e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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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, 2011
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 þ
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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) |
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, 2011 the registrant had 486 million shares of Class A common stock,
$0.0001 par value, and 53 million shares of Class B common stock, $0.0001 par value, outstanding.
BROADCOM CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
TABLE OF CONTENTS
Broadcom® and the pulse logo are among the trademarks of Broadcom Corporation
and/or its affiliates in the United States, certain other countries and/or the EU. Any other
trademarks or trade names mentioned are the property of their respective owners.
© 2011 Broadcom Corporation. All rights reserved.
1
PART I. FINANCIAL INFORMATION
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Item 1. |
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Financial Statements |
BROADCOM CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
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September 30, |
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December 31, |
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2011 |
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2010 |
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(In millions) |
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ASSETS
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Current assets: |
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Cash and cash equivalents |
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$ |
2,333 |
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$ |
1,622 |
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Short-term marketable securities |
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726 |
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1,035 |
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Accounts receivable, net |
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817 |
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820 |
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Inventory |
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491 |
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598 |
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Prepaid expenses and other current assets |
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125 |
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109 |
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Total current assets |
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4,492 |
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4,184 |
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Property and equipment, net |
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339 |
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266 |
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Long-term marketable securities |
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1,184 |
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1,401 |
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Goodwill |
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1,796 |
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1,677 |
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Purchased intangible assets, net |
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427 |
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366 |
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Other assets |
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58 |
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50 |
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Total assets |
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$ |
8,296 |
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$ |
7,944 |
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LIABILITIES AND SHAREHOLDERS EQUITY
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Current liabilities: |
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Accounts payable |
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$ |
510 |
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$ |
604 |
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Wages and related benefits |
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169 |
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208 |
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Deferred revenue and income |
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28 |
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55 |
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Accrued liabilities |
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524 |
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404 |
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Total current liabilities |
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1,231 |
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1,271 |
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Long-term debt |
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698 |
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697 |
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Other long-term liabilities |
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202 |
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150 |
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Commitments and contingencies |
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Shareholders equity: |
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Common stock |
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Additional paid-in capital |
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11,701 |
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11,994 |
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Accumulated deficit |
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(5,504 |
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(6,177 |
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Accumulated other comprehensive income (loss) |
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(32 |
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9 |
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Total shareholders equity |
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6,165 |
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5,826 |
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Total liabilities and shareholders equity |
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$ |
8,296 |
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$ |
7,944 |
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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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2011 |
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2010 |
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2011 |
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2010 |
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(In millions, except per share data) |
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Net revenue: |
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Product revenue |
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$ |
1,902 |
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$ |
1,749 |
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$ |
5,396 |
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$ |
4,700 |
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Income from Qualcomm Agreement |
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52 |
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52 |
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155 |
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155 |
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Licensing revenue |
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3 |
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5 |
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18 |
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18 |
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Total net revenue |
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1,957 |
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1,806 |
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5,569 |
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4,873 |
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Costs and expenses: |
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Cost of product revenue |
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960 |
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872 |
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2,732 |
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2,329 |
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Research and development |
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502 |
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448 |
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1,504 |
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1,290 |
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Selling, general and administrative |
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164 |
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144 |
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525 |
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421 |
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Amortization of purchased intangible assets |
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8 |
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5 |
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23 |
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13 |
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Impairments of long-lived assets |
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9 |
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2 |
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92 |
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2 |
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Restructuring costs, net |
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17 |
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17 |
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Settlement costs (gains), net |
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27 |
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(23 |
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4 |
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Charitable contribution |
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25 |
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Total operating costs and expenses |
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1,687 |
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1,471 |
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4,895 |
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4,059 |
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Income from operations |
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270 |
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335 |
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674 |
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814 |
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Interest income (expense), net |
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(1 |
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2 |
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(1 |
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7 |
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Other income (expense), net |
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7 |
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(1 |
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7 |
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4 |
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Income before income taxes |
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276 |
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336 |
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680 |
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825 |
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Provision for income taxes |
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6 |
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8 |
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7 |
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9 |
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Net income |
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$ |
270 |
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$ |
328 |
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$ |
673 |
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$ |
816 |
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Net income per share (basic) |
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$ |
0.50 |
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$ |
0.64 |
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$ |
1.25 |
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$ |
1.63 |
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Net income per share (diluted) |
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$ |
0.48 |
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$ |
0.60 |
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$ |
1.19 |
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$ |
1.52 |
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Weighted average shares (basic) |
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537 |
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509 |
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537 |
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502 |
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Weighted average shares (diluted) |
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558 |
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544 |
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564 |
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537 |
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Dividends per share |
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$ |
0.09 |
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$ |
0.08 |
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$ |
0.27 |
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$ |
0.24 |
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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:
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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2011 |
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2010 |
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2011 |
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2010 |
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(In millions) |
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Cost of product revenue |
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$ |
6 |
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$ |
5 |
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$ |
19 |
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$ |
17 |
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Research and development |
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85 |
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80 |
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284 |
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253 |
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Selling, general and administrative |
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30 |
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28 |
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99 |
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89 |
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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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2011 |
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2010 |
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(In millions) |
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Operating activities |
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Net income |
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$ |
673 |
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$ |
816 |
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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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79 |
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58 |
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Stock-based compensation expense: |
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Stock options and other awards |
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99 |
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87 |
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Restricted stock units |
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303 |
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272 |
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Acquisition-related items: |
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Amortization of purchased intangible assets |
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65 |
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36 |
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Impairments of long-lived assets |
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92 |
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2 |
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Non-cash settlement gain |
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(14 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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15 |
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(284 |
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Inventory |
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137 |
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(165 |
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Prepaid expenses and other assets |
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(33 |
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35 |
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Accounts payable |
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(99 |
) |
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129 |
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Deferred revenue and income |
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(28 |
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(28 |
) |
Accrued settlement costs |
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31 |
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(166 |
) |
Other accrued and long-term liabilities |
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36 |
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127 |
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Net cash provided by operating activities |
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1,356 |
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919 |
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Investing activities |
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Net purchases of property and equipment |
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(141 |
) |
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(82 |
) |
Net cash paid for acquired companies |
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(347 |
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(150 |
) |
Purchases of strategic investments |
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(8 |
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Purchases of marketable securities |
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(2,533 |
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(1,417 |
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Proceeds from sales and maturities of marketable securities |
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3,056 |
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723 |
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Net cash provided by (used in) investing activities |
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35 |
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(934 |
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Financing activities |
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Repurchases of Class A common stock |
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(670 |
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(275 |
) |
Dividends paid |
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(145 |
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(121 |
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Payment of assumed debt |
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(15 |
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Proceeds from issuance of common stock |
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258 |
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372 |
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Minimum tax withholding paid on behalf of employees for restricted stock units |
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(123 |
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(97 |
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Net cash used in financing activities |
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(680 |
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(136 |
) |
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Increase (decrease) in cash and cash equivalents |
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711 |
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(151 |
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Cash and cash equivalents at beginning of period |
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1,622 |
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1,397 |
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Cash and cash equivalents at end of period |
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$ |
2,333 |
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$ |
1,246 |
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See accompanying notes.
4
BROADCOM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2011
1. Summary of Significant Accounting Policies
Our Company
Broadcom Corporation (including our subsidiaries, referred to collectively in this Report as
Broadcom, we, our and us) is a global leader and innovator in semiconductor solutions for
wired and wireless communications. Our products seamlessly deliver voice, video, data and
multimedia connectivity in the home, office and mobile environment. We provide the industrys
broadest portfolio of state-of-the-art system-on-a-chip and embedded software solutions.
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, 2010, included in our Annual Report on
Form 10-K filed with the SEC February 2, 2011.
The interim unaudited 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,
2011 and December 31, 2010, and our consolidated results of operations for the three and nine
months ended September 30, 2011 and 2010 and cash flows for the nine months ended September 30,
2011 and 2010. The results of operations for the three and nine months ended September 30, 2011 are
not necessarily indicative of the results to be expected for future quarters or the full year.
Use of Estimates
The preparation of financial statements in accordance with GAAP 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 or 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
We derive revenue principally from sales of integrated circuit products, royalties and license
fees for our intellectual property and software and related services. The timing of revenue
recognition and the amount of revenue actually recognized for each arrangement depends upon a
variety of factors, including the specific terms of each arrangement and the nature of our
deliverables and obligations. Determination of the appropriate amount of revenue recognized
involves judgments and estimates that we believe are reasonable, but actual results may differ from
our estimates. We recognize product revenue when all of the following criteria are met: (i)
persuasive evidence of an
5
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. 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 for unclaimed rebate amounts as
specific rebate programs contractually end and 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.
Multiple Element Arrangements Excluding Software
We occasionally enter into revenue arrangements that contain multiple deliverables. Judgment
is required to properly identify the accounting units of the multiple deliverable transactions and
to determine the manner in which revenue should be allocated among the accounting units. Moreover,
judgment is used in interpreting the commercial terms and determining when all criteria of revenue
recognition have been met for each deliverable in order for revenue recognition to occur in the
appropriate accounting period. While changes in the allocation of the arrangement consideration
between the units of accounting will not affect the amount of total revenue recognized for a
particular sales arrangement, any material changes in these allocations could impact the timing of
revenue recognition, which could affect our results of operations. When we enter into an
arrangement that includes multiple elements, the allocation of value to each element is derived
based on managements best estimate of selling price when vendor specific evidence or third party
evidence is unavailable.
Distributor Revenue
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 fixed
and determinable revenue recognition criterion 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 and such customer has taken title and the risk of loss.
Software, Royalties and Cancellation Fee Revenue
Revenue from software licenses is recognized when all of the software revenue recognition
criteria are met and, if applicable, when vendor specific objective evidence, or 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 support
period. 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 in arrears on a quarterly basis, based upon reports received
from licensees during the period, unless collectability 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.
