honestly and with integrity and they are required to demonstrate that they have read and understand our Code of Business Conduct and Ethics, a copy of which is published on the corporate website at www.arm.com.
The board has a formal schedule of matters specifically reserved for its decision, which includes the approval of major business issues, policies, operating budgets and capital expenditure. It is also responsible for sanctioning unusual commercial arrangements such as atypical license agreements and investments. Authority is delegated to various committees that are constituted within written terms of reference and chaired by independent non-executive directors where required by the Combined Code on Corporate Governance 2008. The Chairman has primary responsibility for running the board and the Chief Executive Officer has executive responsibilities for the operations and results of the Company and making proposals to the board for the strategic development of the Company. There are clear and documented divisions of accountability and responsibility for the roles of Chairman and Chief Executive Officer.
Composition and operation of the board
The Combined Code on Corporate Governance 2008 requires that at least half of the board, excluding the Chairman, should comprise independent non-executive directors and the board currently comprises six executive directors, six independent non-executive directors, one non-executive director and the Chairman. The Chairman was regarded as independent at the time of his appointment. The executive directors are the Chief Executive Officer, the President, the Chief Financial Officer, the Chief Technology Officer and the General Managers of the Processor and Physical IP Divisions, all of whom play significant roles in the day-to-day management of the business. The board has considered the overall balance between executive and non-executive directors and believes that the number of executive directors is fully justified by the contribution made by each of them. All directors have completed conflicts of interest questionnaires and any planned changes in their directorships outside the Company are subject to prior approval by the board. No conflicts of interest arose in 2010 or to date in 2011 and no situations were or have since been identified that might lead to a conflict of interests.
The board reviews the independence of the non-executive directors on appointment and at appropriate intervals and considers the six independent non-executive directors to be independent in character, judgment and behavior, based on both participation and performance at board and committee meetings. There are no relationships or circumstances which are likely to affect the judgment of any of them. Kathleen O'Donovan became the Senior Independent Director upon the retirement of Jeremy Scudamore on January 31, 2011. The Senior Independent Director provides a communication channel between the Chairman and non-executive directors and is available to discuss matters with shareholders, if required. Janice Roberts and Larry Hirst (who joined the board on January 25, 2011), Andy Green (who joined the board on February 25, 2011), John Scarisbrick and Young Sohn all have a broad understanding of the Company’s technology and the practices of major US-based technology companies. Philip Rowley and Kathleen O’Donovan are both financial experts with strong financial backgrounds. The beneficial interests of the directors in the share capital of the Company are set out in “-Share Ownership”. In the opinion of the board, these shareholdings do not detract from the non-executive directors’ independent status.
The board reflects a balance between financial, sector specific and general business skills, with a highly experienced international team leading the business in both executive and non-executive roles. The board played an important role in guiding ARM through the challenging economic environment in 2010, providing clear strategic direction and ensuring that the Company’s performance and standards of conduct remained at expected levels.
During 2010, the nomination committee undertook an exercise to refresh the non-executive director representation. Janice Roberts and Larry Hirst joined the board on January 25, 2011 and Andy Green joined the board on February 25, 2011. The nomination committee worked with external advisers, Russell Reynolds, in connection with these appointments, which bring the board back into the required balance. Jeremy Scudamore retired for health reasons on January 31, 2011.
As part of our succession plans, John Scarisbrick will be retiring from the board at the Annual General Meeting in 2011, having served for more than 9 years. The membership of all board committees underwent a full review in December 2010 and John Scarisbrick stepped down from the remuneration committee on December 16, 2010 to make way for the new appointees.
The table below shows directors’ attendance at scheduled board meetings and conference calls or ad hoc meetings which they were eligible to attend during the 2010 financial year:
| | | | Board conference calls/ad hoc meetings |
Total number of meetings | 6 | | 5 |
Doug Dunn | 6/6 | | 4/5 |
Warren East | 6/6 | | 5/5 |
Tudor Brown | 6/6 | | 2/5 |
Mike Inglis | 6/6 | | 5/5 |
Lucio Lanza (retired May 14, 2010) | 2/3 | | 2/2 |
Mike Muller | 6/6 | | 4/5 |
Kathleen O’Donovan | 6/6 | | 2/5 |
Philip Rowley | 6/6 | | 5/5 |
John Scarisbrick | 6/6 | | 4/5 |
Jeremy Scudamore | 6/6 | | 5/5 |
Tim Score | 6/6 | | 4/5 |
Simon Segars | 6/6 | | 4/5 |
Young Sohn | 6/6 | | 4/5 |
Our Chairman, Doug Dunn, is a non-executive director of four other companies (ST Microelectronics N.V., Soitec S.A., TomTom N.V. and B E Semiconductor Industries N.V.) and he does not chair any other board.
Non-executive directors have the opportunity to influence agendas for board discussions and in 2010 were active in setting the agenda for the strategic review and ensuring the amount of time spent reviewing strategic and operational issues was appropriately balanced. The board holds at least one meeting each year in one of the
Company’s overseas offices and spent three days visiting the Processor Division Design Centre in Austin, Texas in 2010. In the event that directors are unable to attend a meeting or a conference call they receive and read the papers for consideration at that meeting and have the opportunity to relay their comments and, if necessary, to follow up with the Chairman or the Chief Executive Officer after the meeting. During 2010, the Chairman held at least three meetings with the non-executive directors without the executives present and the non-executive directors met on at least one occasion without the Chairman being present.
The directors have the benefit of directors’ and officers’ liability insurance and there is an established procedure for individual directors, who consider it necessary in the furtherance of their duties, to obtain independent legal or other professional advice at the Company’s expense. In addition, all members of the board have access to the advice of the Company Secretary. The Company Secretary also acts as secretary to the board committees.
Main responsibilities of the Chairman include:
| | · | leadership of the board and creating the conditions for overall board and individual director effectiveness and a constructive relationship with good communications between the executive and non-executive directors; |
| | · | ensuring that the board as a whole plays a full and constructive part in the development of strategy and overall commercial objectives; |
| | · | chairing the nomination committee which initiates succession planning to retain and build an effective and complementary board; |
| | · | ensuring that there is effective communication with shareholders and that members of the board develop an understanding of the views of the major investors in the Company; |
| | · | promoting the highest standards of integrity, probity and corporate governance throughout the Company, particularly at board level; and |
| | · | ensuring that the performance of the board as a whole, its committees, and individual directors is formally and rigorously evaluated at least once a year. |
Main responsibilities of the Chief Executive Officer include:
| | · | proposing and developing the Company’s strategy and overall commercial objectives in conjunction with the executive committee; |
| | · | day-to-day management of the Company; |
| | · | managing the executive committee; |
| | · | leading the communication program with shareholders and analysts; and |
| | · | fostering good relationships with key stakeholders. |
Board evaluation, induction and training
The board undertakes an annual board evaluation. During 2010, this exercise was conducted with the assistance of external advisers, Independent Audit, who observed a board meeting, reviewed board papers and had in-depth individual discussions with all directors, other key executives and the external audit partner. They presented their findings to the board in December 2010. Their detailed report and recommendations were discussed in detail in January 2011 and agreed actions will be implemented during 2011.
The evaluation covered:
| | · | succession planning; and |
| | · | process and practicalities. |
The overall conclusion was that individual board members are satisfied that the board works well and operates effectively in an environment where there is constructive challenge from the non-executive directors. They are also satisfied with the contribution made by their colleagues and that board committees operate properly and efficiently.
A full, formal induction program is arranged for new directors, tailored to their specific requirements, the aim of which is to introduce them to key executives across the business and to enhance their knowledge and understanding of the Company and its activities. They also receive guidance on the regulatory regimes and corporate governance framework that the Company operates under. The Company has a commitment to training and all directors, executive or non-executive, are encouraged to attend suitable training courses at the Company’s expense. During 2010, the board received an update from the Company Secretary on UK and US corporate governance matters.
Before each meeting, the board is provided with information concerning the state of the business and its performance in a form and of a quality appropriate for it to discharge its duties. The ultimate responsibility for reviewing and approving the annual report and accounts and the quarterly reports and for ensuring that they present a balanced assessment of the Company’s position, lies with the board. The board delegates day-to-day responsibility for managing the Company to the executive committee and has a number of other committees, details of which are set out below.
Executive Committee
The executive committee is responsible for developing and implementing the strategy approved by the board. In particular, the committee is responsible for ensuring that the Company’s budget and forecasts are properly prepared, that targets are met and for generally managing and developing the business within the overall budget. Variations from the budget and changes in strategy require approval from the main board of the Company. The executive committee, which meets monthly, comprises the Chief Executive Officer, Chief Financial Officer, the President, the Chief Operating Officer, the Chief Technology Officer, the General Managers of the Processor, Physical IP, System Design Divisions and Media Processing Business Unit, the EVPs of Human Resources, Corporate Development, Sales and Marketing, the General Counsel and the Company Secretary and meetings are attended by other senior operational personnel, as appropriate. Biographies of the members of the executive committee appear on the Company’s website at www.arm.com.
The terms of reference of the audit, remuneration and nomination committees are published on the Company’s website at www.arm.com.
Audit Committee
The table below sets out membership of the committee during the year:
| | |
Philip Rowley | Independent non-executive director | 4/4 |
Kathleen O’Donovan | Independent non-executive director | 4/4 |
Jeremy Scudamore | Senior Independent director | 4/4 |
Young Sohn | Independent non-executive director | 4/4 |
During 2010, Philip Rowley was the financial expert as defined in the Sarbanes-Oxley Act. Kathleen O’Donovan is also qualified to fulfil this role and became the financial expert on January 26, 2011 when she assumed the chairmanship of the committee. Both have recent and relevant financial expertise. The external auditors, Chief Executive Officer, Chief Financial Officer, the VP Corporate Operations, the Head of Tax and the Company Secretary attend all meetings in order to ensure that all the information required by the audit committee
for it to operate effectively is available. Representatives of the Company’s external auditors meet with the audit committee at least once a year without any executive directors being present.
As part of the process to refresh the board and its committees, Janice Roberts and Larry Hirst joined and Young Sohn and Jeremy Scudamore stepped down from the audit committee on January 26, 2011.
During the year, the activities of the committee included:
| | · | a review of the risk assessment and mitigation processes and development of an enhanced Corporate Risk Register giving the board greater visibility of risk assessment and mitigation within the Company; |
| | · | reviewing the 2010 internal and external audit plans and reports on overseas subsidiaries; |
| | · | considering and approaching the assumptions in the annual impairment review, prior to approval by the full board; |
| | · | reviewing the status of Sarbanes-Oxley compliance and testing; |
| | · | re-approval of the pre-approved non-audit services policy; and |
| | | reviewing the external auditors’ performance, effectiveness, independence and fees, the results of which have enabled us to recommend the reappointment of PricewaterhouseCoopers LLP. |
The committee’s responsibilities include:
| | · | monitoring the integrity of the financial statements of the Company and any formal announcements relating to the Company’s financial performance and reviewing any significant financial reporting judgments contained therein; |
| | · | reviewing the effectiveness of the Company’s internal control over financial reporting; |
| | · | providing oversight of the Company’s risk management systems; |
| | · | making recommendations to the board in relation to the appointment, remuneration and resignation or dismissal of the Company’s external auditors; |
| | · | assessing the external auditors’ independence and objectivity and the effectiveness of the audit process; |
| | · | developing and implementing policy on the engagement of the external auditors to supply non-audit services and assessing their nature, extent and cost effectiveness; and |
| | · | considering compliance with legal requirements, accounting standards, the Listing Rules of the Financial Services Authority and the requirements of the SEC. |
PricewaterhouseCoopers LLP have been the Company’s auditors since it listed on the London Stock Exchange in April 1998. The external auditors are required to rotate the audit partner responsible for the Company and subsidiary audits every fifth year end and the current lead audit partner has been in place since July 2007. The audit committee considers that the relationship with the auditors is working well and remains satisfied with their effectiveness. This view was supported by a review of the effectiveness of the external audit process which was undertaken early in 2011 involving the audit committee, the executive team and senior managers who interact with the auditors. It looked at robustness of audit, quality of delivery and quality of people and service and concluded that the services provided by the auditors and their mode of delivery are effective. Accordingly, the audit committee has not considered it necessary to date to require the firm to tender for the audit work.
There are no contractual obligations restricting the Company’s choice of external auditor. The committee also keeps under review the value for money of the audit. The committee has discussed with the external auditors their independence, and has received and reviewed written disclosures from the external auditors as required by the Auditing Practices Board’s International Standard on Auditing (ISA) (UK and Ireland) 260 “Communication of audit matters with those charged with governance”, as well as those required by the Public Company Accounting Oversight Board Rule 3526, “Communication with Audit Committees concerning independence”. Through this process, the committee has concluded that the auditors are independent.
Policy on auditors providing non-audit services
To avoid the possibility of the auditors’ objectivity and independence being compromised, there is an agreed policy in place on the provision of non-audit services by the auditors, which sets out arrangements for approving:
| | · | services that have general pre-approval by the audit committee; |
| | · | services that require specific pre-approval by the audit committee before work commences; and |
| | · | services that cannot be provided by the auditors. |
The Company’s tax advisory work is carried out by the auditors only in cases where they are best suited to perform the work in a cost effective manner, given their familiarity with the Company’s business. In other cases, the Company has engaged another independent firm of accountants to perform tax advisory work. The Company does not normally award general consulting work to the auditors. From time to time, however, the Company will engage the auditors to perform work on matters relating to benchmarking of the internal audit function, human resources, and royalty audits. A breakdown of fees paid to the auditors can be found in note 5 to the financial statements.
Remuneration Committee
The table below sets out membership of the committee during the year:
| | |
Jeremy Scudamore (Chairman 2010) | Senior Independent Director | 3/3 |
Kathleen O’Donovan | Independent non-executive director | 3/3 |
John Scarisbrick (member until December 16, 2010) | Non-executive director | 3/3 |
Young Sohn | Independent non-executive director | 3/3 |
As part of the process to refresh the board and its committees, Philip Rowley joined the remuneration committee on January 25, 2011 and took over as chairman in place of Jeremy Scudamore on January 31, 2011, Larry Hirst joined the committee and Kathleen O'Donovan stepped down as a member on January 25, 2011. In addition, John Scarisbrick retired from the committee on December 16, 2010 and Andy Green joined the committee on February 25, 2011. The current membership of the committee is Philip Rowley (Chairman), Young Sohn, Larry Hirst and Andy Green.
The committee's other responsibilities include:
| | · | determining and agreeing with the board, within agreed terms of reference, the Company’s policy for the remuneration of the executive directors and the individual remuneration packages for each executive director. This includes basic salary, annual bonus, the level and terms of conditional awards under the Long Term Incentive Plan and the terms of performance conditions that apply to such benefits, pension rights and any compensation payments; |
| | · | making recommendations in relation to the remuneration of senior management including, members of the executive committee; and |
| | · | liaising with the board in relation to the preparation of the board’s annual report to shareholders on the Company’s policy on the remuneration of executive directors and in particular the directors’ remuneration report, as required by the Companies Act 2006, the Combined Code on Corporate Governance 2008 and the Listing Rules of the Financial Services Authority. |
The committee’s terms of reference are published on the corporate website at www.arm.com. Given their diverse business experience, the independent non-executive directors who made up the committee in 2010 and the new members who joined the committee in 2011 offer a balanced view and international expertise in relation to remuneration matters for the Company.
The committee has access to independent professional advice from external advisers in the furtherance of its duties and makes use of such advice. During 2010, after a review of potential advisers, Towers Watson were appointed by the committee and undertook a review of executive remuneration, including a detailed comparison of the composition of the remuneration packages for the executive directors and key senior managers against those offered by appropriate peer companies. Their main conclusion was that the base salaries were below median relative to other companies of similar market capitalisation. The amount of leverage was normal and total reward was constrained by the level of base salaries. The maximum bonus under the Deferred Annual Bonus Plan (DAB) was below the market norm and it was recommended that this be increased from 125% to 150%. This change was approved by the remuneration committee in December 2010 to apply to bonuses earned in relation to the 2011 financial year onwards. This will bring maximum
bonus for executive directors and executive committee members in line with the maximum bonus that can be achieved by the next level of management, who can also achieve a maximum bonus of 150%
For 2010, the average increase in base salaries for the executive directors was 3.3% and the average increase for the workforce as a whole was 3.58%.
In addition to the appointment of Towers Watson, other advisers who provided services during 2010 were:
| | · | KPMG who provided general advice on remuneration and benefits, including tax advice for employees who are seconded overseas and also worked on royalty audits; |
| | · | Linklaters who provided legal services in relation to equity plans and corporate matters; |
| | · | Monks who provided salary survey data; |
| | · | Deloitte who provided salary survey data, royalty audit services and tax training; and |
| | · | Kepler Associates who provide independent verification of TSR calculations for the Long Term Incentive Plan. |
Advisers are generally appointed by Bill Parsons, the EVP, Human Resources and are subject to review by the committee. The EVP, Human Resources also provided advice to the committee and to the Company in 2010. Monks is an associate of the Company’s external auditor and these services were approved by the audit committee in accordance with the procedure described in the Corporate Governance report. The Chief Executive Officer and the EVP, Human Resources, normally attend for part of remuneration committee meetings. No director is involved in deciding his or her own remuneration.
The Deferred Annual Bonus Plan for executive directors and senior managers and the Employee Equity Plan for all other employees were approved by shareholders at the 2006 AGM. These plans brought the remuneration structure more closely in line with UK market norms, increased alignment between remuneration and financial performance and strengthened the retention aspect of the deferred bonus. Cessation of option grants to executive directors (other than in exceptional circumstances) and the reduction from three plans to two for executive directors and senior managers, together with the move away from options to shares for all employees reduces potential dilution and simplifies remuneration arrangements.
Nomination Committee
The table below sets out membership of the committee during the year:
| | |
Doug Dunn | Chairman | 4/4 |
Lucio Lanza (resigned May 14, 2010) | Independent non-executive director | 0/1 |
| Kathleen O’Donovan (appointed May 14, 2010) | Independent non-executive director | 3/3 |
Philip Rowley | Independent non-executive director | 4/4 |
| John Scarisbrick | Non-executive director | 4/4 |
| Young Sohn (appointed December 16, 2010) | Independent non-executive director | N/A |
The nomination committee met on four occasions during 2010 and successfully achieved its objective of identifying three suitable new independent non-executive directors and recommending their appointment to the board. The committee engaged an external search firm, Russell Reynolds, to seek and introduce suitable candidates.
As part of the process to refresh the board and its committees, Kathleen O’Donovan and Young Sohn joined the nomination committee on May 14, 2010 and on December 16, 2010 respectively.
In addition to leading the process for board appointments and making recommendations to the board in relation to new appointments of executive and non-executive directors, the Committee reviews succession planning, board composition and balance. The committee considers the roles and capabilities required for each new appointment, based on an evaluation of the skills and experience of the existing directors.
Internal control/risk management
The Company fully complies with the Combined Code on Corporate Governance 2008’s provisions on internal control, having established procedures to implement the Turnbull Guidance 2005. The board has established a continuous process for identifying, evaluating and managing the significant risks faced by the Company. The board confirms that the necessary actions have been or are being taken to remedy any significant failings or weaknesses identified from this process.
The board of directors has overall responsibility for ensuring that the Company maintains an adequate system of internal control and risk management and for reviewing its effectiveness, while implementation of internal control systems is the responsibility of management. The Company has implemented an internal control system designed to help ensure:
| | · | the effective and efficient operation of the Company and its divisions by enabling management to respond appropriately to significant risks to achieving the Company’s business objectives; |
| | · | the safeguarding of assets from inappropriate use or from loss and fraud and ensuring that liabilities are identified and managed; |
| | · | the quality of internal and external reporting; |
| | · | compliance with applicable laws and regulations and with internal policies on the conduct of the Company’s business; and |
| | · | the ability to recover in a timely manner from the effects of disasters or major accidents which originate outside the Company’s direct control. |
Compliance with section 404 of the Sarbanes-Oxley Act has been successfully achieved for each financial year since it became effective for foreign private issuers in 2006. The processes and procedures for identifying, evaluating and managing the significant business, operational, financial, compliance and other risks facing the Company have been successfully integrated into day-to-day business operations through the ARM Management System and are proven to provide a sustainable solution for ongoing compliance. The board has reviewed and approved the system of internal control, including internal controls over the consolidation process and financial reporting, which has been in place for the year under review and up to the date of approval of the annual report and financial statements. These controls consist of extensive reviews by qualified and experienced individuals underpinned by a system of checklists that ensures that all elements of the financial statements and appropriate disclosures are considered and accurately stated. Control systems are designed to manage rather than eliminate the risks inherent in a fast-moving, high-technology business and can, therefore, provide only reasonable and not absolute assurance against material misstatement or loss.
The Company has a number of other committees and bodies which contribute to the overall control environment. These include:
Risk Review Committee
The risk review committee consists of the Chief Technology Officer, the Chief Financial Officer, the VP Finance, ARM Group and the Company Secretary and it receives and reviews quarterly reports from the divisions and corporate functions. The committee is responsible for identifying and evaluating risks which may impact the Company’s strategic and business objectives and for monitoring the progress of actions designed to mitigate such risks. The risk review committee reports formally to the executive committee twice a year where its findings are considered and challenged and reports to the board at least once a year.
Compliance Committee
The compliance committee consists of the General Counsel, the Chief Operating Officer, the Chief Financial Officer, the EVP, Human Resources, the VP Corporate Operations, the Chief Information Officer and the Company Secretary. It oversees compliance throughout the business with all appropriate international regulations, trading requirements and standards, including direct oversight of financial, employment, environmental and security processes and policies.
Disclosure Committee
The disclosure committee comprises the Chief Executive Officer, the Chief Financial Officer, the VP Finance, ARM Group, the General Counsel, the VP of Investor Relations and the Company Secretary. It is responsible for ensuring that disclosures made by the Company to its shareholders and the investment community are accurate, complete and fairly present the Company’s financial condition in all material respects.
In addition, there is a series of interconnected meetings that span the Company including the weekly executive team meeting chaired by the Chief Executive Officer and the weekly business review meeting chaired by the Chief Operating Officer, the purpose of which is to monitor and control all main business activities, sales forecasts and other matters requiring approval. Each month there are Operations and Customer Satisfaction Meetings where management reviews with representation from the divisions and functions across the Company; revenues, orders booked, costs, product and project delivery dates and levels of defects found in products in development. The outputs of these meetings are reviewed by the executive committee which, in turn, raises relevant issues with the board of the Company.
The Company has an internal audit function that meets criteria set out in the key practice standards prescribed by the Institute of Internal Auditors. A number of steps were implemented during 2010 which enhanced the internal audit function through rebalancing the emphasis between operational and financial audit. These included a more formal and rigorous risk assessment process, a broadening of the scope of the internal audit program and an increase in the financial capability within the Corporate Operations Group.
The Company’s management system documents processes and responsibilities across all business functions and operations. As an autonomous part of this system, the internal audit function carries out a program of audits to assess its effectiveness and efficiency, resulting in continuous maintenance and improvement of the system, adapting to changes in business operations as necessary. To demonstrate compliance with the Sarbanes-Oxley Act, the audit function also maintains the documented controls over financial reporting and confirms the operation of them either by direct testing or through a monitored self-assessment program. The management system is audited externally by Lloyd’s Register Quality Assurance for compliance with ISO9001:2008 and as part of its Business Assurance scheme supports the Sarbanes-Oxley compliance activity.
Any significant control failings identified through the internal audit function or the independent auditors are brought to the attention of the compliance committee and undergo a detailed process of evaluation of both the failing and the steps taken to remedy it. There is then a process for communication of any significant control failures to the audit committee. There were no significant control failures during 2010 or up to February 25, 2011, being the latest practicable date before the printing of this report.
Whistleblowing procedures
The Company operates a whistleblowing policy which provides for employees to report concerns about any unethical business practices to senior management in strict confidence or, if they prefer, anonymously through an independent third-party telephone line. They can do so without fear of recrimination. The audit committee receives any such confidential reports from the compliance committee. There were no whistleblowing reports in 2010 and none up to February 25, 2011, being the latest practicable date before the printing of this report.
Environmental, social, corporate governance and ethical policies
While the Company is accountable to its shareholders, it also endeavours to take into account the interests of all its stakeholders, including employees, customers and suppliers and the local communities and environments in which it operates. The Chief Financial Officer takes responsibility for these matters, which are considered at board level. A corporate responsibility (CR) report is included in this report and a more detailed version is available via the Company’s website www.arm.com. The Company’s Code of Business Conduct and Ethics is also available on the Company’s website and the Company regularly monitors employees’ awareness of Company policies and procedures, including its ethical policies. Employees reconfirm their understanding of key policies each year to reinforce awareness. The Company's Code of Business Conduct and Ethics and Company Rules have been updated in response to the Bribery Act 2010 and will be updated further when the Government guidance is issued. Further training will be given to all employees and arrangements with contractors and suppliers have been and will continue to be reviewed and updated as appropriate to reflect the requirements of the Act.
As a company whose primary business is the licensing of IP, employees are highly valued and their rights and dignity are respected. The Company strives for equal opportunities for all its employees and does not tolerate any harassment of, or discrimination against, its staff. The Company endeavors to be honest and fair in its relationships with its customers and suppliers and to be a good corporate citizen respecting the laws of the countries in which it operates.
Environmental policies
The Company’s premises are composed entirely of offices since it has no manufacturing activities. Staff make use of computer-aided design tools to generate IP. This involves neither hazardous substances nor complex waste emissions. With the exception of development systems products, the majority of “products” sold by the Company comprise microprocessor core and physical IP designs that are delivered electronically to customers.
A number of initiatives in this area have continued in 2010. The Company’s environmental policy is published on its website within the CR report. An environmental action plan is in place, including monitoring energy usage, resource consumption and waste creation so that targets set for improvement are realistic and meaningful, ensuring existing controls continue to operate satisfactorily and working with suppliers to improve environmental management.
In line with the Companies Act 2006, the articles of association enable the Company to send information to shareholders electronically and make documents available through the website rather than in hard copy, which provide both environmental and cost benefits. Shareholders can opt to continue receiving a printed copy of the annual report if they prefer.
Health and safety
Although ARM operates in an industry and in environments which are considered low risk from a health and safety perspective, the safety of employees, contractors and visitors is a priority in all ARM workplaces world-wide. Continual improvement in safety management systems is achieved through detailed risk assessments to identify and eliminate potential hazards and through occupational health assessments for employees. More detail about the Company’s approach to environmental matters and health and safety is included below.
Information and communication with shareholders
The board makes considerable efforts to establish and maintain good relationships with shareholders. There is regular dialogue with institutional investors during the year other than during close periods. The main channel of communication continues to be through the Chief Executive Officer, the Chief Financial Officer and the VP of Investor Relations, although the Chairman, the Senior Independent Director and the other directors are available to engage in dialogue with major shareholders as appropriate. The board also encourages communication with private investors and part of the Company’s website is dedicated to providing accurate and timely information for all investors including comprehensive information about the business, its Partners and products, all press releases, Regulatory News Services (“RNS”) and Securities and Exchange Commission (“SEC”) announcements.
We continued to develop our engagement with other stakeholders in 2010, strengthening our relationships and expanding the ARM network of Partners and our Connected Community.
ARM’s University Programme is an important initiative for the future of the business and our relationships with business partners. We engage with universities around the world, developing the next generation of ARM engineers, donating equipment and software, helping to design courses and textbooks, and providing technical support and training to students and faculties. In 2010, the program strengthened its commitment to institutions in India, South America, and China to nurture growing talent. ARM and our Partners are seeing the benefit of the University Programme as students graduate with experience in designing with ARM products and as university engineering departments base their own research around ARM technology.
At present, around 28 sell-side analysts write research reports on the Company and their details appear on the Company’s website. Shareholders can also obtain telephone numbers from the website, enabling them to listen to earnings presentations and audio conference calls with analysts and in addition, webcasts or audiocasts of key presentations are made available through the website. Members of the board attend the annual analyst and investor day and develop an understanding of the views of major shareholders through any direct contact that may be initiated by shareholders, or through analysts’ and brokers’ briefings. The board also receives feedback from the Company’s brokers and financial PR advisers, who in turn obtain feedback from analysts and brokers following investor roadshows. All shareholders may register to receive the Company’s press releases via the internet.
The board actively encourages participation at the Annual General Meeting (AGM), scheduled for May 12, 2011, which is the principal forum for dialogue with private shareholders. A presentation is made outlining recent developments in the business and an open question-and-answer session follows to enable shareholders to ask questions about the business in general.
All resolutions proposed at the 2011 AGM will be decided on a poll and the voting results will be published via RNS and the SEC and will be available on the Company’s website.
Corporate responsibility report
ARM is committed to implementing and developing best practice Corporate Responsibility (CR) in our market segment and intends to become a leader for CR in the sector.
ARM’s CR strategy encompasses accountability to all stakeholders, including employees and their families, providing excellent service to our Partners and shareholders, fostering good relationships with suppliers, on-going involvement with local communities and minimizing our impact on the environment as well as designing energy efficient products. During 2010, ARM joined the United Nations Global Compact (UNGC), an initiative for businesses that are committed to aligning their operations and strategies in the areas of human rights, labor, environment and anti-corruption. In the year, ARM took an active role by convening an IT Sector panel at the World Climate Summit and joined the UN Caring for Climate initiative. We also entered a partnership with the International Business Leaders’ Forum (IBLF) to explore how the better use of technology can reduce energy consumption and improve living standards globally.
ARM’s continued success has been achieved through the strength and depth of our stakeholder relationships. Our corporate governance framework and processes enable us to manage the Company effectively and to demonstrate transparent, consistent and effective governance so that we remain accountable to our shareholders, employees, partners, suppliers and the local, regional, and national communities we support and with whom we interact.
As part of our effort to improve stakeholder communications, we enhanced our CR Report in 2010 guided by the Global Reporting Initiative, the most widely used sustainability reporting structure, to aid transparency and consistency. To take this further, ARM is the one of the first companies to incorporate the UNGC’s fifty-point Blueprint for Sustainability Leadership into its full 2010 CR Report which is available on our website at www.arm.com.
Employees
The welfare of ARM’s employees around the world is one of our top priorities. ARM’s Corporate Vision and its Management Charter include commitments to provide a sector-leading environment for employees to develop their personal and collective potential. The interests of employees and shareholders are aligned by providing equity participation to all employees through restricted shares under the Employee Equity Plan and the opportunity to buy shares through savings plans. When ARM’s quarterly results are published, members of the executive committee also present the same results internally. ARM also provides periodic question and answer sessions at each site led by an executive committee member where “no question is off limits”.
We have established a Global Equal Employment Opportunities policy covering the recruitment, transfer and promotion of staff as well as their training and development. Employee consultation groups advise the Company on issues that impact employees and a comprehensive Global Opinion Survey is conducted every two years to monitor employee views and provide input on internal operations. At least once a year, employees and managers have a formal discussion on performance and development through the ARM Feedback and Development System. Training needs are tracked and delivered and progress is monitored through our Learning and Development team, ensuring that the Company’s skills base is increased in line with business needs and employees’ personal aspirations.
ARM provides a number of assistance and wellness programs to employees and their families including private medical insurance, travel and life insurance, pensions/401(k) plans, sabbaticals, sick pay, holiday pay, employee counseling, flexible working, on-site physiotherapy and athletic training. ARM also offers family-friendly programs such as maternity, paternity and parental leave, a child care voucher scheme in the UK and a flexible spending account in the US.
Employee consultation groups advise the Company on various issues that impact employees and a comprehensive global opinion survey is conducted every two years to monitor employee views and this provides valuable input on internal operations.
Ecosystem
ARM maintains continuous efforts to achieve class-leading levels of customer and ecosystem partner satisfaction, measured through regular surveys and feedback channels including an annual worldwide ARM Partner Meeting and ARM Technology Conferences held in India, Asia and the US.
As part of our commitment to the World Climate Summit, IBLF and UNGC we work continuously with our Partners to improve sustainability across the ecosystem. ARM collaborates with research and development organizations such as university science and engineering programs worldwide. We also participate in EU-funded research to improve the efficient and responsible use of ARM-powered products.
Customers
ARM has built its business around a partnership model, working together with our customers to enable mutual success. Engagement with customers happens at many levels in the organization, from the executive committee level, through sales, marketing and engineering. Customer satisfaction is monitored and reviewed by management to identify a range of key metrics to be monitored including: product and project delivery dates; product quality levels; customer support satisfaction and direct feedback gathered from customers and elsewhere in the ecosystem. The output is reviewed by management which, in turn, raises any pertinent issues with the executive committee.
Suppliers
As a Company which does not have any manufacturing operations, ARM has a limited number of suppliers. Central procurement functions were enhanced in 2010 and the introduction of new policies and procedures, with training workshops, have enabled ARM to standardize the procurement screening and feedback processes across the Company. This new procurement system has enabled the introduction of corporate responsibility requirements so that any new supplier must demonstrate that they have a compatible ethical policy in place. ARM’s sources its electricity from renewable energy suppliers wherever possible.
Surrounding communities
ARM undertakes many initiatives within the communities in which it functions. In 2010, ARM invested £2.5 million in an interest-free charitable bond for Cambridge-based social enterprise Future Business, to support a new incubation centre. The bond is the biggest philanthropic investment ever made by ARM. The investment was made because Future Business supports all four elements of ARM’s corporate giving policy: Clean Technology, Education, Entrepreneurship and the Local Community.
ARM’s University Programme helps the next generation of ARM engineers by donating equipment and software, assisting students, helping to design courses and providing technical support and training. ARM is involved in a number of STEM (science, technology, engineering and mathematics) programs at regional schools, sharing employees’ expertise with students. From corporate philanthropy, to paid employee volunteer time, to the Matching Gift Donation program, the Company actively encourages community involvement and support.
ARM is a founding member of The Learning Collaboration, enabling small and medium sized organizations around Cambridge to share their diverse experience and combine their buying power to purchase quality training and development services. ARM is also a founder of the Cambridge Network which links people from business and academia to the global high-tech community. This year, ARM partnered with The Humanitarian Centre to encourage research and partnerships that improve the efficacy of information technology in international development. ARM has also helped found the Cambridge Responsibility Forum, a joint venture between multiple local businesses to promote corporate responsibility and sustainability issues in Cambridge.
Team ARM, the Company’s global team-building and fund-raising employee network, raised over £93,000 for charities through sponsored cycle rides, marathons, boat races and even moustache-growing.
Environment
An expanding global population, rising energy costs and climate-change concerns are all driving renewed interest in energy-efficiency. ARM’s technology is inherently low-power and enables smarter, more energy efficient products to be created. As ARM-designed chips are in over 20% of all digital electronic products sold in 2010, this presents an enormous opportunity for improved efficiency.
For 20 years, ARM’s research and development has focused on getting the best processing performance from the least power. ARM technology allows partners to develop smarter digital electronic products that can measure, manage and improve the environmental performance of consumer electronics and IT equipment, reducing the carbon footprint for many consumer products.
ARM actively monitors energy usage, resource consumption, waste creation, suppliers’ environmental management systems and its own carbon footprint so that targets can be set for improvements that are realistic and meaningful. ARM is improving its strategy for low carbon business operation, and has set goals of:
| | · | Thirty percent emission reduction in tons of CO2 emission per employee by 2020. |
| | · | Fifteen percent energy use reduction measured in KW Hours per employee by 2020. |
These goals are also in line with the Environmental Issues Area of the UNGC. The goals are tracked monthly and reported to ARM management as well as stakeholders. We are also reviewing behavioral change issues relating to the adoption of existing video-conferencing facilities and are investing in more equipment with a view to reducing the number of flights per employee each year.
The following table gives details of the CO2 emissions per head for the four main ARM offices:
CO2 emissions per head (tones) | | | | | | | | | |
Cambridge offices | | | 4.04 | | | | 4.03 | | | | 4.16 | |
San Jose office | | | 4.51 | | | | 2.36 | | | | 2.15 | |
Bangalore office | | | 4.30 | | | | 4.70 | | | | 4.75 | |
Austin office | | | N/A | | | | 3.43 | | | | 2.63 | |
All 4 sites | | | 4.42 | | | | 4.01 | | | | 3.97 | |
Summary
ARM makes good corporate citizenship a priority and external evaluators have recognized this. ARM is in the NASDAQ OMX CRD Global Sustainability 100 Index, demonstrating how corporate responsibility has been incorporated throughout the ARM way of business. CRD Analytics evaluated more than 3,000 global companies in order to establish these individual, quantitative ratings of sustainability. This section is intended to provide a brief overview, our full CR Report for 2010 is published on our website at www.arm.com.
