Marvell Technology 10-Q 8 Jun 10 2010 Q1 Quarterly report Financial data

Document and Entity Information

Document and Entity Information
	3 Months Ended May. 01, 2010	May. 31, 2010
Document Type	10-Q
Amendment Flag	false
Document Period End Date	2010-05-01
Document Fiscal Year Focus	2,010
Document Fiscal Period Focus	Q1
Trading Symbol	MRVL
Entity Registrant Name	MARVELL TECHNOLOGY GROUP LTD
Entity Central Index Key	0001058057
Current Fiscal Year End Date	--01-31
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		644,536,712

UNAUDITED CONDENSED CONSOLIDATE

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)
In Thousands	3 Months Ended May. 01, 2010	12 Months Ended Jan. 30, 2010
Current assets:
Cash and cash equivalents	$1,352,339	$1,105,428
Short-term investments	726,864	691,289
Accounts receivable, net	448,693	356,796
Inventories	206,643	241,541
Prepaids and other current assets	54,676	62,527
Deferred income taxes	7,964	7,964
Total current assets	2,797,179	2,465,545
Property and equipment, net	340,641	342,497
Long-term investments	34,235	34,281
Goodwill	1,997,662	1,997,662
Acquired intangible assets, net	156,582	179,101
Other non-current assets	154,283	151,854
Total assets	5,480,582	5,170,940
Current liabilities:
Accounts payable	288,568	277,405
Accrued liabilities	82,590	82,067
Accrued employee compensation	114,808	125,810
Income taxes payable	18,275	19,992
Deferred income	83,329	59,396
Current portion of capital lease obligations	1,981	1,940
Total current liabilities	589,551	566,610
Capital lease obligations, net of current portion		511
Non-current income taxes payable	120,898	117,240
Other long-term liabilities	70,405	68,600
Total liabilities	780,854	752,961
Commitments and contingencies (Note 9)
Shareholders' equity:
Common shares	1,288	1,277
Additional paid-in capital	4,683,490	4,607,844
Accumulated other comprehensive loss	(560)	(885)
Retained earnings (accumulated deficit)	15,510	(190,257)
Total shareholders' equity	4,699,728	4,417,979
Total liabilities and shareholders' equity	$5,480,582	$5,170,940

1_UNAUDITED CONDENSED CONSOLIDA

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Thousands, except Per Share data	3 Months Ended May. 01, 2010	3 Months Ended May. 02, 2009
Net revenue	$855,579	$521,434
Operating costs and expenses:
Cost of goods sold	343,985	257,630
Research and development	219,111	206,089
Selling and marketing	38,423	33,910
General and administrative	23,108	102,728
Amortization and write-off of acquired intangible assets	22,549	30,356
Total operating costs and expenses	647,176	630,713
Operating income (loss)	208,403	(109,279)
Interest and other expense, net	(3,701)	(72)
Interest expense	(51)	(88)
Income (loss) before income taxes	204,651	(109,439)
Provision (benefit) for income taxes	(1,116)	2,018
Net income (loss)	$205,767	($111,457)
Net income (loss) per share:
Basic	0.32	-0.18
Diluted	0.3	-0.18
Weighted average shares:
Basic	640,926	618,677
Diluted	678,059	618,677

2_UNAUDITED CONDENSED CONSOLIDA

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Thousands	3 Months Ended May. 01, 2010	3 Months Ended May. 02, 2009
Cash flows from operating activities:
Net income (loss)	$205,767	($111,457)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	23,078	25,375
Stock-based compensation	26,896	31,648
Amortization and write-off of acquired intangible assets	22,549	30,356
Amortization of marketable securities premium	2,035
Fair market value adjustment to Intel inventory sold	(942)	(1,343)
Excess tax benefits from stock-based compensation	(185)	(29)
Changes in assets and liabilities:
Accounts receivable	(91,897)	(63,266)
Inventories	35,417	106,281
Prepaid expenses and other assets	10,381	14,330
Accounts payable	4,826	30,738
Accrued liabilities and other	2,298	63,455
Accrued employee compensation	(10,506)	13,033
Income taxes payable	1,941	1,343
Deferred income	23,933	4,065
Net cash provided by operating activities	255,591	144,529
Cash flows from investing activities:
Purchases of investments	(187,878)
Sales and maturities of investments	149,440
Purchases of property and equipment	(16,395)	(3,414)
Purchases of technology licenses	(2,250)	(9,300)
Net cash used in investing activities	(57,083)	(12,714)
Cash flows from financing activities:
Proceeds from the issuance of common shares	48,688	385
Principal payments on capital lease obligations	(470)	(433)
Excess tax benefits from stock-based compensation	185	29
Net cash provided by (used in) financing activities	48,403	(19)
Net increase in cash and cash equivalents	246,911	131,796
Cash and cash equivalents at beginning of period	1,105,428	927,409
Cash and cash equivalents at end of period	$1,352,339	$1,059,205

