| Notes to Financial Statements | |
| 6 Months Ended
Aug. 01, 2009
USD / shares
|
| Notes to Financial Statements [Abstract] | |
| Note 1. The Company and its Significant Accounting Policies |
Note 1. The Company and its Significant Accounting Policies
The Company
Marvell Technology Group Ltd., a Bermuda company (the Company), is a leading global semiconductor provider of high-performance application specific standard products. The Companys core strength of expertise is the development of complex System-on-a-Chip devices leveraging its extensive technology portfolio of intellectual property in the areas of analog, mixed-signal, digital signal processing and embedded ARM-based microprocessor integrated circuits. The Companys broad product portfolio includes devices for data storage, enterprise-class Ethernet data switching, Ethernet physical-layer transceiver handheld cellular, Ethernet-based wireless networking, personal area networking, Ethernet-based PCconnectivity, control plane communications controllers, video-image processing and power management solutions.
Basis of presentation
The Companys fiscal year is the 52- or 53-week period ending on the Saturday closest to January31. In a 52-week year, each fiscal quarter consists of 13 weeks. The additional week in a 53-week year is added to the fourth quarter, making such quarter consist of 14 weeks. Fiscal 2010 and fiscal 2009 are comprised of a 52-week period.
The unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for annual financial statements. In the opinion of management, all adjustments consisting of normal and recurring entries considered necessary for a fair statement of the results for the interim periods have been included in the Companys financial position as of August1, 2009, the results of its operations for the three and six months ended August1, 2009 and August2, 2008, and its cash flows for the six months ended August1, 2009 and August2, 2008. The January31, 2009 condensed consolidated balance sheet data was derived from audited consolidated financial statements included in the Companys 2009 Annual Report on Form 10-K for the year ended January31, 2009 but does not include all disclosures required by GAAP. Certain reclassifications have been made to conform to the current periods presentation.
These condensed consolidated financial statements and related notes are unaudited and should be read in conjunction with the Companys audited financial statements and related notes for the year ended January31, 2009 included in the Companys Annual Report on Form 10-K for the year ended January31, 2009 as filed on March28, 2009 with the Securities and Exchange Commission (SEC). The results of operations for the three and six months ended August1, 2009 are not necessarily indicative of the results that may be expected for any other interim period or for the full fiscal year.
Use of estimates
The preparation of consolidated financial statements in conformity with GAAP in the United States requires management to make estimates, judgments and assumptions |
| Note 2. Recent Accounting Pronouncements |
Note 2. Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No.141 (revised 2007), Business Combinations (SFAS 141R). SFAS 141R changes the accounting for business combinations including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for pre-acquisition gain and loss contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring cost accruals, the treatment of acquisition related transaction costs and the recognition of changes in the acquirers income tax valuation allowance. Although the adoption of SFAS 141R during the first quarter ended May2, 2009 had no impact on the Companys financial position and results of operations, the Company expects SFAS 141R will have an impact on its consolidated financial statements, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions it consummates after the effective date of February1, 2009.
In February 2008, the FASB issued FASB Staff Position (FSP) SFASNo.157-2, Effective Date of FASB Statement No.157 (FSP 157-2), to partially defer SFAS No.157, Fair Value Measurements (SFAS 157). FSP 157-2 defers the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years, and interim periods within those fiscal years, beginning after November15, 2008. The adoption of FSP 157-2 in the first quarter of fiscal 2010 did not have a material impact on the Companys financial position and results of operations.
In March2008, the FASB issued SFAS No.161, Disclosures about Derivative Instruments and Hedging Activities (SFAS 161). SFAS 161 amends and expands the disclosure requirements of SFAS No.133 and requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November15, 2008, with early application encouraged. The adoption of SFAS 161 in the first quarter of fiscal 2010 did not have a material impact on the Companys financial position and results of operations.