Going concern
After dividend payments of £34.3 million in 2010, the highly cash generative nature of the business enabled the Company to increase its cash, cash equivalents, short- and long-term deposits and marketable securities balance to £290.1 million (net of accrued interest of £1.7 million) at the end of 2010 from £141.8 million at the start of the year. After reviewing the 2011 budget and longer-term plans, the directors are satisfied that, at the time of approving the financial statements, it is appropriate to adopt the going concern basis in preparing the financial statements of the Company.
Statement of directors’ responsibilities
The directors are responsible for preparing the annual report, the directors’ remuneration report and the Company financial statements in accordance with applicable law and regulations.
Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the Company financial statements in accordance with International Financial Reporting Standards as issued by the IASB. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of Company and of the profit or loss for that period.
In preparing those financial statements, the directors are required to:
| | · | select suitable accounting policies and then apply them consistently; |
| | · | make judgements and estimates that are reasonable and prudent; |
| | · | state that the Company financial statements comply with IFRSs as issued by the IASB, subject to any material departures disclosed and explained in the financial statements; and |
| | · | prepare the Company and parent company financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business, in which case there should be supporting assumptions or qualifications as necessary. |
The directors are also required by the Disclosure and Transparency Rules of the Financial Services Authority to include a report containing a fair view of the business and a description of the principal risks and uncertainties facing the Company and the Group.
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and to enable them to ensure that the Company financial statements comply with the Companies Act 2006 and Article 4 of the IAS Regulation and the parent company financial statements and the directors’ remuneration report comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The directors are responsible for ensuring the maintenance and integrity of the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Remuneration Committee
See “—Corporate Governance—Remuneration Committee” above for details regarding the Company’s Remuneration committee.
Remuneration policy
The remuneration committee, in its deliberations on remuneration policy for the Company’s executive directors, seeks to give full consideration to the principles set out in the Combined Code on Corporate Governance 2008. The committee is able to consider corporate performance on environmental, social and corporate governance issues when setting the remuneration of executive directors. The committee also monitors developments in accounting for equity-based remuneration on an ongoing basis.
The Company operates a remuneration policy and framework for executive directors designed to ensure that it attracts and retains the high quality management skills necessary to achieve a high level of corporate performance, in line with the best interests of shareholders. This policy seeks to provide rewards and incentives for the remuneration of executive directors that reflect their performance and align with the objectives of the Company. These comprise a mix of performance-related and non-performance-related remuneration. The committee believes that a director’s total remuneration should seek to recognize their worth in the external market and, to this end, obtains information from independently published remuneration surveys, benchmarks the total remuneration package and applies the following principles:
| | · | base salaries are set by reference to the market median, as part of a total remuneration package which has the potential to be upper quartile; |
| | · | a significant amount (i.e., more than 50%) of total potential remuneration is performance-related; |
| | · | a significant element of performance-related remuneration is provided in the form of shares; |
| | · | elements of performance-related variable remuneration are subject to deferral; and |
| | · | the performance of divisional general managers is measured both at division and Company level. |
A shareholding guideline is in place for executive directors and certain senior managers, who are required to build up a holding of shares in the Company over a period of five years. The shareholdings may include shares received through earlier grants under the Company’s share option schemes and/or the Long Term Incentive Plan and/or the Deferred Annual Bonus Plan and, in the case of executive directors and members of the executive committee, the required holding is 100% of basic salary.
Incentive arrangements
The remuneration committee aims to ensure that individuals are fairly rewarded for their contribution to the success of the Company. There are four key incentive schemes in operation within the Company. These are the Deferred Annual Bonus Plan (DAB) and Long Term Incentive Plan (LTIP) for executive directors and senior managers and the Employee Equity Plan and Annual Bonus Plan for all other employees. These plans provide alignment between remuneration and the financial performance of the Company and strengthen retention of key employees through deferment of bonus. Option grants to executive directors ceased in 2006 (although the facility to grant options exists in exceptional circumstances) and the move away from options to restricted shares for all employees reduces potential dilution and has simplified remuneration arrangements. Since 2007, variable remuneration for executive directors and certain senior managers has consisted of two performance-related elements: annual bonus and a conditional award under the Long Term Incentive Plan.
Deferred Annual Bonus Plan (DAB)
There is a strong variable element to executive directors’ remuneration and for 2010 a bonus of up to a maximum of 125% of base salary (after application of a personal performance multiplier which flexes the payment by 0.75 to 1.25) could be earned through the DAB if all targets were met.
The strong performance of the Company in 2010 resulted in both of the two bonus targets being achieved, each of which was capable of triggering 50% of total bonus. For 2010, the US dollar revenue target was $548.7 million against which revenue of $631.3 million was achieved. The normalized operating profit target range was from zero payout at £89.5 million up to 25% at £112.4million and 50% at £120.0 million, all at the budget exchange rate of £1:US$1.65. Actual currency adjusted normalized operating profit was £150.1 million. These targets were set by the remuneration committee in December 2009/January 2010 against the background of the extremely difficult trading conditions that prevailed in 2009 and the considerable uncertainty that existed in relation to global economic conditions and trading prospects for the semiconductor industry as a whole. It is to the credit of the executive team and all employees that these targets were exceeded in such a potentially difficult year. The bonuses payable to each executive director in respect of performance during are all at 125% of base salary, half of which was compulsorily deferred into shares for three years. Shares representing the deferred element of bonus earned in 2007 and awarded in 2008 vested in February 2011, with the maximum 2:1 ratio of matching shares being triggered.
The personal performance multiplier depends on the achievement of pre-determined objectives which are reviewed and approved by the committee each year. These include key strategic objectives related to each director’s role and responsibilities including compliance with the Management Charter which is designed to foster employee development, understanding of the overall vision and strategy of the Company and good governance. There is compulsory deferral into shares of 50% of the bonus earned and an opportunity to earn an equity match of up to 2:1, subject to achievement of an EPS performance condition. At the end of the three year deferral period the shares and any matching shares earned are satisfied first from treasury shares and then by newly issued shares.
The targets set by the committee for the DAB each year are intended to be stretching but motivational and average bonus paid to the executive directors over the past 5 years is 77.8% of salary (with a range from 38.6% payout in 2007 to 125% in 2010).
Following the remuneration review conducted by Towers Watson and taking account of the relatively modest increases in base salary, the committee has taken the decision that the maximum potential bonus for 2011 onwards will increase to 150% of base salary (after application of the personal performance multiplier). This is regarded as fair taking account of the total remuneration packages available to the executive directors and the arrangements in place in peer group companies. For 2011, the committee has decided to adopt the same bonus target arrangement so that 50% of bonus will be dependent on achieving a US dollar revenue target and 50% on achieving a currency adjusted normalized operating profit target, which the committee believes have been set at challenging but motivational levels.
At EPS growth equal to the increase in the Consumer Prices Index (CPI) plus 4% per annum, the deferred shares will be matched on a 0.3:1 basis, rising to 2:1 when EPS growth is in excess of CPI plus 12% per annum. These targets are directly related to the Company’s financial results and encourage achievement of the Company’s short-term financial goals, while the deferral and matching elements encourage a longer term view of the success of the Company. The deferred shares can be forfeited in the event of gross misconduct and the matching shares are subject to forfeiture for “bad leavers”.
Long Term Incentive Plan (LTIP)
Annual grants to executive directors are normally made at a level equivalent to base salary. Conditional awards vest to the extent that the performance criteria are satisfied over a three-year performance period from January 1 of the year of award and no re-testing thereafter is possible. The performance conditions are based on the Company’s Total Shareholder Return (TSR) when measured against that of two comparator groups (each testing half of the shares comprised in the award). The first index comprises UK companies across all sectors (FTSE 350) and the second comprises predominantly US companies within the hi-tech sector (FTSE Global Technology Index). The committee approved the replacement of the FTSE Global Technology Index (which ceased to exist at the end of February 2011) with the All World Technology Index for assessing TSR for LTIP awards made in 2009 and subsequently.
Towers Watson has confirmed that there is 99% correlation between the performance of the two indices. The performance criteria provide the link to performance against an appropriate peer group. For each comparator group, the number of shares that may vest may be up to a maximum of 200% of the relevant half of the shares comprised in the conditional award if the Company’s TSR ranks in the upper decile, 50% of the relevant half of the shares will vest in the event of median performance and between median and upper decile performance vesting will increase on a straight-line basis. Additional shares may vest to cover dividends paid by the Company during the performance period. No shares will be received for below-median performance. In addition, no shares will vest unless the committee is satisfied that there has been a sustained improvement in the underlying financial performance of the Company.
Former share option schemes
The option grants to executive directors made up to 2006 remain available for exercise and vesting in accordance with the rules of the relevant schemes. They are subject to performance conditions which led to partial vesting after three years based on real EPS growth and the remainder vests after seven years. Any options issued to executive directors prior to their appointment to the board are not subject to performance conditions. The performance conditions relating to these remaining option grants are set out in more detail in the table later in this report.
Pensions
The Company does not operate its own pension scheme but makes payments into a group personal pension plan, which is a money purchase scheme. For executive directors, the normal rate of Company contribution is 10% of the executive’s basic salary plus additional amounts in accordance with the Company’s salary sacrifice scheme. Full details of Company contributions are set out in the directors’ emoluments table. In response to impending changes in legislation, the committee has agreed that, to the extent that contributions cannot be made in a tax efficient way at the 10% of basic salary level, the difference will be paid as an additional cash allowance (and subject to appropriate tax and other deductions).
Executive Director Service Contracts
Executive directors have service contracts that may be terminated by either party on one year’s notice. These agreements provide for each of the directors to provide services to the Company on a full-time basis and contain restrictive covenants for periods of three to six months following termination of employment relating to non-competition, non-solicitation of the Company’s customers, non-dealing with customers and non-solicitation of the Company’s suppliers and employees. In addition, each service contract contains an express obligation of confidentiality in respect of the Company’s trade secrets and confidential information and provides for the Company to own any intellectual property rights created by the directors in the course of their employment.
The dates of the service contracts of each person who served as an executive director during the financial year are as follows:
| |
Warren East | January 29, 2001 |
Tim Score | March 1, 2002 |
Tudor Brown | April 3, 1996 |
Mike Inglis | July 17, 2002 |
Mike Muller | January 31, 1996 |
Simon Segars | January 4, 2005 |
Where notice is served to terminate the appointment, whether by the Company or the executive director, the Company in its absolute discretion is entitled to terminate the appointment by paying to the executive director his salary in lieu of any required period of notice.
Each of the executive officers has the right to participate in relation to existing grants in the various share option schemes and plans described below (other than the Incentive Stock Option Plan, the Savings Related Plan and the Employee Stock Purchase Plan, which are designed for employees in the United States). The grant of options under the existing share option schemes and plans ceased once the Deferred Annual Bonus Plan and the new Employee
Equity Plan were approved by shareholders at the 2006 AGM. Executive officers still have the right to participate in the Save as You Earn (“SAYE”) Scheme except Simon Segars, who is currently based in the United States and has the right to participate in the Employee Stock Purchase Plan.
Although eligible for the Employee Equity Plan, it is not currently envisaged that the executive officers will participate in this plan which is designed for employees who do not participate in the Deferred Annual Bonus Plan.
Non-executive Directors
During 2010, the chairmen of the audit and remuneration committees each received a total fee of £47,500 per annum and the other non-executive directors each received a total fee of £42,000 per annum. These fees were arrived at by reference to fees paid by other companies of similar size and complexity and reflected the amount of time non-executive directors were expected to devote to the Company’s activities during the year. The remuneration of the non-executive directors is set by the executive directors and the term of appointment is three years which can be rolled forward for a further period of three years and is then subject to annual review. Fees paid to non-executive directors are reviewed annually with effect from January 1.
Non-executive directors do not have service contracts, are not eligible to participate in bonus or share incentive arrangements and their service does not qualify for pension purposes or other benefits. No element of their fees is performance-related.
EMPLOYEES
At December 31, 2010, the Company had 1,889 full-time employees, including 784 in the United Kingdom, 93 in France, 28 in Germany, 62 in Norway, 29 in Sweden, 3 in Slovenia, 3 in Israel, 1 in Belgium, 505 in the United States where Simon Segars is President of ARM, Inc., 34 in Japan where Takafumi Nishijima is president of ARM KK, 13 in South Korea, where Young Sub Kim is president of ARM Korea Limited, 15 in Taiwan, where Philip Lu is Chairman of ARM Taiwan Limited, 42 in P.R. China where Allen Wu is President of ARM Consulting (Shanghai) Co. Ltd, 1 in Singapore and 276 in India where Guru Ganesan is Managing Director of ARM Embedded Technologies Pvt. Limited.
The table below sets forth the number of Company employees by function and by location at year end for the periods indicated:
| | | | |
| | | | | | | | | | |
Total | | | 1,740 | | | | 1,710 | | | | 1,889 | |
| Function | | | | | | | | | | | | |
Research and Development | | | 1,136 | | | | 1,131 | | | | 1,274 | |
Marketing and Sales | | | 351 | | | | 329 | | | | 349 | |
Finance and Administration | | | 253 | | | | 250 | | | | 266 | |
| Location | | | | | | | | | | | | |
Europe | | | 857 | | | | 865 | | | | 1,003 | |
United States | | | 501 | | | | 496 | | | | 505 | |
Far East and India | | | 382 | | | | 349 | | | | 381 | |
Overall, approximately three quarters of the Company’s employees have technical degrees and approximately one third of the Company’s employees have advanced technical degrees. The Company’s future success will depend on its ability to attract, retain and motivate highly qualified technical and management personnel who are in great demand in the microprocessor industry. The Company’s employees are not represented by any collective bargaining agreements and the Company has never experienced a work stoppage. The Company believes that its employee relations are good. See “Item 3. Key Information—Risk Factors—We Are Dependent on Our Senior Management Personnel and on Hiring and Retaining Both Qualified Engineers and Experienced Sales and Marketing Personnel” for a discussion of the dependence of the Company on identifying, attracting, motivating and retaining qualified engineers and other personnel.
SHARE OWNERSHIP
The following table sets forth, as of February 25, 2011, certain information as to the shares and outstanding options to subscribe for shares held by (i) each executive officer and director of the Company holding options and (ii) all executive officers and directors of the Company, as a group. As of February 25, 2011, there were 1,345,086,360 shares outstanding and options with respect to 5,851,201 underlying shares are exercisable and nil RSUs expected to vest within 60 days of February 25, 2011.
| | Beneficial Ownership Number(2) | | | Beneficial Ownership Percentage | | | Number of Shares underlying options(1) | | | Weighted average exercise price (per Share)(1) | | | Exercise prices and Expiration dates | |
Tudor Brown | | | 932,398 | | | | 0.07 | % | | | 139,448 | | | £ | 1.24 | | | | (3 | ) |
Doug Dunn | | | 48,000 | | | less than 0.01 | % | | | — | | | | — | | | | — | |
Warren East | | | 1,294,914 | | | | 0.10 | % | | | 199,072 | | | £ | 1.24 | | | | (4 | ) |
Mike Inglis | | | 250,000 | | | | 0.02 | % | | | 131,494 | | | £ | 1.20 | | | | (5 | ) |
Mike Muller | | | 1,458,389 | | | | 0.11 | % | | | 124,961 | | | £ | 1.27 | | | | (6 | ) |
Kathleen O’Donovan | | | — | | | | — | | | | — | | | | — | | | | — | |
Philip Rowley | | | 50,000 | | | less than 0.01 | % | | | — | | | | — | | | | — | |
John Scarisbrick | | | 10,800 | | | less than 0.01 | % | | | — | | | | — | | | | — | |
Tim Score | | | 387,363 | | | | 0.03 | % | | | 183,214 | | | £ | 1.20 | | | | (7 | ) |
Simon Segars | | | 265,345 | | | | 0.02 | % | | | 111,475 | | | £ | 1.24 | | | | (8 | ) |
Young Sohn | | | 84,000 | | | | 0.01 | % | | | | | | | | | | | — | |
| Andy Green (appointed February 25, 2011) | | | — | | | | — | | | | — | | | | — | | | | — | |
| Larry Hirst (appointed January 25, 2011) | | | — | | | | — | | | | — | | | | — | | | | — | |
| Janice Roberts (appointed January 25, 2011) | | | — | | | | — | | | | — | | | | — | | | | — | |
| All current directors and senior management as a group (14 persons) | | | 4,781,209 | | | | 0.36 | % | | | 889,664 | | | £ | 1.23 | | | | — | |
| (1) | Adjusted to reflect 5 for 1 share split in the Company’s ordinary shares which took place in April 2000 and for the 4 for 1 share split in April 1999 where applicable. |
| (2) | Shares that are not outstanding but that may be acquired upon exercise of options within 60 days of the date of this report are deemed outstanding for the purpose of computing the number and percentage of outstanding shares beneficially owned by the relevant person. However, such shares are not deemed to be outstanding for the purpose of computing the percentage of outstanding shares beneficially owned by any other person. |
| (3) | Options to subscribe for 46,044 shares at £1.055 per share expire on February 4, 2012; options to subscribe for 93,404 shares at £1.325 per share expire on February 1, 2013. |
| (4) | Options to subscribe for 62,559 shares at £1.055 per share expire on February 4, 2012; options to subscribe for 136,513 shares at £1.325 per share expire on February 1, 2013. |
| (5) | Options to subscribe for 40,038 shares at £1.055 per share expire on February 4, 2012; options to subscribe for 80,830 shares at £1.325 per share expire on February 1, 2013 and options to subscribe for 10,626 shares at £0.854 per share expire on January 31, 2013. |
| (6) | Options to subscribe for 2,091 shares at £3.35 per share expire on May 13, 2011, options to subscribe for 42,040 shares at £1.055 per share expire on February 4, 2012 and options to subscribe for 80,830 shares at £1.325 per share expire on February 1, 2013. |
| (7) | Options to subscribe for 50,047 shares at £1.055 per share expire on February 4, 2012, options to subscribe for 114,959 shares at £1.325 per share expire on February 1, 2013 and options to subscribe for 18,208 shares at £0.854 per share expire on January 31, 2015. |
| (8) | Options to subscribe for 36,034 shares at £1.055 per share expire on February 4, 2012 and options to subscribe for 75,441 shares at £1.325 per share expire on February 1, 2013. |
Share Option Schemes and Plans
The Company operates the following share option schemes and plans under which employees may acquire shares: the Deferred Annual Bonus Plan, the Employee Equity Plan and the U.S. Employee Stock Purchase Plan. For a description of these plans, please see “—Board Practices—Incentive Arrangements” above.
During 2010, the Company operated the ARM Holdings plc Deferred Annual Bonus Plan (the “Deferred Annual Bonus Plan”), ARM Holdings plc Employee Equity Plan, (the “Employee Equity Plan”), the ARM Holdings plc Executive Share Option Scheme (the “Executive Scheme”), the ARM Holdings plc Unapproved Share Option Scheme (the “Unapproved Scheme”), the Long Term Incentive Plan (“LTIP”), the ARM Holdings plc Unapproved
Share Option Scheme French Operation (the “French Scheme”), the ARM Holdings plc Unapproved Share Option Scheme Belgian Operation (the “Belgian Scheme”), the ARM Holdings plc Savings Related Share Option Scheme (the “Save As You Earn Scheme” or “SAYE Scheme”), the ARM Holdings plc Stock Option Plan (the “US Incentive Stock Option Scheme” or “US ISO Scheme”) and the ARM Holdings plc Savings Related Share Option Plan (the “Savings Related Plan”) (together, the “Schemes and Plans”). Following the adoption of the Deferred Annual Bonus Plan and the Employee Equity Plan at the 2006 AGM, awards are no longer made pursuant to the Executive Scheme, the Unapproved Scheme, the French Scheme, the Belgian Scheme and the US ISO Scheme, although existing grants of options under such schemes remain exercisable. See “—Board Practices—Incentive Arrangements” above. Upon the acquisition of Artisan in 2004, the Company assumed the share plans of Artisan, namely the 1993 Plan, the 1997 Plan, the 2000 Plan, the 2003 Plan, the Director Plan, the Executive Plan and the ND00 Plan. Following the acquisition of Artisan, the Artisan plans were closed to new grants. None of the benefits under the Schemes and Plans are pensionable. Options granted under the SAYE Scheme and the Savings Related Plan are at an option price equal to not less than 80% of the market value of the shares.
Details of the Schemes and Plans are set out below.
Save As You Earn (“SAYE”) Scheme
Issue of Invitations. Invitations to join the SAYE Scheme are normally issued within 42 days of the announcement of the Company’s results for any period.
Eligibility. All employees of the Company and any subsidiaries designated by the Board of Directors who have worked for the Company or a participating subsidiary for a qualifying period as determined by the Board of Directors (but not to exceed five years) and any other employees nominated by the Board of Directors are eligible to participate in the SAYE Scheme.
Savings contract. Employees joining the SAYE Scheme must enter into a savings contract with a designated savings carrier under which they make a monthly saving for a period of three or five years or, if the Board of Directors so allows, any other period permitted under the relevant legislation. The monthly saving must not exceed such limit as is fixed by the Board of Directors within the ceiling imposed by the relevant legislation (currently £250 per month). With the three-year savings period, the employee receives no tax-free bonus. With the five-year savings period, the employee receives a tax-free bonus of 1.8 monthly payments. With the five-year savings period, the employee has the choice of leaving the money for a further two years to receive an additional bonus of 3.1 monthly payments, making a total bonus of 4.9 monthly payments over seven years (which sum cannot be used to buy shares in the Company). An option is granted to the employee to acquire shares in the Company which is exercisable within six months of maturity after the bonus is payable under the savings contract.
Option price. Options are granted at an option price which is not less than 80% of the market value of the shares on the day before the date of invitation (or some other date agreed with the UK Inland Revenue) and, where shares are to be subscribed, their nominal value (if greater). Market value means a value for the shares agreed in advance with the UK Inland Revenue if the shares are not listed or, if they are listed, the middle market quotation on the immediately preceding business day, or the average of the middle market quotations over the three preceding business days.
Exercise of options. Options are normally exercisable for a six-month period following the maturity date under the relevant savings contract. If the option is not exercised within this six-month period, the option will lapse. Options may also, however, be exercised, in certain circumstances, for example on an option holder ceasing to be an employee due to injury, disability, redundancy, retirement, following change of control of the employing company and in the event of a takeover or winding up of the Company. If any option is exercised early in one of these circumstances, the option holder may only use the savings made under his savings contract at that time to exercise the option. Options are not transferable and may only be exercised by the person to whom they are granted, except in certain specific circumstances (e.g., death of employee).
Exchange of options. In the event of a change of control of the Company in certain circumstances, option holders may exchange their options for options over shares in the acquiring company.
Issue of shares. Shares issued on the exercise of options rank equally with shares of the same class in issue on the date of allotment, except in respect of rights arising by reference to a prior record date. Application has been made to and approved by the London Stock Exchange for the listing of shares issued under the SAYE Scheme.
Variation in share capital. Options may be adjusted following certain variations in the share capital of the Company, including a capitalization or rights issue, subdivision or consolidation or reduction of the share capital.
Termination of the SAYE Scheme. No options may be granted under the SAYE Scheme after the tenth anniversary of the date of the adoption of the rules.
Savings Related Plan
The Savings Related Plan is substantially the same as the SAYE Scheme, except that it has been structured to give tax benefits to employees in the United States. In addition, the directors may amend the Savings Related Plan to take account of any taxation, securities or exchange control laws in other territories to allow the Savings Related Plan to be operated for the benefit of employees in other territories, provided that the terms of any options of such employees are not more favorable overall than the terms of options granted to other employees.
Executive Scheme
Eligibility. All employees (excluding executive directors) of the Company and any subsidiaries of the Company (designated by the directors) who are not within two years of their normal retirement date are eligible to participate in the Executive Scheme.
Grant of options. Options are granted by the Remuneration Committee which consists wholly of non-executive directors. Options are normally granted within 42 days of the announcement of the Company’s results for any period.
Option price. Options will be granted at an option price which is not less than the market value of the shares on the date of grant, or such other day as agreed with the UK Inland Revenue and, where shares are to be subscribed, the nominal value (if greater). Market value is defined as a value for the shares agreed upon in advance with the UK Inland Revenue if the shares are not listed, or if they are, the middle-market quotation on the preceding business day.
Limitation on employee participation. An employee’s participation is limited so that the aggregate price payable for shares under option at any one time does not exceed £30,000. This limit applies to options granted under the Executive Scheme and any other UK Inland Revenue approved executive share option scheme established by the Company or associated companies.
Exercise of options. Options are normally exercisable, subject to any performance condition being satisfied, and by a person who remains a director or employee of the Company or any subsidiary, between the third and tenth anniversaries of grant. Options may also, however, be exercised early in certain circumstances, for example on an option holder ceasing to be an employee due to ill health, redundancy, retirement, following a change in control of the employing company, and in the event of a takeover or winding up of the Company. Options are not transferable and may only be exercised by the persons to whom they are granted, except in certain specific circumstances (e.g., death of employee).
Exchange of options. In the event of a change of control of the Company in certain circumstances, option holders may exchange their options for options over shares in the acquiring company.
Issues of shares. Shares issued on the exercise of options rank equally with shares of the same class in issue on the date of allotment except in respect of rights arising by reference to a prior record date. Application has been made to and approved by the London Stock Exchange for the listing of shares which may be issued under the Executive Scheme.
Variation in share capital. Options may be adjusted following certain variations in the share capital of the Company including a capitalization or rights issue.
Termination of the Executive Scheme. No options may be granted under the Executive Scheme after the tenth anniversary of the adoption of the Executive Scheme.
Unapproved Scheme
The Unapproved Scheme is substantially the same as the Executive Scheme, except that the £30,000 limit on individual participation does not apply. Instead, the Board of Directors shall consider any limits on the grant of options to employees having regard to the performance of the employee and prevailing market practice. At the 2001 AGM, the Chairman of the Company stated that the Company’s internal policy is never to issue options to a value of more than two times salary in any one year, provided however, that the Company may, in exceptional circumstances, offer options up to five times annual salary for the recruitment of a key individual.
Options granted to executive directors are exercisable on or after the seventh anniversary of the date of grant, vesting may be accelerated if a performance condition is satisfied, in which case the options are exercisable on or after the third anniversary of grant. For options granted in 2004 and 2005, 50% of the shares under option will vest after three years if the Company achieves average real EPS growth of 12.5% over the performance period. If average real EPS growth of at least 33.1% is achieved over the performance period, 100% of the shares under option will vest after three years. The Remuneration Committee has a discretion to amend or waive the performance condition in certain circumstances. Options granted to persons other than the executive directors are normally exercisable over four years, as to 25% of the shares covered by the option on the first anniversary following their grant, and 25% on or after each subsequent anniversary. All employees of ARM Limited at the year end are eligible to receive options under the Annual Share Grant which typically occurs in late January following the results announcement of the previous year. These options are exercisable over four years, as to 25% of the shares covered by the option on December 31 following their grant, and 25% on or after each subsequent December 31. All options expire on the seventh anniversary of their grant.
Performance Condition. The Remuneration Committee may grant options subject to a performance condition aimed at linking the exercise of options to sustained improvements in the underlying financial performance of the Company.
Long-Term Incentive Plan
A Long-Term Incentive Plan was approved by shareholders at the 2003 Annual General Meeting. Conditional share awards held by directors are as follows:
| | Performance period ending December 31, | | | | Market price at date of award £ | | | As at January 1, 2010 Number | | | | | | | | | | | | As at December 31, 2010 Number | | | |
Warren East | | 2009 | | February, 8, 2007 | | | 1.28 | | | | 308,594 | | | | — | | | | (308,594 | ) | | | | | | — | | | February 2010 |
| | | 2010 | | February, 8, 2008 | | | 0.93 | | | | 446,237 | | | | — | | | | — | | | | | | | 446,237 | ** | | February 2011 |
| | | 2011 | | February, 8, 2009 | | | 0.9975 | | | | 416,040 | | | | — | | | | — | | | | | | | 416,040 | | | February 2012 |
| | | 2012 | | February, 8, 2010 | | | 2.05 | | | | — | | | | 209,756 | | | | — | | | | | | | 209,756 | | | February 2013 |
| | | | | | | | | | | | 1,170,871 | | | | 209,756 | | | | (308,594 | ) | | | — | | | | 1,072,033 | | | |
Tim Score | | 2009 | | February, 8, 2007 | | | 1.28 | | | | 261,719 | | | | — | | | | (261,719 | ) | | | | | | | — | | | February 2010 |
| | | 2010 | | February, 8, 2008 | | | 0.93 | | | | 387,097 | | | | — | | | | — | | | | | | | | 387,097 | ** | | February 2011 |
| | | 2011 | | February, 8, 2009 | | | 0.9975 | | | | 360,902 | | | | — | | | | — | | | | | | | | 360,902 | | | February 2012 |
| | | 2012 | | February, 8, 2010 | | | 2.05 | | | | — | | | | 180,487 | | | | — | | | | | | | | 180,487 | | | February 2013 |
| | | | | | | | | | | | 1,009,718 | | | | 180,487 | | | | (261,719 | ) | | | | | | | 928,486 | | | |
Tudor Brown | | 2009 | | February, 8, 2007 | | | 1.28 | | | | 214,844 | | | | — | | | | (214,844 | ) | | | | | | | — | | | February 2010 |
| | | 2010 | | February, 8, 2008 | | | 0.93 | | | | 306,452 | | | | — | | | | — | | | | | | | | 306,452 | ** | | February 2011 |
| | | 2011 | | February, 8, 2009 | | | 0.9975 | | | | 214,286 | | | | — | | | | — | | | | | | | | 214,286 | | | February 2012 |
| | | 2012 | | February, 8, 2010 | | | 2.05 | | | | — | | | | 106,341 | | | | — | | | | | | | | 106,341 | | | February 2013 |
| | | | | | | | | | | | 735,582 | | | | 106,341 | | | | (214,844 | ) | | | | | | | 627,079 | | | |
Mike Inglis | | 2009 | | February, 8, 2007 | | | 1.28 | | | | 187,500 | | | | — | | | | (187,500 | ) | | | | | | | — | | | February 2010 |
| | | 2010 | | February, 8, 2008 | | | 0.93 | | | | 268,817 | | | | — | | | | — | | | | | | | | 268,817 | ** | | February 2011 |
| | | 2011 | | February, 8, 2009 | | | 0.9975 | | | | 250,627 | | | | — | | | �� | — | | | | | | | | 250,627 | | | February 2012 |
| | | 2012 | | February, 8, 2010 | | | 2.05 | | | | — | | | | 126,829 | | | | — | | | | | | | | 126,829 | | | February 2013 |
| | | | | | | | | | | | 706,944 | | | | 126,829 | | | | (187,500 | ) | | | | | | | 646,273 | | | |
Mike Muller | | 2009 | | February, 8, 2007 | | | 1.28 | | | | 183,594 | | | | — | | | | (183,594 | ) | | | | | | | — | | | February 2010 |
| | | 2010 | | February, 8, 2008 | | | 0.93 | | | | 263,441 | | | | — | | | | — | | | | | | | | 263,441 | ** | | February 2011 |
| | | 2011 | | February, 8, 2009 | | | 0.9975 | | | | 245,614 | | | | — | | | | — | | | | | | | | 245,614 | | | February 2012 |
| | | 2012 | | February, 8, 2010 | | | 2.05 | | | | — | | | | 124,390 | | | | — | | | | | | | | 124,390 | | | February 2013 |
| | | | | | | | | | | | 692,649 | | | | 124,390 | | | | (183,594 | ) | | | | | | | 633,445 | | | |
| | Performance period ending December 31, | | | | Market price at date of award £ | | | As at January 1, 2010 Number | | | | | | | | | | | | As at December 31, 2010 Number | | | |
Simon Segars | | 2009 | | February, 8, 2007 | | | 1.28 | | | | 179,688 | | | | — | | | | (179,688 | ) | | | | | | | — | | | February 2010 |
| | | 2010 | | February, 8, 2008 | | | 0.93 | | | | 268,817 | | | | — | | | | — | | | | | | | | 268,817 | ** | | February 2011 |
| | | 2011 | | February, 8, 2009 | | | 0.9975 | | | | 250,627 | | | | — | | | | — | | | | | | | | 250,627 | | | February 2012 |
| | | 2012 | | February, 8, 2010 | | | 2.05 | | | | | | | | 125,853 | | | | — | | | | | | | | 125,853 | | | February 2013 |
| | | | | | | | | | | | 699,132 | | | | 125,853 | | | | (179,688 | ) | | | | | | | 645,297 | | | |
| * | The performance conditions applicable to the 2007 conditional awards were satisfied to the extent of 181.6% plus dividend shares as detailed below. |
| ** | The performance conditions applicable to the 2008 conditional awards were satisfied to the extent of 200% plus dividend shares as detailed below. |
Conditional awards will vest to the extent that the performance criteria are satisfied over a three-year performance period from January 1 of the year of award, and no re-testing thereafter is possible. The performance conditions are based on the Company’s TSR when measured against that of two comparator groups (each testing half of the shares comprised in the award). The first index comprises UK companies across all sectors (FTSE 350) and the second comprises predominantly US companies within the Hi Tech sector (All World Technology Index). For each comparator group, the number of shares that may vest may be up to a maximum of 200% of the shares if the Company’s TSR ranks in the upper decile, 50% will vest in the event of median performance and between median and upper decile performance vesting will increase on a straightline basis. Additional shares may vest to cover dividends paid by the Company during the performance period. No shares will be received for below-median performance. In addition, no shares will vest unless the committee is satisfied that there has been a sustained improvement in the underlying financial performance of the Company.
The performance conditions applicable to the conditional awards granted on February 8, 2007 were satisfied to the extent of 181.6% plus dividend shares which vested on February 8, 2010, as follows:
| | | | | | | | | | | | | | | |
Warren East | | | 308,594 | | | | 560,406 | | | | 28,455 | | | | 588,861 | | | | 1,185,613 | |
Tim Score | | | 261,719 | | | | 475,281 | | | | 24,133 | | | | 499,414 | | | | 1,005,520 | |
Tudor Brown | | | 214,844 | | | | 390,156 | | | | 19,810 | | | | 409,966 | | | | 825,426 | |
Mike Muller | | | 183,594 | | | | 333,406 | | | | 16,929 | | | | 350,335 | | | | 705,364 | |
Mike Inglis | | | 187,500 | | | | 340,500 | | | | 17,288 | | | | 357,788 | | | | 720,370 | |
Simon Segars | | | 179,688 | | | | 326,313 | | | | 16,568 | | | | 342,881 | | | | 690,357 | |
Total | | | 1,335,939 | | | | 2,426,062 | | | | 123,183 | | | | 2,549,245 | | | | 5,132,650 | |
The performance conditions applicable to the conditional awards granted on February 8, 2008 were satisfied to the extent of 200% plus dividend shares which vested on February 8, 2011, as follows:
| | | | | | | | | | | | | | | |
Warren East | | | 446,237 | | | | 892,474 | | | | 42,465 | | | | 934,939 | | | | 5,562,887 | |
Tim Score | | | 387,097 | | | | 774,194 | | | | 36,837 | | | | 811,031 | | | | 4,825,634 | |
Tudor Brown | | | 306,452 | | | | 612,904 | | | | 29,163 | | | | 642,067 | | | | 3,820,299 | |
Mike Muller | | | 263,441 | | | | 526,882 | | | | 25,070 | | | | 551,952 | | | | 3,284,114 | |
Mike Inglis | | | 268,817 | | | | 537,634 | | | | 25,581 | | | | 563,215 | | | | 3,351,129 | |
Simon Segars | | | 268,817 | | | | 537,634 | | | | 25,581 | | | | 563,215 | | | | 3,351,129 | |
Total | | | 1,940,861 | | | | 3,881,722 | | | | 184,697 | | | | 4,066,419 | | | | 24,195,192 | |
The following awards over ordinary shares were made under the LTIP on February 8, 2011: Warren East 77,741; Tim Score 62,684; Tudor Brown 36,007; Mike Inglis 44,190; Mike Muller 43,372; and Simon Segars 43,863; The mid-market closing price of an ordinary share on February 7, 2011 being the day prior to the date of these conditional awards was 611 pence.
