Acquisitions | 9 Months Ended |
Aug. 03, 2014 |
Business Combinations [Abstract] | ' |
Acquisitions and Investment | ' |
Acquisitions and Investments |
PLX Technology, Inc. |
On August 12, 2014, we completed our acquisition of PLX Technology, Inc., or PLX, a provider of PCI Express, or PCIe, silicon and software connectivity solutions, in an all-cash transaction valued at approximately $310 million, or $293 million net of cash and debt acquired. Avago funded the transaction with available cash. With the acquisition of the core PLX PCIe silicon business, we intend to broaden our portfolio to better serve the enterprise storage and networking end markets. |
We are currently evaluating the purchase price allocation following the consummation of the PLX acquisition. It is not practical to disclose the preliminary purchase price allocation for this transaction, given the short period of time between the acquisition date and the issuance of these unaudited condensed consolidated financial statements. |
LSI Corporation |
On May 6, 2014, we acquired LSI, a company that provides high-performance storage and networking semiconductors used in hard disk drives, solid state drives, communication systems, computer servers, storage systems and personal computers. With the acquisition of LSI, we intend to enhance our competitive position in the enterprise storage market. The acquisition expands Avago's product offerings and provides us with system-level expertise in the wired infrastructure market. |
Total consideration consisted of the following (in millions): |
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Cash paid to LSI stockholders | $ | 6,344 | | | | | | | | | | | | | |
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Cash paid for options and restricted stock units | 154 | | | | | | | | | | | | | |
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Fair value of partially vested assumed equity awards | 20 | | | | | | | | | | | | | |
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Total purchase price | 6,518 | | | | | | | | | | | | | |
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Less: cash acquired | 854 | | | | | | | | | | | | | |
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Total purchase price, net of cash acquired | $ | 5,664 | | | | | | | | | | | | | |
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In connection with the LSI acquisition, we assumed stock options and RSUs, originally granted by LSI, and converted them into Avago share options and RSUs. The portion of the fair value of partially vested equity awards associated with prior service of LSI employees represents a component of the total consideration for the LSI acquisition, as presented above. Stock options assumed were valued using the Black Scholes option pricing model based on the exercise behavior of Avago's employees. RSUs were valued based on Avago’s stock price as of the acquisition date. |
We allocated the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. The fair value of identifiable intangible assets acquired was based on estimates and assumptions made by management at the time of acquisition. As additional information becomes available, such as finalization of the estimated fair values of tax accounts, we may revise our preliminary purchase price allocation during the remainder of the measurement period (which will not exceed 12 months from the acquisition date). Any such revisions or changes may be material. |
Our preliminary allocation of the total purchase price, net of cash acquired, is as follows (in millions): |
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| Estimated Fair Value | | | | | | | | | | | | |
Trade accounts receivable | $ | 282 | | | | | | | | | | | | | |
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Inventory | 386 | | | | | | | | | | | | | |
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Other current assets | 357 | | | | | | | | | | | | | |
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Assets held-for-sale | 450 | | | | | | | | | | | | | |
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Property, plant and equipment | 260 | | | | | | | | | | | | | |
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Goodwill | 1,158 | | | | | | | | | | | | | |
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Intangible assets | 3,865 | | | | | | | | | | | | | |
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Other long-term assets | 178 | | | | | | | | | | | | | |
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Total assets acquired | 6,936 | | | | | | | | | | | | | |
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Accounts payable | (207 | ) | | | | | | | | | | | | |
Employee compensation and benefits | (91 | ) | | | | | | | | | | | | |
Other current liabilities | (175 | ) | | | | | | | | | | | | |
Pension and post-retirement benefit obligations | (446 | ) | | | | | | | | | | | | |
Other long-term liabilities | (353 | ) | | | | | | | | | | | | |
Total liabilities assumed | (1,272 | ) | | | | | | | | | | | | |
Fair value of net assets acquired | $ | 5,664 | | | | | | | | | | | | | |
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Our results of continuing operations for the fiscal quarter and three fiscal quarters ended August 3, 2014 include $525 million of net revenue and $360 million of net loss attributable to LSI after May 6, 2014. Transaction costs of $21 million incurred in connection with this acquisition are included in selling, general and administrative expense in the unaudited condensed consolidated statements of operations for the fiscal quarter and three fiscal quarters ended August 3, 2014. Goodwill is primarily attributable to the assembled workforce of LSI, anticipated synergies and economies of scale expected from the operations of the combined company. |