In April 2008, the FASB issued FSP SFASNo. 142-3, Determination of Useful Life of Intangible Assets (FSP 142-3). FSP 142-3 amends the factors that should be considered in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS142. FSP 142-3 also requires expanded disclosure related to the determination of intangible asset useful lives. FSP 142-3 is effective for fiscal years beginning after December15, 2008. Earlier adoption is not permitted. The adoption of FSP 142-3 in the first quarter of fiscal 2010 did not have an impact on the Companys fina |
| Note 3. Investments |
Note 3. Investments
The following tables summarize the Companys investments (in thousands):
As of August1, 2009
Amortized Cost Gross Unrealized Gains Gross Unrealized Loss Estimated Fair Value
Long-term investments:
Available-for-sale:
Auction rate securities $ 36,800 $ $ (2,467 ) $ 34,333
Trading securities:
Auction rate securities and settlement option 5,000 5,000
Total long-term investments $ 41,800 $ $ (2,467 ) $ 39,333
Total investments $ 41,800 $ $ (2,467 ) $ 39,333
As of January 31, 2009
Amortized Cost Gross Unrealized Gains Gross Unrealized Loss Estimated Fair Value
Long-term investments:
Available-for-sale:
Auction rate securities $ 36,850 $ $ (1,309 ) $ 35,541
Trading securities:
Auction rate securities and settlement option 5,000 5,000
Total long-term investments $ 41,850 $ $ (1,309 ) $ 40,541
Total investments $ 41,850 $ $ (1,309 ) $ 40,541
As of August1, 2009 and January31, 2009, the Companys investment portfolio included $41.8million and $41.9 million, respectively, in par value of auction rate securities. Auction rate securities are usually found in the form of municipal bonds, preferred stock, pools of student loans or collateralized debt obligations with contractual maturities generally between 20 and 30years and whose interest rates are reset every seven to 35days through an auction process. At the end of each reset period, investors can sell or continue to hold the securities at par. The Companys auction rate securities are all backed by student loans originated under the Federal Family Education Loan Program and are over-collateralized, insured and guaranteed by the U.S. Federal Department of Education. All auction rate securities held by the Company are rated by the major independent rating agencies as either AAA or Aaa at the time of purchase. The Company believes the mark-to-market losses for its auction rate securities are all non-credit losses.
In the fourth quarter ended January31, 2009, UBS, one of the brokers who the Company purchased auction rate securities from, offered a settlement where UBS has the right to call and sell one of the auction rate securities the Company purchased from them at par value of $5 million at a future date. As a result of the Companys participation in this settlement, the Company included the put option from the settlement in long term investments and elected to apply SFAS No.159, The Fair Value Option for Financial Assets and Financial Liabilities, to measure the put option at fair value. The Company also elected to transfer this auction rate security to trading securities from available-for-sale pursuant to SFAS No.115, Accounting |
| Note 4. Supplemental Financial Information (in thousands): |
Note 4. Supplemental Financial Information (in thousands):
Inventories
August1, 2009 January31, 2009
Work-in-process $ 141,129 $ 188,830
Finished goods 70,254 121,824
$ 211,383 $ 310,654
Property and equipment, net
August1, 2009 January31, 2009
Machinery and equipment $ 348,383 $ 343,772
Computer software 77,412 75,986
Furniture and fixtures 23,635 23,490
Leasehold improvements 40,030 38,872
Buildings 146,294 146,294
Building improvements 45,586 45,329
Land 71,198 71,198
Construction in progress 1,029 2,483
753,567 747,424
Less: Accumulated depreciation and amortization (400,848 ) (356,571 )
$ 352,719 $ 390,853
Other non-current assets
August1, 2009 January31, 2009
Long term prepayments for foundry capacity $ 4,000 $ 8,800
Equity investments in privately held companies 7,058 7,058
Severance fund 49,530 43,121
Technology licenses 24,531 24,108
Deferred tax assets, non-current 35,707 41,575
Other 11,291 13,665
$ 132,117 $ 138,327
Accrued liabilities
August1, 2009 January31, 2009
Accrued royalties 6,895 5,660
Accrued rebates 13,052 28,925
Accrued legal and professional services 18,634 9,719
Accrued legal settlement 88,000 16,000
Other 30,493 22,809
$ 157,074 $ 83,113
Other long-term liabilities
August1, 2009 January31, 2009
Accrued severance obligations $ 51,008 $ 46,716
Long-term facilities consolidation charge 3,071 2,246
Other 4,217 693
$ 58,296 $ 49,655
Net income (loss) per share
The Company reports both basic net income (loss) per share, which is based upon the weighted average number of common shares outstanding excluding contingently issuable or returnable shares, and diluted net income (loss) per share, which is based on the weighted average number of common shares outstanding and dilutive potential common shares. The computations of basic and diluted net income (loss) per share are presented in the following table (in thousands, except per share amounts):