Licensing Revenue
We license or otherwise provide rights to use portions of our intellectual property, which
includes certain patent rights essential to and/or utilized in the manufacture and sale of certain
wireless products. Licensees typically pay a license fee in one or more installments and ongoing
royalties based on their sales of products incorporating or using our licensed intellectual
property. License fees are recognized over the estimated period of benefit to the licensee,
typically five to ten years. We recognize licensing revenue on the sale of patents when all of the
following criteria are met: (i) persuasive evidence of an arrangement exist, (ii) delivery has
occurred, (iii) the price to be paid by the
6
purchaser is fixed or determinable and (iv) collection of the resulting accounts receivable is
reasonably assured. These criteria are usually met at the time of patent transfer. We recognize
royalty revenues based on royalties reported by licensees and when other revenue recognition
criteria are met, which is generally a quarter in arrears from the period earned.
Income from the Qualcomm Agreement
On April 26, 2009 we entered into a four-year Settlement and Patent License and Non-Assert
Agreement, or the Qualcomm Agreement, with Qualcomm Incorporated, or Qualcomm. The Qualcomm
Agreement is a multiple element arrangement which includes: (i) an exchange of intellectual
property rights, including in certain circumstances, by a series of covenants not to assert claims
of patent infringement under future patents issued within one to four years of the execution date
of the agreement, (ii) the assignment of certain existing patents by Broadcom to Qualcomm with
Broadcom retaining a royalty-free license under these patents, and (iii) the settlement of all
outstanding litigation and claims between us and Qualcomm. The proceeds of the Qualcomm Agreement
were allocated amongst the principal elements of the transaction. A gain of $65 million from the
settlement of litigation was immediately recognized as a reduction in settlement costs that
approximates the value of awards determined by the United States District Court for the Central
District of California. The remaining consideration was predominantly associated with the transfer
of current and future intellectual property rights and is being recognized within net revenue over
the performance period of four years as a single unit of accounting. However this income will be
limited to the lesser of the cumulative straight-line amortization over the four year performance
period or the cumulative cash proceeds received.
Deferred Revenue and Income
We defer revenue and income 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.
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 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 an 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 less our expected dividend
yield. 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, the expected volatility of our stock price and the expected dividend yield. 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.
Fair Value of Financial Instruments
Our financial instruments consist principally of cash and cash equivalents, short- and
long-term marketable securities, accounts receivable, accounts payable and long-term debt. The fair
value of a financial instrument is the amount that would be received in an asset sale or paid to
transfer a liability in an orderly transaction between unaffiliated market participants. The fair
value of our long-term debt is determined by using estimated market prices. Assets and liabilities
measured at fair value are categorized based on whether or not the inputs are observable in the
market and the degree that the inputs are observable. The categorization of financial instruments
within the valuation hierarchy is based upon the lowest level of input that is significant to the
fair value measurement. The hierarchy is prioritized into three levels (with Level 3 being the
lowest) defined as follows:
Level 1: Inputs are based on quoted market prices for identical assets or liabilities in
active markets at the measurement date.
7
Level 2: Inputs include quoted prices for similar assets or liabilities in active markets
and/or quoted prices for identical or similar assets or liabilities in markets that are not
active near the measurement date.
Level 3: Inputs include managements best estimate of what market participants would use in
pricing the asset or liability at the measurement date. The inputs are unobservable in the
market and significant to the instruments valuation.
The fair value of the majority of our cash equivalents and marketable securities was
determined based on Level 1 inputs. The fair value of certain marketable securities and our
long-term debt were determined based on Level 2 inputs. We do not have any marketable securities
in the Level 3 category. We believe that the recorded values of all our other financial
instruments approximate their current fair values because of their nature and respective relatively
short maturity dates or durations.
Cash, Cash Equivalents and Marketable Securities
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. The cost
of these investments approximates their fair value. We maintain an investment portfolio of various
security holdings, types and maturities. We define marketable securities as income yielding
securities that can be readily converted into cash. Marketable securities short-term and long-term
classifications are based on remaining maturities at each reporting period. Examples of marketable
securities include U.S. Treasury and agency obligations, commercial paper and corporate notes and
bonds. We place our cash investments in instruments that meet credit quality standards and
concentration exposures as specified in our investment policy. It is our policy to invest in
instruments that have a final maturity not to exceed three years and a portfolio weighted average
maturity not to exceed 18 months. We do not use derivative financial instruments.
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.
Goodwill and Other 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 acquired net tangible and intangible assets. Other
long-lived assets primarily represent purchased intangible assets including developed technology,
customer relationships and in-process research and development, or IPR&D. We currently amortize our
intangible assets with definitive lives over periods ranging from one to fifteen years using a
method that reflects the pattern in which the economic benefits of the intangible asset are
consumed or otherwise used or, if that pattern cannot be reliably determined, using a straight-line
amortization method. We capitalize IPR&D projects acquired as part of a business combination. On
completion of each project, IPR&D assets are reclassified to developed technology and amortized
over their estimated useful lives. We test for the impairment of long-lived assets, including other
purchased intangible assets, when indicators of impairment, such as reductions in demand, the
abandonment of IPR&D projects or significant economic slowdowns in the semiconductor industry, are
present.
Guarantees and Indemnifications
In some agreements to which we are a party, we have agreed to indemnify the other party for
certain matters, including, but not limited to 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.
8
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
therefor have been recorded in the accompanying unaudited condensed consolidated financial
statements. However, the maximum potential amount of the future payments we could be required to
make under these indemnification obligations could be significant.
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, judgments, fines and settlements, paid by such
individual. 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 generally limit our exposure and enable us to recover a portion of the amounts
paid with respect to such obligations.
Recent Accounting Pronouncements
In June 2011 the Financial Accounting Standards Board, or FASB, issued guidance regarding the
presentation of comprehensive income. The new standard requires the presentation of comprehensive
income, the components of net income and the components of other comprehensive income either in a
single continuous statement of comprehensive income or in two separate but consecutive statements.
The new standard also requires presentation of adjustments for items that are reclassified from
other comprehensive income to net income in the statement where the components of net income and
the components of other comprehensive income are presented. The updated guidance is effective on a
retrospective basis for financial statements issued for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2011. The adoption of this guidance will not have
a material impact on our financial statements.
In May 2011 the FASB issued additional guidance on fair value measurements that clarifies the
application of existing guidance and disclosure requirements, changes certain fair value
measurement principles and requires additional disclosures about fair value measurements. The
updated guidance is effective on a prospective basis for financial statements issued for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2011. The
adoption of this guidance will not have a material impact on our financial statements.
In September 2011 the FASB issued new accounting guidance intended to simplify goodwill
impairment testing. Entities will be allowed to perform a qualitative assessment on goodwill
impairment to determine whether a quantitative assessment is necessary. This guidance is effective
for goodwill impairment tests performed in interim and annual periods for fiscal years beginning
after December 15, 2011. Early adoption is permitted. The adoption of this guidance will not have
a material impact on our financial statements.
2. Supplemental Financial Information
Net Revenue
The following table presents details of our product revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Product sales made through direct sales force (1) |
|
|
76.6 |
% |
|
|
77.6 |
% |
|
|
76.9 |
% |
|
|
78.2 |
% |
Product sales made through distributors(2) |
|
|
23.4 |
|
|
|
22.4 |
|
|
|
23.1 |
|
|
|
21.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes 8.6% and 8.3% of product sales maintained under hubbing arrangements with certain of
our customers in the three months ended September 30, 2011 and 2010, respectively, and 9.0%
and 6.6% in the nine months ended September 30, 2011 and 2010, respectively. |
9
|
|
|
(2) |
|
Includes 8.1% and 8.6% of product sales maintained under fulfillment distributor arrangements
in the three months ended September 30, 2011 and 2010, respectively, and 7.3% and 7.4% in the
nine months ended September 30, 2011 and 2010, respectively. |
Income from the Qualcomm Agreement is expected to be recognized in the remainder of 2011
through 2013 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
2012 |
|
2013 |
|
Thereafter |
|
Total |
|
|
(In millions) |
Income from Qualcomm Agreement |
|
$ |
52 |
|
|
$ |
186 |
|
|
$ |
86 |
|
|
$ |
|
|
|
$ |
324 |
|
Inventory
The following table presents details of our inventory:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In millions) |
|
Work in process |
|
$ |
194 |
|
|
$ |
279 |
|
Finished goods |
|
|
297 |
|
|
|
319 |
|
|
|
|
|
|
|
|
|
|
$ |
491 |
|
|
$ |
598 |
|
|
|
|
|
|
|
|
Property and Equipment
The following table presents details of our property and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
Useful Life |
|
2011 |
|
|
2010 |
|
|
|
(In years) |
|
(In millions) |
|
Leasehold improvements |
|
1 to 10 |
|
$ |
200 |
|
|
$ |
173 |
|
Office furniture and equipment |
|
3 to 7 |
|
|
35 |
|
|
|
29 |
|
Machinery and equipment |
|
3 to 5 |
|
|
388 |
|
|
|
313 |
|
Computer software and equipment |
|
2 to 4 |
|
|
128 |
|
|
|
142 |
|
Construction in progress |
|
N/A |
|
|
17 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
768 |
|
|
|
671 |
|
Less accumulated depreciation and amortization |
|
|
|
|
(429 |
) |
|
|
(405 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
339 |
|
|
$ |
266 |
|
|
|
|
|
|
|
|
|
|
Goodwill
The following tables summarize the activity related to the carrying value of our goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable Segments |
|
|
|
|
|
|
Broadband |
|
|
Mobile & |
|
|
Infrastructure & |
|
|
|
|
|
|
Communications |
|
|
Wireless |
|
|
Networking |
|
|
Consolidated |
|
|
|
(In millions) |
|
Goodwill at December 31, 2010(1) |
|
$ |
595 |
|
|
$ |
447 |
|
|
$ |
623 |
|
|
$ |
1,665 |
|
Goodwill recorded in connection with
acquisitions |
|
|
|
|
|
|
23 |
|
|
|
111 |
|
|
|
134 |
|
Other |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill at September 30, 2011 |
|
$ |
597 |
|
|
$ |
470 |
|
|
$ |
734 |
|
|
$ |
1,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects of foreign currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill at September 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Does not include the effects of $12 million in foreign currency translation. |
10
Purchased Intangible Assets
The following table presents details of our purchased intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2011 |
|
|
December 31, 2010 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Gross |
|
|
Amortization |
|
|
Net |
|
|
Gross |
|
|
Amortization |
|
|
Net |
|
|
|
(In millions) |
|
Developed technology |
|
$ |
587 |
|
|
$ |
(270 |
) |
|
$ |
317 |
|
|
$ |
481 |
|
|
$ |
(236 |
) |
|
$ |
245 |
|
In-process research and
development |
|
|
59 |
|
|
|
|
|
|
|
59 |
|
|
|
56 |
|
|
|
|
|
|
|
56 |
|
Customer relationships |
|
|
173 |
|
|
|
(110 |
) |
|
|
63 |
|
|
|
154 |
|
|
|
(102 |
) |
|
|
52 |
|
Customer backlog |
|
|
10 |
|
|
|
(10 |
) |
|
|
|
|
|
|
10 |
|
|
|
(8 |
) |
|
|
2 |
|
Other |
|
|
13 |
|
|
|
(9 |
) |
|
|
4 |
|
|
|
11 |
|
|
|
(9 |
) |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
842 |
|
|
$ |
(399 |
) |
|
$ |
443 |
|
|
$ |
712 |
|
|
$ |
(355 |
) |
|
$ |
357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects of foreign
currency translation |
|
|
|
|
|
|
|
|
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
427 |
|
|
|
|
|
|
|
|
|
|
$ |
366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In September 2011 we recorded a purchased intangible impairment charge of $9 million primarily
related to our acquisition of Teknovus, Inc. in 2010. The primary factor contributing to this
impairment charge was a reduction in the forecasted cash flows related to this networking business.