On May 29, 2014, we entered into an agreement with Seagate, pursuant to which we agreed to sell the Flash Business to Seagate for $450 million in cash. The Flash Business was classified as assets held-for-sale on the unaudited condensed consolidated balance sheet and carried at fair value less cost to sell as determined at the acquisition date. The expected cost to sell the Flash Business was not material. This transaction closed on September 2, 2014. |
On August 13, 2014, we entered into an agreement with Intel, pursuant to which we agreed to sell the Axxia Business, for $650 million in cash. This transaction is expected to close in our fourth fiscal quarter of 2014. This transaction did not meet the criteria for assets held-for-sale under the relevant accounting guidance as of May 6, 2014 and therefore the assets of the Axxia Business have not been included in assets held-for-sale in the LSI purchase price allocation. As of August 3, 2014, the assets of the Axxia Business were classified as assets held-for-sale on the unaudited condensed consolidated balance sheet and carried at fair value less cost to sell. |
Intangible Assets |
Identified intangible assets acquired consisted of the following: |
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| Fair Value (in millions) | Weighted-Average | | | | | | | | | | | |
Lives (in years) | | | | | | | | | | | |
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Developed technology | $ | 1,961 | | 10 | | | | | | | | | | | |
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Customer relationships | 1,415 | | 8 | | | | | | | | | | | |
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Trade names | 178 | | 8 | | | | | | | | | | | |
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Customer order backlog | 106 | | 1 | | | | | | | | | | | |
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Patents | 11 | | 8 | | | | | | | | | | | |
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In place lease | 2 | | 3 | | | | | | | | | | | |
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Total identified finite-lived intangible assets | 3,673 | | | | | | | | | | | | | |
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In-process research and development | 192 | | | | | | | | | | | | | |
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Total identified intangible assets | $ | 3,865 | | | | | | | | | | | | | |
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Developed technology relates to systems-on-a-chip, read channel, pre-amplifiers, redundant array of independent disk, or RAID, Syncro, Axxia design, standard and customized networking solutions technologies. We valued the developed technology that generates cash flows from sales of existing products using the multi-period excess earnings method under the income approach. The method reflects the present value of the projected cash flows that are expected to be generated by the developed technology less charges representing the contribution of other assets to those cash flows. The economic useful life was determined based on the technology cycle related to each developed technology as well as the cash flows over the forecast period. |
Customer relationships represent the fair value of future projected revenue that will be derived from sales of products to existing customers of LSI. Customer relationships were valued using the with-and-without-method under the income approach. In this method, the fair value was measured by the difference between the present values of the cash flows from the sale with and without the existing customers in place over the period of time necessary to reacquire the customers. The economic useful life was determined based on the estimated customer product or program ramp-up period required to develop the similar existing customer revenue base. |
Trade names relate to LSI's brands, and their fair values were determined by applying the relief-from-royalty method under the income approach. This valuation method is based on the application of a royalty rate to forecasted revenue under the respective trade name. The economic useful life was determined based on the expected life of the trade names, the history of the trade names, and the cash flows anticipated over the forecasted periods. |
Customer order backlog represents business under existing contractual obligations as of the acquisition date. The fair value of backlog was determined using the multi-period excess earnings method under the income approach based on expected operating cash flows from future contractual revenue. The economic useful life was determined based on the expected life of the backlog and the cash flows over the forecast period. |
Patents represent issued patents and patent applications worldwide, and existing licensing contracts. We valued the existing patents associated with new IP licensing contracts using the multi-period excess earnings method under the income approach. The method reflects the present value of the projected cash flows that are expected to be generated by the patents less charges representing the contribution of other assets to those cash flows. We valued the existing IP licensing contracts using the discounted cash flow method under the income approach. The method reflects the present value of the projected cash flows that are expected to be generated by the licensing contracts. The economic useful life was determined based on the actual contractual terms of the existing patents and licensing contracts and the cash flows over the forecasted periods. |
The fair value of in-process research and development, or IPR&D, was determined using the multi-period excess earnings method under the income approach. This method reflects the present value of the projected cash flows that are expected to be generated by the IPR&D less charges representing the contribution of other assets to those cash flows. |