Three Months Ended Six Months Ended
August1, 2009 August2, 2008 August1, 2009 August2, 2008
Numerator:
Net income (loss) $ 58,493 $ 71,367 $ (52,964 ) $ 141,306
Denominator:
Weighted average shares of common shares outstanding
Weighted average shares basic 620,881 606,860 619,779 604,041
Effect of dilutive securities:
Warrants 631
Common share options and other 27,229 30,972 26,419 |
| Note 5. Derivative Financial Instruments |
Note 5. Derivative Financial Instruments
The Company manages its foreign currency exchange rate risk through the purchase of foreign currency exchange contracts that hedge against the short-term impact of currency fluctuations. The Companys policy is to enter into foreign currency forward contracts with maturities generally less than 12 months that mitigate the impact of rate fluctuations on certain local currency denominated operating expenses. All derivatives are recorded at fair value in either prepaid and other current assets or other accrued liabilities. The Company reports cash flows from derivative instruments in cash flows from operating activities. The Company uses quoted prices to value its derivative instruments.
As of August1, 2009, the notional amounts of outstanding hedge contracts were as follows (in thousands):
BuyContracts SellContracts
Israeli shekel $ 43,396 $ 14,081
Total $ 43,396 $ 14,081
Cash Flow Hedges. The Company designates and documents its foreign currency forward exchange contracts as cash flow hedges for certain operating expenses denominated in Israeli shekels. The Company evaluates and calculates the effectiveness of each hedge at least quarterly. The effective change is recorded in other comprehensive income (loss) (OCI) and is subsequently reclassified to operating expense when the hedged expense is recognized. Ineffectiveness is recorded in interest and other income, net.
Other Foreign Currency Hedges. The Company enters into foreign currency forward exchange contracts to hedge certain payments denominated in Israeli shekels that it does not designate and document as cash flow or other hedges for accounting purposes. The maturities of these contracts are generally less than 12 months. Gains or losses arising from the remeasurement of these contracts to fair value each period are recorded in interest and other income, net.
The fair value and balance sheet classification of foreign exchange contract derivatives are as follows (in thousands):
August1, 2009
Prepaids and other current assets:
Derivative assets designated as hedging instruments:
Cash flow hedges $ 2,091
Derivative assets not designated as hedging instruments:
Other forward contracts (68 )
Total derivative assets $ 2,023
The following tables summarize the pre-tax effect of foreign exchange contract derivatives by (a)cash flow hedges and (b)other foreign currency hedges on OCI and the unaudited condensed consolidated statement of operations for the three and six months ended August1, 2009.
(a) Cash Flow Hedges (in thousands):
ThreeMonthsEnded SixMonthsEnded
August1, 2009 August1, 2009
Accumulated loss in OCI, beginning of period $ (1,076 ) $
Gains recorded in OCI (effective portion) 3,656 2,580
Gains reclassified from OCI to operating expense (effective portion) (790 ) (790 )
Accumulated gain in OCI, end of period $ 1,790 $ 1,790
The Company anticipates |
| Note 6. Fair Value Measurements |
Note 6. Fair Value Measurements
Effective February3, 2008, the Company adopted SFAS 157, except as it applies to the non-financial assets and non-financial liabilities subject to FSP 157-2, which the Company adopted during the first quarter ended May2, 2009. SFAS 157 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, SFAS 157 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level2 - Include other inputs that are directly or indirectly observable in the marketplace.
Level3 - Unobservable inputs that are supported by little or no market activity.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
In accordance with SFAS 157, the Company measures its cash equivalents and marketable securities at fair value. The Companys cash equivalents and marketable securities are primarily classified within Level 1 with the exception of its investments in auction rate securities, which are classified within Level 3. Cash equivalents and marketable securities are valued primarily using quoted market prices utilizing market observable inputs. The Companys investments in auction rate securities are classified within Level 3 because there are no active markets for the auction rate securities and therefore the Company is unable to obtain independent valuations from market sources. Therefore, the auction rate securities were valued using a discounted cash flow model. Some of the inputs to the cash flow model are unobservable in the market. The total amount of assets measured using Level 3 valuation methodologies represented 0.9% of total assets as of August1, 2009.
