e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 000-23993
Broadcom Corporation
(Exact Name of Registrant as Specified in Its Charter)
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California |
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33-0480482 |
(State or Other Jurisdiction |
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(I.R.S. Employer |
of Incorporation or Organization) |
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Identification No.) |
5300 California Avenue
Irvine, California 92617-3038
(Address of Principal Executive Offices) (Zip Code)
(949) 926-5000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes
þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated Filer
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Accelerated filer o |
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Non-accelerated filer o |
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes
o No þ
As of September 30, 2009 the registrant had 436.5 million shares of Class A common stock,
$0.0001 par value, and 58.6 million shares of Class B common stock, $0.0001 par value, outstanding.
BROADCOM CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009
TABLE OF CONTENTS
Broadcom® and the pulse logo are among the trademarks of Broadcom Corporation
and/or its affiliates in the United States, certain other countries and/or the EU. Any other
trademarks or trade names mentioned are the property of their respective owners.
© 2009 Broadcom Corporation. All rights reserved.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BROADCOM CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
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September 30, |
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December 31, |
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2009 |
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2008 |
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(In thousands) |
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ASSETS |
Current assets: |
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Cash and cash equivalents |
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$ |
1,345,221 |
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$ |
1,190,645 |
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Short-term marketable securities |
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561,287 |
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707,477 |
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Accounts receivable, net |
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541,587 |
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372,311 |
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Inventory |
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307,216 |
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366,106 |
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Prepaid expenses and other current assets |
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95,296 |
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114,674 |
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Total current assets |
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2,850,607 |
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2,751,213 |
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Property and equipment, net |
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228,621 |
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234,691 |
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Long-term marketable securities |
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470,643 |
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Goodwill |
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1,277,951 |
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1,279,243 |
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Purchased intangible assets, net |
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21,324 |
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61,958 |
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Other assets |
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67,019 |
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66,160 |
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Total assets |
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$ |
4,916,165 |
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$ |
4,393,265 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
Current liabilities: |
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Accounts payable |
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$ |
423,199 |
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$ |
310,487 |
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Wages and related benefits |
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182,394 |
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157,758 |
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Deferred revenue |
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96,421 |
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12,338 |
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Accrued liabilities |
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301,371 |
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236,520 |
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Total current liabilities |
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1,003,385 |
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717,103 |
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Long-term deferred revenue |
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637 |
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3,898 |
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Other long-term liabilities |
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62,688 |
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65,197 |
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Commitments and contingencies |
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Shareholders equity: |
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Common stock |
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50 |
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49 |
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Additional paid-in capital |
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11,170,000 |
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10,930,315 |
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Accumulated deficit |
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(7,318,273 |
) |
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(7,324,330 |
) |
Accumulated other comprehensive income (loss) |
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(2,322 |
) |
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1,033 |
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Total shareholders equity |
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3,849,455 |
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3,607,067 |
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Total liabilities and shareholders equity |
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$ |
4,916,165 |
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$ |
4,393,265 |
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See accompanying notes.
2
BROADCOM CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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(In thousands, except per share data) |
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Net revenue: |
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Product revenue |
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$ |
1,194,745 |
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$ |
1,254,083 |
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$ |
2,989,292 |
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$ |
3,409,051 |
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Licensing revenue |
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59,452 |
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44,392 |
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158,285 |
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122,565 |
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Total net revenue |
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1,254,197 |
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1,298,475 |
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3,147,577 |
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3,531,616 |
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Operating costs and expenses: |
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Cost of product revenue |
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615,349 |
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619,459 |
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1,580,300 |
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1,655,218 |
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Research and development |
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391,170 |
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379,279 |
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1,138,664 |
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1,115,002 |
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Selling, general and administrative |
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142,480 |
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141,941 |
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394,938 |
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395,904 |
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Amortization of purchased intangible assets |
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4,159 |
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183 |
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12,457 |
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550 |
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In-process research and development |
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10,900 |
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Impairment of long-lived assets |
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7,634 |
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250 |
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18,895 |
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2,150 |
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Restructuring costs (reversals) |
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4,772 |
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12,330 |
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(1,000 |
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Settlement costs (gains) |
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(57,256 |
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15,810 |
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Charitable contribution |
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50,000 |
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Total operating costs and expenses |
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1,165,564 |
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1,141,112 |
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3,150,328 |
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3,194,534 |
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Income (loss) from operations |
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88,633 |
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157,363 |
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(2,751 |
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337,082 |
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Interest income, net |
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2,978 |
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12,451 |
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11,362 |
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44,983 |
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Other income (expense), net |
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(178 |
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(3,720 |
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2,487 |
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(2,987 |
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Income before income taxes |
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91,433 |
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166,094 |
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11,098 |
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379,078 |
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Provision for income taxes |
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6,837 |
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1,188 |
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5,041 |
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5,069 |
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Net income |
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$ |
84,596 |
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$ |
164,906 |
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$ |
6,057 |
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$ |
374,009 |
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Net income per share (basic) |
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$ |
0.17 |
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$ |
0.32 |
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$ |
0.01 |
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$ |
0.72 |
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Net income per share (diluted) |
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$ |
0.16 |
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$ |
0.31 |
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$ |
0.01 |
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$ |
0.70 |
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Weighted average shares (basic) |
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495,491 |
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509,041 |
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493,599 |
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517,418 |
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Weighted average shares (diluted) |
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521,443 |
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523,759 |
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508,559 |
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531,187 |
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The following table presents details of total stock-based compensation expense included in
each functional line item in the unaudited condensed consolidated statements of income above:
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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(In thousands) |
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Cost of product revenue |
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$ |
6,579 |
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$ |
6,652 |
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$ |
18,584 |
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$ |
18,354 |
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Research and development |
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90,829 |
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93,334 |
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266,698 |
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262,043 |
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Selling, general and administrative |
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31,290 |
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33,328 |
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89,817 |
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93,661 |
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See accompanying notes.
3
BROADCOM CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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Nine Months Ended |
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September 30, |
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2009 |
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2008 |
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(In thousands) |
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Operating activities |
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Net income |
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$ |
6,057 |
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$ |
374,009 |
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Adjustments to reconcile net income to net cash provided
by operating activities: |
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Depreciation and amortization |
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47,314 |
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55,770 |
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Stock-based compensation expense: |
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Stock options and other awards |
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126,461 |
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168,891 |
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Restricted stock units |
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248,638 |
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205,167 |
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Acquisition-related items: |
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Amortization of purchased intangible assets |
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24,558 |
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12,354 |
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In-process research and development |
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10,900 |
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Impairment of long-lived assets |
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18,895 |
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2,150 |
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Loss on strategic investments, net |
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4,266 |
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Non-cash restructuring charges |
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3,471 |
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Loss (gain) on sale of marketable securities |
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(1,046 |
) |
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1,781 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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(169,276 |
) |
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(131,998 |
) |
Inventory |
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58,890 |
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(91,292 |
) |
Prepaid expenses and other assets |
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19,972 |
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(1,629 |
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Accounts payable |
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112,525 |
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147,332 |
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Deferred revenue |
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80,822 |
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(8,962 |
) |
Other accrued and long-term liabilities |
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77,684 |
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24,719 |
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Net cash provided by operating activities |
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654,965 |
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773,458 |
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Investing activities |
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Net purchases of property and equipment |
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(48,774 |
) |
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(65,151 |
) |
Net cash received from (paid for) acquired companies |
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842 |
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(29,795 |
) |
Purchases of strategic investments |
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(2,000 |
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(355 |
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Purchases of marketable securities |
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(1,057,972 |
) |
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(1,110,514 |
) |
Proceeds from sales and maturities of marketable securities |
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737,377 |
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512,022 |
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Net cash used in investing activities |
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(370,527 |
) |
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(693,793 |
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Financing activities |
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Repurchases of Class A common stock |
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(206,517 |
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(859,775 |
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Proceeds from issuance of common stock |
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137,229 |
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114,582 |
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Minimum tax withholding paid on behalf of employees for
restricted stock units |
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(60,574 |
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(45,186 |
) |
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Net cash used in financing activities |
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(129,862 |
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(790,379 |
) |
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Increase (decrease) in cash and cash equivalents |
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154,576 |
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(710,714 |
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Cash and cash equivalents at beginning of period |
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1,190,645 |
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2,186,572 |
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Cash and cash equivalents at end of period |
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$ |
1,345,221 |
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$ |
1,475,858 |
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See accompanying notes.
4
BROADCOM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
1. Summary of Significant Accounting Policies
Our Company
Broadcom Corporation (including our subsidiaries, referred to collectively in these unaudited
condensed consolidated financial statements as Broadcom, we, our and us) is a major
technology innovator and global leader in semiconductors for wired and wireless communications. Our
products enable the delivery of voice, video, data and multimedia to and throughout the home, the
office and the mobile environment. Broadcom provides one of the industrys broadest portfolios of
state-of-the-art system-on-a-chip and software solutions to manufacturers of computing and
networking equipment, digital entertainment and broadband access products, and mobile devices. Our
diverse product portfolio includes solutions for digital cable, satellite and Internet Protocol
(IP) set-top boxes and media servers; high definition television (HDTV); high definition DVD
players and personal video recording (PVR) devices; cable and DSL modems and residential gateways;
high-speed transmission and switching for local, metropolitan, wide area and storage networking;
server solutions; broadband network and security processors; wireless and personal area networking;
cellular communications; global positioning system (GPS) applications; mobile multimedia and
applications processors; mobile power management; and Voice over Internet Protocol (VoIP) gateway
and telephony systems.
Basis of Presentation
The interim unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States, or GAAP, for interim
financial information and with the instructions to Securities and Exchange Commission, or SEC, Form
10-Q and Article 10 of SEC Regulation S-X. They do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial statements. Therefore,
these financial statements should be read in conjunction with our audited consolidated financial
statements and notes thereto for the year ended December 31, 2008, included in our Annual Report on
Form 10-K filed with the SEC February 4, 2009.
The interim condensed consolidated financial statements included herein are unaudited;
however, they contain all normal recurring accruals and adjustments that, in the opinion of
management, are necessary to present fairly our consolidated financial position at September 30,
2009 and December 31, 2008, and our consolidated results of operations and cash flows for the three
and nine months ended September 30, 2009 and 2008. The results of operations for the three and nine
months ended September 30, 2009 are not necessarily indicative of the results to be expected for
future quarters or the full year.
In June 2009 the Financial Accounting Standards Board, or FASB, established the Accounting
Standards Codification, or Codification, as the source of authoritative GAAP recognized by the
FASB. The Codification is effective in the first interim and annual periods ending after September
15, 2009 and had no effect on our unaudited condensed consolidated financial statements.
Certain prior period amounts in the unaudited condensed consolidated statements of income have
been reclassified to conform with the current period presentation of product and licensing revenue.
We have evaluated subsequent events through October 22, 2009, the date of issuance of the
unaudited condensed consolidated financial statements. During this period we did not have any
material subsequent events.
Foreign Currency Translation
The functional currency for most of our international operations is the U.S. dollar. The
functional currency for a small number of our foreign subsidiaries is the local currency. Assets
and liabilities denominated in foreign currencies are translated using the exchange rates on the
balance sheet dates. Revenues and expenses are translated
5
using the average exchange rates prevailing during the year. Any translation adjustments
resulting from this process are shown separately as a component of accumulated other comprehensive
income (loss) within shareholders equity in the unaudited condensed consolidated balance sheets.
Foreign currency transaction gains and losses are reported in other income (expense), net in the
unaudited condensed consolidated statements of income.
Use of Estimates
The preparation of financial statements in accordance with United States generally accepted
accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the dates of the financial statements and the
reported amounts of total net revenue and expenses in the reporting periods. We regularly evaluate
estimates and assumptions related to revenue recognition, rebates, allowances for doubtful
accounts, sales returns and allowances, warranty reserves, inventory reserves, stock-based
compensation expense, goodwill and purchased intangible asset valuations, strategic investments,
deferred income tax asset valuation allowances, uncertain tax positions, tax contingencies,
self-insurance, restructuring costs (reversals), litigation and other loss contingencies. These
estimates and assumptions are based on current facts, historical experience and various other
factors that we believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities and the recording of
revenue, costs and expenses that are not readily apparent from other sources. The actual results we
experience may differ materially and adversely from our estimates. To the extent there are material
differences between the estimates and actual results, our future results of operations will be
affected.
Revenue Recognition
Our product revenue consists principally of sales of semiconductor devices and, to a lesser
extent, software licenses and royalties, development, support and maintenance agreements, data
services and cancellation fees. Our licensing revenue is generated from the licensing of
intellectual property. The majority of our product sales occur through the efforts of our direct
sales force. The remaining balance of product sales occurs through distributors.
The following table presents details of our total net revenue:
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|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Product revenue (1) |
|
|
95.3 |
% |
|
|
96.6 |
% |
|
|
95.0 |
% |
|
|
96.5 |
% |
Licensing revenue |
|
|
4.7 |
|
|
|
3.4 |
|
|
|
5.0 |
|
|
|
3.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes software licenses and royalties, development, support and maintenance agreements,
data services and cancellation fees totaling less than 0.8% of total net revenue for all
periods presented. |
The following table presents details of our product revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Product sales made through direct sales force |
|
|
76.8 |
% |
|
|
81.2 |
% |
|
|
79.0 |
% |
|
|
83.9 |
% |
Product sales made through distributors |
|
|
23.2 |
|
|
|
18.8 |
|
|
|
21.0 |
|
|
|
16.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
We recognize product revenue when all of the following criteria are met: (i) persuasive
evidence of an arrangement exists, (ii) delivery has occurred, (iii) the price to the customer is
fixed or determinable, and (iv) collection of the resulting receivable is reasonably assured. These
criteria are usually met at the time of product shipment. However, we do not recognize revenue when
any significant obligations remain. We record reductions of revenue for estimated product returns
and pricing adjustments, such as competitive pricing programs and rebates, in the same period that
the related revenue is recorded. The amount of these reductions is based on historical sales
returns, analysis of credit memo data, specific criteria included in rebate agreements, and
other factors known at the
6
time. We accrue 100% of potential rebates at the time of sale and do not
apply a breakage factor. We reverse the accrual for unclaimed rebate amounts as specific rebate
programs contractually end or when we believe unclaimed rebates are no longer subject to payment
and will not be paid. See Note 2 for a summary of our rebate activity.
A portion of our product sales is made through distributors under agreements allowing for
pricing credits and/or rights of return. These pricing credits and/or right of return provisions
prevent us from being able to reasonably estimate the final price of the inventory to be sold and
the amount of inventory that could be returned pursuant to these agreements. As a result, the
criterion listed in (iii) in the paragraph above has not been met at the time we deliver products
to our distributors. Accordingly, product revenue from sales made through these distributors is not
recognized until the distributors ship the product to their customers. We also maintain inventory,
or hubbing, arrangements with certain of our customers. Pursuant to these arrangements we deliver
products to a customer or a designated third party warehouse based upon the customers projected
needs, but do not recognize product revenue unless and until the customer reports that it has
removed our product from the warehouse to be incorporated into its end products.
In arrangements that include a combination of semiconductor products and software, where
software is considered more-than-incidental and essential to the functionality of the product being
sold, we account for the entire arrangement as a sale of software and software-related items and
allocate the arrangement consideration based on vendor-specific objective evidence, or VSOE.
In arrangements that include a combination of semiconductor products, software and/or
services, where software is not considered more-than-incidental to the product being sold, we
allocate the arrangement consideration based on each elements relative fair value.
In the arrangements described above, both the semiconductor products and software are
delivered concurrently and post-contract customer support is not provided. Therefore, we recognize
revenue upon shipment of the semiconductor product, assuming all other basic revenue recognition
criteria are met, as both the semiconductor products and software are considered delivered elements
and no undelivered elements exist. In limited instances where there are undelivered elements, we
allocate revenue based on the relative fair value of the individual elements. If there is no
established fair value for an undelivered element, the entire arrangement is accounted for as a
single unit of accounting, resulting in a deferral of revenue and costs for the delivered element
until the undelivered element has been fulfilled. In cases where the undelivered element is a data
or support service, the revenue and costs applicable to both the delivered and undelivered elements
are recorded ratably over the respective service period or estimated product life. If the
undelivered element is essential to the functionality of the delivered element, no revenue or costs
are recognized until the undelivered element is delivered.
Revenue from software licenses is recognized when all revenue recognition criteria are met
and, if applicable, when VSOE exists to allocate the total license fee to each element of
multiple-element software arrangements, including post-contract customer support. Post-contract
support is recognized ratably over the term of the related contract. When a contract contains
multiple elements wherein the only undelivered element is post-contract customer support and VSOE
of the fair value of post-contract customer support does not exist, revenue from the entire
arrangement is recognized ratably over the support period. Software royalty revenue is recognized
based upon reports received from licensees during the period, unless collectibility is not
reasonably assured, in which case revenue is recognized when payment is received from the licensee.
Revenue from cancellation fees is recognized when cash is received from the customer.
Revenue from the licensing of intellectual property is recognized based upon either the
performance period of the license or upon receipt of licensee reports as applicable in our various
intellectual property arrangements. See Note 2 for additional details of the licensing of
intellectual property.
We record deferred revenue when advance payments are received from customers before
performance obligations have been completed and/or services have been performed. Deferred revenue
does not include amounts from products delivered to distributors that the distributors have not yet
sold through to their end customers.
7
Cost of Product Revenue
Cost of product revenue comprises the cost of our semiconductor devices, which consists of the
cost of purchasing finished silicon wafers manufactured by independent foundries, costs associated
with our purchase of assembly, test and quality assurance services and packaging materials for
semiconductor products, as well as royalties paid to vendors for use of their technology. Also
included in cost of product revenue is the amortization of purchased technology, and manufacturing
overhead, including costs of personnel and equipment associated with manufacturing support, product
warranty costs, provisions for excess and obsolete inventories, and stock-based compensation
expense for personnel engaged in manufacturing support.
Concentration of Credit Risk
We sell the majority of our products throughout North America, Asia and Europe. Sales to our
recurring customers are generally made on open account while sales to occasional customers are
typically made on a prepaid or letter of credit basis. We perform periodic credit evaluations of
our recurring customers and generally do not require collateral. An allowance for doubtful accounts
is maintained for potential credit losses, which losses historically have not been significant.
We invest our cash in U.S. Treasury instruments and in deposits and money market funds with
major financial institutions. It is our policy to invest in instruments that have a final maturity
of no longer than three years, with a portfolio weighted average maturity of no longer than 18
months.
Fair Value of Financial Instruments
Our financial instruments consist principally of cash and cash equivalents, short- and
long-term marketable securities, accounts receivable and accounts payable. Marketable securities
consist of available-for-sale securities that are reported at fair value with the related
unrealized gains and losses included in accumulated other comprehensive income (loss), a component
of shareholders equity, net of tax. The fair value of our cash equivalents and marketable
securities is determined based on Level 1 inputs, which consist of quoted prices in active
markets for identical assets. We believe that the recorded values of all of our other financial
instruments approximate their current fair values because of their nature and respective relatively
short maturity dates or durations.
Cash and Cash Equivalents
We consider all highly liquid investments that are readily convertible into cash and have an
original maturity of three months or less at the time of purchase to be cash equivalents.
Marketable Securities
Broadcom defines marketable securities as income yielding securities that can be readily
converted into cash. Examples of marketable securities include U.S. Treasury and agency
obligations, commercial paper, corporate notes and bonds, time deposits, foreign notes and
certificates of deposit.
We account for our investments in debt and equity instruments as available-for-sale.
Management determines the appropriate classification of such securities at the time of purchase and
re-evaluates such classification as of each balance sheet date. Cash equivalents and marketable
securities are reported at fair value with the related unrealized gains and losses included in
accumulated other comprehensive income (loss), a component of shareholders equity, net of tax. We
assess whether our investments with unrealized loss positions are other than temporarily impaired.
Unrealized gains and losses and declines in value judged to be other than temporary are determined
based on the specific identification method and are reported in other income (expense), net in the
unaudited condensed consolidated statements of income.
8
Inventory
Inventory consists of work in process and finished goods and is stated at the lower of cost
(first-in, first-out) or market. We establish inventory reserves for estimated obsolete or
unmarketable inventory equal to the difference between the cost of inventory and the estimated net
realizable value based upon assumptions about future demand and market conditions. Shipping and
handling costs are classified as a component of cost of product revenue in the unaudited condensed
consolidated statements of income. Inventory acquired through business combinations is recorded at
its acquisition date fair value which is the net realizable value less a normal profit margin
depending on the stage of inventory completion.
Property and Equipment
Property and equipment are carried at cost. Depreciation and amortization are calculated using
the straight-line method over the assets estimated remaining useful lives, ranging from one to ten
years. Depreciation and amortization of leasehold improvements are computed using the shorter of
the remaining useful lives or lease terms.
Goodwill and Long-Lived Assets
Goodwill is recorded as the difference, if any, between the aggregate consideration paid for
an acquisition and the fair value of the net tangible and intangible assets acquired. We test
goodwill for impairment at the reporting unit level (operating segment or one level below an
operating segment) on an annual basis in the fourth quarter or more frequently if we believe
indicators of impairment exist. The performance of the test involves a two-step process. The first
step of the impairment test involves comparing the fair values of the applicable reporting units
with their aggregate carrying values, including goodwill. We generally determine the fair value of
our reporting units using the income approach methodology of valuation that includes the discounted
cash flow method as well as other generally accepted valuation methodologies. If the carrying
amount of a reporting unit exceeds the reporting units fair value, we perform the second step of
the goodwill impairment test to determine the amount of impairment loss. The second step of the
goodwill impairment test involves comparing the implied fair value of the affected reporting units
goodwill with the carrying value of that goodwill.
We account for the impairment of long-lived assets, including other purchased intangible
assets, when indicators of impairment, such as reductions in demand or significant economic
slowdowns in the semiconductor industry, are present. Reviews are performed to determine whether
the carrying value of an asset is impaired, based on comparisons to undiscounted expected future
cash flows. If this comparison indicates that there is impairment, the impaired asset is written
down to fair value, which is typically calculated using: (i) quoted market prices or (ii)
discounted expected future cash flows utilizing an appropriate discount rate. Impairment is based
on the excess of the carrying amount over the fair value of those assets.
Warranty
Our products typically carry a one to three year warranty. We establish reserves for estimated
product warranty costs at the time revenue is recognized based upon our historical warranty
experience, and additionally for any known product warranty issues. If actual costs differ from our
initial estimates, we record the difference in the period it is identified. Actual claims are
charged against the warranty reserve. See Note 2 for a summary of our warranty activity.
Guarantees and Indemnifications
In some agreements to which we are a party, we have agreed to indemnify the other party for
certain matters such as product liability. We include intellectual property indemnification
provisions in our standard terms and conditions of sale for our products and have also included
such provisions in certain agreements with third parties. We have and will continue to evaluate and
provide reasonable assistance for these other parties. This may include certain levels of financial
support to minimize the impact of the litigation in which they are involved. To date, there have
been no known events or circumstances that have resulted in any material costs related to these
indemnification provisions and no liabilities have been recorded in the accompanying unaudited
condensed consolidated financial
9
statements. However, the maximum potential amount of the future payments we could be required
to make under these indemnification obligations could be significant.
We also have obligations to indemnify certain of our present and former directors, officers
and employees to the maximum extent not prohibited by law. Under these obligations, Broadcom is
required to indemnify (subject to certain exceptions) each such director, officer and employee
against expenses, including attorneys fees, judgments, fines and settlements, paid by such
individual in connection with our currently outstanding securities litigation and related
government investigations described in Note 9. The potential amount of the future payments we could
be required to make under these indemnification obligations could be significant. We maintain
directors and officers insurance policies that may limit our exposure and enable us to recover a
portion of the amounts paid with respect to such obligations. However, certain of our insurance
carriers have reserved their rights under their respective policies, and in the third quarter of
2008 one of our insurance carriers notified us that coverage was not available and that it intended
to suspend payment to us. As a result, we ceased receiving reimbursements under these policies for
our expenses related to the matters described above. However, in January 2009 we entered into an
agreement with that insurance carrier and certain of our other insurance carriers pursuant to
which, without prejudicing our rights or the rights of such insurers, we have received payments
from these insurers under these insurance policies. In August 2009 we entered into a proposed
settlement with our directors and officers insurance carriers as part of a partial settlement of
the federal derivative action. We recognize reimbursements from our directors and officers
insurance carriers on a cash basis, pursuant to which we record a reduction of selling, general and
administrative expense only when cash is received from our insurance
carriers. In the nine months ended
September 30, 2009, we recovered legal expenses of $16.6 million under these insurance policies.
From inception of the securities litigation and related government investigations through September
30, 2009, we have recovered legal expenses of $43.3 million under these insurance policies. These
amounts have been recorded as a reduction of selling, general and administrative expense.
In certain limited circumstances, all or portions of the amounts recovered from our insurance
carriers may be required to be repaid. We regularly evaluate the need to record a liability for
potential future repayments. As of September 30, 2009 we have not recorded a liability in
connection with these potential insurance repayment provisions. In connection with our currently
outstanding securities litigation and related government investigations described in Note 9, as of
September 30, 2009, we had advanced $79.0 million to certain former officers for attorney and
expert fees for which we did not receive reimbursement from our insurance carriers, which amount
has been expensed. If our coverage under these policies is reduced or eliminated, or if the
proposed partial settlement does not receive final court approval, our potential financial exposure
in the pending securities litigation and related government investigations would be increased.
See Note 9 for a summary of our currently outstanding securities litigation and related
government investigations, an update regarding future reimbursements related to our insurance
polices, as well as a further discussion of our litigation matters.
Income Taxes
We utilize the asset and liability method of accounting for income taxes, under which deferred
taxes are determined based on the temporary differences between the financial statement and tax
basis of assets and liabilities using tax rates expected to be in effect during the years in which
the basis differences reverse. A valuation allowance is recorded when it is more likely than not
that some of the deferred tax assets will not be realized.
Income tax positions must meet a more-likely-than-not recognition threshold to be recognized.
Income tax positions that previously failed to meet the more-likely-than-not threshold are
recognized in the first subsequent financial reporting period in which that threshold is met.
Previously recognized tax positions that no longer meet the more-likely-than-not threshold are
derecognized in the first subsequent financial reporting period in which that threshold is no
longer met. We recognize potential accrued interest and penalties related to unrecognized tax
benefits within the unaudited condensed consolidated statements of income as income tax expense.
Stock-Based Compensation
Broadcom has in effect stock incentive plans under which incentive stock options have been
granted to employees and restricted stock units and non-qualified stock options have been granted
to employees and non-employee members of the Board of Directors. We also have an employee stock
purchase plan for all eligible
10
employees. We are required to estimate the fair value of share-based awards on the date of
grant. The value of the award is principally recognized as expense ratably over the requisite
service periods. The fair value of our restricted stock units is based on the closing market price
of our Class A common stock on the date of grant. We have estimated the fair value of stock options
and stock purchase rights as of the date of grant or assumption using the Black-Scholes option
pricing model, which was developed for use in estimating the value of traded options that have no
vesting restrictions and that are freely transferable. The Black-Scholes model considers, among
other factors, the expected life of the award and the expected volatility of our stock price. We
evaluate the assumptions used to value stock options and stock purchase rights on a quarterly
basis. The fair values generated by the Black-Scholes model may not be indicative of the actual
fair values of our equity awards, as it does not consider other factors important to those awards
to employees, such as continued employment, periodic vesting requirements and limited
transferability.
Litigation and Settlement Costs
Legal costs are expensed as incurred. We are involved in disputes, litigation and other legal
actions. We record a charge equal to at least the minimum estimated liability for a loss
contingency when both of the following conditions are met: (i) information available prior to
issuance of the financial statements indicates that it is probable that an asset had been impaired
or a liability had been incurred at the date of the financial statements and (ii) the loss or range
of loss can be reasonably estimated.
Net Income (Loss) Per Share
Net income (loss) per share (basic) is calculated by dividing net income (loss) by the
weighted average number of common shares outstanding during the year. Net income per share
(diluted) is calculated by adjusting outstanding shares, assuming any dilutive effects of options
and restricted stock units calculated using the treasury stock method. Under the treasury stock
method, an increase in the fair market value of our Class A common stock results in a greater
dilutive effect from outstanding options, stock purchase rights and restricted stock units.
Additionally, the exercise of employee stock options and stock purchase rights and the vesting of
restricted stock units results in a further dilutive effect on net income per share.
Business Enterprise Segments
Our Chief Executive Officer, who is considered to be our chief operating decision maker,
reviews financial information presented on an operating segment basis for purposes of making
operating decisions and assessing financial performance. Although we have four operating segments,
under current aggregation criteria, which includes similar economic characteristics, nature of products,
production processes, type or class of products and distribution methods, we operate in only one
reportable operating segment, wired and wireless broadband communications.
Self-Insurance
We are self-insured for certain healthcare benefits provided to our U.S. employees. The
liability for the self-insured benefits is limited by the purchase of stop-loss insurance. The
stop-loss coverage provides payment for aggregate claims exceeding $0.3 million per covered person
for any given year.
Accruals for losses are made based on our claim experience and actuarial estimates based on
historical data. Actual losses may differ from accrued amounts. Should actual losses exceed the
amounts expected and if the recorded liabilities are insufficient, an additional expense will be
recorded.
Recent Accounting Pronouncements
In December 2007 the FASB issued Accounting Standard, or AS, Topic 805, Business Combinations,
or AS 805, which established principles and requirements for the acquirer of a business to
recognize and measure in its financial statements the identifiable assets (including in-process
research and development and defensive assets) acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree. AS 805 is effective for financial statements issued for
fiscal years beginning after December 15, 2008. Prior to the adoption of AS 805, in-process
11
research and development costs were immediately expensed and acquisition costs were
capitalized. Under AS 805 all acquisition costs are expensed as incurred. The standard also
provides guidance for recognizing and measuring the goodwill acquired in the business combination
and determines what information to disclose to enable users of financial statements to evaluate the
nature and financial effects of the business combination. In April 2009 the FASB updated AS 805 to
amend the provisions for the initial recognition and measurement, subsequent measurement and
accounting, and disclosures for assets and liabilities arising from contingencies in business
combinations. This update also eliminates the distinction between contractual and non-contractual
contingencies. We expect AS 805 will have an impact on our consolidated financial statements, but
the nature and magnitude of the specific effects will depend upon the nature, terms and size of the
acquisitions we consummate after the January 1, 2009 effective date.
In September 2009 the FASB reached a consensus on Accounting Standards Update, or ASU,
2009-13, Revenue Recognition (Topic 605) Multiple-Deliverable Revenue Arrangements, or ASU
2009-13 and ASU 2009-14, Software (Topic 985) Certain Revenue Arrangements That Include Software
Elements, or ASU 2009-14. ASU 2009-13 modifies the requirements that must be met for an entity to
recognize revenue from the sale of a delivered item that is part of a multiple-element arrangement
when other items have not yet been delivered. ASU 2009-13 eliminates the requirement that all
undelivered elements must have either: i) VSOE or ii) third-party evidence, or TPE, before an
entity can recognize the portion of an overall arrangement consideration that is attributable to
items that already have been delivered. In the absence of VSOE or TPE of the standalone selling
price for one or more delivered or undelivered elements in a multiple-element arrangement, entities
will be required to estimate the selling prices of those elements. Overall arrangement
consideration will be allocated to each element (both delivered and undelivered items) based on
their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or
TPE or are based on the entitys estimated selling price. The residual method of allocating
arrangement consideration has been eliminated. ASU 2009-14 modifies the software revenue
recognition guidance to exclude from its scope tangible products that contain both software and
non-software components that function together to deliver a products essential functionality.
These new updates are effective for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. Early adoption is permitted. We are currently
evaluating the impact that the adoption of these ASUs will have on our consolidated financial
statements.