We believe the amount of purchased intangible assets recorded as developed technology, customer relationships, trade names, customer order backlog, patents, in place lease and IPR&D, represent the fair value of and approximate the amount a market participant would pay for these intangible assets as of the acquisition date. |
Unaudited Pro Forma Information |
The following unaudited pro forma financial information presents combined results of operations for each of the periods presented, as if LSI had been acquired as of the beginning of fiscal year 2013. The pro forma information excludes results of operations of LSI's Flash Business and Axxia Business and related transaction costs, and includes adjustments to amortization and depreciation for intangible assets and property, plant and equipment acquired, adjustments to share-based compensation expense, and interest expense for the additional indebtedness incurred to complete the acquisition. The pro forma results for the three fiscal quarters ended August 4, 2013 also include amortization of the purchase accounting effect on inventory acquired from LSI. The pro forma data are for informational purposes only and are not necessarily indicative of the consolidated results of operations of the combined business had the merger actually occurred at the beginning of fiscal year 2013 or of the results of future operations of the combined business. Consequently, actual results will differ from the unaudited pro forma information presented below (in millions, except for per share amounts): |
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| Fiscal Quarter Ended | | Three Fiscal Quarters Ended |
| August 3, | | August 4, | | August 3, | | August 4, |
2014 | 2013 | 2014 | 2013 |
Pro forma net revenue | $ | 1,269 | | | $ | 1,165 | | | $ | 3,687 | | | $ | 3,299 | |
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Pro forma income (loss) from continuing operations | $ | 265 | | | $ | 28 | | | $ | 375 | | | $ | (254 | ) |
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Pro forma income (loss) per share from continuing operations - basic | $ | 1.05 | | | $ | 0.11 | | | $ | 1.49 | | | $ | (1.03 | ) |
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Pro forma income (loss) per share from continuing operations - diluted | $ | 0.99 | | | $ | 0.11 | | | $ | 1.39 | | | $ | (1.03 | ) |
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CyOptics |
On June 28, 2013, we acquired CyOptics, a U.S.-based company that manufactures and sells Indium Phosphide, or InP, optical chip and component technologies for the data communications and telecommunications markets. CyOptics has front-end manufacturing operations in the U.S. and back-end manufacturing operations in Mexico. The aggregate consideration for the acquisition was approximately $377 million of which $373 million was paid in cash, net of $3 million in cash acquired. We have also recorded a $4 million liability representing additional deferred consideration to the previous shareholders of CyOptics. We expect to pay this amount in the fourth quarter of fiscal year 2014. |
In addition, approximately $27 million was payable to key employees of CyOptics as part of a retention bonus plan, of which $17 million has been paid as of August 3, 2014. This amount was paid into escrow, will be paid to those employees over a three-year period subsequent to the acquisition date and is being recognized as compensation expense in operating results over the same period. For eligible CyOptics employees whose employment is involuntarily terminated by the Company, retention bonus payments are accelerated and due in full upon such termination in accordance with the provisions of the plan. During the three fiscal quarters ended August 3, 2014, we recorded compensation expense of $10 million due to the departure of certain plan participants. The amount of such compensation expense incurred during the fiscal quarter ended August 3, 2014 was immaterial. |
Our allocation of the total purchase price, net of cash acquired, is as follows (in millions): |
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| Fair Value | | | | | | | | | | | | |
Trade accounts receivable | $ | 51 | | | | | | | | | | | | | |
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Inventory | 35 | | | | | | | | | | | | | |
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Other current assets | 2 | | | | | | | | | | | | | |
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Property, plant and equipment | 44 | | | | | | | | | | | | | |
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Goodwill | 190 | | | | | | | | | | | | | |
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Intangible assets | 141 | | | | | | | | | | | | | |
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Total assets acquired | 463 | | | | | | | | | | | | | |
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Accounts payable | (25 | ) | | | | | | | | | | | | |
Employee compensation and benefits | (5 | ) | | | | | | | | | | | | |
Other current liabilities | (2 | ) | | | | | | | | | | | | |
Long-term deferred tax liabilities (included in other long-term liabilities) | (54 | ) | | | | | | | | | | | | |
Total liabilities assumed | (86 | ) | | | | | | | | | | | | |
Fair value of net assets acquired | $ | 377 | | | | | | | | | | | | | |
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There were no significant contingencies assumed as part of the acquisition. As of August 3, 2014, we had a $12 million indemnification receivable in other long-term assets for tax positions related to CyOptics' value-added tax and income taxes payable existing prior to the acquisition. |
Intangible Assets |
Identified intangible assets acquired consisted of the following: |
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| Fair Value (in millions) | | Estimated Useful Lives (in years) | | | | | | | | | | |