In June 2011 we recorded a purchased intangible impairment charge of $74 million related to our
acquisition of Beceem Communications, Inc. in 2010. The primary factor contributing to this
impairment charge was a reduction in the forecasted cash flows related to WiMAX products, as
wireless service providers have accelerated their adoption of competing Long Term Evolution, or
LTE, products. In March 2011 we recorded an impairment charge of $9 million primarily related to a
technology license that was acquired in 2008. The primary factor contributing to this impairment
charge was the continued reduction in the forecasted cash flows for our Blu-ray Disc business. In
the three and nine months ended September 30, 2010 we recorded an impairment charge to developed
technology of $2 million.
In determining the amount of these impairment charges we calculated fair values as of the
impairment date for acquired developed technology, in-process research and development and customer
relationships. The fair value for the first two assets was determined using the multiple period
excess earnings method, which method is described below in Note 3. The fair value of acquired
customer relationships was based on the benefit derived from the incremental revenue and related
cash flow as a direct result of the customer relationship. The fair values were determined using
significant unobservable inputs categorized as Level 3 inputs.
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, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
Cost of product revenue |
|
$ |
13 |
|
|
$ |
7 |
|
|
$ |
42 |
|
|
$ |
23 |
|
Other operating expenses |
|
|
8 |
|
|
|
5 |
|
|
|
23 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
21 |
|
|
$ |
12 |
|
|
$ |
65 |
|
|
$ |
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
The following table presents details of the amortization of existing purchased intangible
assets, including IPR&D, that is currently estimated to be expensed in the remainder of 2011 and
thereafter:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased Intangible Asset Amortization by Year |
|
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2015 |
|
|
Thereafter |
|
|
Total |
|
|
|
(In millions) |
|
Cost of product
revenue |
|
$ |
12 |
|
|
$ |
78 |
|
|
$ |
73 |
|
|
$ |
61 |
|
|
$ |
47 |
|
|
$ |
92 |
|
|
$ |
363 |
|
Other operating
expenses |
|
|
7 |
|
|
|
28 |
|
|
|
10 |
|
|
|
4 |
|
|
|
4 |
|
|
|
11 |
|
|
|
64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
19 |
|
|
$ |
106 |
|
|
$ |
83 |
|
|
$ |
65 |
|
|
$ |
51 |
|
|
$ |
103 |
|
|
$ |
427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Liabilities
The following table presents details of our accrued liabilities:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In millions) |
|
Accrued rebates |
|
$ |
340 |
|
|
$ |
270 |
|
Accrued royalities |
|
|
30 |
|
|
|
19 |
|
Accrued settlement charges |
|
|
50 |
|
|
|
17 |
|
Accrued legal costs |
|
|
19 |
|
|
|
28 |
|
Accrued taxes |
|
|
9 |
|
|
|
14 |
|
Warranty reserve |
|
|
14 |
|
|
|
13 |
|
Restructuring liabilities |
|
|
15 |
|
|
|
|
|
Other |
|
|
47 |
|
|
|
43 |
|
|
|
|
|
|
|
|
|
|
$ |
524 |
|
|
$ |
404 |
|
|
|
|
|
|
|
|
Other Long-Term Liabilities
The following table presents details of our other long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In millions) |
|
Deferred rent |
|
$ |
46 |
|
|
$ |
39 |
|
Accrued taxes |
|
|
30 |
|
|
|
29 |
|
Deferred tax liabilities |
|
|
71 |
|
|
|
35 |
|
Accrued settlement charges |
|
|
36 |
|
|
|
38 |
|
Other long-term liabilities |
|
|
19 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
$ |
202 |
|
|
$ |
150 |
|
|
|
|
|
|
|
|
12
Accrued Rebate Activity
The following table summarizes the activity related to accrued rebates:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In millions) |
|
Beginning balance |
|
$ |
270 |
|
|
$ |
162 |
|
Charged as a reduction of revenue |
|
|
498 |
|
|
|
381 |
|
Reversal of unclaimed rebates |
|
|
(11 |
) |
|
|
(3 |
) |
Payments |
|
|
(417 |
) |
|
|
(227 |
) |
|
|
|
|
|
|
|
Ending balance |
|
$ |
340 |
|
|
$ |
313 |
|
|
|
|
|
|
|
|
We recorded rebates to certain customers of $184 million and $145 million in the three months
ended September 30, 2011 and 2010, respectively.
Warranty Reserve Activity
The following table summarizes activity related to the warranty reserve:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In millions) |
|
Beginning balance |
|
$ |
13 |
|
|
$ |
10 |
|
Charged to costs and expenses |
|
|
8 |
|
|
|
1 |
|
Payments |
|
|
(7 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
Ending balance |
|
$ |
14 |
|
|
$ |
8 |
|
|
|
|
|
|
|
|
We recorded a net charge and a net reversal to costs and expenses of $2 million and $4 million
in the three months ended September 30, 2011 and 2010, respectively.
Restructuring Activity
As part of our regular
portfolio management review process and in light of our decision to significantly reduce our investment in our digital
television and Blu-ray Disc® lines of business within
our Broadband Communications operating segment, in September 2011 we began implementing a restructuring plan to
reduce our worldwide headcount by approximately 300 employees. We recorded $17 million in restructuring costs
in the three months ended September 30, 2011, of which $15 million was related to severance and
other charges associated with our reduction in workforce across multiple locations and functions,
and $2 million was related to the closure of one of our facilities. Most of these expenses will be
paid in the three months ended December 31, 2011. We currently expect to complete this plan by the
end of 2011 and will record additional costs of approximately $6 million in the three months ended
December 31, 2011, primarily for additional facilities closures.
13
The following table summarizes activity related to our current and long-term restructuring
liabilities during the nine months ended September 30, 2011:
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, 2011 |
|
|
|
(In millions) |
|
Beginning balance |
|
$ |
|
|
Charged to expense |
|
|
17 |
|
Reversal of restructuring costs |
|
|
|
|
Payments and other |
|
|
(2 |
) |
|
|
|
|
Ending balance |
|
$ |
15 |
|
|
|
|
|
Settlement Costs (Gains)
In the three and nine months ended September 30, 2011 we recorded net settlement costs of $27
million and net settlement gains of $23 million, primarily related to patent infringement claims
and the Derivative Settlement. We recorded settlement charges of $4 million in the nine months
ended September 30, 2010. See Note 9.
Charitable Contribution
In June 2011 we contributed $25 million to the Broadcom Foundation to support science,
technology, engineering and mathematics programs, as well as a broad range of community services.
This payment was recorded as an operating expense in our unaudited condensed consolidated
statements of income in the nine months ended September 30, 2011. Approximately $2 million of the
$25 million contribution came from Dr. Henry Samueli, our
Chief Technical Officer and member of the Board of Directors, who made such payment to Broadcom Corporation
in connection with the settlement of the shareholder derivative litigation as further described in
Note 9.
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, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
(In millions, except per share data) |
|
Numerator: Net income |
|
$ |
270 |
|
|
$ |
328 |
|
|
$ |
673 |
|
|
$ |
816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for net income per share (basic) |
|
|
537 |
|
|
|
509 |
|
|
|
537 |
|
|
|
502 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock awards |
|
|
21 |
|
|
|
35 |
|
|
|
27 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for net income per share (diluted) |
|
|
558 |
|
|
|
544 |
|
|
|
564 |
|
|
|
537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share (basic) |
|
$ |
0.50 |
|
|
$ |
0.64 |
|
|
$ |
1.25 |
|
|
$ |
1.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share (diluted) |
|
$ |
0.48 |
|
|
$ |
0.60 |
|
|
$ |
1.19 |
|
|
$ |
1.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share (diluted) does not include the effect of anti-dilutive common share
equivalents resulting from outstanding equity awards. There were 23 million and 30 million
anti-dilutive common share equivalents in the three months ended September 30, 2011 and 2010,
respectively, and 21 million and 34 million anti-dilutive common share equivalents in the nine
months ended September 30, 2011 and 2010, respectively.
Supplemental Cash Flow Information
In the nine months ended September 30, 2011 we paid $1 million related to share repurchases
that had not settled by December 31, 2010. In the nine months ended September 30, 2011 we received
$4 million related to stock option exercises that had not settled by December 31, 2010. In the
nine months ended September 30, 2011 we accrued $2
14
million related to stock option exercises that had not settled by September 30, 2011. In the
nine months ended September 30, 2011, we paid $12 million for capital equipment that was accrued as
of December 31, 2010 and had billings of $10 million for capital equipment that were accrued but
not yet paid as of September 30, 2011.