The Deferred Annual Bonus Plan
As described above, there is compulsory deferral of 50% of the annual bonus earned by executive directors in the year. The emoluments detailed below include the full bonus earned for 2010, although only half has been settled in cash and the deferred elements will be settled in shares after three years.
The total number of awards under the deferred annual bonus plan held by the directors following the 2011 grant is:
| | Shares deferred as part of the 2008 bonus Number | | | Shares deferred as part of the 2009 bonus Number | | | Shares deferred as part of the 2010 bonus Number | | | | |
Warren East | | | 143,388 | | | | 85,024 | | | | 43,985 | | | | 272,397 | |
Tim Score | | | 127,443 | | | | 74,370 | | | | 37,847 | | | | 239,660 | |
Tudor Brown | | | 86,161 | | | | 43,427 | | | | 22,299 | | | | 151,887 | |
Mike Inglis | | | 88,502 | | | | 51,219 | | | | 26,595 | | | | 166,316 | |
Mike Muller | | | 84,650 | | | | 50,195 | | | | 26,084 | | | | 160,929 | |
Simon Segars | | | 88,502 | | | | 51,006 | | | | 26,391 | | | | 165,899 | |
Total | | | 618,646 | | | | 355,241 | | | | 183,201 | | | | 1,157,088 | |
The performance conditions applicable to the deferred elements of the annual bonus for 2007 were fully satisfied and matching shares in the ratio 2:1 were earned. Dividend shares are allocated on the deferred element, but not the matching shares, and the total amounts vested on February 8, 2011, as follows:
| | Shares deferred as part of the 2007 bonus Number | | | | | | | | | | |
Warren East | | | 82,043 | | | | 164,086 | | | | 3,902 | | | | 250,031 | |
Tim Score | | | 69,581 | | | | 139,162 | | | | 3,309 | | | | 212,052 | |
Tudor Brown | | | 54,739 | | | | 109,478 | | | | 2,603 | | | | 166,820 | |
Mike Muller | | | 48,810 | | | | 97,620 | | | | 2,321 | | | | 148,751 | |
Mike Inglis | | | 48,810 | | | | 97,620 | | | | 2,321 | | | | 148,751 | |
Simon Segars | | | 47,772 | | | | 95,544 | | | | 2,272 | | | | 145,588 | |
Total | | | 351,755 | | | | 703,510 | | | | 16,728 | | | | 1,071,993 | |
The market value of an ARM share on the date of vesting was 595 pence.
French Scheme
The French Scheme is substantially the same as the Executive Scheme, except that it has been structured to enable options granted under it to provide tax benefits for employees in France. Options granted under the French Scheme are not subject to performance conditions. The rules of the French Scheme state that options may not be exercised until the fourth anniversary of grant.
The Incentive Stock Option Plan
The Incentive Stock Option Plan is substantially the same as the Unapproved Scheme, except that it has been structured to enable options granted under it to qualify as incentive stock options for the purpose of the US Internal Revenue Code, and therefore provide tax benefits for employees in the United States.
Options granted under the Incentive Stock Option Plan are not subject to performance conditions. The rules of the Incentive Stock Option Plan state that options may not be exercised after the fifth anniversary of their grant. Options granted to new employees are normally exercisable over four years, as to 25% of the shares covered by the option on the first anniversary following their grant, and 25% on or after each subsequent anniversary. In addition,
all employees of ARM, Inc. and ARM Physical IP, Inc. at the year end are eligible to receive options under the Annual Share Grant. These options are exercisable over four years, as to 25% of the shares covered by the option on December 31 following their grant, and 25% on or after each subsequent December 31. All options expire on the seventh anniversary of their grant.
Belgian Scheme
The Belgian Scheme is substantially the same as the Executive Scheme, except that it has been structured to enable options granted under it to provide tax benefits for employees in Belgium. Options granted under the Belgian Scheme are not subject to performance conditions. The rules of the Belgian Scheme state that the options may not be exercised until the first January following the third anniversary of their grant.
Employee Share Ownership Trust (“ESOP”)
The ESOP was a Jersey (Channel Islands) resident discretionary trust established with the object of facilitating the recruitment, retention and motivation of employees. The trustee was a subsidiary of the Company. Beneficiaries included all employees and former employees together with spouses and children under the age of 18.
As at December 31, 2010 and December 31, 2009, the trust held nil shares and the trust has now been wound up.
1993 Plan, the 1997 Plan, the 2000 Plan, the 2003 Plan, the Director Plan, the Executive Plan and the ND00 Plan (the “Artisan Plans”)
As stated, all these plans were assumed following the acquisition of Artisan in 2004 and were immediately closed to new grants. Under each plan, there are multiple vesting templates and vesting periods. The majority of the options were already vested upon acquisition, and the most common vesting template was 25% vesting after one year, and then 6.25% vesting each quarter thereafter, until 100% vest after four years. Some options vest on a monthly basis, and some over five years. All options lapse ten years from the date of grant.
The Deferred Annual Bonus Plan, Employee Equity Plan and U.S. Employee Stock Purchase Plan
For a description of these plans, please see “—Board Practices—Incentive Arrangements” above.
Amendments to the Schemes and Plans
The directors may amend the Schemes and Plans, except that any amendment relating to the identity of option holders, the limitations on their benefits, the number of shares which may be issued under the Schemes and Plans, the basis for determining an option holder’s entitlement to shares (other than provided for in accordance with the rules) or the adjustment of rights for option holders in the event of a variation in share capital may not be made to the advantage of option holders without prior approval of the shareholders of the Company in general meeting, except for minor amendments relating to tax and administrative matters. Amendments to the Executive Scheme and the SAYE Scheme are subject to the prior approval of the UK Inland Revenue, while they are to retain their approved status.
Limits
In any five-year period, not more than 10% of the issued ordinary share capital of the Company may in aggregate be issued or issuable under the Schemes and Plans and any other employee share schemes or plans operated by the Company. Shares issued to satisfy options granted under the Artisan Plans are excluded from this 10% limit.
MAJOR SHAREHOLDERS
The following table sets forth certain information as at February 25, 2011, with respect to each person who is known by the Company to be the beneficial owner of more than 3% of outstanding shares.
Beneficial ownership is determined in accordance with the rules of the US Securities and Exchange Commission and includes voting or investment power with respect to the securities. As at February 25, 2011 the number of our shares held in the US in the form of ordinary shares or ADSs amounts to approximately 60% of our total outstanding share capital. We believe that the persons named in the table have sole voting and investment power with respect to all shares shown as beneficially owned by them. The shareholders listed below have the same voting rights as our other shareholders. As far as the Company is aware, it is neither directly nor indirectly owned or controlled by one or more corporations or by any government.
As at February 25, 2011 which is the most recent practicable date prior to the date of this annual report, except as noted below, we are not aware of:
| | · | any arrangements that might lead to a change in control of our business; |
| | · | any person who is interested in 3% or more of our capital; or |
| | · | any person who can, will or could directly or indirectly, jointly or severally, exercise control over us. |
| | Share Beneficially Owned (Number) | | |
| Janus Capital Management | | 79,045,291 | | 5.88 |
| FMR | | 66,018,481 | | 5.01 |
| Thornburg Investment Management | | 65,856,520 | | 5.00 |
Legal & General Investment Management | | 49,884,833 | | 3.80 |
RELATED PARTY TRANSACTIONS
During 2009, the Company received funding for SOI technology development of £1,033,000 from SOI TEC Silicon On Insulator Technologies SA (Soitec), a company of which Doug Dunn, Group Chairman, is a non-executive director. No amounts were outstanding from Soitec in relation to this funding at either December 31, 2010 or 2009. During 2009, the Company also invoiced £409,000 to Soitec in relation to an IP license which was fully outstanding at December 31, 2009. This has been settled in full during 2010. Furthermore, the Company was invoiced £390,000 in 2009 by Soitec in relation to license income from the two parties’ ongoing collaborative agreement to develop SOI technology. Amounts owed to Soitec at December 31, 2010 in relation to this agreement were £nil (2009: £390,000).
As at December 31, 2009, £139,000 was owing to the Company by Netronome Systems Inc., a company of which John Scarisbrick (a non-executive director of the Company) is Chairman. During 2010 this balance was repaid in full and no further amounts invoiced.
During the year, the Company was invoiced £3,190,000 in subscription fees by its associated company, Linaro Limited. As at December 31, 2010, £1,029,000 was outstanding. In addition the Company provided consulting and other services to Linaro of £1,050,000. As at December 31, 2010, £595,000 was still owed to the Company.
There were no other related party transactions during 2010 which require disclosure.
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
Consolidated financial statements are set forth under “Item 18. Financial Statements.”
LEGAL PROCEEDINGS
It is common industry practice for licensors of technology to offer to indemnify their licensees for loss suffered by the licensee in the event that the technology licensed is held to infringe the intellectual property of a third party. Consistent with such practice, the Company provides such indemnification to its licensees but generally subject to a limitation of liability. The obligation for the Company to indemnify its licensees is subject to certain provisos and is usually contingent upon a third party bringing an action against the licensee alleging that the technology licensed by the Company to the licensee infringes such third party’s intellectual property rights. The indemnification obligations typically survive any termination of the license and will continue in perpetuity.
The Company does not provide for any such guarantees unless it has received notification from the other party that they are likely to invoke the guarantee. The provision is made if both of the following conditions are met: (i) information available prior to the issuance of the financial statements indicates that it is probable that a liability had been incurred at the date of the financial statements; and (ii) the amount of the liability can be reliably estimated. Any such provision is based upon the directors’ estimate of the expected costs of any such claim.
We are currently not subject to material legal proceedings.
DIVIDEND DISTRIBUTION POLICY
The directors recommend payment of a final dividend in respect of 2010 of 1.74 pence per share which, taken together with the interim dividend of 1.16 pence per share paid in October 2010, gives a total dividend in respect of 2010 of 2.90 pence per share, an increase of 20% over the 2.42 pence per share in 2009 following a 10% increase from 2.2 pence in 2008. Subject to shareholder approval, the final dividend will be paid on May 18, 2011 to shareholders on the register on May 3, 2011.
It is the board’s intention to increase the dividend over time, taking into account the opportunity for continued investment in the business and the Company’s underlying operational performance.
SIGNIFICANT CHANGES
We have not experienced any significant changes since the date of the annual financial statements.
The information in this section has been extracted from publicly available documents from various sources, including officially prepared materials from the London Stock Exchange and the Nasdaq National Market and has not been prepared or independently verified by us. This is the latest available information to our knowledge.
MARKET PRICE INFORMATION
Shares
The Company’s ordinary shares were listed on the London Stock Exchange in April 1998 under the symbol ARM. The London Stock Exchange is the principal trading market for the Company’s ordinary shares.
The following table sets forth, for the periods indicated, the high and low closing prices of the ordinary shares reported on the London Stock Exchange:
| | | | |
| | | | | | | |
| Annual prices: | | | | | | |
2006 | | £ | 1.42 | | | £ | 0.99 | |
2007 | | | 1.65 | | | | 1.18 | |
2008 | | | 1.25 | | | | 0.79 | |
2009 | | | 1.78 | | | | 0.81 | |
2010 | | | 4.40 | | | | 1.84 | |
| Quarterly prices: | | | | | | | | |
2009: | | | | | | | | |
First Quarter | | | 1.03 | | | | 0.81 | |
Second Quarter | | | 1.22 | | | | 1.04 | |
Third Quarter | | | 1.44 | | | | 1.18 | |
Fourth Quarter | | | 1.78 | | | | 1.36 | |
2010: | | | | | | | | |
First Quarter | | | 2.39 | | | | 1.84 | |
Second Quarter | | | 2.93 | | | | 2.28 | |
Third Quarter | | | 4.15 | | | | 2.71 | |
Fourth Quarter | | | 4.40 | | | | 3.39 | |
2011: | | | | | | | | |
First Quarter (through February 25, 2011) | | | 6.37 | | | | 4.38 | |
| Monthly prices: | | | | | | | | |
October 2010 | | | 4.05 | | | | 3.60 | |
November 2010 | | | 3.98 | | | | 3.39 | |
December 2010 | | | 4.40 | | | | 3.90 | |
January 2011 | | | 5.36 | | | | 4.38 | |
February 2011 (through February 25, 2011) | | | 6.37 | | | | 5.48 | |
ADSs
The Company’s ordinary shares were listed in April 1998 on the Nasdaq Stock Market in the United States in the form of American Depositary Shares (“ADSs”), evidenced by American Depositary Receipts, under the symbol ARMHY. One of the Company’s ADSs, for which The Bank of New York Mellon is the depositary, represents three ordinary shares.
The following table sets forth, for the periods indicated, the reported high and low closing prices on the Nasdaq National Market for the outstanding ADSs.
| | | | |
| | | | | | | |
| Annual prices: | | | | | | |
2006 | | $ | 7.78 | | | $ | 5.41 | |
2007 | | | 10.07 | | | | 6.92 | |
2008 | | | 7.40 | | | | 3.69 | |
2009 | | | 8.65 | | | | 3.44 | |
2010 | | | 20.75 | | | | 8.85 | |
| Quarterly prices: | | | | | | | | |
| 2009: | | | | | | | | |
First Quarter | | | 4.69 | | | | 3.44 | |
Second Quarter | | | 6.04 | | | | 4.78 | |
Third Quarter | | | 7.00 | | | | 5.69 | |
Fourth Quarter | | | 8.65 | | | | 6.52 | |
| | | | |
| | | | | | | |
| 2010: | | | | | | | | |
First Quarter | | $ | 10.81 | | | $ | 8.85 | |
Second Quarter | | | 13.13 | | | | 10.01 | |
Third Quarter | | | 19.79 | | | | 12.30 | |
Fourth Quarter | | | 20.75 | | | | 16.66 | |
| 2011: | | | | | | | | |
First Quarter (through February 25, 2011) | | | 31.13 | | | | 20.86 | |
| Monthly prices: | | | | | | | | |
October 2010 | | | 19.25 | | | | 17.43 | |
November 2010 | | | 18.82 | | | | 16.66 | |
December 2010 | | | 20.75 | | | | 18.31 | |
January 2011 | | | 27.22 | | | | 20.86 | |
February 2011 (through February 25, 2011) | | | 31.13 | | | | 27.13 | |
CORPORATE GOVERNANCE
Differences in our corporate governance and Nasdaq corporate governance practices
In February 2005, the SEC approved Nasdaq’s new corporate governance rules for listed companies. Under these new rules, as a Nasdaq-listed foreign private issuer, we must disclose any significant ways in which our corporate governance practices differ from those followed by US companies under Nasdaq listing standards. We believe the following to be the significant differences between our corporate governance practices and Nasdaq corporate governance rules applicable to US companies.
Independent Directors
The Combined Code requires that at least half the board excluding the Chairman should comprise independent non-executive directors and the board currently comprises six executive directors, six independent non-executive directors and one non-executive director and the Chairman. In accordance with the Combined Code, the Chairman of the Board of Directors is not considered independent although he was regarded as independent at the time of his appointment.
The Group has complied with the provisions of the Combined Code on Corporate Governance 2008, with the following exceptions:
John Scarisbrick completed nine years’ service as an independent non-executive director in August 2010. The board continues to regard him as independent through his conduct and the challenging contributions he makes both at and between board meetings. He stepped down from the remuneration committee on December 16, 2010 and is no longer included in the number of independent non-executive directors for the purposes of assessing board balance. He will retire from the board at the 2011 AGM.
Between the retirement of Lucio Lanza at the AGM on May 14, 2010 and January 25, 2011 there were five non-executive directors (all of whom were regarded as independent until August 2010 when John Scarisbrick reached his ninth anniversary) and six executive directors.
The board has considered the overall balance between executive and non-executive directors and believes that the number of executive directors is fully justified by the contribution made by each of them.
Nomination of Directors. Nasdaq listing standards require that nominees to a company’s board of directors be selected, or recommended for the board’s selection, either by a majority of the company’s independent directors or by a nomination committee comprised solely of independent directors. The nomination committee leads the process
for board appointments and makes recommendations to the board in relation to new appointments of executive and non-executive directors and on succession planning, board composition and balance. It is chaired by Doug Dunn, Chairman of the Board of Directors, and the other members are John Scarisbrick, Kathleen O’Donovan, Philip Rowley and Young Sohn.
Shareholder Approval
Stock option plans. Nasdaq listing standards require listed companies to obtain shareholder approval before a stock option or purchase plan is established or materially amended or other equity compensation arrangement is made pursuant to which stock may be acquired by officers, directors, employees or consultants of the Company, subject to certain exceptions. The Company’s directors may amend the Schemes and Plans, except that any amendment relating to the identity of option holders, the limitations on their benefits, the number of shares which may be issued under the Schemes and Plans, the basis for determining an option holder’s entitlement to shares (other than provided for in accordance with the rules) or the adjustment of rights for option holders in the event of a variation in share capital may not be made to the advantage of option holders without prior approval of the shareholders of the Company in general meeting, except for minor amendments relating to tax and administrative matters. Amendments to the UK Approved Executive Scheme and the SAYE Scheme are subject to the prior approval of the UK Inland Revenue, while they are to retain their approved status.
Other transactions. Nasdaq listing standards require listed companies to obtain shareholder approval prior to the issuance of securities in certain circumstances related to a change of control of the issuer, the acquisition of the stock or assets of another company under certain circumstances and in connection with certain transactions involving the sale, issuance or potential issuance of 20% or more of common stock or voting power of the issuer. As a foreign private issuer, the Company complies with corporate governance practices customary in its home jurisdiction, the United Kingdom. While not dealing directly with the transactions enumerated in the Nasdaq listing requirements, there are various provisions requiring shareholder vote, which can best be summarized as follows.
Under the Listing Rules of the UK Financial Services Authority, shareholder approval is usually required for an acquisition or disposal by a listed company if, generally, the size of the company or business to be acquired or disposed of represents 25% or more of the assets, profits or gross capital of the listed company or if the consideration to be paid represents 25% or more of the aggregate market value of the listed company’s equity shares. Shareholder approval may also be required for an acquisition or disposal of assets between a listed company and parties, including: (a) directors or shadow directors of the company or its subsidiaries; (b) any person who is, or was in the last 12 months preceding the date of the transaction, a holder of 10% or more of the nominal value of any class of the company’s or any holding company’s or its subsidiary’s shares having the right to vote in all circumstances at general meetings; or (c) any of the associates of persons described in (a) or (b).
Quorum
Nasdaq rules require that the quorum for any meeting of shareholders must not be less than 33⅓% of the outstanding shares of a company’s common voting stock. We comply with the relevant quorum standards applicable to companies in the United Kingdom, as set forth in our Articles of Association summarized below.
Independent by Regulatory Body
The Company’s auditors are registered with the US Public Company Accounting Oversight Board and, therefore, are subject to its inspection regime.
ARTICLES OF ASSOCIATION
The following summarizes certain rights of holders of shares. The following summary does not purport to be complete and is qualified in its entirety by reference to the Articles of Association of the Company, a copy of which has been filed as an exhibit hereto. At the Annual General Meeting of the Company held on May 14, 2010, new Articles of Association were adopted which took account of changes in UK company law brought about by the Companies Act 2006.
Shareholder Meetings
An Annual General Meeting of shareholders must be held once in every year (within the period of six months after the end of the Company’s financial year). The Board of Directors may convene an Extraordinary General Meeting of shareholders whenever they think fit. General meetings may be held at such time and place as may be determined by the Board of Directors. An Annual General Meeting may be convened on at least 21 days’ written notice to shareholders entitled to receive notices. Subject to the passing of a special resolution at the 2011 AGM, an Extraordinary General Meeting for any purpose can be convened on 14 days’ written notice. The Company may determine that only those persons entered on the register at the close of business on a day determined by the Company, such day being no more than 21 days before the day the notice of the meeting is sent, shall be entitled to receive such a notice. Three shareholders must be present in person or by proxy to constitute a quorum for all purposes at general meetings.
Voting Rights
Subject to disenfranchisement in the event of (i) non-payment of any call or sum due and payable in respect of any ARM ordinary share or (ii) a shareholder, or other person interested in ARM ordinary shares held by a shareholder, being in default for a period of 14 days of a notice requiring them to supply ARM with information under Section 793 of the UK Companies Act 2006, on a show of hands every shareholder who is present in person or by proxy or by representative has one vote and, on a poll, every shareholder present in person or by proxy or by representative has one vote for each share held. In the case of joint holders of ordinary shares the vote of the person whose name stands first in the share register in respect of the shares who tenders a vote, whether in person or by proxy, is accepted to the exclusion of any votes tendered by any other joint holders.
Voting at any general meeting is by a show of hands or by poll. A poll is required for any special resolution which is proposed. A poll may be demanded by (i) the chairman of the meeting, (ii) not less than five shareholders present in person or by proxy and entitled to vote, (iii) any shareholder or shareholders present in person or by proxy and representing not less than one-tenth of the total voting rights of all shareholders having the right to vote at such meeting or (iv) any shareholder or shareholders present in person or by proxy and holding shares in the Company conferring a right to vote at the meeting being shares on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all the shares conferring that right. Where a poll is not demanded, the interests of beneficial owners of shares who hold through a nominee, such as a holder of an ADR, may not be reflected in votes cast on a show of hands if such nominee does not attend the meeting or receives conflicting voting instructions from different beneficial owners for whom it holds as nominee. A nominee such as a depositary is able to appoint any ADR holder as its proxy in respect of the ADR holders’ underlying ordinary shares. Since under English law voting rights are only conferred on registered holders of shares, a person holding through a nominee may not directly demand a poll unless such person has been appointed as the nominee’s proxy with respect to the relevant meeting. In line with UK corporate governance best practice, all resolutions set out in the Circular and Notice of the 2011 Annual General Meeting will be decided on a poll.
Unless a special resolution is required by law or the Articles (see below), voting in a general meeting is by ordinary resolution. An ordinary resolution (e.g., a resolution for the election of directors, the approval of financial statements, the declaration of a final dividend, the appointment of auditors or the grant of authority to allot shares), in the case of a vote by show of hands, requires the affirmative vote of a majority of the shareholders present in person or by proxy who vote on the resolution, or, on a poll, a majority of the votes actually cast by those present in person or by proxy. A special resolution (e.g., a resolution amending the Articles of Association, changing the name of the Company or waiving the statutory pre-emption rights which would otherwise apply to an allotment of equity securities to be paid up wholly in cash), the voting for which must be taken on a poll, requires at least three-fourths of the votes actually cast on the resolution by those present in person or by proxy.
The Articles of Association provide that holders of ADRs are entitled to attend, speak and vote on a poll or show of hands, at any general meeting of the Company following appointment by The Bank of New York Mellon, as the depositary, as proxies in respect of the underlying ordinary shares represented by the ADRs. Each such proxy may also appoint a substitute proxy. Alternatively, holders of ADRs are entitled to vote on a poll by supplying their voting instructions to the depositary, who will vote the ordinary shares underlying their ADRs on their behalf.
Directors
A Director shall not vote in respect of any contract or arrangement in which he has, or can have, a direct or indirect interest and shall not be counted in the quorum at a meeting in relation to any resolution on which he is not entitled to vote. Subject to the provisions of law, a Director shall (in the absence of some other material interest) be entitled to vote and be counted in the quorum in respect of any resolution concerning the giving of any security, guarantee or indemnity in respect of money lent or obligations incurred by him or by any other person for the benefit of the Company or any of its subsidiaries or in respect of any debt or other obligation of the Company or its subsidiaries for which he himself has assumed responsibility under a guarantee or indemnity or by the giving of security. A Director shall also (in the absence of some other material interest) be entitled to vote and be counted in the quorum in respect of any resolution regarding an offer of shares or other securities of or by the Company or any of its subsidiaries in which offer he is or may be entitled to participate, subject to the provisions of law.
A Director shall not be required to retire by reason of his having attained any particular age, and any provision of law which would have the effect of rendering any person ineligible for appointment or election as a Director or liable to vacate office as a Director on account of his having reached any specified age or of requiring special notice or any other special formality in connection with the appointment or election of any Director over a specified age, shall not apply to the Company. A Director shall not be required to hold any shares of the Company by way of qualification.
Dividends
The Company may by ordinary resolution declare dividends but no such dividend shall exceed the amount recommended by the directors. If and so far as in the opinion of the directors the profits of the Company justify such payments, the directors may also, from time to time, pay interim dividends of such amounts and on such dates and in respect of such periods as they think fit. The directors may also pay fixed dividends on any class of shares carrying a fixed dividend expressed to be payable on fixed dates on the dates prescribed for the payment thereof. Subject to the extent that rights attached to any shares or the terms of issue thereof provide otherwise, all dividends shall be apportioned and paid proportionately to the amounts paid up during any portion or portions of the period in respect of which the dividend is paid. No amount paid on a share in advance of calls shall be treated as paid on the share. Dividends may be paid in such currency as the Board of Directors may decide; however, the Company intends to pay cash dividends denominated in pounds sterling.
No dividend shall be paid otherwise than out of profits available for distribution (determined in accordance with the provisions of the UK Companies Act 2006). No dividend or other moneys payable on or in respect of a share shall bear interest as against the Company. Any dividend unclaimed after a period of 12 years from the date on which such dividend was declared, or became due for payment, shall be forfeited and shall revert to the Company. With the sanction of an ordinary resolution and the recommendation of the Board of Directors, payment of any dividend may be satisfied wholly or in part by the distribution of specific assets and in particular of paid-up shares or debentures in any other company. The Board of Directors may, if authorized by an ordinary resolution, offer a scrip dividend to ordinary shareholders.
Winding Up
If the Company shall be wound up, the liquidator may, with the authority of a special resolution of the Company: (i) divide amongst the members in specie or in kind the whole or any part of the assets of the Company (whether they shall consist of property of the same kind or not) and, for that purpose, set such value as he deems fair upon any property to be divided and determine how the division shall be carried out between the members; or (ii) vest any part of the assets in trustees upon such trusts for the benefit of members as the liquidator shall think fit; but no member shall be compelled to accept any shares or other property in respect of which there is a liability.
Issues of Shares and Pre-emptive Rights
Without prejudice to any special rights previously conferred on the holders of any issued shares or class of shares, any share in the Company may be issued with such preferred, deferred or other special rights, or subject to such restrictions, whether as regards dividend, return of capital, voting or otherwise, as an ordinary resolution of a
general meeting of shareholders may from time to time determine (or, in the absence of any such determination, as the Board of Directors may determine). The Company may issue redeemable shares provided that there are shares outstanding at the time which are not redeemable at the relevant time.
Subject to the provisions of the UK Companies Act 2006 relating to authority, pre-emption rights and otherwise and of any resolution of the Company in general meeting, all unissued shares shall be at the disposal of the directors and they may allot (with or without conferring a right of renunciation), grant options over or otherwise dispose of them to such persons, at such times and on such terms as they think proper.
The UK Companies Act 2006 confers on shareholders, to the extent not disapplied, rights of pre-emption in respect of the issue of equity securities that are, or are to be, paid up wholly in cash. The term “equity securities” means: (i) shares other than shares which, with respect to dividends and capital, carry a right to participate only up to a specified amount in a distribution and other than shares allotted pursuant to an employees’ shares scheme; and (ii) rights to subscribe for, or to convert securities into, such shares. These provisions may be disapplied by a special resolution of the shareholders, either generally or specifically, for a maximum period not exceeding five years.
Subject to the restrictions summarized below and to the passing of a resolution to renew the directors’ authority to allot at the 2011 AGM, the directors will be generally and unconditionally authorized for the purpose of Section 551 of the UK Companies Act 2006 to exercise all or any powers of the Company to allot relevant securities (within the meaning of that Section) up to an aggregate nominal amount of £221,939 (i.e., a total of 443,878,498 shares). In addition to this general authority to allot relevant securities, in connection with a rights issue by the Company, the directors will also be authorized to allot an additional aggregate nominal amount of relevant securities of up to £33,627 (i.e., a total of 67,254,318 shares). Both allotment authorities will continue for a period expiring (unless previously renewed, varied or revoked by the Company in general meeting) on the earlier of the end of the AGM of the Company held in 2012 or June 30, 2012 (on terms that, during such period, the Company may make an offer or agreement which would or might require relevant securities to be allotted after the expiry of such period).
Subject to the passing of a resolution at the 2011 AGM, the directors will be empowered pursuant to Section 561 of the UK Companies Act 2006 to allot equity securities (within the meaning of Section 560(1) of the UK Companies Act 2006) for cash pursuant to the authorities described above as if Section 561 of the UK Companies Act 2006 did not apply to any such allotment (on terms that the Company may make an offer or agreement which would or might require equity securities to be allotted after the expiry of such authority), such power to be limited to (a) allotments of equity securities up to an aggregate nominal amount equal to 33% of the issued share capital of the Company in connection with an offer of such securities open for acceptance for a period fixed by the directors to holders of shares on the register on the record date fixed by the directors in proportion to their prospective holdings, but subject to such exclusions or other arrangements as the directors may deem necessary or expedient in relation to fractional entitlements or legal or practical problems under the laws of, or the requirements of any recognized regulatory body or any stock exchange, in any territory; (b) allotments of equity securities up to a further aggregate nominal amount equal to 33% of the issued share capital of the Company in connection with an offer to holders of shares in proportion (as nearly as may be practicable) to their existing holdings to subscribe further securities by means of the issue of a renounceable letter (or other negotiable document) which may be traded for a period before payment for the securities is due, but subject to such exclusions or other arrangements as the directors may deem necessary or expedient in relation to treasury shares, fractional entitlements, record dates or legal, regulatory or practical problems in, or under the laws of, any territory; and (c) allotments (otherwise than as described in (a) or (b) above) of equity securities for cash up to an aggregate nominal amount equal to 5% of the issued share capital of the Company.
Transfer of Shares
Any holder of ordinary shares which are in certificated form may transfer in writing all or any of such holder’s shares in any usual or common form or in any other form which the directors may approve and may be made under hand only. The instrument of transfer of a share which is in certificated form shall be signed by or on behalf of the transferor and (except in the case of fully paid shares which are in certificated form) by or on behalf of the transferee. All instruments of transfer which are registered may be retained by the Company. All transfers of shares which are in uncertificated form may be effected by means of the CREST settlement system.
The directors may in their absolute discretion, and without assigning any reason therefore, refuse to register any transfer of shares (not being fully paid shares) which are in certificated form provided that, where such shares are admitted to the Official List maintained by the UK Listing Authority, such discretion may not be exercised in such a way as to prevent dealings in the shares of that class on a proper and open basis. The directors may also refuse to register an allotment or transfer of shares (whether fully paid or not) to more than four persons jointly. The directors may also refuse to register a transfer of shares which are in certificated form unless the instrument of transfer is both (i) in respect of only one class of shares and (ii) lodged at the transfer office accompanied by the relevant share certificate(s) and such other evidence as the directors may reasonably require to show the right of the transferor to make such transfer.
Disclosure of Interests
Chapter 5 of the Disclosure and Transparency Rules published by the Financial Services Authority provides that if the percentage of voting rights that a person (including a company and other legal entities) holds directly or indirectly as a shareholder or through other financial instruments (such as derivatives) exceeds 3% of the voting rights attached to all shares (whether or not the voting rights are suspended and including voting rights held through ADRs) is required to notify the company of its interest within two trading days following the day on which the notification obligation arises. After the 3% level is exceeded, similar notifications must be made in respect of increases or decreases of 1% or more.
For the purposes of the notification obligation, a person is an indirect holder of voting rights to the extent that it is able to acquire, dispose of or exercise voting rights in any of the following cases: (i) voting rights held by a third party with whom that person has concluded an agreement, which obliges them to adopt, by concerted exercise of the voting rights they hold, a lasting common policy towards the management of the issuer in question; (ii) voting rights held by a third party under an agreement concluded with that person providing for the temporary transfer for consideration of the voting rights in question; (iii) voting rights attaching to shares which are lodged as collateral with that person provided that person controls the voting rights and declares its intention of exercising them; (iv) voting rights attaching to shares in which that person has the life interest; (v) voting rights which are held, or may be exercised within the meaning of points (i) to (iv) or, in cases (vi) and (viii) by a firm undertaking investment management, or by a management company, by an undertaking controlled by that person; (vi) voting rights attaching to shares deposited with that person which the person can exercise at its discretion in the absence of specific instructions from the shareholders; (vii) voting rights held by a third party in his own name on behalf of that person; and (viii) voting rights which that person may exercise as a proxy where that person can exercise the voting rights at his discretion in the absence of specific instructions from the shareholders.
Certain interests (e.g., those held by certain investment fund managers) may be disregarded for the purposes of calculating the 3% threshold, but the disclosure obligation will still apply where such interests exceed 5% or 10% or more of voting rights, and to increases or decreases of 1% or more at above the 10% threshold.
In addition, Section 793 of the UK Companies Act 2006 gives the Company the power by written notice to require a person whom the Company knows or has reasonable cause to believe to be, or to have been at any time during the three years immediately preceding the date on which the notice is issued, interested in its voting shares to confirm that fact or to indicate whether or not that is the case and, where such person holds or during the relevant time had held an interest in such shares, to give such further information as may be required relating to such interest and any other interest in the shares of which such person is aware.
Where any such notice is served by a company under the foregoing provisions on a person who is or was interested in shares of the company and that person fails to give the company any information required by the notice within the time specified in the notice, the company may apply to the English court for an order directing that the shares in question be subject to restrictions prohibiting, among other things, any transfer of those shares, the exercise of the voting rights in respect of such shares, the taking up of rights in respect of such shares and, other than in liquidation, payments in respect of such shares. In this context, the term “interest” is widely defined and will generally include an interest of any kind whatsoever in voting shares, including the interest of a holder of an ADR.
A person who fails to fulfill the obligations imposed by Chapter 5 of the Disclosure and Transparency Rules may be subject to a penalty by the Financial Services Authority. The Financial Services Authority may use its
powers to ensure that the relevant information is disclosed to the Company (and to the market) and may order that information be disclosed to it. A person who fails to fulfill the obligations imposed by Section 793 of the UK Companies Act 2006 described above is subject to criminal penalties.
Restrictions on Voting
No shareholder shall, unless the directors otherwise determine, be entitled in respect of any share held by him to vote either personally or as a proxy if any call or other sum payable by him to the Company in respect of that share remains unpaid.
If a shareholder, or a person appearing to be interested in shares held by such shareholder, has been duly served with a notice under Section 793 of the UK Companies Act 2006 (as described above), and is in default for a period of 14 days in supplying to the Company the information thereby required, then (unless the directors otherwise determine) the shareholder shall not (for so long as the default continues) nor shall any transferee to whom any such shares are transferred (other than pursuant to an approved transfer (as defined in the Articles) or pursuant to the paragraph below), be entitled to attend or vote either personally or by proxy at a shareholders’ meeting or exercise any other right conferred by membership in relation to shareholders’ meetings in respect of the shares in relation to which the default occurred (“default shares”) or any other shares held by the shareholder.
Where the default shares represent 0.25% or more of the issued shares of the class in question, the directors may by notice to the shareholder direct that any dividend or other money which would otherwise be payable on the default shares shall be retained by the Company without liability to pay interest and the shareholder shall not be entitled to elect to receive shares in lieu of dividends and/or that no transfer of any of the shares held by the shareholder shall be registered unless transfer is an approved transfer or the shareholder is not himself in default in supplying the information required and the transfer is of part only of the shareholders holdings and is accompanied by a certificate given by the shareholder in a form satisfactory to the directors to the effect that after due and careful inquiry the shareholder is satisfied that none of the shares which are the subject of the transfer are default shares. In the case of shares in uncertificated form, the directors may only exercise their discretion not to register a transfer if permitted to do so under the UK Uncertificated Securities Regulations 2001. Any direction notice may treat shares of a member in certificated and uncertificated form as separate holdings and either apply only to the former or to the latter or make different provisions for the former and the latter.