2. Supplemental Financial Information
Inventory
The following table presents details of our inventory:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Work in process |
|
$ |
146,834 |
|
|
$ |
166,811 |
|
Finished goods |
|
|
160,382 |
|
|
|
199,295 |
|
|
|
|
|
|
|
|
|
|
$ |
307,216 |
|
|
$ |
366,106 |
|
|
|
|
|
|
|
|
12
Property and Equipment
The following table presents details of our property and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
Useful Life |
|
|
2009 |
|
|
2008 |
|
|
|
(In years) |
|
|
(In thousands) |
|
Leasehold improvements |
|
|
1 to 10 |
|
|
$ |
161,359 |
|
|
$ |
154,594 |
|
Office furniture and equipment |
|
|
3 to 7 |
|
|
|
26,436 |
|
|
|
25,059 |
|
Machinery and equipment |
|
|
3 to 5 |
|
|
|
221,672 |
|
|
|
193,993 |
|
Computer software and equipment |
|
|
2 to 4 |
|
|
|
120,615 |
|
|
|
113,501 |
|
Construction in progress |
|
|
N/A |
|
|
|
4,927 |
|
|
|
3,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
535,009 |
|
|
|
491,040 |
|
Less accumulated depreciation
and amortization |
|
|
|
|
|
|
(306,388 |
) |
|
|
(256,349 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
228,621 |
|
|
$ |
234,691 |
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
The following table summarizes the activity related to the carrying value of our goodwill
during the nine months ended September 30, 2009:
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, 2009 |
|
|
|
(In thousands) |
|
Beginning balance |
|
$ |
1,279,243 |
|
Goodwill recorded in connection with an acquisition |
|
|
849 |
|
Purchase price adjustment DTV Business of AMD, Inc. |
|
|
(2,141 |
) |
|
|
|
|
Ending balance |
|
$ |
1,277,951 |
|
|
|
|
|
Purchased Intangible Assets
The following table presents details of our purchased intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Gross |
|
|
Amortization (1) |
|
|
Net |
|
|
Gross |
|
|
Amortization |
|
|
Net |
|
|
|
(In thousands) |
|
Completed
technology |
|
$ |
220,669 |
|
|
$ |
(203,422 |
) |
|
$ |
17,247 |
|
|
$ |
220,669 |
|
|
$ |
(190,074 |
) |
|
$ |
30,595 |
|
Customer
relationships |
|
|
80,366 |
|
|
|
(77,523 |
) |
|
|
2,843 |
|
|
|
80,366 |
|
|
|
(50,558 |
) |
|
|
29,808 |
|
Customer backlog |
|
|
3,436 |
|
|
|
(3,436 |
) |
|
|
|
|
|
|
3,436 |
|
|
|
(3,436 |
) |
|
|
|
|
Other |
|
|
9,214 |
|
|
|
(7,980 |
) |
|
|
1,234 |
|
|
|
9,214 |
|
|
|
(7,659 |
) |
|
|
1,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
313,685 |
|
|
$ |
(292,361 |
) |
|
$ |
21,324 |
|
|
$ |
313,685 |
|
|
$ |
(251,727 |
) |
|
$ |
61,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included in accumulated amortization in 2009 is an impairment charge in the nine months
ended September 30, 2009 of $16.1 million related to the acquisition of the DTV Business of
AMD, of which $4.8 million was recorded in the three months ended September 30, 2009. The
primary factor contributing to this impairment charge was the continued reduction in our
revenue outlook for this business. |
The following table presents details of the amortization of purchased intangible assets
included in the cost of product revenue and other operating expense categories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Cost of
product revenue |
|
$ |
3,876 |
|
|
$ |
3,935 |
|
|
$ |
12,101 |
|
|
$ |
11,804 |
|
Other operating
expenses |
|
|
4,159 |
|
|
|
183 |
|
|
|
12,457 |
|
|
|
550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,035 |
|
|
$ |
4,118 |
|
|
$ |
24,558 |
|
|
$ |
12,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
The following table presents details of estimated future straight-line amortization of
existing purchased intangible assets. If we acquire additional purchased intangible assets in the
future, our cost of product revenue or operating expenses will be increased by the amortization of
those assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased Intangible Assets Amortization by Year |
|
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
Thereafter |
|
|
Total |
|
|
|
(In thousands) |
|
Cost of
product revenue |
|
$ |
3,697 |
|
|
$ |
12,527 |
|
|
$ |
1,023 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
17,247 |
|
Other operating
expenses |
|
|
1,664 |
|
|
|
1,579 |
|
|
|
500 |
|
|
|
334 |
|
|
|
|
|
|
|
4,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,361 |
|
|
$ |
14,106 |
|
|
$ |
1,523 |
|
|
$ |
334 |
|
|
$ |
|
|
|
$ |
21,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Liabilities
The following table presents details of our accrued liabilities:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Accrued rebates |
|
$ |
150,808 |
|
|
$ |
125,058 |
|
Accrued charitable contribution |
|
|
50,000 |
|
|
|
|
|
Accrued legal costs |
|
|
31,074 |
|
|
|
26,973 |
|
Accrued payments on repurchases of
Class A common stock |
|
|
10,954 |
|
|
|
|
|
Warranty reserve |
|
|
9,988 |
|
|
|
11,473 |
|
Accrued taxes |
|
|
10,706 |
|
|
|
15,924 |
|
Restructuring liabilities |
|
|
5,409 |
|
|
|
3,342 |
|
Accrued licensing payments |
|
|
|
|
|
|
25,467 |
|
Other |
|
|
32,432 |
|
|
|
28,283 |
|
|
|
|
|
|
|
|
|
|
$ |
301,371 |
|
|
$ |
236,520 |
|
|
|
|
|
|
|
|
Other Long-Term Liabilities
The following table presents details of our other long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Deferred rent |
|
$ |
32,597 |
|
|
$ |
32,594 |
|
Accrued taxes |
|
|
24,432 |
|
|
|
26,190 |
|
Restructuring liabilities |
|
|
|
|
|
|
837 |
|
Other long-term liabilities |
|
|
5,659 |
|
|
|
5,576 |
|
|
|
|
|
|
|
|
|
|
$ |
62,688 |
|
|
$ |
65,197 |
|
|
|
|
|
|
|
|
14
Accrued Rebate Activity
The following table summarizes the activity related to accrued rebates during the nine months
ended September 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Beginning balance |
|
$ |
125,058 |
|
|
$ |
132,603 |
|
Charged as a reduction of revenue |
|
|
217,581 |
|
|
|
181,508 |
|
Reversal of unclaimed rebates |
|
|
(9,171 |
) |
|
|
(36,525 |
) |
Payments |
|
|
(182,660 |
) |
|
|
(158,457 |
) |
|
|
|
|
|
|
|
Ending balance |
|
$ |
150,808 |
|
|
$ |
119,129 |
|
|
|
|
|
|
|
|
We recorded rebates to certain customers of $97.0 million and $71.1 million and reversed
accrued rebates of $1.6 million and $10.0 million in the three months ended September 30, 2009 and
2008, respectively.
Warranty Reserve Activity
The following table summarizes activity related to the warranty reserve during the nine months
ended September 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Beginning balance |
|
$ |
11,473 |
|
|
$ |
23,287 |
|
Charged to costs and expenses |
|
|
4,525 |
|
|
|
2,282 |
|
Reversal of warranty reserves(1) |
|
|
(1,572 |
) |
|
|
(10,600 |
) |
Payments |
|
|
(4,438 |
) |
|
|
(4,261 |
) |
|
|
|
|
|
|
|
Ending balance |
|
$ |
9,988 |
|
|
$ |
10,708 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Relates to warranty costs incurred at a rate less than previously estimated. |
We
recorded warranty charges to costs and expenses of $0.2 million in the three months ended
September 30, 2009.
Restructuring Activity
In light of the deterioration in worldwide economic conditions, in January 2009 we implemented
a restructuring plan that included a reduction in our worldwide headcount of 200 people, which
represented 3% of our global workforce. In the three months ended September 30, 2009 we implemented
a plan to reduce our headcount by an additional 120 people related to our DTV business.
We recorded $4.8 million and $12.3 million in net restructuring costs in the three and nine
months ended September 30, 2009, respectively, related to the plans, primarily for severance and
other charges associated with our reduction in workforce across multiple locations and functions
and, to a lesser extent, the closure of one of our facilities. In the three and nine months ended
September 30, 2009, we recorded restructuring charges of $0.8 million and $3.5 million,
respectively, related to stock-based compensation expense incurred in connection with the
modification of certain share-based awards.
15
The following table summarizes activity related to our current and long-term restructuring
liabilities during the nine months ended September 30, 2009:
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, 2009 |
|
|
|
(In thousands) |
|
Beginning balance |
|
$ |
4,179 |
|
Charged to expense(1) |
|
|
13,080 |
|
Reversal of restructuring costs(2) |
|
|
(750 |
) |
Payments(1) |
|
|
(11,100 |
) |
|
|
|
|
Ending balance(3) |
|
$ |
5,409 |
|
|
|
|
|
|
|
|
(1) |
|
Restructuring charges and related payments are primarily related to severance. |
|
(2) |
|
We recorded a reversal of restructuring liabilities of $0.8 million, reflecting revised
assumptions on a facility included in a prior restructuring plan. |
|
(3) |
|
The remaining excess facility cost will be paid over the remaining lease term through
2010. |
Computation of Net Income Per Share
The following table presents the computation of net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands, except per share data) |
|
Numerator: Net income |
|
$ |
84,596 |
|
|
$ |
164,906 |
|
|
$ |
6,057 |
|
|
$ |
374,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: Weighted average shares outstanding |
|
|
495,561 |
|
|
|
509,134 |
|
|
|
493,685 |
|
|
|
517,511 |
|
Less: Unvested common shares outstanding |
|
|
(70 |
) |
|
|
(93 |
) |
|
|
(86 |
) |
|
|
(93 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for net income per share (basic) |
|
|
495,491 |
|
|
|
509,041 |
|
|
|
493,599 |
|
|
|
517,418 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested common shares outstanding |
|
|
39 |
|
|
|
17 |
|
|
|
33 |
|
|
|
6 |
|
Stock awards |
|
|
25,913 |
|
|
|
14,701 |
|
|
|
14,927 |
|
|
|
13,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for net income per share (diluted) |
|
|
521,443 |
|
|
|
523,759 |
|
|
|
508,559 |
|
|
|
531,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share (basic) |
|
$ |
0.17 |
|
|
$ |
0.32 |
|
|
$ |
0.01 |
|
|
$ |
0.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share (diluted) |
|
$ |
0.16 |
|
|
$ |
0.31 |
|
|
$ |
0.01 |
|
|
$ |
0.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share (diluted) does not include the effect of anti-dilutive common share
equivalents resulting from outstanding equity awards. There were 50.7 million and 77.4 million
anti-dilutive common share equivalents in the three months ended September 30, 2009 and 2008,
respectively. There were 91.8 million and 81.4 million anti-dilutive common share equivalents in
the nine months ended September 30, 2009 and 2008, respectively.
Licensing of Intellectual Property
Settlement and Patent License and Non-Assert Agreement
On April 26, 2009 we entered into a Settlement and Patent License and Non-Assert Agreement, or
the Qualcomm Agreement, with QUALCOMM Incorporated, or Qualcomm. As part of the Qualcomm Agreement,
each party granted certain rights under its patent portfolio to the other party including, in
certain circumstances, under future patents issued within one to four years after April 26, 2009.
The term of the Qualcomm Agreement commenced April 26, 2009 and will continue until the expiration
of the last to expire of the covered patents. The Qualcomm Agreement also resulted in the parties
dismissing with prejudice all outstanding litigation between them, and in Broadcom withdrawing its
complaints with foreign competition authorities.
16
In addition, certain patents were assigned by Broadcom to Qualcomm with Broadcom retaining a
royalty-free license under these patents. Also, Qualcomm will make payments to Broadcom totaling
$891.2 million, of which $243.2 million has been paid through September 30, 2009. The remaining
balance will be paid in fifteen equal and successive quarterly payments of $43.2 million each,
continuing in the three months ending December 31, 2009 and concluding in the three months ending
June 30, 2013.
We determined the estimated fair values of the individual components of the Qualcomm Agreement
and used the relative fair value method to allocate the payment amounts to the individual
components of the gain on settlement and revenue from the licensing of our intellectual property.
In the nine months ended September 30, 2009 we recorded a gain on settlement of outstanding
litigation related to intellectual property of $65.3 million, which represents the estimated
relative fair value of the settlement for Qualcomms past infringement. The fair value of this
amount was primarily established based on awards determined by the United States District Court for
the Central District of California.
The estimated relative fair value of the licensing revenue as well as the assignment of
patents of $825.9 million will be recorded as a single unit of accounting and recognized over the
Qualcomm Agreements performance period of four years. In the three and nine months ended September
30, 2009, we recorded licensing revenue of $51.7 million and $88.5 million, respectively, and
expect to record licensing revenue in equal quarterly amounts of $51.7 million during the quarters
ending December 31, 2009 through March 31, 2012, $47.7 million in the three months ending June 30,
2012 and $43.2 million in each of the following four quarters ending June 30, 2013. At September
30, 2009 we had deferred revenue of $89.5 million related to the Qualcomm Agreement.
Separately, we recorded licensing revenue of $30.5 million in the nine months ended September
30, 2009 related to additional payments made by Qualcomm during 2008 for shipments from May 2007
through December 31, 2008, related to a permanent injunction on certain products. These amounts
were previously deferred due to continuing litigation appeals, which have been resolved through the
Qualcomm Agreement.
Patent and Other Licensing Agreements
In July 2007 we entered into a patent license agreement with a wireless network operator.
Under the agreement, royalty payments were made to us at a rate of $6.00 per unit for each
applicable unit sold by the operator on or after the date of the agreement, subject to certain
conditions, including without limitation a maximum payment of $40.0 million per calendar quarter
and a lifetime maximum of $200.0 million. We recorded licensing revenue of $19.0 million in the
nine months ended September 30, 2009, and $38.0 million and $109.2 million in the three and nine
months ended September 30, 2008, respectively, under this agreement and recorded a cumulative total
of $200.0 million in licensing revenue from the commencement of the agreement through March 31,
2009. We have also recorded revenue in connection with other licensing agreements.
Charitable Contribution
In April 2009 we established the Broadcom Foundation, or the Foundation, to support
mathematics and science programs, as well as a broad range of community services. In June 2009 we
pledged to make an unrestricted grant of $50.0 million to the Foundation upon receiving a
determination letter from the Internal Revenue Service of its exemption from federal income
taxation under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended. Accordingly, as
the receipt of the determination letter was deemed probable, we recorded an operating expense for
the contribution of $50.0 million in the nine months ended September 30, 2009. We received the
determination letter in the three months ended September 30, 2009 and expect to fund the
contribution in the three months ending December 31, 2009.
Supplemental Cash Flow Information
During the nine months ended September 30, 2009, we repurchased $11.0 million of our Class A
common stock in one or more transactions that had not been settled by September 30, 2009. We also
paid $5.4 million related to capital equipment purchases that were accrued at December 31, 2008. In
addition, billings of $5.6 million for capital
17
equipment were accrued but not yet paid as of
September 30, 2009. These amounts have been excluded from the unaudited condensed consolidated
statements of cash flows.
3. Business Combinations
License Agreement
In connection with our acquisition of Sunext Design, Inc., we were required to pay up to an
additional $38.0 million in future license fees and royalties related to optical disk reader and
writer technology, assuming Sunext Technology successfully delivers the technologies as defined in
a separate license agreement. To date we have paid $31.4 million related to certain delivered
technologies and prepaid royalties, as defined in the license agreement. We may be required to pay
up to an additional $2.6 million as defined in the agreement.
Contingent Consideration
In connection with our acquisition of Global Locate, Inc. in 2007, additional cash
consideration of up to $80.0 million could have been paid to the former holders of Global Locate
capital stock and other rights upon satisfaction of certain future performance goals. We previously
paid $20.2 million in 2007 and 2008 to the former holders of Global Locate capital stock and other
rights upon satisfaction of certain performance goals. The time remaining for completion of the
other performance goals has expired and no future payments are expected.
Supplemental Pro Forma Data (Unaudited)
The unaudited pro forma statement of operations data below gives effect to the Sunext Design
and DTV Business of AMD, Inc. acquisitions that were completed in 2008 as if they had occurred at
the beginning of 2008. The following data includes the amortization of purchased intangible assets
and stock-based compensation expense, but excludes the charge for acquired in-process research and
development. In addition, it includes an impairment of goodwill and
purchased intangibles of $432.0 million recorded by AMD prior to our acquisition of the DTV Business. This pro forma data is
presented for informational purposes only and does not purport to be indicative of the results of
future operations or of the results that would have occurred had the acquisitions taken place at
the beginning of 2008.
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, 2008 |
|
|
|
(In thousands, except per |
|
|
|
share data) |
|
Pro forma net revenue |
|
$ |
3,596,616 |
|
|
|
|
|
Pro forma net loss |
|
$ |
(159,118 |
) |
|
|
|
|
Pro forma net loss per share (basic and diluted) |
|
$ |
(0.31 |
) |
|
|
|
|
4. Cash, Cash Equivalents and Marketable Securities
At September 30, 2009 we had $2.377 billion in cash, cash equivalents and marketable
securities. We maintain an investment portfolio of various security holdings, types and maturities.
The fair value of all of our cash equivalents and marketable securities is determined based on
Level 1 inputs, which consist of quoted prices in active markets for identical assets. We place
our cash investments in instruments that meet credit quality standards, as specified in our
investment policy guidelines. These guidelines also limit the amount of credit exposure to any one
issue, issuer or type of instrument. All of our marketable securities are rated AAA, Aaa, A-1 or
P-1 by the major credit rating agencies.
A summary of our cash, cash equivalents and short- and long-term marketable securities by
major security type follows:
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term |
|
|
Long-Term |
|
|
|
|
|
|
Cash and |
|
|
Marketable |
|
|
Marketable |
|
|
|
|
|
|
Cash Equivalents |
|
|
Securities |
|
|
Securities |
|
|
Total |
|
|
|
(In thousands) |
|
September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
55,613 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
55,613 |
|
Time deposits |
|
|
580,756 |
|
|
|
|
|
|
|
|
|
|
|
580,756 |
|
U.S. Treasury and agency money market funds |
|
|
653,605 |
|
|
|
|
|
|
|
|
|
|
|
653,605 |
|
U.S. Treasury and agency obligations |
|
|
|
|
|
|
561,287 |
|
|
|
470,643 |
|
|
|
1,031,930 |
|
Institutional money market funds |
|
|
55,247 |
|
|
|
|
|
|
|
|
|
|
|
55,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,345,221 |
|
|
$ |
561,287 |
|
|
$ |
470,643 |
|
|
$ |
2,377,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
88,366 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
88,366 |
|
Time deposits |
|
|
273,654 |
|
|
|
|
|
|
|
|
|
|
|
273,654 |
|
U.S. Treasury and agency money market funds |
|
|
828,586 |
|
|
|
|
|
|
|
|
|
|
|
828,586 |
|
U.S. Treasury and agency obligations |
|
|
|
|
|
|
703,722 |
|
|
|
|
|
|
|
703,722 |
|
Commercial paper and corporate bonds |
|
|
|
|
|
|
3,755 |
|
|
|
|
|
|
|
3,755 |
|
Institutional money market funds |
|
|
39 |
|
|
|
|
|
|
|
|
|
|
|
39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,190,645 |
|
|
$ |
707,477 |
|
|
$ |
|
|
|
$ |
1,898,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the gross unrealized gains and losses and fair values for those
investments as of September 30, 2009 and December 31, 2008 aggregated by major security type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
|
(In thousands) |
|
September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and agency obligations |
|
$ |
1,030,722 |
|
|
$ |
1,208 |
|
|
$ |
|
|
|
$ |
1,031,930 |
|
Commercial paper and corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,030,722 |
|
|
$ |
1,208 |
|
|
$ |
|
|
|
$ |
1,031,930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and agency obligations |
|
$ |
698,910 |
|
|
$ |
4,814 |
|
|
$ |
(2 |
) |
|
$ |
703,722 |
|
Commercial paper and corporate bonds |
|
|
3,354 |
|
|
|
401 |
|
|
|
|
|
|
|
3,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
702,264 |
|
|
$ |
5,215 |
|
|
$ |
(2 |
) |
|
$ |
707,477 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All of our long-term marketable securities had maturities of between one and two years in
duration at September 30, 2009.
We review our portfolio of investments to identify and evaluate investments that have an
indication of possible other-than-temporary impairment. Factors considered in determining whether a
loss is other-than-temporary include the length of time and extent to which fair value has been
less than the cost basis, the financial condition and near-term prospects of the issuer, and our
intent and ability to hold the investment for a period of time sufficient to allow for any
anticipated recovery in market value. We maintain an investment portfolio of various holdings,
types and maturities. We do not use derivative financial instruments.
5. Income Taxes
We recorded tax provisions of $6.8 million and $5.0 million for the three and nine months
ended September 30, 2009, respectively, and tax provisions of $1.2 million and $5.1 million for the
three and nine months ended September 30, 2008, respectively. Our effective tax rates were 7.5% and
45.4% for the three and nine months ended September 30, 2009, respectively, and 0.7% and 1.3% for
the three and nine months ended September 30, 2008, respectively. While our tax provisions for the
nine months ended September 30, 2009 and 2008 were for similar
19
amounts of $5.0 million and $5.1
million, respectively, which primarily represent provisions for
foreign income taxes for both periods, our pretax income was significantly different at $11.1 million and $379.1
million, respectively, which resulted in significantly different effective tax rates of 45.4% and
1.3%, respectively. The difference between our effective tax rates and the 35% federal statutory
rate resulted primarily from foreign earnings taxed at rates lower than the federal statutory rate
for the three and nine months ended September 30, 2009 and September 30, 2008, domestic losses
recorded without income tax benefit for the three and nine months ended September 30, 2009, and tax
benefits resulting primarily from the expiration of the statutes of limitations for the assessment
of taxes in various foreign jurisdictions of $6.5 million for the nine months ended September 30,
2009, and $4.4 million for the nine months ended September 30, 2008. We recorded a tax benefit of
$3.9 million in the nine months ended September 30, 2009 reflecting the utilization of a portion of
our credits for increasing research activities (research and development tax credits) pursuant to a
provision contained in the American Recovery and Reinvestment Tax Act of 2009, which was enacted in
February 2009. Additionally, in the nine months ended September 30, 2009, we recorded a tax
provision of $3.2 million associated with the exposure resulting from a recent decision by the U.
S. Court of Appeals for the Ninth Circuit in the case involving Xilinx, Inc. as discussed below.
On May 27, 2009, the U.S. Court of Appeals for the Ninth Circuit in the case between Xilinx,
Inc. and the Commissioner of Internal Revenue, overturned a 2005 U.S. Tax Court ruling regarding
treatment of certain compensation expenses under a Companys research and development cost-sharing
arrangements with affiliates. The Court of Appeals held that related parties to such an arrangement
must share stock-based compensation expenses, notwithstanding the fact that unrelated parties in
such an arrangement would not share such costs. The case is subject to further appeal. The
potential impact to Broadcom, should the IRS prevail, of including such stock-based compensation
expenses in our research and development cost-sharing arrangements would be additional income for
federal and state purposes from January 1, 2001 forward, and may result in additional related
federal and state income and franchise taxes, and material adjustments to our federal and state net
operating loss carryforwards, our federal and state capitalized research and development costs and
our deferred tax positions. Specifically, in the nine months ended September 30, 2009, we recorded
a $3.2 million tax provision for additional federal and state income and franchise taxes. We also
reduced our federal and state net operating loss carryforwards by approximately $600.0
million and $380.0 million, respectively, and reduced our federal and state capitalized
research and development costs by approximately $10.0 million and $15.0 million, respectively.
Additionally, in the nine months ended September 30, 2009, we reduced our deferred tax asset
relating to stock-based compensation expenses by approximately $60.0 million, and increased our
deferred tax asset for certain tax credits by approximately $10.0 million, with each of these
amounts offset by a corresponding adjustment to our valuation allowance for deferred tax asset
resulting in no net change to deferred tax assets.
As a result of the expensing of share-based payments since January 1, 2006, our deferred tax
assets exclude certain excess tax benefits from employee stock-based compensation that are a
component of our research and development credits, capitalized research and development, and net
operating loss carryovers. If and when these tax benefits are realized, a credit is recorded to
equity. The federal and state net operating losses and the capitalized research and development
costs we reduced as a result of the decision in the Xilinx case represent such excess tax benefits
from employee stock-based compensation and therefore do not result in an adjustment to our deferred
tax assets.
We utilize the asset and liability method of accounting for income taxes. We record net
deferred tax assets to the extent we believe these assets will more likely than not be realized. In
making such determination, we consider all available positive and negative evidence, including
scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning
strategies and recent financial performance. Forming a conclusion that a valuation allowance is not
required is difficult when there is negative evidence such as cumulative losses in recent years. As
a result of our recent cumulative losses in the U.S. and certain foreign jurisdictions, and the
full utilization of our loss carryback opportunities, we have concluded that a full valuation
allowance should be recorded in such jurisdictions. In certain other foreign jurisdictions where we
do not have cumulative losses, we had net deferred tax assets of $8.7 million and $7.5 million at
September 30, 2009 and December 31, 2008, respectively.
At September 30, 2009 our judgment changed with respect to prior period uncertain tax
positions, which resulted in additional unrecognized tax benefits in the amount of approximately
$360 million, of which approximately $260 million would be credited to paid-in capital if
ultimately sustained and utilized to reduce our income tax liabilities because it relates to excess
deductions from employee stock options. The remaining portion of these tax benefits,
20
approximately
$100 million, were previously offset by a valuation allowance on our deferred tax assets. If these
tax positions are not sustained, there will be no net effect on our tax provision because of the
related valuation allowance.
We file federal, state and foreign income tax returns in jurisdictions with varying statutes
of limitations. The 2004 through 2008 tax years generally remain subject to examination by federal
and most state tax authorities. In foreign jurisdictions, the 2001 through 2008 tax years generally
remain subject to examination by tax authorities.
Our income tax returns for the 2004, 2005 and 2006 tax years are currently under examination
by the Internal Revenue Service and certain state jurisdictions. In addition, our employment tax
returns for the 2003, 2004, 2005 and 2006 tax years are under examination by the Internal Revenue
Service. We currently do not expect that the results of these examinations will have a material
effect on our financial condition or results of operations.
We operate under tax holidays in Singapore, which are effective through March 31, 2014. The
tax holidays are conditional upon our continued compliance in meeting certain employment and
investment thresholds.
6. Shareholders Equity
Share Repurchase Program
From time to time our Board of Directors has authorized various programs to repurchase shares
of our Class A common stock depending on market conditions and other factors.
In July 2008 the Board of Directors authorized our current program to repurchase shares of
Broadcoms Class A common stock having an aggregate value of up to $1.0 billion. Repurchases under
the program may be made at any time during the period that commenced July 31, 2008 and continuing
through and including July 31, 2011. In the
nine months ended September 30, 2009 we repurchased a total of 8.0 million shares of our Class
A common stock at a weighted average price of $27.06, of which $11.0 million had not settled. As of
September 30, 2009, $358.4 million remained authorized for repurchase under our current program.
Repurchases under our share repurchase programs were and will be made in open market or
privately negotiated transactions in compliance with Rule 10b-18 promulgated under the Securities
Exchange Act of 1934, as amended, or the Exchange Act.
Comprehensive Income
The components of comprehensive income, net of taxes, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
|
(In thousands) |
|
Net income |
|
$ |
84,596 |
|
|
$ |
164,906 |
|
|
$ |
6,057 |
|
|
$ |
374,009 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on marketable securities, net of tax |
|
|
79 |
|
|
|
(417 |
) |
|
|
(4,444 |
) |
|
|
(440 |
) |
Translation adjustments |
|
|
82 |
|
|
|
206 |
|
|
|
1,089 |
|
|
|
(4,513 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
84,757 |
|
|
$ |
164,695 |
|
|
$ |
2,702 |
|
|
$ |
369,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
7. Employee Benefit Plans
Combined Incentive Plan Activity
Activity
under all stock option incentive plans in the nine months ended September 30, 2009 is set
forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
|
Exercise |
|
|
Exercise |
|
|
Grant-Date |
|
|
|
Number of |
|
|
Price Range |
|
|
Price |
|
|
Fair Value |
|
|
|
Shares |
|
|
per Share |
|
|
per Share |
|
|
per Share |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
122,270 |
|
|
$ |
.01 - $81.50 |
|
|
$ |
25.42 |
|
|
$ |
15.66 |
|
Options granted |
|
|
2,669 |
|
|
|
17.83 - 23.17 |
|
|
|
23.14 |
|
|
|
10.92 |
|
Options cancelled |
|
|
(3,261 |
) |
|
|
.01 - 48.63 |
|
|
|
30.80 |
|
|
|
15.78 |
|
Options exercised |
|
|
(5,605 |
) |
|
|
.01 - 29.52 |
|
|
|
17.42 |
|
|
|
13.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2009 |
|
|
116,073 |
|
|
$ |
.01 - $81.50 |
|
|
$ |
25.60 |
|
|
$ |
15.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock unit activity in the nine months ended September 30, 2009 is set forth below:
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units |
|
|
|
Outstanding |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant-Date |
|
|
|
Number of |
|
|
Fair Value |
|
|
|
Shares |
|
|
per Share |
|
|
|
(In thousands) |
|
|
|
|
|
Balance at December 31, 2008 |
|
|
27,622 |
|
|
$ |
27.61 |
|
Restricted stock units granted |
|
|
12,307 |
|
|
|
23.57 |
|
Restricted stock units cancelled |
|
|
(1,120 |
) |
|
|
25.16 |
|
Restricted stock units vested |
|
|
(8,241 |
) |
|
|
29.02 |
|
|
|
|
|
|
|
|
Balance at September 30, 2009 |
|
|
30,568 |
|
|
$ |
25.69 |
|
|
|
|
|
|
|
|
The per share fair values of stock options and employee stock purchase rights granted in the
nine months ended September 30, 2009 in connection with stock incentive plans have been estimated
with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee |
|
|
Employee |
|
Stock |
|
|
Stock |
|
Purchase |
|
|
Options |
|
Rights |
Expected life (in years) |
|
|
5.00 |
|
|
|
1.04 |
|
Volatility |
|
|
0.53 |
|
|
|
0.55 |
|
Risk-free interest rate |
|
|
1.83 |
% |
|
|
0.56 |
% |
Dividend yield |
|
|
0.00 |
% |
|
|
0.00 |
% |
Weighted average fair value |
|
$ |
10.92 |
|
|
$ |
7.42 |
|
22
Unearned Stock-Based Compensation
The following table presents details of unearned stock-based compensation currently estimated
to be expensed in the remainder of 2009 through 2013 related to unvested share-based payment
awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2010 |
|
2011 |
|
2012 |
|
2013 |
|
Total |
|
|
(In thousands) |
Unearned stock-based compensation |
|
$ |
124,979 |
|
|
$ |
386,570 |
|
|
$ |
255,281 |
|
|
$ |
124,329 |
|
|
$ |
26,113 |
|
|
$ |
917,272 |
|
If there are any modifications or cancellations of the underlying unvested awards, we may be
required to accelerate, increase or cancel any remaining unearned stock-based compensation expense.
Future stock-based compensation expense and unearned stock-based compensation will increase to the
extent that we grant additional equity awards or assume unvested equity awards in connection with
acquisitions.
8. Settlement Costs (Gains)
We recorded settlement gains of $65.3 million related to the Qualcomm Agreement in the nine
months ended September 30, 2009. We also recorded $6.9 million in settlement costs in the nine
months ended September 30, 2009 for an estimated settlement associated with certain employment tax
items. In addition, in the nine months ended September 30, 2009 we recorded settlement costs of
$1.2 million related to a patent infringement claim.
In April 2008 we entered into a settlement with the SEC relating to the previously-disclosed
SEC investigation of Broadcoms historical stock option granting practices. Without admitting or
denying the SECs allegations, we agreed to pay a civil penalty of $12.0 million, which we recorded
as a settlement cost in 2008. The settlement was approved by the United States District Court for
the Central District of California in late April 2008. In addition, we settled a patent
infringement claim for $3.8 million in 2008. Both of the 2008 settlements were recorded in the nine
months ended September 30, 2008.
For further discussion of settlement gains, income tax and litigation matters, see Notes 2, 5
and 9, respectively.
9. Litigation
Intellectual Property Proceedings. In April 2009 we entered into a Settlement and Patent
License and Non-Assert Agreement, or the Qualcomm Agreement, with QUALCOMM Incorporated that
resulted in the parties dismissing with prejudice all outstanding litigation between them, and
Broadcom withdrawing its complaints with foreign competition authorities. For further discussion of
this Agreement, see Note 2.
In December 2006 SiRF Technology, Inc., or SiRF, filed a complaint in the United States
District Court for the Central District of California against Global Locate, Inc., a privately-held
company that became a wholly-owned subsidiary of Broadcom in July 2007, alleging that certain
Global Locate products infringe four SiRF patents relating generally to GPS technology. In January
2007 Global Locate filed an answer denying the allegations in SiRFs complaint and asserting
counterclaims. The counterclaims seek a declaratory judgment that the four SiRF patents are invalid
and not infringed, assert that SiRF has infringed four Global Locate patents relating generally to
GPS technology, and assert unfair competition and antitrust violations related to the filing of
sham litigation. In May 2007 the court granted Global Locates motion to stay the case until the
U.S. International Trade Commission, or ITC, actions between Global Locate and SiRF, discussed
below, become final.