3. Business Combinations
In May 2011, we completed our acquisition of SC Square Ltd., a leading security software
developer for $40 million, exclusive of cash acquired. The purchase price was paid in cash, with a
portion of the consideration placed into escrow pursuant to the terms of the acquisition agreement.
In April 2011, we completed our acquisition of Provigent Inc., a privately-held company that
provides highly integrated, high performance, mixed signal semiconductors for microwave backhaul
systems. In connection with the acquisition, we paid $314 million, exclusive of cash acquired, to
acquire all of the outstanding shares of capital stock and other equity rights of Provigent. The
purchase price was paid in cash, except that a portion attributable to certain unvested employee
stock options was paid in the form of Broadcom equity awards. The equity awards had a fair value of
$4 million, of which substantially all will be recognized as stock-based compensation expense over
the next three years. A portion of the cash consideration was placed into escrow pursuant to the
terms of the acquisition agreement.
Our primary reasons for these acquisitions were to expand our addressable market in the Mobile
& Wireless and Infrastructure & Networking markets, 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 allocated the purchase price of these acquisitions to tangible assets, liabilities and
identifiable intangible assets acquired based on their estimated fair values. The excess of the
purchase price over the aggregate fair values was recorded as goodwill. The principal factor that
resulted in recognition of goodwill was that the purchase price for the acquisitions was based in
part on cash flow projections assuming the integration of any acquired technology and products with
our products, which is of considerably greater value than utilizing the acquired companys
technology or product on a standalone basis. The fair value assigned to identifiable intangible
assets acquired was based on estimates and assumptions made by management at the time of
acquisition. Intangible assets are amortized using a method that reflects the pattern in which the
economic benefits of the intangible asset are consumed or otherwise used or, if that pattern cannot
be reliably determined, using a straight-line amortization method.
For these acquisitions the purchase price has been allocated to the tangible and intangible
assets acquired and liabilities assumed on the basis of their respective estimated fair values on
the acquisition date. Based upon those calculations, the purchase prices for the acquisitions were
allocated as follows:
15
|
|
|
|
|
|
|
2011 |
|
|
|
Acquisitions |
|
|
|
(In millions) |
|
Fair Market Values |
|
|
|
|
Cash and cash equivalents |
|
$ |
10 |
|
Short-term marketable securities |
|
|
1 |
|
Accounts receivable, net |
|
|
12 |
|
Inventory |
|
|
30 |
|
Prepaid and other current assets |
|
|
4 |
|
Property and equipment, net |
|
|
3 |
|
Goodwill |
|
|
134 |
|
Purchased intangible assets |
|
|
233 |
|
|
|
|
|
Total assets acquired |
|
|
427 |
|
Accounts payable |
|
|
7 |
|
Wages and related benefits |
|
|
4 |
|
Accrued liabilities |
|
|
2 |
|
Long-term liabilities |
|
|
57 |
|
|
|
|
|
Total liabilities assumed |
|
|
70 |
|
|
|
|
|
Purchase price allocation |
|
$ |
357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful |
|
2011 |
|
|
|
Life |
|
Acquisitions |
|
|
|
(In years) |
|
(In millions) |
|
Purchased Intangible Assets: |
|
|
|
|
|
|
Developed technology |
|
4 - 13 |
|
$ |
148 |
|
In-process research and development |
|
8 - 10 |
|
|
45 |
|
Customer relationships |
|
3 - 8 |
|
|
37 |
|
Other |
|
1 - 10 |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
$ |
233 |
|
|
|
|
|
|
|
Purchased Intangible Assets
Developed technology represents patented technology and completed technology. Patented
technology is the fundamental technology that survives multiple product iterations, while completed
technology is specific to certain products acquired: both of these technologies have passed
technological feasibility. We generally use a relief-from-royalty method to value patented
technology, based on market royalties for similar fundamental technologies. The relief-from-royalty
method estimates the cost savings that accrue to the owner of an intangible asset that would
otherwise be payable as royalties or license fees on revenues earned through the use of the asset.
The royalty rate used is based on an analysis of empirical, market-derived royalty rates for
guideline intangible assets. Typically, revenue is projected over the expected remaining useful
life of the patented technology. The market-derived royalty rate is then applied to estimate the
royalty savings. To value completed technology, we generally use a multi-period excess earnings
approach which calculates the value based on the risk-adjusted present value of the cash flows
specific to the products, allowing for a reasonable return.
The fair value of the IPR&D for our acquisitions was determined using the income approach.
Under the income approach, the expected future cash flows from each project under development are
estimated and discounted to their net present values at an appropriate risk-adjusted rate of
return. Significant factors considered in the calculation of the rate of return are the weighted
average cost of capital, the return on assets, as well as the risks inherent in the development
process, including the likelihood of achieving technological success and market acceptance. Each
project was analyzed to determine the unique technological innovations, the existence and reliance
on patented technology, the existence of any alternative future use or current technological
feasibility, and the complexity, cost and time to complete the remaining development. Future cash
flows for each project were estimated based on
16
forecasted revenue and costs, taking into account the expected product life cycles, market
penetration and growth rates.
Customer relationships represent the fair value of future projected revenue that will be
derived from the sale of products to existing customers of the acquired companies.
In-Process Research and Development
We capitalized $45 million of IPR&D costs in 2011 related to our Provigent acquisition. Upon
completion of each project, the related IPR&D assets will be reclassified to developed technology
and subsequently amortized over their estimated useful lives. If any of the projects are abandoned,
we will be required to impair the related IPR&D asset.
We believe the amounts recorded as IPR&D, as well as developed technology, represented the
fair values and approximate the amounts a market participant would pay for these projects as of the
respective acquisition dates.
The following table summarizes the significant assumptions underlying the valuations of IPR&D
at the acquisition date for our Provigent acquisition completed in 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
Average |
|
|
|
|
|
Risk |
|
|
|
|
|
|
|
|
Estimated |
|
Estimated |
|
Estimated |
|
Adjusted |
|
|
|
|
|
|
|
|
Percent |
|
Time to |
|
Cost to |
|
Discount |
|
|
Company Acquired |
|
Development Projects |
|
Complete |
|
Complete |
|
Complete |
|
Rate |
|
IPR&D |
|
|
|
|
|
|
|
|
|
|
(In years) |
|
(In millions) |
|
|
|
|
|
(In millions) |
Provigent, Inc. |
|
Microwave |
|
|
41 |
% |
|
|
2.1 |
|
|
$ |
74 |
|
|
|
21.0 |
% |
|
$ |
45 |
|
The assumptions consist primarily of expected completion dates for the IPR&D projects,
estimated costs to complete the projects, and revenue and expense projections for the products once
they have entered the market. Research and development costs to bring the products of the acquired
companies to technological feasibility are not expected to have a material impact on our results of
operations or financial condition. At September 30, 2011 all development projects from our
Provigent acquisition were still in process.
Contingent Consideration
In connection with certain of our acquisitions, additional cash consideration of up to $20
million may be paid to former shareholders upon satisfaction of certain future performance goals.
In connection with this contingent consideration, we originally recorded an estimated $1 million
liability. As of September 30, 2011, there have been no changes to our original estimates.
Supplemental Pro Forma Data (Unaudited)
The unaudited pro forma statement of income data below gives effect to our 2011 and 2010
acquisitions as if they had occurred at the beginning of the year prior to their respective
acquisition dates. The following data includes the amortization of purchased intangible assets and
acquired inventory valuation step-up, and stock-based compensation expense. 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 in
the periods noted above.
17
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In millions, except per share data) |
|
Pro forma net revenue |
|
$ |
5,592 |
|
|
$ |
4,987 |
|
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
653 |
|
|
$ |
745 |
|
|
|
|
|
|
|
|
Pro forma net income per share (basic) |
|
$ |
1.21 |
|
|
$ |
1.48 |
|
|
|
|
|
|
|
|
Pro forma net income per share (diluted) |
|
$ |
1.16 |
|
|
$ |
1.39 |
|
|
|
|
|
|
|
|
Pending Acquisition
In September 2011 we signed a definitive agreement to acquire NetLogic Microsystems, Inc., or
NetLogic, a publicly traded company that is a leader in high performance intelligent semiconductor
solutions for next generation networks. The expected purchase consideration is approximately $3.7
billion, net of cash assumed, based on the shares outstanding on September 11, 2011.
Under the agreement, each issued and outstanding share of NetLogic common stock (other than
(i) shares held by Broadcom, NetLogic or any of their respective wholly owned subsidiaries and (ii)
shares held by NetLogic stockholders who perfect their appraisal rights) will be converted into the
right to receive $50.00 in cash. The agreement further provides for, subject to certain limited
exceptions, (i) the assumption of all in-the-money options to acquire NetLogic common stock
outstanding immediately prior to the effective time of the Merger held by employees, (ii) the
cash-out of all in-the-money stock options held by non-employees, (iii) the conversion of all
unvested restricted stock units held by NetLogic employees into Broadcom restricted stock units and
(iv) the cash-out of all unvested restricted stock units held by persons other than NetLogic
employees.
The transaction has been approved by the Broadcom and NetLogic boards of directors and is
subject to customary closing conditions, including the receipt of regulatory
clearances and the approval of NetLogics stockholders. There are no financing contingencies
related to the acquisition. The transaction is expected to close in the first half of 2012.