Alteration of Share Capital
The Company may from time to time by ordinary resolution of its shareholders:
| | (i) | increase its share capital by the creation of new shares of such amount as the resolution shall prescribe; |
| | (ii) | consolidate and divide all or any of its share capital into shares of larger amounts than its existing shares; |
| | (iii) | cancel any shares which, at the date of the passing of the resolution, have not been taken, or agreed to be taken, by any person and diminish the amount of its capital by the amount of the shares so canceled; |
| | (iv) | subdivide its shares, or any of them, into shares of smaller amount than is fixed by the Articles of Association so that the resolution in question may determine that one or more of the shares in question may have preferred, deferred or other special rights, or be subject to any such restrictions, as the Company has power to attach to unissued or new shares; and |
| | (v) | subject to the provisions of the UK Companies Act 2006: |
| | by ordinary resolution, purchase all or any of its shares of any class; and |
| | by special resolution, reduce its share capital, any capital redemption reserve and any share premium account or other undistributable reserve in any way. |
The following resolution was passed at the 2010 AGM:
That the Company be and is hereby unconditionally and generally authorized for the purpose of Section 166 of the UK Companies Act 2006 to make market purchases (as defined in Section 693 of that Act) of ordinary shares of 0.05 pence each in the capital of the Company provided that:
| | (a) | the maximum number of shares which may be purchased is 131,170,000; |
| | (b) | the minimum price which may be paid for each share is 0.05 pence; |
| | (c) | the maximum price (excluding expenses) which may be paid for any ordinary share is an amount equal to 105% of the average of the middle-market quotations of the Company’s ordinary shares as derived from the Official List of the London Stock Exchange plc for the five business days immediately preceding the day on which such share is contracted to be purchased; and |
| | (d) | this authority shall expire at the conclusion of the AGM of the Company held in 2011 or, if earlier, June 30, 2011 (except in relation to the purchase of shares the contract for which was concluded before the expiry of such authority and which might be executed wholly or partly after such expiry) unless such authority is renewed prior to such time. |
| | The following resolution is proposed for approval by shareholders at the 2011 AGM: |
That the Company be and is hereby unconditionally and generally authorized for the purpose of Section 693 of the UK Companies Act 2006 to make market purchases (as defined in Section 693 of that Act) of ordinary shares of 0.05 pence each in the capital of the Company provided that:
| | (a) | the maximum number of shares which may be purchased is 134,508,636; |
| | (b) | the minimum price which may be paid for each share is 0.05 pence; |
| | (c) | the maximum price (excluding expenses) which may be paid for any ordinary share is an amount equal to 105% of the average of the closing mid market price of the Company’s ordinary shares as derived from the Daily Official List of the London Stock Exchange plc for the five business days immediately preceding the day on which such share is contracted to be purchased; and |
| | (d) | this authority shall expire at the conclusion of the AGM of the Company held in 2012 or, if earlier, on June 30, 2011 (except in relation to the purchase of shares the contract for which was concluded before the expiry of such authority and which might be executed wholly or partly after such expiry) unless such authority is renewed prior to such time. |
Reserves
The directors may from time to time set aside out of the profits of the Company and carry to reserve such sums as they think proper which, at the discretion of the directors, shall be applicable for any purpose to which the profits of the Company may properly be applied and pending such application may either be employed in the business of the Company or be invested. The directors may divide the reserve into such special funds as they think fit and may consolidate into one fund any special funds or any parts of any special funds into which the reserve may have been divided. The directors may also without placing the same to reserve, carry forward any profits.
Capitalization of Profits and Reserves
The directors may, with the sanction of an ordinary resolution of the Company, capitalize any sum standing to the credit of any of the Company’s reserve accounts (including any share premium account, capital redemption reserve or other undistributable reserve) or any sum standing to the credit of its profit and loss account. Such capitalization shall be effected by appropriating such sum to the holders of ordinary shares on the register on the date of the resolution (or such other date as may be specified therein or determined as therein provided) in proportion to their then holdings of ordinary shares and applying such sum in paying up in full unissued ordinary shares (or, subject to any special rights previously conferred on any shares or class of shares for the time being issued, unissued shares of any other class). The directors may do all acts and all things considered necessary for the
purpose of such capitalization, with full power to the directors to make such provisions as they think fit in respect of fractional entitlements which would arise on the basis aforesaid (including provisions whereby fractional entitlements are disregarded or the benefit thereof accrues to the Company rather than to the members concerned). The directors may authorize any person to enter into, on behalf of all the members, an agreement with the Company providing for any such capitalization and matters incidental thereto, and any such agreement shall be effective and binding on all concerned.
MATERIAL CONTRACTS
Service Agreements
Executive directors (as referred in “Item 6. Directors, Senior Management and Employees”) have service contracts that may be terminated by either party on one year’s notice. These agreements provide for each of the executive directors to provide services to the Company on a full-time basis. The agreements contain restrictive covenants for periods of three or six months following termination of employment relating to non-competition, non-solicitation of the Company’s customers, non-dealing with customers and non-solicitation of the Company’s suppliers and employees. In addition, each employment agreement contains an express obligation of confidentiality in respect of the Company’s trade secrets and confidential information and provides for the Company to own any intellectual property rights created by the executives in the course of their employment.
The service contracts for each of Mr. East, Mr. Muller, Mr. Brown, Mr. Score, Mr. Inglis and Mr. Segars, all of whom served as directors during the financial year, are as described above. Mr. East’s contract is dated January 29, 2001, Mr. Muller’s contract is dated January 31, 1996, Mr. Brown’s contract is dated April 3, 1996, Mr. Score’s contract is dated March 1, 2002, Mr. Inglis’ contract is dated July 17, 2002 and Mr. Segars’ contract is dated January 4, 2005.
EXCHANGE CONTROLS
There are currently no government laws, decrees or regulations in the United Kingdom that restrict the export or import of capital, including, but not limited to, UK foreign exchange controls on the payment of dividends, interest or other payments to non-resident holders of the shares.
TAXATION
The following is a discussion of material US federal and UK tax consequences of the ownership and disposition of shares or ADSs by a beneficial owner of shares or ADSs that is for US federal income tax purposes (i) a citizen or resident of the United States, a corporation or other entity taxable as a corporation, created or organized under the laws of the United States or any political subdivision thereof, or an estate or trust the income of which is subject to US federal income tax regardless of its source, and (ii) that owns such shares or ADSs as capital assets (a “US Holder”).
This discussion does not address the tax consequences to a US Holder (i) that is resident (or, in the case of an individual, ordinarily resident) in the United Kingdom for UK tax purposes or that is subject to UK taxation by virtue of carrying on a trade, profession or vocation in the United Kingdom, or (ii) that is a corporation which alone or together with one or more associated corporations, controls, directly or indirectly, 10% or more of the voting stock of the Company. This discussion is not exhaustive of all possible tax considerations that may be relevant in the particular circumstances of each US Holder and does not address all tax considerations that may be relevant to all categories of potential purchasers, some of whom may be subject to special rules. In particular, the discussion does not address special classes of holders, such as (i) certain financial institutions, (ii) insurance companies, (iii) dealers and traders in securities or foreign currencies, (iv) persons holding shares or ADSs as part of a hedge, straddle, conversion transaction or other integrated transaction, (v) persons whose functional currency for US federal income tax purposes is not the US dollar, (vi) partnerships or other entities classified as partnerships for US federal income tax purposes, (vii) persons liable for the alternative minimum tax, (viii) tax-exempt organizations, or (ix) persons who acquired shares or ADSs pursuant to the exercise of any employee stock option or otherwise as compensation.
Prospective investors are advised to satisfy themselves as to the tax consequences, including the consequences under foreign, US federal, state and local laws applicable in their own particular circumstances, of the acquisition, ownership and disposition of shares or ADSs by consulting their tax advisers.
The statements regarding US and UK tax laws and practices set forth below, including the statements regarding the US / UK double taxation convention relating to income and capital gains (the “Treaty”) and the US / UK double taxation convention relating to estate and gift taxes (the “Estate Tax Treaty”), are based on those laws and practices and the Treaty and the Estate Tax Treaty as in force and as applied in practice on the date of this annual report and are subject to changes to those laws and practices and the Treaty and the Estate Tax Treaty subsequent to the date of this annual report, possibly on a retroactive basis. This discussion is further based in part upon representations of the Depositary and assumes that each obligation provided for in, or otherwise contemplated by, the Deposit Agreement and any related agreement will be performed in accordance with its respective terms. In general, US Holders of ADSs will be treated as owners of the shares underlying their ADSs for US federal income tax purposes. Accordingly, except as noted, the US federal and UK tax consequences discussed below apply equally to US Holders of ADSs and shares.
The US Treasury has expressed concerns that parties to whom American depositary shares are released before shares are delivered to the depositary (“pre-release”), or intermediaries in the chain of ownership between holders and the issuer of the shares underlying the American depositary shares, may be taking actions that are inconsistent with the claiming of foreign tax credits for US holders of American depositary shares. Such actions would also be inconsistent with the claiming of the reduced rate of tax, described below, applicable to dividends received by certain non-corporate holders. Accordingly, the creditability of UK taxes and the availability of the reduced tax rate for dividends received by certain non-corporate holders, each described below, could be affected by actions taken by parties to whom the ADSs are pre-released or such intermediaries.
Taxation of Dividends
Under current UK tax law, no withholding tax will be deducted from dividends paid by the Company.
Subject to the passive foreign investment company (“PFIC”) rules described below, distributions paid on ADSs or shares, other than certain pro rata distributions of shares, will be treated as dividends to the extent paid out of the Company’s current or accumulated earnings and profits (as determined under US federal income tax principles). Because the Company does not maintain calculations of its earnings and profits under US federal income tax principles, it is expected that distributions generally will be reported to US Holders as dividends. Dividends paid in pounds sterling will be included in a US Holder’s income, in a US dollar amount calculated by reference to the exchange rate in effect on the date that the depositary, in the case of ADSs, or US Holder, in the case of shares, actually or constructively receives the dividend, regardless of whether the payment is in fact converted into US dollars on such date. If the dividend is converted into US dollars on the date of receipt, a US Holder generally should not be required to recognize foreign currency gain or loss in respect of the dividend income. A US Holder may have foreign currency gain or loss if the amount of such dividend is not converted into US dollars on the date of its receipt.
Subject to applicable limitations and the discussion above regarding concerns expressed by the US Treasury, dividends paid to certain non-corporate US Holders in taxable years beginning before January 1, 2013 may be taxable at favorable rates, up to a maximum rate of 15%. US Holders should consult their own tax advisers regarding the availability of the reduced tax rate on dividends in their particular circumstances. The amount of dividend will not be eligible for the dividends received deduction generally allowed to US corporations under the Internal Revenue Code.
Taxation of Capital Gains
Subject to the comments set out below in relation to temporary non-residents, a US Holder not resident (or in the case of an individual, ordinarily resident) in the UK will not ordinarily be liable for United Kingdom taxation on capital gains realized on the disposition of such US Holder’s shares or ADSs unless, at the time of the disposition, in the case of a corporate US Holder, such US Holder carries on a trade in the United Kingdom through a permanent establishment or, in the case of any other US Holder, such US Holder carries on a trade, profession or vocation in
the United Kingdom through a branch or agency and such shares or ADSs are, or have been, used, held or acquired by or for the purposes of such trade (or profession or vocation), permanent establishment, branch or agency in which case such US Holder may, depending on the circumstances, be liable to UK tax on a gain realized on disposal of such holder’s shares or ADSs.
An individual US Holder who has ceased to be resident or ordinarily resident for UK tax purposes in the United Kingdom for a period of less than five years of assessment and who disposes of shares or ADSs during that period may, for the year of assessment when that individual returns to the United Kingdom, be liable to UK tax on gains arising during the period of absence, subject to any available exemption or relief.
Subject to the PFIC rules discussed below, a US Holder will generally recognize capital gain or loss for US federal income tax purposes on the sale or exchange of the shares or ADSs in the same manner as such holder would on the sale or exchange of any other shares held as capital assets. As a result, a US Holder will generally recognize capital gain or loss for US federal income tax purposes equal to the difference between the US dollar amount realized and such holder’s adjusted tax basis in the shares or ADSs, and this gain or loss be long-term capital gains or loss if the US Holder held the shares of ADSs for more than one year. The gain or loss will generally be US-source for foreign tax credit purposes. US Holders should consult their own tax advisers about the treatment of capital gains, which may be taxed at lower rates than ordinary income for non-corporate taxpayers, and capital losses, the deductibility of which may be limited.
A US Holder who is liable for both UK and US tax on a gain recognized on the sale or exchange of shares or ADSs will generally be entitled, subject to certain limitations and subject to the discussion above regarding concerns expressed by the US Treasury, to credit the UK tax against its US federal income tax liability. The rules governing foreign tax credits are complex. US Holders should consult their tax advisers regarding the creditability of foreign taxes in their particular circumstances.
PFIC Rules
The Company believes that it was not a PFIC for US federal income tax purposes for the year ending December 31, 2010. However, since PFIC status depends upon the composition of a company’s income and assets and the market value of its assets (including, among others, goodwill and equity investments in less than 25% owned entities) from time to time, which may be largely based upon the market value of its shares, which will vary over time and may be especially volatile in a technology-related enterprise such as the Company, there can be no assurance that the Company will not be a PFIC for any taxable year. If the Company were a PFIC for any taxable year during which a US Holder held shares or ADSs, certain adverse consequences could apply to the US Holder.
If the Company were a PFIC for any taxable year during a US Holder’s holding period for the shares or ADSs, gain recognized by such US Holder on a sale or other disposition of the shares or ADSs would be allocated ratably over the US Holder’s holding period for the shares or ADSs. The amounts allocated to the taxable year of the sale or other disposition and to any year before the Company became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate for that taxable year, and an interest charge would be imposed on the tax attributable to the allocated amount. Further, any distribution in respect of ADSs or shares in excess of 125% of the average of the annual distributions on ADSs or shares received by the US Holder during the preceding three years or the US Holder’s holding period, whichever if shorter, would be subject to taxation in the manner just described for gains. Certain elections may be available to US persons that would result in alternative treatments (such as a mark-to-market treatment) of the shares or ADSs. US Holders should consult their tax advisers to determine whether any such elections are available and, if so, what the consequences of the alternative treatments would be in those holders’ particular circumstances.
In addition, if the Company were to be a PFIC in a taxable year in which it pays a dividend or the prior taxable year, the 15% dividend rate discussed above applicable to certain dividends paid to certain non-corporate US Holders, would not apply. US Holders should consult their tax advisers concerning the potential application of the PFIC rules to their ownership and disposition of the shares and ADSs.
Estate and Gift Tax
Subject to the discussion of the Estate Tax Treaty in the next paragraph, shares or ADSs beneficially owned by an individual will be subject to UK inheritance tax on the death of the individual or, in certain circumstances, if the shares or ADSs are the subject of a gift (including a transfer at less than full market value) by such individual. Inheritance tax is not generally chargeable on gifts to individuals or to certain types of settlement made more than seven years before the death of the donor. Special rules apply to shares or ADSs held in a settlement.
Shares or ADSs held by an individual whose domicile is determined to be the United States for purposes of the Estate Tax Treaty, and who is not a national of the United Kingdom, will not be subject to UK inheritance tax on the individual’s death or on a lifetime transfer of the shares or ADSs except where the shares or ADSs (i) are part of the business property of a UK permanent establishment of an enterprise or (ii) pertain to a UK fixed base of an individual used for the performance of independent personal services. The Estate Tax Treaty generally provides a credit against US federal tax liability for the amount of any tax paid in the United Kingdom in a case where the shares or ADSs are subject both to UK inheritance tax and to US federal estate or gift tax.
Stamp Duty and Stamp Duty Reserve Tax
UK stamp duty will, subject to certain exceptions, be payable at the rate of 1.5% of the amount or value of the consideration payable if on sale or of the value of the shares (rounded up to the next multiple of £5) on any instrument transferring the shares (i) to, or to a nominee for, a person whose business is or includes the provision of clearance services or (ii) to, or to a nominee or agent for, a person whose business is or includes issuing depositary receipts. This would include transfers of shares to the Custodian for deposits under the ADR Deposit Agreement. UK stamp duty reserve tax (“SDRT”), at the rate of 1.5% of the amount or value of the consideration payable or, in certain circumstances, the value of the shares, could also be payable in these circumstances, and on issue to such a person, but no SDRT will be payable if stamp duty equal to such SDRT liability is paid. In circumstances where stamp duty is not payable on the transfer of shares to the Custodian at the rate of 1.5% (i.e., where there is no chargeable instrument) SDRT will be payable to bring the charge up to 1.5% in total. In accordance with the terms of the ADR Deposit Agreement, any tax or duty payable by the ADR Depositary or the Custodian on any such transfers of shares in registered form will be charged by the ADR Depositary to the party to whom ADRs are delivered against such transfers.
No UK stamp duty will be payable on the acquisition of any ADR or on any subsequent transfer of an ADR, provided that the transfer (and any subsequent instrument of transfer) remains at all times outside the United Kingdom and that the instrument of transfer is not executed in or brought into the United Kingdom. An agreement to transfer an ADR will not give rise to SDRT.
Subject to certain exceptions, a transfer of shares in registered form (including a transfer from the ADR Depositary to an ADR holder) will attract ad valorem UK stamp duty at the rate of 0.5% of the amount or value of the consideration for the transfer (rounded up to the next multiple of £5). Generally, ad valorem stamp duty applies neither to gifts nor on a transfer from a nominee to the beneficial owner, although in cases of transfers where no ad valorem stamp duty arises, a fixed UK stamp duty of £5 may be payable. SDRT at a rate of 0.5% of the amount or value of the consideration for the transfer may be payable on an unconditional agreement to transfer shares. If, within six years of the date of the agreement, an instrument transferring the shares is executed and duly stamped, any SDRT paid may be repaid or, if it has not been paid the liability to pay such tax (but not necessarily interest and penalties) would be cancelled. SDRT is chargeable whether the agreement or transfer is made or effected in the United Kingdom or elsewhere and whether or not any party is resident or situated in any part of the United Kingdom.
Information Reporting and Backup Withholding
Payment of dividends and sales proceeds that are made within the United States or through certain US-related financial intermediaries generally are subject to information reporting, and may be subject to backup withholding unless (i) they are received by a corporation or other exempt recipient or (ii) in the case of backup withholding, the recipient provides a correct taxpayer identification number and certifies that it is not subject to backup withholding.
The amount of any backup withholding from a payment to a US Holder will be allowed as a credit against the US Holder’s US federal income tax liability and may entitle such US holder to a refund, provided that the required information is timely furnished to the Internal Revenue Service.
DOCUMENTS ON DISPLAY
The documents concerning us which are referred to herein may be inspected at the Securities and Exchange Commission. You may read and copy any document filed or furnished by us at the SEC’s public reference rooms in Washington D.C., New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the reference rooms.
FOREIGN CURRENCY EXCHANGE RATE RISK
The Company’s earnings and liquidity are affected by fluctuations in foreign currency exchange rates, principally the US dollar rate, as most of the Company’s revenues and cash receipts are denominated in US dollars while a high proportion of its costs are in sterling.
The Company hedges its exposure using forward contracts for the sale of US dollars, which are negotiated with major UK or US clearing banks. The Company also uses currency options as a further hedging instrument for limited proportions of its dollar exposure. The fair values of the financial instruments outstanding at December 31, 2008, 2009 and 2010 are disclosed in Notes 1c and 18 to the Consolidated Financial Statements. The settlement period of the forward contracts outstanding at December 31, 2010 was between January 6, 2011 and March 30, 2011. The settlement period of the option contracts outstanding at December 31, 2010 was between January 18, 2011 and December 30, 2011.
During the fiscal year, the Company was exposed to foreign currency exchange risk inherent in its sales commitments, anticipated sales, anticipated purchases and assets and liabilities denominated in currencies other than sterling. ARM transacts business in approximately nine foreign currencies worldwide, of which the most significant to the Company’s operations were the US dollar, the Indian Rupee, the euro and the Japanese yen for 2010. Generally, the Company is a net receiver of US dollars, and therefore benefits from a weaker sterling and is adversely affected by a stronger sterling relative to the dollar. It is a net payer of other foreign currencies but at a significantly lower level than the US dollar receivables. The Company has performed a sensitivity analysis at December 31, 2010, 2009 and 2008, using a modeling technique that measures the changes in the fair values arising from a hypothetical 10% adverse movement in the levels of foreign currency exchange rates relative to sterling with all other variables held constant. The analysis covers all of the Company’s foreign currency contracts offset by the underlying exposures. The foreign currency exchange rates used were based on market rates in effect at December 31, 2010, 2009 and 2008. The sensitivity analysis indicated that a hypothetical 10% adverse movement in foreign currency exchange rates would result in a loss in the fair values of ARM’s foreign exchange derivative financial instruments, net of exposures, of £4.9 million at December 31, 2010 (2009: £2.7 million, 2008: £4.2 million).
INTEREST RATE RISK
At December 31, 2010, the Company had £305.1 million (2009: £148.8 million) of interest-bearing assets. At December 31, 2010, 89% (2009: 75%) of interest-bearing assets, comprising cash equivalents; short-term and long-term deposits; short-term marketable securities; are at fixed rates and are therefore exposed to fair value interest rate risk. Floating rate cash earns interest based on relevant national LIBID equivalents and is therefore exposed to cash flow interest rate risk.
Other financial assets, such as available-for-sale investments, are not directly exposed to interest rate risk.
The Company had no borrowings at December 31, 2009 and no borrowings during 2010. As such, any increases in interest rates in 2010 would have had no impact on the Company’s interest payable. However, a 1% decrease in
the average interest rate during the year would have reduced interest income by approximately £1.9 million and profit after tax by £1.4 million.
The Company has no derivative financial instruments to manage interest rate fluctuations in place at year-end since it has no loan financing, and as such no hedge accounting is applied.
The Company’s cash flow is carefully monitored on a daily basis. Excess cash, considering expected future cash flows, is placed on either short-term or medium-term deposit to maximize the interest income thereon. Daily surpluses are swept into higher-interest earning accounts overnight. The Company manages its proportion of fixed-to-floating deposits based on the prevailing economic climate at the time (with reference to forward interest rates) and also on the required maturity of the deposits (as driven by the expected timing of the Company’s cash receipts and payments over the short- to medium-term).
Fees and charges payable to the depositary
The Company’s ADS program is administered by The Bank of New York Mellon, One Wall Street, New York, U.S., as depositary.
The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.
Persons depositing or withdrawing shares must pay: | | |
| $5.00 (or less) per 100 ADSs (or portion of 100 ADSs) | | · Issuance and delivery of ADSs including issuances resulting from a dividend or free distribution of shares or rights · Surrender of ADSs for the purpose of withdrawal of shares including if the deposit agreement terminates |
| $.02 (or less) per ADS (or portion thereof) | | · Any cash distribution to ADS registered holders |
| A fee equivalent to the fee that would be payable if securities distributed to investors had been shares and the shares had been deposited for issuance of ADSs | | · Distribution of securities (other than shares or rights) distributed to holders of deposited securities which are distributed by the depositary to ADS registered holders |
| Registration fees | | · Registration of shares on the share register to or from the name of the depositary or its agent when the investor deposits or withdraws shares |
| Expenses of the depositary | | · Cable telex and facsimile transmissions (when expressly provided in the deposit agreement) · Reasonable expenses incurred by depositary in the conversion of dividends and other distributions in foreign currency to U.S. dollars |
| Taxes and other governmental charges the depositary or the custodian have to pay on any ADS or share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes | | · As necessary |
Fees and charges payable by the depositary
From January 1, 2009 to December 31, 2009, the Company did not receive any payments from the depositary. In February 2010, the Company received a payment of $1,287,500, which included $150,000 for 2007; $87,500 for 2008; $500,000 for 2009; and $500,000 for 2010 from the depositary. In August, 2010, the Company received a further $600,000 from the depositary, which included $500,000 for the year to July 2, 2011. These amounts were for continuing annual stock exchange listing fees, standard out-of pocket maintenance costs for the ADRs (for expenses relating to postage and envelopes for mailing annual reports and proxy materials, printing and distributing dividend checks, electronic filing of U.S. Federal tax information, mailing required tax forms, stationery, facsimile, and telephone calls), and legal fees. In addition, the 2010 payments included $50,000 and $100,000, respectively, for the achievement by the Company of certain performance indicators relating to the ADR facility.
The depositary has agreed to reimburse the Company for expenses they incur that are related to maintenance expenses of the ADS program. The depositary has agreed to reimburse the Company for its continuing annual stock exchange listing fees. The depositary has also agreed to pay the standard out-of-pocket maintenance costs for the ADRs, which consist of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend checks, electronic filing of U.S. Federal tax information, mailing required tax forms, stationery, postage, facsimile, and telephone calls. It has also agreed to reimburse the Company annually for certain investor relationship programs or special investor relations promotional activities. In certain instances, the depositary has agreed to provide additional payments to the Company based on the performance of the ADR facility. There are limits on the amount of expenses for which the depositary will reimburse the Company, but the amount of reimbursement available to the Company is not related to the amount of fees the depositary collects from investors.
Not applicable.
Not applicable.
Disclosure controls and procedures. As of December 31, 2010, the Company, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, performed an evaluation of the effectiveness of the Company’s disclosure controls and procedures. The Company’s management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which by their nature can provide only reasonable assurance regarding management’s control objectives. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to provide reasonable assurance that the information required to be disclosed by the Company in reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time specified in the rules and forms of the SEC and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting. There has been no change in the Company’s internal control over financial reporting that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, as amended. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS and includes those policies and procedures that:
| | · | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transaction and dispositions of the assets of the company; |
| | · | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and |
| | · | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use of disposition of the company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2010.
The Company’s independent auditors, PricewaterhouseCoopers LLP, which has audited the consolidated financial statements of the Company for the fiscal year ended December 31, 2010, has also assessed the effectiveness of the Company’s internal controls over financial reporting; their report is included herein.
Philip Rowley, an independent non-executive director and Chairman of the Company’s audit committee until January 26, 2011, was regarded as an audit committee financial expert for the purposes of the Sarbanes-Oxley Act of 2002 up to that date. Kathleen O’Donovan, who was appointed to the Board as an independent non-executive director in December 2006 and became a member of the audit committee in January 2007 is also qualified to be an audit committee financial expert and became the financial expert on January 26, 2011 when she assumed the chairmanship of the audit committee.
The Company has in place a code of business conduct and ethics, which is applicable to all directors, officers and employees, including the Chief Executive Officer, Chief Financial Officer, VP Finance, ARM Group and any person performing similar functions. The policy contains provisions relating to honest and ethical conduct (including the handling of conflicts of interest between personal and professional relationships), the preparation of full, fair, accurate, timely and understandable disclosure in reports and documents filed with the Securities and Exchange Commission and in other public communications made by the Company, compliance with applicable laws, rules and regulations, prompt internal reporting of violations of company policies, accountability for adherence to the policy and other matters. This policy is available on our website at www.arm.com and upon written request from ARM Holdings plc, 110 Fulbourn Road, Cambridge, CB1 9NJ, UK. Any amendment to or waiver from a provision of the policy relating to directors and executive officers will be promptly disclosed on the Company’s website.
| | | | | | | | | | |
| | | | | | | £’000 | | | | |
Audit Fees(1) | | | 713 | | | | 726 | | | | 796 | |
Audit-Related Fees(2) | | | 81 | | | | 86 | | | | 52 | |
Tax Fees(3) | | | 174 | | | | 412 | | | | 364 | |
All Other Fees(4) | | | 50 | | | | 109 | | | | 430 | |
| (1) | Audit fees include fees for services pursuant to section 404 of the Sarbanes-Oxley Act, being £255,000 in 2008, £247,000 in 2009 and £240,000 in 2010. |
| (2) | Audit-related services consist primarily of work completed on quarterly earnings and technical assistance on understanding and implementing new accounting and financial reporting guidance, as further described in our audit and non-audit services pre-approval policy filed in our annual report on Form 20-F for the year ended December 31, 2003. |
| (3) | Tax services consist primarily of fees in respect of post-acquisition restructuring and tax compliance work, as further described in our audit and non-audit services pre-approval policy. |
| (4) | All other fees consist primarily of fees for royalty audits and advice relating to employee share-based compensation. |
The audit of ARM Holdings plc (included in Audit Fees) and the royalty audits (categorized as All Other Fees) were specifically pre-approved by the audit committee. The remaining services (including the annual audit services performed for each subsidiary of the Company) received general pre-approval from the audit committee.
Not applicable.
On July 19, 2005, the Company announced a rolling share repurchase program whereby a maximum number of shares, being 10% of issued share capital, may be purchased between Company AGMs (subject to shareholder approval, authority to purchase shares is renewed at each AGM). At the 2008 AGM, the shareholders authorized the repurchase of 127,208,000 shares during the period May 13, 2008 to May 14, 2009 (the date of the 2009 AGM). From May 13, 2008 to December 31, 2008, the Company repurchased 24,779,206 shares. The Company repurchased no shares in 2009 or 2010.
Not applicable.
Please refer to “Item 10. Additional Information—Corporate Governance”.
The Company has responded to Item 18 in lieu of this item.
The following financial statements, together with the report of PricewaterhouseCoopers LLP thereon, are filed as part of this Form 20-F.
| 1.1 | | Articles of Association of ARM Holdings plc. |
| *4.1 | | Executive Service Agreement between ARM Limited and Warren East, dated January 29, 2001. |
| *4.2 | | Executive Service Agreement between Advanced Risc Machines Limited and William Tudor Brown, dated April 3, 1996. |
| *****4.3 | | Letter Agreement between ARM Limited and William Tudor Brown, dated June 25, 2008. |
| *4.4 | | Executive Service Agreement between Advanced Risc Machines Limited and Michael Peter Muller, dated January 31, 1996. |
| **4.5 | | Executive Service Agreement between ARM Limited and Tim Score, dated March 1, 2002. |
| **4.6 | | Executive Service Agreement between ARM Limited and Mike Inglis, dated July 17, 2002. |
| ****4.7 | | Executive Service Agreement between ARM Limited and Simon Segars, dated January 4, 2005. |
| ***4.8 | | ARM Holdings plc Employee Equity Plan. |
| ***4.9 | | ARM Holdings plc Deferred Annual Bonus Plan. |
| ***4.10 | | ARM Holdings plc U.S. Employee Stock Purchase Plan. |
| 8.1 | | List of significant subsidiaries. |
| 12.1 | | CEO certification required by Rule 13a-14(a). |
| 12.2 | | CFO certification required by Rule 13a-14(a). |
| 13.1 | | Certification required by Rule 13a-14(b). |
| 15.1 | | Consent of the Independent Registered Public Accounting firm. |
| * | Previously filed with the Securities and Exchange Commission as part of the annual report on Form 20-F as filed on June 15, 2001 and incorporated herein by reference. |
| ** | Previously filed with the Securities and Exchange Commission as part of the annual report on Form 20-F as filed on June 23, 2003 and incorporated herein by reference. |
| *** | Previously filed with the Securities and Exchange Commission as part of the registration statement on Form S-8 on May 8, 2006 and incorporated herein by reference. |
| **** | Previously filed with the Securities and Exchange Commission as part of the annual report on Form 20-F as filed on May 23, 2006 and incorporated herein by reference. |
| ***** | Previously filed with the Securities and Exchange Commission as part of the annual report on Form 20-F as filed on April 7, 2009 and incorporated herein by reference. |
SIGNATURE
The registrant certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
| | ARM Holdings plc | |
| | | |
| | | |
| | By: | /s/ Tim Score | |
| | | Name: | Tim Score | |
| | | Title: | Chief Financial Officer | |
Dated: March 4, 2011
To the Board of Directors and Shareholders of ARM Holdings plc
In our opinion, the accompanying consolidated balance sheets and the related consolidated income statements, consolidated statements of comprehensive income, consolidated cash flow statements and consolidated statements of changes in shareholders’ equity present fairly, in all material respects, the financial position of ARM Holdings plc and its subsidiaries at December 31, 2010 and December 31, 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s report on internal control over financial reporting included under Item 15 of the Annual Report on Form 20-F. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and International Standards on Auditing. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
| | By: | /s/PricewaterhouseCoopers LLP | |
| | | Name: | PricewaterhouseCoopers LLP | |
| | | | London United Kingdom February 28, 2011 | |
| | | | | | | 2008 £000 | | | | 2009 £000 | | | | 2010 £000 | |
| Revenues | | | | | | 298,934 | | | | 305,022 | | | | 406,595 | |
| | | | | | | | | | | | | | | | |
| Cost of revenues | | | | | | (32,878 | ) | | | (25,471 | ) | | | (26,071 | ) |
Gross profit | | | | | | 266,056 | | | | 279,551 | | | | 380,524 | |
| Operating expenses | | | | | | | | | | | | | | | |
Research and development | | | | | | (87,588 | ) | | | (112,215 | ) | | | (139,750 | ) |
Sales and marketing | | | | | | (57,448 | ) | | | (61,723 | ) | | | (70,108 | ) |
General and administrative | | | | | | (61,077 | ) | | | (59,999 | ) | | | (63,707 | ) |
Total operating expenses, net | | | | | | (206,113 | ) | | | (233,937 | ) | | | (273,565 | ) |
Profit from operations | | | | | | 59,943 | | | | 45,614 | | | | 106,959 | |
Investment income | | | | | | 3,297 | | | | 1,788 | | | | 3,634 | |
| Interest payable and similar charges | | | | | | (51 | ) | | | (143 | ) | | | (566 | ) |
Profit before tax | | 2, 5 | | | | | 63,189 | | | | 47,259 | | | | 110,027 | |
Tax | | 6 | | | | | (19,597 | ) | | | (6,820 | ) | | | (24,053 | ) |
Profit for the year | | 2 | | | | | 43,592 | | | | 40,439 | | | | 85,974 | |
| Earnings per share | | | | | | | | | | | | | | | | |
Basic and diluted earnings | | | | | | | 43,592 | | | | 40,439 | | | | 85,974 | |
Number of shares (‘000) | | | | | | | | | | | | | | | | |
| Basic weighted average number of shares | | | | | | | 1,265,237 | | | | 1,266,624 | | | | 1,313,186 | |
| Effect of dilutive securities: Employee incentive schemes | | | | | | | 21,176 | | | | 34,026 | | | | 39,007 | |
| Diluted weighted average number of shares | | | | | | | 1,286,413 | | | | 1,300,650 | | | | 1,352,193 | |
Basic EPS | | 8 | | | | | 3.4 | p | | | 3.2 | p | | | 6.5 | p |
Diluted EPS | | 8 | | | | | 3.4 | p | | | 3.1 | p | | | 6.4 | p |
All activities relate to continuing operations. The accompanying notes are an integral part of the financial statements.
| | | | | | | 2008 £000 | | | | 2009 £000 | | | | 2010 £000 | |
Profit for the year | | | | | | 43,592 | | | | 40,439 | | | | 85,974 | |
| Other comprehensive income: | | | | | | | | | | | | | | | |
| Realized gain on available-for-sale investments (net of tax of £84,000) | | | | | | 214 | | | | — | | | | — | |
| Unrealized holding gain/(loss) on available-for-sale financial assets (net of tax of £nil) | | 13 | | | | | (285 | ) | | | 130 | | | | 155 | |
Currency translation adjustment | | | | | | | 164,369 | | | | (61,718 | ) | | | 16,624 | |
| Other comprehensive income/(loss) for the year | | | | | | | 164,298 | | | | (61,588 | ) | | | 16,779 | |
| Total comprehensive income/(loss) for the year | | | | | | | 207,890 | | | | (21,149 | ) | | | 102,753 | |
The accompanying notes are an integral part of the financial statements.