In February 2007 SiRF filed a complaint in the ITC alleging that Global Locate engaged in
unfair trade practices by importing integrated circuits and other products that infringe, both
directly and indirectly, four SiRF patents relating generally to GPS technology. The complaint
seeks an exclusion order to bar importation of those Global Locate products into the United States
and a cease and desist order to bar further sales of infringing Global Locate products that have
already been imported. In March 2007 the ITC instituted an investigation of Global Locate based
upon the allegations made in the SiRF complaint. SiRF withdrew two patents from the investigation,
and an ITC administrative law judge conducted a hearing on SiRFs remaining two patents in suit in
March 2008. In June 2008 the ITC administrative law judge issued an initial determination finding
SiRFs two patents not infringed and one
23
patent invalid. In August 2008 the ITC denied SiRFs
petition to review the administrative law judges initial determination finding no violation,
thereby adopting the administrative law judges initial determination as the final determination of
the ITC and terminating the investigation. In October 2008 SiRF filed a notice of appeal with the
United States Court of Appeal for the Federal Circuit. In March 2009, SiRF filed a request to
withdraw its appeal which was subsequently granted by the United States Court of Appeal for the
Federal Circuit.
In April 2007 Global Locate filed a complaint in the ITC against SiRF and four of its
customers, e-TEN Corporation, Pharos Science & Applications, Inc., MiTAC International Corporation
and Mio Technology Limited, referred to collectively as the SiRF Defendants, asserting that the
SiRF Defendants engaged in unfair trade practices by importing GPS devices, including integrated
circuits and embedded software, incorporated in products such as personal navigation devices and
GPS-enabled cellular telephones that infringe, both directly and indirectly, six Global Locate
patents relating generally to GPS technology. The complaint seeks an exclusion order to bar
importation of the SiRF Defendants products into the United States and a cease and desist order to
bar further sales of infringing products that have already been imported. In May 2007 the ITC
instituted an investigation of the SiRF Defendants based upon the allegations made in the Global
Locate complaint. A hearing was held in April and May 2008. In August 2008 the administrative law
judge issued an initial determination finding that SiRF and the other SiRF Defendants infringed
each of Global Locates six patents, and that each of the six patents was not invalid and issued a
recommended determination on remedy and bonding. In October 2008 the ITC determined, in part, not
to review the administrative law judges initial determination finding violation of three of Global
Locates patents. The ITC also decided to review the administrative law judges initial
determination that three other Global Locate patents were infringed by SiRF.
In January 2009 the Commission issued a Final Determination and upheld the ITC administrative
law judges August 2008 initial determination finding that SiRF and the other SiRF respondants
infringe six Global Locate patents and that each of the six patents was not invalid. The Commission
also issued an exclusion order banning the importation into the United States of infringing SiRF
chips and the SiRF Defendants products containing infringing SiRF chips and a cease and desist
order prohibiting SiRF and the other SiRF Defendants from engaging in certain activities related to
the infringing chips. In March 2009, the SiRF Defendants filed a notice of appeal with the United
States Court of Appeal for the Federal Circuit. A hearing before the Federal Circuit has been set
for November 2009.
In May 2008 Broadcom filed a complaint in the United States District Court for the Central
District of California against SiRF, alleging that certain SiRF GPS and multimedia products
infringe four Broadcom patents relating generally to graphics and communications technology. The
District Court complaint seeks preliminary and permanent injunctions against SiRF and the recovery
of monetary damages, including treble damages for willful infringement, and attorneys fees. In
June 2008 SiRF answered the complaint and asserted counterclaims seeking a declaratory judgment
that Broadcoms patents are invalid and not infringed. In September 2008 the court denied SiRFs
motion to stay the case. Discovery is ongoing. In October 2009, Broadcom amended its complaint to
add CSR plc as a defendant. Trial has been set for November 2010.
In October 2007 Wi-LAN Inc. filed complaints against us and multiple other defendants in the
United States District Court for the Eastern District of Texas alleging that certain Broadcom
products infringe three Wi-LAN patents relating generally to wireless LAN and DSL technology. The
complaint seeks a permanent injunction against us as well as the recovery of monetary damages and
attorneys fees. We filed an answer in January 2008 denying the allegations in Wi-LANs complaint
and asserting counterclaims seeking a declaratory judgment that the three Wi-LAN patents are
invalid, unenforceable and not infringed. In February 2009 Wi-LAN filed a supplemental complaint
alleging that certain Broadcom products infringe a fourth Wi-LAN patent relating generally to
Bluetooth technology. The complaint seeks a permanent injunction against us as well as the recovery
of monetary damages and attorneys fees. We filed an answer in February 2009 denying the
allegations in Wi-LANs complaint and asserting counterclaims seeking a declaratory judgment that
the fourth Wi-LAN patent is invalid, unenforceable and not infringed. Discovery is ongoing. Trial
has been set for January 2011.
In December 2008, we filed a complaint in the United States District Court for the Northern
District of California against Wi-LAN seeking declaratory judgment that Broadcoms products do not
infringe the fourth Wi-LAN patent referred to in the previous paragraph and that the patent is
invalid and unenforceable. Wi-LAN has not yet answered the complaint. No trial date has been set.
24
In September 2009, we filed a complaint in the United States District Court for the Central
District of California against Emulex Corporation, or Emulex, alleging infringement of ten patents
generally relating to networking technologies. The complaint seeks preliminary and permanent
injunctions against Emulex and the recovery of monetary damages, including treble damages for
willful infringement, and attorneys fees. Emulex has not yet answered the complaint.
Securities Litigation and Other Related Matters. In April 2009 we filed a complaint in
Delaware Chancery Court against Emulex and Emulex officers and directors (Fred B. Cox, Michael P.
Downey, Bruce C. Edwards, Paul F. Folino, Robert H. Goon, Don M. Lyle, James M. McCluney, and Dean
A. Yoost) alleging that a poison pill and certain bylaw amendments adopted by Emulex are contrary
to law and/or breach the directors fiduciary duty to Emulex, which we dismissed in June 2009.
In May 2009, Emulex filed a complaint in the Central District of California against Broadcom
and Fiji Acquisition Corporation alleging violation of securities laws in connection with
Broadcoms proposed acquisition of Emulex. The complaint sought a declaration of securities laws
violations, an injunction, and an award of costs and attorneys fees. Emulex filed an amended
complaint in June, which Broadcom moved to dismiss. In July 2009 Emulex voluntarily dismissed its
complaint.
In May 2009 Emulex filed a complaint in Orange County Superior Court against Broadcom alleging
fraud, unfair competition, and intentional interference with contractual relations and prospective
economic advantage in
connection with Broadcoms proposed acquisition of Emulex. In September 2009 Emulex
voluntarily dismissed its complaint without prejudice.
From March through August 2006 a number of purported Broadcom shareholders filed putative
shareholder derivative actions, the Options Derivative Actions, against Broadcom, each of the then
members of our Board of Directors and certain current or former officers, alleging, among other
things, that the defendants improperly dated certain Broadcom employee stock option grants. Four of
those cases, Murphy v. McGregor, et al. (Case No. CV06-3252 R (CWx)), Shei v. McGregor, et al.
(Case No. SACV06-663 R (CWx)), Ronconi v. Dull, et al. (Case No. SACV 06-771 R (CWx)) and Jin v.
Broadcom Corporation, et al. (Case No. 06CV00573) have been consolidated in the United States
District Court for the Central District of California. The plaintiffs filed a consolidated amended
complaint in November 2006. In addition, two putative shareholder derivative actions, Pirelli
Armstrong Tire Corp. Retiree Med. Benefits Trust v. Samueli, et al. (Case No. 06CC0124) and Servais
v. Samueli, et al. (Case No. 06CC0142), were filed in the California Superior Court for the County
of Orange. The Superior Court consolidated the state court derivative actions in August 2006, and
the plaintiffs filed a consolidated amended complaint in September 2006. The plaintiffs in the
Options Derivative Actions contend, among other things, that the defendants conduct violated
United States and California securities laws, breached defendants fiduciary duties, wasted
corporate assets, unjustly enriched the defendants, and caused errors in our consolidated financial
statements. The plaintiffs seek, among other things, unspecified damages and disgorgement of
profits from the alleged conduct, to be paid to Broadcom.
In January 2007 the California Superior Court granted defendants motion to stay the state
derivative action pending resolution of the prior-filed federal derivative action. In March 2007
the court in the federal derivative action denied our motion to dismiss, which motion was based on
the ground that the shareholder plaintiffs lack standing to assert claims on behalf of Broadcom.
Motions to dismiss filed by the individual defendants were heard, and mostly denied, in May 2007.
Additionally, in May 2007 the Board of Directors established a special litigation committee, or
SLC, to decide what course of action Broadcom should pursue in respect of the claims asserted in
the Options Derivative Actions. The SLC is currently engaged in its review.
In August 2009 Broadcom, by and through its SLC, plaintiffs and certain of the defendants
executed a Stipulation and Agreement of Partial Settlement, or Partial Derivative Settlement, in
the federal derivative action pertaining to past employee stock option grants. If approved by the
court, the Partial Derivative Settlement will resolve all claims in the action against the
defendants, other than three individuals: Dr. Henry T. Nicholas, III, our former President and
Chief Executive Officer and former Co-Chairman of the Board, William J. Ruehle, our former Chief
Financial Officer, and Dr. Henry Samueli, who currently remains employed by Broadcom as a
technology advisor and is our former Chief Technical Officer and former Chairman of the Board. In
connection with the Partial
25
Derivative Settlement, Broadcom and certain of the defendants also
entered into a settlement with Broadcoms directors and officers liability insurance carriers, or
Insurance Agreement. On September 30, 2009 the United States District Court for the Central
District of California issued an order preliminarily approving the Partial Derivative Settlement. A
final approval hearing has been scheduled for December 14, 2009.
From August through October 2006 several plaintiffs filed purported shareholder class actions
in the United States District Court for the Central District of California against Broadcom and
certain of our current or former officers and directors, entitled Bakshi v. Samueli, et al. (Case
No. 06-5036 R (CWx)), Mills v. Samueli, et al. (Case No. SACV 06-9674 DOC R(CWx)), and Minnesota
Bakers Union Pension Fund, et al. v. Broadcom Corp., et al. (Case No. SACV 06-970 CJC R (CWx)), the
Options Class Actions. The essence of the plaintiffs allegations is that we improperly backdated
stock options, resulting in false or misleading disclosures concerning, among other things, our
business and financial condition. Plaintiffs also allege that we failed to account for and pay
taxes on stock options properly, that the individual defendants sold our common stock while in
possession of material nonpublic information, and that the defendants conduct caused artificial
inflation in our stock price and damages to the putative plaintiff class. The plaintiffs assert
claims under Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. In
November 2006 the Court consolidated the Options Class Actions and appointed the New Mexico State
Investment Council as lead class plaintiff. In October 2007 the federal appeals court resolved a
dispute regarding the appointment of lead class counsel. In March 2008 the district judge entered a
revised order appointing lead class counsel. The lead plaintiff filed an amended consolidated class
action complaint in late April 2008, naming additional defendants including certain current
officers and directors of Broadcom as well as Ernst & Young LLP, our former independent registered
public accounting firm, or E&Y. In October 2008 the district judge
granted defendants motions to dismiss with leave to amend. In October 2008 the lead plaintiff
filed an amended complaint. In November 2008 defendants filed motions to dismiss. On February 2,
2009 these motions were denied except with respect to E&Y and the former Chairman of the Audit
Committee, which were granted with leave to amend, and with respect to the former Chief Executive
Officer, which was granted without leave to amend. The lead plaintiff did not amend its complaint
with respect to the former Chairman of the Audit Committee and the time period to do so has
expired. With respect to E&Y, in March 2009 the district judge entered a final judgment for E&Y and
against the lead plaintiff. We intend to defend the consolidated class action vigorously.
In April 2008 we delivered a Notice of Arbitration and Arbitration Claim to our former
independent registered public accounting firm, E&Y, and certain related parties. The arbitration
relates to the issues that led to the restatement of Broadcoms financial statements for the
periods from 1998 through March 31, 2006 as disclosed in an amended Annual Report on Form 10-K/A
for the year ended December 31, 2005 and an amended Quarterly Report on Form 10-Q/A for the three
months ended March 31, 2006, each filed with the SEC January 23, 2007. In May 2008 E&Y delivered a
Notice of Defense and Counterclaim. No date for an arbitration hearing has been scheduled.
We have indemnification agreements with each of our present and former directors and officers,
under which we are generally required to indemnify each such director or officer against expenses,
including attorneys fees, judgments, fines and settlements, arising from the Options Derivative
Actions, the Options Class Actions and the pending SEC and U.S. Attorneys Office investigations
described below (subject to certain exceptions, including liabilities arising from willful
misconduct, from conduct knowingly contrary to the best interests of Broadcom, or conduct that is
knowingly fraudulent or deliberately dishonest or results in improper personal benefit). The
potential amount of the future payments we could be required to make under these indemnification
obligations could be significant and could have a material impact on our results of operations,
particularly as the defendants in the criminal and civil actions described below prepare to go to
trial in 2009 and 2010. Pursuant to the Insurance Agreement, and subject to the terms described
more completely therein, including relinquishing of rights under certain insurance policies by
Broadcom and certain of its former and current officers and directors, Broadcom will receive
payments totaling $118.0 million from its insurance carriers. That amount includes $43.3 million in
reimbursements previously received from the insurance carriers under reservations of rights, and
$74.7 million to be paid to Broadcom upon final approval of the Partial Derivative Settlement. In
addition, Broadcom has agreed to pay, subject to court approval of a fee award motion, $11.5
million to the lead federal derivative plaintiffs counsel for attorneys fees, expenses and costs
of plaintiffs counsel in connection with the Partial Derivative Settlement and their prosecution
of the derivative action.
26
In the event that the Partial Derivative Settlement is approved by the trial court but such
approval is subsequently reversed or vacated by an appellate court or otherwise does not become
final and non-appealable, Broadcom in its sole discretion has the election to either provide a
release to the insurance carriers and indemnify them related to any future claims and retain the
$118.0 million in accordance with the Insurance Agreement or repay to the insurance
carriers certain portions of the aggregate amount previously paid to Broadcom.
In November 2008 Randy Lee Soderstrom, alleged to have been employed by a former contractor of
Broadcom and presently a prisoner in a California state prison, filed a complaint entitled
Soderstrom v. Henry T. Nicholas III, William J. Ruehle, Henry Samueli, David Dull, Broadcom
Corporation in the United States District Court for the Northern District of California (Case No.
CV 08 5310 PVT). In his complaint, Soderstrom sought relief under the Racketeering Influenced and
Corrupt Organizations Act (RICO). The complaint made allegations relative to conduct similar to
that which is alleged in the Options Derivative Actions and Option Class Actions discussed above,
and the SEC and United States Attorneys Office investigations discussed below, but also contained
certain different allegations. The plaintiff is representing himself in this action. On May 20,
2009, the Court granted Broadcoms motion to dismiss and also granted the motions to dismiss of all
other defendants. A final judgment on behalf of defendants was entered the same day. The plaintiff
filed a motion to alter or amend the judgment on June 22, 2009, which was denied on June 25, 2009.
The plaintiff appealed, but on September 15, 2009 the lower courts decision was summarily affirmed
by a three-judge panel of the United States Court of Appeals for the Ninth Circuit. The plaintiff
subsequently asked the entire Ninth Circuit to hear his case. Broadcom intends to continue to
defend this action vigorously.
SEC Formal Order of Investigation and United States Attorneys Office Investigation. In April
2008 the SEC
brought a complaint against Broadcom alleging violations of the federal securities laws, and
we entered into a settlement with the SEC. Without admitting or denying the SECs allegations, we
paid a civil penalty of $12.0 million, which we recorded as a settlement cost in the three months
March 31, 2008, and stipulated to an injunction against future violations of certain provisions of
the federal securities laws. The settlement was approved by the United States District Court for
the Central District of California Court in late April 2008, thus concluding the SECs
investigation of this matter with respect to Broadcom.
In May 2008 the SEC filed a complaint in the United States District Court for the Central
District of California (Case No. SACV08-539 CJC (RNBx)) against Dr. Samueli and three other former
executive officers of Broadcom, relating to its previously-disclosed investigation of the companys
historical stock option granting practices. The SECs civil complaint alleges that Dr. Samueli,
along with the other defendants, violated the anti-fraud provisions of the federal securities laws,
falsified books and records, and caused the company to report false financial results. The SECs
complaint seeks to: (i) enjoin the defendants from future violations of the securities laws; (ii)
require two of the defendants to disgorge any ill-gotten gains and pay prejudgment interest; (iii)
require all defendants to pay civil monetary penalties; (iv) require two defendants to disgorge
bonuses and stock sales profits pursuant to Section 304 of the Sarbanes-Oxley Act of 2002; (v) bar
all defendants from serving as officers or directors of a public company; and (vi) provide other
appropriate relief. Pending resolution of the SEC action, Dr. Samueli has taken a leave of absence
from his position as an executive officer of Broadcom and he resigned from his position as Chairman
and a member of the Board of Directors. We do not know when the investigation will be resolved with
respect to Dr. Samueli or what actions, if any, the SEC may require him to take in resolution of
the investigation against him personally.
In August 2006 we were informally contacted by the U.S. Attorneys Office for the Central
District of California and asked to produce documents related to our historical option granting
practices. In 2007 and 2008 we continued to provide substantial amounts of documents and
information to the U.S. Attorneys Office on a voluntary basis and pursuant to grand jury
subpoenas. We are continuing to cooperate with the U.S. Attorneys Office in 2009. In June 2008 Dr.
Nicholas and Mr. Ruehle were named in an indictment relating to alleged stock options backdating at
the company. Also, in June 2008 Dr. Samueli pled guilty to making a materially false statement to
the SEC in connection with its investigation of alleged stock options backdating at the company. In
September 2008 the United States District Court for the Central District of California rejected Dr.
Samuelis plea agreement. Dr. Samueli appealed the ruling to the United States Court of Appeals for
the Ninth Circuit, but that court rejected his appeal. Mr. Ruehles trial is scheduled to commence
in late October 2009; Dr. Nicholas trial is scheduled to take place in February 2010. Any further
action by the SEC, the U.S. Attorneys Office or other governmental agency could result in
additional civil or criminal sanctions and/or fines against us and/or certain of our current or
former officers, directors and/or employees.
27
United States Attorneys Office Investigation and Prosecution. In June 2005 the United States
Attorneys Office for the Northern District of California commenced an investigation into the
possible misuse of proprietary competitor information by certain Broadcom employees. In December
2005 one former employee was indicted for fraud and related activity in connection with computers
and trade secret misappropriation. The former employee had been immediately suspended in June 2005,
after just two months employment, when we learned about the government investigation. Following an
internal investigation, his employment was terminated, nearly two months prior to the indictment.
The indictment does not allege any wrongdoing by us, and we are cooperating fully with the ongoing
investigation and the prosecution.
General. We and our subsidiaries are also involved in other legal proceedings, claims and
litigation arising in the ordinary course of business.
The pending proceedings involve complex questions of fact and law and will require the
expenditure of significant funds and the diversion of other resources to prosecute and defend. The
results of legal proceedings are inherently uncertain, and material adverse outcomes are possible.
The resolution of intellectual property litigation may require us to pay damages for past
infringement or to obtain a license under the other partys intellectual property rights that could
require one-time license fees or ongoing royalties, which could adversely impact our product gross
margins in future periods, or could prevent us from manufacturing or selling some of our products
or limit or restrict the type of work that employees involved in such litigation may perform for
us. From time to time we may enter into confidential discussions regarding the potential settlement
of pending litigation or other
proceedings; however, there can be no assurance that any such discussions will occur or will
result in a settlement. The settlement of any pending litigation or other proceeding could require
us to incur substantial settlement payments and costs. In addition, the settlement of any
intellectual property proceeding may require us to grant a license to certain of our intellectual
property rights to the other party under a cross-license agreement. If any of those events were to
occur, our business, financial condition and results of operations could be materially and
adversely affected.
28
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement
You should read the following discussion and analysis in conjunction with our Unaudited
Condensed Consolidated Financial Statements and the related Notes thereto contained in Part I, Item
1 of this Report. The information contained in this Quarterly Report on Form 10-Q is not a complete
description of our business or the risks associated with an investment in our common stock. We urge
you to carefully review and consider the various disclosures made by us in this Report and in our
other reports filed with the Securities and Exchange Commission, or SEC, including our Annual
Report on Form 10-K for the year ended December 31, 2008 and subsequent reports on Forms 10-Q and
8-K, which discuss our business in greater detail.
The section entitled Risk Factors contained in Part II, Item 1A of this Report, and similar
discussions in our other SEC filings, describe some of the important risk factors that may affect
our business, financial condition, results of operations and/or liquidity. You should carefully
consider those risks, in addition to the other information in this Report and in our other filings
with the SEC, before deciding to purchase, hold or sell our common stock.
All statements included or incorporated by reference in this Quarterly Report on Form 10-Q,
other than statements or characterizations of historical fact, are forward-looking statements.
Examples of forward-looking statements include, but are not limited to, statements concerning
projected total net revenue, costs and expenses and product gross margin; our accounting estimates,
assumptions and judgments; the impact of litigation related to the January 2007 restatement of our
financial statements for prior periods; estimates related to the amount and/or timing of the
expensing of unearned stock-based compensation expense; our success in pending litigation; the
demand for our products; the effect that recent economic conditions, seasonality and volume
fluctuations in the demand for our customers consumer-oriented products will have on our quarterly
operating results; our dependence on a few key customers and/or design wins for a substantial
portion of our revenue; our ability to adjust operations in response to changes in demand for
existing products and services or the demand for new products requested by our customers; the
competitive nature of and anticipated growth in our markets; our ability to migrate to smaller
process geometries; manufacturing, assembly and test capacity; our ability to consummate
acquisitions and integrate their operations successfully; our potential needs for additional
capital; inventory and accounts receivable levels; the impact of the IRS review of certain income
and employment tax returns on our results of operations; the effect of potential changes in U.S. or
foreign tax laws and regulations or the interpretation thereof; the level of accrued rebates and
our plans to implement cost savings measures. These forward-looking statements are based on our
current expectations, estimates and projections about our industry and business, managements
beliefs, and certain assumptions made by us, all of which are subject to change. Forward-looking
statements can often be identified by words such as anticipates, expects, intends, plans,
predicts, believes, seeks, estimates, may, will, should, would, could,
potential, continue, ongoing, similar expressions, and variations or negatives of these
words. These statements are not guarantees of future performance and are subject to risks,
uncertainties and assumptions that are difficult to predict. Therefore, our actual results could
differ materially and adversely from those expressed in any forward-looking statements as a result
of various factors, some of which are listed under the section entitled Risk Factors in Part II,
Item 1A of this Report. These forward-looking statements speak only as of the date of this Report.
We undertake no obligation to revise or update publicly any forward-looking statement, except as
otherwise required by law.
Overview
Broadcom Corporation is a major technology innovator and global leader in semiconductors for
wired and wireless communications. Our products enable the delivery of voice, video, data and
multimedia to and throughout the home, the office and the mobile environment. Broadcom provides the
industrys broadest portfolio of state-of-the-art system-on-a-chip and software solutions to
manufacturers of computing and networking equipment, digital entertainment and broadband access
products, and mobile devices. Our diverse product portfolio includes solutions for digital cable,
satellite and Internet Protocol (IP) set-top boxes and media servers; high definition television
(HDTV); high definition DVD players and personal video recording (PVR) devices; cable and DSL
modems and residential gateways; high-speed transmission and switching for local, metropolitan,
wide area and storage networking; server solutions; broadband network and security processors;
wireless and personal area networking;
29
cellular communications; global positioning system (GPS) applications; mobile multimedia and
applications processors; mobile power management; and Voice over Internet Protocol (VoIP) gateway
and telephony systems.
Net Revenue. Our product revenue is generated principally by sales of semiconductor devices
and, to a lesser extent, software licenses and royalties, support and maintenance agreements, data
services and cancellation fees. Our licensing revenue is generated from the licensing of
intellectual property. The majority of our product sales occur through the efforts of our direct
sales force. The remaining balance of our product sales occurs through distributors.
We sell our products to leading manufacturers of wired and wireless communications equipment
in each of our target markets. Because we leverage our technologies across different markets,
certain of our integrated circuits may be incorporated into equipment used in multiple markets. We
utilize independent foundries and third-party subcontractors to manufacture, assemble and test all
of our semiconductor products.
The following table presents details of our total net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Product revenue (1) |
|
|
95.3 |
% |
|
|
96.6 |
% |
|
|
95.0 |
% |
|
|
96.5 |
% |
Licensing revenue |
|
|
4.7 |
|
|
|
3.4 |
|
|
|
5.0 |
|
|
|
3.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes software licenses and royalties, support and maintenance agreements, data services
and cancellation fees totaling less than 0.8% of total net revenue for all periods presented. |
The following table presents details of our product revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Product sales made through direct sales force |
|
|
76.8 |
% |
|
|
81.2 |
% |
|
|
79.0 |
% |
|
|
83.9 |
% |
Product sales made through distributors(1) |
|
|
23.2 |
|
|
|
18.8 |
|
|
|
21.0 |
|
|
|
16.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Product sales made through distributors increased as a percentage of product revenue in the
three and nine months ended September 30, 2009. The increase is due to the ramping of mobile
and wireless products sold by stocking distributors serving as an interface for certain of our
customers as well as incremental demand in our enterprise networking products in the Asia
market. |
The demand for our products has been affected in the past, and may continue to be affected in
the future, by various factors, including, but not limited to, the following:
|
|
|
general economic and political conditions and specific conditions in the markets we
address, including the continuing volatility in the technology sector and semiconductor
industry, the recent global economic recession, trends in the broadband communications
markets in various geographic regions, including seasonality in sales of consumer products
into which our products are incorporated; |
|
|
|
the inability of certain of our customers who depend on credit to have access to their
traditional sources of credit to finance the purchase of products from us or purchases of
capital equipment from others, particularly in the recent global economic environment,
which may lead them to reduce their level of purchases or to seek credit or other
accommodations from us;
|
30
|
|
|
the timing, rescheduling or cancellation of significant customer orders and our
ability, as well as the ability of our customers, to manage inventory; |
|
|
|
our ability to specify, develop or acquire, complete, introduce, market and transition
to volume production new products and technologies in a cost effective and timely manner; |
|
|
|
|
the rate at which our present and future customers and end-users adopt our products and
technologies in our target markets; and |
|
|
|
|
the qualification, availability and pricing of competing products and technologies and
the resulting effects on sales and pricing of our products. |
For these and other reasons, our total net revenue and results of operations for the three
months ended September 30, 2009 and prior periods may not necessarily be indicative of future net
revenue and results of operations.
From time to time, our key customers place large orders causing our quarterly net revenue to
fluctuate significantly. We expect that these fluctuations will continue and that they may be
exaggerated by the seasonal swings in consumer products and changes in the overall economic
environment. In addition, an increasing percentage of our inventory is maintained under hubbing
arrangements with certain of our customers. Pursuant to these arrangements we deliver products to a
customer or a designated third party warehouse based upon the customers projected needs, but do
not recognize product revenue unless and until the customer reports that it has removed our product
from the warehouse to incorporate into its end products. Historically, we have had good visibility
into customer requirements and shipments within a quarter. However, if a customer does not take our
products under a hubbing arrangement in accordance with the schedule it originally provided to us,
our predicted future revenue stream could vary substantially from our forecasts and our results of
operations could be materially and adversely affected. Additionally, since we own inventory that is
physically located in a third partys warehouse, our ability to effectively manage inventory levels
may be impaired, causing our total inventory turns to decrease, which could increase expenses
associated with excess and obsolete product and negatively impact our cash flow.
Sales to our five largest customers, including sales to their manufacturing subcontractors, as
a percentage of total net revenue were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Five largest customers as a group |
|
|
36.3 |
% |
|
|
33.5 |
% |
|
|
34.2 |
% |
|
|
35.9 |
% |
We expect that our largest customers will continue to account for a substantial portion of our
total net revenue for the remainder of 2009 and for the foreseeable future. In the three months
ended September 30, 2009 we had one greater than 10% customer. The identities of our largest
customers and their respective contributions to our total net revenue have varied and will likely
continue to vary from period to period.
Product revenue derived from all independent customers located outside the United States,
excluding foreign subsidiaries or manufacturing subcontractors of customers that are headquartered
in the United States even though such subsidiaries or manufacturing subcontractors are located
outside of the United States, as a percentage of product revenue was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Asia (primarily in Korea, China, Japan and Taiwan) |
|
|
37.5 |
% |
|
|
31.9 |
% |
|
|
37.2 |
% |
|
|
30.5 |
% |
Europe (primarily in the United Kingdom, Finland and France) |
|
|
10.4 |
|
|
|
10.3 |
|
|
|
12.4 |
|
|
|
10.1 |
|
Other |
|
|
5.3 |
|
|
|
0.3 |
|
|
|
2.3 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53.2 |
% |
|
|
42.5 |
% |
|
|
51.9 |
% |
|
|
40.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
31
Product revenue derived from shipments to international destinations, as a percentage of total
product revenue was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Asia (primarily in China, Hong Kong, Singapore and Japan) |
|
|
92.9 |
% |
|
|
89.2 |
% |
|
|
90.5 |
% |
|
|
86.0 |
% |
Europe (primarily in Hungary, France, Germany and Sweden) |
|
|
2.1 |
|
|
|
2.8 |
|
|
|
2.9 |
|
|
|
2.8 |
|
Other |
|
|
1.3 |
|
|
|
2.1 |
|
|
|
1.3 |
|
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96.3 |
% |
|
|
94.1 |
% |
|
|
94.7 |
% |
|
|
91.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
All of our revenue to date has been denominated in U.S. dollars.
Product Gross Margin. Our product gross margin, or gross profit as a percentage of net product
revenue, has been affected in the past, and may continue to be affected in the future, by various
factors, including, but not limited to, the following:
|
|
|
our product mix and volume of product sales (including sales to high volume customers); |
|
|
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the positions of our products in their respective life cycles; |
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the effects of competition; |
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the effects of competitive pricing programs and rebates; |
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provisions for excess and obsolete inventories and their relationship to demand
volatility; |
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manufacturing cost efficiencies and inefficiencies; |
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fluctuations in direct product costs such as wafer pricing and assembly, packaging and
testing costs, and other fixed costs; |
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our ability to create cost advantages through successful integration and convergence; |
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licensing royalties payable by us; |
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product warranty costs; |
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amortization of purchased intangible assets; |
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stock-based compensation expense; and |
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reversals of unclaimed rebates and warranty reserves. |
Net Income (Loss). Our net income (loss) has been affected in the past, and may continue to be
affected in the future, by various factors, including, but not limited to, the following:
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stock-based compensation expense; |
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cash-based incentive compensation expense; |
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required levels of research and development and other operating costs; |
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licensing of intellectual property; |
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in-process research and development, or IPR&D; |
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litigation costs and insurance recoveries;
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settlement costs or gains; |
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charitable contributions; |
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income tax benefits from adjustments to tax reserves of foreign subsidiaries; |
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the loss of interest income resulting from lower average interest rates and investment
balance reductions resulting from expenditures on repurchases of our Class A common stock; |
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amortization of purchased intangible assets; |
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impairment of goodwill and long-lived assets; |
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deferral of revenue under multiple-element arrangements; |
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other-than-temporary impairment of marketable securities and strategic investments; |
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gain (loss) on strategic investments; and |
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restructuring costs or reversals thereof. |
In the three months ended September 30, 2009 our net income was $84.6 million as compared to
net income of $164.9 million in the three months ended September 30, 2008, a difference of $80.3
million. This decrease in profitability was the direct result of $55.2 million less product gross
profit principally due to a decline in product revenue and product gross margins, offset in part by
$15.1 million of additional licensing revenue.
Net revenue in the three months ended September 30, 2009 decreased in our broadband
communications and enterprise networking target markets, offset in part by an increase in net
revenue in our mobile and wireless target market. The decrease in net revenue from our broadband
communications target market resulted primarily from a decrease in demand for broadband modems,
digital set-top boxes and digital TV products. The increase in net revenue from our mobile and
wireless target market resulted primarily from the ramp of our cellular products and an increase in
demand for our wireless LAN product offerings. Also reflected in our mobile and wireless target
market was an increase in licensing revenue of $15.1 million primarily as a result of our licensing
agreement with QUALCOMM Incorporated, or Qualcomm. See discussion under Settlement and Patent
License and Non-Assert Agreement below. The decrease in net revenue from our enterprise networking
target market resulted primarily from a broad-based decline in demand for our Ethernet switch and
controller products.