The table below sets forth, by level, the Companys financial assets that were accounted for at fair value as of August1, 2009. The table does not include assets and liabilities that are measured at historical cost or any basis other than fair value (in thousands):
Fair Value Mearsurements as of August1, 2009
Total Level 1 Level 2 Level 3
Items measured at fair value on a recurring basis:
Assets
Cash equivalents:
Money market funds $ 860,394 $ 860,394 $ $
Prepaids and other current assets:
Derivative assets 2,023 2,023
Long-term investments:
Auction rate securities and settlement option 39,333 39,333
Total assets $ 901,750 $ 860,394 $ 2,023 $ 39,333
The foll |
| Note 7. Acquired Intangible Assets, Net |
Note 7. Acquired Intangible Assets, Net
As of August1, 2009 As of January31, 2009
Rangeof UsefulLives Gross Carrying Amount Accumulated Amortization andWrite-Offs Net Carrying Amount Gross Carrying Amount Accumulated Amortization andWrite-Offs Net Carrying Amount
Purchased technology 17years $ 714,640 $ (641,438 ) $ 73,202 $ 714,640 $ (615,206 ) $ 99,434
Core technology 1 8years 212,650 (115,880 ) 96,770 212,650 (101,990 ) 110,660
Trade name 1 5years 350 (239 ) 111 350 (219 ) 131
Customer contracts 4 7years 183,300 (123,792 ) 59,508 183,300 (107,294 ) 76,006
Supply contract 900 (900 ) 900 (900 )
Non-compete agreements 3 years 700 (513 ) 187 700 (397 ) 303
Total intangible assets, net $ 1,112,540 $ (882,762 ) $ 229,778 $ 1,112,540 $ (826,006 ) $ 286,534
Based on the identified intangible assets recorded at August1, 2009, the future amortization expense of identified intangibles for the next five fiscal years is as follows (in thousands):
Fiscal year Amount
Remainder of fiscal 2010 $ 49,722
2011 79,913
2012 41,951
2013 35,217
2014 22,093
Thereafter 882
$ 229,778
|
| Note 8. Restructuring |
Note 8. Restructuring
During the three months ended August1, 2009, the Company continued to implement certain cost reduction measures that included reductions in workforce that were announced in the first quarter ended May2, 2009.In addition, the Company also impaired some facilities due to vacating certain locations.As a result, during the three months ended August1, 2009, the Company recorded a restructuring charge of $5.0 million consisting of $1.1 million of severance and related employee benefits to the terminated employees, $1.5 million for equipment and other related charges and $2.4 million of additional facilities impairment charges.
The following table sets forth an analysis of the components of the restructuring charges and the payments made through August1, 2009 (in thousands):
Three Months Ended Six Months Ended
August1, 2009 August2, 2008 August1, 2009 August2, 2008
Restructuring liabilities, beginning of period $ 7,367 $ 1,661 $ 7,685 $ 2,731
Severance and related charges 1,104 8,524
Equipment and other related charges 1,516 2,432
Facilities and related charges 2,336 2,336
Non-cash adjustment (239 ) (239 )
Net cash payments (6,850 ) (175 ) (15,504 ) (1,245 )
Restructuring liabilities, end of period $ 5,234 $ 1,486 $ 5,234 $ 1,486
The Company anticipates that $0.2million will be paid out in cash for severance and related charges during the three months ending October31, 2009. The remaining facility lease charges included in the restructure liabilities will be paid out through fiscal 2018. |
| Note 9. Commitments and Contingencies |
Note 9. Commitments and Contingencies
Warranty obligations
The following table presents changes in the warranty accrual included in accrued liabilities during the three and six months ended August1, 2009 and August2, 2008 (in thousands):
Three Months Ended Six Months Ended
August1, 2009 August2, 2008 August1, 2009 August2, 2008
Warranty accrual:
Beginning balance $ 4,205 $ 2,541 $ 2,094 $ 2,532
Accruals 445 308 2,968 820
Settlements (1,229 ) (328 ) (1,641 ) (831 )
Ending balance $ 3,421 $ 2,521 $ 3,421 $ 2,521
Intellectual property indemnification
The Company has agreed to indemnify certain customers for claims made against the Companys products, where such claims allege infringement of third party intellectual property rights, including, but not limited to, patents, registered trademarks and/or copyrights. Under the aforementioned indemnification clauses, the Company may be obligated to defend the customer and pay for the damages awarded against the customer under an infringement claim, including paying for the customers attorneys fees and costs. The Companys indemnification obligations generally do not expire after termination or expiration of the agreement containing the indemnification obligation. In certain cases, there are limits on and exceptions to the Companys potential liability for indemnification. Although historically the Company has not made significant payments under these indemnification obligations, the Company cannot estimate the amount of potential future payments, if any, that it might be required to make as a result of these agreements. However, the maximum potential amount of any future payments that the Company could be required to make under these indemnification obligations could be significant.