The Company and its Significant

The Company and its Significant Accounting Policies
	3 Months Ended May. 01, 2010
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 2011 and fiscal 2010 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 May1, 2010, the results of its operations for the three months ended May1, 2010 and May2, 2009, and its cash flows for the three months ended May1, 2010 and May2, 2009. The January30, 2010 condensed consolidated balance sheet data was derived from audited consolidated financial statements included in the Companys Annual Report on Form 10-K for the year ended January30, 2010 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 January30, 2010 included in the Companys Annual Report on Form 10-K for the year ended January30, 2010 as filed on March31, 2010 with the Securities and Exchange Commission. The results of operations for the three months ended May1, 2010 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 that affect the reported amounts of asset

Recent Accounting Pronouncement

Recent Accounting Pronouncements
	3 Months Ended May. 01, 2010
Recent Accounting Pronouncements	Note 2. Recent Accounting Pronouncements In June 2009, the Financial Accounting Standard Board (FASB) issued guidance that amends the consolidation rules related to variable interest entities. The determination of whether a company is required to consolidate an entity is based on, among other things, an entitys purpose and design and a companys ability to direct the activities of the entity that most significantly impact the entitys economic performance. This guidance requires ongoing reassessments of whether an enterprise is the primary beneficiary of the variable interest entity. This guidance became effective during the three months ended May1, 2010 and the adoption did not have a material impact on the Companys financial position or results of operations. In September 2009, the FASB issued new accounting guidance related to the revenue recognition of multiple element arrangements. The new guidance states that if vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, companies will be required to develop a best estimate of the selling price to separate deliverables and allocate arrangement consideration using the relative selling price method. The accounting guidance was adopted during the three months ended May1, 2010, however, as the Company does not generally enter into multiple element arrangements, the adoption did not impact the Companys financial position or results of operations. In January 2010, the FASB issued guidance that expands the interim and annual disclosure requirements of fair value measurements, including the information about movement of assets between Level1 and 2 of the three-tier fair value hierarchy established under its fair value measurement guidance. This guidance also requires separate disclosure for purchases, sales, issuances and settlements in the reconciliation for fair value measurements using significant unobservable inputs using Level3 methodologies. Except for the detailed disclosure in the Level3 reconciliation, which is effective for the fiscal years beginning after December15, 2010, all the other disclosures under this guidance became effective during the three months ended May1, 2010. The adoption of the guidance did not have a material impact on the Companys financial position or results of operations.

Investments

Investments
	3 Months Ended May. 01, 2010
Investments	Note 3. Investments The following tables summarize the Companys investments (in thousands): As of May1, 2010 Amortized Cost Gross Unrealized Gains Gross Unrealized Loss Estimated Fair Value Short-term investments: Available-for-sale: Corporate debt securities $ 324,163 $ 1,169 $ (70 ) $ 325,262 U.S. government and agencies 396,491 135 (24 ) 396,602 Trading securities: Auction rate security and settlement option 5,000 5,000 Total short-term investments $ 725,654 $ 1,304 $ (94 ) $ 726,864 Long-term investments: Available-for-sale: Auction rate securities $ 36,550 $ $ (2,315 ) $ 34,235 Total long-term investments $ 36,550 $ $ (2,315 ) $ 34,235 Total investments $ 762,204 $ 1,304 $ (2,409 ) $ 761,099 As of January30, 2010 Amortized Cost Gross Unrealized Gains Gross Unrealized Loss Estimated Fair Value Short-term investments: Available-for-sale: Corporate debt securities $ 227,610 $ 934 $ (75 ) $ 228,469 U.S. government and agencies 457,592 258 (30 ) 457,820 Trading securities: Auction rate security and settlement option 5,000 5,000 Total short-term investments $ 690,202 $ 1,192 $ (105 ) $ 691,289 Long-term investments: Available-for-sale: Auction rate securities $ 36,600 $ $ (2,319 ) $ 34,281 Total long-term investments $ 36,600 $ $ (2,319 ) $ 34,281 Total investments $ 726,802 $ 1,192 $ (2,424 ) $ 725,570 As of May1, 2010, the Companys investment portfolio included $41.6million in par value of auction rate securities. Beginning in February 2008, liquidity issues in the global credit markets resulted in a failure of auction rate securities, as the amount of securities submitted for sale in those auctions exceeded the amount of bids. To estimate the fair value of the auction rate securities since that time, the Company used a discounted cash flow model based on estimated timing and amount of future interest and principal payments, credit quality of the underlying securities and illiquidity considerations, the collateralization of underlying security investments, the credit worthiness of the issuer of the securities, the probability of full repayment and other considerations described above. As of May1, 2010, the auction rate securities were $2.3 million less than par value and recorded in long-term investments except for one $5 million auction rate security, which was transferred to short-term investments during fiscal 2010 after the Company executed a settlement agreement with