In the nine months ended September 30, 2009 our net income was $6.1 million as compared to net
income of $374.0 million in the nine months ended September 30, 2008, a difference of $368.0
million. This decrease in profitability was the direct result of $344.8 million less product gross
profit principally due to a decline in revenue and product gross margins, a $50.0 million
charitable contribution, an increase in impairment of long-lived assets and restructuring costs of
$16.7 million and $13.3 million, respectively, offset in part by $35.7 million of additional
licensing revenue and a net settlement gain of $73.1 million.
Net revenue in the nine months ended September 30, 2009 significantly decreased in our
broadband communications and enterprise networking target markets, offset in part by a moderate
increase in net revenue in our mobile and wireless target market. The decrease in net revenue from
our broadband communications target market resulted primarily from a decrease in demand for
broadband modems, digital set-top boxes and digital TV products, offset in part by an increase in
demand for our high definition DVD products. The increase in net revenue from our mobile and
wireless target market resulted primarily from the ramp of our cellular products and an increase in
demand for wireless LAN product offerings, offset in part by a decrease in demand for our Bluetooth
products. Also reflected in our mobile and wireless target market was an increase in licensing
revenue of $35.7 million as a
result of the Qualcomm Agreement. The decrease in net revenue from our enterprise networking
target market resulted primarily from a broad-based decline in demand for our Ethernet switch and
controller products.
We expect research and development costs to increase slightly over the short term and
continue to increase over the longer term as a result of growth in, and the diversification of, the
markets we serve, new product opportunities, the number of design wins that go into production,
changes in our compensation policies, and any expansion into new markets and technologies.
33
We currently do not believe the acquisition of the DTV Business of AMD, Inc. in late 2008 will
achieve earnings neutrality by the end of 2009. In the three and nine months ended September 30,
2009 we recorded an impairment to customer relationships, completed technology and certain other
assets of $7.6 million and $18.9 million, respectively, related to this acquisition. In addition,
in the three months ended September 30, 2009 we recorded charges of $10.4 million for excess and
obsolete inventory related to the DTV Business of AMD. The primary factor contributing to these
charges was a continued reduction in our revenue outlook for this business.
Settlement and Patent License and Non-Assert Agreement. On April 26, 2009 we entered into a
Settlement and Patent License and Non-Assert Agreement, or the Qualcomm Agreement, with QUALCOMM
Incorporated, or Qualcomm. As part of the Qualcomm Agreement, each party granted certain rights
under its patent portfolio to the other party including, in certain circumstances, under future
patents issued within one to four years after April 26, 2009. The term of the Qualcomm Agreement
commenced April 26, 2009 and will continue until the expiration of the last to expire of the
covered patents. The Qualcomm Agreement also resulted in the parties dismissing with prejudice all
outstanding litigation between them, and in Broadcom withdrawing its complaints with foreign
competition authorities.
In addition, certain patents were assigned by Broadcom to Qualcomm with Broadcom retaining a
royalty-free license under these patents. Also, Qualcomm will make payments to Broadcom totaling
$891.2 million, of which $243.2 million has been paid through September 30, 2009. The remaining
balance will be paid in fifteen equal and successive quarterly payments of $43.2 million each,
continuing in the three months ending December 31, 2009 and concluding in the three months ending
June 30, 2013.
We determined the estimated fair values of the individual components of the Qualcomm Agreement
and used the relative fair value method to allocate the payment amounts to the individual
components of the gain on settlement and revenue from the licensing of our intellectual property.
In the nine months ended September 30, 2009 we recorded a gain on settlement of outstanding
litigation related to intellectual property of $65.3 million, which represents the estimated
relative fair value of the settlement for Qualcomms past infringement. The fair value of this
amount was primarily established based on awards determined by the United States District Court for
the Central District of California.
The estimated relative fair value of the licensing revenue as well as the assignment of
patents of $825.9 million will be recorded as a single unit of accounting and recognized over the
Qualcomm Agreements performance period of four years. In the three and nine months ended September
30, 2009, we recorded licensing revenue related to the Qualcomm Agreement of $51.7 million and
$88.5 million, respectively, and expect to record licensing revenue in equal quarterly amounts of
$51.7 million during the quarters ending December 31, 2009 through March 31, 2012, $47.7 million in
the three months ending June 30, 2012 and $43.2 million in each of the following four quarters
ending June 30, 2013. At September 30, 2009 we had deferred revenue of $89.5 million related to the
Qualcomm Agreement.
Separately, we recorded licensing revenue of $30.5 million in the nine months ended September
30, 2009 related to additional payments made by Qualcomm during 2008 for shipments from May 2007
through December 31, 2008, related to a permanent injunction on certain products. These amounts
were previously deferred due to continuing litigation appeals, which have been resolved through the
Qualcomm Agreement.
Product Cycles. The cycle for test, evaluation and adoption of our products by customers can
range from three to more than nine months, with an additional three to more than twelve months
before a customer commences volume production of equipment incorporating our products. Due to this
lengthy sales cycle, we may experience significant delays from the time we incur expenses for
research and development, selling, general and administrative efforts,
and investments in inventory, to the time we generate corresponding revenue, if any. The rate
of new orders may vary significantly from month to month and quarter to quarter. If anticipated
sales or shipments in any quarter do not occur when expected, expenses and inventory levels could
be disproportionately high, and our results of operations for that quarter, and potentially for
future quarters, would be materially and adversely affected.
Mobile Platforms. The development and introduction of new products often requires substantial
research and development resources. During the last five years we have incurred substantial
expenditures on the development of new products for the cellular handset market. Currently 20% of
our research and development expense is
34
attributable to our mobile platforms products. However,
this market is characterized by very long product development and sales cycles due to the
significant qualification requirements of cellular handset makers and wireless network operators,
and accordingly, it is common to experience significant delays from the time research and
development efforts commence to the time corresponding revenues are generated. Due to these lengthy
product development and sales cycles, our mobile platforms business had a material negative impact
on our earnings in 2008, including impairment charges of $169.4 million recorded in the three
months ended December 31, 2008 relating to this business, and may continue to do so until we
realize significant cellular revenues.
Prior to the three months ended September 30, 2009, most of the revenue that we derived from
our mobile platforms business related to the licensing of our intellectual property. Although we
are generating additional revenue from our ramp of cellular products, it is possible that our
customers may delay further product development plans or that their products will not be
commercially successful, which would continue to materially and adversely affect our results of
operations.
Acquisition Strategy. An element of our business strategy involves the acquisition of
businesses, assets, products or technologies that allow us to reduce the time required to develop
new technologies and products and bring them to market, incorporate enhanced functionality into and
complement our existing product offerings, augment our engineering workforce, and enhance our
technological capabilities. We plan to continue to evaluate strategic opportunities as they arise,
including acquisitions and other business combination transactions, strategic relationships,
capital infusions and the purchase or sale of assets.
Business Enterprise Segments. Our Chief Executive Officer, who is considered to be our chief
operating decision maker, reviews financial information presented on an operating segment basis for
purposes of making operating decisions and assessing financial performance. Although we have four
operating segments, under current aggregation criteria, which includes similar economic characteristics,
nature of products, production processes, type or class of products and distribution methods, we
operate in only one reportable operating segment, wired and wireless broadband communications.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting
principles, or GAAP, requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements and the reported amounts of net
revenue and expenses in the reporting period. We regularly evaluate our estimates and assumptions
related to revenue recognition, rebates, allowances for doubtful accounts, sales returns and
allowances, warranty reserves, inventory reserves, stock-based compensation expense, goodwill and
purchased intangible asset valuations, strategic investments, deferred income tax asset valuation
allowances, uncertain tax positions, tax contingencies, self-insurance, restructuring costs,
litigation and other loss contingencies. We base our estimates and assumptions on current facts,
historical experience and various other factors that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values
of assets and liabilities and the recording of revenue, costs and expenses that are not readily
apparent from other sources. The actual results experienced by us may differ materially and
adversely from our estimates. To the extent there are material differences between our estimates
and the actual results, our future results of operations will be affected.
We believe the following are either (i) critical accounting policies that require us to make
significant estimates or assumptions in the preparation of our unaudited condensed consolidated
financial statements or (ii) other key accounting policies that generally do not require us to make
estimates or assumptions but may require us to make difficult or subjective judgments:
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Net Revenue. We recognize product revenue when all of the following criteria are met:
(i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) our
price to the customer is fixed or
determinable and (iv) collection of the resulting accounts receivable is reasonably assured.
These criteria are usually met at the time of product shipment. However, we do not recognize
revenue when any significant obligations remain. Customer purchase orders and/or contracts
are generally used to determine the existence of an arrangement. Shipping documents are used
to verify product delivery. We assess whether a price is fixed or determinable based upon the
payment terms associated with the transaction and whether the sales price is subject to
refund or adjustment. We assess the collectibility of our accounts receivable based primarily
upon the creditworthiness of the customer as determined by credit checks and analysis, as
well as the customers payment history.
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In arrangements that include a combination of semiconductor products and software, where
software is considered more-than-incidental and essential to the functionality of the product
being sold, we account for the entire arrangement as a sale of software and software-related
items and allocate the arrangement consideration based on vendor-specific objective evidence,
or VSOE. In arrangements that include a combination of semiconductor products, software
and/or services, where software is not considered more-than-incidental to the product being
sold, we allocate the arrangement consideration based on each elements relative fair value.
In the arrangements described above, both the semiconductor products and software are
delivered concurrently and post-contract customer support is not provided. Therefore, we
recognize revenue upon shipment of the semiconductor product, assuming all other basic
revenue recognition criteria are met, as both the semiconductor products and software are
considered delivered elements and no undelivered elements exist. In limited instances where
there are undelivered elements, we allocate revenue based on the
relative fair value of the
individual elements. If there is no established fair value for an undelivered element, the
entire arrangement is accounted for as a single unit of accounting, resulting in a deferral
of revenue and costs for the delivered element until the undelivered element has been
fulfilled. In cases where the undelivered element is a data or support service, the revenue
and costs applicable to both the delivered and undelivered elements are recorded ratably over
the respective service period or estimated product life. If the undelivered element is
essential to the functionality of the delivered element, no revenue or costs are recognized
until the undelivered element is delivered. If we enter into future multiple element arrangements in which the fair value of each
deliverable is not known, the portion of revenue we recognize on a deferred basis may vary
significantly in any given quarter, which could cause even greater fluctuations in our
quarterly operating results. |
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A portion of our sales is made through distributors under agreements allowing for pricing
credits and/or rights of return. These pricing credits and/or rights of return provisions
prevent us from being able to reasonably estimate the final price of the inventory to be sold
and the amount of inventory that could be returned pursuant to these agreements. As a result,
the price to the customer is not fixed or determinable at the time we deliver products to our
distributors. Accordingly, product revenue from sales made through these distributors is not
recognized until the distributors ship the product to their customers. We also maintain
inventory, or hubbing, arrangements with certain of our customers. Pursuant to these
arrangements we deliver products to a customer or a designated third party warehouse based
upon the customers projected needs, but do not recognize product revenue unless and until
the customer reports it has removed our product from the warehouse to be incorporated into
its end products. Historically, we have had good visibility into customer requirements and
shipments within a quarter. However, if a customer does not take our products under a hubbing
arrangement in accordance with the schedule it originally provided to us, our future revenue
stream could vary substantially from our forecasts and our results of operations could be
materially and adversely affected. In addition, distributors and customers with hubbing
arrangements provide us with periodic data regarding product, price, quantity, and customers
when products are shipped to their customers, as well as the quantities of our products that
they still have in stock. For specialized shipping terms we may rely on data provided by our
freight forwarding providers. For our royalty revenue we rely on data provided by the
licensee. Any error in the data provided to us by customers, distributors or other third
parties could lead to inaccurate reporting of our total net revenue and net income. |
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We record deferred revenue when advance payments are received from customers before
performance obligations have been completed and/or services have been performed. Deferred
revenue does not include amounts from products delivered to distributors that the
distributors have not yet sold through to their end customers. |
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Sales Returns, Pricing Adjustments and Allowance for Doubtful Accounts. We record
reductions of revenue for estimated product returns and pricing adjustments, such as
competitive pricing programs and rebates, in the same period that the related revenue is
recorded. The amount of these reductions is based on historical sales returns, analysis of
credit memo data, specific criteria included in rebate agreements, and other factors known
at the time. We accrue 100% of potential rebates at the time of sale and do not apply a
breakage factor. We reverse the accrual of unclaimed rebate amounts as specific rebate
programs contractually end or when we believe unclaimed rebates are no longer subject to
payment and will not be paid. Thus the reversal of unclaimed rebates may have a positive
impact on our net revenue and net income in subsequent periods.
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Additional reductions of
revenue would result if actual product returns or pricing adjustments exceed our estimates.
We also maintain an allowance for doubtful accounts for estimated losses resulting from the
inability of customers to make required payments. If the financial condition of any
customer were to deteriorate, resulting in an impairment of its ability to make payments,
additional allowances could be required. |
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Inventory and Warranty Reserves. We establish inventory reserves for estimated
obsolescence or unmarketable inventory in an amount equal to the difference between the
cost of inventory and its estimated realizable value based upon assumptions about future
demand and market conditions. If actual demand and market conditions are less favorable
than those projected by management, additional inventory reserves could be required. Under
the hubbing arrangements that we maintain with certain customers, we own inventory that is
physically located in a customers or third partys warehouse. As a result, our ability to
effectively manage inventory levels may be impaired, which would cause our total inventory
turns to decrease. In that event, our expenses associated with excess and obsolete
inventory could increase and our cash flow could be negatively impacted. Our products
typically carry a one to three year warranty. We establish reserves for estimated product
warranty costs at the time revenue is recognized. Although we engage in extensive product
quality programs and processes, our warranty obligation has been and may in the future be
affected by product failure rates, product recalls, repair or field replacement costs and
additional development costs incurred in correcting any product failure, as well as
possible claims for consequential costs. Should actual product failure rates, use of
materials or service delivery costs differ from our estimates, additional warranty reserves
could be required. In that event, our product gross margins would be reduced. |
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Stock-Based Compensation Expense. All share-based payments, including grants of stock
options, restricted stock units and employee stock purchase rights, are required to be
recognized in our financial statements based upon their respective grant date fair values.
Under this standard, the fair value of each employee stock option and employee stock
purchase right is estimated on the date of grant using an option pricing model that meets
certain requirements. We currently use the Black-Scholes option pricing model to estimate
the fair value of our stock options and stock purchase rights. Although we utilize the
Black-Scholes model, which meets established requirements, the fair values generated by
the model may not be indicative of the actual fair values of our equity awards as it does
not consider certain factors important to those awards to employees, such as continued
employment and periodic vesting requirements as well as limited transferability. The
determination of the fair value of share-based payment awards utilizing the Black-Scholes
model is affected by our stock price and a number of assumptions, including expected
volatility, expected life, risk-free interest rate and expected dividends. We use the
implied volatility for traded options on our stock as the expected volatility assumption
required in the Black-Scholes model. Our selection of the implied volatility approach is
based on the availability of data regarding actively traded options on our stock as we
believe that implied volatility is more representative of fair value than historical
volatility. The expected life of the stock options is based on historical and other
economic data trended into the future. The risk-free interest rate assumption is based on
observed interest rates appropriate for the expected terms of our stock options and stock
purchase rights. The dividend yield assumption is based on our history and expectation of
no dividend payouts. The fair value of our restricted stock units is based on the closing
market price of our Class A common stock on the date of grant. We evaluate the assumptions
used to value stock awards on a quarterly basis. If factors change and we employ different
assumptions, stock-based compensation expense may differ significantly from what we have
recorded in the past. If there are any modifications or cancellations of the underlying
unvested securities, we may be required to accelerate, increase or cancel any remaining
unearned stock-based compensation expense. To the extent that we grant additional equity
securities to employees or we assume unvested securities in connection with any
acquisitions, our stock-based compensation expense will be increased by the additional
unearned compensation resulting from those additional grants or acquisitions. |
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Goodwill and Purchased Intangible Assets. Goodwill is recorded as the difference, if
any, between the aggregate consideration paid for an acquisition and the fair value of the
net tangible and intangible assets (including in-process research and development and
defensive assets) acquired. Prior to 2009 in-process research and development was expensed
immediately. The amounts and useful lives assigned to intangible assets acquired, other
than goodwill, impact the amount and timing of future amortization thereof. The value of
our intangible assets, including goodwill, could be impacted by future adverse changes such
as: (i) any future declines in our operating results, (ii) a decline in the valuation of
technology company stocks, including the valuation of our common stock, (iii) a further
significant slowdown in the worldwide economy
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or the semiconductor industry, (iv) any
failure to meet the performance projections included in our forecasts of future operating
results or (v) the abandonment of any our acquired in-process research and development
projects. We evaluate these assets, including purchased intangible assets deemed to have
indefinite lives, on an annual basis in the fourth quarter or more frequently if we believe
indicators of impairment exist. In the process of our annual impairment review, we
primarily use the income approach methodology of valuation that includes the discounted
cash flow method as well as other generally accepted valuation methodologies to determine
the fair value of our intangible assets. Significant management judgment is required in the
forecasts of future operating results that are used in the discounted cash flow method of
valuation. It is possible, however, that the plans may change and estimates used may prove
to be inaccurate. If our actual results, or the plans and estimates used in future
impairment analyses, are lower than the original estimates used to assess the
recoverability of these assets, we could incur additional impairment charges. |
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Deferred Taxes and Uncertain Tax Positions. We utilize the asset and liability method
of accounting for income taxes. We record a valuation allowance to reduce our deferred tax
assets to the amount that we believe is more likely than not to be realized. In assessing
the need for a valuation allowance, we consider all positive and negative evidence,
including scheduled reversals of deferred tax liabilities, projected future taxable income,
tax planning strategies, and recent financial performance. Forming a conclusion that a
valuation allowance is not required is difficult when there is negative evidence such as
cumulative losses in recent years. As a result of our cumulative losses in the U.S. and
certain foreign jurisdictions, our U.S. tax losses after tax deductions for stock-based
compensation, and the full utilization of our loss carryback opportunities, we have
concluded that a full valuation allowance against our net deferred tax assets is
appropriate in the U.S. and certain foreign jurisdictions. In certain other foreign
jurisdictions where we do not have cumulative losses, we record valuation allowances to
reduce our net deferred tax assets to the amount we believe is more likely than not to be
realized. In the future, if we realize a deferred tax asset that currently carries a
valuation allowance, we may record a reduction of income tax expense in the period of such
realization. Income tax positions must meet a more-likely-than-not recognition threshold to
be recognized. Income tax positions that previously failed to meet the more-likely-than-not
threshold are recognized in the first subsequent financial reporting period in which that
threshold is met. Previously recognized tax positions that no longer meet the
more-likely-than-not threshold are derecognized in the first subsequent financial reporting
period in which that threshold is no longer met. Prior to 2007 we recorded estimated
income tax liabilities to the extent they were probable and could be reasonably estimated.
As a multinational corporation, we are subject to taxation in many jurisdictions, and the
calculation of our tax liabilities involves dealing with uncertainties in the application
of complex tax laws and regulations in various taxing jurisdictions. If we ultimately
determine that the payment of these liabilities will be unnecessary, we reverse the
liability and recognize a tax benefit during the period in which we determine the liability
no longer applies. Conversely, we record additional tax charges in a period in which we
determine that a recorded tax liability is less than we expect the ultimate assessment to
be. The application of tax laws and regulations is subject to legal and factual
interpretation, judgment and uncertainty. Tax laws and regulations themselves are subject
to change as a result of changes in fiscal policy, changes in legislation, the evolution of
regulations and court rulings. Therefore, the actual liability for U.S. or foreign taxes
may be materially different from our estimates, which could result in the need to record
additional tax liabilities or potentially reverse previously recorded tax liabilities. |
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Litigation and Settlement Costs. We are involved in disputes, litigation and other
legal proceedings. We prosecute and defend these matters aggressively. However, there are
many uncertainties associated with any litigation, and we cannot assure you that these
actions or other third party claims against us will be resolved without costly litigation
and/or substantial settlement charges. In addition, the resolution of intellectual property
litigation may require us to pay damages for past infringement or to obtain a license under
the other partys intellectual property rights that could require one-time license fees or
running royalties, which could
adversely impact product gross margins in future periods, or could prevent us from
manufacturing or selling some of our products or limit or restrict the type of work that
employees involved in such litigation may perform for Broadcom. If any of those events were
to occur, our business, financial condition and results of operations could be materially and
adversely affected. We record a charge equal to at least the minimum estimated liability for
a loss contingency when both of the following conditions are met: (i) information available
prior to issuance of the financial statements indicates that it is probable that an asset had
been impaired or a liability had been incurred at the date of the financial statements and
(ii) the amount or range of loss can be reasonably estimated. However, the actual liability
in any such disputes or litigation may be materially different from our estimates, which
could result in the need to record additional costs. |
38
Results of Operations for the Three and Nine Months Ended September 30, 2009 Compared to the
Three and Nine Months Ended September 30, 2008
The following table sets forth certain unaudited condensed consolidated statements of income
data expressed as a percentage of total net revenue for the periods indicated:
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2009 |
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2008 |
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2009 |
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2008 |
Net revenue: |
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Product revenue |
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95.3 |
% |
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96.6 |
% |
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95.0 |
% |
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96.5 |
% |
Licensing revenue |
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4.7 |
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3.4 |
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5.0 |
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3.5 |
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Total net revenue |
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100.0 |
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100.0 |
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100.0 |
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100.0 |
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Operating costs and expenses: |
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Cost of product revenue |
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49.1 |
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47.7 |
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50.2 |
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46.9 |
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Research and development |
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31.2 |
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29.2 |
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36.2 |
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31.6 |
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Selling, general and administrative |
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11.3 |
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11.0 |
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12.5 |
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11.2 |
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Amortization of purchased intangible assets |
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0.3 |
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0.4 |
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In-process research and development |
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0.3 |
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Impairment of long-lived assets |
|
|
0.6 |
|
|
|
|
|
|
|
0.6 |
|
|
|
0.1 |
|
Restructuring costs (reversals) |
|
|
0.4 |
|
|
|
|
|
|
|
0.4 |
|
|
|
|
|
Settlement costs (gains) |
|
|
|
|
|
|
|
|
|
|
(1.8 |
) |
|
|
0.4 |
|
Charitable contribution |
|
|
|
|
|
|
|
|
|
|
1.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
92.9 |
|
|
|
87.9 |
|
|
|
100.1 |
|
|
|
90.5 |
|
Income (loss) from operations |
|
|
7.1 |
|
|
|
12.1 |
|
|
|
(0.1 |
) |
|
|
9.5 |
|
Interest income, net |
|
|
0.2 |
|
|
|
1.0 |
|
|
|
0.4 |
|
|
|
1.3 |
|
Other income (expense), net |
|
|
|
|
|
|
(0.3 |
) |
|
|
0.1 |
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
7.3 |
|
|
|
12.8 |
|
|
|
0.4 |
|
|
|
10.7 |
|
Provision for income taxes |
|
|
0.6 |
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
6.7 |
% |
|
|
12.7 |
% |
|
|
0.2 |
% |
|
|
10.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents details of total stock-based compensation expense as a percentage
of net revenue included in each functional line item in the unaudited condensed consolidated
statements of income data above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Cost of product revenue |
|
|
0.5 |
% |
|
|
0.5 |
% |
|
|
0.6 |
% |
|
|
0.5 |
% |
Research and development |
|
|
7.2 |
|
|
|
7.2 |
|
|
|
8.5 |
|
|
|
7.4 |
|
Selling, general and administrative |
|
|
2.5 |
|
|
|
2.6 |
|
|
|
2.9 |
|
|
|
2.7 |
|
39
Net Revenue, Cost of Product Revenue, Product Gross Margin and Total Gross Margin
The following tables present net revenue, cost of product revenue and product gross margin for
the three and Nine months ended September 30, 2009 and 2008 and the three months ended September
30, 2009 and June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
|
|
|
% |
|
|
|
September 30, 2009 |
|
|
September 30, 2008 |
|
|
|
|
|
|
Change |
|
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
Increase |
|
|
in |
|
|
|
Amount |
|
|
Revenue |
|
|
Amount |
|
|
Revenue |
|
|
(Decrease) |
|
|
Amount |
|
|
|
|
|
|
|
(In thousands, except percentages) |
|
|
|
|
|
|
|
|
|
Product revenue(1) |
|
$ |
1,194,745 |
|
|
|
95.3 |
% |
|
$ |
1,254,083 |
|
|
|
96.6 |
% |
|
$ |
(59,338 |
) |
|
|
(4.7 |
)% |
Licensing revenue |
|
|
59,452 |
|
|
|
4.7 |
|
|
|
44,392 |
|
|
|
3.4 |
|
|
|
15,060 |
|
|
|
33.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
$ |
1,254,197 |
|
|
|
100.0 |
% |
|
$ |
1,298,475 |
|
|
|
100.0 |
% |
|
$ |
(44,278 |
) |
|
|
(3.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue(2) |
|
$ |
615,349 |
|
|
|
49.1 |
% |
|
$ |
619,459 |
|
|
|
47.7 |
% |
|
$ |
(4,110 |
) |
|
|
(0.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product gross margin (3) |
|
|
48.5 |
% |
|
|
|
|
|
|
50.6 |
% |
|
|
|
|
|
|
(2.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margin (3) |
|
|
50.9 |
% |
|
|
|
|
|
|
52.3 |
% |
|
|
|
|
|
|
(1.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
|
|
|
|
|
% |
|
|
|
September 30, 2009 |
|
|
September 30, 2008 |
|
|
|
|
|
|
Change |
|
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
Increase |
|
|
in |
|
|
|
Amount |
|
|
Revenue |
|
|
Amount |
|
|
Revenue |
|
|
(Decrease) |
|
|
Amount |
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except percentages) |
|
|
|
|
|
|
|
|
|
Product revenue(1) |
|
$ |
2,989,292 |
|
|
|
95.0 |
% |
|
$ |
3,409,051 |
|
|
|
96.5 |
% |
|
$ |
(419,759 |
) |
|
|
(12.3 |
)% |
Licensing revenue |
|
|
158,285 |
|
|
|
5.0 |
|
|
|
122,565 |
|
|
|
3.5 |
|
|
|
35,720 |
|
|
|
29.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
$ |
3,147,577 |
|
|
|
100.0 |
% |
|
$ |
3,531,616 |
|
|
|
100.0 |
% |
|
$ |
(384,039 |
) |
|
|
(10.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue(2) |
|
$ |
1,580,300 |
|
|
|
50.2 |
% |
|
$ |
1,655,218 |
|
|
|
46.9 |
% |
|
$ |
(74,918 |
) |
|
|
(4.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product gross margin (3) |
|
|
47.1 |
% |
|
|
|
|
|
|
51.4 |
% |
|
|
|
|
|
|
(4.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margin (3) |
|
|
49.8 |
% |
|
|
|
|
|
|
53.1 |
% |
|
|
|
|
|
|
(3.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
|
|
|
% |
|
|
|
September 30, 2009 |
|
|
June 30 |
|
2009 |
|
|
|
Change |
|
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
Increase |
|
|
in |
|
|
|
Amount |
|
|
Revenue |
|
|
Amount |
|
|
Revenue |
|
|
(Decrease) |
|
|
Amount |
|
|
|
|
|
|
|
(In thousands, except percentages) |
|
|
|
|
|
|
|
|
|
Product revenue(1) |
|
$ |
1,194,745 |
|
|
|
95.3 |
% |
|
$ |
966,317 |
|
|
|
92.9 |
% |
|
$ |
228,428 |
|
|
|
23.6 |
% |
Licensing revenue |
|
|
59,452 |
|
|
|
4.7 |
|
|
|
73,627 |
|
|
|
7.1 |
|
|
|
(14,175 |
) |
|
|
(19.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
$ |
1,254,197 |
|
|
|
100.0 |
% |
|
$ |
1,039,944 |
|
|
|
100.0 |
% |
|
$ |
214,253 |
|
|
|
20.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue(2) |
|
$ |
615,349 |
|
|
|
49.1 |
% |
|
$ |
518,674 |
|
|
|
49.9 |
% |
|
$ |
96,675 |
|
|
|
18.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product gross margin (3) |
|
|
48.5 |
% |
|
|
|
|
|
|
46.3 |
% |
|
|
|
|
|
|
2.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margin (3) |
|
|
50.9 |
% |
|
|
|
|
|
|
50.1 |
% |
|
|
|
|
|
|
0.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes software licenses and royalties, support and maintenance agreements, data services
and cancellation fees of less than 0.8% of total net revenue for all periods presented. |
40
|
|
|
(2) |
|
Includes stock-based compensation expense resulting from stock options, stock purchase rights
and restricted stock units we issued or assumed in acquisitions. For a further discussion of
stock-based compensation expense, see the section entitled Stock-Based Compensation Expense
below. |
|
(3) |
|
Due to the separate presentation of product revenue and licensing revenue implemented in the
three months ended June 30, 2009, the tables include product gross margin in addition to our
previously reported total gross margin. |
Net Revenue. Our product revenue is generated principally by sales of our semiconductor
devices. Our broadband communications products include solutions for cable modems, DSL
applications, digital cable, direct broadcast satellite and IP set-top boxes, digital TVs and high
definition DVD and personal video recording devices. Our mobile and wireless products include
wireless LAN, cellular, touch controller, GPS, Bluetooth, mobile multimedia and applications
processors, mobile power management and VoIP solutions. Our enterprise networking products include
Ethernet transceivers, controllers, switches, broadband network and security processors and server
chipsets. Our licensing revenue is generated by the licensing of our intellectual property,
primarily patents, and is included in our mobile and wireless target market presentation below.
Net revenue is revenue less reductions for rebates and provisions for returns and allowances.
The following table presents net revenue from each of our major target markets and its
respective contribution to net revenue in the three months ended September 30, 2009 as compared to
the three months ended September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
|
|
|
% |
|
|
|
September 30, 2009 |
|
|
September 30, 2008 |
|
|
|
|
|
|
Change |
|
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
Increase |
|
|
in |
|
|
|
Amount |
|
|
Revenue |
|
|
Amount |
|
|
Revenue |
|
|
(Decrease) |
|
|
Amount |
|
|
|
|
|
|
|
(In thousands, except percentages) |
|
|
|
|
|
|
|
|
|
Broadband communications |
|
$ |
394,863 |
|
|
|
31.5 |
% |
|
$ |
458,323 |
|
|
|
35.3 |
% |
|
$ |
(63,460 |
) |
|
|
(13.8 |
)% |
Mobile and wireless |
|
|
572,287 |
|
|
|
45.6 |
|
|
|
494,429 |
|
|
|
38.1 |
|
|
|
77,858 |
|
|
|
15.7 |
|
Enterprise networking |
|
|
287,047 |
|
|
|
22.9 |
|
|
|
345,723 |
|
|
|
26.6 |
|
|
|
(58,676 |
) |
|
|
(17.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
1,254,197 |
|
|
|
100.0 |
% |
|
$ |
1,298,475 |
|
|
|
100.0 |
% |
|
$ |
(44,278 |
) |
|
|
(3.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in net revenue from our broadband communications target market resulted primarily
from a decrease in demand for broadband modems, digital set-top boxes and digital TV products. The
increase in net revenue from our mobile and wireless target market resulted primarily from the ramp
of our cellular products and an increase in demand for our wireless LAN product offerings. Also
reflected in our mobile and wireless target market was an increase in licensing revenue of $15.1
million primarily as a result of the Qualcomm Agreement. The decrease in net revenue from our
enterprise networking target market resulted primarily from a broad-based decline in demand for our
Ethernet switch and controller products.
41
The following table presents net revenue from each of our major target markets and its
respective contribution to net revenue in the nine months ended September 30, 2009 as compared to
the nine months ended September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
|
|
|
|
|
% |
|
|
|
September 30, 2009 |
|
|
September 30, 2008 |
|
|
|
|
|
|
Change |
|
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
Increase |
|
|
in |
|
|
|
Amount |
|
|
Revenue |
|
|
Amount |
|
|
Revenue |
|
|
(Decrease) |
|
|
Amount |
|
|
|
|
|
|
|
(In thousands, except percentages) |
|
|
|
|
|
|
|
|
|
Broadband communications |
|
$ |
1,075,960 |
|
|
|
34.2 |
% |
|
$ |
1,281,688 |
|
|
|
36.3 |
% |
|
$ |
(205,728 |
) |
|
|
(16.1 |
)% |
Mobile and wireless |
|
|
1,355,866 |
|
|
|
43.1 |
|
|
|
1,267,928 |
|
|
|
35.9 |
|
|
|
87,938 |
|
|
|
6.9 |
|
Enterprise networking |
|
|
715,751 |
|
|
|
22.7 |
|
|
|
982,000 |
|
|
|
27.8 |
|
|
|
(266,249 |
) |
|
|
(27.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
3,147,577 |
|
|
|
100.0 |
% |
|
$ |
3,531,616 |
|
|
|
100.0 |
% |
|
$ |
(384,039 |
) |
|
|
(10.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in net revenue from our broadband communications target market resulted primarily
from a decrease in demand for broadband modems, digital set-top boxes and digital TV products,
offset in part by an increase in demand for our high definition DVD products. The increase in net
revenue from our mobile and wireless target market resulted primarily from the ramp of our cellular
products and an increase in demand for wireless LAN product offerings, offset in part by a decrease
in demand for our Bluetooth products. Also reflected in our mobile and wireless target market was an
increase in licensing revenue of $35.7 million as a result of the Qualcomm Agreement. The decrease
in net revenue from our enterprise networking target market resulted primarily from a broad-based
decline in demand for our Ethernet switch and controller products.