as of December 31
| | | | | | | 2009 £000 | | | | 2010 £000 | |
| Assets | | | | | | | | | | | |
Current assets: | | | | | | | | | | | |
Cash and cash equivalents | | 9, 18 | | | | | 34,489 | | | | 29,363 | |
Short-term deposits | | 18 | | | | | 105,524 | | | | 247,466 | |
Short-term marketable securities | | 13, 18 | | | | | 1,795 | | | | — | |
Embedded derivatives | | 18 | | | | | 2,480 | | | | 2,303 | |
| Fair value of currency exchange contracts | | 18 | | | | | 457 | | | | — | |
Accounts receivable | | 10 | | | | | 65,247 | | | | 105,668 | |
Prepaid expenses and other assets | | 11 | | | | | 23,635 | | | | 18,431 | |
Current tax assets | | | | | | | 350 | | | | 3,646 | |
Inventories: finished goods | | 12 | | | | | 1,680 | | | | 1,784 | |
Total current assets | | | | | | | 235,657 | | | | 408,661 | |
Non-current assets: | | | | | | | | | | | | |
Available-for-sale financial assets | | 13, 18 | | | | | 9,432 | | | | 20,329 | |
Long-term deposits | | 18 | | | | | — | | | | 15,000 | |
Loans and receivables | | 18 | | | | | — | | | | 1,934 | |
Prepaid expenses and other assets | | 11 | | | | | 1,611 | | | | 1,920 | |
Property, plant and equipment | | 14 | | | | | 13,565 | | | | 13,847 | |
Goodwill | | 15 | | | | | 516,798 | | | | 532,285 | |
Other intangible assets | | 16 | | | | | 24,696 | | | | 12,099 | |
Deferred tax assets | | 6 | | | | | 42,724 | | | | 78,587 | |
Total non-current assets | | | | | | | 608,826 | | | | 676,001 | |
Total assets | | | | | | | 844,483 | | | | 1,084,662 | |
| Liabilities and shareholders’ equity | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | |
Accounts payable | | 18 | | | | | 2,280 | | | | 4,305 | |
Fair value of currency exchange contracts | | 18 | | | | | — | | | | 201 | |
Accrued and other liabilities | | 17 | | | | | 46,688 | | | | 72,028 | |
Current tax liabilities | | | | | | | 16,536 | | | | 20,216 | |
Deferred revenue | | | | | | | 39,562 | | | | 72,049 | |
Total current liabilities | | | | | | | 105,066 | | | | 168,799 | |
Non-current liabilities: | | | | | | | | | | | | |
Deferred revenue | | | | | | | — | | | | 20,657 | |
Deferred tax liabilities | | 6 | | | | | 720 | | | | 301 | |
Total non-current liabilities | | | | | | | 720 | | | | 20,958 | |
Total liabilities | | | | | | | 105,786 | | | | 189,757 | |
Net assets | | | | | | | 738,697 | | | | 894,905 | |
| Capital and reserves attributable to equity holders of the Company | | | | | | | | | | | | |
Share capital | | 19 | | | | | 672 | | | | 672 | |
Share premium account | | | | | | | 351,578 | | | | 351,578 | |
Share option reserve | | | | | | | 61,474 | | | | 61,474 | |
Retained earnings | | | | | | | 241,950 | | | | 381,379 | |
Revaluation reserve | | | | | | | (155 | ) | | | — | |
Cumulative translation adjustment | | | | | | | 83,178 | | | | 99,802 | |
Total equity | | | | | | | 738,697 | | | | 894,905 | |
The accompanying notes are an integral part of the financial statements.
for the Year Ended December 31
| | | | | | | 2008 £000 | | | | 2009 £000 | | | | 2010 £000 | |
| Operating activities | | | | | | | | | | | | | | | |
| Profit before tax | | | | | | 63,189 | | | | 47,259 | | | | 110,027 | |
| Investment income, net | | | | | | (3,246 | ) | | | (1,645 | ) | | | (3,068 | ) |
Profit from operations | | | | | | 59,943 | | | | 45,614 | | | | 106,959 | |
| Adjustments for: | | | | | | | | | | | | | | | |
| Depreciation and amortization of property, plant and equipment and intangible assets | | | | | | 26,952 | | | | 24,953 | | | | 19,949 | |
| Profit on disposal of available-for-sale investments | | | | | | — | | | | (224 | ) | | | (37 | ) |
| Loss on disposal of property, plant and equipment | | | | | | 36 | | | | 79 | | | | 252 | |
| Compensation charge in respect of share-based payments | | | | | | 15,409 | | | | 19,001 | | | | 27,129 | |
| Impairment of available-for-sale investments | | | | | | — | | | | 412 | | | | — | |
Provision for doubtful debts | | | | | | 641 | | | | 1,018 | | | | (904 | ) |
| Provision for obsolescence of inventories | | | | | | 87 | | | | 211 | | | | (199 | ) |
| Movement in fair value of currency exchange contracts | | | | | | 17,961 | | | | (18,914 | ) | | | 658 | |
| Movement in fair value of embedded derivatives | | | | | | (12,518 | ) | | | 9,818 | | | | 177 | |
| Changes in working capital | | | | | | | | | | | | | | | |
Accounts receivable | | | | | | (6,364 | ) | | | 9,531 | | | | (39,942 | ) |
Inventories | | | | | | 280 | | | | 81 | | | | 95 | |
| Prepaid expenses and other assets | | | | | | (8,915 | ) | | | 358 | | | | 4,695 | |
Accounts payable | | | | | | 4,661 | | | | (4,673 | ) | | | 2,025 | |
Deferred revenue | | | | | | 1,548 | | | | 10,281 | | | | 53,594 | |
Accrued and other liabilities | | | | | | 6,831 | | | | 14,564 | | | | 25,340 | |
| Cash generated by operations before tax | | | | | | 106,552 | | | | 112,110 | | | | 199,791 | |
Income taxes paid | | | | | | (6,019 | ) | | | (15,550 | ) | | | (22,859 | ) |
| Net cash from operating activities | | | | | | 100,533 | | | | 96,560 | | | | 176,932 | |
| Investing activities | | | | | | | | | | | | | | | |
Interest received | | | | | | 3,234 | | | | 1,277 | | | | 2,101 | |
Interest paid | | | | | | — | | | | — | | | | (566 | ) |
| Purchases of property, plant and equipment | | 14 | | | | | (8,084 | ) | | | (6,030 | ) | | | (6,182 | ) |
| Proceeds on disposal of property, plant and equipment | | | | | | | — | | | | 49 | | | | 146 | |
| Purchases of other intangible assets | | | | | | | (5,938 | ) | | | (3,888 | ) | | | (1,173 | ) |
| Purchases of available-for-sale investments | | | | | | | (1,029 | ) | | | (9,116 | ) | | | (10,997 | ) |
| Proceeds on disposal of available-for-sale investments | | | | | | | 6,291 | | | | 663 | | | | 142 | |
| Purchase of short and long-term deposits | | | | | | | (758 | ) | | | (104,902 | ) | | | (153,264 | ) |
| Outflow from provision of long-term loan | | | | | | | — | | | | — | | | | (1,934 | ) |
| Purchase of subsidiaries, net of cash acquired* | | | | | | | (7,371 | ) | | | (563 | ) | | | — | |
Net cash used ininvesting activities | | | | | | | (13,655 | ) | | | (122,510 | ) | | | (171,727 | ) |
| Financing activities | | | | | | | | | | | | | | | | |
| Proceeds received on issuance of shares from treasury | | | | | | | 5,581 | | | | 19,085 | | | | 24,015 | |
Purchase of own shares | | | | | | | (40,286 | ) | | | — | | | | — | |
Dividends paid to shareholders | | 7 | | | | | (26,383 | ) | | | (28,961 | ) | | | (34,323 | ) |
| Net cash used in financing activities | | | | | | | (61,088 | ) | | | (9,876 | ) | | | (10,308 | ) |
| Net increase/(decrease) in cash and cash equivalents | | | | | | | 25,790 | | | | (35,826 | ) | | | (5,103 | ) |
| Cash and cash equivalents at beginning of the year | | | | | | | 49,509 | | | | 76,502 | | | | 34,489 | |
| Effect of foreign exchange rate changes | | | | | | | 1,203 | | | | (6,187 | ) | | | (23 | ) |
| Cash and cash equivalents at end of the year | | 9 | | | | | 76,502 | | | | 34,489 | | | | 29,363 | |
| * | The aggregate cash outflow for purchase of subsidiaries in 2010 was £nil (2009: £563,000) and net cash acquired was £nil (2009: £nil). |
The accompanying notes are an integral part of the financial statements.
for the Year Ended December 31
| | | Attributable to equity holders of the Company | |
| | | | | | | | | | | | | | | | | | Cumulative translation adjustment £000 | | | | |
| Balance at January 1, 2008 | | | 672 | | | | 351,578 | | | | 61,474 | | | | 185,125 | | | | (214 | ) | | | (19,473 | ) | | | 579,162 | |
Profit for the year | | | − | | | | − | | | | − | | | | 43,592 | | | | − | | | | − | | | | 43,592 | |
| Other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Realized gain on available-for-sale investment (net of tax of £84,000) | | | − | | | | − | | | | − | | | | − | | | | 214 | | | | − | | | | 214 | |
| Unrealized holding loss on available-for-sale financial assets (net of tax of £nil) | | | − | | | | − | | | | − | | | | − | | | | (285 | ) | | | − | | | | (285 | ) |
| Currency translation adjustment | | | − | | | | − | | | | − | | | | − | | | | − | | | | 164,369 | | | | 164,369 | |
| Total comprehensive income/(expense) for the year | | | − | | | | − | | | | − | | | | 43,592 | | | | (71 | ) | | | 164,369 | | | | 207,890 | |
Dividends (see note 7) | | | − | | | | − | | | | − | | | | (26,383 | ) | | | − | | | | − | | | | (26,383 | ) |
| Credit in respect of employee share schemes | | | − | | | | − | | | | − | | | | 15,409 | | | | − | | | | − | | | | 15,409 | |
| Movement on tax arising on share options | | | − | | | | − | | | | − | | | | (1,030 | ) | | | − | | | | − | | | | (1,030 | ) |
Purchase of own shares | | | − | | | | − | | | | − | | | | (40,286 | ) | | | − | | | | − | | | | (40,286 | ) |
| Proceeds from sale of own shares | | | − | | | | − | | | | − | | | | 5,581 | | | | − | | | | − | | | | 5,581 | |
| Balance at December 31, 2008 | | | 672 | | | | 351,578 | | | | 61,474 | | | | 182,008 | | | | (285 | ) | | | 144,896 | | | | 740,343 | |
Profit for the year | | | − | | | | − | | | | − | | | | 40,439 | | | | − | | | | − | | | | 40,439 | |
| Other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized holding gain on available-for-sale financial assets (net of tax of £nil) | | | − | | | | − | | | | − | | | | − | | | | 130 | | | | − | | | | 130 | |
| Currency translation adjustment | | | − | | | | − | | | | − | | | | − | | | | − | | | | (61,718 | ) | | | (61,718 | ) |
| Total comprehensive income/(expense) for the year | | | − | | | | − | | | | − | | | | 40,439 | | | | 130 | | | | (61,718 | ) | | | (21,149 | ) |
| Dividends (see note 7) | | | − | | | | − | | | | − | | | | (28,961 | ) | | | − | | | | − | | | | (28,961 | ) |
| Credit in respect of employee share schemes | | | − | | | | − | | | | − | | | | 19,001 | | | | − | | | | − | | | | 19,001 | |
| Movement on tax arising on share options | | | − | | | | − | | | | − | | | | 10,378 | | | | − | | | | − | | | | 10,378 | |
| Proceeds from sale of own shares | | | − | | | | − | | | | − | | | | 19,085 | | | | − | | | | − | | | | 19,085 | |
| Balance at December 31, 2009 | | | 672 | | | | 351,578 | | | | 61,474 | | | | 241,950 | | | | (155 | ) | | | 83,178 | | | | 738,697 | |
Profit for the year | | | − | | | | − | | | | − | | | | 85,974 | | | | − | | | | − | | | | 85,974 | |
| Other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized holding gain on available-for-sale financial assets (net of tax of £nil) | | | − | | | | − | | | | − | | | | − | | | | 155 | | | | − | | | | 155 | |
| Currency translation adjustment | | | − | | | | − | | | | − | | | | − | | | | − | | | | 16,624 | | | | 16,624 | |
| Total comprehensive income for the year | | | − | | | | − | | | | − | | | | 85,974 | | | | 155 | | | | 16,624 | | | | 102,753 | |
| Dividends (see note 7) | | | | | | | | | | | | | | | (34,323 | ) | | | | | | | | | | | (34,323 | ) |
| Credit in respect of employee share schemes | | | − | | | | − | | | | − | | | | 27,129 | | | | − | | | | − | | | | 27,129 | |
| Movement on tax arising on share options | | | − | | | | − | | | | − | | | | 36,634 | | | | − | | | | − | | | | 36,634 | |
| Proceeds from sale of own shares | | | − | | | | − | | | | − | | | | 24,015 | | | | − | | | | − | | | | 24,015 | |
| Balance at December 31, 2010 | | | 672 | | | | 351,578 | | | | 61,474 | | | | 381,379 | | | | − | | | | 99,802 | | | | 894,905 | |
| * | Own shares held. Offset within retained earnings is an amount of £22,059,000 (2009: £65,102,000) representing the cost of own shares held, being 21,624,158 (2009: 60,321,361) shares in the Company. These shares are expected to be used in part for the benefit of the Company’s employees and directors to satisfy share option, restricted stock units (RSUs) and conditional share awards in future periods. Refer to note 20 for further details on the movement on these balances. |
| ** | Revaluation reserve. The Company includes on its balance sheet publicly traded investments, which are classified as available-for-sale. These are carried at market value. Unrealized holding gains or losses on such securities are included, net of related taxes, within the revaluation reserve. Any unrealized gains within this reserve are undistributable. |
The accompanying notes are an integral part of the financial statements.
1 The Company and a summary of its significant accounting policies and financial risk management
1a General information about the Company
The business of the Company
ARM Holdings plc and its subsidiary companies (ARM or “the Company”) designs microprocessors, physical IP and related technology and software, and sells development tools to enhance the performance, cost-effectiveness and energy-efficiency of high-volume embedded applications.
The Company licenses and sells its technology and products to leading international electronics companies, which in turn manufacture, market and sell microprocessors, application-specific integrated circuits (ASICs) and application-specific standard processors (ASSPs) based on ARM’s technology to systems companies for incorporation into a wide variety of end products.
By creating a network of Partners, and working with them to best utilize the Company’s technology, the Company is establishing its processor architecture and physical IP for use in many high-volume embedded microprocessor applications, including cellular phones, digital televisions and PC peripherals and for potential use in many growing markets, including smart cards and microcontrollers.
The Company also licenses and sells development systems direct to systems companies and provides support services to its licensees, systems companies and other systems designers.
The Company’s principal geographic markets are Europe, the United States and Asia Pacific.
The Company’s financial statements were authorized for issue on February 28, 2011 by Tim Score, director and Chief Financial Officer, on behalf of the board.
Incorporation and history
ARM is a public limited company incorporated and domiciled under the laws of England and Wales. The registered office of the Company is 110 Fulbourn Road, Cambridge, CB1 9NJ, UK.
The Company was formed on October 16, 1990, as a joint venture between Apple Computer (UK) Limited and Acorn Computers Limited, and operated under the name Advanced RISC Machines Holdings Limited until March 10, 1998, when its name was changed to ARM Holdings plc. Its initial public offering was on April 17, 1998.
Company undertakings include ARM Limited (incorporated in the UK), ARM Inc. (incorporated in the US), ARM KK (incorporated in Japan), ARM Korea Limited (incorporated in South Korea), ARM France SAS (incorporated in France), ARM Germany GmbH (incorporated in Germany), ARM Norway AS (incorporated in Norway), ARM Sweden AB (incorporated in Sweden), ARM Embedded Technologies Pvt. Limited (incorporated in India), ARM Physical IP Asia Pacific Pte. Limited (incorporated in Singapore), ARM Taiwan Limited (incorporated in Taiwan) and ARM Consulting (Shanghai) Co. Limited (incorporated in PR China).
1b Summary of significant accounting policies
The principal accounting policies applied in the presentation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.
Basis of preparation
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the IASB, IFRIC interpretations and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.
The consolidated financial statements have been prepared under the historical cost convention as modified by the revaluation to fair value of available-for-sale investments; share-based payments; financial assets and liabilities (including derivative instruments) at fair value through the income statement; and embedded derivatives.
Critical accounting estimates and judgments
The preparation of these financial statements requires the directors to make critical accounting estimates and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates and judgments are summarized in note 1d.
New standards, amendments and interpretations
(a) Standards, amendments and interpretations effective in 2010
IFRS 3 (Revised), “Business combinations” This is equivalent to FAS 141R issued by the FASB in December 2007. The revision to this standard changes accounting for business combinations. While the acquisition method is still applied, there are significant changes to the treatment of contingent payments, transaction costs and the calculation of goodwill. Published by the IASB in January 2008, the standard is applicable to business combinations occurring in accounting periods beginning on or after July 1, 2009 and was endorsed by the EU on June 3, 2009. This could impact the Company’s financial statements in the future if it makes further acquisitions.
Amendment to IAS 39, “Financial Instruments: Recognition and measurement on eligible hedged items” This amendment makes two significant changes. It prohibits designating inflation as a hedgeable component of a fixed rate debt. It also prohibits including time value in the one-sided hedged risk when designating options as hedges. Published by the IASB in July 2008, it is effective for periods beginning on or after July 1, 2009 and must be applied retrospectively. This was endorsed by the EU on September 15, 2009 and has not impacted the Company since it does not currently designate any financial instruments as hedges.
Amendment to IFRS 2, “Share-based payments; group cash-settled transactions” This amendment provides a clear basis to determine the classification of share-based payment awards in both consolidated and separate financial statements. Published by the IASB in 2009, it is effective for periods beginning on or after January 1, 2010 and was endorsed by the EU on March 23, 2010. This has had no material impact on the Company.
Annual improvements 2009 This is a series of amendments to 12 standards as part of the IASB program on annual improvement. Published by the IASB In April 2009, these are effective for accounting periods beginning on or after January 1, 2010. These amendments were endorsed by the EU on March 23, 2010. These improvements have had no material impact on the results of the Company. Included within these improvements were:
IAS 36 (amendment), ‘Impairment of assets’ This amendment clarifies that the largest cash-generating unit (or group of units) to which goodwill should be allocated for the purposes of impairment testing is an operating segment. This has no impact on the Company since it does not aggregate segments for this purpose.
IAS 1 (amendment), ‘Presentation of financial statements’ The amendment clarifies that the potential settlement of a liability by the issue of equity is not relevant to its classification as current or non-current. By amending the definition of current liability, the amendment permits a liability to be classified as non-current (provided that the entity has an unconditional right to defer settlement by transfer of cash or other assets for at least 12 months after the accounting period) notwithstanding the fact that the entity could be required by the counterparty to settle in shares at any time. This has no impact on the Company as it does not settle liabilities in this manner.
IAS 38 (amendment), ‘Intangible assets’ The amendment clarifies guidance in measuring the fair value of an intangible asset acquired in a business combination and permits the grouping of intangible assets as a single asset if each asset has similar useful economic lives. This standard could have an impact on the Company in the event that it makes an acquisition and chooses to adopt this policy.
IFRS 5 (amendment) ‘Non-current assets held for sale and discontinued operations’ This amendment clarifies that IFRS5 specifies the disclosures required in respect of non-current assets classified as held for sale or discontinued operations. This could have an impact on the Company if it holds such assets in the future.
(b) Standards, amendments and interpretations effective in 2010 but not relevant to the Company
IFRIC 15, “Agreements for construction of real estate” This clarifies which standard (IAS 18, ‘Revenue’, or IAS 11, ‘Construction contracts’) should be applied to particular transactions and means that IAS 18 is applied to a wider range of transactions. This is not relevant to the Company as it does not have any transactions involving real estate. Published by the IASB in July 2008, it is effective for periods beginning on or after January 1, 2009. This standard was endorsed by the EU on January 1, 2010 for periods beginning on or after December 1, 2010.
IFRIC 16, “Hedges of a net investment in a foreign operation” This clarifies the usage and requirements of IAS 21 with respect to net investment hedging. This is not relevant to the Company as it does not undertake such activities. Published by the IASB in July 2008, it is effective for periods beginning on or after October 1, 2008. This interpretation was endorsed by the EU for periods beginning on or after July 1, 2009.
IFRIC 17, “Distributions of non-cash assets to owners” This clarifies how an entity should measure distributions of assets, other than cash, when it pays dividends to its owners. This is not relevant to the Company as it does not make any distributions of assets to its owners, other than cash. Published by the IASB in November 2008, it is effective for periods beginning on or after July 1, 2009. This interpretation was endorsed by the EU for periods beginning on or after July 1, 2009.
IFRIC 18, “Transfer of assets from customers” This clarifies the accounting for arrangements where an item of property, plant and equipment, which is provided by the customer, is used to provide an ongoing service. This is not relevant to the Company as it does not engage in such activities. Published by the IASB in January 2009, it is effective for transfers of assets from customers received on or after July 1, 2009. This interpretation was endorsed by the EU for periods beginning on or after October 2010.
Amendments to IFRIC 9 and IAS 39, “Embedded derivatives” This amendment allows entities to reclassify particular financial instruments from the fair value through the income statement or available-for-sale categories in specific circumstances. This is not relevant to the Company since it currently does not meet the criteria of the amendment. Published by the IASB in March 2009, it is effective for periods commencing on or after June 30, 2009. It was endorsed by the EU on November 30, 2009.
IAS 27 (Revised), “Consolidated and separate financial statements” This amendment revises the accounting for transactions with non-controlling interests. Published by the IASB in January 2008, this is effective for accounting periods beginning on or after July 1, 2009 and was endorsed by the EU on June 3, 2009. This is not relevant to the Company as it does not have any non-controlling interests.
(c) Standards, amendments and interpretations that are not yet effective and have not been early adopted
Amendment to IAS 24, “Related party disclosures” This removes the requirement for government related entities to disclose details of all transactions with the government and it clarifies and simplifies the definition of a related party. Published by the IASB in November 2009, this is effective for accounting periods beginning on or after January 1, 2011. This amendment was endorsed by the EU on July 19, 2010.
IFRS 9, “Financial instruments on classification and measurement” This is the first part of a new standard to replace IAS 39. IFRS 9 has two measurement categories: amortized cost and fair value. All equity instruments are measured at fair value. A debt instrument is measured at amortized cost only if the entity is holding it to collect contractual cash flows and the cash flows represent principal and interest. Otherwise it is measured at fair value through the income statement. Published by the IASB in November 2009, this is effective for accounting periods beginning on or after January 1, 2013. This standard is not yet endorsed by the EU.
Amendment to IFRIC 14, “Prepayments of a minimum funding requirement” This relates to companies that are required to make minimum funding contributions to a defined benefit pension plan. The Company does not have any such schemes and therefore it will not be relevant. Published by the IASB in November 2009, it is effective for annual periods beginning on or after January 1, 2011. This interpretation was endorsed by the EU on July 19, 2010.
IFRIC 19, “Extinguishing financial liabilities with equity instruments” This clarifies the accounting when an entity re-negotiates the terms of its debt with the result that the liability is extinguished through the debtor issuing its own equity instruments to the creditor. Published by the IASB in November 2009, this is effective for accounting periods beginning on or after July 1, 2010. This was endorsed by the EU on July 23, 2010.
Annual improvements 2010 This set of amendments includes changes to six standards and one IFRIC. These are minor amendments and are not expected to have a significant impact on the Company. Published by the IASB in May 2010, these are generally applicable for accounting periods beginning after January 1, 2011.
Amendment to IAS 32, “Rights Issues” This addresses the accounting for rights issues which are denominated in a currency other than the functional currency of the issuer. Published by the IASB in October 2009, this is effective for accounting periods beginning on or after February 1, 2010. This was endorsed by the EU on December 23, 2009.
Amendment to IAS 12, “Income taxes on deferred tax” This amendment introduces an exception to the existing principle for the measurement of deferred tax assets or liabilities arising on investment property measured at fair value. This is not relevant to the Company as it does not currently own any investment properties. Published by the IASB in December 2010, it is effective for accounting periods on or after January 1, 2012. This is not yet endorsed by the EU.
It is too early to tell whether the adoption of these standards, annual improvements and interpretations will have an impact in future periods on the financial statements when they come into effect for accounting periods after January 1, 2011.
Principles of consolidation
The consolidated financial statements incorporate the financial statements of the Company and all its subsidiaries. Intra-group transactions, including sales, profits, receivables and payables, have been eliminated on consolidation. All subsidiaries use uniform accounting policies for like transactions and other events and similar circumstances.
Business combinations
The results of subsidiaries acquired in the year are included in the income statement from the date they are acquired. On acquisition, all of the subsidiaries’ assets and liabilities that exist at the date of acquisition are recorded at their fair values reflecting their condition at that date.
Segment reporting
At December 31, 2010, the Company was organized on a worldwide basis into three business segments, namely the Processor Division (PD), the Physical IP Division (PIPD) and the System Design Division (SDD). This is based upon the Company’s internal organization and management structure and is the primary way in which the Chief Operating Decision Maker (CODM) and the rest of the board are provided with financial information. The directors believe that the CODM is the Chief Executive Officer of the Company.
Segment expenses are expenses that are directly attributable to a segment together with the relevant portion of other expenses that can reasonably be allocated to the segment. Foreign exchange gains or losses, investment income, interest payable and similar charges and tax are not allocated by segment.
Segment assets and liabilities include items that are directly attributable to a segment plus an allocation on a reasonable basis of shared items. Corporate assets and liabilities are not included in business segments and are thus unallocated. At December 31, 2010 and 2009, these comprised cash and cash equivalents, short and long-term deposits, short-term marketable securities, available-for-sale investments, loans and receivables, embedded derivatives and the fair value of currency exchange contracts. Any current and deferred tax assets and liabilities are also not included in business segments and are thus unallocated.
Foreign currency translation
(a) Functional and presentation currency. The functional currency of each Company entity is the currency of the primary economic environment in which each entity operates. The consolidated financial statements are presented in sterling, which is the presentation currency of the Company.
(b) Transactions and balances. Transactions denominated in foreign currencies have been translated into the functional currency of each Company entity at actual rates of exchange ruling at the date of transaction. Monetary assets and liabilities denominated in foreign currencies have been translated at rates ruling at the balance sheet date. Exchange differences have been included in general and administrative expenses.
(c) Group companies. The results and financial positions of all Company entities (none of which has the currency of a hyper-inflationary economy) not based in the UK are translated into sterling as follows:
| | (i) | Assets and liabilities for each balance sheet presented are translated at the closing rate of exchange at the balance sheet date; |
| | (ii) | Income and expenses for each income statement presented are translated at the exchange rate ruling at the time of each transaction during the period; and |
| | (iii) | All resulting exchange differences are recognized as a separate component of equity, being taken directly to equity via the cumulative translation adjustment. |
When a foreign operation is partially disposed of or sold, exchange differences that were recognized in equity are recognized in the income statement as part of the gain or loss on sale.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.
Fair value estimation
The fair value of financial instruments traded in active markets (such as trading and available-for-sale securities) is based on quoted market prices at the balance sheet date. The quoted market price used for financial assets held by the Company is the current bid price.
The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined using valuation techniques. The Company uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date. The fair value of forward exchange contracts is determined using quoted forward exchange rates at the balance sheet date. The fair value of foreign currency options is based upon valuations performed by an independent bank as well as management’s view of market conditions.
The carrying value less impairment provision of trade receivables and payables are assumed to approximate their fair values as this is the amount which would be receivable/payable if the assets/liabilities had crystallized at the balance sheet date. Any current tax liabilities are not included in this category.
Revenue recognition
The Company follows the principles of IAS 18, “Revenue recognition”, in determining appropriate revenue recognition policies. In principle, therefore, revenue associated with the sale of goods is recognized when all of the following conditions have been satisfied:
| | · | the Company has transferred to the buyer the significant risks and rewards of ownership of the goods; |
| | · | the Company does not retain either continuing managerial involvement to the degree usually associated with ownership or effective control over the goods sold; |
| | · | the amount of revenue can be measured reliably; |
| | · | it is probable that the economic benefits associated with the transaction will flow to the Company; and |
| | · | the costs incurred or to be incurred in respect of the sale can be measured reliably. |
Revenue associated with the rendering of services is recognized when all of the following conditions have been satisfied:
| | · | the amount of revenue can be measured reliably; |
| | · | it is probable that the economic benefits associated with the transaction will flow into the Company; |
| | · | the stage of completion of the transaction at the end of the reporting period can be measured reliably; and |
| | · | the costs incurred for the transaction and the costs to complete the transaction can be measured reliably. |
Revenue is shown net of value-added tax, returns, rebates and discounts, and after eliminating sales within the Company.
Revenue comprises the value of sales of licenses to ARM technology, royalties arising from the resulting sale of licensees’ ARM technology-based products, revenues from support, maintenance and training, consulting contracts and the sale of development boards and software toolkits.
Revenue from standard license products which are not modified to meet the specific requirements of each customer is recognized when the all of the conditions relevant to revenue associated with the sale of goods have been satisfied:
| | · | The significant risks and rewards of ownership are transferred when a license arrangement has been agreed and the goods have been delivered to the customer; |
| | · | Continuing managerial involvement and effective control over goods sold is relinquished at the point at which goods are delivered to the customer; |
| | · | Revenue is recognized to the extent that it is reliably measurable; any consideration due under the licensing arrangement that is not deemed to be reliably measurable is deferred until it can be measured reliably; and |
| | · | Revenue is recognized to the extent that it is probable that the economic benefits associated with the transaction will flow to the Company; any economic benefits of the transaction that are deemed unlikely to flow to the Company are deferred until it becomes probable that they will flow to the Company. |
The majority of the Company’s revenues come from the licensing of intellectual property and there are therefore very few direct costs associated with the sale of goods; where there are direct costs of sale, these are measured with reference to the purchasing agreements in place with the Company’s suppliers.
Many license agreements are for products which are designed to meet the specific requirements of each customer. Revenue from the sale of such licenses is recognized on a percentage-of-completion basis over the period from signing of the license to customer acceptance. Under the percentage-of-completion method, provisions for estimated losses on uncompleted contracts are recognized in the period in which the likelihood of such losses is determined. The percentage-of-completion is measured by monitoring progress using records of actual time incurred to date in the project compared with the total estimated project requirement, which approximates to the extent of performance.
Where invoicing milestones on license arrangements are such that the receipts fall due significantly outside the period over which the customization is expected to be performed or significantly outside its normal payment terms for standard license arrangements, the Company evaluates whether it is probable that economic benefits associated with these milestones will flow to the Company and therefore whether these receipts should initially be included in the arrangement consideration.
In particular, it considers:
| | · | whether there is sufficient certainty that the invoice will be raised in the expected timeframe, particularly where the invoicing milestone is in some way dependent on customer activity; |
| | · | whether it has sufficient evidence that the customer considers that the Company’s contractual obligations have been, or will be, fulfilled; |
| | · | whether there is sufficient certainty that only those costs expected to be incurred will indeed be incurred before the customer will accept that a future invoice may be raised; and |
| | · | the extent to which previous experience with similar product groups and similar customers supports the conclusions reached. |
Where the Company considers that there is insufficient evidence that it is probable that the economic benefits associated with such future milestones will flow to the Company, taking into account these criteria, such milestones are excluded from the arrangement consideration until there is sufficient evidence that it is probable that the economic benefits associated with the transaction will flow into the Company. The Company does not discount future invoicing milestones, as the effect of doing so would be immaterial.
Where agreements involve several components, the entire fee from such arrangements is allocated to each of the individual components based on each component’s fair value, where fair value is the price that is regularly charged for an item when sold separately. Where a component in a multiple-component agreement has not previously been sold separately, the assessment of fair value for that component is based on other factors, including, but not limited to, the price charged when it was sold alongside other items and the book price of the component relative to the book prices of the other components in the agreement. If fair value of one or more components in a multiple-component agreement is not determinable (where such component is not considered incidental to the overall arrangement), the entire arrangement fee is deferred until such fair value is determinable, or the component has been delivered to the licensee. Where, in substance, two or more elements of a contract are linked and fair values cannot be allocated to the individual components, the revenue recognition criteria are applied to the elements as if they were a single element.
Agreements including rights to unspecified future products (as opposed to unspecified upgrades and enhancements) are accounted for using subscription accounting, with revenue from the arrangement being recognized on a straight-line basis over the term of the arrangement, or an estimate of the economic life of the products offered if no term is specified, beginning with the delivery of the first product.
In addition to the license fees, contracts generally contain an agreement to provide post-delivery service support, in the form of support, maintenance and training which consists of the right to receive services and/or unspecified product upgrades or enhancements that are offered on a when-and-if-available basis. Fees for post-delivery service support are generally specified in the contract. Revenue related to post-delivery service support is recognized based on fair value, which is determined with reference to contractual renewal rates. If no renewal rates are specified, and fair value of the post-delivery support service cannot be determined by other methods, the entire fee under the transaction is amortized and recognized on a straight-line basis over the contractual post-delivery service support period. Where renewal rates are specified, revenue for post-delivery service support is recognized on a straight-line basis over the period for which support and maintenance is contractually agreed by the Company with the licensee.
If the amount of revenue recognized exceeds the amounts invoiced to customers, the excess amount is recorded as amounts recoverable on contracts within accounts receivable.
The excess of license fees and post-delivery service support invoiced over revenue recognized is recorded as deferred revenue.
Sales of software, including development systems, which are not specifically designed for a given license (such as off-the-shelf software) are recognized upon delivery, when the significant risks and rewards of ownership have been transferred to the customer. At that time, the Company has no further obligations except that, where necessary,
the costs associated with providing post-delivery service support have been accrued. Services (such as training) that the Company provides which are not essential to the functionality of the IP are separately stated and priced in the contract and, therefore, accounted for separately. Revenue is recognized as services are performed and it is probable that the economic benefits associated with the transaction will flow into the Company.
Royalty revenues are earned on sales by the Company’s customers of products containing ARM technology. Royalty revenues are recognized when it is probable that the economic benefits associated with the transaction will flow to the Company and the amount of revenue can be reliably measured. Revenues are recognized when the Company receives notification from the customer of product sales, or receives payment of any fixed royalties. Notification is typically received in the quarter following shipment of the products by the customer.
Certain products have been co-developed by the Company and a collaborative partner, where both parties had the right to sell licenses to the product. In those cases where the Company receives royalty revenues from the sale of these products, the total value of the royalty is recorded as revenue and the amount payable to the collaborative partner is recorded as cost of sales. Where the collaborative partner collects royalties on the sales of these products, the Company records as revenue the commission it is due when informed by the collaborative partner that a sale has been made.
As disclosed above, in accordance with IAS 8, “Accounting policies, changes in accounting estimates and errors,” the Company makes significant estimates in applying its revenue recognition policies. In particular, as discussed in detail above, estimates are made in relation to the use of the percentage-of-completion accounting method, which requires that the extent of progress toward completion of contracts may be anticipated with reasonable certainty. The use of the percentage-of-completion method is itself based on the assumption that, at the outset of license agreements, there is an insignificant risk that customer acceptance is not obtained. The Company also makes assessments, based on prior experience, of the extent to which future milestone receipts represent a probable future economic benefit to the Company. In addition, when allocating revenue to various components of arrangements involving several components, it is assumed that the fair value of each element is reflected by its price when sold separately. The complexity of the estimation process and issues related to the assumptions, risks and uncertainties inherent with the application of the revenue recognition policies affect the amounts reported in the financial statements. If different assumptions were used, it is possible that different amounts would be reported in the financial statements.
Research and development expenditure
All ongoing research expenditure is expensed in the period in which it is incurred. Where a product is technically feasible, production and sale are intended, a market exists, expenditure can be measured reliably, and sufficient resources are available to complete the project, development costs are capitalized and amortized on a straight-line basis over the estimated useful life of the respective product. The Company believes its current process for developing products is essentially completed concurrently with the establishment of technological feasibility which is evidenced by a working model. Accordingly, development costs incurred after the establishment of technological feasibility have not been significant and, therefore, no costs have been capitalized to date.
Where no internally-generated intangible asset can be recognized, development expenditure is recognized as an expense in the period in which it is incurred. Any collaborative agreement whereby a third party agrees to partially fund the Company’s research and development is recognized over the period of the agreement as a credit within research and development costs.
Retirement benefit costs
The Company contributes to defined contribution plans substantially covering all employees in Europe and the United States and to government pension schemes for employees in Japan, South Korea, Taiwan, PR China, Israel and India. The Company contributes to these plans based upon various fixed percentages of employee compensation, and such contributions are expensed as incurred.
Operating leases
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Costs, net of any lease incentives, in respect of operating leases are charged on a straight-line basis over the lease term even if payments are not made on such a basis.
Investment income, interest payable and similar charges
Investment income, interest payable and similar charges relate to interest income and expense, which is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable.
Dividends
Distributions to equity holders are not recognized in the income statement under IFRS, but are disclosed as a component of the movement in shareholders’ equity. A liability is recorded for a dividend when the dividend is approved by the Company’s shareholders. Interim dividends are recognized as a distribution when paid.
Earnings per share
Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the period, excluding treasury, which are treated as cancelled. For diluted earnings per share, the weighted number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares. The diluted share base for the year ended December 31, 2010 excludes incremental shares of approximately 185,000 (2009: 11,986,000) related to employee share options. These shares are excluded due to their anti-dilutive effect as a result of the exercise price of these shares being higher than the market price.
Property, plant and equipment
The cost of property, plant and equipment is their purchase cost, together with any incidental costs of acquisition. External costs and internal costs are capitalized to the extent they enhance the future economic benefit of the asset.