Supplemental Financial Informat

Supplemental Financial Information (in thousands)
	3 Months Ended May. 01, 2010
Supplemental Financial Information (in thousands)	Note 4. Supplemental Financial Information (in thousands) Inventories May1, 2010 January 30, 2010 Work-in-process $ 127,939 $ 128,371 Finished goods 78,704 113,170 Inventories $ 206,643 $ 241,541 Property and equipment, net May1, 2010 January30, 2010 Machinery and equipment $ 382,997 $ 371,281 Computer software 67,297 66,643 Furniture and fixtures 23,390 23,335 Leasehold improvements 31,988 33,224 Buildings 146,294 146,294 Building improvements 46,730 45,631 Land 71,198 71,198 Construction in progress 7,463 5,174 777,357 762,780 Less: Accumulated depreciation and amortization (436,716 ) (420,283 ) Property and equipment, net $ 340,641 $ 342,497 Other non-current assets May1, 2010 January 30, 2010 Severance fund $ 56,199 $ 57,261 Technology licenses 37,233 33,486 Deferred tax assets, non-current 34,638 34,638 Long-term prepayments for foundry capacity 8,504 8,504 Equity investments in privately held companies 7,314 6,314 Other 10,395 11,651 Other non-current assets $ 154,283 $ 151,854 Accrued liabilities May 1, 2010 January 30, 2010 Accrued royalties $ 14,659 $ 12,651 Accrued legal and professional services 13,882 13,585 Accrued rebates 12,943 13,404 Accrued customer advances 7,876 8,167 Accrued tapeouts 7,834 5,957 Accrued sales/GST tax 5,546 6,082 Other 19,850 22,221 Accrued liabilities $ 82,590 $ 82,067 Other long-term liabilities May 1, 2010 January 30, 2010 Accrued severance $ 54,905 $ 53,549 Long-term facilities consolidation charge 3,518 3,305 Accrued technology license 4,500 4,500 Other 7,482 7,246 Other long-term liabilities $ 70,405 $ 68,600 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 May1, 2010 May2, 2009 Numerator: Net income (loss) $ 205,767 $ (111,457 ) Denominator: Weighted average shares of common shares outstanding: Weighted average shares basic 640,926 618,677 Effect of dilutive securities: Common share options and other 37,1

Derivative Financial Instrument

Derivative Financial Instruments
	3 Months Ended May. 01, 2010
Derivative Financial Instruments	Note 5. Derivative Financial Instruments The Company manages some of 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 prepaids and other current assets or 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 May1, 2010, the notional amounts of outstanding hedge contracts were as follows (in thousands): May1, 2010 January30, 2010 BuyContracts SellContracts BuyContracts SellContracts Israeli shekel $ 49,582 $ $ 29,512 $ (1,163 ) Total $ 49,582 $ $ 29,512 $ (1,163 ) 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 (OCI) and is subsequently reclassified to operating expense when the hedged expense is recognized. Ineffectiveness is recorded in interest and other expense, net. Other Foreign Currency Forward Contracts. 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 (expense), net. The fair value and balance sheet classification of foreign exchange contract derivatives are as follows (in thousands): May1, 2010 January30, 2010 Prepaids and other current assets: Derivative assets designated as hedging instruments: Cash flow hedges $ 591 $ 836 Other forward contracts (6 ) Total derivative assets $ 591 $ 830 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 statements of operations for the three months ended May1, 2010. (a) Cash Flow Hedges (in thousands): ThreeMonthsEnded May1, 2010 May2, 2009 Accumulated OCI, beginning of period $ 341 $ Gains (losses) recorded in OCI (effective portion) 250 (1,076 ) Losses reclassified from OCI to operating expense (effective portion) (51 ) Acc