We recorded rebates to certain customers of $97.0 million and $71.1 million in the three
months ended September 30, 2009 and 2008, respectively, and $217.5 million and $181.5 million in
the nine months ended September 30, 2009 and 2008, respectively. The increase in rebates in the
three and nine months ended September 30, 2009 was attributable to a change to the mix in sales
to customers that participate in our rebate programs, primarily an increase in the mobile and
wireless area. At the time of the sale we accrue 100% of the potential rebate as a reduction of
revenue and do not apply a breakage factor. The amount of these reductions is based upon the terms
included in our various rebate agreements. We anticipate that accrued rebates will vary in future
periods based upon the level of overall sales to customers that participate in our rebate programs.
We reverse the accrual of unclaimed rebate amounts as specific rebate programs contractually end or
when we believe unclaimed rebates are no longer subject to payment and will not be paid. We
reversed accrued rebates of (i) $1.6 million and $10.0 million in the three months ended September
30, 2009 and 2008, respectively, and (ii) $9.1 million and $36.5 million in the nine months ended
September 30, 2009 and 2008, respectively.
The following table presents net revenue from each of our major target markets and its
respective contribution to net revenue in the three months ended September 30, 2009 as compared to
the three months ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
|
|
|
% |
|
|
|
September 30, 2009 |
|
|
June 30, 2009 |
|
|
|
|
|
|
Change |
|
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
in |
|
|
|
Amount |
|
|
Revenue |
|
|
Amount |
|
|
Revenue |
|
|
Increase |
|
|
Amount |
|
|
|
|
|
|
|
(In thousands, except percentages) |
|
|
|
|
|
|
|
|
|
Broadband communications |
|
$ |
394,863 |
|
|
|
31.5 |
% |
|
$ |
363,843 |
|
|
|
35.0 |
% |
|
$ |
31,020 |
|
|
|
8.5 |
% |
Mobile and wireless |
|
|
572,287 |
|
|
|
45.6 |
|
|
|
465,748 |
|
|
|
44.8 |
|
|
|
106,539 |
|
|
|
22.9 |
|
Enterprise networking |
|
|
287,047 |
|
|
|
22.9 |
|
|
|
210,353 |
|
|
|
20.2 |
|
|
|
76,694 |
|
|
|
36.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
1,254,197 |
|
|
|
100.0 |
% |
|
$ |
1,039,944 |
|
|
|
100.0 |
% |
|
$ |
214,253 |
|
|
|
20.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
The increase in net revenue from our broadband communications target market resulted primarily
from an increase in demand for broadband modems and digital set-top boxes. The increase in net
revenue from our mobile and wireless target market resulted primarily from strong new
product ramps in cellular basebands and our combo solutions, as well as normal seasonality as our
customers prepare for the upcoming holiday season. Another factor contributing to the increase in
our mobile and wireless target market was the continued ramp of our cellular products, offset by a
decrease in licensing revenue of $14.2 million. The increase in net revenue from our enterprise
networking target market resulted principally from improving customer order patterns particularly for
our Ethernet switch and controller products.
Cost of Product Revenue, Product Gross Margin and Total Gross Margin. Cost of product revenue
comprises the cost of our semiconductor devices, which consists of the cost of purchasing finished
silicon wafers manufactured by independent foundries, costs associated with our purchase of
assembly, test and quality assurance services and
packaging materials for semiconductor products, as well as royalties paid to vendors for use
of their technology. Also included in cost of product revenue is the amortization of purchased
technology, and manufacturing overhead, including costs of personnel and equipment associated with
manufacturing support, product warranty costs, provisions for excess and obsolete inventories, and
stock-based compensation expense for personnel engaged in manufacturing support. Product gross
margin is product revenue less cost of product revenue divided by product revenue and does not
include licensing revenue of intellectual property. Total gross margin is total net revenue less
cost of product revenue divided by total net revenue.
Product gross margin decreased from 50.6% in the three months ended September 30, 2008 to
48.5% in the three months ended September 30, 2009 primarily as a result of changes in the product
mix. Other factors that contributed to the decrease in product gross margin were a net decrease in
the reversal of rebates of $8.4 million related to unclaimed rebates and fixed costs being spread
over a lower revenue base, offset by a net decrease in excess and obsolete inventory provisions of
$11.3 million.
Product gross margin decreased from 51.4% in the nine months ended September 30, 2008 to 47.1%
in the nine months ended September 30, 2009 primarily as a result of changes in the product mix.
Other factors that contributed to the decrease in product gross margin were: (i) a net decrease in
the reversal of rebates of $27.4 million related to unclaimed rebates, (ii) fixed costs being
spread over a lower revenue base and (iii) a net increase in excess and obsolete inventory
provisions of $7.2 million.
Product gross margin increased from 46.3% in the three months ended June 30, 2009 to 48.5% in
the three months ended September 30, 2009 as a result of (i) fixed costs being spread over a higher
revenue base, (ii) changes in product mix (iii) continued focus on cost improvement and (iv) a net
decrease in excess and obsolete inventory provisions of $8.6 million. In addition, in the three
months ended September 30, 2009 we recorded reduced excess and obsolete inventory provisions due to
improved ordering patterns, offset by additional excess and obsolete provisions of $10.4 million
related to inventory from our DTV business.
Product gross margin has been and will likely continue to be impacted by our product mix and
volume of product sales, including sales to high volume customers, competitive pricing programs and
rebates, fluctuations in silicon wafer costs and assembly, packaging and testing costs, competitive
pricing requirements, product warranty costs, provisions for excess and obsolete inventories, the
position of our products in their respective life cycles, and the introduction of products with
lower margins, among other factors. Typically our newly introduced products have lower gross
margins until we commence volume production and launch lower cost revisions of such products
enabling us to benefit from economies of scale and more efficient designs. Our product gross margin
may also be impacted by additional stock-based compensation expense and changes therein, as
discussed below, and the amortization of purchased intangible assets related to future
acquisitions.
Research and Development Expense
Research and development expense consists primarily of salaries and related costs of employees
engaged in research, design and development activities, including stock-based compensation expense.
Development and design costs consist primarily of costs related to engineering design tools, mask
and prototyping costs, testing and subcontracting costs. In addition, we incur other costs related
to facilities and equipment expense, among other items.
43
The following tables present details of research and development expense for the three and
nine months ended September 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
|
|
|
% |
|
|
|
September 30, 2009 |
|
|
September 30, 2008 |
|
|
|
|
|
|
Change |
|
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
Increase |
|
|
in |
|
|
|
Amount |
|
|
Revenue |
|
|
Amount |
|
|
Revenue |
|
|
(Decrease) |
|
|
Amount |
|
|
|
|
|
|
|
(In thousands, except percentages) |
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
$ |
196,036 |
|
|
|
15.6 |
% |
|
$ |
183,219 |
|
|
|
14.1 |
% |
|
$ |
12,817 |
|
|
|
7.0 |
% |
Stock-based compensation(1) |
|
|
90,829 |
|
|
|
7.2 |
|
|
|
93,334 |
|
|
|
7.2 |
|
|
|
(2,505 |
) |
|
|
(2.7 |
) |
Development and design costs |
|
|
54,237 |
|
|
|
4.3 |
|
|
|
50,278 |
|
|
|
3.9 |
|
|
|
3,959 |
|
|
|
7.9 |
|
Other |
|
|
50,068 |
|
|
|
4.1 |
|
|
|
52,448 |
|
|
|
4.0 |
|
|
|
(2,380 |
) |
|
|
(4.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
$ |
391,170 |
|
|
|
31.2 |
% |
|
$ |
379,279 |
|
|
|
29.2 |
% |
|
$ |
11,891 |
|
|
|
3.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
|
|
|
|
|
% |
|
|
|
September 30, 2009 |
|
|
September 30, 2008 |
|
|
|
|
|
|
Change |
|
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
Increase |
|
|
in |
|
|
|
Amount |
|
|
Revenue |
|
|
Amount |
|
|
Revenue |
|
|
(Decrease) |
|
|
Amount |
|
|
|
|
|
|
|
(In thousands, except percentages) |
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
$ |
574,200 |
|
|
|
18.2 |
% |
|
$ |
533,656 |
|
|
|
15.1 |
% |
|
$ |
40,544 |
|
|
|
7.6 |
% |
Stock-based compensation(1) |
|
|
266,698 |
|
|
|
8.5 |
|
|
|
262,043 |
|
|
|
7.4 |
|
|
|
4,655 |
|
|
|
1.8 |
|
Development and design costs |
|
|
148,185 |
|
|
|
4.7 |
|
|
|
165,185 |
|
|
|
4.7 |
|
|
|
(17,000 |
) |
|
|
(10.3 |
) |
Other |
|
|
149,581 |
|
|
|
4.8 |
|
|
|
154,118 |
|
|
|
4.4 |
|
|
|
(4,537 |
) |
|
|
(2.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
$ |
1,138,664 |
|
|
|
36.2 |
% |
|
$ |
1,115,002 |
|
|
|
31.6 |
% |
|
$ |
23,662 |
|
|
|
2.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes stock-based compensation expense resulting from stock options, stock purchase rights
and restricted stock units we issued or assumed in acquisitions. For a further discussion of
stock-based compensation expense, see the section entitled Stock-Based Compensation Expense
below. |
The increase in salaries and benefits is primarily attributable to an increase in headcount by
approximately 400 personnel (predominantly in the broadband communications area as a result of our
acquisition of the DTV Business of AMD, Inc.) to approximately 5,500 at September 30, 2009, which
represents an 8.3% increase from our September 30, 2008 levels.
In addition we increased our
incentive plan costs due primarily to the stronger than anticipated
performance in relative revenue growth as compared to an identified
segment of the semiconductor industry and cash
flow from operations generated in the three months ended September
30, 2009 and expected for the full year. The increase in salaries and benefits in the three and nine months ended
September 30, 2009 was offset in part by the impact of our restructuring plan in January 2009. We
did not have an annual salary merit increase in 2009. In the three months ended September 30, 2009
development and design costs increased due to prototyping and engineering design tool costs. In the
nine months ended September 30, 2009 development and design costs decreased due to reduced
prototyping, subcontracting and testing costs as well as license fees, offset in part by an
increase in engineering design tool costs. Development and design costs vary from period to period
depending on the timing of development and tape-out of various products.
We remain committed to significant research and development efforts to extend our technology
leadership in the wired and wireless communications markets in which we operate. We currently hold
more than 3,650 U.S. and 1,450 foreign patents, and maintain an active program of filing for and
acquiring additional U.S. and foreign patents in wired and wireless communications and other
fields.
44
Selling, General and Administrative Expense
Selling, general and administrative expense consists primarily of personnel-related expenses,
including stock-based compensation expense, legal and other professional fees, facilities expenses
and communications expenses.
The following tables present details of selling, general and administrative expense for the
three and nine months ended September 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
|
|
|
% |
|
|
|
September 30, 2009 |
|
|
September 30, 2008 |
|
|
|
|
|
|
Change |
|
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
Increase |
|
|
in |
|
|
|
Amount |
|
|
Revenue |
|
|
Amount |
|
|
Revenue |
|
|
(Decrease) |
|
|
Amount |
|
|
|
(In thousands, except percentages) |
|
Salaries and benefits |
|
$ |
53,180 |
|
|
|
4.2 |
% |
|
$ |
51,195 |
|
|
|
3.9 |
% |
|
$ |
1,985 |
|
|
|
3.9 |
% |
Stock-based compensation(1) |
|
|
31,290 |
|
|
|
2.5 |
|
|
|
33,328 |
|
|
|
2.6 |
|
|
|
(2,038 |
) |
|
|
(6.1 |
) |
Legal and accounting fees |
|
|
42,728 |
|
|
|
3.4 |
|
|
|
37,495 |
|
|
|
2.9 |
|
|
|
5,233 |
|
|
|
14.0 |
|
Other |
|
|
15,282 |
|
|
|
1.2 |
|
|
|
19,923 |
|
|
|
1.6 |
|
|
|
(4,641 |
) |
|
|
(23.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
$ |
142,480 |
|
|
|
11.3 |
% |
|
$ |
141,941 |
|
|
|
11.0 |
% |
|
$ |
539 |
|
|
|
0.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
|
|
|
|
|
% |
|
|
|
September 30, 2009 |
|
|
September 30, 2008 |
|
|
|
|
|
|
Change |
|
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
Increase |
|
|
in |
|
|
|
Amount |
|
|
Revenue |
|
|
Amount |
|
|
Revenue |
|
|
(Decrease) |
|
|
Amount |
|
|
|
(In thousands, except percentages) |
|
Salaries and benefits |
|
$ |
144,335 |
|
|
|
4.6 |
% |
|
$ |
148,998 |
|
|
|
4.2 |
% |
|
$ |
(4,663 |
) |
|
|
(3.1 |
)% |
Stock-based compensation(1) |
|
|
89,817 |
|
|
|
2.9 |
|
|
|
93,661 |
|
|
|
2.7 |
|
|
|
(3,844 |
) |
|
|
(4.1 |
) |
Legal and accounting fees |
|
|
116,854 |
|
|
|
3.7 |
|
|
|
93,660 |
|
|
|
2.7 |
|
|
|
23,194 |
|
|
|
24.8 |
|
Other |
|
|
43,932 |
|
|
|
1.3 |
|
|
|
59,585 |
|
|
|
1.6 |
|
|
|
(15,653 |
) |
|
|
(26.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
$ |
394,938 |
|
|
|
12.5 |
% |
|
$ |
395,904 |
|
|
|
11.2 |
% |
|
$ |
(966 |
) |
|
|
(0.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes stock-based compensation expense resulting from stock options, stock purchase rights
and restricted stock units we issued or assumed in acquisitions. For a further discussion of
stock-based compensation expense, see the section entitled Stock-Based Compensation Expense
below. |
In the three months ended September 30, 2009 salaries and benefits increased slightly as the
impact of our restructuring plan was more than offset by an increase in our incentive plan costs.
In the nine months ended September 30, 2009 salaries and benefits decreased due to reduced costs
relating to the impact of our restructuring plan and recruiting and training costs, offset in part
by an increase in our incentive plan costs. We did not have an annual salary merit increase in
2009. Employees engaged in selling, general and administrative activities increased slightly to
1,300 as compared to our headcount at September 30, 2008. The increase in legal fees in the three
and nine months ended September 30, 2009 resulted primarily from attorneys fees and expenses
related to our outstanding intellectual property and securities litigation. Legal fees fluctuate
from period to period due to the nature, scope, timing and costs of the matters in litigation from
time to time. See Note 9 of Notes to Unaudited Condensed Consolidated Financial Statements. The
decrease in the three and nine months ended September 30, 2009 in the Other line item included in
the above tables is primarily attributable to a reduction in
facilities, travel and
communication expenses.
We have obligations to indemnify certain of our present and former directors, officers and
employees to the maximum extent not prohibited by law. Under these obligations, Broadcom is
required (subject to certain exceptions) to indemnify each such director, officer and employee
against expenses, including attorneys fees,
45
judgments, fines and settlements, paid by such
individual in connection with our currently outstanding securities litigation and related
government investigations described in Note 9 of Notes to Unaudited Condensed Consolidated
Financial Statements. The potential amount of the future payments we could be required to make
under these indemnification obligations could be significant. We maintain directors and officers
insurance policies that may limit our exposure and enable us to recover a portion of the amounts
paid with respect to such obligations. However, certain of our insurance carriers have reserved
their rights under their respective policies, and in the third quarter of 2008 one of our insurance
carriers notified us that coverage was not available and that it intended to suspend payment to us.
As a result, we ceased receiving reimbursements under these policies for our expenses related to
the matters described above. However, in January 2009 we entered into an agreement with that
insurance carrier and certain of our other insurance carriers pursuant to which, without
prejudicing our rights or the rights of such insurers, we have received payments from these
insurers under these insurance policies. Also, as described in Note 9 of Notes to Unaudited
Condensed Consolidated Financial Statements, in September 2009 we entered into a proposed
settlement with our directors and officers insurance carriers as a part of the partial settlement
of the federal derivative action. We recognize reimbursements from our directors and officers
insurance carriers on a cash basis, pursuant to which we record a reduction of selling, general and
administrative expense only when cash is received from our insurance carriers. In the nine months
ended September 30, 2009, we recovered legal expenses of $16.6 million under these insurance
policies. From inception of the securities litigation and related government investigations through
September 30, 2009, we have recovered legal expenses of $43.3 million under these insurance
policies. These amounts have been recorded as a reduction of selling, general and administrative
expense.
In certain limited circumstances, all or portions of the amounts recovered from our insurance
carriers may be required to be repaid. We regularly evaluate the need to record a liability for
potential future repayments. As of September 30, 2009 we have not recorded a liability in
connection with these potential insurance repayment provisions. In connection with our currently
outstanding securities litigation and related government investigations described in Note 9, as of
September 30, 2009, we had advanced $79.0 million to certain former officers for attorney and
expert fees for which we did not receive reimbursement from our insurance carriers, which amount
has been expensed. If our coverage under these policies is reduced or eliminated or if the proposed
settlement doe not receive final court approval, our potential financial exposure in the pending
securities litigation and related government investigations would be increased. Our business,
financial position and results of operations may be materially and adversely affected to the extent
that our insurance coverage fails to pay or reimburse expenses and any judgments, fines or
settlement costs that we may incur in connection with the related actions.
In August 2009 Broadcom, by and through its SLC, plaintiffs and certain of the defendants
executed a Stipulation and Agreement of Partial Settlement, the Partial Derivative Settlement, in
the federal derivative action pertaining to past employee stock option grants. If approved by the
court, the Partial Derivative Settlement will resolve all claims in the action against the
defendants, other than three individuals: Dr. Henry T. Nicholas, III, our former President and
Chief Executive Officer and former Co-Chairman of the Board, William J. Ruehle, our former Chief
Financial Officer, and Dr. Henry Samueli, who currently remains employed by Broadcom as a
technology advisor and is our former Chief Technical Officer and former Chairman of the Board. In
connection with the Partial Derivative Settlement, Broadcom and certain of the defendants also
entered into a settlement with Broadcoms directors and officers
liability insurance carriers, or the
Insurance Agreement. On September 30, 2009 the United States District Court for the Central
District of California issued an order preliminarily approving the Partial Derivative Settlement. A
final approval hearing has been scheduled for December 14, 2009.
Pursuant to the Insurance Agreement, and subject to the terms described more completely
therein, including relinquishing of rights under certain insurance policies by Broadcom and certain
of its former and current officers and directors, Broadcom will receive payments totaling $118.0
million from its insurance carriers. That amount includes $43.3 million in reimbursements
previously received from the insurance carriers under reservations of rights, and $74.7 million to
be paid to Broadcom upon final approval of the Partial Derivative Settlement. In addition,
Broadcom has agreed to pay, subject to court approval of a fee award motion, $11.5 million to the
lead federal derivative plaintiffs counsel for attorneys fees, expenses and costs of plaintiffs
counsel in connection with the Partial Derivative Settlement and their prosecution of the
derivative action. In the event that the Partial Derivative Settlement is approved by the Trial
Court but such approval is subsequently reversed or vacated by an appellate court or otherwise does
not become final and non-appealable, Broadcom in its sole discretion has the
election to either provide a release to the insurance carriers and indemnify them related to
any future claims and retain the $118.0 million in accordance with the Insurance Agreement or repay
to the insurance carriers certain portions of the aggregate amount previously paid to Broadcom.
46
For further discussion of litigation matters, see Note 9 of Notes to Unaudited Condensed
Consolidated Financial Statements.
Stock-Based Compensation Expense
The following table presents details of total stock-based compensation expense that is
included in each functional line item in our unaudited condensed consolidated statements of income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Cost of product revenue |
|
$ |
6,579 |
|
|
$ |
6,652 |
|
|
$ |
18,584 |
|
|
$ |
18,354 |
|
Research and development |
|
|
90,829 |
|
|
|
93,334 |
|
|
|
266,698 |
|
|
|
262,043 |
|
Selling, general and administrative |
|
|
31,290 |
|
|
|
33,328 |
|
|
|
89,817 |
|
|
|
93,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
128,698 |
|
|
$ |
133,314 |
|
|
$ |
375,099 |
|
|
$ |
374,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents details of unearned stock-based compensation currently estimated
to be expensed in the remainder of 2009 through 2013 related to unvested share-based payment
awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2010 |
|
2011 |
|
2012 |
|
2013 |
|
Total |
|
|
(In thousands) |
Unearned stock-based compensation |
|
$ |
124,979 |
|
|
$ |
386,570 |
|
|
$ |
255,281 |
|
|
$ |
124,329 |
|
|
$ |
26,113 |
|
|
$ |
917,272 |
|
See Note 7 of Notes to Unaudited Condensed Consolidated Financial Statements for a discussion
of activity related to share-based awards.
We recognize stock-based compensation expense related to share-based awards over their
respective service periods. Unearned stock-based compensation is principally amortized ratably over
the service periods of the underlying stock options and restricted stock units, generally 48 months
and 16 quarters, respectively. If there are any modifications or cancellations of the underlying
unvested awards, we may be required to accelerate, increase or cancel any remaining unearned
stock-based compensation expense. Future stock-based compensation expense and unearned stock-based
compensation will increase to the extent that we grant additional equity awards to employees or
assume unvested equity awards in connection with acquisitions.
Amortization of Purchased Intangible Assets
The following table presents details of the amortization of purchased intangible assets
included in the cost of product revenue and other operating expense categories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Cost of product revenue |
|
$ |
3,876 |
|
|
$ |
3,935 |
|
|
$ |
12,101 |
|
|
$ |
11,804 |
|
Other operating expenses |
|
|
4,159 |
|
|
|
183 |
|
|
|
12,457 |
|
|
|
550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,035 |
|
|
$ |
4,118 |
|
|
$ |
24,558 |
|
|
$ |
12,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents details of estimated future straight-line amortization of
existing purchased intangible assets. If we acquire additional purchased intangible assets in the
future, our cost of product revenue or operating expenses will be increased by the amortization of
those assets. The increase in amortization of purchased intangibles in the three and nine months
ended September 30, 2009 as compared to the three and nine months ended September 30, 2008 relates
primarily to the acquired purchased intangible assets of the DTV Business of AMD.
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased Intangible Assets Amortization by Year |
|
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
Thereafter |
|
|
Total |
|
|
|
(In thousands) |
|
Cost of product revenue |
|
$ |
3,697 |
|
|
$ |
12,527 |
|
|
$ |
1,023 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
17,247 |
|
Other operating expenses |
|
|
1,664 |
|
|
|
1,579 |
|
|
|
500 |
|
|
|
334 |
|
|
|
|
|
|
|
4,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,361 |
|
|
$ |
14,106 |
|
|
$ |
1,523 |
|
|
$ |
334 |
|
|
$ |
|
|
|
$ |
21,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-Process Research and Development
In the nine months ended September 30, 2008 we recorded IPR&D of $10.9 million related to our
acquisition of Sunext Design, Inc. The amount allocated to IPR&D was determined through established
valuation techniques used in the high technology industry and was expensed upon acquisition as it
was determined that the underlying projects had not reached technological feasibility and no
alternative future uses existed.
Impairment of Long-Lived Assets
In the three and nine months ended September 30, 2009 we recorded an impairment to customer
relationships, completed technology and certain other assets of $7.6 million and $18.9 million,
respectively, related to the acquisition of the DTV Business of AMD. The primary factor
contributing to these impairment charges was the continued reduction in our revenue outlook for
this business.
Restructuring Costs (Reversals)
In light of the deterioration in worldwide economic conditions, in January 2009 we implemented
a restructuring plan that included a reduction in our worldwide headcount of 200 people, which
represented 3% of our global workforce. In the three months ended September 30, 2009 we implemented
a plan to reduce our headcount by an additional 120 people related to our DTV business.
We recorded $4.8 million and $12.3 million in net restructuring costs in the three and nine
months ended September 30, 2009, respectively, related to the plans, primarily for severance and
other charges associated with our reduction in workforce across multiple locations and functions
and, to a lesser extent, the closure of one of our facilities. In the three and nine months ended
September 30, 2009, we recorded restructuring charges of $0.8 million and $3.5 million,
respectively, related to stock-based compensation expense incurred in connection with the
modification of certain share-based
awards. We expect to record additional restructuring costs in the three
months ending December 31, 2009 of $3.0 million. We anticipate
annual cost savings of approximately $12.0 million as a result of the
restructuring plan implemented in the three months ended September 30, 2009.
Settlement Costs (Gains)
We recorded settlement gains of $65.3 million related to the Qualcomm Agreement in the nine
months ended September 30, 2009. For a further discussion of this agreement, see Settlement and
Patent License and Non-Assert Agreement in the Overview section. We also recorded $6.9 million in
settlement costs in the nine months ended September 30, 2009 for an estimated settlement associated
with certain employment tax items. In addition, we recorded settlement costs of $1.2 million
related to a patent infringement claim in the nine months ended September 30, 2009.
In April 2008 we entered into a settlement with the SEC relating to the previously-disclosed
SEC investigation of Broadcoms historical stock option granting practices. Without admitting or
denying the SECs allegations, we agreed to pay a civil penalty of $12.0 million, which we recorded
as a settlement cost in 2008. The settlement was
approved by the United States District Court for the Central District of California in late
April 2008. In addition, we settled a patent infringement claim for $3.8 million in 2008. Both of
the 2008 settlements were recorded in the nine months ended September 30, 2008.
For further discussion of income tax and litigation matters, see Notes 5 and 9, respectively,
to the Unaudited Condensed Consolidated Financial Statements.
48
Charitable Contribution
In April 2009 we established the Broadcom Foundation, or the Foundation, to support
mathematics and science programs, as well as a broad range of community services. In June 2009 we
pledged to make an unrestricted grant of $50.0 million to the Foundation upon receiving a
determination letter from the Internal Revenue Service of exemption from federal income taxation
under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended. Accordingly, as the
receipt of the determination letter was deemed probable, we recorded an operating expense for this
contribution of $50.0 million in the nine months ended September 30, 2009. We received the
determination letter in the three months ended September 30, 2009 and expect to fund the
contribution in the three months ending December 31, 2009.
Interest and Other Income (Expense), Net
The following tables present interest and other income (expense), net, for the three and nine
months ended September 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Three Months Ended |
|
|
|
|
|
% |
|
|
September 30, 2009 |
|
September 30, 2008 |
|
|
|
|
|
Change |
|
|
|
|
|
|
% of Net |
|
|
|
|
|
% of Net |
|
Increase |
|
in |
|
|
Amount |
|
Revenue |
|
Amount |
|
Revenue |
|
(Decrease) |
|
Amount |
|
|
(In thousands, except percentages) |
Interest income, net |
|
$ |
2,978 |
|
|
|
0.2 |
% |
|
$ |
12,451 |
|
|
|
1.0 |
% |
|
$ |
(9,473 |
) |
|
|
(76.1 |
)% |
Other expense, net |
|
|
(178 |
) |
|
|
|
|
|
|
(3,720 |
) |
|
|
(0.3 |
) |
|
|
3,542 |
|
|
|
(95.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
Nine Months Ended |
|
|
|
|
|
% |
|
|
September 30, 2009 |
|
September 30, 2008 |
|
|
|
|
|
Change |
|
|
|
|
|
|
% of Net |
|
|
|
|
|
% of Net |
|
Increase |
|
in |
|
|
Amount |
|
Revenue |
|
Amount |
|
Revenue |
|
(Decrease) |
|
Amount |
|
|
(In thousands, except percentages) |
Interest income, net |
|
$ |
11,362 |
|
|
|
0.4 |
% |
|
$ |
44,983 |
|
|
|
1.3 |
% |
|
$ |
(33,621 |
) |
|
|
(74.7 |
)% |
Other income (expense), net |
|
|
2,487 |
|
|
|
0.1 |
|
|
|
(2,987 |
) |
|
|
(0.1 |
) |
|
|
5,474 |
|
|
|
(183.3 |
) |
Interest income, net, reflects interest earned on cash and cash equivalents and marketable
securities balances. Other income (expense), net primarily includes the gain on the sale of a
marketable security and gains and losses on foreign currency transactions. The decrease in interest
income, net, was the result of the overall decrease in market interest rates. Our cash and
marketable securities balances increased from $2.288 billion at September 30, 2008 to $2.377
billion at September 30, 2009, primarily due to net cash provided by operating activities,
including the $243.2 million received from the Qualcomm Agreement. The average interest rates
earned in the three months ended September 30, 2009 and 2008 were 0.51% and 2.34%, respectively.
The average interest rates earned in the nine months ended September 30, 2009 and 2008 were 0.71%
and 2.66%, respectively.
Income Tax Provision
We recorded tax provisions of $6.8 million and $5.0 million for the three and nine months
ended September 30, 2009, respectively, and tax provisions of $1.2 million and $5.1 million for the
three and nine months ended September 30, 2008, respectively. Our effective tax rates were 7.5% and
45.4% for the three and nine months ended September 30, 2009, respectively, and 0.7% and 1.3% for
the three and nine months ended September 30, 2008,
respectively. While our tax provisions for the
nine months ended September 30, 2009 and 2008 were for similar amounts of $5.0 million and $5.1
million, respectively, which primarily represent provisions for
foreign income taxes for both periods, our pretax income was significantly different at $11.1 million and $379.1
million, respectively, which resulted in significantly different effective tax rates of 45.4% and
1.3%, respectively. The difference between our effective tax rates and the 35% federal statutory
rate resulted primarily from foreign earnings taxed at rates lower than the federal statutory rate
for the
49
three and nine months ended September 30, 2009 and September 30, 2008, domestic losses
recorded without income tax benefit for the three and nine months ended September 30, 2009, and tax
benefits resulting primarily from the expiration of the statutes of limitations for the assessment
of taxes in various foreign jurisdictions of $6.5 million for the nine months ended September 30,
2009, and $4.4 million for the nine months ended September 30, 2008. We recorded a tax benefit of
$3.9 million in the nine months ended September 30, 2009 reflecting the utilization of a portion of
our credits for increasing research activities (research and development tax credits) pursuant to a
provision contained in the American Recovery and Reinvestment Tax Act of 2009, which was enacted in
February 2009. Additionally, in the nine months ended September 30, 2009, we recorded a tax
provision of $3.2 million associated with the exposure resulting from a recent decision by the U.
S. Court of Appeals for the Ninth Circuit in the case involving Xilinx, Inc. as discussed below.
On May 27, 2009, the U.S. Court of Appeals for the Ninth Circuit in the case between Xilinx,
Inc. and the Commissioner of Internal Revenue, overturned a 2005 U.S. Tax Court ruling regarding
treatment of certain compensation expenses under a Companys research and development cost-sharing
arrangements with affiliates. The Court of Appeals held that related parties to such an arrangement
must share stock-based compensation expenses, notwithstanding the fact that unrelated parties in
such an arrangement would not share such costs. The case is subject to further appeal. The
potential impact to Broadcom, should the IRS prevail, of including such stock-based compensation
expenses in our research and development cost-sharing arrangements would be additional income for
federal and state purposes from January 1, 2001 forward, and may result in additional related
federal and state income and franchise taxes, and material adjustments to our federal and state net
operating loss carryforwards, our federal and state capitalized research and development costs and
our deferred tax positions. Specifically, in the nine months ended September 30, 2009, we recorded
a $3.2 million tax provision for additional federal and state income and franchise taxes. We also
reduced our federal and state net operating loss carryforwards by approximately $600.0 million and
$380.0 million, respectively, and reduced our federal and state capitalized research and
development costs by approximately $10.0 million and $15.0 million, respectively. Additionally, in
the nine months ended September 30, 2009, we reduced our deferred tax asset relating to stock-based
compensation expenses by approximately $60.0 million, and increased our deferred tax asset for
certain tax credits by approximately $10.0 million, with each of these amounts offset by a
corresponding adjustment to our valuation allowance for deferred tax asset resulting in no net
change to deferred tax assets.