Depreciation is calculated so as to write off the cost of property, plant and equipment, less their estimated residual values, which are adjusted, if appropriate, at each balance sheet date, on a straight-line basis over the expected useful economic lives of the assets concerned. The principal economic lives used for this purpose are:
Freehold buildings | 25 years |
Leasehold improvements | Five to seven years or term of lease, whichever is shorter |
Computer equipment | Three to five years |
Fixtures and fittings | Five to ten years |
Motor vehicles | Four years |
Provision is made against the carrying value of property, plant and equipment where an impairment in value is deemed to have occurred. Asset lives and residual values are reviewed on an annual basis.
Intangible assets
(a) Goodwill. Goodwill represents the excess of the fair value of the consideration paid on acquisition of a business over the fair value of the assets, including any intangible assets identified and liabilities acquired. Goodwill is not amortized but is measured at cost less impairment losses. In determining the fair value of consideration, the fair value of equity issued is the market value of equity at the date of completion, the fair value of share options assumed is calculated using the Black-Scholes valuation model, and the fair value of contingent consideration is based upon whether the directors believe any performance conditions will be met and thus whether any further consideration will be payable.
(b) Other intangible assets. Computer software, purchased patents and licenses to use technology are capitalized at cost and amortized on a straight-line basis over a prudent estimate of the time that the Company is
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expected to benefit from them, which is typically three to ten years. Costs that are directly attributable to the development of new business application software and which are incurred during the period prior to the date that the software is placed into operational use, are capitalized. External costs and internal costs are capitalized to the extent they enhance the future economic benefit of the asset.
Although an independent valuation is made of any intangible assets purchased as part of a business combination, the directors are primarily responsible for determining the fair value of intangible assets. Developed technology, existing agreements and customer relationships, core technology, trademarks and tradenames, and order backlog are capitalized and amortized over a period of one to ten years, being a best estimate of the time that the Company is expected to benefit from them.
In-process research and development projects purchased as part of a business combination may meet the criteria set out in IFRS 3, “Business combinations,” for recognition as intangible assets other than goodwill. The directors track the status of in-process research and development intangible assets such that their amortization commences when the assets are brought into use. This typically means a write-off period of one to five years.
Amortization is calculated so as to write off the cost of intangible assets, less their estimated residual values, which are adjusted, if appropriate, at each balance sheet date, on a straight-line basis over the expected useful economic lives of the assets concerned. The principal economic lives used for this purpose are:
Computer software | Three to five years |
Patents and licenses | Three to ten years |
In-process research and development | One to five years |
Developed technology | One to five years |
Existing agreements and customer relationships | Two to ten years |
Core technology | Five years |
Trademarks and tradenames | Four to five years |
Order backlog | One year |
Impairment of non-financial assets
Assets that have an indefinite useful life, for example goodwill, are not subject to amortization but are tested annually for impairment.
Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date.
The annual impairment tests in 2008, 2009 and 2010 showed there was no impairment with respect to goodwill. Furthermore, no trigger events have been identified that would suggest the impairment of any of the Company’s other intangibles.
Financial assets
The Company classifies its financial assets in the following categories: at fair value through the income statement, loans and receivables, and available-for-sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition.
(a) Financial assets at fair value through the income statement. Financial assets at fair value through the income statement are financial assets held for trading – that is, assets that have been acquired principally for the purpose of selling in the short-term. Assets in this category are classified as current assets. They are initially
recognized at fair value with transaction costs being expensed in the income statement. Specifically, the Company’s currency exchange contracts and embedded derivatives fall within this category. Gains or losses arising from changes in the fair value of “financial assets at fair value through the income statement” are presented in the income statement within general and administrative expenses in the period in which they arise.
(b) Loans and receivables. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets. “Accounts receivable” and “cash and cash equivalents” are classified as “Loans and receivables” in the balance sheet. Loans and receivables are measured initially at fair value and then annually are measured at amortized cost.
(c) Available-for-sale investments. Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date.
Publicly-traded investments are classified as available-for-sale. Initially recognized at fair value plus transaction costs on the trade date, they are revalued at market value at each period end. Unrealized holding gains or losses on such securities are included, net of related taxes, directly in equity via a revaluation reserve except where there is evidence of permanent impairment (see below).
Equity securities that are not publicly traded are also classified as available-for-sale and are recorded at fair value plus transaction costs at the trade date. Given that the markets for these assets are not active, the Company establishes fair value by using valuation techniques. At December 31, 2010 and 2009, the estimated fair value of these investments approximated to cost less any permanent diminution in value, based on estimates determined by the directors.
Impairment of financial assets
The Company considers at each reporting date whether there is any indication that any financial asset is impaired. If there is such an indication, the Company carries out an impairment test by measuring the assets’ recoverable amount, which is the higher of the assets’ fair value less costs to sell and their value in use. If the recoverable amount is less than the carrying amount an impairment loss is recognized, and the assets are written down to their recoverable amount.
In the case of equity securities classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered as an indicator that the securities are permanently impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any permanent impairment loss on that financial asset previously recognized in the income statement – is removed from equity and recognized in the income statement. Impairment losses recognized in the income statement on equity instruments are not reversed through the income statement.
When securities classified as available-for-sale are sold or permanently impaired, the accumulated fair value adjustments recognized in equity are recycled through the income statement.
Impairment testing of trade receivables is described under “Accounts receivable” below.
Derivative financial instruments
The Company utilizes currency exchange contracts to manage the exchange risk on actual transactions related to accounts receivable, denominated in a currency other than the functional currency of the business. The Company’s currency exchange contracts do not subject the Company to risk from exchange rate movements because the gains and losses on such contracts offset losses and gains, respectively, on the transactions being hedged. The currency exchange contracts and related accounts receivable are recorded at fair value at each period end. Fair value is estimated using the settlement rates prevailing at the period end. All recognized gains and losses resulting from the settlement of the contracts are recorded within general and administrative expenses in the income statement. The Company does not enter into currency exchange contracts for the purpose of hedging anticipated transactions.
Cash and cash equivalents
Cash and cash equivalents includes cash in hand, deposits held with banks and other short-term highly liquid investments with original maturities of three months or less.
Short- and long-term deposits and short-term marketable securities
The Company considers all highly-liquid investments with original maturity dates of greater than three months but less than one year to be either short-term deposits or short-term marketable securities. Deposits with a maturity date of greater than one year from the balance sheet date are classified as long-term.
Accounts receivable
Accounts receivable are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of the receivables.
Accounts receivable are first assessed individually for impairment. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments (more than 90 days overdue) are considered indicators that the trade receivable may be impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate.
Where there is no objective evidence of impairment for an individual receivable, it is included in a group of receivables with similar credit risk characteristics and these are collectively assessed for impairment.
In the case of impairment, the carrying amount of the asset(s) is reduced through the use of an allowance account, and the amount of the loss is recognized in the income statement within general and administrative costs. When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited against general and administrative costs in the income statement.
Inventories
Inventories are stated at the lower of cost and net realizable value. In general, cost is determined on a first-in, first-out basis and includes transport and handling costs. Where necessary, provision is made for obsolete, slow-moving and defective inventory.
Accounts payable
Accounts payable are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method.
Income taxes
The current income tax charge is calculated on the basis of tax laws enacted or substantively enacted at the balance sheet date in the countries where the Company’s subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.
Deferred income taxes are computed using the liability method. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using enacted rates and laws that will be in effect when the differences are expected to reverse. The deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither accounting nor
taxable profit or loss. Deferred tax assets are recognized to the extent that it is probable that future taxable profits will arise against which the temporary differences will be utilized.
Deferred tax is provided on temporary differences arising on investments in subsidiaries except where the timing of the reversal of the temporary difference is controlled by the Company and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets and liabilities arising in the same tax jurisdiction are offset.
In the United Kingdom and the United States, the Company is entitled to a tax deduction for amounts treated as compensation on exercise of certain employee share options under each jurisdiction’s tax rules. As explained under “Share-based payments” below, a compensation expense is recorded in the Company’s income statement over the period from the grant date to the vesting date of the relevant options and awards. As there is a temporary difference between the accounting and tax bases, a deferred tax asset is recorded. The deferred tax asset arising is calculated by comparing the estimated amount of tax deduction to be obtained in the future (based on the Company’s share price at the balance sheet date) with the cumulative amount of the compensation expense recorded in the income statement. If the amount of estimated future tax deduction exceeds the cumulative amount of the compensation expense at the statutory rate, the excess is recorded directly in equity, against retained earnings.
As explained under “Share-based payments” below, no compensation charge is recorded in respect of options granted before November 7, 2002 or in respect of those options which have been exercised or have lapsed before January 1, 2005. Nevertheless, tax deductions have arisen and will continue to arise on these options. The tax effects arising in relation to these options are recorded directly in equity, against retained earnings.
Provisions
Provisions for restructuring costs and legal claims are recognized when: the Company has a present legal or constructive obligation as a result of past events; it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount of the outflow can be reliably estimated.
Embedded derivatives
In accordance with IAS 39, “Financial instruments: recognition and measurement,” the Company has reviewed all its contracts for embedded derivatives that are required to be separately accounted for if they do not meet certain requirements set out in the standard. From time to time, the Company may enter into contracts denominated in a currency (typically US dollars) that is neither the functional currency of the Company entity nor the functional currency of the customer or the collaborative partner. Where there are uninvoiced amounts on such contracts, the Company carries such derivatives at fair value. The resulting gain or loss is recognized in the income statement under general and administrative expenses, as shown below:
| | | | 2008 £000 | | | | 2009 £000 | | | | 2010 £000 | |
Gain/(loss) in income statement | | | 12,518 | | | | (9,818 | ) | | | (177 | ) |
Share-based payments
The Company issues equity-settled share-based payments to certain employees. In accordance with IFRS 2, “Share-based payments,” equity-settled share-based payments are measured at fair value at the date of grant. Fair value is measured by use of the Black-Scholes pricing model. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Company’s estimate of the number of shares that will eventually vest.
The Company operates Save As You Earn (SAYE) schemes in the United Kingdom and an Employee Share Purchase Plan (ESPP) in the United States. Options under the SAYE schemes are granted at a 20% discount to market price of the underlying shares on the date of announcement of the scheme and at a 15% discount to the lower of the market prices at the beginning and end of the scheme for the ESPP. The UK SAYE schemes are approved by the UK tax authorities, which stipulates that the saving period must be at least 36 months. The Company has
recognized a compensation charge in respect of the SAYE plans and US ESPPs. The charges for these are calculated as detailed above.
The Company also has a Long Term Incentive Plan (LTIP) on which it is also required to recognize a compensation charge under IFRS 2, calculated as detailed above.
The share-based payments charge is allocated to cost of sales, research and development expenses, sales and marketing expenses and general and administrative expenses on the basis of head count.
Employer’s taxes on share options
Employer’s National Insurance in the United Kingdom and equivalent taxes in other jurisdictions are payable on the exercise of certain share options and vesting of share awards. In accordance with IFRS 2, this is treated as a cash-settled transaction. A provision is made, calculated using the intrinsic value of the relevant options and awards at the balance sheet date, pro-rated over the vesting period of the options.
Treasury shares
Where the Company purchases its own equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs is deducted from equity attributable to the Company’s equity holders until the shares are cancelled or reissued. Where such shares are subsequently sold or reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to equity holders of the Company.
Equity instruments
Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs.
1c Financial risk management
The Company operates in the intensely competitive semiconductor industry which has been characterized by price erosion, rapid technological change, short product life cycles, cyclical market patterns and heightened foreign and domestic competition. Significant technological changes in the industry could affect operating results.
The Company’s operations expose it to a variety of financial risks that include currency risk, interest rate risk, securities price risk, credit risk and liquidity risk.
Given the size of the Company, the directors have not delegated the responsibility for monitoring financial risk management to a sub-committee of the board. The policies set by the board of directors are implemented by the Company’s finance department. The Company has a treasury policy that sets out specific guidelines to manage currency risk, interest rate risk, credit risk and liquidity risk and also sets out circumstances where it would be appropriate to use financial instruments to manage these.
Currency risk
The Company’s earnings and liquidity are affected by fluctuations in foreign currency exchange rates, principally in respect of the US dollar, reflecting the fact that most of its revenues and cash receipts are denominated in US dollars, while a significant proportion of its costs are settled in sterling. The Company seeks to use currency exchange contracts and currency options to manage the US dollar/sterling risk as appropriate, by monitoring the timing and value of anticipated US dollar receipts (which tend to arise from low-volume, high-value license deals and royalty receipts) in comparison with its requirement to settle certain expenses in US dollars. The Company reviews the resulting exposure on a regular basis and hedges this exposure using currency exchange contracts and currency options for the sale of US dollars as appropriate. Such contracts are entered into with the objective of matching their maturity with projected US dollar cash receipts.
The Company is also exposed to currency risk in respect of the foreign currency denominated assets and liabilities of its overseas subsidiaries. At present, the Company does not mitigate this risk, for example by using foreign currency intra-group loans, as it has currently no requirement for external borrowings.
At December 31, 2010, the Company had outstanding currency exchange contracts to sell $65 million (2009: $45 million) for sterling. In addition, the Company utilizes option instruments which have various provisions that, depending on the spot rate at maturity, give either the Company or the counterparty the option to exercise. At December 31, 2010, the Company had outstanding currency options under which the Company may, under certain circumstances, be required to sell up to $208 million (2009: $106 million) for sterling. A common scenario with options of this type is that the spot price at expiry is such that neither the Company nor the counterparty chooses to exercise the option. The Company had $153 million (2009: $87 million) of accounts receivable denominated in US dollars at that date, and US dollar cash, cash equivalents, short-term investments and short-term marketable securities balances of $16 million (2009: $26 million). Thus, the Company’s currency exchange contracts and currency options at year-end potentially exceeded its US dollar current assets. This is because the Company has taken longer term positions through its currency exchange contracts given the expected nature of the Company’s cash flows.
The Company has elected not to apply hedge accounting, and all movements in the fair value of derivative foreign exchange instruments are recorded in the income statement, offsetting the foreign exchange movements on the accounts receivable, cash, cash equivalents, short-term investments and short-term marketable securities balances being hedged.
In addition, certain customers remit royalties and license fees in other currencies, primarily the euro. The Company is also required to settle certain expenses in euros, primarily in its French and German subsidiaries, and as the net amounts involved are not considered significant, the Company does not take out euro currency exchange contracts.
As at December 31, 2010, if sterling had strengthened by 10% against foreign currencies with all other variables held constant, post-tax profit for the year would have been £4.9 million lower (2009: sterling strengthened by 10%, post-tax profit lower by £2.7 million, 2008: sterling weakened by 10%, post tax-profit lower by £4.2 million), mainly as a result of the mix of financial instruments at respective year-ends.
Interest rate risk
At December 31, 2010, the Company had £305.1 million (2009: £148.8 million) of interest-bearing assets. At December 31, 2010, 89% (2009: 75%) of interest-bearing assets (comprising cash and cash equivalents; short- and long-term deposits and marketable securities; loans and receivables; and the Company’s convertible loan notes), are at fixed rates and are therefore exposed to fair value interest rate risk. Floating rate cash earns interest based on relevant national LIBID or base rate equivalents and is therefore exposed to cash flow interest rate risk. The proportion of funds held in fixed rather than floating rate deposits is determined in accordance with the policy outlined under “Liquidity risk” below. Other financial assets, such as available-for-sale investments, are not directly exposed to interest rate risk.
Had interest rates been 1% lower throughout the year, interest receivable would have reduced by approximately £1.9 million (2009: £0.9 million) and profit after tax by £1.4 million (2009: £0.6 million).
The Company had no borrowings during 2009 or 2010.
The Company had no derivative financial instruments to manage interest rate fluctuations in place at year-end since it has no loan financing, and as such no hedge accounting is applied. The Company’s cash flow is carefully monitored on a daily basis. Excess cash, considering expected future cash flows, is placed on either short-term or long-term deposit to maximize the interest income thereon. Daily surpluses are swept into higher-interest earning accounts overnight.
Securities price risk
The Company is exposed to equity securities price risk on available-for-sale investments. As there can be no guarantee that there will be a future market for securities (which are generally unlisted at the time of investment) or
that the value of such investments will rise, the directors evaluate each investment opportunity on its merits before committing ARM’s funds. The board of directors reviews holdings in such companies on a regular basis to determine whether continued investment is in the best interests of the Company. Funds for such ventures are limited in order that the financial effect of any potential decline of the value of investments will not be substantial in the context of the Company’s financial results.
(i) Listed investments. At December 31, 2010 and December 31, 2009, the Company had no listed investments.
(ii) Unlisted investments. The Company had unlisted investments with a carrying value as at December 31, 2010 of £20.3 million (2009: £9.4 million). A permanent 10% fall in the underlying value of these companies as at December 31, 2010 would therefore have reduced the Company’s post-tax profit by £1.5 million (2009: £0.7 million, 2008: £0.1 million) and resulted in a £nil (2009: £nil) reduction in other components of equity.
Credit risk
Credit risk is managed on a Company basis. Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to customers, including outstanding receivables and committed transactions.
As at December 31, 2009 and 2010, the Company had no significant concentrations of credit risk. The amount of exposure to any individual counterparty is subject to a limit, which is reassessed periodically by the board of directors.
Financial instrument counterparties are subject to pre-approval by the board of directors and such approval is limited to financial institutions with at least an AA rating, or (in the case of UK building societies) had over £1 billion in assets, except in certain jurisdictions where the cash holding concerned is immaterial. At December 31, 2009 and 2010, the majority of the Company’s cash, cash equivalents, short- and long-term deposits and marketable securities were deposited with major clearing banks and building societies in the UK and US in the form of money market deposits and corporate bonds for varying periods up to two years.
Over 95% of the Company’s cash and cash equivalents, short- and long-term deposits and marketable securities were held with global financial institutions with at least an AA rating, or (in the case of UK building societies) had over £1 billion in assets, as at December 31, 2009 and 2010.
The Company has implemented policies that require appropriate credit checks on potential customers before sales commence. The Company generally does not require collateral on accounts receivable, as many of its customers are large, well-established companies. The Company has not experienced any significant losses related to individual customers or groups of customers in any particular industry or geographic area.
The Company markets and sells to a relatively small number of customers with individually large value transactions. At December 31, 2010, three (2009: one) customer accounted for just over 10% of accounts receivable. Monies from two of these customers have been received in full since the year end. The remaining customer (for which outstanding balances are not yet due) is one of many large, established semiconductor companies that accounted in total for over 90% of the year-end accounts receivable balance, where the risk of default on monies owed was deemed negligible. The Company performs credit checks on all customers (other than those paying in advance) in order to assess their credit-worthiness and ability to pay its invoices as they become due. As such, the balance of accounts receivable not owed by the large semiconductor companies is still deemed by management to be of low risk of default due to the nature of the checks performed on them, and accordingly a relatively small allowance against these receivables is in place to cover this low risk of default.
No credit limits were exceeded during the reporting period and management does not expect any losses from non-performance by these counterparties.
Liquidity risk
The Company’s policy is to maintain balances of cash, cash equivalents, short- and long-term deposits and marketable securities, such that highly liquid resources exceed the Company’s projected cash outflows at all times.
Surplus funds are placed on fixed- or floating-rate deposits depending on the prevailing economic climate at the time (with reference to forward interest rates) and also on the required maturity of the deposit (as driven by the expected timing of the Company’s cash receipts and payments over the short- to medium-term).
Management monitors rolling forecasts of the Company’s liquidity reserve on the basis of expected cash flow. This is carried out at both a local and a Company level with the local subsidiaries being funded by the Company as required.
The table below analyzes the Company’s financial liabilities which will be settled on a net basis into relevant maturity groupings based on the remaining period at the balance sheet to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances as the impact of discounting is not significant.
| | | | | | Between six months and one year £000 | |
| At December 31, 2010: | | | | | | |
Accounts payable | | | 4,305 | | | | — | |
Accrued and other liabilities | | | 41,789 | | | | — | |
| At December 31, 2009: | | | | | | | | |
Accounts payable | | | 2,280 | | | | — | |
Accrued and other liabilities | | | 29,577 | | | | — | |
The table below analyzes the Company’s derivative financial instruments which will be settled on a gross basis into relevant maturity groupings based on the remaining period at the balance sheet to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances as the impact of discounting is not significant.
| | | Less than three months 000s | | | Over three months but less than six months 000s | | | Between six months and one year 000s | |
| Forward foreign exchange contracts – held-for-trading at December 31, 2010 | | | | | | | | | |
Outflow | | $ | 65,000 | | | $ | — | | | $ | — | |
Inflow | | £ | 41,230 | | | £ | — | | | £ | — | |
| Foreign exchange options – held-for-trading at December 31, 2010 | | | | | | | | | | | | |
Outflow (maximum) | | $ | 60,000 | | | $ | 63,000 | | | $ | 85,500 | |
Inflow (maximum) | | £ | 40,238 | | | £ | 42,034 | | | £ | 56,155 | |
| Forward foreign exchange contracts – held-for-trading at December 31, 2009 | | | | | | | | | | | | |
Outflow | | $ | 42,000 | | | $ | 3,000 | | | $ | — | |
Inflow | | £ | 25,911 | | | £ | 1,892 | | | £ | — | |
| Foreign exchange options – held-for-trading at December 31, 2009 | | | | | | | | | | | | |
Outflow (maximum) | | $ | 36,000 | | | $ | 32,500 | | | $ | 37,500 | |
Inflow (maximum) | | £ | 23,463 | | | £ | 21,014 | | | £ | 24,599 | |
Capital risk management
The Company’s objectives when managing capital are to safeguard the Company’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. The capital structure of the Company consists of cash, cash
equivalents, short- and long-term deposits and marketable securities and capital and reserves attributable to equity holders of the Company, as disclosed in note 19 and the consolidated statement of changes in shareholders’ equity.
In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, sell assets to raise cash or take on debt.
Since 2004, the Company’s strategy has been to increase its balance sheet efficiency by reducing its cash balance via returning cash to shareholders through a progressive dividend policy and a share buyback program. Whilst the Company intends to further increase balance sheet efficiency over time, since 2008, recognizing the uncertain macroeconomic environment, the net cash balance was increased from £51.3 million at the start of 2008 to £78.8 million at December 31, 2008, £141.8 million at December 31, 2009 and to £291.8 million at December 31, 2010. In the year, the dividend was increased by 20% reflecting the board’s long-term confidence in the business. No share buybacks were made in the year, though the program remains in place and will be used as and when the board believe it is appropriate to do so. The capital structure is continually monitored by the Company.
Fair value of currency exchange contracts
The fair value of currency exchange contracts is estimated using the settlement rates. The estimation of the fair value of the liability in respect of currency exchange contracts is £201,000 at December 31, 2010 (2009: asset of £457,000). The resulting gains and losses on the movement of the fair value of currency exchange contracts is recognized in the income statement under general and administrative expenses, as shown below:
| | | | 2008 £000 | | | | 2009 £000 | | | | 2010 £000 | |
(Loss)/gain in income statement | | | (17,961 | ) | | | 18,914 | | | | (658 | ) |
Valuation hierarchy
The table below shows the financial instruments carried at fair value by valuation method:
| | | Level 1* | | | Level 2* | | | Level 3* | | | Total | |
| | £000 | | | £000 | | | £000 | | | £000 | |
| Assets | | | | | | | | | | | | | | | | |
| Fair value through the income statement: | | | | | | | | | | | | | | | | |
Embedded derivatives | | | — | | | | 2,303 | | | | — | | | | 2,303 | |
| | | | — | | | | 2,303 | | | | — | | | | 2,303 | |
| Available-for-sale: | | | | | | | | | | | | | | | | |
Other long-term investments | | | — | | | | — | | | | 20,329 | | | | 20,329 | |
| | | | — | | | | — | | | | 20,329 | | | | 20,329 | |
Total Assets | | | — | | | | 2,303 | | | | 20,329 | | | | 22,632 | |
| * | Level 1 valued using unadjusted quoted prices in active markets for identical instruments. Level 2 valued using techniques based significantly on observable market data. Level 3 valued using information other than observable market data. |
As at December 31, 2010 there was a liability for currency exchange contacts of £201,000 (2009: £nil), which is considered to be a level 2 valuation.
| | | Level 1* | | | Level 2* | | | Level 3* | | | Total | |
| | £000 | | | £000 | | | £000 | | | £000 | |
| Assets | | | | | | | | | | | | | | | | |
| Fair value through the income statement: | | | | | | | | | | | | | | | | |
Embedded derivatives | | | — | | | | 2,480 | | | | — | | | | 2,480 | |
Currency exchange contracts | | | — | | | | 457 | | | | — | | | | 457 | |
| | | | — | | | | 2,937 | | | | — | | | | 2,937 | |
| Available-for-sale: | | | | | | | | | | | | | | | | |
Short-term marketable securities | | | 1,795 | | | | — | | | | — | | | | 1,795 | |
Other long-term investments | | | — | | | | — | | | | 9,432 | | | | 9,432 | |
| | | | 1,795 | | | | 2,937 | | | | 9,432 | | | | 11,227 | |
Total Assets | | | 1,795 | | | | 2,937 | | | | 9,432 | | | | 14,164 | |
Level 3 financial assets
| | | Other long-term investments £000 | |
| Balance at January 1, 2010 | | | 9,432 | |
| Additions | | | 11,019 | |
| Disposals | | | (122 | ) |
| Balance at December 31, 2010 | | | 20,329 | |
| | | Other long-term investments £000 | |
| Balance at January 1, 2009 | | | 1,167 | |
| Additions | | | 9,116 | |
| Disposals | | | (439 | ) |
| Impairments | | | (412 | ) |
| Balance at December 31, 2009 | | | 9,432 | |
1d Critical accounting estimates and judgments
The preparation of financial statements in accordance with generally accepted accounting principles requires the directors to make critical accounting estimates and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates and judgments are continually evaluated and are based on historical experiences and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.
Impairment of goodwill
The Company tests goodwill for impairment at least annually. This requires an estimation of the value in use of the cash generating units (CGUs) to which goodwill is allocated. As discussed in detail in note 15, estimating the value in use requires the Company to make an estimate of the expected future cash flows from the CGUs and also to choose a suitable discount rate in order to calculate the present values of those cash flows. The Company uses a pre-tax discount rate of approximately 11% (2009: 12%).
Revenue recognition
Revenue from the sale of license agreements which are designed to meet the specific requirements of each customer is recognized on a percentage-of-completion method basis. Use of this method requires the directors to estimate the total project resource requirement and also any losses on uncompleted contracts.
Provisions for income taxes
The Company is subject to income taxes in numerous jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Company recognizes liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax
outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.
Provision for impairment of trade receivables
The Company assesses trade receivables for impairment which requires the directors to estimate the likelihood of payment forfeiture by customers.
Legal settlements and other contingencies
Determining the amount to be accrued for legal settlement requires the directors to estimate the committed future legal and settlement fees that the Company is expecting to incur. Where suits are filed against the Company for infringement of patents, the directors assess the extent of any potential infringement based on legal advice and written opinions received from external counsel and then estimate the level of accrual required.
Contingent consideration for an acquisition is recognized as part of the purchase consideration if the contingent conditions are expected to be satisfied. This requires the directors to estimate the acquiree’s future financial performance, typically more than one year post-acquisition.
At December 31, 2010, the Company was organized on a worldwide basis into three main business segments:
Processor Division (PD), encompassing those resources that are centered around microprocessor cores, including specific functions such as graphics IP, fabric IP, embedded software and configurable digital signal processing IP.
Physical IP Division (PIPD), concerned with the building blocks necessary for translation of a circuit design into actual silicon.
System Design Division (SDD), focused on the tools and models used to create and debug software and system-on-chip (SoC) designs.
This is based upon the Company’s internal organization and management structure and is the primary way in which the CODM is provided with financial information. Whilst revenues are also reported into four main revenue streams (namely licensing, royalties, development systems and services), the costs, operating results and balance sheets are only analysed into these three divisions. Further, the information provided to the CODM is based on the normalized profit before tax and therefore this information is provided as well as the equivalent profits stated under IFRS.
The reconciling items: intangible amortisation and other acquisition related charges; share-based payments costs including employers taxes; restructuring and investment related charges are analysed below in addition to an analysis of revenues; operating costs; investment income; interest payable and similar charges; profit/(loss) before tax; tax; profit/(loss) after tax; depreciation; capital expenditure; total assets and liabilities; net assets and goodwill for each segment and the Company in total.
Business segment information
Year ended December 31, 2010 | | | | | | | | | | | | | | | |
| Segmental income statement | | | | | | | | | | | | | | | |
Revenue | | | 315,747 | | | | 54,855 | | | | 35,993 | | | | — | | | | 406,595 | |
Operating costs | | | (179,224 | ) | | | (82,519 | ) | | | (39,493 | ) | | | 1,600 | | | | (299,636 | ) |
Investment income | | | — | | | | — | | | | — | | | | 3,634 | | | | 3,634 | |
| Interest payable and similar charges | | | — | | | | — | | | | — | | | | (566 | ) | | | (566 | ) |
Profit/(loss) before tax | | | 136,523 | | | | (27,664 | ) | | | (3,500 | ) | | | 4,668 | | | | 110,027 | |
Tax | | | — | | | | — | | | | — | | | | (24,053 | ) | | | (24,053 | ) |
Year ended December 31, 2010 | | | | | | | | | | | | | | | |
Profit/(loss) for the year | | | 136,523 | | | | (27,664 | ) | | | (3,500 | ) | | | (19,385 | ) | | | 85,974 | |
| Reconciliation to normalized profit/(loss) before tax | | | | | | | | | | | | | | | | | | | | |
Intangible amortization and other acquisition related charges | | | 2,181 | | | | 8,413 | | | | 801 | | | | — | | | | 11,395 | |
Share-based payment costs including employer’s taxes | | | 24,969 | | | | 9,949 | | | | 6,992 | | | | — | | | | 41,910 | |
Restructuring charges | | | (358 | ) | | | — | | | | (15 | ) | | | — | | | | (373 | ) |
Investment related charges | | | 4,448 | | | | — | | | | — | | | | — | | | | 4,448 | |
| Normalized profit/(loss) before tax | | | 167,763 | | | | (9,302 | ) | | | 4,278 | | | | 4,668 | | | | 167,407 | |
Segmental balance sheet | | | | | | | | | | | | | | | | | | | | |
Total assets | | | 239,918 | | | | 414,929 | | | | 29,820 | | | | 399,995 | | | | 1,084,662 | |
Total liabilities | | | (115,854 | ) | | | (38,576 | ) | | | (14,609 | ) | | | (20,718 | ) | | | (189,757 | ) |
Net assets | | | 124,064 | | | | 376,353 | | | | 15,211 | | | | 379,277 | | | | 894,905 | |
Other segmental items | | | | | | | | | | | | | | | | | | | | |
| Depreciation | | | 3,045 | | | | 2,470 | | | | 604 | | | | — | | | | 6,119 | |
Capital expenditure | | | 3,889 | | | | 2,773 | | | | 693 | | | | — | | | | 7,355 | |
Goodwill | | | 139,560 | | | | 377,767 | | | | 14,958 | | | | — | | | | 532,285 | |
Revenue (US dollar) | | $ | 490,747 | | | $ | 85,143 | | | $ | 55,417 | | | | — | | | $ | 631,307 | |
Year ended December 31, 2009 | | | | | | | | | | | | | | | |
| Segmental income statement | | | | | | | | | | | | | | | |
Revenue | | | 227,191 | | | | 44,890 | | | | 32,941 | | | | — | | | | 305,022 | |
Operating costs | | | (148,820 | ) | | | (81,070 | ) | | | (37,019 | ) | | | 7,501 | | | | (259,408 | ) |
Investment income | | | — | | | | — | | | | — | | | | 1,788 | | | | 1,788 | |
| Interest payable and similar charges | | | — | | | | — | | | | — | | | | (143 | ) | | | (143 | ) |
Profit/(loss) before tax | | | 78,371 | | | | (36,180 | ) | | | (4,078 | ) | | | 9,146 | | | | 47,259 | |
Tax | | | — | | | | — | | | | — | | | | (6,820 | ) | | | (6,820 | ) |
Profit/(loss) for the year | | | 78,371 | | | | (36,180 | ) | | | (4,078 | ) | | | 2,326 | | | | 40,439 | |
| Reconciliation to normalized profit/(loss) before tax | | | | | | | | | | | | | | | | | | | | |
Intangible amortization and other acquisition related charges | | | 2,598 | | | | 12,056 | | | | 1,500 | | | | — | | | | 16,154 | |
Share-based payment costs including employer’s taxes | | | 13,906 | | | | 6,489 | | | | 4,304 | | | | — | | | | 24,699 | |
Restructuring charges | | | 7,292 | | | | 348 | | | | 831 | | | | — | | | | 8,471 | |
Investment related charges | | | 188 | | | | — | | | | — | | | | — | | | | 188 | |
| Normalized profit/(loss) before tax | | | 102,355 | | | | (17,287 | ) | | | 2,557 | | | | 9,146 | | | | 96,771 | |
| Segmental balance sheet | | | | | | | | | | | | | | | | | | | | |
Total assets | | | 215,271 | | | | 402,223 | | | | 28,089 | | | | 198,900 | | | | 844,483 | |
Total liabilities | | | (54,457 | ) | | | (24,839 | ) | | | (9,234 | ) | | | (17,256 | ) | | | (105,786 | ) |
Net assets | | | 160,814 | | | | 377,384 | | | | 18,855 | | | | 181,644 | | | | 738,697 | |
| Other segmental items | | | | | | | | | | | | | | | | | | | | |
Depreciation | | | 2,775 | | | | 2,140 | | | | 703 | | | | — | | | | 5,618 | |
Capital expenditure | | | 2,860 | | | | 3,427 | | | | 588 | | | | — | | | | 6,875 | |
Goodwill | | | 135,723 | | | | 366,258 | | | | 14,817 | | | | — | | | | 516,798 | |
Revenue (US dollar) | | | 365,730 | | | | 72,148 | | | | 51,575 | | | | — | | | | 489,453 | |
Year ended December 31, 2008 | | | | | | | | | | | | | | | |
| Segmental income statement | | | | | | | | | | | | | | | |
Revenue | | | 221,354 | | | | 46,432 | | | | 31,148 | | | | — | | | | 298,934 | |
Operating costs | | | (124,597 | ) | | | (73,173 | ) | | | (38,189 | ) | | | (3,032 | ) | | | (238,991 | ) |
Investment income | | | — | | | | — | | | | — | | | | 3,297 | | | | 3,297 | |
Interest payable | | | — | | | | — | | | | — | | | | (51 | ) | | | (51 | ) |
Profit/(loss) before tax | | | 96,757 | | | | (26,741 | ) | | | (7,041 | ) | | | 214 | | | | 63,189 | |
Tax | | | — | | | | — | | | | — | | | | (19,597 | ) | | | (19,597 | ) |
Profit/(loss) for the year | | | 96,757 | | | | (26,741 | ) | | | (7,041 | ) | | | (19,383 | ) | | | 43,592 | |
| Reconciliation to normalized profit/(loss) before tax | | | | | | | | | | | | | | | | | | | | |
Intangible amortization and other acquisition related charges | | | 1,337 | | | | 16,116 | | | | 2,530 | | | | — | | | | 19,983 | |
Share-based payment costs including employer’s taxes | | | 9,208 | | | | 3,821 | | | | 2,879 | | | | — | | | | 15,908 | |
Restructuring charges | | | — | | | | 1,359 | | | | 513 | | | | — | | | | 1,872 | |
Investment related charges | | | | | | | | | | | | | | | | | | | | |
| Normalized profit/(loss) before tax | | | 107,302 | | | | (5,445 | ) | | | (1,119 | ) | | | 214 | | | | 100,952 | |
| Segmental balance sheet | | | | | | | | | | | | | | | | | | | | |
Total assets | | | 235,899 | | | | 463,302 | | | | 32,136 | | | | 116,846 | | | | 848,183 | |
Total liabilities | | | (41,696 | ) | | | (20,192 | ) | | | (10,617 | ) | | | (35,335 | ) | | | (107,840 | ) |
Net assets | | | 194,203 | | | | 443,110 | | | | 21,519 | | | | 81,511 | | | | 740,343 | |
| Other segmental items | | | | | | | | | | | | | | | | | | | | |
Depreciation | | | 2,740 | | | | 1,496 | | | | 934 | | | | — | | | | 5,170 | |
Capital expenditure | | | 3,444 | | | | 4,466 | | | | 810 | | | | — | | | | 8,720 | |
Goodwill | | | 143,649 | | | | 407,940 | | | | 16,255 | | | | — | | | | 567,844 | |
Revenue (US dollar) | | | 403,541 | | | | 84,874 | | | | 57,796 | | | | — | | | | 546,211 | |
There are no inter-segment revenues. Unallocated operating costs are foreign exchange revaluation on monetary items, including cash and cash equivalents. Unallocated assets and liabilities include: cash and cash equivalents; short- and long-term deposits; available-for-sale investments; marketable securities; loans and receivables; embedded derivatives; fair value of currency exchange contracts; deferred tax balances; current tax and VAT. Capital expenditure comprises additions to property, plant and equipment and other intangible assets, including additions resulting from acquisitions through business combinations. The results of each segment have been prepared using accounting policies consistent with those of the Company as a whole.