Fair Value Measurements

Fair Value Measurements
	3 Months Ended May. 01, 2010
Fair Value Measurements	Note 6. Fair Value Measurements Effective February3, 2008, the Company adopted the authoritative guidance for fair value measurements and disclosures for all assets and liabilities within the scope of this guidance, except as it applies to the non-financial assets and non-financial liabilities subject to additional authoritative guidance, which the Company adopted during the first quarter ended May2, 2009. The guidance 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, the guidance 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. 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 Company investments in corporate debt securities are classified within Level 2 as the market inputs to value these instruments consist of market yields, reported trades and broker/dealer quotes. In addition, foreign currency contracts are classified within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments. 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 0.7% of total assets as of May1, 2010. The tables below set forth, by level, the Companys financial assets that were accounted for at fair value as of May1, 2010 and January30, 2010. The tables do not include assets and liabilities that are measured at historical cost or any basis other than fair value (in thousands): Level 1 Level 2 Level 3 PortionofCarrying Value Measured at Fair Value at May1, 2010 Items measured at fair value on a r

Acquired Intangible Assets, Net

Acquired Intangible Assets, Net (in thousands)
	3 Months Ended May. 01, 2010
Acquired Intangible Assets, Net (in thousands)	Note 7. Acquired Intangible Assets, Net (in thousands) May1, 2010 January30, 2010 Range of UsefulLives Gross Carrying Amounts Accumulated Amortization and Write-Offs Net Carrying Amount Gross Carrying Amounts Accumulated Amortization and Write-Offs Net Carrying Amount Purchased technology 1-7years $ 714,640 $ (675,800 ) $ 38,840 $ 714,640 $ (665,010 ) $ 49,630 Core technology 1 - 8years 212,650 (136,277 ) 76,373 212,650 (129,478 ) 83,172 Trade name 1 - 5years 350 (269 ) 81 350 (259 ) 91 Customer contracts 4 - 7years 183,300 (142,025 ) 41,275 183,300 (137,163 ) 46,137 Non-compete agreements 3 years 700 (687 ) 13 700 (629 ) 71 Total intangible assets, net $ 1,111,640 $ (955,058 ) $ 156,582 $ 1,111,640 $ (932,539 ) $ 179,101 Based on the identified intangible assets recorded at May1, 2010, the future amortization expense of identified intangibles for the next five fiscal years is as follows (in thousands): Fiscal year Amount Reminder of fiscal 2011 $ 55,643 2012 42,150 2013 35,416 2014 22,292 2015 1,081 Thereafter $ 156,582

Restructuring

Restructuring
	3 Months Ended May. 01, 2010
Restructuring	Note 8. Restructuring During the three months ended May1, 2010, the Company subleased one of its reserved facilities and thus recorded an adjustment to the restructuring liabilities. In addition, the Company continued to make payments and incur on-going operating expenses from its reserved facilities. During the three months ended May2, 2009, in response to the challenging economic environment, the Company implemented certain cost reduction measures that included reductions in workforce in all functions of the organization worldwide. As a result, a restructuring charge of $8.3 million was recorded, which consisted of $7.4 million of severance and related employee benefits to approximately 300 terminated employees and $0.9 million of equipment and other related charges. The following table sets forth an analysis of the components of the restructuring charges and the payments made (in thousands): ThreeMonthsEnded May1, 2010 May2, 2009 Restructuring liabilities, beginning of period $ 5,397 $ 7,685 Severance and related charges: Equipment and other related charges 916 Workforce reduction 7,420 Net cash payments (651 ) (8,654 ) Adjustments to previous assumptions 218 Restructuring liabilities, end of period $ 4,964 $ 7,367 The following table presents details of restructuring charges by functional line item (in thousands): ThreeMonthsEnded May1, 2010 May2, 2009 Research and development $ (100 ) $ 5,840 Selling and marketing 1,264 General and administrative 318 1,232 $ 218 $ 8,336 The remaining facility lease charges included in the restructuring liabilities will be paid out through fiscal 2018.

Commitments and Contingencies

Commitments and Contingencies
	3 Months Ended May. 01, 2010
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 months ended May1, 2010 and May2, 2009 (in thousands): May1, 2010 May2, 2009 Beginning balance $ 1,966 $ 2,094 Warranties issued 859 2,523 Reduction for payments or product replacements (429 ) (412 ) Adjustments related to changes in estimates of existing exposures (794 ) Ending balance $ 1,602 $ 4,205 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 as well as 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. 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 Under the Companys manufacturing relationships with all other foundries, cancellation of all outstanding purchase orders are allowed but require repayment of all expenses incurred through the date of cancellation. As of May1, 2010, these foundries had incurred approximately $302.2million of manufacturing expenses on the Companys outstanding purchase orders. 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 eighteen months. The amendment extends the term of the agreement and the agreed upon pricing terms. As of May1, 2010, all payments (included in prepaid expenses and other current assets and other non-current assets) had been made and approximately $161.7 million of the prepayment had been utilized. At May1, 2010, there were no outstanding commitments under the agreement. As of May1, 2010, the Company had approximately $40.5 million of other outstanding non-cancelable purchase orders for capital purchase obligations. Contingencies IPO Securities Litigation. On July31, 2001, a putative class action suit was fil