As a result of the expensing of share-based payments since January 1, 2006, our deferred tax
assets exclude certain excess tax benefits from employee stock-based compensation that are a
component of our research and development credits, capitalized research and development, and net
operating loss carryovers. If and when these tax benefits are realized, a credit is recorded to
equity. The federal and state net operating losses and the capitalized research and development
costs we reduced as a result of the decision in the Xilinx case represent such excess tax benefits
from employee stock-based compensation and therefore do not result in an adjustment to our deferred
tax assets.
We utilize the asset and liability method of accounting for income taxes. We record net
deferred tax assets to the extent we believe these assets will more likely than not be realized. In
making such determination, we consider all available positive and negative evidence, including
scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning
strategies and recent financial performance. Forming a conclusion that a valuation allowance is not
required is difficult when there is negative evidence such as cumulative losses in recent years. As
a result of our recent cumulative losses in the U.S. and certain foreign jurisdictions, and the
full utilization of our loss carryback opportunities, we have concluded that a full valuation
allowance should be recorded in such jurisdictions. In certain other foreign jurisdictions where we
do not have cumulative losses, we had net deferred tax assets of $8.7 million and $7.5 million at
September 30, 2009 and December 31, 2008, respectively.
At September 30, 2009 our judgment changed with respect to prior period uncertain tax
positions, which resulted in additional unrecognized tax benefits in the amount of approximately
$360 million, of which approximately $260 million would be
credited to paid-in capital if
ultimately sustained and utilized to reduce our income tax liabilities because it relates to excess
deductions from employee stock options. The remaining portion of these tax benefits, approximately
$100 million, were previously offset by a valuation allowance on our deferred tax assets. If these
tax positions are not sustained, there will be no net effect on our tax provision because of the
related valuation allowance.
50
We file federal, state and foreign income tax returns in jurisdictions with varying statutes
of limitations. The 2004 through 2008 tax years generally remain subject to examination by federal
and most state tax authorities. In foreign jurisdictions, the 2001 through 2008 tax years generally
remain subject to examination by tax authorities.
Our income tax returns for the 2004, 2005 and 2006 tax years are currently under examination
by the Internal Revenue Service and certain state jurisdictions. In addition, our employment tax
returns for the 2003, 2004, 2005 and 2006 tax years are under examination by the Internal Revenue
Service. We currently do not expect that the results of these examinations will have a material
effect on our financial condition or results of operations.
We operate under tax holidays in Singapore, which are effective through March 31, 2014. The
tax holidays are conditional upon our continued compliance in meeting certain employment and
investment thresholds.
Liquidity and Capital Resources
Working Capital and Cash and Marketable Securities. The following table presents working
capital, cash and cash equivalents and marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30 |
|
|
December 31, |
|
|
Increase |
|
|
|
2009 |
|
|
2008 |
|
|
(Decrease) |
|
|
|
(In thousands) |
|
Working capital |
|
$ |
1,847,222 |
|
|
$ |
2,034,110 |
|
|
$ |
(186,888 |
) |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents(1) |
|
$ |
1,345,221 |
|
|
$ |
1,190,645 |
|
|
$ |
154,576 |
|
Short-term marketable securities(1) |
|
|
561,287 |
|
|
|
707,477 |
|
|
|
(146,190 |
) |
Long-term marketable securities |
|
|
470,643 |
|
|
|
|
|
|
|
470,643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,377,151 |
|
|
$ |
1,898,122 |
|
|
$ |
479,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included in working capital. |
Our working capital, cash and cash equivalents and marketable securities increased in the nine
months ended September 30, 2009 primarily due to cash provided by operations (including the
proceeds received from the Qualcomm Agreement). See the summary of cash, cash equivalents and
short-term marketable securities by major security type and discussion of market risk that follows
in Item 3:
Quantitative and Qualitative Disclosures about Market Risk.
Cash Provided and Used in the Nine Months Ended September 30, 2009 and 2008. Cash and cash
equivalents increased to $1.345 billion at September 30, 2009 from $1.191 billion at December 31,
2008 as a result of cash provided by operating activities.
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Cash provided by operating activities |
|
$ |
654,965 |
|
|
$ |
773,458 |
|
Cash used in investing activities |
|
|
(370,527 |
) |
|
|
(693,793 |
) |
Cash used in financing activities |
|
|
(129,862 |
) |
|
|
(790,379 |
) |
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
$ |
154,576 |
|
|
$ |
(710,714 |
) |
Cash and cash equivalents at beginning of period |
|
$ |
1,190,645 |
|
|
$ |
2,186,572 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
1,345,221 |
|
|
$ |
1,475,858 |
|
|
|
|
|
|
|
|
In the nine months ended September 30, 2009 our operating activities provided $655.0 million
in cash. This was primarily the result of $468.3 million in net non-cash operating expenses, $180.6
million in net cash provided by changes in operating assets and liabilities (including the proceeds
received from the Qualcomm Agreement) and net
51
income of $6.1 million. Non-cash items included in
net income in the nine months ended September 30, 2009 consisted of depreciation and amortization,
stock-based compensation expense, amortization of purchased intangible assets, impairment of
long-lived assets, non-cash restructuring charges and a gain on sale of marketable securities. In
the nine months ended September 30, 2008 our operating activities provided $773.5 million in cash.
This was primarily the result of $374.0 million in net income and $461.3 million in net non-cash
operating expenses, offset in part by $61.8 million in changes in operating assets and liabilities.
Non-cash items included in net income in the nine months ended September 30, 2008 consisted of
depreciation and amortization, stock-based compensation expense, amortization of purchased
intangible assets, IPR&D, impairment of long-lived assets and loss on strategic investments.
Accounts receivable increased $169.3 million from $372.3 million at December 31, 2008 to
$541.6 million at September 30, 2009 resulting primarily from a change in our revenue linearity and
the result of the $127.7 million increase in net revenue in the three months ended September 30,
2009 to $1.254 billion, as compared with $1.127 billion in the three months ended December 31,
2008. Our days sales outstanding increased from 30 days at December 31, 2008 to 39 days at
September 30, 2009, driven by a variation in revenue linearity and a slight delay in the timing of
customer payments. We typically bill customers on an open account basis subject to our standard net
thirty day payment terms. If, in the longer term, our revenue increases, it is likely that our
accounts receivable balance will also increase. Our accounts receivable could also increase if
customers delay their payments or if we grant extended payment terms to customers, both of which
are more likely to occur during challenging economic times when our customers may face issues
gaining access to sufficient credit on a timely basis.
Inventories decreased $58.9 million from $366.1 million at December 31, 2008 to $307.2 million
at September 30, 2009 as we reduced our inventory purchases to reflect the reduction in revenues
and the recent economic slowdown. Our inventory days on hand decreased from 60 days at December 31,
2008 to 45 days at September 30, 2009 which was in line with our established objective of reducing
inventory from the December 31, 2008 level. In the future, our inventory levels will continue to be
determined based upon the level of purchase orders we receive and the stage at which our products
are in their respective product life cycles, our ability, and the ability of our customers, to
manage inventory under hubbing arrangements, and competitive situations in the marketplace. Such
considerations are balanced against the risk of obsolescence or potentially excess inventory
levels.
Accounts payable increased $112.7 million from $310.5 million at December 31, 2008 to $423.2
million at September 30, 2009. Our days payable outstanding increased from 51 days at December 31,
2008 to 63 days at September 30, 2009, resulting primarily from the timing of inventory purchases
and vendor payments.
Investing activities used $370.5 million in cash in the nine months ended September 30, 2009,
which was primarily the result of net purchases of marketable securities of $320.6 million and
$48.8 million of capital equipment purchases mostly to support our research and development
efforts. Investing activities used cash of $693.8 million in the nine months ended September 30,
2008, which was primarily the result of net purchases of marketable securities of $598.5 million,
$65.2 million of capital equipment purchases, mostly to support our research and development
efforts, $9.6 million in net cash paid for the acquisition of Sunext Design and $20.1 million
related to contingent consideration paid for attainment of certain performance goals.
Our financing activities used $129.9 million in cash in the nine months ended September 30,
2009, which was primarily the result of $206.5 million in repurchases of shares of our Class A
common stock pursuant to the share repurchase program implemented in July 2008 and $60.6 million in
minimum tax withholding paid on behalf of employees for shares issued pursuant to restricted stock
units, offset in part by $137.2 million in proceeds received from issuances of common stock upon
exercise of stock options and pursuant to our employee stock purchase plan. An additional $11.0
million of repurchases of our Class A common stock was not settled in cash as of September 30,
2009. Our financing activities used $790.4 million in cash in the nine months ended September 30,
2008, which was primarily the result of $859.8 million in repurchases of shares of our Class A
common stock pursuant to the share repurchase program implemented in November 2007, offset in part
by $69.4 million in net proceeds received from issuances of common stock upon exercise of stock
options and pursuant to our employee stock purchase plan.
From time to time our Board of Directors has authorized various programs to repurchase shares
of our Class A common stock depending on market conditions and other factors. In July 2008 the
Board of Directors authorized our
52
current program to repurchase shares of Broadcoms Class A common
stock having an aggregate value of up to $1.0 billion. Repurchases under the program may be made at
any time during the period that commenced July 31, 2008 and continuing through and including July
31, 2011. In the nine months ended September 30, 2009 we repurchased a total of 8.0 million shares
of our Class A common stock at a weighted average price of $27.06, of which $11.0 million had not
settled. As of September 30, 2009, $358.4 million remained authorized for repurchase under our
current program.
The timing and number of stock option exercises and employee stock purchases and the amount of
cash proceeds we receive through those exercises and purchases are not within our control, and in
the future we may not generate as much cash from the exercise of stock options as we have in the
past. Moreover, it is now our practice to issue a combination of restricted stock units and stock
options only to certain employees and, in most cases to issue solely restricted stock units. Unlike
the exercise of stock options, the issuance of shares upon vesting of restricted stock units does
not result in any cash proceeds to Broadcom and requires the use of cash, as we currently allow
employees to elect to have a portion of the shares issued upon vesting of restricted stock units
withheld to satisfy minimum statutory withholding taxes, which we then pay in cash to the
appropriate tax authorities on each participating employees behalf.
Prospective Capital Needs. We believe that our existing cash, cash equivalents and marketable
securities, together with cash generated from operations and from the purchase of common stock
through our employee stock purchase plan, will be sufficient to cover our working capital needs,
capital expenditures, investment requirements, commitments and repurchases of our Class A common
stock for at least the next 12 months. However, it is possible that we may need to raise additional
funds to finance our activities beyond the next 12 months or to consummate acquisitions of other
businesses, assets, products or technologies. If needed, we may be able to raise such funds by
selling equity or debt securities to the public or to selected investors, or by borrowing money
from financial institutions. We could also reduce certain expenditures, such as repurchases of our
Class A common stock.
In April 2009 we established the Broadcom Foundation, or the Foundation, to support
mathematics and science programs, as well as a broad range of community services. In June 2009 we
pledged to make an unrestricted grant of $50.0 million to the Foundation upon receiving a
determination letter from the Internal Revenue Service of its exemption from federal income
taxation under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended. Accordingly, as
the receipt of the determination letter was deemed probable, we recorded an operating expense for
the contribution of $50.0 million in the nine months ended September 30, 2009. We received the
determination letter in the three months ended September 30, 2009 and expect to fund the
contribution in the three months ending December 31, 2009.
In addition, even though we may not need additional funds, we may still elect to sell
additional equity or debt securities or obtain credit facilities for other reasons. If we elect to
raise additional funds, we may not be able to obtain such funds on a timely basis on acceptable
terms, if at all. If we raise additional funds by issuing additional equity or convertible debt
securities, the ownership percentages of existing shareholders would be reduced. In addition, the
equity or debt securities that we issue may have rights, preferences or privileges senior to those
of our Class A common stock.
Although we believe that we have sufficient capital to fund our activities for at least the
next 12 months, our future capital requirements may vary materially from those now planned. We
anticipate that the amount of capital we will need in the future will depend on many factors,
including:
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general economic and political conditions and specific conditions in the markets we
address, including the continuing volatility in the technology sector and semiconductor
industry, the recent global economic recession, trends in the broadband communications
markets in various geographic regions, including seasonality in sales of consumer products
into which our products are incorporated; |
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the inability of certain of our customers who depend on credit to have access to their
traditional sources of credit to finance the purchase of products from us, which may lead
them to reduce their level of purchases or to seek credit or other accommodations from us; |
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litigation expenses, settlements and judgments; |
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the overall levels of sales of our semiconductor products, licensing revenue and
product gross margins; |
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our business, product, capital expenditure and research and development plans, and
product and technology roadmaps; |
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the market acceptance of our products; |
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repurchases of our Class A common stock; |
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required levels of research and development and other operating costs; |
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volume price discounts and customer rebates; |
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intellectual property disputes, customer indemnification claims and other types of
litigation risks; |
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the levels of inventory and accounts receivable that we maintain; |
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acquisitions of other businesses, assets, products or technologies; |
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licensing royalties payable by or to us; |
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changes in our compensation policies; |
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the issuance of restricted stock units and the related cash payments we make for
withholding taxes due from employees during 2009 and future years; |
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capital improvements for new and existing facilities; |
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technological advances; |
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our competitors responses to our products and our anticipation of and responses to
their products; |
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our relationships with suppliers and customers; |
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the availability and cost of sufficient foundry, assembly and test capacity and
packaging materials; and |
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the level of exercises of stock options and stock purchases under our employee stock
purchase plan. |
In addition, we may require additional capital to accommodate planned future long-term growth,
hiring, infrastructure and facility needs.
Off-Balance Sheet Arrangements. At September 30, 2009 we had no material off-balance sheet
arrangements, other than our operating leases.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
At September 30, 2009 we had $2.377 billion in cash, cash equivalents and marketable
securities. We maintain an investment portfolio of various security holdings, types and maturities.
The fair value of all of our cash equivalents and marketable securities is determined based on
Level 1 inputs, which consist of quoted prices in active markets for identical assets. We place
our cash investments in instruments that meet credit quality standards, as specified in our
investment policy guidelines. These guidelines also limit the amount of credit exposure to any one
issue, issuer or type of instrument. At September 30, 2009 all of our marketable securities are
rated AAA, Aaa, A-1 or P-1 by the major credit rating agencies. We invest our cash in U.S.
Treasury instruments and in deposits and money market funds with major financial institutions. Our
investment policy for marketable securities requires that all securities mature in three years or
less, with a weighted average maturity of no longer than 18 months.
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We account for our investments in debt and equity instruments as available-for-sale.
Management determines the appropriate classification of such securities at the time of purchase and
reevaluates such classification as of each balance sheet date. Cash equivalents and marketable
securities are reported at fair value with the related unrealized gains and losses included in
accumulated other comprehensive income (loss), a component of shareholders equity, net of tax. We
assess whether our investments with unrealized loss positions are other than temporarily impaired.
Realized gains and losses and declines in value judged to be other than temporary are determined
based on the specific identification method and are reported in other income (expense), net, in the
unaudited condensed consolidated statements of income. The fair value of cash equivalents and
marketable securities is determined based on quoted market prices for those securities.
Investments in both fixed rate and floating rate instruments carry a degree of interest rate
risk. Fixed rate securities may have their market value adversely impacted due to an increase in
interest rates, while floating rate securities may produce less income than expected if interest
rates fall. Due in part to these factors, our future investment income may fall short of
expectations due to changes in interest rates or if the decline in fair value of our publicly
traded debt investments is judged to be other-than-temporary. We may suffer losses in principal if
we are forced to sell securities that have declined in market value due to changes in interest
rates. However, because any debt securities we hold are classified as available-for-sale, no gains
or losses are realized in the income statement due to changes in interest rates unless such
securities are sold prior to maturity or unless declines in value are determined to be
other-than-temporary. These securities are reported at fair value with the related unrealized gains
and losses included in accumulated other comprehensive income (loss), a component of shareholders
equity, net of tax.
In a declining interest rate environment, as short term investments mature, reinvestment
occurs at less favorable market rates. Given the short term nature of certain investments, the
current interest rate environment may continue to negatively impact our investment income.
To assess the interest rate risk associated with our investment portfolio, we performed a
sensitivity analysis to determine the impact a change in interest rates would have on the value of
the investment portfolio assuming a 100 basis point parallel shift in the yield curve. Based on
investment positions as of September 30, 2009, a 100 basis point increase in interest rates across
all maturities would result in a $10.4 million incremental decline in the fair market value of the
portfolio. As of December 31, 2008, a similar 100 basis point shift in the yield curve would have
resulted in a $3.1 million incremental decline in the fair market value of the portfolio. Such
losses would only be realized if we sold the investments prior to maturity.
Actual future gains and losses associated with our investments may differ from the sensitivity
analyses performed as of September 30, 2009 due to the inherent limitations associated with
predicting the changes in the timing and level of interest rates and our actual exposures and
positions.
Recent economic conditions have had widespread negative effects on the financial markets. Due
to credit concerns and lack of liquidity in the short-term funding markets, we have shifted a large
percentage of the portfolio to U.S. Treasury and other government securities and time deposits,
which may negatively impact our investment income, particularly in the form of declining yields.
Approximately $645.1 million of our $1.345 billion of cash and cash equivalents at September
30, 2009 is located in foreign countries where we conduct business. There may be tax effects upon
repatriation of the cash to the United States.
Exchange Rate Risk
We consider our direct exposure to foreign exchange rate fluctuations to be minimal.
Currently, sales to customers and arrangements with third-party manufacturers provide for pricing
and payment in United States dollars, and, therefore, are not subject to exchange rate
fluctuations. Increases in the value of the United States dollar relative to other currencies
could make our products more expensive, which could negatively impact our ability to compete.
Conversely, decreases in the value of the United States dollar relative to other currencies could
result in our suppliers raising their prices to continue doing business with us. Fluctuations in
currency exchange rates could affect our business in the future.
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Item 4. Controls and Procedures
We are committed to maintaining disclosure controls and procedures designed to ensure that
information required to be disclosed in our periodic reports filed under the Securities Exchange
Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and forms, and that such information is
accumulated and communicated to our management, including our chief executive officer and chief
financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In
designing and evaluating our disclosure controls and procedures, management recognizes that any
controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives, and management necessarily is required to
apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures
and implementing controls and procedures based on the application of managements judgment.
Under the supervision and with the participation of our management, including our principal
executive officer and principal financial officer, we conducted an evaluation of our disclosure
controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated
under the Exchange Act. Based on this evaluation, our principal executive officer and our principal
financial officer concluded that our disclosure controls and procedures were effective at a
reasonable assurance level as of September 30, 2009, the end of the period covered by this Report.
There has been no change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) of the Exchange Act) during the three months ended September 30, 2009 that
has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
Inherent Limitations on Internal Control
A control system, no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further, the benefits of
controls must be considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that all control issues
and instances of management override or improper acts, if any, have been detected. These inherent
limitations include the realities that judgments in decision making can be faulty, and that
breakdowns can occur because of simple errors or mistakes. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more people, or by
management override of the control. The design of any system of controls is also based in part upon
certain assumptions about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future conditions. Because of
the inherent limitations in a cost-effective control system, misstatements due to management
override, error or improper acts may occur and not be detected. Any resulting misstatement or loss
may have an adverse and material effect on our business, financial condition and results of
operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth under Note 9 of Notes to Unaudited Condensed Consolidated Financial
Statements, included in Part I, Item 1 of this Report, is incorporated herein by reference. For an
additional discussion of certain risks associated with legal proceedings, see Risk Factors
immediately below.
Item 1A. Risk Factors
Before deciding to purchase, hold or sell our common stock, you should carefully consider the
risks described below in addition to the other cautionary statements and risks described elsewhere
and the other information contained in this Report and in our other filings with the SEC, including
our Annual Report on Form 10-K for the year ended December 31, 2008 and subsequent reports on Forms
10-Q and 8-K. The description of risk factors included below includes any material changes to and
supersedes the description of risk factors associated with our business previously described in
Part I, Item 1A of our Annual Report on Form 10-K for the year ended December
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31, 2008. The risks
and uncertainties described below are not the only ones we face. Additional risks and uncertainties
not presently known to us or that we currently deem immaterial may also affect our business. If any
of these known or unknown risks or uncertainties actually occurs with material adverse effects on
Broadcom, our business, financial condition, results of operations and/or liquidity could be
seriously harmed. In that event, the market price for our Class A common stock will likely decline,
and you may lose all or part of your investment.
Our operating results may be adversely impacted by worldwide political and economic uncertainties
and specific conditions in the markets we address, including the cyclical nature of and volatility
in the semiconductor industry. As a result, the market price of our Class A common stock may
decline.
We operate primarily in the semiconductor industry, which is cyclical and subject to rapid
change and evolving industry standards. From time to time, the semiconductor industry has
experienced significant downturns, such as the recent downturn. These downturns are characterized
by decreases in product demand, excess customer inventories, and accelerated erosion of prices.
These factors could cause substantial fluctuations in our revenue, gross margins and results of
operations. In addition, during these downturns some competitors may become more aggressive in
their pricing practices, which would adversely impact our product gross margins. Any downturns in
the semiconductor industry may be severe and prolonged, and any failure of the industry or wired
and wireless communications markets to fully recover from downturns could seriously impact our
revenue and harm our business, financial condition and results of operations. The semiconductor
industry also periodically experiences increased demand and production capacity constraints, which
may affect our ability to ship products. Accordingly, our operating results may vary significantly
as a result of the general conditions in the semiconductor industry, which could cause large
fluctuations in our stock price.
Our business is subject to variability due to the recent deterioration in general worldwide
economic conditions and credit availability resulting from the financial crisis affecting the
banking system and financial markets. Many other factors have the potential to significantly impact
our business, such as: concerns about inflation and deflation, volatility in energy costs,
decreased consumer confidence, reduced corporate profits and capital spending, adverse business
conditions and liquidity concerns in the wired and wireless communications markets, reduced
availability of insurance coverage or reduced ability to pay claims by insurance carriers, recent
international conflicts and terrorist and military activity, and the impact of natural disasters
and public health emergencies. These conditions make it extremely difficult for our customers, our
vendors and us to accurately forecast and plan future business activities, and they could cause
U.S. and foreign businesses to further slow spending on our products and services, which would
delay and lengthen sales cycles. Furthermore, during challenging economic times our customers may
face issues gaining timely access to sufficient credit or could even need to file for bankruptcy.
Either of these circumstances could result in an impairment of their ability to make timely
payments to us. If these circumstances were to occur, we may be required to increase our allowance
for doubtful accounts and our days sales outstanding would be negatively impacted. Historically,
semiconductor companies are several steps removed from the end-customer in the supply chain and
have experienced growth patterns which are different than what the end demand might be,
particularly during periods of high volatility. This can manifest itself in periods of growth in
excess of their customers followed by periods of under-shipment before the volatility abates.
However, given recent economic conditions it is possible that any correlation will continue to be
less predictable and will result in increased volatility in our operating results and stock price.
We cannot predict the timing, strength or duration of any
economic slowdown or subsequent economic recovery, worldwide, in the semiconductor industry or
in the wired and wireless communications markets. If the economy or markets in which we operate
deviate from present levels or deteriorate, we may record additional charges related to
restructuring costs and the impairment of goodwill and long-lived assets, and our business,
financial condition and results of operations may be materially and adversely affected.
Additionally, the combination of our lengthy sales cycle coupled with challenging macroeconomic
conditions could have a synergistic negative impact on the results of our operations. The impact of
market volatility is not limited to revenue but may also affect our product gross margins and other
financial metrics. Such impact could be manifested in, but not limited to, factors such as fixed
cost overhead absorption.
Our quarterly operating results may fluctuate significantly. As a result, we may fail to meet the
expectations of securities analysts and investors, which could cause our stock price to decline.
Our quarterly net revenue and operating results have fluctuated significantly in the past and
are likely to continue to vary from quarter to quarter due to a number of factors, many of which
are not within our control. If our operating results do not meet the expectations of securities
analysts or investors, who may derive their expectations by extrapolating data from recent
historical operating results, the market price of our Class A common stock will likely
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decline.
Fluctuations in our operating results may be due to a number of factors, including, but not limited
to, those listed below and those identified throughout this Risk Factors section, some of which
may contribute to more pronounced fluctuations in an uncertain global economic environment:
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general economic and political conditions and specific conditions in the markets we
address, including the continuing volatility in the technology sector and semiconductor
industry, the recent global economic recession, and trends in the broadband communications
markets in various geographic regions, including seasonality in sales of consumer products
into which our products are incorporated; |
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the timing, rescheduling or cancellation of significant customer orders and our
ability, as well as the ability of our customers, to manage inventory; |
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our ability to adjust our operations in response to changes in demand for our existing
products and services or demand for new products requested by our customers; |
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the effectiveness of our expense and product cost control and reduction efforts; |
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the gain or loss of a key customer, design win or order; |
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our dependence on a few significant customers and/or design wins for a substantial
portion of our revenue; |
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our ability to specify, develop or acquire, complete, introduce, market and transition
to volume production new products and technologies in a cost-effective and timely manner; |
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intellectual property disputes, customer indemnification claims and other types of
litigation risks; |
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the availability and pricing of raw materials and third party semiconductor foundry,
assembly and test capacity; |
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our ability to retain, recruit and hire key executives, technical personnel and other
employees in the positions and numbers, with the experience and capabilities, and at the
compensation levels that we need to implement our business and product plans; |
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our ability to timely and accurately predict market requirements and evolving industry
standards and to identify and capitalize upon opportunities in new markets; |
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the rate at which our present and future customers and end users adopt our technologies
and products in our target markets; |
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changes in our product or customer mix; |
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competitive pressures and other factors such as the qualification, availability and
pricing of competing products and technologies and the resulting effects on sales and
pricing of our products; |
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our ability to timely and effectively transition to smaller geometry process
technologies or achieve higher levels of design integration; |
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the volume of our product sales and pricing concessions on volume sales; |
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the impact of the Internal Revenue Service review of certain of our income and
employment tax returns; and |
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the effects of public health emergencies, natural disasters, terrorist activities,
international conflicts and other events beyond our control. |
We expect new product lines to account for a high percentage of our future sales. Some of
these markets are immature and/or unpredictable or are new markets for Broadcom. We cannot assure
you that these markets will develop into significant opportunities or that we will continue to
derive significant revenue from these markets. Based on the limited amount of historical data
available to us, it is difficult to anticipate our future revenue streams from, or the
sustainability of, such newer markets. Typically our new products have lower gross margins until we
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commence volume production and launch lower cost revisions of such products, enabling us to benefit
from economies of scale and more efficient designs. However, certain of our new products, such as
products for the cellular phone market, will likely have lower gross margins than our customary
products for some time after we commence volume production of those products, which will be
dependent upon our product mix.
Additionally, as an increasing number of our chips are being incorporated into consumer
electronic products, we anticipate greater seasonality and fluctuations in the demand for our
products, which may result in greater variations in our quarterly operating results. Consumer
electronic products can also have lower gross margins than the gross margins we have been able to
achieve in the past, depending upon where they are in their respective product life cycles, which
could negatively impact our product revenue and product gross margin.
In the past we have entered into arrangements that include multiple deliverables, such as the
sale of semiconductor products and related data services. Under these arrangements, the services
may be provided without having a separate fair value. In that event, we will only recognize a
portion of the total revenue we receive from the customer during a quarter, and will recognize the
remaining revenue ratably over the respective service period or estimated product life. There are
also other scenarios whereby revenue may be deferred for even longer periods or ratable recognition
over the service period may not be permitted and all of the revenue may be required to be
recognized in later periods or at the end of the arrangement. As we enter into future multiple
element arrangements in which the fair value of each deliverable is not known, the portion of
revenue we recognize on a deferred basis may vary significantly in any given quarter, which could
cause even greater fluctuations in our quarterly operating results.
We are subject to order and shipment uncertainties, and our ability to accurately forecast customer
demand may be impaired by our lengthy sales cycle. If we are unable to accurately predict customer
demand, we may hold excess or obsolete inventory, which would reduce our product gross margin.
Conversely, we may have insufficient inventory, which would result in lost revenue opportunities
and potentially in loss of market share and damaged customer relationships.
We typically sell products pursuant to purchase orders rather than long-term purchase
commitments. Customers can generally cancel, change or defer purchase orders on short notice
without incurring a significant penalty. In the recent past, some of our customers have developed
excess inventories of their own products and have, as a consequence, deferred purchase orders for
our products. It is difficult to accurately predict what or how many products our customers will
need in the future. Anticipating demand is challenging because our customers face volatile pricing
and unpredictable demand for their own products, are increasingly focused on cash preservation and
tighter inventory management, and may be involved in legal proceedings that could affect their
ability to buy our products.
Our ability to accurately forecast customer demand may also be impaired by the delays inherent
in our lengthy sales cycle. After we have developed and delivered a product to a customer, the
customer will usually test and evaluate our product prior to designing its own equipment that will
incorporate our product. Our customers may need three to more than nine months to test, evaluate
and adopt our product and an additional three to more than twelve months to begin volume production
of equipment that incorporates our products. Due to this lengthy sales cycle, we may experience
significant delays from the time we increase our operating expenses and make
investments in inventory until the time that we generate revenue from these products. It is
possible that we may never generate any revenue from these products after incurring such
expenditures. Even if a customer selects our product to incorporate into its equipment, we have no
assurance that the customer will ultimately bring its product to market or that such effort by our
customer will be successful. The delays inherent in our lengthy sales cycle increase the risk that
a customer will decide to cancel or curtail, reduce or delay its product plans. If we incur
significant research and development expenses, marketing expenses and investments in inventory in
the future that we are not able to recover, our operating results could be adversely affected. In
addition, as an increasing number of our chips are being incorporated into consumer products, we
anticipate greater fluctuations in demand for our products, which makes it even more difficult to
forecast customer demand.
We place orders with our suppliers based on forecasts of customer demand and, in some
instances, may establish buffer inventories to accommodate anticipated demand. Our forecasts are
based on multiple assumptions, each of which may introduce error into our estimates. If we
overestimate customer demand, we may allocate resources to manufacturing products that we may not
be able to sell when we expect to, if at all. As a result, we could hold excess or obsolete
inventory, which would reduce our profit margins and adversely affect our financial results.
Conversely, if we underestimate customer demand or if insufficient manufacturing capacity is
available, we could forego revenue opportunities and potentially lose market share and damage our
customer relationships. In addition,
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any future significant cancellations or deferrals of product orders or the return of
previously sold products could materially and adversely affect our profit margins, increase product
obsolescence and restrict our ability to fund our operations. Furthermore, we generally recognize
revenue upon shipment of products to a customer. If a customer refuses to accept shipped products
or does not timely pay for these products, which has occurred in the past, our revenue and
financial results could be materially and adversely impacted.
In addition, a growing percentage of our inventory is maintained under hubbing arrangements
with certain of our customers and we plan to continue to use these arrangements for the foreseeable
future. Pursuant to these arrangements, we deliver products to a customer or a designated third
party warehouse based upon the customers projected needs, but do not recognize product revenue
unless and until the customer reports that it has removed our product from the warehouse to
incorporate into its end products. Historically we have had good visibility into customer
requirements and shipments within a quarter. However, if a customer does not take our products
under a hubbing arrangement in accordance with the schedule it originally provided us, our
predicted future revenue stream could vary substantially from our forecasts and our results of
operations could be materially and adversely affected. In addition, distributors and/or customers
with hubbing arrangements provide us periodic reports regarding product, price, quantity, and when
products are shipped to their customers, as well as the quantities of our products they still have
in stock. For specialized shipping terms we may also rely on data provided by our freight
forwarding providers. For our royalty revenue we also rely on data provided by our customers. Any
error in the data provided to us by customers, distributors or other third parties could lead to
inaccurate reporting of our revenue, gross profit and net income. Additionally, since we own
inventory that is physically located in a third partys warehouse, our ability to effectively
manage inventory levels may be impaired, causing our total inventory turns to decrease, which could
increase expenses associated with excess and obsolete product and negatively impact our cash flow.
If we fail to appropriately adjust our operations in response to changes in demand for our existing
products and services or to the demand for new products requested by our customers, our business
could be materially and adversely affected.
We intend to manage our costs and expenses in the short term to achieve our long-term business
objectives. We anticipate that in the long term, we may need to expand as general worldwide
economic conditions improve. Through internal growth and acquisitions, we significantly increased
the scope of our operations and expanded our workforce from approximately 2,800 full-time employees
and temporary workers as of December 31, 2003 (excluding interns) to approximately 7,300 full-time
employees and temporary workers as of September 30, 2009 (excluding interns). Nonetheless, we may
not be able to adjust our workforce and operations in a sufficiently timely manner to respond
effectively to changes in demand for our existing products and services or to the demand for new
products requested by our customers. In that event, we may be unable to meet competitive challenges
or exploit potential market opportunities, and our current or future business could be materially
and adversely affected.