18
4. Cash, Cash Equivalents and Marketable Securities
A summary of our cash, cash equivalents and short- and long-term marketable securities by
major security type follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term |
|
|
Long-Term |
|
|
|
|
|
|
Cash and |
|
|
Marketable |
|
|
Marketable |
|
|
|
|
|
|
Cash Equivalents |
|
|
Securities |
|
|
Securities |
|
|
Total |
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
September 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
110 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
110 |
|
Bank deposits |
|
|
1,530 |
|
|
|
|
|
|
|
1 |
|
|
|
1,531 |
|
Money market funds |
|
|
262 |
|
|
|
|
|
|
|
|
|
|
|
262 |
|
U.S. treasury and and agency obligations |
|
|
|
|
|
|
143 |
|
|
|
774 |
|
|
|
917 |
|
Commercial paper |
|
|
431 |
|
|
|
336 |
|
|
|
|
|
|
|
767 |
|
Corporate bonds |
|
|
|
|
|
|
239 |
|
|
|
395 |
|
|
|
634 |
|
Asset-backed securities and other |
|
|
|
|
|
|
8 |
|
|
|
14 |
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,333 |
|
|
$ |
726 |
|
|
$ |
1,184 |
|
|
$ |
4,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
103 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
103 |
|
Bank deposits |
|
|
455 |
|
|
|
|
|
|
|
|
|
|
|
455 |
|
Money market funds |
|
|
641 |
|
|
|
|
|
|
|
|
|
|
|
641 |
|
U.S. treasury and and agency obligations |
|
|
4 |
|
|
|
586 |
|
|
|
1,360 |
|
|
|
1,950 |
|
Commercial paper |
|
|
419 |
|
|
|
363 |
|
|
|
|
|
|
|
782 |
|
Corporate bonds |
|
|
|
|
|
|
86 |
|
|
|
41 |
|
|
|
127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,622 |
|
|
$ |
1,035 |
|
|
$ |
1,401 |
|
|
$ |
4,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the gross unrealized gains and losses and fair values for those
investments aggregated by major security type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
September 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury and and agency obligations |
|
$ |
917 |
|
|
$ |
1 |
|
|
$ |
(1 |
) |
|
$ |
917 |
|
Corporate bonds |
|
|
636 |
|
|
|
1 |
|
|
|
(3 |
) |
|
|
634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,553 |
|
|
$ |
2 |
|
|
$ |
(4 |
) |
|
$ |
1,551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury and and agency obligations |
|
$ |
1,953 |
|
|
$ |
2 |
|
|
$ |
(5 |
) |
|
$ |
1,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
The following table shows the fair value measurements for those investments aggregated by
major security type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Fair Value |
|
|
|
(In millions) |
|
September 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
110 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
110 |
|
Bank deposits |
|
|
1,531 |
|
|
|
|
|
|
|
|
|
|
|
1,531 |
|
Money market funds |
|
|
262 |
|
|
|
|
|
|
|
|
|
|
|
262 |
|
U.S. treasury and and agency
obligations |
|
|
917 |
|
|
|
|
|
|
|
|
|
|
|
917 |
|
Commercial paper |
|
|
|
|
|
|
767 |
|
|
|
|
|
|
|
767 |
|
Corporate bonds |
|
|
13 |
|
|
|
621 |
|
|
|
|
|
|
|
634 |
|
Asset-backed securities and other |
|
|
|
|
|
|
22 |
|
|
|
|
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,833 |
|
|
$ |
1,410 |
|
|
$ |
|
|
|
$ |
4,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
103 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
103 |
|
Bank deposits |
|
|
455 |
|
|
|
|
|
|
|
|
|
|
|
455 |
|
Money market funds |
|
|
641 |
|
|
|
|
|
|
|
|
|
|
|
641 |
|
U.S. treasury and and agency
obligations |
|
|
1,950 |
|
|
|
|
|
|
|
|
|
|
|
1,950 |
|
Commercial paper |
|
|
|
|
|
|
782 |
|
|
|
|
|
|
|
782 |
|
Corporate bonds |
|
|
20 |
|
|
|
107 |
|
|
|
|
|
|
|
127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,169 |
|
|
$ |
889 |
|
|
$ |
|
|
|
$ |
4,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no transfers between Level 1, Level 2 or Level 3 securities in the nine months
ended September 30, 2011. All of our long-term marketable securities had maturities of between one
and three years in duration at September 30, 2011. As of September 30, 2011, we had approximately
$1.21 billion of cash, cash equivalents, and short-term investments held by our foreign
subsidiaries.
At September 30, 2011 we had 180 investments that were in an unrealized loss position for less
than 12 months. Our gross unrealized losses of $4 million at September 30, 2011 were due to changes
in interest rates. We have determined that the gross unrealized losses on these investments at
September 30, 2011 are temporary in nature. We evaluate securities for other-than-temporary
impairment on a quarterly basis. Impairment is evaluated considering numerous factors, and their
relative significance varies depending on the situation. Factors considered 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 in order to
allow for an anticipated recovery in fair value.
5. Income Taxes
We recorded tax provisions of $6 million and $7 million for the three and nine months ended
September 30, 2011, respectively, and tax provisions of $8 million and $9 million for the three and
nine months ended September 30, 2010, respectively. Our effective tax rates were 2.2% and 1.0% for
the three and nine months ended September 30, 2011, respectively, and 2.4% and 1.1% for the three
and nine months ended September 30, 2010, 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 in the three and nine months ended September 30, 2011 and
2010, and tax benefits resulting primarily from the expiration of statutes of limitations for the
assessment of taxes in various foreign jurisdictions of $6 million for the nine months ended
September 30, 2011, and $7 million for the nine months ended September 30, 2010. As part of our
acquisition of Innovision Research & Technology plc, we recorded a tax provision of $3 million for
the three and nine months ended September 30, 2010 for certain acquired deferred tax assets. We
also recorded a tax benefit of approximately $3 million in the nine months ended September 30, 2010
resulting primarily from the March 22, 2010 decision in the U.S. Court of Appeals for the Ninth
Circuit case concerning Xilinx (as disclosed in prior periods). During the quarter ended June 30,
2011 we completed our analysis under Internal Revenue Code Sections 382 and 383 for our 2010
acquisition of Beceem Communications, Inc., and determined there was no resulting material
limitation on our ability to utilize the acquired net operating loss and tax credit carryforwards.
20
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 liabilities of $50 million and $17 million
at September 30, 2011 and December 31, 2010, respectively. The increase in net deferred tax
liabilities for the nine months ended September 30, 2011 primarily related to $43 million of net
deferred tax liabilities from our acquisition of Provigent Inc. in April 2011.
We file federal, state and foreign income tax returns in jurisdictions with varying statutes
of limitations. The 2007 through 2010 tax years generally remain subject to examination by federal
and most state tax authorities. In foreign jurisdictions, the 2002 through 2010 tax years generally
remain subject to examination by tax authorities.
On June 30, 2011 we concluded the Internal Revenue Service (IRS) examination of our income tax
returns for 2004 through 2006, executed a closing agreement covering the 2001 through 2006 tax
years, and agreed to certain adjustments for the 2001 through 2006 tax years, primarily related to
intercompany transfer pricing transactions. Those audit adjustments were offset by federal net
operating losses and credits, and did not result in any income tax expense or cash tax liability
for the Company. As a result of the IRS examination, taking into account effects on post-audit
periods, we reduced our federal net operating losses by approximately $620 million and we reduced
amounts relating to uncertain tax benefits by approximately $180 million as of September 30, 2011.
This reduction in federal net operating loss carryforwards was fully offset with a reduction in our
valuation allowance for deferred tax assets, and had no impact on our operating results or
financial position. We are currently calculating the reduction of our state net operating loss
carryforwards resulting from the IRS audit, and such reduction will be fully offset with a
corresponding reduction in our valuation allowance for deferred tax assets and will not impact our
operating results or financial position.
In December, 2010 the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act
of 2010 was enacted. A provision in this legislation provided for the extension of the research and
development tax credit for qualifying expenditures paid or incurred from January 1, 2010 through
December 31, 2011. As a result of this legislation, we generated federal research and development
tax credits of $145 million for the year ended December 31, 2010 and expect to generate additional
research and development tax credits for the year ended December 31, 2011. These tax credits, if
unutilized, will carry forward to future periods. No tax benefit was recorded for these
carryforwards since we have a full valuation allowance on our U.S. deferred tax assets.
We operate under tax holidays in Singapore, which are effective through March 2014. The tax
holidays are conditional upon our meeting certain employment and investment thresholds.
21
6. Long-Term Debt
The following table presents details of our long-term debt liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In millions, except percentage data) |
|
|
|
|
|
|
|
Effective |
|
|
|
|
|
|
Effective |
|
|
|
Amount |
|
|
Rate |
|
|
Amount |
|
|
Rate |
|
1.500% fixed-rate notes, due 2013 |
|
$ |
300 |
|
|
|
1.605 |
% |
|
$ |
300 |
|
|
|
1.605 |
% |
2.375% fixed-rate notes, due 2015 |
|
|
400 |
|
|
|
2.494 |
% |
|
|
400 |
|
|
|
2.494 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
700 |
|
|
|
|
|
|
|
700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaccreted discount |
|
|
(2 |
) |
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
698 |
|
|
|
|
|
|
$ |
697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Notes
In November 2010 we issued senior unsecured notes in an aggregate principal amount of $700
million. These Notes consist of $300 million aggregate principal amount of notes which mature in
November 2013, or the 2013 Notes, and bear interest at a fixed rate of 1.500% per annum, and $400
million aggregate principal amount of notes which mature in November 2015, or the 2015 Notes, and
bear interest at a fixed rate of 2.375% per annum. Interest is payable in cash semi-annually in
arrears on May 1 and November 1 of each year, beginning on May 1, 2011. The 2013 Notes were issued
with an original issue discount at 99.694% and the 2015 Notes were issued with an original issue
discount at 99.444% and are recorded as long-term debt, net of original issue discount. The
discount and debt issuance costs associated with the issuance of the Notes are amortized to
interest expense over their respective terms.
The effective rates for the fixed-rate debt include the interest on the notes and the
accretion of the original issue discount. Based on estimated market prices, the fair value of our
Notes was $707 million and $687 million as of September 30, 2011 and December 31, 2010,
respectively.
In the three months ended September 30, 2011 we entered into and completed an exchange offer
registration statement to issue registered notes with substantially identical terms as the original
Notes. Nearly all of the original notes were exchanged. The exchange offer was made in order to
satisfy certain obligations of Broadcom contained in a Registration Rights Agreement, dated as of
November 1, 2010.