Purchase commitments
On February28, 2005 and as amended on March31, 2005, the Company entered into an agreement with a foundry to reserve and secure foundry fabrication capacity for a fixed number of wafers at agreed upon prices for a period of five and a half years beginning on October1, 2005. In return, the Company agreed to pay the foundry $174.2million over a period of 18 months. The amendment extends the term of the agreement and the agreed upon pricing terms until December31, 2015. As of August1, 2009, payments totaling $174.2million (included in prepaid expenses and other current assets and other non-current assets) have been made and approximately $158.6 million of the prepayment has been utilized as of August1, 2009. At August1, 2009, there were no outstanding commitments under the agreement.
Under the Companys manufacturing relationships with foundries, cancellation of all outstanding purchase orders are allowed but require repayment of all expenses incurred through the date of cancellation. As of August1, 2009, the amount of open purchase orders to these foundries was approximately $187.8million.
As of August1, 2009, the Company had approximately $16.1 mil |
| Note 10. Stock-Based Compensation |
Note 10. Stock-Based Compensation
The Company adopted SFAS No.123 (revised 2004), Share Based Payment (SFAS 123R) in its fiscal year beginning January29, 2006. SFAS 123R requires the measurement and recognition of compensation expense for all share-based awards to employees and directors, including employee stock options, restricted stock units and employee stock purchase rights based on estimated fair values.
The following table presents details of stock-based compensation expenses by functional line item (in thousands):
Three Months Ended Six Months Ended
August1, 2009 August2, 2008 August1, 2009 August2, 2008
Cost of goods sold $ 1,810 $ 3,755 $ 5,926 $ 6,828
Research and development 22,193 32,998 43,930 62,930
Selling and marketing 3,659 6,159 7,370 13,507
General and administrative 2,353 4,715 4,437 9,588
$ 30,015 $ 47,627 $ 61,663 $ 92,853
Stock-based compensation of $1.8 million and $3.6 million was capitalized in inventory as of August1, 2009 and January31, 2009, respectively.