Conversely, if we expand our operations and workforce too rapidly in anticipation of increased
demand for our products, and such demand does not materialize at the pace at which we expect, our
business could be materially and adversely affected. We expect new product lines, which often
require substantial research and development expenses to develop, to account for a high percentage
of our future revenue. However, some of the markets for these new products are immature and/or
unpredictable or are new markets for Broadcom, and if these markets do not develop at the rates we
originally anticipated or if we do not execute successfully, the rate of increase in our operating
expenses may exceed the rate of increase, if any, in our revenue. Moreover, we may intentionally
choose to increase the rate of our research and development expenses more rapidly than the increase
in the rate of our revenue in the short term in anticipation of the long term benefits we would
derive from such investment. However, such benefits may never materialize or may not be as
significant as we originally believed they would be. For instance, during the last five years we
have incurred substantial expenditures on the development of new products for the cellular handset
market. Currently 20% of our research and development expense was attributable to our mobile
platforms products. However, this market is characterized by very long product development and
sales cycles due to the significant qualification requirements of cellular handset makers and
wireless network operators, and accordingly, it is common to experience significant delays from the
time research and development efforts commence and significant costs are incurred to the time
corresponding revenues are generated. Due to these lengthy product development and sales cycles,
our mobile platforms business had a material negative impact on our earnings in 2008, including
impairment charges of $169.4 million recorded in the three months ended December 31, 2008 relating
to this business. Prior to the three months ended September 30, 2009, most of the revenue that we
derived from our mobile platforms business related to the licensing of our intellectual property.
In connection with the Qualcomm Agreement, in the nine months ended September 30, 2009, we recorded
licensing revenue of $88.5 million. We expect to record equal quarterly amounts of $51.7 million
during the quarters ending December 31,
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2009 through March 31, 2012, $47.7 million in the three months ending June 30, 2012 and $43.2
million in following four quarters ending June 30, 2013. Although we are generating additional
product revenue from our ramp of cellular products, it is possible that our customers may delay
further product development plans or that their products will not be commercially successful, which
would continue to materially and adversely affect our results of operations.
Additionally, our operations are characterized by a high percentage of costs that are fixed or
difficult to reduce in the short term, such as research and development expenses, the employment
and training of a highly skilled workforce, stock-based compensation expense, and legal, accounting
and other external fees. If we experience a slowdown in the semiconductor industry or the wired and
wireless communications markets in which we operate, such as the recent slowdown, we may not be
able to adjust our operating expenses in a sufficiently timely or effective manner. Although we
announced restructuring actions in 2009 and have implemented a number of other cost saving
measures, if the recent slowdown is more severe or prolonged than we anticipate, our business,
financial condition and results of operations could be materially and adversely affected and may
result in additional restructuring costs.
Our past growth has placed, and any future long-term growth is expected to continue to place,
a significant strain on our management personnel, systems and resources. To implement our current
business and product plans, we will need to continue to expand, train, manage and motivate our
workforce. All of these endeavors will require substantial management effort. In the past we have
implemented an enterprise resource planning system to help us improve our planning and management
processes, and implemented an equity administration system to support our more complex equity
programs. We anticipate that we will also need to continue to implement a variety of new and
upgraded operational and financial systems, including enhanced human resources management systems
and a business-to-business solution, as well as additional procedures and other internal management
systems. In general, the accuracy of information delivered by these systems may be subject to
inherent programming quality. We may engage in relocations of our employees or operations from time
to time. Such relocations could result in temporary disruptions of our operations or a diversion of
managements attention and resources. If we are unable to effectively manage our expanding
operations, we may be unable to adjust our business quickly enough to meet competitive challenges
or exploit potential market opportunities, or conversely, we may scale our business too quickly and
the rate of increase in our expenses may exceed the rate of increase in our revenue, either of
which would materially and adversely affect our current or future business.
If we are unable to develop and introduce new products successfully and in a cost-effective and
timely manner or to achieve market acceptance of our new products, our operating results would be
adversely affected.
Our future success is dependent upon our ability to develop new semiconductor products for
existing and new markets, introduce these products in a cost-effective and timely manner, and
convince leading equipment manufacturers to select these products for design into their own new
products. Our products are generally incorporated into our customers products at the design stage.
We often incur significant expenditures on the development of a new product without any assurance
that an equipment manufacturer will select our product for design into its own product. Once an
equipment manufacturer designs a competitors product into its product offering, it becomes
significantly more difficult for us to sell our products to that customer because changing
suppliers involves significant cost, time, effort and risk for the customer.
Even if an equipment manufacturer designs one of our products into its product offering, we
have no assurances that its product will be commercially successful or that we will receive any
revenue from sales of that product. Sales of our products largely depend on the commercial success
of our customers products. Our customers are typically not obligated to purchase our products and
can choose at any time to stop using our products if their own products are not commercially
successful or for any other reason. In addition, any substantial delay in our customers product
development plans could have a material negative impact on our business.
Our historical results have been, and we expect that our future results will continue to be,
dependent on the introduction of a relatively small number of new products and the timely
completion and delivery of those products to customers. The development of new silicon devices is
highly complex, and from time to time we have experienced delays in completing the development and
introduction of new products or lower than anticipated manufacturing yields in the early production
of such products. If we were to experience any similar delays in the
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successful completion of a new product or similar reductions in our manufacturing yields for a
new product in the future, our customer relationships, reputation and business could be seriously
harmed.
In addition, the development and introduction of new products often requires substantial
research and development resources. As a result, we may choose to discontinue one or more products
or product development programs to dedicate more resources to new products. The discontinuation of
an existing or planned product may materially and adversely affect our relationship with our
customers, including customers who may purchase more than one product from us.
Our ability to develop and deliver new products successfully will depend on various factors,
including our ability to:
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timely and accurately predict market requirements and evolving industry standards; |
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accurately define new products; |
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timely and effectively identify and capitalize upon opportunities in new markets; |
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timely complete and introduce new product designs; |
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adjust our operations in response to changes in demand for our products and services or
the demand for new products requested by our customers; |
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license any desired third party technology or intellectual property rights; |
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effectively develop and integrate technologies from companies that we have acquired; |
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timely qualify and obtain industry interoperability certification of our products and
the products of our customers into which our products will be incorporated; |
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obtain sufficient foundry capacity and packaging materials; |
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achieve high manufacturing yields; and |
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shift our products to smaller geometry process technologies to achieve lower cost and
higher levels of design integration. |
In some of our businesses, our ability to develop and deliver next generation products
successfully and in a timely manner may depend in part on access to information, or licenses of
technology or intellectual property rights, from companies that are our competitors. We cannot
assure you that such information or licenses will be made available to us on a timely basis, if at
all, or at reasonable cost and on commercially reasonable terms.
If we are not able to develop and introduce new products successfully and in a cost effective
and timely manner, we will be unable to attract new customers or to retain our existing customers,
as these customers may transition to other companies that can meet their product development needs,
which would materially and adversely affect our results of operations.
Our outstanding civil litigation relating to the voluntary review of our past equity award
practices reported in January 2007 could continue to result in significant costs to us. In
addition, any other related action by a governmental agency could result in civil or criminal
sanctions against certain of our current and/or former officers, directors and/or employees.
In connection with the voluntary review of our past equity award practices, we restated our
financial statements for each of the years ended December 31, 1998 through December 31, 2005, and
for the three months ended March 31, 2006. Accordingly, you should not rely on financial
information included in the reports on Forms 10-K, 10-Q and 8-K previously filed by Broadcom, the
related opinions of our independent registered public accounting firm, or
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earnings press releases and similar communications issued by us, for periods ended on or
before March 31, 2006, all of which have been superseded in their entirety by the information
contained in our amended Annual Report on Form 10-K/A for the year ended December 31, 2005 and our
amended Quarterly Report on Form 10-Q/A for the three months ended March 31, 2006, each filed
January 23, 2007.
In June 2006 we received an informal request for information from the staff of the Los Angeles
regional office of the SEC regarding our historical option granting practices. In December 2006 we
were informed that the SEC had issued a formal order of investigation in the matter. In April 2008
the SEC brought a complaint against Broadcom alleging violations of the federal securities laws,
and we entered into a settlement with the SEC. Without admitting or denying the SECs allegations,
we agreed to pay a civil penalty of $12.0 million, which we recorded as a settlement cost in 2008,
and stipulated to an injunction against future violations of certain provisions of the federal
securities laws. The settlement was approved by the United States District Court for the Central
District of California in late April 2008, thus concluding the SECs investigation of this matter
with respect to Broadcom.
As discussed in detail in Note 9 of Notes to Unaudited Condensed Consolidated Financial
Statements, included in Part I, Item 1 of this Report, in May 2008 the SEC filed a complaint in the
United States District Court for the Central District of California against Dr. Henry Samueli, our
then Chairman of the Board and Chief Technical Officer, and three other former executive officers
of Broadcom. The SECs civil complaint alleges that Dr. Samueli, and the other defendants, violated
the anti-fraud provisions of the federal securities laws, falsified books and records, and caused
the company to report false financial results. We do not know when the SEC action will be resolved
with respect to Dr. Samueli or what actions, if any, the SEC may require him to take in resolution
of the action against him personally.
In August 2006 we were informally contacted by the U.S. Attorneys Office for the Central
District of California and asked to produce documents. In 2007 and 2008 we continued to provide
substantial amounts of documents and information to the U.S. Attorneys Office on a voluntary basis
and pursuant to grand jury subpoenas. We are continuing to cooperate with the U.S. Attorneys
Office in 2009. As widely reported, in June 2008 Dr. Henry T. Nicholas, III, our former President
and Chief Executive Officer and a former director, and William J. Ruehle, our former Chief
Financial Officer, were named in an indictment relating to alleged stock options backdating at the
company. Also in June 2008 Dr. Samueli pled guilty to making a materially false statement in
connection with the SECs investigation described above. In September 2008 the United States
District Court for the Central District of California rejected Dr. Samuelis plea agreement. Dr.
Samueli has appealed the ruling in the United States Court of Appeals for the Ninth Circuit, but
that court rejected his appeal. Mr. Ruehles trial is scheduled to commence in late October 2009;
Dr. Nicholas trial is scheduled to take place in February 2010. Any further action by the SEC, the
U.S. Attorneys Office or other governmental agency could result in additional civil or criminal
sanctions and/or fines against us and/or certain of our current or former officers, directors
and/or employees.
Additionally, as discussed in Note 9 of Notes to Unaudited Condensed Consolidated Financial
Statements, we currently are engaged in civil litigation with parties that claim, among other
allegations, that certain of our current and former directors and officers improperly dated stock
option grants to enhance their own profits on the exercise of such options or for other improper
purposes. Although we and the other defendants intend to defend these claims vigorously, there are
many uncertainties associated with any litigation, and we cannot assure you that these actions will
be resolved without substantial costs and/or settlement charges that may exceed any reimbursement
we may be entitled to under our directors and officers insurance policies.
In addition, we rely on independent registered public accounting firms for opinions and
consents to maintain current reports under the Securities Exchange Act of 1934, as amended, or the
Exchange Act, and to have effective registration statements under the Securities Act of 1933, as
amended, or the Securities Act, on file with the SEC, including our outstanding registration
statements on Forms S-3, S-4 and S-8. The pending arbitration proceedings involving Ernst & Young
LLP, or E&Y, our former independent registered public accounting firm, could adversely impact our
ability to obtain any necessary consents in the future from E&Y. In that event, we may be required
to have our new independent registered public accounting firm reaudit the affected periods and
during such reaudit may not be able to timely file required Exchange Act reports with the SEC or to
issue equity, including common stock pursuant to equity awards that comprise a significant portion
of our compensation packages, under our outstanding or any new registration statements.
Furthermore, as a result of the reaudit, it is possible that additional accounting issues may be
identified.
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The resolution of the pending investigation by the U.S. Attorneys Office, the defense of our
pending civil litigation, and the defense of any additional litigation that may arise relating to
our past equity award practices or the January 2007 restatement of our prior financial statements
has in the past and could continue to result in significant costs and diversion of the attention of
management and other key employees. We have indemnification agreements with each of our present and
former directors and officers, under which Broadcom is generally required to indemnify them against
expenses, including attorneys fees, judgments, fines and settlements, arising from the pending
litigation and related government actions described above (subject to certain exceptions, including
liabilities arising from willful misconduct, from conduct knowingly contrary to the best interests
of Broadcom, or conduct that is knowingly fraudulent or deliberately dishonest or results in
improper personal benefit). The potential amount of the future payments we could be required to
make under these indemnification obligations could be significant and could have a material impact
on our results of operations, particularly as the defendants in the criminal and civil actions
described above prepare to go to trial in late 2009 and in 2010.
Although we maintain various insurance policies related to the risks associated with our business,
including directors and officers insurance, we cannot assure you that the amount of our insurance
coverage will be sufficient, that our insurance policies will provide coverage for the matters and
circumstances described above or that portions of payments by our insurance companies previously
made to us will not be required to be repaid to the insurance companies as these matters reach
conclusion. As discussed in Note 9 in the Notes to the Unaudited Condensed Consolidated Financial
Statements, in August 2009 Broadcom and certain of the defendants in the federal derivative action
pertaining to past employee stock option grants executed the Partial Derivative Settlement and the
Insurance Agreement, a settlement with Broadcoms directors and officers liability insurance
carriers. Pursuant to the Insurance Agreement, and subject to the terms described more completely
therein, including relinquishing of rights under certain insurance policies by Broadcom and certain
of its former and current officers and directors, Broadcom will receive payments totaling $118.0
million from its insurance carriers. That amount includes $43.3 million in reimbursements
previously received from the insurance carriers under reservations of rights, and $74.7 million to
be paid to Broadcom upon final approval of the Partial Derivative Settlement. In addition,
Broadcom has agreed to pay, subject to court approval of a fee award motion, $11.5 million to the
lead federal derivative plaintiffs counsel for attorneys fees, expenses and costs of plaintiffs
counsel in connection with the Partial Derivative Settlement and their prosecution of the derivative
action.
In the event that the Partial Derivative Settlement is approved by the trial court but such
approval is subsequently reversed or vacated by an appellate court or otherwise does not become
final and non-appealable, Broadcom in its sole discretion has the election to either provide a
release to the insurance carriers and indemnify them related to any future claims and retain the
$118.0 million in accordance with the Insurance Agreement or repay to the insurance carriers
certain portions of the aggregate amount previously paid to Broadcom. Our business, financial
position and results of operations may be materially and adversely affected to the extent that our
insurance coverage is not sufficient to pay or reimburse expenses and any judgments, fines or
settlement costs that we may incur in connection with these matters or in the event we are required
to repay amounts that were previously paid by our insurance companies.
Our acquisition strategy may result in unanticipated accounting charges or otherwise adversely
affect our results of operations, and result in difficulties in assimilating and integrating the
operations, personnel, technologies, products and information systems of acquired companies or
businesses, or be dilutive to existing shareholders. In addition, completing and integrating
acquisitions can be costly.
A key element of our business strategy involves expansion through the acquisitions of
businesses, assets, products or technologies that allow us to complement our existing product
offerings, expand our market coverage, increase our engineering workforce or enhance our
technological capabilities. We have historically acquired numerous companies and certain assets of
other businesses. We continually evaluate and explore strategic opportunities as they arise,
including business combination transactions, strategic partnerships, and the purchase or sale of
assets, including tangible and intangible assets such as intellectual property.
Acquisitions may require significant capital infusions, typically entail many risks, and could
result in difficulties in assimilating and integrating the operations, personnel, technologies,
products and information systems of acquired companies or businesses. We have in the past and may
in the future experience delays in the timing and successful
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integration of an acquired companys technologies and product development through volume
production, unanticipated costs and expenditures, changing relationships with customers, suppliers
and strategic partners, or contractual, intellectual property or employment issues. In addition,
key personnel of an acquired company may decide not to work for us. Moreover, to the extent we
acquire a company with existing products, those products may have lower gross margins than our
customary products, which could adversely affect our gross margin and operating results. If an
acquired company also has inventory that we assume, we will be required to write up the carrying
value of that inventory to fair value. When that inventory is sold, the gross margin for those
products will be nominal and our gross margin for that period will be negatively affected. The
acquisition of another company or its products and technologies may also require us to enter into a
geographic or business market in which we have little or no prior experience. These challenges
could disrupt our ongoing business, distract our management and employees, harm our reputation and
increase our expenses. These challenges are magnified as the size of the acquisition increases.
Furthermore, these challenges would be even greater if we acquired a business or entered into a
business combination transaction with a company that was larger and more difficult to integrate
than the companies we have historically acquired.
Acquisitions can result in increased debt or contingent liabilities, adverse tax consequences,
additional stock-based compensation expense, and the recording and later amortization of amounts
related to certain purchased intangible assets, any of which items could negatively impact our
results of operations. In addition, we may record goodwill and other purchased intangible assets in
connection with an acquisition and incur impairment charges in the future. For example, we have
previously recorded goodwill and long-lived assets impairment charges in connection with various
acquisitions related to our mobile platforms group and with respect to our most recent acquisition
of the DTV Business of AMD, Inc. If our actual results, or the plans and estimates used in future
impairment analyses, are less favorable than the original estimates used to assess the
recoverability of these assets, we could incur additional impairment charges. Any of these types of
charges could cause the price of our Class A common stock to decline. Beginning January 1, 2009,
the accounting for business combinations has changed. In connection with the new guidance,
previously capitalized acquisition costs incurred in connection with a business combination are now
expensed as incurred. In addition, previously expensed in-process research and development costs
are now capitalized. These in-process research and development costs are subsequently tested for
impairment prior to achieving technological feasibility and are amortized to expense upon achieving
technological feasibility. If the in-process research and development program is abandoned, the
capitalized costs are expensed immediately. We expect that the new requirements will have an
impact on our unaudited condensed consolidated financial statements, but the nature and magnitude
of the specific effects will depend upon the nature, terms, size and results of operations of the
acquisitions we consummate after the January 1, 2009.
Acquisitions or asset purchases made entirely or partially for cash may reduce our cash
reserves. We may seek to obtain additional cash to fund an acquisition by selling equity or debt
securities. Any issuance of equity or convertible debt securities may be dilutive to our existing
shareholders. In addition, the equity or debt securities that we may issue could have rights,
preferences or privileges senior to those of our Class A and/or Class B common stock. For example,
as a consequence of the prior pooling-of-interests accounting rules, the securities issued in nine
of our acquisitions were shares of Class B common stock, which have voting rights superior to those
of our publicly traded Class A common stock.
We cannot assure you that we will be able to consummate any pending or future acquisitions or
that we will realize any anticipated benefits from these acquisitions. We may not be able to find
suitable acquisition opportunities that are available at attractive valuations, if at all. Even if
we do find suitable acquisition opportunities, we may not be able to consummate the acquisitions on
commercially acceptable terms, and any decline in the price of our Class A common stock may make it
significantly more difficult and expensive to initiate or consummate additional acquisitions. In
addition, acquisitions may involve significant transaction expenses which are expensed as incurred
and may negatively affect our operating expenses.
Changes in current or future laws or regulations or the imposition of new laws or regulations,
including new or changed tax regulations or new interpretations thereof, by federal or state
agencies or foreign governments could adversely affect our results of operations, impede the sale
of our products or otherwise harm our business.
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Changes in current laws or regulations applicable to us or the imposition of new laws and
regulations in the
United States or elsewhere could materially and adversely affect our business, financial
condition and results of operations.
We currently operate under tax holidays and favorable tax incentives in certain foreign
jurisdictions. For instance, in Singapore we operate under tax holidays that reduce taxes on
substantially all of our operating income in that jurisdiction. Such tax holidays and incentives
often require us to meet specified employment and investment criteria in such jurisdictions. We
cannot assure you that we will continue to meet such criteria or enjoy such tax holidays and
incentives, or realize any net tax benefits from these tax holidays or incentives. If any of our
tax holidays or incentives are terminated, our results of operations may be materially and
adversely affected. Additionally, potential future U.S. tax legislation could impact the tax
benefits we effectively realize from our tax holidays and tax incentives.
In a recent decision by the U. S. Court of Appeals for the Ninth Circuit in the case between
Xilinx, Inc. and the Commissioner of Internal Revenue overturned a 2005 U.S. Tax Court ruling
regarding treatment of certain compensation expenses under a companys research and development
cost-sharing arrangements with affiliates. The Court of Appeals held that related parties to such
an arrangement must share stock option costs, notwithstanding the fact that unrelated parties in
such an arrangement would not share such costs. The case is subject to further appeal. The
potential impact to Broadcom, should the IRS prevail, of including such stock-based compensation
expenses in our research and development cost-sharing arrangements would be additional income for
federal and state purposes from January 1, 2001 forward, and may result in additional related
federal and state income and franchise taxes, and material adjustments to our federal and state net
operating loss carryforwards, our federal and state capitalized research and development costs and
our deferred tax positions. We are subject to ongoing examination of our income tax returns in the
United States and other jurisdictions. We regularly assess the likely outcomes of these audits to
determine the appropriateness of our provision for income taxes, but there can be no assurance that
the outcomes from these audits will not have an adverse effect on our operating results.
The effects of regulation on our customers or the industries in which they operate may
materially and adversely impact our business. For example, the Federal Communications Commission
has broad jurisdiction over each of our target markets in the United States. Although current FCC
regulations and the laws and regulations of other federal or state agencies are not directly
applicable to our products, they do apply to much of the equipment into which our products are
incorporated. FCC regulatory policies that affect the ability of cable or satellite operators or
telephone companies to offer certain services to their customers or other aspects of their business
may impede sales of our products in the United States. For example, in the past we have experienced
delays when products incorporating our chips failed to comply with FCC emissions specifications.
In addition, we and our customers are subject to various import and export laws and
regulations. Changes in or violations of such regulations could materially and adversely affect our
business, financial condition and results of operations. Additionally, various government export
regulations apply to the encryption or other features contained in some of our products. We have
made numerous filings and applied for and received a number of export licenses under these
regulations. However, if we fail to continue to receive licenses or otherwise comply with these
regulations, we may be unable to manufacture the affected products at foreign foundries or ship
these products to certain customers, or we may incur penalties or fines or our business, financial
condition or results of operations may be otherwise adversely affected.
We and our customers may also be subject to regulation by countries other than the United
States. Foreign governments may impose tariffs, duties and other import restrictions on components
that we obtain from non-domestic suppliers and may impose export restrictions on products that we
sell internationally. These tariffs, duties or restrictions could materially and adversely affect
our business, financial condition and results of operations.
Due to environmental concerns, the use of lead and other hazardous substances in electronic
components and systems is receiving increased attention. In response, the European Union passed the
Restriction on Hazardous Substances, or RoHS, Directive, legislation that limits the use of lead
and other hazardous substances in electrical equipment. The RoHS Directive became effective July 1,
2006. We believe that our current product designs and material supply chains are in compliance with
the RoHS Directive.
Because we depend on a few significant customers and/or design wins for a substantial portion of
our revenue, the loss of a key customer or design win or any significant delay in our customers
product development plans could seriously impact our revenue and harm our business. In addition, if
we are unable
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to continue to sell existing and new products to our key customers in significant quantities or to
attract new significant customers, our future operating results could be adversely affected.
We have derived a substantial portion of our past revenue from sales to a relatively small
number of customers. As a result, the loss of any significant customer could materially and
adversely affect our financial condition and results of operations.
Sales to our five largest customers represented 34.2% and 35.9% of our total net revenue in
the nine months ended September 30, 2009 and 2008, respectively. We expect that our largest
customers will continue to account for a substantial portion of our total net revenue in 2009 and
for the foreseeable future. The identities of our largest customers and their respective
contributions to our net revenue have varied and will likely continue to vary from period to
period.
A significant portion of our revenue may also depend on a single product design win with a
large customer. As a result, the loss of any such key design win or any significant delay in the
ramp of volume production of the customers products into which our product is designed could
materially and adversely affect our financial condition and results of operations. For instance, as
a result of the recent significant economic downturn, which caused a decline in the cellular
market, as well as tempered expectations of the future growth rate for that market, and an increase
in our implied discount rate due to higher risk premiums, as well as the decline in our market
capitalization, we had to adjust our assumptions used to assess the estimated fair value of our
mobile platforms business. In addition, these key design wins are often with large customers who
have significantly greater financial, sales, marketing and other resources than we have and greater
bargaining and pricing power, which could materially and adversely affect our operating margins.
We may not be able to maintain or increase sales to certain of our key customers or continue
to secure key design wins for a variety of reasons, including the following:
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most of our customers can stop incorporating our products into their own products with
limited notice to us and suffer little or no penalty; |
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our agreements with our customers typically do not require them to purchase a minimum
quantity of our products; |
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many of our customers have pre-existing or concurrent relationships with our current or
potential competitors that may affect the customers decisions to purchase our products; |
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our customers face intense competition from other manufacturers that do not use our
products; |
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some of our customers may choose to consolidate their supply sources to our detriment;
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some of our customers offer or may offer products that compete with our products. |
These relationships often require us to develop new products that may involve significant
technological challenges. Our customers frequently place considerable pressure on us to meet their
tight development schedules. Accordingly, we may have to devote a substantial portion of our
resources to strategic relationships, which could detract from or delay our completion of other
important development projects or the development of next generation products and technologies.
Delays in development could impair our relationships with strategic customers and negatively impact
sales of the products under development.
In addition, our longstanding relationships with some larger customers may also deter other
potential customers who compete with these customers from buying our products. To attract new
customers or retain existing customers, we may offer certain customers favorable prices on our
products. We may have to offer the same lower prices to certain of our customers who have
contractual most favored nation pricing arrangements. In that event, our average selling prices
and gross margins would decline. The loss of a key customer or design win, a reduction in sales to
any key customer, a significant delay in our customers product development plans or our inability
to attract new significant customers or secure new key design wins could seriously impact our
revenue and materially and adversely affect our results of operations.
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Intellectual property risks and third party claims of infringement, misappropriation of proprietary
rights or other claims against us could adversely affect our ability to market our products,
require us to redesign our products or seek licenses from third parties, and seriously harm our
operating results. In addition, the defense of such claims could result in significant costs and
divert the attention of our management or other key employees.
Companies in and related to the semiconductor industry and the wired and wireless
communications markets often aggressively protect and pursue their intellectual property rights.
There are various intellectual property risks associated with developing and producing new products
and entering new markets, and we may not be able to obtain, at reasonable cost and upon
commercially reasonable terms, licenses to intellectual property of others that is alleged to read
on such new or existing products. From time to time, we have received, and may continue to receive,
notices that claim we have infringed upon, misappropriated or misused other parties proprietary
rights. Moreover, in the past we have been and we currently are engaged in litigation with parties
that claim that we infringed their patents or misappropriated or misused their trade secrets. In
addition, we or our customers may be sued by other parties that claim that our products have
infringed their patents or misappropriated or misused their trade secrets, or which may seek to
invalidate one or more of our patents. An adverse determination in any of these types of disputes
could prevent us from manufacturing or selling some of our products, limit or restrict the type of
work that employees involved in such litigation may perform for Broadcom, increase our costs of
revenue, and expose us to significant liability. Any of these claims or litigation may materially
and adversely affect our business, financial condition and results of operations. For example, in a
patent or trade secret action, a court could issue a preliminary or permanent injunction that would
require us to withdraw or recall certain products from the market, redesign certain products
offered for sale or under development, or restrict employees from performing work in their areas of
expertise. We may also be liable for damages for past infringement and royalties for future use of
the technology, and we may be liable for treble damages if infringement is found to have been
willful. In addition, governmental agencies may commence investigations or criminal proceedings
against our employees, former employees and/or the company relating to claims of misappropriation
or misuse of another partys proprietary rights. We may also have to indemnify some customers and
strategic partners under our agreements with such parties if a third party alleges or if a court
finds that our products or activities have infringed upon, misappropriated or misused another
partys proprietary rights. We have received requests from certain customers and strategic partners
to include increasingly broad indemnification provisions in our agreements with them. These
indemnification provisions may, in some circumstances, extend our liability beyond the products we
provide to include liability for combinations of components or system level designs and for
consequential damages and/or lost profits. Even if claims or litigation against us are not valid or
successfully asserted, these claims could result in significant costs and diversion of the
attention of management and other key employees to defend. Additionally, we have sought and may in
the future seek to obtain licenses under other parties intellectual property rights and have
granted and may in the future grant licenses to certain of our intellectual property rights to
others in connection with cross-license agreements or settlements of claims or actions asserted
against us. However, we may not be able to obtain licenses under anothers intellectual property
rights on commercially reasonable terms, if at all. In addition, any other rights that we grant to
competitors may increase their ability to compete in the marketplace.
Our products may contain technology provided to us by other parties such as contractors,
suppliers or customers. We may have little or no ability to determine in advance whether such
technology infringes the intellectual property rights of a third party. Our contractors, suppliers
and licensors may not be required to indemnify us in the event that a claim of infringement is
asserted against us, or they may be required to indemnify us only up to a maximum amount, above
which we would be responsible for any further costs or damages. In addition, we may have little or
no ability to correct errors in the technology provided by such contractors, suppliers and
licensors, or to continue to develop new generations of such technology. Accordingly, we may be
dependent on their ability and willingness to do so. In the event of a problem with such
technology, or in the event that our rights to use such technology become impaired, we may be
unable to ship our products containing such technology, and may be unable to replace the technology
with a suitable alternative within the time frame needed by our customers.
We may not be able to adequately protect or enforce our intellectual property rights, which could
harm our competitive position.
Our success and future revenue growth will depend, in part, on our ability to protect our
intellectual property. We primarily rely on patent, copyright, trademark and trade secret laws, as
well as nondisclosure agreements and other methods, to protect our proprietary technologies and
processes. Despite our efforts to protect our proprietary
68
technologies and processes, it is possible that competitors or other unauthorized third
parties may obtain, copy, use or disclose our technologies and processes. We currently hold over
3,650 U.S. and 1,450 foreign patents and have more than 7,750 additional U.S. and foreign pending
patent applications. However, we cannot assure you that any additional patents will be issued. Even
if a new patent is issued, the claims allowed may not be sufficiently broad to protect our
technology. In addition, any of our existing or future patents may be challenged, invalidated or
circumvented. As such, any rights granted under these patents may not provide us with meaningful
protection. We may not be able to obtain foreign patents or file pending applications corresponding
to our U.S. patents and patent applications. Even if foreign patents are granted, effective
enforcement in foreign countries may not be available. If our patents do not adequately protect our
technology, our competitors may be able to offer products similar to ours. Our competitors may also
be able to develop similar technology independently or design around our patents. Some or all of
our patents have in the past been licensed and likely will in the future be licensed to certain of
our competitors through cross-license agreements. Moreover, because we have participated and
continue to participate in developing various industry standards, we may be required to license
some of our patents to others, including competitors, who develop products based on those
standards.
Certain of our software (as well as that of our customers) may be derived from so-called open
source software that is generally made available to the public by its authors and/or other third
parties. Such open source software is often made available under licenses, such as the GNU General
Public License, or GPL, which impose certain obligations on us in the event we were to distribute
derivative works of the open source software. These obligations may require us to make source code
for the derivative works available to the public, and/or license such derivative works under a
particular type of license, rather than the forms of license customarily used to protect our
intellectual property. In addition, there is little or no legal precedent for interpreting the
terms of certain of these open source licenses, including the determination of which works are
subject to the terms of such licenses. While we believe we have complied with our obligations under
the various applicable licenses for open source software, in the event that the copyright holder of
any open source software were to successfully establish in court that we had not complied with the
terms of a license for a particular work, we could be required to release the source code of that
work to the public and/or stop distribution of that work. With respect to our proprietary software,
we generally license such software under terms that prohibit combining it with open source software
as described above. Despite these restrictions, parties may combine Broadcom proprietary software
with open source software without our authorization, in which case we might nonetheless be required
to release the source code of our proprietary software.
We generally enter into confidentiality agreements with our employees, consultants and
strategic partners. We also try to control access to and distribution of our technologies,
documentation and other proprietary information. Despite these efforts, internal or external
parties may attempt to copy, disclose, obtain or use our products, services or technology without
our authorization. Also, current or former employees may seek employment with our business
partners, customers or competitors, and we cannot assure you that the confidential nature of our
proprietary information will be maintained in the course of such future employment. Additionally,
current, departing or former employees or third parties could attempt to penetrate our computer
systems and networks to misappropriate our proprietary information and technology or interrupt our
business. Because the techniques used by computer hackers and others to access or sabotage networks
change frequently and generally are not recognized until launched against a target, we may be
unable to anticipate, counter or ameliorate these techniques. As a result, our technologies and
processes may be misappropriated, particularly in countries where laws may not protect our
proprietary rights as fully as in the United States.
In addition, some of our customers have entered into agreements with us that grant them the
right to use our proprietary technology if we fail to fulfill our obligations, including product
supply obligations, under those agreements, and if we do not correct the failure within a specified
time period. Also, some customers may require that we make certain intellectual property available
to our competitors so that the customer has a choice among semiconductor vendors for solutions to
be incorporated into the customers products. Moreover, we often incorporate the intellectual
property of strategic customers into our own designs, and have certain obligations not to use or
disclose their intellectual property without their authorization.