Geographical information
The Company manages its business segments on a global basis. The operations are based in three main geographical areas. The United Kingdom is the home country of the parent. The main operations are in the following principal territories:
Analysis of revenue by destination*:
| | | | 2008 £000 | | �� | | 2009 £000 | | | | 2010 £000 | |
United States | | | 90,648 | | | | 84,747 | | | | 129,252 | |
Taiwan | | | 26,746 | | | | 34,828 | | | | 51,839 | |
South Korea | | | 33,472 | | | | 41,381 | | | | 48,664 | |
Japan | | | 54,561 | | | | 48,014 | | | | 46,405 | |
China | | | 10,008 | | | | 15,835 | | | | 30,722 | |
British Virgin Islands | | | 15,985 | | | | 14,550 | | | | 21,346 | |
| | | | 2008 £000 | | | | 2009 £000 | | | | 2010 £000 | |
| Germany | | | 10,451 | | | | 8,481 | | | | 16,271 | |
Netherlands | | | 16,410 | | | | 14,347 | | | | 14,794 | |
Switzerland | | | 5,409 | | | | 10,369 | | | | 13,316 | |
Rest of Europe | | | 19,214 | | | | 13,936 | | | | 13,930 | |
Rest of North America | | | 6,370 | | | | 10,702 | | | | 10,460 | |
Rest of Asia Pacific | | | 9,660 | | | | 7,832 | | | | 9,596 | |
| | | | 298,934 | | | | 305,022 | | | | 406,595 | |
| * | Destination is defined as the location of ARM’s customers. |
The Company’s revenue within the home country of the parent company amounted to £3.8 million, £1.7 million and £3.5 million for the years ended December 31, 2010, 2009 and 2008, respectively.
The Company’s exports from the United Kingdom were £391.0 million, £293.2 million and £281.1 million for the years ended December 31, 2010, 2009 and 2008, respectively.
Analysis of revenue by origin:
| | | | 2008 £000 | | | | 2009 £000 | | | | 2010 £000 | |
Europe* | | | 286,299 | | | | 296,785 | | | | 396,399 | |
United States | | | 12,181 | | | | 7,838 | | | | 9,901 | |
Asia Pacific | | | 454 | | | | 399 | | | | 295 | |
| | | | 298,934 | | | | 305,022 | | | | 406,595 | |
| * | Includes the United Kingdom which had total revenues of £394.8 million in 2010 (2009: £295.0 million, 2008: £284.6 million). |
Analysis of revenue by revenue stream:
| | | | 2008 £000 | | | | 2009 £000 | | | | 2010 £000 | |
Licensing | | | 103,506 | | | | 98,446 | | | | 132,528 | |
Royalties | | | 147,728 | | | | 155,447 | | | | 217,624 | |
Services | | | 16,552 | | | | 18,188 | | | | 20,450 | |
Development systems | | | 31,148 | | | | 32,941 | | | | 35,993 | |
| | | | 298,934 | | | | 305,022 | | | | 406,595 | |
Analysis of non-current assets (excluding deferred tax assets, goodwill and other intangible assets):
| | | | 2008 £000 | | | | 2009 £000 | | | | 2010 £000 | |
Europe* | | | 8,278 | | | | 14,410 | | | | 43,134 | |
United States | | | 8,502 | | | | 7,975 | | | | 7,088 | |
Asia Pacific | | | 2,411 | | | | 2,223 | | | | 2,808 | |
| | | | 19,191 | | | | 24,608 | | | | 53,030 | |
| * | Includes the United Kingdom which had non-current assets (excluding deferred tax assets, goodwill and other intangible assets) of £42.7 million in 2010 (2009: £14.0 million, 2008: £7.8 million). |
| 3 | Key management compensation and directors’ emoluments |
Key management compensation
The directors are of the opinion that the key management of the Company comprises the executive and non-executive directors of ARM Holdings plc together with the Executive Committee (comprising all directors of ARM Limited and certain senior management). These persons have authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly. At December 31, 2010, key management comprised 22 people (2009: 21).
The aggregate amounts of key management compensation are set out below:
| | | | 2008 £000 | | | | 2009 £000 | | | | 2010 £000 | |
Salaries and short-term employee benefits | | | 5,756 | | | | 6,441 | | | | 8,395 | |
Share-based payments | | | 3,114 | | | | 2,697 | | | | 2,976 | |
| Company pension contributions to money purchase schemes | | | 312 | | | | 341 | | | | 393 | |
| | | | 9,182 | | | | 9,479 | | | | 11,764 | |
Directors’ emoluments
The aggregate emoluments of the directors of the Company are set out below:
| | | | 2008 £000 | | | | 2009 £000 | | | | 2010 £000 | |
| Aggregate emoluments in respect of qualifying services | | | 3,602 | | | | 3,842 | | | | 4,632 | |
| Aggregate Company pension contributions to money purchase schemes | | | 194 | | | | 203 | | | | 226 | |
Aggregate gains on exercise of share options | | | 12 | | | | 976 | | | | 6,178 | |
| Aggregate amounts receivable under the Long Term Incentive Plan | | | 635 | | | | 477 | | | | 5,133 | |
| | | | 4,443 | | | | 5,498 | | | | 16,169 | |
The average number of persons, including executive directors, employed monthly by the Company during the year was:
| | | | | | | | | | |
| By segment | | | | | | | | | |
Processor Division | | | 834 | | | | 893 | | | | 1,031 | |
Physical IP Division | | | 532 | | | | 512 | | | | 496 | |
System Design Division | | | 345 | | | | 318 | | | | 272 | |
| | | | 1,711 | | | | 1,723 | | | | 1,799 | |
| | | | | | | | | | |
| By activity | | | | | | | | | |
Research and development | | | 1,115 | | | | 1,141 | | | | 1,208 | |
Sales and marketing | | | 350 | | | | 334 | | | | 337 | |
General and administrative | | | 246 | | | | 248 | | | | 254 | |
| | | | 1,711 | | | | 1,723 | | | | 1,799 | |
| | | | 2008 £000 | | | | 2009 £000 | | | | 2010 £000 | |
| Staff costs (for the above persons) | | | | | | | | | | | | |
Wages and salaries | | | 96,893 | | | | 106,711 | | | | 124,412 | |
Restructuring costs | | | 2,166 | | | | 8,659 | | | | 373 | |
Share-based payments (note 22) | | | 15,409 | | | | 19,001 | | | | 27,129 | |
Social security costs | | | 10,698 | | | | 12,362 | | | | 16,288 | |
Other pension costs | | | 4,594 | | | | 5,281 | | | | 5,871 | |
| | | | 129,760 | | | | 152,014 | | | | 174,073 | |
| 5 | Profit before tax: analysis of expenses by nature |
The following items have been charged/(credited) to the income statement in arriving at profit before tax:
| | | | 2008 £000 | | | | 2009 £000 | | | | 2010 £000 | |
| Staff costs, including share-based payments (note 4) | | | 129,760 | | | | 152,014 | | | | 174,073 | |
| Cost of inventories recognized as an expense (included in cost of sales) | | | 3,522 | | | | 2,659 | | | | 3,308 | |
| Depreciation of property, plant and equipment – owned assets (note 14) | | | 5,170 | | | | 5,618 | | | | 6,119 | |
| Amortization of other intangible assets (note 16): | | | | | | | | | | | | |
Cost of sales | | | 463 | | | | 385 | | | | 255 | |
Research and development | | | 10,854 | | | | 7,656 | | | | 3,544 | |
Sales and marketing | | | 8,074 | | | | 8,483 | | | | 7,851 | |
General and administrative | | | 2,391 | | | | 2,811 | | | | 2,180 | |
Impairment of available-for-sale investments | | | — | | | | 412 | | | | — | |
| Profit on disposal of available-for-sale investment | | | — | | | | (224 | ) | | | (37 | ) |
| Loss on disposal of property, plant and equipment and intangible assets | | | 36 | | | | 79 | | | | 252 | |
| Other operating lease rentals payable: | | | | | | | | | | | | |
Plant and machinery | | | 12,075 | | | | 17,524 | | | | 21,837 | |
Property | | | 6,960 | | | | 6,610 | | | | 6,323 | |
| Accounts receivables impairment (including movement in provision) | | | 3,702 | | | | 1,018 | | | | (904 | ) |
| Foreign exchange gains/(losses) (including movement on embedded derivatives) | | | 3,032 | | | | (7,309 | ) | | | (1,501 | ) |
Services provided by the Company’s auditor and its associates
During the year the Company (including its overseas subsidiaries) obtained the following services from the Company’s auditor and its associates:
| | | | 2008 £000 | | | | 2009 £000 | | | | 2010 £000 | |
| Fees payable to the Company’s auditor for the audit of the Company and consolidated financial statements | | | 294 | | | | 241 | | | | 243 | |
| Fees payable to the Company’s auditor and its associates for other services: | | | | | | | | | | | | |
| The audit of the Company’s subsidiaries pursuant to legislation | | | 247 | | | | 238 | | | | 230 | |
| Services pursuant to section 404 of the Sarbanes-Oxley Act | | | 255 | | | | 247 | | | | 240 | |
Other services pursuant to legislation | | | 52 | | | | 86 | | | | 81 | |
| Statutory audit, financial reporting and other related services | | | 848 | | | | 812 | | | | 794 | |
| | | | 2008 £000 | | | | 2009 £000 | | | | 2010 £000 | |
Tax services | | | 364 | | | | 412 | | | | 174 | |
All other services | | | 430 | | | | 109 | | | | 50 | |
| | | | 1,642 | | | | 1,333 | | | | 1,018 | |
Analysis of charges in the year:
| | | | 2008 £000 | | | | 2009 £000 | | | | 2010 £000 | |
Current tax: | | | | | | | | | | | | |
Current tax on profits for the year | | | 25,458 | | | | 20,456 | | | | 31,391 | |
Adjustments in respect of prior years | | | (707 | ) | | | (2,664 | ) | | | 298 | |
| Total current tax | | | 24,751 | | | | 17,792 | | | | 31,689 | |
Deferred tax | | | (5,154 | ) | | | (10,972 | ) | | | (7,636 | ) |
Income tax expense | | | 19,597 | | | | 6,820 | | | | 24,053 | |
Analysis of tax on items charged to equity:
| | | | 2008 £000 | | | | 2009 £000 | | | | 2010 £000 | |
| Deferred tax credit on available-for-sale investments | | | 84 | | | | − | | | | − | |
| Deferred tax charge/(credit) on outstanding share options and awards | | | 1,838 | | | | (9,593 | ) | | | (29,033 | ) |
Current tax benefit on share options and awards | | | (808 | ) | | | (785 | ) | | | (7,601 | ) |
The tax for the year is different to the standard rate of corporation tax in the United Kingdom as explained below:
| | | | 2008 £000 | | | | 2009 £000 | | | | 2010 £000 | |
Profit before tax | | | 63,189 | | | | 47,259 | | | | 110,027 | |
| Profit before tax multiplied by rate of corporation tax in the UK of 28% (2009: 28%, 2008: 28.5%) | | | 18,009 | | | | 13,233 | | | | 30,808 | |
| Effects of: | | | | | | | | | | | | |
Adjustments to tax in respect of prior years | | | (707 | ) | | | (2,664 | ) | | | 298 | |
Adjustments in respect of foreign tax rates | | | 1,174 | | | | 295 | | | | 1,203 | |
Research and development tax credits | | | (5,424 | ) | | | (5,650 | ) | | | (7,265 | ) |
Permanent differences–foreign exchange | | | 279 | | | | 4,462 | | | | − | |
Permanent differences–other* | | | 1,979 | | | | 402 | | | | 1,340 | |
| Permanent differences–recognition of US deferred tax assets | | | (1,786 | ) | | | — | | | | (4,005 | ) |
Foreign withholding tax | | | 2,551 | | | | 1,648 | | | | 2,013 | |
Amortization of other intangible assets | | | (1,524 | ) | | | (1,294 | ) | | | (641 | ) |
| Timing differences in respect of share-based payments | | | 3,170 | | | | (3,612 | ) | | | 302 | |
Other differences | | | 1,876 | | | | — | | | | − | |
Total taxation | | | 19,597 | | | | 6,820 | | | | 24,053 | |
| * | Includes expenditure disallowable for tax purposes. |
Deferred tax
Deferred tax is calculated in full on temporary differences under the liability method using the tax rate relevant to each tax jurisdiction.
The movement on the deferred tax account is shown below:
| | | | 2008 £000 | | | | 2009 £000 | | | | 2010 £000 | |
At January 1 | | | 17,598 | | | | 22,840 | | | | 42,004 | |
Income statement credit | | | 5,154 | | | | 10,972 | | | | 7,636 | |
| Adjustment in respect of share-based payments | | | (1,838 | ) | | | 9,593 | | | | 29,033 | |
Exchange differences | | | 3,404 | | | | (1,408 | ) | | | (387 | ) |
Available-for-sale investments | | | (84 | ) | | | — | | | | − | |
| Amount acquired with subsidiary undertakings | | | (1,394 | ) | | | 7 | | | | − | |
At December 31 | | | 22,840 | | | | 42,004 | | | | 78,286 | |
Deferred tax assets have been partially recognized in respect of tax losses and other temporary differences giving rise to deferred tax assets because it is not probable that the unrecognized portion of these assets will be recovered. Previously unrecognized deferred tax assets of £4,005,000 in the US have been recognized due to the increased likelihood that these will be recoverable.
The amount of deferred tax assets unrecognized at December 31, 2010 is £1,425,000 (2009: £7,678,000).
No deferred tax has been recognized in respect of a further £23.0 million (2009: £29.0 million) of unremitted earnings of overseas subsidiaries because the Company is in a position to control the timing of the reversal of the differences and either it is probable that such differences will not reverse in the foreseeable future or no tax is payable on the reversal.
In June 2010, the UK government announced its intention to reduce the main rate of UK corporation tax from 28% to 24% by April 1, 2014 by enacting, every year until 2014, a reduction of 1%. At December 31, 2010, the first of these reductions, being a change in UK corporation tax rate from 28% to 27% on April 1, 2011, had been substantively enacted. The government also announced that the main rate of capital allowances will decrease from 20% to 18% from April 1, 2012. These changes have not had a material impact on the deferred tax balances as at December 31, 2010.
The movements in deferred tax assets and liabilities (prior to offsetting of balances within the same tax jurisdiction as permitted by IAS 12, “Income Taxes”) during the year are shown below. Deferred tax assets and liabilities are only offset where there is a legally enforceable right of offset and there is an intention to settle the balances net.
Deferred tax assets
| | | Amounts relating to share-based payments £000 | | | Temporary difference on available for-sale investments £000 | | | Temporary differences relating to fixed assets £000 | | | Tax losses and R&D tax credits carried forward £000 | | | Non deductible reserves £000 | | | | |
At January 1, 2010 | | | 18,945 | | | | 374 | | | | 6,914 | | | | 9,154 | | | | 12,075 | | | | 47,462 | |
| Income statement credit/(charge) | | | 614 | | | | (361 | ) | | | (1,046 | ) | | | 7,621 | | | | (2,470 | ) | | | 4,358 | |
| Movement on deferred tax arising on outstanding share options | | | 25,626 | | | | — | | | | — | | | | — | | | | — | | | | 25,626 | |
| Unutilized current year share option deductions | | | — | | | | — | | | | — | | | | 3,407 | | | | — | | | | 3,407 | |
Exchange differences | | | — | | | | — | | | | — | | | | (310 | ) | | | — | | | | (310 | ) |
| At December 31, 2010 (prior to offsetting) | | | 45,185 | | | | 13 | | | | 5,868 | | | | 19,872 | | | | 9,605 | | | | 80,543 | |
| Offsetting of deferred tax liabilities | | | | | | | | | | | | | | | | | | | | | | | (1,956 | ) |
| | | Amounts relating to share-based payments £000 | | | Temporary difference on available for-sale investments £000 | | | Temporary differences relating to fixed assets £000 | | | Tax losses and R&D tax credits carried forward £000 | | | Non deductible reserves £000 | | | | |
| At December 31, 2010 (after offsetting) | | | | | | | | | | | | | | | | | | | | | | | 78,587 | |
At January 1, 2009 | | | 5,150 | | | | 594 | | | | 7,306 | | | | 14,074 | | | | 9,604 | | | | 36,728 | |
| Income statement credit/(charge) | | | 5,311 | | | | (220 | ) | | | (392 | ) | | | (4,152 | ) | | | 2,471 | | | | 3,018 | |
| Movement on deferred tax arising on outstanding share options | | | 9,593 | | | | — | | | | — | | | | — | | | | — | | | | 9,593 | |
| Unutilized current year share option deductions | | | (1,109 | ) | | | — | | | | — | | | | 1,109 | | | | — | | | | — | |
Exchange differences | | | — | | | | — | | | | — | | | | (1,877 | ) | | | — | | | | (1,877 | ) |
| At December 31, 2009 (prior to offsetting) | | | 18,945 | | | | 374 | | | | 6,914 | | | | 9,154 | | | | 12,075 | | | | 47,462 | |
| Offsetting of deferred tax liabilities | | | | | | | | | | | | | | | | | | | | | | | (4,738 | ) |
| At December 31, 2009 (after offsetting) | | | | | | | | | | | | | | | | | | | | | | | 42,724 | |
Deferred tax liabilities
| | | Amounts relating to intangible assets arising on acquisition £000 | | | | | | | |
At January 1, 2010 | | | 4,763 | | | | 695 | | | | 5,458 | |
| Movement in respect on amortization of intangible assets | | | (3,361 | ) | | | — | | | | (3,361 | ) |
Other short-term differences | | | — | | | | 83 | | | | 83 | |
Exchange differences | | | 77 | | | | — | | | | 77 | |
At December 31, 2010 (prior to offsetting) | | | 1,479 | | | | 778 | | | | 2,257 | |
Offsetting of deferred tax assets | | | | | | | | | | | (1,956 | ) |
At December 31, 2010 (after offsetting) | | | | | | | | | | | 301 | |
At January 1, 2009 | | | 10,444 | | | | 3,444 | | | | 13,888 | |
Acquired with subsidiary (Logipard) | | | (7 | ) | | | — | | | | (7 | ) |
| Movement in respect on amortization of intangible assets | | | (5,205 | ) | | | — | | | | (5,205 | ) |
Other short-term differences | | | — | | | | (2,749 | ) | | | (2,749 | ) |
Exchange differences | | | (469 | ) | | | — | | | | (469 | ) |
At December 31, 2009 (prior to offsetting) | | | 4,763 | | | | 695 | | | | 5,458 | |
Offsetting of deferred tax assets | | | | | | | | | | | (4,738 | ) |
At December 31, 2009 (after offsetting) | | | | | | | | | | | 720 | |
The deferred tax liability due after more than one year prior to offsetting is £1,308,000 (2009: £1,198,000).
| | | | 2008 £000 | | | | 2009 £000 | | | | 2010 £000 | |
Final 2007 paid at 1.20 pence per share | | | 15,267 | | | | — | | | | — | |
Interim 2008 paid at 0.88 pence per share | | | 11,116 | | | | — | | | | — | |
Final 2008 paid at 1.32 pence per share | | | — | | | | 16,634 | | | | — | |
Interim 2009 paid at 0.97 pence per share | | | — | | | | 12,327 | | | | — | |
Final 2009 paid at 1.45 pence per share | | | — | | | | — | | | | 19,022 | |
Interim 2010 paid at 1.16 pence per share | | | — | | | | — | | | | 15,301 | |
| | | | 26,383 | | | | 28,961 | | | | 34,323 | |
In addition, the directors are proposing a final dividend in respect of the financial year ended December 31, 2010 of 1.74 pence per share which will absorb an estimated £23.4 million of shareholders’ funds. It will be paid on May 18, 2011 to shareholders who are on the register of members on May 3, 2011.
Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year, excluding those held as treasury stock which are treated as cancelled.
For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares. The Company had two categories of dilutive potential ordinary shares during the year: those being share options granted to employees and directors where the exercise price is less than the average market price of the Company’s ordinary shares during the year and the awards made under the Company’s Restricted Stock Unit (RSU), Deferred Annual Bonus Plan (DAB) and Long Term Incentive Plan (LTIP) schemes. For 2010, 2009 and 2008 no shares that were allocated for awards under the LTIP were included in the diluted EPS calculation as the performance criteria could not be measured until the conclusion of the performance period.
Reconciliations of the earnings and weighted average number of shares used in the calculations are shown on the face of the income statement.
| 9 | Cash and cash equivalents |
| | | | 2009 £000 | | | | 2010 £000 | |
Cash at bank and in hand | | | 32,489 | | | | 29,363 | |
| Bank deposits with original maturity of less than three months | | | 2,000 | | | | — | |
| | | | 34,489 | | | | 29,363 | |
Cash and cash equivalents. The carrying amount approximates to fair value because of the short-term maturity of these instruments being no greater than three months.
The effective interest rate on bank deposits (with original maturity of less than three months) outstanding as at December 31, 2009 was 1.5% and these deposits had an average maturity of 27 days.
| | | | 2009 £000 | | | | 2010 £000 | |
| Trade debtors (including receivables from related parties – see note 26) | | | 55,289 | | | | 99,068 | |
Less: Provision for impairment of trade debtors | | | (2,395 | ) | | | (2,091 | ) |
Trade debtors, net | | | 52,894 | | | | 96,977 | |
Amounts recoverable on contracts | | | 12,353 | | | | 8,691 | |
Current accounts receivable | | | 65,247 | | | | 105,668 | |
Movements in the Company’s provision for impairment of trade debtors are as follows:
| | | | 2008 £000 | | | | 2009 £000 | | | | 2010 £000 | |
At January 1 | | | (1,504 | ) | | | (1,744 | ) | | | (2,395 | ) |
Credit/(charge) to income statement | | | (641 | ) | | | (1,018 | ) | | | 904 | |
Reclassification/(utilized) | | | 430 | | | | 263 | | | | (543 | ) |
Foreign exchange | | | (29 | ) | | | 104 | | | | (57 | ) |
At December 31 | | | (1,744 | ) | | | (2,395 | ) | | | (2,091 | ) |
See also note 18 for further disclosure regarding the credit quality of the Company’s gross trade debtors.
| 11 | Prepaid expenses and other assets |
| | | | 2009 £000 | | | | 2010 £000 | |
Other receivables | | | 9,414 | | | | 5,968 | |
Prepayments and accrued income | | | 14,221 | | | | 12,463 | |
Current prepaid expenses and other assets | | | 23,635 | | | | 18,431 | |
Plus: non-current prepayments and accrued income | | | 1,611 | | | | 1,920 | |
Total prepaid expenses and other assets | | | 25,246 | | | | 20,351 | |
| | | | 2009 £000 | | | | 2010 £000 | |
Finished goods | | | 2,138 | | | | 2,043 | |
Less: Provision for obsolescence of inventories | | | (458 | ) | | | (259 | ) |
| | | | 1,680 | | | | 1,784 | |
| 13 | Available-for-sale financial assets |
Current:
| | | Short-term marketable securities £000 | |
| At January 1, 2010 | | | 1,795 | |
| Net cash redeemed in the year | | | (1,950 | ) |
| Revaluation through equity | | | 155 | |
| At December 31, 2010 | | | — | |
| | | Short-term marketable securities £000 | |
| At January 1, 2009 | | | 1,816 | |
| Revaluation through equity | | | 130 | |
| Exchange differences | | | (151 | ) |
| At December 31, 2009 | | | 1,795 | |
Non-Current:
| | | Other long-term investments £000 | |
| Net book value | | | |
| At January 1, 2010 | | | 9,432 | |
| Additions | | | 11,019 | |
| Disposals | | | (122 | ) |
| At December 31, 2010 | | | 20,329 | |
| | | Other long-term investments £000 | |
| Net book value | | | |
| At January 1, 2009 | | | 1,167 | |
| Additions | | | 9,116 | |
| Disposals | | | (439 | ) |
| Exchange differences | | | (412 | ) |
| At December 31, 2009 | | | 9,432 | |
Short-term marketable securities.
There is a readily available market for these investments. Unrealized gains and losses on these investments are recognized directly in equity via the revaluation reserve. The Company recognizes an impairment charge when the decline in fair value below cost is judged to be other than temporary. At December 31, 2009, the fair value was equal to cost. At December 31, 2010, the Company had no such securities.
Other long-term investments
Those unlisted companies in which the Company has invested are generally early-stage development enterprises, which are generating value for shareholders through research and development activities, and most do not currently report profits (carrying value at December 31, 2010: £20,329,000; 2009: £9,432,000). The directors are of the opinion that the fair value of these investments approximates to carrying value. Provisions have been made against other investments to reflect any impairment in value.
Additions in the year included:
– further convertible loan notes to Cognovo Limited (a UK company specializing in software-defined modem techniques and solutions);
– a 13% investment and a further convertible loan note to Ideaworks 3D Limited (a UK software company specializing in enabling games and applications to be deployed across multiple platforms and operating systems on mobile devices);
– a convertible loan note to Nethra Imaging Inc. (a US chip company specializing in imaging solutions);
– a 27% investment (comprising 13% voting and 14% non-voting shares) in Calxeda Inc. (a US company, formerly called Smooth-stone Inc., specializing in low-power server technology); and
– a 12% investment in Ambiq Micro Inc. (a US company specializing ultra low-power microcontrollers).
During the year, the Company disposed of its investment in CoWare Inc. (a company which develops system-on-chip software for a wide range of applications).
Other investments include a 5% holding in Arteris Holdings Inc. (a US network-on-chip company), a 5% holding in Carbon Design Systems Inc. (a US system-on-chip design solutions company), a 10% holding in Cyclos Semiconductor Inc. (a US company specializing in on-chip energy harvesting), a 5% holding in eSol Co. Ltd (an embedded software company in Japan) and a 5% holding in Triad Semiconductor Inc. (a US chip company specializing in mixed signal ASICs).
Available-for-sale financial assets include the following:
| | | | 2009 £000 | | | | 2010 £000 | |
Unlisted short-term marketable securities – United States | | | 1,795 | | | | − | |
Total current financial assets | | | 1,795 | | | | − | |
Unlisted equity securities – United Kingdom | | | 25 | | | | 579 | |
Unlisted equity securities – China | | | 123 | | | | 174 | |
Unlisted equity securities – Japan | | | 890 | | | | 890 | |
Unlisted equity securities – United States | | | 1,416 | | | | 5,613 | |
Convertible loan notes – United Kingdom | | | 6,615 | | | | 10,624 | |
Convertible loan notes – United States | | | 363 | | | | 2,449 | |
Total non-current financial assets | | | 9,432 | | | | 20,329 | |
Total financial assets | | | 11,227 | | | | 20,329 | |
Available-for-sale financial assets are denominated in the following currencies:
| | | | 2009 £000 | | | | 2010 £000 | |
Sterling | | | 9,069 | | | | 17,880 | |
US dollars | | | 2,158 | | | | 2,449 | |
Total financial assets | | | 11,227 | | | | 20,329 | |
| 14 | Property, plant and equipment |
| | | | | | Leasehold improvements £000 | | | | | | Fixtures, fittings and motor vehicles £000 | | | | |
| Cost | | | | | | | | | | | | | | | |
At January 1, 2010 | | | 190 | | | | 20,709 | | | | 21,686 | | | | 5,678 | | | | 48,263 | |
Additions | | | − | | | | 324 | | | | 5,161 | | | | 697 | | | | 6,182 | |
Disposals | | | − | | | | (3,709 | ) | | | (1,428 | ) | | | (1,298 | ) | | | (6,435 | ) |
Exchange differences | | | − | | | | 359 | | | | 512 | | | | 244 | | | | 1,115 | |
At December 31, 2010 | | | 190 | | | | 17,683 | | | | 25,931 | | | | 5,321 | | | | 49,125 | |
| Aggregate depreciation | | | | | | | | | | | | | | | | | | | | |
At January 1, 2010 | | | 87 | | | | 14,178 | | | | 17,027 | | | | 3,406 | | | | 34,698 | |
Charge for the year | | | 7 | | | | 1,537 | | | | 3,770 | | | | 805 | | | | 6,119 | |
Transfers | | | − | | | | 3 | | | | (3 | ) | | | − | | | | − | |
Disposals | | | − | | | | (3,613 | ) | | | (1,431 | ) | | | (1,191 | ) | | | (6,235 | ) |
Exchange differences | | | − | | | | 103 | | | | 367 | | | | 226 | | | | 696 | |
At December 31, 2010 | | | 94 | | | | 12,208 | | | | 19,730 | | | | 3,246 | | | | 35,278 | |
Net book value At December 31, 2010 | | | 96 | | | | 5,475 | | | | 6,201 | | | | 2,075 | | | | 13,847 | |
| | | | | | Leasehold improvements £000 | | | | | | Fixtures, fittings and motor vehicles £000 | | | | |
| Cost | | | | | | | | | | | | | | | |
At January 1, 2009 | | | 190 | | | | 19,573 | | | | 21,689 | | | | 6,127 | | | | 47,579 | |
Additions | | | − | | | | 2,610 | | | | 2,636 | | | | 784 | | | | 6,030 | |
Transfers | | | − | | | | (18 | ) | | | 76 | | | | (58 | ) | | | − | |
Disposals | | | − | | | | (840 | ) | | | (1,717 | ) | | | (789 | ) | | | (3,346 | ) |
Exchange differences | | | − | | | | (616 | ) | | | (998 | ) | | | (386 | ) | | | (2,000 | ) |
At December 31, 2009 | | | 190 | | | | 20,709 | | | | 21,686 | | | | 5,678 | | | | 48,263 | |
| | | | | | Leasehold improvements £000 | | | | | | Fixtures, fittings and motor vehicles £000 | | | | |
| Aggregate depreciation | | | | | | | | | | | | | | | | | | | | |
At January 1, 2009 | | | 79 | | | | 13,620 | | | | 16,218 | | | | 3,465 | | | | 33,382 | |
Charge for the year | | | 8 | | | | 1,434 | | | | 3,252 | | | | 924 | | | | 5,618 | |
Transfers | | | − | | | | 2 | | | | 10 | | | | (12 | ) | | | − | |
Disposals | | | − | | | | (742 | ) | | | (1,700 | ) | | | (776 | ) | | | (3,218 | ) |
Exchange differences | | | − | | | | (136 | ) | | | (753 | ) | | | (195 | ) | | | (1,084 | ) |
At December 31, 2009 | | | 87 | | | | 14,178 | | | | 17,027 | | | | 3,406 | | | | 34,698 | |
Net book value At December 31, 2009 | | | 103 | | | | 6,531 | | | | 4,659 | | | | 2,272 | | | | 13,565 | |
| | | | £000 | |
At January 1, 2009 | | | 567,844 | |
Revision to consideration and intangible assets – Logipard | | | 103 | |
Exchange differences | | | (51,149 | ) |
At December 31, 2009 | | | 516,798 | |
Exchange differences | | | 15,487 | |
At December 31, 2010 | | | 532,285 | |
During the fourth quarter of 2010, the Company tested its balance of goodwill for impairment in accordance with IAS 36, “Impairment of assets.” No impairment charge was recorded as a result of this annual impairment test.
Goodwill is allocated to the Company’s CGUs according to business segment. The carrying amounts of goodwill by CGU at December 31, 2010 are summarized below:
| | | | | | | | | System Design Division £000 | | | | |
Goodwill relating to Artisan | | | 125,923 | | | | 377,767 | | | | − | | | | 503,690 | |
Goodwill relating to Falanx | | | 9,400 | | | | − | | | | − | | | | 9,400 | |
Goodwill relating to Axys | | | − | | | | − | | | | 7,777 | | | | 7,777 | |
| Goodwill relating to KEG and KSI | | | − | | | | − | | | | 7,150 | | | | 7,150 | |
Goodwill relating to Logipard | | | 2,177 | | | | − | | | | − | | | | 2,177 | |
| Goodwill relating to other acquisitions | | | 2,060 | | | | − | | | | 31 | | | | 2,091 | |
| Goodwill at December 31, 2010 | | | 139,560 | | | | 377,767 | | | | 14,958 | | | | 532,285 | |
| Goodwill at December 31, 2009 | | | 135,723 | | | | 366,258 | | | | 14,817 | | | | 516,798 | |
The recoverable amount for each CGU has been measured based on a value-in-use calculation.
Processor Division (PD)
The Processor Division encompasses those resources that are centered around microprocessor cores, including specific functions such as graphics IP, fabric IP, embedded software IP and configurable digital signal processing (DSP) IP.
The key assumptions in the value-in-use calculations were:
Period over which the directors have projected cash flows. A ten-year forecast period is used with an assumed terminal growth rate after 2020 of 3% per annum. It is considered appropriate to use a ten-year forecast period to properly reflect the period over which the benefits of the acquired businesses to the Processor Division are expected to accrue.
Revenue growth. Revenue growth assumptions are based on financial budgets and forecasts approved by senior management, taking into account typical semiconductor industry growth rates and ARM’s historical experience in the context of wider industry and economic conditions.
Revenue attributable to the benefits afforded by owning the PIPD unit. The directors believe that revenue will accrue to PD as a result of the ownership of the Physical IP Division for the following reasons:
| | · | The development of faster and more power-efficient microprocessors as a result of collaboration between PD and PIPD engineering teams. This is expected to generate more PD licensing deals at higher prices; |
| | · | The potential for PD to win more microprocessor licensing business as a result of ARM being able to offer both processor and physical IP in-house; and |
| | · | The improvement in PD operating margins as a result of being able to transfer a number of engineering tasks to the Bangalore design center acquired with Artisan. |
Operating margins. Operating margins have been assumed to grow steadily over the period of the calculation.
Discount rate. Future cash flows are discounted at a rate of 10% per annum post tax.
The directors are confident that the amount of goodwill allocated to PD is appropriate and that the assumptions used in estimating its fair value are appropriate. While it is conceivable that a key assumption in the calculation could change, the directors believe that no reasonably foreseeable changes to key assumptions would result in an impairment of goodwill, such is the margin by which the estimated fair value exceeds the carrying value.
Physical IP Division (PIPD)
The Physical IP Division is concerned with the building blocks necessary for translation of a circuit design into actual silicon.
The key assumptions in the value in use calculations were:
Period over which the directors have projected cash flows A ten-year forecast period is used with an assumed terminal growth rate after 2020 of 3% per annum. Given the long-term nature of the ARM licensing and royalty business model, it is considered appropriate to use a ten-year forecast period to assess the expected future cash flows to be generated from the assets under review. The Company’s experience in PD indicates that the base of licenses grows gradually over time as licensees outsource an increasing proportion of their physical IP needs, with royalties, which are a function of the cumulative licensing base, increasing accordingly.
Revenue growth Revenue is assumed to grow by approximately 12% per annum on average for the next five years, falling to 4% per annum by 2020, reflecting the uncertainty of estimating revenues in the years further in the future. Since the acquisition of Artisan at the end of 2004, PIPD has accelerated the development of leading-edge physical IP technology. As semiconductor process geometries shrink, PIPD is expected to have more licensing opportunities across a broader range of foundries and other semiconductor companies. Royalty revenues are expected to increase going forward as a result of the growth in the installed license base, both before and after the acquisition of Artisan.
US dollar license revenues increased by 15% year-on-year in 2010 and royalty revenues increased by 21%. The increase in revenues was due not only to the improved economic climate during 2010 but also further success in signing licenses for leading edge physical IP technology. As a result, backlog increased by 34% in 2010 compared with the beginning of the year. The directors believe that the investment of the past few years in the technology portfolio will not only bring growth in future years to PIPD but also contribute significantly to the success of PD as the synergistic benefits of the combined technologies begin to accrue. Further evidence of this was seen in 2010 with a number of licenses being signed for Processor Optimization Packages (POPs). These POPs enable an enhanced performance in PD processors.