The following assumptions were used for each respective period to calculate the weighted average fair value of each option award on the date of grant using the Black-Scholes option pricing model:
Stock Option Plans EmployeeStockPurchasePlan
Three Months Ended Three Months Ended
August1, 2009 August2, 2008 August1, 2009 August2, 2008
Volatility 53 % 44 % 51 % 45 %
Expected life (in years) 4.6 5.0 1.3 1.3
Risk-free interest rate 1.9 % 2.7 % 0.7 % 4.3 %
Dividend yield
Weighted average fair value $ 5.69 $ 7.01 $ 4.14 $ 6.05
Stock Option Plans EmployeeStockPurchasePlan
Six Months Ended Six Months Ended
August1, 2009 August2, 2008 August1, 2009 August2, 2008
Volatility 52 % 44 % 51 % 45 %
Expected life (in years) 4.6 5.2 1.3 1.3
Risk-free interest rate 1.8 % 3.3 % 0.7 % 4.3 %
Dividend yield
Weighted average fair value $ 5.13 $ 5.25 $ 4.14 $ 6.05
In developing estimates used in the adoption of SFAS 123R, the Company established the expected term for employee options and awards, as well as expected forfeiture rates, based on the historical settlement experience and after giving consideration to vesting schedules. Expected volatility under SFAS 123R was developed based on the average of the Companys historical daily stock price volatility. The risk-free interest rate assumption is based on observed interest rates appropriate for the expected terms of the Companys stock options. SFAS 123R also requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates. |
| Note 11. Shareholders' Equity |
Note 11. Shareholders Equity
Stock plans
In April1995, the Company adopted the 1995 Stock Option Plan (the Option Plan). The Option Plan, as amended, had 383,440,718 common shares reserved for issuance thereunder as of August1, 2009. Options granted under the Option Plan generally have a term of ten years and generally must be issued at prices not less than 100% and 85% for incentive and nonqualified stock options, respectively, of the fair market value of the stock on the date of grant. Incentive stock options granted to shareholders who own greater than 10% of the outstanding stock are for periods not to exceed five years and must be issued at prices not less than 110% of the fair market value of the stock on the date of grant. The options generally vest 20% one year after the vesting commencement date, and the remaining shares vest one-sixtieth per month over the remaining 48 months. Options granted under the Option Plan prior to March1, 2000 may be exercised prior to vesting and the exercised shares remain unvested until vested in accordance with the terms of the grant. The Company has the right to repurchase such shares at their original purchase price if the optionee is terminated from service prior to vesting. Such right expires as the options vest over a five-year period. Options granted under the Option Plan subsequent to March1, 2000 may only be exercised upon or after vesting. In addition, the Company can also grant stock awards, which may be subject to vesting. Further, the Company can grant stock unit awards. Stock unit awards are denominated in shares of stock, but may be settled in cash or tradable shares of the Companys common shares upon vesting, as determined by the Company at the time of grant.
In August 1997, the Company adopted the 1997 Directors Stock Option Plan (the 1997 Directors Plan). Under the 1997 Directors Plan, an outside director was granted an option to purchase 30,000 common shares upon appointment to the Companys Board of Directors. These options vested 20% one year after the vesting commencement date and remaining shares vest one-sixtieth per month over the remaining 48 months. An outside director was also granted an option to purchase 6,000 common shares on the date of each annual meeting of the shareholders. These options vested one-twelfth per month over 12 months after the fourth anniversary of the vesting commencement date. Options granted under the 1997 Directors Plan could be exercised prior to vesting. The 1997 Directors Plan was terminated in October 2007.
In October 2007, the Company adopted the 2007 Directors Stock Incentive Plan (the 2007 Directors Plan). The 2007 Directors Plan had 750,000 common shares reserved for issuance thereunder as of August1, 2009. Under the 2007 Directors Plan, an outside director is granted an option to purchase 50,000 common shares upon appointment to the Companys Board of Directors. These options vest one-third on the one year anniversary of the date of grant and one-thirdof the shares on each anniversary thereafter. An outside director who has served on the Companys Board of Directors for the prior six months is also granted an option to purchase 12, |
| Note 12. Income Taxes |
Note 12. Income Taxes
For the three months ended August1, 2009 and August2, 2008, the Companys effective tax rate was an income tax expense of 13.8% and 9.0%, respectively. The income tax provision for these periods was affected by non-tax-deductible expenses such as stock-based compensation expense, amortization of acquired intangibles and accrual of unrecognized tax benefits, interest and penalties associated with unrecognized tax positions. The effective tax rate for the three months ended August1, 2009, was impacted by the exclusion of a jurisdiction with a pretax loss for which no benefit would be recognized from the calculation of the income tax provision. In addition, the effective tax rate for the three months ended August1, 2009 was impacted by a revaluation of deferred tax asset due to a tax rate change in a non-US jurisdiction effective during the quarter. The resulting impact was an increase to the tax expense of $2.2 million for the three months ended August1, 2009.
In previous periods, the Company had recorded unrealized foreign exchange gains and losses related to uncertain tax positions in its provision (benefit) for income taxes in the income statement. In the third quarter of fiscal 2009, the Company began presenting this amount in interest and other income, net. In order to conform the comparative amounts to the current presentation, the Company reclassified $1.9 million and $1.2 million from provision (benefit) of income taxes to interest and other income for the three and six months ended August2, 2008, respectively.