Purchased technology - base product | $ | 98 | | | 8 | | | | | | | | | | |
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Purchased technology - packaging | 3 | | | 5 | | | | | | | | | | |
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Customer relationships | 32 | | | 7 | | | | | | | | | | |
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Other - customer backlog | 4 | | | 1 | | | | | | | | | | |
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Total identified finite-lived intangible assets | 137 | | | | | | | | | | | | | |
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In-process research and development | 4 | | | | | | | | | | | | | |
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Total identified intangible assets | $ | 141 | | | | | | | | | | | | | |
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Developed technology represents base product technology and packaging technology. We valued the base product technology that generates cash flows from sales of the existing products using the income approach, specifically the multi-period excess earnings method which calculates the value based on the risk-adjusted present value of the cash flows specific to the products, allowing for a reasonable return. The useful life of 8 years was determined based on the technology cycle related to the base product technology as well as the life of current legacy products. |
Packaging technology was valued utilizing the relief-from-royalty method, a form of the income approach. The relief-from-royalty method estimates the cost savings that accrue to the owner of an intangible asset that would otherwise be payable as royalties or license fees on revenues earned through the use of the asset. The royalty rate was based on an analysis of empirical, market-derived royalty rates for intangible assets. |
Customer relationships represent the fair value of future projected revenue that was expected to be derived from sales of products to existing customers of CyOptics. Customer relationships were valued using the with-and-without-method, a form of the income approach. In this method, fair value is measured by the lost profits associated with the period of time necessary to reacquire the customers. The method involves a comparison of the cash flows assuming the customer relationships were in place to cash flows that would be generated if customer relationships were newly created. There are additional considerations related to the build-in time for certain product lines and the qualification periods included in the valuation model. This method also assumes that all other assets, know-how and technology were easily available in both scenarios. |
The fair value of IPR&D was determined using the multi-period excess earnings method, a form of the income approach. Under the income approach, the expected future cash flows from each project under development are estimated and discounted to their net present values at an appropriate risk-adjusted rate of return. |
We believe the amount recorded as developed technology, IPR&D and customer relationships, represent the fair value of and approximate the amount a market participant would pay for these intangible assets as of the acquisition date. |
Unaudited Pro Forma Information |
The following table presents certain unaudited pro forma financial information for each of the fiscal years ended November 3, 2013 and October 28, 2012 as if CyOptics had been acquired as of the beginning of the fiscal year 2012. The unaudited estimated pro forma information combines the historical results of CyOptics with our consolidated historical results and includes fair value adjustments reflecting the estimated impact of amortization of intangible assets acquired and depreciation of acquired property, plant and equipment for the respective periods. The pro forma data are for informational purposes only and are not necessarily indicative of the consolidated results of operations of the combined business had the acquisition actually occurred at the beginning of our fiscal year 2012 or of the results of future operations of the combined business. Consequently, actual results will differ from the unaudited pro forma information presented below (in millions, except for per share amounts): |
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| Fiscal Year Ended | | | | | | | | |
| 3-Nov-13 | | 28-Oct-12 | | | | | | | | |
Pro forma net revenue | $ | 2,663 | | | $ | 2,578 | | | | | | | | | |
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Pro forma net income | $ | 547 | | | $ | 551 | | | | | | | | | |
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Pro forma net income per share-basic | $ | 2.21 | | | $ | 2.25 | | | | | | | | | |
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Pro forma net income per share-diluted | $ | 2.17 | | | $ | 2.2 | | | | | | | | | |
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Investments |
In fiscal year 2013, we made a minority equity investment of $9 million in the common stock of a U.S. publicly-traded company, which we accounted for as a trading security. In the fiscal quarter ended May 4, 2014, we disposed our investment in this company. There was no significant impact on our unaudited condensed consolidated financial statements from the disposal of this investment. |
As a result of the acquisition of LSI on May 6, 2014, we acquired a 51% equity interest in a joint venture, Silicon Manufacturing Partners Pte Ltd., or SMP, owned by us and GLOBALFOUNDRIES, a manufacturing foundry for integrated circuits. SMP operates an integrated circuit manufacturing facility in Singapore. We account for our ownership position in SMP under the equity method of accounting. As of August 3, 2014, the carrying amount of our equity interest was $22 million. The equity interest is reported in other long-term assets on the unaudited condensed consolidated balance sheet. |