We may redeem the Notes at any time, subject to a specified make-whole premium as defined in
the indenture governing the Notes. In the event of a change of control triggering event, each
holder of Notes will have the right to require us to purchase for cash all or a portion of their
Notes at a redemption price of 101% of the aggregate principal amount of such Notes plus accrued
and unpaid interest. Default can be triggered by any missed interest or principal payment, breach
of covenant, or in certain events of bankruptcy, insolvency or reorganization.
The Notes contain a number of restrictive covenants, including, but not limited to,
restrictions on our ability to grant liens on assets; enter into sale and lease-back transactions;
or merge, consolidate or sell assets. Failure to comply with these covenants, or any other event of
default, could result in acceleration of the principal amount and accrued but unpaid interest on
the Notes.
Relative to our overall indebtedness, the Notes rank in right of payment (i) equal with all of
our other existing and future senior unsecured indebtedness (ii) senior to all of our existing and
future subordinated indebtedness, and (iii) effectively subordinated to all of our subsidiaries
existing and future indebtedness and other obligations (including secured and unsecured
obligations) and subordinated to our existing and future secured indebtedness and other
obligations, to the extent of the assets securing such indebtedness and other obligations.
22
Credit Facility
In November 2010 we entered into a credit facility with certain institutional lenders that
provides for unsecured revolving facility loans, swingline loans and letters of credit in an
aggregate amount of up to $500 million. The credit facility matures on November 19, 2014, at which
time all outstanding revolving facility loans and accrued and unpaid interest must be repaid. We
did not draw on our credit facility during 2010 or in the nine months ended September 30, 2011.
Any advances under a Eurodollar Rate Committed Loan will accrue interest at the British
Bankers Association LIBOR, or BBA LIBOR, plus the Applicable Rate. Any advances under a US Dollar
Base Rate Committed Loan will accrue interest at rates that are equal to the higher of (a) the
Federal Funds Rate plus 0.5% (b) Bank of Americas prime rate as announced from time to time, or
(c) BBA LIBOR plus the Applicable Rate. The Applicable Rate is based on our senior debt credit
ratings as published by Standard & Poors Rating Services and Moodys Investors Service, Inc. We
are also required to pay a commitment fee on the actual daily unused amount of commitments. We may
also, upon the agreement of the existing lenders, increase the commitments under the credit
facility by up to an additional $100 million.
The Credit Facility contains customary representations and warranties as well as affirmative,
negative and financial covenants. Financial covenants require us to maintain a consolidated
leverage ratio of no more than 3.25 to 1.00 and a consolidated interest coverage ratio of no less
than 3.00 to 1.00.
7. Shareholders Equity
Share Repurchase Programs
In February 2010, we announced that our Board of Directors had authorized an evergreen share
repurchase program intended to offset dilution of incremental grants of stock awards associated
with our stock incentive plans. The maximum number of shares of our Class A common stock that may
be repurchased in any one year (including under an ASR or other arrangement) is equal to the total
number of shares issued pursuant to our equity awards in the previous year and the current year.
Our February 2010 share repurchase program does not have an expiration date and may be suspended at
any time at the discretion of the Board of Directors.
In February 2011 we entered into an accelerated share repurchase, or ASR, agreement to
repurchase $300 million of our Class A common stock, which was recorded as a reduction to
shareholders equity. Under the ASR program we received and cancelled 7 million shares of our Class
A common stock with a weighted average price of $42.64 per share.
In addition to the shares repurchased under the ASR in February 2011, we repurchased 10
million shares of our Class A common stock at a weighted average price of $36.84 per share in the
nine months ended September 30, 2011. We repurchased 9 million shares of our Class A common stock
at a weighted average price of $30.65 per share in the nine months ended September 30, 2010. We did
not repurchase any shares of our Class A common stock in the three months ended September 30, 2011
and 2010.
Repurchases under our share repurchase programs were and are intended to 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.
Quarterly Dividend
In January 2011 our Board of Directors adopted an amendment to the existing dividend policy
pursuant to which we increased the quarterly cash dividend by 12.5% to $0.09 per share ($0.36 per
share on an annual basis) and declared a quarterly cash dividend of $0.09 per share payable to
holders of our common stock. In the three months ended September 30, 2011 and 2010 we paid $48
million and $41 million, respectively, and $145 million and $121 million in the nine months ended
September 30, 2011 and 2010, respectively, in dividends to holders of our Class A and Class B
common stock. These dividends were paid from U.S. domestic sources other than our retained earnings
and are accounted for as reductions of shareholders equity.
23
Comprehensive Income
The components of comprehensive income, net of taxes, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In millions) |
|
Net income |
|
$ |
673 |
|
|
$ |
816 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Unrealized gain on marketable securities |
|
|
1 |
|
|
|
1 |
|
Translation adjustments |
|
|
(42 |
) |
|
|
12 |
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
632 |
|
|
$ |
829 |
|
|
|
|
|
|
|
|
8. Employee Benefit Plans
Combined Incentive Plan Activity
Activity under all stock option incentive plans 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 millions, except per share data) |
|
Balance at December 31, 2010 |
|
|
78 |
|
|
$ |
0.01 - 48.63 |
|
|
$ |
27.05 |
|
|
$ |
15.05 |
|
Options granted(1) |
|
|
|
|
|
|
45.82 |
|
|
|
45.82 |
|
|
|
11.72 |
|
Options cancelled |
|
|
(2 |
) |
|
|
0.55 - 46.01 |
|
|
|
29.22 |
|
|
|
11.91 |
|
Options exercised |
|
|
(8 |
) |
|
|
0.01 - 45.05 |
|
|
|
23.55 |
|
|
|
14.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2011 |
|
|
68 |
|
|
$ |
0.01 - 48.63 |
|
|
$ |
27.42 |
|
|
$ |
15.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Less than one million stock options were granted in the nine months ended September 30, 2011. |
24
Restricted stock unit activity is set forth below:
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units |
|
|
|
Outstanding |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant-Date |
|
|
|
Number of |
|
|
Fair Value |
|
|
|
Shares |
|
|
per Share |
|
|
|
(In millions, except per share data) |
|
Balance at December 31, 2010 |
|
|
28 |
|
|
$ |
27.17 |
|
Restricted stock units granted |
|
|
10 |
|
|
|
43.12 |
|
Restricted stock units cancelled |
|
|
(2 |
) |
|
|
31.81 |
|
Restricted stock units vested |
|
|
(10 |
) |
|
|
28.50 |
|
|
|
|
|
|
|
|
Balance at September 30, 2011 |
|
|
26 |
|
|
$ |
32.47 |
|
|
|
|
|
|
|
|
In January 2011 the Compensation Committee adopted a Performance Restricted Stock Units
Incentive Award Program, or the PRSU Program. Under the PRSU Program, and at the sole discretion of
the Compensation Committee, certain of our executives will annually be designated as participants.
The PRSU Program was adopted under, and all awards and grants under the program shall be pursuant
to, the Broadcom Corporation 1998 Stock Incentive Plan, as amended and restated. The Compensation
Committee designated the first performance cycle under the PRSU Program to be January 1, 2010
through December 31, 2010. Pursuant to the PRSU Program, a participant has the opportunity to
receive grants of performance-based RSUs, or PRSUs, if the performance targets established by the
Compensation Committee have been met for a performance cycle (typically, January 1 through December
31 of a subject year). In 2011 our executive officers received PRSUs, in lieu of stock options, and
additionally, continued to receive time-based grants of RSUs. In 2011 we granted 0.2 million PRSUs
that were based on 2010 performance targets under the PRSU Program. Under the terms of the PRSU
Program, the award recipients were also awarded grants of the same number of PRSUs to be made in
the subsequent two calendar years on the basis of having met the 2010 performance targets. These
PRSU grants were included in both the computation of stock-based compensation expense and diluted
net income per share.
In February 2011 as part of Broadcoms regular annual equity compensation review program, our
Compensation Committee granted approximately 6 million restricted stock units.
The per share fair values of stock options and employee stock purchase rights granted in the
nine months ended September 30, 2011 in connection with stock incentive plans and rights granted in
connection with the employee stock purchase plan have been estimated with the following weighted
average assumptions:
|
|
|
|
|
|
|
|
|
|
|
Employee |
|
|
|
|
Stock |
|
Employee |
|
|
Purchase |
|
Stock |
|
|
Rights |
|
Options |
Expected life (in years) |
|
|
1.77 |
|
|
|
3.60 |
|
Implied Volatility |
|
|
0.36 |
|
|
|
0.34 |
|
Risk-free interest rate |
|
|
0.53 |
% |
|
|
1.56 |
% |
Expected dividend yield |
|
|
0.99 |
% |
|
|
0.80 |
% |
Weighted average fair value |
|
$ |
11.07 |
|
|
$ |
11.72 |
|
The weighted average fair values per share of the restricted stock units granted in the nine
months ended September 30, 2011 was $43.12, calculated based on the fair market value of our Class
A common stock on the respective grant dates less any expected dividend yield.
25
Stock-Based Compensation Expense
The following table presents details of total stock-based compensation expense that is
included in each functional line item on our unaudited condensed consolidated statements of income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
(In millions) |
|
Cost of product revenue |
|
$ |
6 |
|
|
$ |
5 |
|
|
$ |
19 |
|
|
$ |
17 |
|
Research and development |
|
|
85 |
|
|
|
80 |
|
|
|
284 |
|
|
|
253 |
|
Selling, general and administrative |
|
|
30 |
|
|
|
28 |
|
|
|
99 |
|
|
|
89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
121 |
|
|
$ |
113 |
|
|
$ |
402 |
|
|
$ |
359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents details of unearned stock-based compensation currently estimated
to be expensed in the remainder of 2011 through 2015 related to unvested share-based payment
awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
2012 |
|
2013 |
|
2014 |
|
2015 |
|
Total |
|
|
(In millions) |
Unearned stock-based compensation |
|
$ |
115 |
|
|
$ |
354 |
|
|
$ |
226 |
|
|
$ |
116 |
|
|
$ |
15 |
|
|
$ |
826 |
|
The weighted-average period over which the unearned stock-based compensation is expected to be
recognized is 1.4 years.
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.