The Companys total unrecognized tax benefits as of August1, 2009 and August2, 2008 were $111.5 million and $118.3 million, respectively. The Company also recorded a FIN 48 liability for potential interest and penalties of $25.5million and $11.1million, respectively, as of August1, 2009. For the three months ended August1, 2009, the provision for income taxes in several foreign jurisdictions was reduced by $4.0 million because of several factors including the statute of limitations lapsed for uncertain tax positions, and the impact of a revaluation of certain unrecognized tax benefits due to tax rate change in a non-U.S. jurisdiction effective during the quarter. If recognized, all of the FIN 48 liabilities recorded to date, except the portion attributable to the foreign exchange gains and losses, will impact the effective tax rate.
The Company conducts business globally and, as a result, one or more of its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is subject to examination by tax authorities throughout the world, including such major jurisdictions as Singapore, Japan, Taiwan, China, India, Germany, Israel, Netherlands, Switzerland, the United Kingdom, Canada, Malaysia and the United States. The Company is subject to non-U.S. income tax examinations for years beginning with fiscal year 2002 and for U.S. income tax examinations beginning with fiscal year 2006. The U.S. tax authorities closed an employment tax audit during the quarter with regard to the re-measured stock options for calendar years 2003 through 200 |
| Note 13. Related Party Transactions |
Note 13. Related Party Transactions
On August19, 2005, through its subsidiaries MSI and MIL, the Company entered into a License and Manufacturing Services Agreement with C2 Microsystems, Inc. (C2Micro License Agreement). The C2Micro License Agreement has substantially similar terms as other license and manufacturing services agreements of the Company with other third parties for similar technology. The Company recognized none and $1.4 million of revenue under the C2Micro License Agreement during the three months ended August1, 2009 and August2, 2008, respectively. The Company recognized none and $2.6 million of revenue under the C2Micro License Agreement during the six months ended August1, 2009 and August2, 2008, respectively. As of August1, 2009, the Company had a receivable of $1.4 million from C2 Microsystems. Dr.Sehat Sutardja, the Companys President and Chief Executive Officer, and Weili Dai, the Vice President of Sales for Communications and Consumer Business of MSI and Vice President and General Manager of Communications and Computing Business Unit of MSI, through their ownership and control of Estopia LLC (Estopia), are indirect shareholders of C2 Microsystems. Dr.Sehat Sutardja and Weili Dai are husband and wife. Kuo Wei (Herbert) Chang, a member of the Companys Board of Directors, is a member of the board of directors of C2 Microsystems and, through his ownership and control of C-Squared venture entities, is also an indirect shareholder of C2 Microsystems. Dr.Pantas Sutardja, the Companys Vice President, Chief Technology Officer and Chief Research and Development Officer, is also a shareholder of C2 Microsystems.
On January8, 2007, the Company, through MIL, entered into a Library/IP/Software Evaluation License Agreement (the Evaluation License Agreement) with VeriSilicon Holdings Co., Ltd. (VeriSilicon). The Evaluation License Agreement has no consideration. The Company also incurred $4,000 and $43,000 of royalty expense from VeriSilicon under a core license agreement assumed from its acquisition of the semiconductor design business of UTStarcom, Inc. during the three months ended August1, 2009 and August2, 2008, respectively. The Company incurred $6,000 and $109,000 of royalty expense under the same license agreement during the six months ended August1, 2009 and August2, 2008, respectively. This core license agreement had been assumed by VeriSilicon after its acquisition of certain assets from LSI. On March30, 2009, the Company entered into an addendum to this core license agreement with VeriSilicon. The Company recorded a license fee of $0.5 million and maintenance fees of $80,000 in the first quarter ended May2, 2009. On June30, 2009, the Company entered into a second addendum to this technology license agreement with VeriSilicon for VeriSilicon to perform services for a fee of $40,000. Weili Dais brother (and Dr.Sehat Sutardjas brother-in-law) is the Chairman, President and Chief Executive Officer of VeriSilicon. Ms.Dai is also a shareholder of VeriSilicon.
On September28, 2007, the Company, through MIL, entered into a Master Technology Agreement (the Technology Agreement) with Sonics, Inc. (Sonics), pursuant to whi |