Stock-Based Compensation

Stock-Based Compensation
	3 Months Ended May. 01, 2010
Stock-Based Compensation	Note 10. Stock-Based Compensation The following table presents details of stock-based compensation expenses by functional line item (in thousands): Three Months Ended May1, 2010 May 2, 2009 Cost of goods sold $ 2,236 $ 4,116 Research and development 18,851 21,737 Selling and marketing 3,173 3,711 General and administrative 2,636 2,084 $ 26,896 $ 31,648 Stock-based compensation of $1.2 million and $1.6 million was capitalized in inventory as of May1, 2010 and January30, 2010, 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: StockOptionPlans ESPP ThreeMonthsEnded ThreeMonthsEnded May1, 2010 May2, 2009 May1, 2010 May2, 2009 Estimated fair value $ 9.65 $ 3.90 $ 4.34 $ 5.39 Volatility 53 % 51 % 51 % 45 % Expected term (in years) 4.7 4.6 1.1 1.3 Risk-free interest rate 2.2 % 1.7 % 0.6 % 1.8 % Dividend yield 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 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. Forfeitures were estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates.

Shareholders' Equity

Shareholders' Equity
	3 Months Ended May. 01, 2010
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 383.4million common shares reserved for issuance thereunder as of May1, 2010. 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 subsequent to March1, 2000 may only be exercised upon or after vesting. 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 May1, 2010. 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 12,000 common shares on the date of each annual meeting of the Companys shareholders. These options vest 100% on the earlier of the date of the next annual general meeting of shareholders or the one year anniversary of the date of grant. Under the Option Plan and the 2007 Directors Plan, the Company may also grant restricted stock awards, which may be subject to vesting, and stock unit awards, which 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. Employee stock purchase plan In June2000, the Company adopted the 2000 Employee Stock Purchase Plan (the Purchase Plan), and on October22, 2009, the Purch

Income Taxes

Income Taxes
	3 Months Ended May. 01, 2010
Income Taxes	Note 12. Income Taxes For the three months ended May1, 2010 and May2, 2009, the Companys effective tax rate was an income tax benefit of 0.6% and an income tax expense of 1.8%, 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, and interest and penalties associated with unrecognized tax positions. For the three months ended May1, 2010, the effective tax rate was impacted by a reduction of unrecognized tax benefits of approximately $6.5 million due to the expiration of the statute of limitation in multiple jurisdictions. The Companys total unrecognized tax benefits as of May1, 2010 and January30, 2010 were $103.1 million and $103.3 million, respectively. The Companys liability for potential interest and penalties as of May1, 2010 and January30, 2010 was $29.8million and $29.9million, respectively. If recognized, all of the 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 China, Israel, Japan, Singapore, Switzerland and the United States. The Company is subject to non-U.S. and U.S. income tax examinations for years beginning with fiscal year 2002 and fiscal year 2007, respectively.

Related Party Transactions

Related Party Transactions
	3 Months Ended May. 01, 2010
Related Party Transactions	Note 13. Related Party Transactions In August, 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 no revenue under the C2Micro License Agreement during the three months ended May1, 2010 and May2, 2009. 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, 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 also an indirect shareholder of C2 Microsystems as a partner of entities who have invested in 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. In January 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 incurred $0 and $2,000 of royalty expense from VeriSilicon under a core license agreement assumed from its acquisition of the semiconductor business of UTStarcom, Inc. during the three months ended May1, 2010 and May2, 2009, respectively. This core license agreement had been assumed by VeriSilicon after its acquisition of certain assets from LSI Corporation. In March 2009, the Company entered into an addendum to this core license agreement with VeriSilicon. The Company recorded a license fee of $500,000 and maintenance fees of $80,000. In June 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. In December 2009, the Company entered into a third addendum to this technology agreement with VeriSilicon to license additional technology for a license fee of $275,000 with an annual support fee of $47,500. In March 2010, the Company entered into a fourth addendum to this technology agreement with VeriSilicon to license additional technology for a license fee of $2.5 million with an annual support fee of $120,000. No amounts were paid to Verisilicon during the three months ended May1, 2010 and May2, 2009. 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. In October 2007, the Company entered into a License Agreement with Vivante Corporation (the Vivante Agreement). The Vivante Agreement has substantially similar terms as the Company would expect to obtain for license agreements with other third parties f