We cannot assure you that our efforts to prevent the misappropriation or infringement of our
intellectual property or the intellectual property of our customers will succeed. We have in the
past been and currently are engaged in litigation to enforce or defend our intellectual property
rights, protect our trade secrets, or determine the validity and scope of the proprietary rights of
others, including our customers. It is possible that the advent of or developments in such
litigation may adversely affect our relationships and agreements with certain customers that are
either involved in such litigation or also have business relationships with the party with whom we
are engaged in litigation. Such litigation (and the settlement thereof) has been and will likely
continue to be very expensive and time consuming. Additionally, any litigation can divert the
attention of management and other key employees from the operation of
the business, which could negatively impact our business and results of operations.
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The complexity of our products could result in unforeseen delays or expenses and in undetected
defects, or bugs, which could damage our reputation with current or prospective customers, result
in significant costs and claims, and adversely affect the market acceptance of new products.
Highly complex products such as the products that we offer frequently contain hardware or
software defects or bugs when they are first introduced or as new versions are released. Our
products have previously experienced, and may in the future experience, these defects and bugs. If
any of our products contains defects or bugs, or has reliability, quality or compatibility
problems, our reputation may be damaged and customers may be reluctant to buy our products, which
could materially and adversely affect our ability to retain existing customers and attract new
customers. In addition, these defects or bugs could interrupt or delay sales or shipment of our
products to customers. To alleviate these problems, we may have to invest significant capital and
other resources. Although our products are tested by us, our subcontractors, suppliers and
customers, it is possible that new products will contain defects or bugs. If any of these problems
are not found until after we have commenced commercial production of a new product, we may be
required to incur additional development costs and product recall, repair or field replacement
costs. These problems may divert our technical and other resources from other development efforts
and could result in claims against us by our customers or others, including possible claims for
consequential damages and/or lost profits. Moreover, we may lose, or experience a delay in, market
acceptance of the affected product or products, and we could lose credibility with our current and
prospective customers. In addition, system and handset providers that purchase components may
require that we assume liability for defects associated with products produced by their
manufacturing subcontractors and require that we provide a warranty for defects or other problems
which may arise at the system level.
We may be unable to attract, retain or motivate key senior management and technical personnel,
which could seriously harm our business.
Our future success depends to a significant extent upon the continued service of our key
senior management personnel, including our Chief Executive Officer and other senior executives. We
have employment agreements with our Chief Executive Officer and certain other executive officers;
however the agreements do not govern the length of their service with Broadcom. We do not have
employment agreements with most of our elected officers, or any other key employees, although we do
have limited change in control severance benefit arrangements in place with certain executives. The
loss of the services of key senior management or technical personnel could materially and adversely
affect our business, financial condition and results of operations. For instance, if certain of
these individuals were to leave our company unexpectedly, we could face substantial difficulty in
hiring qualified successors and could experience a loss in productivity during the search for and
while any such successor is integrated into our business and operations.
Furthermore, our future success depends on our ability to continue to attract, retain and
motivate senior management and qualified technical personnel, particularly software engineers,
digital circuit designers, RF and mixed-signal circuit designers and systems applications
engineers. Competition for these employees is intense. If we are unable to attract, retain and
motivate such personnel in sufficient numbers and on a timely basis, we will experience difficulty
in implementing our current business and product plans. In that event, we may be unable to
successfully meet competitive challenges or to exploit potential market opportunities, which could
adversely affect our business and results of operations.
We have recently effected a number of cost saving measures and announced a restructuring plan,
both of which could negatively impact employee morale. Over the last few years we have also
modified our compensation policies by increasing cash compensation to certain employees and
instituting awards of restricted stock units, while simultaneously reducing awards of stock
options. These modifications of our compensation policies and the requirement to expense the fair
value of equity awards to employees have increased our operating expenses. However, because we are
mindful of the dilutive impact of our equity awards, we currently intend to further reduce the
number of equity awards granted to employees over the next few years. While this may have a positive impact
on our operating expenses over time, it may negatively impact employee morale and our ability to
attract, retain and motivate employees. Our inability to attract and retain additional key
employees and any increase in stock-based compensation expense could each have an adverse effect on
our business, financial condition and results of operations.
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We depend on third-party subcontractors to assemble and test substantially all of our products. If
any of our subcontractors experience production disruptions or financial difficulty, shipments of our products
may be affected, which could adversely impact customer relationships or impair sales.
We do not own or operate an assembly or test facility. Eight third-party subcontractors
located in Asia assemble and test substantially all of our current products. Because we rely on
third-party subcontractors to perform these functions, we cannot directly control our product
delivery schedules and quality assurance. This lack of control could result in product shortages or
quality assurance problems. These issues could delay shipments of our products or increase our
assembly or testing costs. Additionally, due to the current economic environment it is possible
that our subcontractors may experience financial difficulties that would impede their ability to
operate effectively.
We do not have long-term agreements with any of our assembly or test subcontractors and
typically procure services from these suppliers on a per order basis. If any of these
subcontractors experience financial difficulties, suffer any damage to facilities, experience power
outages or any other disruption of assembly or testing capacity, we may not be able to obtain
alternative assembly and testing services in a timely manner, or at all. Due to the amount of time
that it usually takes to qualify assemblers and testers, we could experience significant delays in
product shipments if we are required to find alternative assemblers or testers for our components.
Any problems that we may encounter with the delivery, quality or cost of our products could damage
our customer relationships and materially and adversely affect our results of operations. We are
continuing to develop relationships with additional third-party subcontractors to assemble and test
our products. However, even if we use these new subcontractors, we will continue to be subject to
all of the risks described above.
As our international business expands, we are increasingly exposed to various legal, business,
political and economic risks associated with our international operations.
We currently obtain substantially all of our manufacturing, assembly and testing services from
suppliers located outside the United States. In addition, 51.9% and 40.9% of our product revenue in
the nine months ended September 30, 2009 and 2008, respectively, was derived from product sales to
independent customers outside the United States, excluding foreign subsidiaries or manufacturing
subcontractors of customers that are headquartered in the United States. We also frequently ship
products to our domestic customers international manufacturing divisions and subcontractors.
Products shipped to international destinations, primarily in Asia, represented 94.7% and 91.4% of
our product revenue in the nine months ended September 30, 2009 and 2008, respectively. We also
undertake design and development activities in Belgium, Canada, China, Denmark, France, Greece,
India, Israel, Japan, Korea, the Netherlands, Spain, Taiwan and the United Kingdom, among other
locations. In addition, we undertake various sales and marketing activities through regional
offices in a number of countries. We intend to continue to expand our international business
activities and to open other design and operational centers abroad. The continuing effects of
overseas conflicts and the risk of terrorist attacks in the United States and abroad, the resulting
heightened security, and the increasing risk of extended international military conflicts may
adversely impact our international sales and could make our international operations more
expensive. International operations are subject to many other inherent risks, including but not
limited to:
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political, social and economic instability; |
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exposure to different business practices and legal standards, particularly with respect
to intellectual property; |
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natural disasters and public health emergencies; |
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nationalization of business and blocking of cash flows; |
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trade and travel restrictions; |
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the imposition of governmental controls and restrictions and unexpected changes in
regulatory requirements; |
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burdens of complying with a variety of foreign laws; |
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import and export license requirements and restrictions of the United States and each
other country in which we operate;
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foreign technical standards; |
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changes in taxation and tariffs; |
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difficulties in staffing and managing international operations; |
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difficulties in collecting receivables from foreign entities or delayed revenue
recognition; and |
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potentially adverse tax consequences. |
Any of the factors described above may have a material adverse effect on our ability to
increase or maintain our foreign sales.
Economic conditions in our primary overseas markets, particularly in Asia, may negatively
impact the demand for our products abroad. All of our international sales to date have been
denominated in U.S. dollars. Accordingly, an increase in the value of the U.S. dollar relative to
foreign currencies could make our products less competitive in international markets or require us
to assume the risk of denominating certain sales in foreign currencies. We anticipate that these
factors will impact our business to a greater degree as we further expand our international
business activities.
In addition, a significant portion of our cash and marketable securities are held in non-U.S.
domiciled countries.
We depend on five independent foundry subcontractors to manufacture substantially all of our
current products, and any failure to secure and maintain sufficient foundry capacity could
materially and adversely affect our business.
We do not own or operate a fabrication facility. Five third-party foundry subcontractors
located in Asia manufacture substantially all of our semiconductor devices in current production.
Due to the recent global economic environment it is possible that our foundry subcontractors could
experience financial difficulties that would impede their ability to operate effectively.
Additionally, availability of foundry capacity has at times in the past been reduced due to strong
demand. If we are unable to secure sufficient capacity at our existing foundries, or in the event
of a public health emergency or closure at any of these foundries, our product revenue, cost of
product revenue and results of operations would be negatively impacted.
If any of our foundries experiences a shortage in capacity, suffers any damage to its
facilities due to earthquake, typhoon or other natural disaster, experiences power outages, suffers
an adverse outcome in pending or future litigation, or encounters financial difficulties or any
other disruption of foundry capacity, we may encounter supply delays or disruptions, and we may
need to qualify an alternative foundry. Our current foundries need to have new manufacturing
processes qualified if there is a disruption in an existing process. We typically require several
months to qualify a new foundry or process before we can begin shipping products from it. If we
cannot accomplish this qualification in a timely manner, we may experience a significant
interruption in supply of the affected products.
Because we rely on outside foundries, we face several significant risks in addition to those
discussed above, including:
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a lack of guaranteed wafer supply and higher wafer prices, particularly in light of the
recent volatility in the commodities markets, which has the impact of increasing the cost
of materials used in production of wafers; |
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limited control over delivery schedules, quality assurance, manufacturing yields and
production costs and other terms; and |
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the limited availability of, or potential delays in obtaining access to, key process
technologies. |
The manufacture of integrated circuits is a highly complex and technologically demanding
process. Although we work closely with our foundries to minimize the likelihood of reduced
manufacturing yields, our foundries have
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from time to time experienced lower than anticipated manufacturing yields. This often occurs
during the production of new products or the installation and start-up of new process technologies.
Poor yields from our foundries could result in product shortages or delays in product shipments,
which could seriously harm our relationships with our customers and materially and adversely affect
our results of operations.
The ability of each foundry to provide us with semiconductor devices is limited by its
available capacity and existing obligations. Although we have entered into contractual commitments
to supply specified levels of products to some of our customers, we do not have a long-term volume
purchase agreement or a significant guaranteed level of production capacity with any of our
foundries. Foundry capacity may not be available when we need it or at reasonable prices.
Availability of foundry capacity has in the past been reduced from time to time due to strong
demand. Foundries can allocate capacity to the production of other companies products and reduce
deliveries to us on short notice. It is possible that foundry customers that are larger and better
financed than we are, or that have long-term agreements with our main foundries, may induce our
foundries to reallocate capacity to them. This reallocation could impair our ability to secure the
supply of components that we need. Although we use five independent foundries to manufacture
substantially all of our semiconductor products, each component is typically manufactured at only
one or two foundries at any given time, and if any of our foundries is unable to provide us with
components as needed and under acceptable terms, we could experience significant delays in securing
sufficient supplies of those components. Also, our third party foundries typically migrate capacity
to newer, state-of-the-art manufacturing processes on a regular basis, which may create capacity
shortages for our products designed to be manufactured on an older process. We cannot assure you
that any of our existing or new foundries will be able to produce integrated circuits with
acceptable manufacturing yields, or that our foundries will be able to deliver enough semiconductor
devices to us on a timely basis, or on reasonable terms or at reasonable prices. These and other
related factors could impair our ability to meet our customers needs and have a material and
adverse effect on our business, financial condition and results of operations.
Although we may utilize new foundries for other products in the future, in using any new
foundries we will be subject to all of the risks described in the foregoing paragraphs with respect
to our current foundries.
To remain competitive, we must keep pace with rapid technological change and evolving industry
standards in the semiconductor industry and the wired and wireless communications markets.
Our future success will depend on our ability to anticipate and adapt to changes in technology
and industry standards and our customers changing demands. We sell products in markets that are
characterized by rapid technological change, evolving industry standards, frequent new product
introductions, short product life cycles and increasing demand for higher levels of integration and
smaller process geometries. Our past sales and profitability have resulted, to a large extent, from
our ability to anticipate changes in technology and industry standards and to develop and introduce
new and enhanced products incorporating the new standards and technologies. Our ability to adapt to
these changes and to anticipate future standards, and the rate of adoption and acceptance of those
standards, will be a significant factor in maintaining or improving our competitive position and
prospects for growth. If new industry standards emerge, our products or our customers products
could become unmarketable or obsolete, and we could lose market share. We may also have to incur
substantial unanticipated costs to comply with these new standards. In addition, our target markets
continue to undergo rapid growth and consolidation. A significant slowdown in any of these wired
and wireless communications markets could materially and adversely affect our business, financial
condition and results of operations. These rapid technological changes and evolving industry
standards make it difficult to formulate a long-term growth strategy because the semiconductor
industry and the wired and wireless communications markets may not continue to develop to the
extent or in the time periods that we anticipate. We have invested substantial resources in
emerging technologies that did not achieve the market acceptance that we had expected. If new
markets do not develop as and when we anticipate, or if our products do not gain widespread
acceptance in those markets, our business, financial condition and results of operations could be
materially and adversely affected.
We face intense competition in the semiconductor industry and the wired and wireless communications
markets, which could reduce our market share in existing markets and affect our entry into new
markets.
The semiconductor industry and the wired and wireless communications markets are intensely
competitive. We expect competition to continue to increase as industry standards become well known
and as other competitors enter our target markets. We currently compete with a number of major
domestic and international suppliers of integrated
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circuits and related applications in our target markets. We also compete with suppliers of
system-level and motherboard-level solutions incorporating integrated circuits that are proprietary
or sourced from manufacturers other than Broadcom. In all of our target markets we also may face
competition from newly established competitors, suppliers of products based on new or emerging
technologies, and customers who choose to develop their own semiconductor solutions. We expect to
encounter further consolidation in the markets in which we compete.
Many of our competitors operate their own fabrication facilities and have longer operating
histories and presence in key markets, greater name recognition, larger customer bases, and
significantly greater financial, sales and marketing, manufacturing, distribution, technical and
other resources than we do. These competitors may be able to adapt more quickly to new or emerging
technologies and changes in customer requirements. They may also be able to devote greater
resources to the promotion and sale of their products. In addition, current and potential
competitors have established or may establish financial or strategic relationships among themselves
or with existing or potential customers, resellers or other third parties. Accordingly, new
competitors or alliances among competitors could emerge and rapidly acquire significant market
share. Existing or new competitors may also develop technologies that more effectively address our
markets with products that offer enhanced features and functionality, lower power requirements,
greater levels of integration or lower cost. Increased competition has resulted in and is likely to
continue to result in declining average selling prices, reduced gross margins and loss of market
share in certain markets. We cannot assure you that we will be able to continue to compete
successfully against current or new competitors. If we do not compete successfully, we may lose
market share in our existing markets and our revenues may fail to increase or may decline.
We may experience difficulties in transitioning to smaller geometry process technologies or in
achieving higher levels of design integration, which may result in reduced manufacturing yields,
delays in product deliveries and increased expenses.
To remain competitive, we expect to continue to transition our semiconductor products to
increasingly smaller line width geometries. This transition requires us to modify the manufacturing
processes for our products and to redesign some products as well as standard cells and other
integrated circuit designs that we may use in multiple products. We periodically evaluate the
benefits, on a product-by-product basis, of migrating to smaller geometry process technologies to
reduce our costs. Substantially all of our products are currently
manufactured in .13 micron and 65 nanometer geometry processes, and we are now designing most new products in 65 nanometers and
planning for the transition to smaller process geometries. In the past, we have experienced some
difficulties in shifting to smaller geometry process technologies or new manufacturing processes,
which resulted in reduced manufacturing yields, delays in product deliveries and increased
expenses. The transition to 65 nanometer geometry process technology has resulted in significantly
higher mask and prototyping costs, as well as additional expenditures for engineering design tools
and related computer hardware. We may face similar difficulties, delays and expenses as we continue
to transition our products to smaller geometry processes.
We are dependent on our relationships with our foundry subcontractors to transition to smaller
geometry processes successfully. We cannot assure you that the foundries that we use will be able
to effectively manage the transition in a timely manner, or at all, or that we will be able to
maintain our existing foundry relationships or develop new ones. If any of our foundry
subcontractors or we experience significant delays in this transition or fail to efficiently
implement this transition, we could experience reduced manufacturing yields, delays in product
deliveries and increased expenses, all of which could harm our relationships with our customers and
our results of operations.
As smaller geometry processes become more prevalent, we expect to continue to integrate
greater levels of functionality, as well as customer and third party intellectual property, into
our products. However, we may not be able to achieve higher levels of design integration or deliver
new integrated products on a timely basis, if at all. Moreover, even if we are able to achieve
higher levels of design integration, such integration may have an adverse impact on our operating
results, as a result of increasing costs and expenditures as described above as well as the risk
that we may reduce our revenue by integrating the functionality of multiple chips into a single
chip.
Our stock price is highly volatile. Accordingly, you may not be able to resell your shares of
common stock at or above the price you paid for them.
The market price of our Class A common stock has fluctuated substantially in the past and is
likely to continue to be highly volatile and subject to wide fluctuations. From January 1, 2008
though September 30, 2009 our Class A
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common stock has traded at prices as low as $12.98 and as high as $31.20 per share.
Fluctuations have occurred and may continue to occur in response to various factors, many of which
we cannot control, including:
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general economic and political conditions and specific conditions in the markets we
address, including the continued volatility in the technology sector and semiconductor
industry, the recent global economic recession, trends in the broadband communications
markets in various geographic regions, including seasonality in sales of consumer products
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quarter-to-quarter variations in our operating results; |
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changes in earnings estimates or investment recommendations by analysts; |
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rulings in currently pending or newly-instituted intellectual property litigation; |
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other newly-instituted litigation or governmental investigations or an adverse decision
or outcome in any litigation or investigations; |
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announcements of changes in our senior management; |
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the gain or loss of one or more significant customers or suppliers; |
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announcements of technological innovations or new products by our competitors,
customers or us; |
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the gain or loss of market share in any of our markets; |
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changes in accounting rules; |
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continuing international conflicts and acts of terrorism; |
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changes in the methods, metrics or measures used by analysts to evaluate our stock; |
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changes in investor perceptions; or |
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changes in expectations relating to our products, plans and strategic position or those
of our competitors or customers. |
In addition, the market prices of securities of Internet-related, semiconductor and other
technology companies have been and remain volatile. This volatility has significantly affected the
market prices of securities of many technology companies for reasons frequently unrelated to the
operating performance of the specific companies. Accordingly, you may not be able to resell your
shares of common stock at or above the price you paid. In the past, we and other companies that
have experienced volatility in the market price of their securities have been, and we currently
are, the subject of securities class action litigation.
Due to the nature of our compensation programs, most of our executive officers sell shares of
our common stock each quarter or otherwise periodically, often pursuant to trading plans
established under Rule 10b5-1 promulgated under the Exchange Act. As a result, sales of shares by
our executive officers may not be indicative of their respective opinions of Broadcoms performance
at the time of sale or of our potential future performance. Nonetheless, the market price of our
stock may be affected by sales of shares by our executive officers.
In addition, fluctuations in the price of our stock may reduce the ability of our share
repurchase program to deliver long-term shareholder value, because the market price of the stock
may decline significantly below the levels at which repurchases were made.
Our co-founders and their affiliates can control the outcome of matters that require the approval
of our shareholders, and accordingly we will not be able to engage in certain transactions without
their approval.
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As of September 30, 2009 our co-founders, directors, executive officers and their respective
affiliates beneficially owned 13.2% of our outstanding common stock and held 56.9% of the total
voting power held by our shareholders. Accordingly, these shareholders currently have enough voting
power to control the outcome of matters that require the approval of our shareholders. These
matters include the election of our Board of Directors, the issuance of additional shares of Class
B common stock, and the approval of most significant corporate transactions, including certain
mergers and consolidations and the sale of substantially all of our assets. In particular, as of
September 30, 2009 our two founders, Dr. Henry T. Nicholas III and Dr. Henry Samueli, who are no
longer officers or directors of Broadcom, beneficially owned a total of 11.9% of our outstanding
common stock and held 56.5% of the total voting power held by our shareholders. Because of their
significant voting stock ownership, we will not be able to engage in certain transactions, and our
shareholders will not be able to effect certain actions or transactions, without the approval of
one or both of these shareholders. These actions and transactions include changes in the
composition of our Board of Directors, certain mergers, and the sale of control of our company by
means of a tender offer, open market purchases or other purchases of our Class A common stock, or
otherwise. Repurchases of shares of our Class A common stock under our share repurchase program
will result in an increase in the total voting power of our co-founders, directors, executive
officers and their affiliates, as well as other continuing shareholders.
Some of the independent foundries upon which we rely to manufacture our products, as well as our
own California and Singapore facilities, are located in regions that are subject to earthquakes and
other natural disasters.
Two of the third-party foundries, upon which we rely to manufacture a substantial number of
our semiconductor devices, are located in Taiwan. Taiwan has experienced significant earthquakes in
the past and could be subject to additional earthquakes. Any earthquake or other natural disaster,
such as a tsunami, in a country in which any of our foundries is located could significantly
disrupt our foundries production capabilities and could result in our experiencing a significant
delay in delivery, or substantial shortage, of wafers and possibly in higher wafer prices.
Our California facilities, including our principal executive offices and major design centers,
are located near major earthquake fault lines. Our international distribution center and some of
our third-party foundries are located in Singapore, which could also be subject to an earthquake,
tsunami or other natural disaster. If there is a major earthquake or any other natural disaster in
a region where one or more of our facilities are located, our operations could be significantly
disrupted. Although we have established business interruption plans to prepare for any such event,
we cannot guarantee that we will be able to effectively address all interruptions that such an
event could cause.
Any supply disruption or business interruption could materially and adversely affect our
business, financial condition and results of operations.
Our articles of incorporation and bylaws contain anti-takeover provisions that could prevent or
discourage a third party from acquiring us.
Our articles of incorporation and bylaws contain provisions that may prevent or discourage a
third party from acquiring us, even if the acquisition would be beneficial to our shareholders. In
addition, we have in the past issued and may in the future issue shares of Class B common stock in
connection with certain acquisitions, upon exercise of certain stock options, and for other
purposes. Class B shares have superior voting rights entitling the holder to ten votes for each
share held on matters that we submit to a shareholder vote (as compared to one vote per share in
the case of our Class A common stock) as well as the right to vote separately as a class (i) as
required by law and (ii) in the case of a proposed issuance of additional shares of Class B common
stock, unless such issuance is approved by at least two-thirds of the members of the Board of
Directors then in office. Our Board of Directors also has the authority to fix the rights and
preferences of shares of our preferred stock and to issue shares of common or preferred stock
without a shareholder vote. It is possible that the provisions in our charter documents, the
exercise of supervoting rights by holders of our Class B common stock, our co-founders, directors
and officers ownership of a majority of the Class B common stock, or the ability of our Board of
Directors to issue preferred stock or additional shares of Class B common stock may prevent or
discourage third parties from acquiring us, even if the acquisition would be beneficial to our
shareholders. In addition, these factors may discourage third parties from bidding for our Class A
common stock at a premium over the market price for our stock. These factors may also materially
and adversely affect voting and other rights of the holders of our common stock and the market
price of our Class A common stock.
76
We had a material weakness in internal control over financial reporting prior to 2007 and cannot
assure you
that additional material weaknesses will not be identified in the future. If our internal control
over financial reporting or disclosure controls and procedures are not effective, there may be
errors in our financial statements that could require a restatement or our filings may not be
timely and investors may lose confidence in our reported financial information, which could lead to
a decline in our stock price.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our
internal control over financial reporting as of the end of each year, and to include a management
report assessing the effectiveness of our internal control over financial reporting in each Annual
Report on Form 10-K. Section 404 also requires our independent registered public accounting firm to
attest to and report on Broadcoms internal control over financial reporting.
In assessing the findings of the voluntary equity award review as well as the restatement of
our unaudited condensed consolidated financial statements for periods ended on or before March 31,
2006, our management concluded that there was a material weakness, as defined in Public Company
Accounting Oversight Board Auditing Standard No. 2, in our internal control over financial
reporting as of December 31, 2005. Management believes this material weakness was remediated
September 19, 2006 and, accordingly, no longer exists as of the date of this filing.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not
expect that our internal control over financial reporting will prevent all errors and all fraud. A
control system, no matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control systems objectives will be met. Further, the design of a
control system must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management override of the
controls. Over time, controls may become inadequate because changes in conditions or deterioration
in the degree of compliance with policies or procedures may occur. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
As a result, we cannot assure you that significant deficiencies or material weaknesses in our
internal control over financial reporting will not be identified in the future. Any failure to
maintain or implement required new or improved controls, or any difficulties we encounter in their
implementation, could result in significant deficiencies or material weaknesses, cause us to fail
to timely meet our periodic reporting obligations, or result in material misstatements in our
financial statements. Any such failure could also adversely affect the results of periodic
management evaluations and annual auditor attestation reports regarding disclosure controls and the
effectiveness of our internal control over financial reporting required under Section 404 of the
Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. The existence of a material
weakness could result in errors in our financial statements that could result in a restatement of
financial statements, cause us to fail to timely meet our reporting obligations and cause investors
to lose confidence in our reported financial information, leading to a decline in our stock price.
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Item 2. |
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Unregistered Sales of Equity Securities and Use of Proceeds |
In the three months ended September 30, 2009, we issued an aggregate of 1.3 million shares of
Class A common stock upon conversion of a like number of shares of Class B common stock. Each share
of Class B common stock is convertible at any time into one share of Class A common stock at the
option of the holder. The offers and sales of those securities were effected without registration
in reliance on the exemption from registration provided by Section 3(a)(9) of the Securities Act.
Issuer Purchases of Equity Securities
From time to time our Board of Directors has authorized various programs to repurchase shares
of our Class A common stock depending on market conditions and other factors.
In July 2008 the Board of Directors authorized our current program to repurchase shares of
Broadcoms Class A common stock having an aggregate value of up to $1.0 billion. Repurchases under
the program may be made at any time during the period that commenced July 31, 2008 and continuing
through and including July 31, 2011. As of
77
September 30, 2009, $358.4 million remained authorized for repurchase under our current
program. The following table presents details of our repurchases during the three months ended
September 30, 2009:
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|
|
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|
Approximate Dollar |
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Total Number of |
|
|
Value of Shares |
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Total Number |
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Average |
|
|
Shares Purchased |
|
|
That May yet be |
|
|
|
of Shares |
|
|
Price |
|
|
as Part of Publicly |
|
|
Purchased under |
|
Period |
|
Purchased |
|
|
per Share |
|
|
Announced Plan |
|
|
the Plan |
|
|
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(In thousands) |
|
|
|
|
|
|
(In thousands) |
|
|
(In thousands) |
|
July 2009 |
|
|
2,968 |
|
|
$ |
25.98 |
|
|
|
2,968 |
|
|
|
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|
August 2009 |
|
|
362 |
|
|
|
28.26 |
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|
|
362 |
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|
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September 2009 |
|
|
2,673 |
|
|
|
29.61 |
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|
2,673 |
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|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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Total |
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|
6,003 |
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|
27.73 |
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|
6,003 |
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$ |
358,352 |
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Repurchases under our share repurchase programs were and will be made in open market or
privately negotiated transactions in compliance with Rule 10b-18 promulgated under the Exchange
Act.
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Item 3. |
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Defaults upon Senior Securities |
None.
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Item 4. |
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Submission of Matters to a Vote of Security Holders |
None.
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Item 5. |
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Other Information |
None.
(a) Exhibits. The following Exhibits are attached hereto and incorporated herein by reference:
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Exhibit |
|
|
Number |
|
Description |
10.1 |
|
Third Amendment dated August 3, 2009 to Letter Agreement between the
registrant and Scott A. McGregor. |
|
|
|
10.2 |
|
Second Amendment dated August 3, 2009 to Letter Agreement between
the registrant and Eric K. Brandt. |
|
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|
10.3 |
|
Amendment dated August 3, 2009 to Letter Agreement between the
registrant and Arthur Chong. |
|
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|
10.4 |
|
Form of Revised Letter Agreement for Change in Control Severance
Benefit Program dated August 3, 2009 between the registrant and each
of the following executive officers: Scott A. Bibaud, Neil Kim,
Thomas F. Lagatta, Daniel A. Marotta, Robert A. Rango, and Nariman
Yousefi. |
|
|
|
10.5 |
|
Revised Letter Agreement for Change in Control Severance Benefit
Program dated August 3, 2009 between the registrant and Robert L.
Tirva. |
|
|
|
10.6 |
|
2009 Base Salary Increase for Henry Samueli, effective July 24, 2009. |
|
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|
31 |
|
Certifications of the Chief Executive Officer and Chief Financial
Officer, as required pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
|
|
|
32 |
|
Certifications of the Chief Executive Officer and Chief Financial
Officer, as required pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 and furnished herewith pursuant to SEC Release No.
33-8238. |
78
|
|
|
Exhibit |
|
|
Number |
|
Description |
101.INS* |
|
XBRL Instance Document |
|
|
|
101.SCH* |
|
XBRL Taxonomy Extension Schema Document |
|
|
|
101.CAL* |
|
XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
101.LAB* |
|
XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
101.PRE* |
|
XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
101.DEF* |
|
XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
|
|
Indicates management contract or compensatory plan or arrangement. |
|
* |
|
Pursuant to applicable securities laws and regulations, we are deemed to have complied with
the reporting obligation relating to the submission of interactive data files in such exhibits
and are not subject to liability under any anti-fraud provisions of the federal securities
laws as long as we have made a good faith attempt to comply with the submission requirements
and promptly amend the interactive data files after becoming aware that the interactive data
files fail to comply with the submission requirements. Users of this data are advised that,
pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are not
subject to liability. |
79
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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|
BROADCOM CORPORATION, |
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|
a California corporation |
|
|
|
|
(Registrant) |
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|
|
|
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|
|
|
/s/ Eric K. Brandt
Eric K. Brandt
|
|
|
|
|
Senior Vice President and Chief Financial Officer |
|
|
|
|
(Principal Financial Officer) |
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|
|
|
|
|
|
|
|
/s/ Robert L. Tirva |
|
|
|
|
|
|
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|
|
Robert L. Tirva |
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Vice President and Corporate Controller |
|
|
|
|
(Principal Accounting Officer) |
|
|
October 22, 2009
80
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
Number |
|
Description |
10.1
|
|
Third Amendment dated August 3, 2009 to Letter Agreement between the
registrant and Scott A. McGregor. |
|
|
|
10.2
|
|
Second Amendment dated August 3, 2009 to Letter Agreement between
the registrant and Eric K. Brandt. |
|
|
|
10.3
|
|
Amendment dated August 3, 2009 to Letter Agreement between the
registrant and Arthur Chong. |
|
|
|
10.4
|
|
Form of Revised Letter Agreement for Change in Control Severance
Benefit Program dated August 3, 2009 between the registrant and each
of the following executive officers: Scott A. Bibaud, Neil Kim,
Thomas F. Lagatta, Daniel A. Marotta, Robert A. Rango, and Nariman
Yousefi. |
|
|
|
10.5
|
|
Revised Letter Agreement for Change in Control Severance Benefit
Program dated August 3, 2009 between the registrant and Robert L.
Tirva. |
|
|
|
10.6
|
|
2009 Base Salary Increase for Henry Samueli, effective July 24, 2009. |
|
|
|
31
|
|
Certifications of the Chief Executive Officer and Chief Financial
Officer, as required pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
|
|
|
32
|
|
Certifications of the Chief Executive Officer and Chief Financial
Officer, as required pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 and furnished herewith pursuant to SEC Release No.
33-8238. |
|
|
|
101.INS*
|
|
XBRL Instance Document |
|
|
|
101.SCH*
|
|
XBRL Taxonomy Extension Schema Document |
|
|
|
101.CAL*
|
|
XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
101.LAB*
|
|
XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
101.PRE*
|
|
XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
101.DEF*
|
|
XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
|
|
Indicates management contract or compensatory plan or arrangement. |
|
* |
|
Pursuant to applicable securities laws and regulations, we are deemed to have complied with
the reporting obligation relating to the submission of interactive data files in such exhibits
and are not subject to liability under any anti-fraud provisions of the federal securities
laws as long as we have made a good faith attempt to comply with the submission requirements
and promptly amend the interactive data files after becoming aware that the interactive data
files fail to comply with the submission requirements. Users of this data are advised that,
pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are not
subject to liability. |