9. Litigation
We and certain of our subsidiaries are currently parties to various legal proceedings,
including those noted in this section. Unless otherwise noted below, during the period presented we
have not: recorded any accrual for loss contingencies associated with such legal proceedings;
determined that an unfavorable outcome is probable or reasonably possible; or determined that the
amount or range of any possible loss is reasonably estimable. We are engaged in numerous other
legal actions not described below arising in the ordinary course of our business and, while there
can be no assurance, we believe that the ultimate outcome of these actions will not have a material
adverse effect on our operating results, liquidity or financial position.
From time to time we may conclude it is in the best interests of our shareholders, employees,
and customers to settle one or more litigation matters, and any such settlement could include
substantial payments; however, other than as noted below, we have not reached this conclusion with
respect to any particular matter at this time. There are a variety of factors that influence our
decisions to settle and the amount we may choose to pay, including the strength of our case,
developments in the litigation, the behavior of other interested parties, the demand on management
time and the possible distraction of our employees associated with the case and/or the possibility
that we may be subject to an injunction or other equitable remedy. It is difficult to predict
whether a settlement is possible, the amount of an appropriate settlement or when is the opportune
time to settle a matter in light of the numerous factors that go into the settlement decision.
Intellectual Property Proceedings
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. In subsequent filings, we added two additional
patents and dropped six patents, bringing the total to six asserted patents. In its answers, Emulex
denied liability and asserted counterclaims seeking a declaratory judgment that the asserted
patents are invalid and not infringed. A trial occurred in September and October 2011.
26
The Court found that Emulex infringed Broadcoms U.S. Patent No. 7,058,150, and the jury
rendered an advisory verdict that the 150 patent is not invalid. We are evaluating our options to
address Emulexs continued infringement of the 150 patent, including seeking a permanent
injunction against Emulex. On the remaining five patents, the jury found one patent not infringed
and failed to reach a verdict on the other four, resulting in a mistrial on those four patents. The
jury also rendered an advisory verdict that three of the four patents are not invalid. The Court
has not yet scheduled a new trial on the four patents.
In November 2009 we filed a complaint in the United States District Court for the Eastern
District of Texas against the Commonwealth Scientific and Industrial Research Organisation, or
CSIRO, seeking a declaratory judgment that a certain U.S. patent number is invalid, unenforceable
and not infringed. CSIRO has answered the complaint and counterclaimed for infringement against
Broadcom wireless LAN products and seeking damages, attorneys fees, and an injunction. In
connection with an ex parte reexamination, the Patent Office has issued a Reexamination Certificate
allowing the original claims of CSIROs patent and adding some amended claims. However, the Patent
Office subsequently initiated a reexamination with respect to all effective claims of the
patent-in-suit, including the amended claims. Trial has been set for April 2012.
In August 2010, Broadcom filed a motion to intervene (i.e., to be added as a party) in U.S.
Ethernet Innovations, LLC v. Acer, Inc., Case No. 10-cv-03724-JW (N.D. Cal.). In this case, U.S.
Ethernet Innovations, LLC, or USEI, filed a patent infringement complaint alleging that numerous
companies, including certain Broadcom customers, infringe four patents relating generally to
Ethernet technology. USEI seeks monetary damages, attorneys fees, and an injunction. Defendants
have filed answers denying the allegations in USEIs complaint and asserting counterclaims for
declaratory judgment that USEIs patents are invalid, unenforceable, and not infringed. Broadcom
contends that it has a license related to USEIs patents and is seeking to assert this license as a
defense. In December 2010, the Court granted Broadcoms motion to intervene. A claims construction hearing was held on October 21, 2011, and no trial date has been set.
As previously reported in our Annual Report on Form 10-K for the year ended December 31, 2010,
since December 2006 Broadcom and its subsidiary, Global Locate, Inc., were engaged in various
litigation matters with SiRF Technology, Inc., which company was later acquired by CSR plc. On
January 10, 2011, Broadcom and CSR announced that the parties had settled all outstanding
litigation between themselves and their subsidiaries. The consideration received and to be received
under the agreement was allocated on a relative fair value basis between a settlement gain, which
was partially recognized in the three months ended March 31, 2011 and patent licensing royalty
revenue. Revenue derived from the patent license will be recognized as licensing revenue.
In December 2010, Rambus Inc. filed a complaint in the United States District Court for the
Northern District of California against Broadcom, alleging that certain Broadcom products infringe
nineteen patents relating generally to memory controller and high speed interface technologies.
Broadcom filed its response to Rambus complaint on January 26, 2011. On February 23, 2011, the
case was designated as a related case with certain other cases filed by Rambus against third
parties Freescale Semiconductor, Inc., LSI Corporation, MediaTek, Inc., NVIDIA Corporation and
STMicroelectronics N.V. On June 13, 2011, the Court issued an order granting in part and denying in
part Broadcoms motion to stay the action pending completion of certain ITC proceedings discussed
below. The case will be stayed as to nine of the asserted patents, and will move forward as to the
remaining patents. For the portion of the case that is not stayed, the Court has set a claims
construction hearing for July 18, 2012. No trial date has been set.
In December 2010 Rambus filed a complaint in the ITC against Broadcom and numerous other
parties, asserting that Broadcom engaged in unfair trade practices by importing certain memory
controllers and devices having certain accused interface technologies that allegedly infringe six
patents. The complaint seeks an exclusion order to bar importation into the United States of all
semiconductor chips that include memory controllers and/or peripheral interfaces that are
manufactured, imported, or sold for importation that infringe any claim of the asserted patents,
and all products incorporating the same. The complaint further seeks an order directing Broadcom
and other parties to cease and desist from importing, marketing, advertising, demonstrating,
sampling, warehousing inventory for distribution, offering for sale, selling, distributing,
licensing, or using any semiconductor chips that include memory controllers and/or peripheral
interfaces, and products containing such semiconductor chips, that infringe any claim of the
asserted patents. On December 29, 2010, the ITC voted to institute an investigation based on
Rambus
27
complaint. Broadcom filed its response to the complaint on February 1, 2011. The evidentiary
hearing concluded on October 20, 2011, and the target date for a Final Determination by the ITC is
currently May 4, 2012.
We and our subsidiaries are also involved in other intellectual property proceedings, claims
and litigation. We will disclose the nature of any such matter if we believe it to be material.
Particularly in the early stages of such proceedings, an assessment of materiality may be
complicated by limited information, including, without limitation, limited information about the
patents-in-suit and Broadcom products against which the patents are being asserted. Accordingly,
our assessment of materiality may change in the future based upon availability of discovery and
further developments in the proceedings at issue. Some of these intellectual property proceedings
may involve, for example, non-practicing entities asserting claims addressing certain of our
products. The resolution of intellectual property litigation can include, among other things,
payment of damages, royalties, or other amounts, 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 may perform for us. In addition, from time to
time we are approached by holders of intellectual property, including non-practicing entities, to
engage in discussions about our obtaining licenses to their intellectual property. We will disclose
the nature of any such discussion if we determine that (i) it is probable an intellectual property
holder will assert a claim of infringement, (ii) there is a reasonable possibility the outcome
(assuming assertion) will be unfavorable, and (iii) the resulting liability would be material to
our financial condition.
Other Litigation
In November 2009 Emulex filed a complaint in the Central District of California against
Broadcom alleging violation of the antitrust laws, defamation, and unfair competition. The
complaint seeks injunctive relief and monetary damages, including treble damages and attorneys
fees. In January 2010, Emulex filed an amended complaint in which Emulex removed, among other
things, the claim of unfair competition. In February 2010, we filed motions to dismiss the case and
a motion to strike. In June 2010, the District Court granted in part and denied in part our motion
to dismiss and denied our motion to strike. In July 2010, we filed a notice of appeal of the
District Courts denial of our motion to strike. In November 2010, the parties agreed to a
voluntary stay of the appeal. No trial date has been set for this matter.
In April 2011, Motorola Mobility, Inc., or MMI, filed a third-party complaint against Broadcom
in the U.S. District Court for the District of Colorado, alleging that we breached a duty to
defend, indemnify, and hold MMI harmless for certain patent infringement claims that MMI is
defending. In the same action, MMI is defending itself against claims for patent infringement
brought by Biax Corporation involving certain U.S. patents. In June 2011, Broadcom filed a motion
to dismiss MMIs third-party complaint. Broadcoms motion is currently pending before the Court.
As previously reported in our Annual Report on Form 10-K for the year ended December 31, 2010,
in 2006 a number of purported Broadcom shareholders filed putative shareholder derivative actions
in state and federal court 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. In August 2009 Broadcom plaintiffs and certain
defendants executed a Stipulation and Agreement of Partial Settlement in the federal derivative
action, which resolved all claims except those against 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, our Chief Technical Officer
and member of our Board of Directors.
In March 2011, Broadcom, plaintiffs and the three remaining defendants executed a Stipulation
and Agreement of Settlement, or Derivative Settlement, in the federal derivative action. On May 23,
2011, the District Court entered an order granting final approval of the Derivative Settlement.
Pursuant to the Derivative Settlement, among other things: (i) Broadcom received a payment from Dr.
Nicholas of approximately $27 million, which was recorded as a settlement gain in our unaudited
condensed consolidated statements of income; (ii) Broadcom cancelled unexercised Broadcom stock
options held by Dr. Samueli valued at approximately $14 million, using a Black-Scholes analysis
based on the closing price of Broadcoms Class A common stock on the date the settlement was deemed
final, which amount was recorded as a settlement gain in our unaudited condensed consolidated
statements of income; (iii) Dr. Samueli contributed approximately $2 million in cash to the
Broadcom Foundation (through Broadcom
28
Corporation), which was recorded as a settlement gain in our unaudited condensed consolidated
statements of income; (iv) Mr. Ruehle executed and filed a Notice of Dismissal with Prejudice of an
action filed by him against Broadcom, which sought damages in excess of $26 million; and (v) Dr.
Nicholas, Mr. Ruehle and Dr. Samueli were dismissed with prejudice from the federal consolidated
shareholder derivative litigation.