Operating margins Operating margins are assumed to increase gradually over time to around 30% by the end of the forecast period. In 2010, PIPD made a loss, mostly as a result of the continued level of investment in the development of leading-edge technology in advance of the revenues from both licensing and royalties being received. Margins are expected to improve significantly in future years as license revenues from leading-edge products gather pace and royalties increase at effectively 100% margins. Costs are expected to remain relatively flat in real terms.
This timescale is consistent with ARM’s experience in developing the processor licensing and royalty model. ARM has signed over 700 processor licenses with more than 250 customers over the last 20 years with less than half of these paying royalties thus far. As royalty revenues are a function of cumulative licensing, royalty growth gathers momentum as the licensing base grows – ARM processor royalties have increased from $38 million in 2002 to $291 million in 2010.
Discount rate Future cash flows are discounted at a rate of 10% per annum post tax.
The directors are confident that the amount of goodwill allocated to PIPD and the assumptions used in estimating its fair value are appropriate.
Whilst it is conceivable that a key assumption in the calculation could change, the directors believe that no reasonably foreseeable changes to key assumptions would result in an impairment of goodwill, such is the margin by which the estimated fair value exceeds the carrying value. The overall assessment is most sensitive to changes in the assumed revenues. Although an overall compound annual growth rate of 12% for the next five years, dropping to 4% by 2020 is anticipated by the directors in reaching their conclusions, an annual growth rate of 7% would support the carrying value of goodwill within the division.
System Design Division (SDD)
The System Design Division is concerned with the tools and models used to create and debug software and system-on-chip (SoC) designs.
The key assumptions in the value in use calculations were:
Period over which the directors have projected cash flows A five-year forecast period is used with an assumed terminal growth rate after 2015 of 3% per annum. It is considered appropriate to use a five-year forecast period to properly reflect the weighted average period over which the benefits of the acquisitions of Axys, KEG and KSI are expected to accrue.
Revenue growth. Revenue growth assumptions are based on financial budgets and forecasts approved by senior management, taking into account typical semiconductor industry growth rates and ARM’s historical experience in the context of wider industry and economic conditions.
Operating margins Operating margins are assumed to be around 14% on average during the period.
Discount rate Future cash flows are discounted at a rate of 10% per annum post tax.
The directors are confident that the amount of goodwill allocated to SDD and the assumptions used in estimating its fair value are appropriate. Whilst it is conceivable that a key assumption in the calculation could change, the directors believe that no reasonably foreseeable changes to key assumptions would result in an impairment of goodwill, such is the margin by which the estimated fair value exceeds the carrying value.
| 16 | Other intangible assets |
| | | | | | | | | In-process research and development £000 | | | | | | Existing agreements and customer relationships £000 | | | | | | Trademarks and trade names £000 | | | | | | | |
| Cost | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At January 1, 2010 | | | 9,587 | | | | 25,430 | | | | 6,007 | | | | 38,465 | | | | 53,825 | | | | 14,304 | | | | 4,491 | | | | 1,982 | | | | 154,091 | |
Additions | | | 1,173 | | | | − | | | | − | | | | − | | | | − | | | | − | | | | − | | | | − | | | | 1,173 | |
Disposals | | | (1,064 | ) | | | − | | | | − | | | | − | | | | − | | | | − | | | | − | | | | − | | | | (1,064 | ) |
| Exchange differences | | | 99 | | | | − | | | | 181 | | | | 362 | | | | 1,224 | | | | 449 | | | | 141 | | | | 62 | | | | 2,518 | |
| At December 31, 2010 | | | 9,795 | | | | 25,430 | | | | 6,188 | | | | 38,827 | | | | 55,049 | | | | 14,753 | | | | 4,632 | | | | 2,044 | | | | 156,718 | |
| Aggregate amortization | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At January 1, 2010 | | | 8,450 | | | | 16,649 | | | | 5,521 | | | | 32,386 | | | | 45,827 | | | | 14,304 | | | | 4,276 | | | | 1,982 | | | | 129,395 | |
| Charge for the year | | | 789 | | | | 2,102 | | | | 515 | | | | 3,028 | | | | 7,170 | | | | − | | | | 226 | | | | − | | | | 13,830 | |
Disposals | | | (866 | ) | | | − | | | | − | | | | − | | | | − | | | | − | | | | − | | | | − | | | | (866 | ) |
| Exchange differences | | | 76 | | | | − | | | | 152 | | | | 454 | | | | 937 | | | | 449 | | | | 130 | | | | 62 | | | | 2,260 | |
| At December 31, 2010 | | | 8,449 | | | | 18,751 | | | | 6,188 | | | | 35,868 | | | | 53,934 | | | | 14,753 | | | | 4,632 | | | | 2,044 | | | | 144,619 | |
| Net book value at December 31, 2010 | | | 1,346 | | | | 6,679 | | | | − | | | | 2,959 | | | | 1,115 | | | | − | | | | − | | | | − | | | | 12,099 | |
| | | | | | | | | In-process research and development £000 | | | | | | Existing agreements and customer relationships £000 | | | | | | | | | | | | | |
| Cost | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At January 1, 2009 | | | 9,639 | | | | 25,430 | | | | 6,497 | | | | 41,823 | | | | 58,762 | | | | 15,760 | | | | 4,949 | | | | 2,183 | | | | 165,043 | |
Additions | | | 845 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 845 | |
| Acquisition –Logipard | | | — | | | | — | | | | 98 | | | | (296 | ) | | | 175 | | | | — | | | | — | | | | — | | | | (23 | ) |
Disposals | | | (669 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (669 | ) |
| Exchange differences | | | (228 | ) | | | — | | | | (588 | ) | | | (3,062 | ) | | | (5,112 | ) | | | (1,456 | ) | | | (458 | ) | | | (201 | ) | | | (11,105 | ) |
| At December 31, 2009 | | | 9,587 | | | | 25,430 | | | | 6,007 | | | | 38,465 | | | | 53,825 | | | | 14,304 | | | | 4,491 | | | | 1,982 | | | | 154,091 | |
| Aggregate amortization | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At January 1, 2009 | | | 7,914 | | | | 14,417 | | | | 4,744 | | | | 31,579 | | | | 42,033 | | | | 12,677 | | | | 4,414 | | | | 2,183 | | | | 119,961 | |
| Charge for the year | | | 1,405 | | | | 2,232 | | | | 1,268 | | | | 3,473 | | | | 7,776 | | | | 2,898 | | | | 283 | | | | — | | | | 19,335 | |
Disposals | | | (669 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (669 | ) |
| Exchange differences | | | (200 | ) | | | — | | | | (491 | ) | | | (2,666 | ) | | | (3,982 | ) | | | (1,271 | ) | | | (421 | ) | | | (201 | ) | | | (9,232 | ) |
| At December 31, 2009 | | | 8,450 | | | | 16,649 | | | | 5,521 | | | | 32,386 | | | | 45,827 | | | | 14,304 | | | | 4,276 | | | | 1,982 | | | | 129,395 | |
| Net book value at December 31, 2009 | | | 1,137 | | | | 8,781 | | | | 486 | | | | 6,079 | | | | 7,998 | | | | — | | | | 215 | | | | — | | | | 24,696 | |
| 17 | Accrued and other liabilities |
| | | | 2009 £000 | | | | 2010 £000 | |
Accruals | | | | | | | | |
Provision for payroll taxes on share awards | | | 6,156 | | | | 17,722 | |
Employee bonus and sales commissions | | | 10,724 | | | | 22,719 | |
Other accruals | | | 23,851 | | | | 25,001 | |
| Total Accruals | | | 40,731 | | | | 65,442 | |
Other taxation and social security | | | 1,996 | | | | 2,561 | |
Other payables | | | 3,961 | | | | 4,025 | |
| | | | 46,688 | | | | 72,028 | |
(a) Financial instruments by category
The accounting policies for financial instruments have been applied to the line items below:
Financial assets
| | | | | | Assets at fair value through the income statement £000 | | | | | | | |
| At December 31, 2010 | | | | | | | | | | | | |
Cash and cash equivalents | | | 29,363 | | | | — | | | | — | | | | 29,363 | |
Short-term deposits | | | 247,466 | | | | — | | | | — | | | | 247,466 | |
Embedded derivatives | | | — | | | | 2,303 | | | | — | | | | 2,303 | |
| Accounts receivable (gross of impairment provision) | | | 107,759 | | | | — | | | | — | | | | 107,759 | |
Total current financial assets | | | 384,588 | | | | 2,303 | | | | — | | | | 386,891 | |
| Available-for-sale investments – unlisted | | | — | | | | — | | | | 20,329 | | | | 20,329 | |
| Long-term deposits | | | 15,000 | | | | — | | | | — | | | | 15,000 | |
| Loans and receivables | | | 1,934 | | | | — | | | | — | | | | 1,934 | |
| Total non-current financial assets | | | 16,934 | | | | — | | | | 20,329 | | | | 37,263 | |
Total financial assets | | | 401,522 | | | | 2,303 | | | | 20,329 | | | | 424,154 | |
| At December 31, 2009 | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | | 34,489 | | | | — | | | | — | | | | 34,489 | |
Short-term deposits | | | 105,524 | | | | — | | | | — | | | | 105,524 | |
| Short-term marketable securities | | | — | | | | — | | | | 1,795 | | | | 1,795 | |
Embedded derivatives | | | — | | | | 2,480 | | | | — | | | | 2,480 | |
Currency exchange contracts | | | — | | | | 457 | | | | — | | | | 457 | |
| Accounts receivable (gross of impairment provision) | | | 67,642 | | | | — | | | | — | | | | 67,642 | |
Total current financial assets | | | 207,655 | | | | 2,937 | | | | 1,795 | | | | 212,387 | |
| Non-current available-for-sale investments – unlisted | | | — | | | | — | | | | 9,432 | | | | 9,432 | |
Total financial assets | | | 207,655 | | | | 2,937 | | | | 11,227 | | | | 221,819 | |
Financial liabilities
| | | | 2009 £000 | | | | 2010 £000 | |
| Liabilities at amortized cost at December 31: | | | | | | | | |
| Accounts payable | | | 2,280 | | | | 4,305 | |
Accrued and other liabilities | | | 29,577 | | | | 41,789 | |
| | | | 31,857 | | | | 46,094 | |
| Liabilities at fair value through the income statement at December 31: | | | | | | | | |
Currency exchange contracts | | | — | | | | 201 | |
Total financial liabilities | | | 31,857 | | | | 46,295 | |
Loans and receivables
During 2010 the Company invested £2.5 million in an interest-free charitable bond with Future Business.This has been recognized in loans and receivables at its initial fair value of £1,934,000, measured using the effective interest method, which resulted in a charge of £566,000 being recognised as interest payable and similar charges.
Short-term deposits
The effective interest rate on short-term deposits outstanding at the year-end was 1.78% (2009: 1.92%) and these deposits have an average maturity of 159 days (2009: 126 days).
Long-term deposits
The effective interest rate on long-term deposits outstanding at the year-end was 2.53% and these deposits have an average maturity of 543 days
(b) Credit quality of financial assets
Trade debtors
On a quarterly basis, all trade debtors more than three months overdue are considered for impairment on a line-by-line basis. Either a provision is made or the lack thereof is justified, with review by senior members of the Company’s finance team.
| | | | 2009 £000 | | | | 2010 £000 | |
| Trade debtors (gross of impairment provision): | | | | | | | | |
Not yet due | | | 30,255 | | | | 66,012 | |
Under 90 days overdue | | | 18,922 | | | | 27,260 | |
Over 90 days but not provided for | | | 3,717 | | | | 3,705 | |
Fully provided for | | | 2,395 | | | | 2,091 | |
Total | | | 55,289 | | | | 99,068 | |
As shown above, at December 31, 2010 trade receivables less than 90 days overdue amounted to £27.3 million. Of those outstanding at December 31, 2010, £11.8 million had been collected by January 31, 2011 and £14.3 million were owed by large, established customers. Similarly, debtors more than 90 days overdue and not provided for amounted to £3.7 million of which £1.3 million had been collected by January 31, 2011 and £1.7 million was owed by large, established customers. For the remainder, discussions regarding repayment are ongoing and repayment schedules have been agreed with the customers concerned. These will be monitored on a quarterly basis in accordance with the control outlined above. No further analysis has been provided here on the quality of these debts as they are not felt to pose a material threat to the Company’s future results.
As shown above, at December 31, 2010, trade debtors fully provided for amounted to £2.1 million (2009: £2.4 million). Of those provided for at December 31, 2010, £nil million relates to trade debtors that are between three and six months overdue (2009: £0.2 million) and £2.1 million relates to trade debtors that are over six months overdue (2009: £2.2 million).
Highly liquid financial assets
As at December 31, 2010, 97% (2009: 91%) of the Company’s cash and cash equivalents, short- and long-term deposits and marketable securities were held with institutions that had either an AA rating or, in the case of UK building societies, had over £1 billion in assets.
| | | 2009 £000 | | | | 2010 £000 | |
| 2,200,000,000 ordinary shares of 0.05 pence each (2009: 2,200,000,000) | | | 1,100 | | | | 1,100 | |
| | | | | | 2010 | |
| | | | | | | | | | | | Value £000 | |
| Issued and fully paid | | | | | | | | | | | |
At January 1 and December 31 | | | 1,344,056 | | | | 672 | | | | 1,344,056 | | | | 672 | |
| | | | |
| At January 1, 2010 | | | 65,102 | |
| Issuance of shares | | | (43,043 | ) |
| | | 22,059 | |
| At January 1, 2009 | | | 107,963 | |
| | | (42,861 | ) |
| | | 65,102 | |
No shares were repurchased during 2009 or 2010.
At December 31, 2010, a total of 21.6 million shares (2009: 60.3 million) were held as Treasury stock. At December 31, 2010, own shares held have a nominal value of 0.05 pence (2009: 0.05 pence) and in total represent 1.6% (2009: 4.5%) of called-up share capital.
There were no acquisitions in 2009 or 2010.
The Company has several share option schemes in current operation, whereby options over shares in the Company can be granted to employees and directors. The different schemes are described below, but all options are granted with a fixed exercise price equal to the market price of the shares under option at the date of grant, except for those options within the SAYE and ESPP schemes as detailed below. Furthermore, from 2006, the Company has issued Restricted Stock Units (RSUs) to employees instead of options which are actual share awards on vesting rather than options to buy shares at a fixed exercise price. Whilst the Company reserves the right to award options to employees going forward, the majority of awards to employees will be in RSUs.
Under the UK Inland Revenue Executive Approved Share Option Plan (the “Executive Scheme”), the Company may grant options to employees meeting certain eligibility requirements. Options under the Executive Scheme are exercisable between three and ten years after their issue, after which time the options expire.
Under the Company’s Unapproved Scheme (the “Unapproved Scheme”), for which it has not sought approval from the UK tax authorities, options are exercisable one to seven years after their issue, after which time the options expire. The Company also operates the US ISO Scheme, which is substantially the same as the Unapproved Scheme, the main difference being that the options are exercisable one to five years after their issue. Under both of these schemes options are exercisable as follows: 25% maximum on first anniversary, 50% maximum on second anniversary, 75% maximum on third anniversary, 100% maximum on fourth anniversary. Various options to directors under the Unapproved Scheme have certain performance criteria attached, which if met are exercisable after three years, otherwise they will become exercisable after seven years.
There is a further scheme for our French employees (the “French Scheme”). In the French Scheme, options are exercisable between four and seven years after their issue.
Upon the acquisition of Artisan in 2004, the Company assumed the share schemes of Artisan existing at acquisition. The schemes remained substantially the same as prior to the acquisition, other than the options became options to purchase shares in ARM Holdings plc instead of Artisan Components Inc. The number and value of options were amended in line with the conversion ratio as detailed in the merger agreement. The schemes assumed were the “1993 Plan”, the “2000 Plan”, the “2003 Plan”, and the “ND00 Plan”.
Under each plan, there are multiple vesting templates and vesting periods. The majority of the options were already vested upon acquisition, and the most common template was 25% vesting after one year, and then 6.25% vesting each quarter thereafter, until 100% vest after four years. Some options vest on a monthly basis, and some vest over five years. All options lapse ten years from the date of grant.
The Company also offers savings-related share option schemes (SAYE) for all non-US employees and executive directors of the Company. The number of options granted is related to the value of savings made by the employee. The period of savings is three or five years. The option price for grants made since 2007 was set at 80% of the market share price prior to the announcement of the grant, but in previous years was set at 85%, and the right to exercise normally only arises for a six-month period once the savings have been completed. In 2007, the Company commenced a new savings-related option scheme for US employees, namely the Employee Share Purchase Plan (ESPP). The number of options granted is related to the value of savings made by the employee. The period of savings is six months, with the option price being at 85% of the lower of the market share price at the beginning and end of the scheme.
The main RSU awards (to employees in all jurisdictions other than France) vest similarly to the unapproved scheme above, namely 25% on each anniversary over four years. RSU awards to our French employees vest 50% after two years, and then a further 25% after three and four years.
Additionally, the Company operates a Deferred Annual Bonus plan (DAB). Under the DAB, which is for directors and selected senior management within the Company, participants are required to defer 50% of any related annual bonus into shares on a compulsory basis. These shares will be deferred for three years, and then a further matching award will be made depending on the achievement of an EPS performance condition over that time. The Company also operates the Long Term Incentive Plan (LTIP), also for directors and selected senior management, whereby share awards are made and vest depending on the Company’s TSR performance compared to two comparator groups over the three-year performance period.
As disclosed in note 4, staff expenses arising from these share-based compensation schemes of £27.1 million (2009: £19.0 million) were charged to the income statement in the year. This is in line with the Company’s policies for recognition and measurement of the costs associated with these remuneration schemes as outlined in note 1.
The fair value of options granted was estimated on the date of grant using the Black-Scholes option pricing model, except for the ESPP whose fair value is the intrinsic value of the award at the date of vest. The following assumptions for each option grant during 2009 and 2010 were as follows:
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Share price at grant date | | £ | 1.949 | | | £ | 2.847 | | | £ | 3.08 | | | £ | 0.965 | | | £ | 1.14 | | | £ | 1.24 | |
Exercise price | | £ | 1.0387 | | | £ | 1.948 | | | £ | 1.6567 | | | £ | 0.8203 | | | £ | 0.854 | | | £ | 0.816 | |
Number of employees | | | 287 | | | | 232 | | | | 291 | | | | 275 | | | | 183 | | | | 304 | |
Shares under option | | | 1,024,154 | | | | 609,763 | | | | 651,371 | | | | 1,368,689 | | | | 1,175,528 | | | | 1,170,412 | |
Vesting period (years) | | | – | | | | 3–5 | | | | – | | | | — | | | | 3–5 | | | | — | |
Expected volatility | | | – | | | | 40%-45 | % | | | – | | | | — | | | | 40%–44 | % | | | — | |
Expected life (years) | | | – | | | | 3–5 | | | | – | | | | — | | | | 3–5 | | | | — | |
Risk-free rate | | | – | | | | 0.5 | % | | | – | | | | — | | | | 0.5 | % | | | — | |
Dividend yield | | | – | | | | 0.85 | % | | | – | | | | — | | | | 1.93 | % | | | — | |
Fair value per option | | £ | 0.9353 | | | £ | 1.219-1.267 | | | £ | 1.4234 | | | £ | 0.1447 | | | £ | 0.416–0.433 | | | £ | 0.424 | |
The fair value of RSUs, LTIP and DAB awards granted was estimated on the date of grant using the Black-Scholes option pricing model. As all are share awards with no exercise price, all awards have been deemed to have an exercise price of £0.0000001 in the Black-Scholes model. The following assumptions for each grant during 2009 and 2010 were as follows:
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Share price at grant date | | £ | 2.05 | | | £ | 2.05 | | | £ | 2.05 | | | £ | 2.05 | | | £ | 2.305 | |
Number of employees | | | 41 | | | | 1,508 | | | | 81 | | | | 41 | | | | 76 | |
Shares awarded | | | 1,008,683 | | | | 10,917,393 | | | | 552,771 | | | | 2,477,746 | | | | 393,850 | |
Vesting period (years) | | | – | | | | 1–4 | | | | 2–4 | | | | 3 | | | | 1–4 | |
Expected volatility | | | 45 | % | | | 34%-46 | % | | | 41%-46 | % | | | 45 | % | | | 32%-45 | % |
Expected life (years) | | | 3 | | | | 1–4 | | | | 2–4 | | | | 3 | | | | 1–4 | |
Risk-free rate | | | 0.5 | % | | | 0.5 | % | | | 0.5 | % | | | 0.5 | % | | | 0.5 | % |
Dividend yield | | | 1.18 | % | | | 1.18 | % | | | 1.18 | % | | | 1.18 | % | | | 1.05 | % |
Fair value per option | | £ | 1.979 | | | £ | 1.955–2.026 | | | £ | 1.955–2.002 | | | £ | 1.979 | | | £ | 2.21-2.281 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Share price at grant date | | £ | 2.305 | | | £ | 3.088 | | | £ | 3.088 | | | £ | 3.506 | | | £ | 3.506 | |
Number of employees | | | 1 | | | | 97 | | | | 3 | | | | 103 | | | | 6 | |
Shares awarded | | | 13,500 | | | | 478,370 | | | | 20,000 | | | | 459,475 | | | | 11,300 | |
Vesting period (years) | | | 2–4 | | | | 1–4 | | | | 2–4 | | | | 1–4 | | | | 2–4 | |
Expected volatility | | | 41%-45 | % | | | 35%-46 | % | | | 42%-46 | % | | | 37%-46 | % | | | 39%-46 | % |
Expected life (years) | | | 2–4 | | | | 1–4 | | | | 2–4 | | | | 1–4 | | | | 2–4 | |
Risk-free rate | | | 0.5 | % | | | 0.5 | % | | | 0.5 | % | | | 0.5 | % | | | 0.5 | % |
Dividend yield | | | 1.05 | % | | | 0.94 | % | | | 0.94 | % | | | 0.83 | % | | | 0.83 | % |
Fair value per option | | £ | 2.21-2.257 | | | £ | 2.974–3.059 | | | £ | 2.974–3.031 | | | £ | 3.392–3.477 | | | £ | 3.392–3.448 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Share price at grant date | | £ | 0.9975 | | | £ | 0.9975 | | | £ | 0.9975 | | | £ | 0.9975 | | | £ | 1.125 | |
Number of employees | | | 41 | | | | 1,534 | | | | 76 | | | | 42 | | | | 54 | |
Shares awarded | | | 1,727,602 | | | | 13,942,683 | | | | 750,214 | | | | 5,430,827 | | | | 477,000 | |
Vesting period (years) | | | — | | | | 1–4 | | | | 2–4 | | | | 3 | | | | 1–4 | |
Expected volatility | | | 43 | % | | | 40%-55 | % | | | 40%-49 | % | | | 43 | % | | | 41%-53 | % |
Expected life (years) | | | 3 | | | | 1–4 | | | | 2–4 | | | | 3 | | | | 1–4 | |
Risk-free rate | | | 1.0 | % | | | 1.0 | % | | | 1.0 | % | | | 1.0 | % | | | 0.5 | % |
Dividend yield | | | 2.21 | % | | | 2.21 | % | | | 2.21 | % | | | 2.21 | % | | | 1.96 | % |
Fair value per option | | £ | 0.934 | | | £ | 0.913–0.976 | | | £ | 0.913–0.954 | | | £ | 0.934 | | | £ | 1.04–1.103 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Share price at grant date | | £ | 1.125 | | | £ | 1.246 | | | £ | 1.246 | | | £ | 1.586 | | | £ | 1.586 | |
Number of employees | | | 3 | | | | 35 | | | | 2 | | | | 26 | | | | 2 | |
Shares awarded | | | 19,500 | | | | 215,450 | | | | 6,000 | | | | 157,550 | | | | 18,000 | |
Vesting period (years) | | | 2–4 | | | | 1–4 | | | | 2–4 | | | | 1–4 | | | | 2–4 | |
Expected volatility | | | 41%-50 | % | | | 41%-50 | % | | | 41%-50 | % | | | 40%-50 | % | | | 41%-50 | % |
Expected life (years) | | | 2–4 | | | | 1–4 | | | | 2–4 | | | | 1–4 | | | | 2–4 | |
Risk-free rate | | | 0.5 | % | | | 0.5 | % | | | 0.5 | % | | | 0.5 | % | | | 0.5 | % |
Dividend yield | | | 1.96 | % | | | 1.94 | % | | | 1.94 | % | | | 1.53 | % | | | 1.53 | % |
Fair value per option | | £ | 1.04–£1.082 | | | £ | 1.153–£1.222 | | | £ | 1.153–£1.199 | | | £ | 1.492–£1.562 | | | £ | 1.492–£1.538 | |
| | | |
| | | |
Share price at grant date | | £ | 1.547 | |
Number of employees | | | 4 | |
Shares awarded | | | 20,500 | |
Vesting period (years) | | | 1–4 | |
Expected volatility | | | 39%-50 | % |
Expected life (years) | | | 1–4 | |
Risk-free rate | | | 0.5 | % |
Dividend yield | | | 1.56 | % |
Fair value per option | | £ | 1.453–£1.523 | |
The expected volatility was primarily based upon historical volatility adjusted for past one-time events that are not expected to re-occur. The expected life is the expected period to exercise.
A reconciliation of option and share award movements during the year to December 31, 2010 is shown below. Share awards do not have an exercise price and therefore the reconciliation below shows only the number of awards, with no corresponding weighted average exercise prices.
| | | | | | | |
| | | | | | Weighted average exercise price | | | | | | | | | Weighted average exercise price | | | | |
| Outstanding at January 1 | | | 62,053,652 | | | £ | 1.057 | | | | 28,871,631 | | | | 34,862,762 | | | £ | 1.013 | | | | 41,221,041 | |
Granted | | | 3,714,629 | | | £ | 0.830 | | | | 22,862,829 | | | | 2,285,288 | | | £ | 1.457 | | | | 18,801,305 | |
Forfeited | | | (1,682,666 | ) | | £ | 1.180 | | | | (1,335,190 | ) | | | (207,688 | ) | | £ | 1.346 | | | | (1,639,124 | ) |
Lapsed | | | (6,266,711 | ) | | £ | 1.958 | | | | (1,295,244 | ) | | | (703,974 | ) | | £ | 3.213 | | | | — | |
Exercised | | | (22,956,142 | ) | | £ | 0.831 | | | | (7,882,985 | ) | | | (22,783,528 | ) | | £ | 1.054 | | | | (15,913,696 | ) |
| Outstanding at December 31 | | | 34,862,762 | | | £ | 1.013 | | | | 41,221,041 | | | | 13,452,860 | | | £ | 0.899 | | | | 42,469,526 | |
| Exercisable at December 31 | | | 29,090,453 | | | £ | 1.021 | | | | — | | | | 8,377,656 | | | £ | 0.819 | | | | — | |
The weighted average share price at the date of exercise or vest of the above share options and awards was £2.34 (2009: £1.29).
The following options over ordinary shares were in existence at December 31:
| | | | | | Weighted average exercise price (£) | | | Weighted average remaining life Expected | | | Weighted average remaining life Contractual | |
| Outstanding options: | | | | | | | | | | | | | |
| 0.22–0.4375 | | | | 1,604,754 | | | | 0.30 | | | | 0.56 | | | | 1.11 | |
| 0.47–0.9475 | | | | 7,417,573 | | | | 0.71 | | | | 1.36 | | | | 2.27 | |
| 1.005–1.055 | | | | 1,730,025 | | | | 1.05 | | | | 0.67 | | | | 1.32 | |
| 1.0575–1.25 | | | | 461,049 | | | | 1.20 | | | | 0.74 | | | | 1.37 | |
| 1.325–3.75 | | | | 2,239,459 | | | | 1.79 | | | | 1.45 | | | | 2.15 | |
Total | | | | 13,452,860 | | | | 0.90 | | | | 1.17 | | | | 1.96 | |
| | | | | | Weighted average exercise price (£) | | | Weighted average remaining life Expected | | | Weighted average remaining life Contractual | |
| Outstanding RSU/LTIP/DAB awards: | | | | | | | | | | | | | | | | | |
0.00 (RSUs) | | | | 27,690,117 | | | | — | | | | 1.25 | | | | 1.25 | |
0.00 (LTIP) | | | | 11,474,982 | | | | — | | | | 0.96 | | | | 0.96 | |
0.00 (DAB) | | | | 3,304,427 | | | | — | | | | 1.16 | | | | 1.16 | |
Total | | | | 42,469,526 | | | | — | | | | 1.17 | | | | 1.17 | |
| | | | | | Weighted average exercise price (£) | | | Weighted average remaining life Expected | | | Weighted average remaining life Contractual | |
| Outstanding options: | | | | | | | | | | | | | |
| 0.19–0.45 | | | | 5,429,016 | | | | 0.28 | | | | 0.76 | | | | 1.55 | |
| 0.47–0.9475 | | | | 9,602,312 | | | | 0.69 | | | | 2.13 | | | | 3.49 | |
| 1.005–1.055 | | | | 6,857,892 | | | | 1.05 | | | | 0.98 | | | | 2.20 | |
| 1.0575–1.25 | | | | 6,598,545 | | | | 1.23 | | | | 0.72 | | | | 1.34 | |
| 1.325–7.738 | | | | 6,374,997 | | | | 1.85 | | | | 1.07 | | | | 2.59 | |
Total | | | | 34,862,762 | | | | 1.01 | | | | 1.23 | | | | 2.36 | |
| | | | | | | | | | | | | | | | | | |
| Outstanding RSU/LTIP/DAB awards: | | | | | | | | | | | | | | | | | |
0.00 (RSUs) | | | | 25,795,320 | | | | — | | | | 1.33 | | | | 1.33 | |
0.00 (LTIP) | | | | 12,099,901 | | | | — | | | | 1.32 | | | | 1.32 | |
0.00 (DAB) | | | | 3,325,820 | | | | — | | | | 1.36 | | | | 1.36 | |
Total | | | | 41,221,041 | | | | — | | | | 1.33 | | | | 1.33 | |
| 23 | Capital and other financial commitments |
| | | | 2009 £000 | | | | 2010 £000 | |
| Capital expenditure commitments | | | 778 | | | | 694 | |
| Other financial commitments (expenditure on investments) | | | 1,500 | | | | 3,044 | |
| Contracts placed for future capital expenditure and other financial expenditure not provided in the financial statements | | | 2,278 | | | | 3,738 | |
| 24 | Operating lease commitments–minimum lease payments |
At December 31, 2009 and 2010, the Company had commitments under non-cancellable operating leases as follows:
| | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| The future aggregate minimum lease payment, under non-cancellable operating leases are as follows: | | | | | | | | | | | | | | | | | | |
Within one year | | | 5,348 | | | | 16,357 | | | | 21,705 | | | | 6,176 | | | | 14,042 | | | | 20,218 | |
| Later than one year and less than five years | | | 14,759 | | | | 14,544 | | | | 29,303 | | | | 16,932 | | | | 2,187 | | | | 19,119 | |
After five years | | | 3,263 | | | | — | | | | 3,263 | | | | 7,185 | | | | — | | | | 7,185 | |
At December 31 | | | 23,370 | | | | 30,901 | | | | 54,271 | | | | 30,293 | | | | 16,229 | | | | 46,522 | |
| 25 | Financial contingencies |
Guarantees. It is common industry practice for licensors of technology to offer to indemnify their licensees for loss suffered by the licensee in the event that the technology licensed is held to infringe the intellectual property of a third party. Consistent with such practice, the Company provides such indemnification to its licensees but subject, in all cases, to a limitation of liability. The obligation for the Company to indemnify its licensees is subject to certain provisos and is usually contingent upon a third party bringing an action against the licensee alleging that the technology licensed by the Company to the licensee infringes such third party’s intellectual property rights. The indemnification obligations typically survive any termination of the license and will continue in perpetuity.
The Company does not provide for any such guarantees unless it has received notification from the other party that they are likely to invoke the guarantee. The provision is made if both of the following conditions are met: (i) information available prior to the issuance of the financial statements indicates that it is probable that a liability had been incurred at the date of the financial statements; and (ii) the amount of the liability can be reasonably estimated. Any such provision is based upon the directors’ estimate of the fair value of expected costs of any such claim.
| 26 | Related party transactions |
During 2009, the Company received funding for SOI technology development of £1,033,000 from SOI TEC Silicon On Insulator Technologies SA (Soitec), a company of which Doug Dunn, Group Chairman, is a non-executive director. No amounts were outstanding from Soitec in relation to this funding at either December 31, 2010 or 2009. During 2009 the Company also invoiced £409,000 to Soitec in relation to an IP license which was fully outstanding at December 31, 2009. This has been settled in full during 2010. Furthermore, the Company was invoiced £390,000 in 2009 by Soitec in relation to license income from the two parties’ ongoing collaborative agreement to develop SOI technology. Amounts owed to Soitec at December 31, 2010 in relation to this agreement were £nil (2009: £390,000).
As at December 31, 2009, £139,000 was owing to the Company by Netronome Systems Inc., a company of which John Scarisbrick (a non-executive director of the Company) is Chairman. During 2010 this balance was repaid in full and no further amounts invoiced.
During the year, the Company was invoiced £3,190,000 in subscription fees by its associated company, Linaro Limited. As at December 31, 2010, £1,029,000 was outstanding. In addition the Company provided consulting and other services to Linaro of £1,050,000. As at December 31, 2010, £595,000 was owed to the Company. Further information relating to Linaro is disclosed in note 28.
There were no other related party transactions during 2010 which require disclosure.
Key management compensation is disclosed in note 3.
| 27 | Post-balance sheet events |
After the year-end, the directors proposed payment of a final dividend in respect of 2010 of 1.74 pence per share. Subject to shareholder approval, the final dividend will be paid on May 18, 2011 to shareholders on the register on May 3, 2011. The final dividend has not been recognized as a distribution during the year ended December 31, 2010.
| 28 | Principal subsidiaries and associates |
Details of principal subsidiary undertakings are shown below. Not all subsidiaries are included as the list would be excessive in length. A full list is filed in the Company’s annual return. All investments are indirctly held unless otherwise shown.
| | | Proportion of total nominal value of issued shares held |
| ARM Limited | England and Wales | Marketing, research and development of RISC-based microprocessors and physical IP components | 100* |
| ARM Inc. | US | Marketing, research and development of RISC-based microprocessors and physical IP components | 100 |
| ARM KK | Japan | Marketing of RISC-based microprocessors and physical IP | 100 |
| ARM Korea Limited | South Korea | Marketing of RISC-based microprocessors and physical IP | 100 |
| ARM France SAS | France | Marketing and development of RISC-based microprocessors and physical IP | 100 |
| ARM Norway AS | Norway | Development of IP | 100 |
| ARM Sweden AB | Sweden | Development of IP | 100 |
| ARM Germany GmbH | Germany | Marketing and development of RISC-based microprocessor IP, integrated processor modelling solutions and microcontroller tools | 100 |
| ARM Embedded Technologies Pvt. Limited | India | Marketing, research and development of RISC-based microprocessors and physical IP | 100 |
| ARM Physical IP Asia Pacific Pte. Limited | Singapore | Marketing of RISC-based microprocessors and physical IP | 100 |
| ARM Taiwan Limited | Taiwan | Marketing of RISC-based microprocessors and physical IP | 100 |
| ARM Consulting (Shanghai) Co. Limited | PR China | Marketing of RISC-based microprocessors and physical IP | 100 |
| * | The Company itself owns less than 1% of the share capital of ARM Limited, the remaining shares are held indirectly through ARM Finance UK Limited and ARM Finance UK Three Limited. Both ARM Finance UK Limited and ARM Finance UK Three Limited are 100% owned within the Company. |
During 2010, the Group was a founder member in the creation of Linaro Limited (Linaro), a not for profit company created to foster innovation in the Linux community. Linaro is a company limited by guarantee and as such has no shareholders. From incorporation to the end of September 2010, the Group controlled a majority of the board of Linaro, and as such treated it as a subsidiary undertaking during that period. Following the appointment of additional third party directors at the end of September 2010, the Group now controls only 25% of the board and therefore considers Linaro to be an associate rather than a subsidiary. During 2010, Linaro made no profit or loss and has nil net assets at December 31 2010.