Upon Court approval of the Derivative Settlement, Broadcom paid plaintiffs counsel $25
million of the settlement proceeds for attorneys fees, expenses, and costs, which was recorded as
an operating expense in our unaudited condensed consolidated statements of income. In addition,
Broadcom contributed approximately $25 million to the Broadcom Foundation (which included the $2
million payment from Dr. Samueli discussed above). Such amount was recorded as a charitable
contribution in our unaudited condensed consolidated statements of income. On July 1, 2011, the
plaintiffs in the state derivative action filed a request for dismissal with prejudice of that
action. The Court entered an order dismissing the state derivative action on July 8, 2011.
In April 2008 we delivered a Notice of Arbitration and Arbitration Claim to our former
independent registered public accounting firm Ernst & Young LLP, or 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. The parties were unable to resolve their
disputes, and Broadcom has recently informed E&Y that it intends to proceed with its claims. No
date for an arbitration hearing has been scheduled.
Since the announcement on September 12, 2011 of Broadcoms entry into a definitive merger
agreement with NetLogic Microsystems Inc. under which a subsidiary of Broadcom, I&N Acquisition
Corp., will be merged with and into NetLogic, referred to as the Merger, the following two lawsuits
have been filed by stockholders of NetLogic purporting to assert claims arising out of the Merger.
- |
|
On September 16, 2011, a putative class action lawsuit was filed in Superior Court of
the State of California, County of Santa Clara, alleging that the directors of NetLogic
breached their fiduciary duties by failing to (i) adequately consider the Merger, including
whether the Merger maximizes stockholder value, and (ii) apprise themselves of the true value
of NetLogic. On October 7, 2011, an amended complaint was filed, asserting that NetLogic filed
a Preliminary Proxy Statement on Schedule 14A, referred to as the Proxy Statement, with the
SEC containing materially false and misleading statements in violation of the NetLogic
directors fiduciary duties. The complaints allege that Broadcom and I&N Acquisition Corp.
aided and abetted these alleged breaches of fiduciary duties by the directors of NetLogic.
The complaints also seek damages, and ask the Court to (i) enjoin the parties from proceeding
with the Merger, (ii) or, in the event the Merger is consummated, order that it be rescinded. |
- |
|
On September 20, 2011, a putative class action complaint was filed in the Court of
Chancery of the State of Delaware, asserting claims similar to those asserted in the
California action (other than with regard to the NetLogic Proxy Statement), and seeking
similar relief. Broadcom recently filed an answer to the Delaware complaint and joined in a
motion to stay the California complaint. The Delaware case is currently set to be heard by
the court on February 24, 2012. |
General
We and our subsidiaries are also involved in other legal proceedings, claims and litigation
arising in the ordinary course of business. We will disclose the nature of any such matter if we
believe it to be material.
The pending proceedings described above involve complex questions of fact and law and may
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. From time to time we may enter into confidential discussions regarding the potential
settlement of pending intellectual property or other litigation or other proceedings; however,
there can be no assurance that any such discussions will occur or will result in a settlement. In
the course of such settlement discussions, if we conclude that a settlement is probable and the
29
settlement amount is estimable we may record settlement costs, notwithstanding not having
reached a final settlement agreement. In the three months ended September 30, 2011 we recorded net
settlement costs of $27 million related to the potential settlement of patent infringement claims.
The settlement of any pending litigation or other proceeding could require us to incur substantial
settlement payments and costs. Furthermore, 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.
10. Business Enterprise Segments, Significant Customer and Geographical Information
Business Enterprise Segments
Broadcom has three reportable segments consistent with our target markets. Our three
reportable segments are: Broadband Communications (Home), Mobile & Wireless (Hand) and
Infrastructure & Networking (Infrastructure). Our Chief Executive Officer, who is our chief
operating decision maker, or CODM, reviews financial information at the reporting segment level. In
January 2011, our Mobile Platforms and Wireless Connectivity businesses were combined for internal
reporting purposes, which aligns with our externally reported Mobile & Wireless segment.
We also report an All Other category that primarily includes licensing revenue from our
agreement with Verizon Wireless and income from the Qualcomm Agreement since they are principally
the result of corporate efforts. All Other also includes operating expenses that we do not
allocate to our other operating segments as these expenses are not included in the segment
operating performance measures evaluated by our CODM. Operating costs and expenses that are not
allocated include stock-based compensation, amortization of purchased intangible assets, impairment
of goodwill and other long-lived assets, net settlement costs, net restructuring costs, charitable
contributions, employer payroll tax on certain stock option exercises, and other miscellaneous
expenses related to corporate allocations that were either over or under the original projections
at the beginning of the year. We include stock-based compensation and acquisition-related items in
the All Other category as decisions regarding equity compensation are made at the corporate level
and our CODM reviews reportable segment performance exclusive of these charges. In 2010, we
reclassified the amortization of acquired inventory valuation step-up from its respective
reportable segment into the All Other category, as these charges are the result of acquisition
accounting and we believe these amounts should not be included when measuring our reportable
segments operating performance. Prior period amounts have been reclassified to conform to the
current period presentation. Our CODM does not review information regarding total assets, interest
income or income taxes on an operating segment basis. The accounting policies for segment reporting
are the same as for Broadcom as a whole.
30
The following tables present details of our reportable segments and the All Other category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable Segments |
|
|
|
|
|
|
Broadband |
|
Mobile & |
|
Infrastructure & |
|
All |
|
|
|
|
Communications |
|
Wireless |
|
Networking |
|
Other |
|
Consolidated |
|
|
(In millions) |
Three Months Ended September 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
526 |
|
|
$ |
942 |
|
|
$ |
437 |
|
|
$ |
52 |
|
|
$ |
1,957 |
|
Operating income
(loss) |
|
|
99 |
|
|
|
171 |
|
|
|
144 |
|
|
|
(144 |
) |
|
|
270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
561 |
|
|
$ |
798 |
|
|
$ |
395 |
|
|
$ |
52 |
|
|
$ |
1,806 |
|
Operating income
(loss) |
|
|
118 |
|
|
|
165 |
|
|
|
141 |
|
|
|
(89 |
) |
|
|
335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable Segments |
|
|
|
|
|
|
Broadband |
|
Mobile & |
|
Infrastructure & |
|
All |
|
|
|
|
Communications |
|
Wireless |
|
Networking |
|
Other |
|
Consolidated |
|
|
(In millions) |
Nine Months Ended September 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
1,529 |
|
|
$ |
2,608 |
|
|
$ |
1,276 |
|
|
$ |
156 |
|
|
$ |
5,569 |
|
Operating income
(loss) |
|
|
282 |
|
|
|
423 |
|
|
|
440 |
|
|
|
(471 |
) |
|
|
674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
1,557 |
|
|
$ |
1,982 |
|
|
$ |
1,178 |
|
|
$ |
156 |
|
|
$ |
4,873 |
|
Operating income
(loss) |
|
|
325 |
|
|
|
330 |
|
|
|
433 |
|
|
|
(274 |
) |
|
|
814 |
|
Included in the All Other category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
(In millions) |
|
Net revenue |
|
$ |
52 |
|
|
$ |
52 |
|
|
$ |
156 |
|
|
$ |
156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
$ |
121 |
|
|
$ |
113 |
|
|
$ |
402 |
|
|
$ |
359 |
|
Amortization of purchased intangible assets |
|
|
21 |
|
|
|
12 |
|
|
|
65 |
|
|
|
36 |
|
Amortization of acquired inventory valuation step-up |
|
|
9 |
|
|
|
|
|
|
|
19 |
|
|
|
7 |
|
Impairments of long-lived assets |
|
|
9 |
|
|
|
2 |
|
|
|
92 |
|
|
|
2 |
|
Settlement costs (gains), net |
|
|
27 |
|
|
|
|
|
|
|
(23 |
) |
|
|
4 |
|
Restructuring costs, net |
|
|
17 |
|
|
|
|
|
|
|
17 |
|
|
|
|
|
Charitable contribution |
|
|
|
|
|
|
|
|
|
|
25 |
|
|
|
|
|
Non recurring legal fees |
|
|
|
|
|
|
|
|
|
|
25 |
|
|
|
|
|
Employer payroll tax on certain stock option exercises |
|
|
2 |
|
|
|
1 |
|
|
|
6 |
|
|
|
5 |
|
Miscellaneous corporate allocation variances |
|
|
(10 |
) |
|
|
13 |
|
|
|
(1 |
) |
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating costs and expenses |
|
$ |
196 |
|
|
$ |
141 |
|
|
$ |
627 |
|
|
$ |
430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating loss for the All Other category |
|
$ |
(144 |
) |
|
$ |
(89 |
) |
|
$ |
(471 |
) |
|
$ |
(274 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
31
Significant Customer and Geographical Information
Sales to our significant customers, including sales to their manufacturing subcontractors, as
a percentage of net revenue were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Five largest customers as a group |
|
|
44.0 |
% |
|
|
39.2 |
% |
|
|
41.6 |
% |
|
|
36.7 |
% |
Product revenue derived from shipments to international destinations, as a percentage of
product revenue was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2011 |
|
2010 |
|
2011 |
|
2010 |
China (exclusive of Hong Kong) |
|
|
34.6 |
% |
|
|
30.9 |
% |
|
|
33.6 |
% |
|
|
29.5 |
% |
Hong Kong |
|
|
26.5 |
|
|
|
26.4 |
|
|
|
26.3 |
|
|
|
26.2 |
|
Singapore, Taiwan and Japan |
|
|
21.9 |
|
|
|
25.8 |
|
|
|
22.4 |
|
|
|
25.2 |
|
Europe |
|
|
1.8 |
|
|
|
2.4 |
|
|
|
2.0 |
|
|
|
2.4 |
|
Other |
|
|
13.7 |
|
|
|
12.2 |
|
|
|
14.2 |
|
|
|
13.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98.5 |
% |
|
|
97.7 |
% |
|
|
98.5 |
% |
|
|
97.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
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, 2010 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
within the meaning of the federal securities laws, including the Private Securities Litigation
Reform Act of 1995. Examples of forward-looking statements include, but are not limited to,
statements concerning projected total net revenue, costs and expenses and product and total gross
margin; our accounting estimates, assumptions and judgments; the demand for our products; our
dependence on a few key customers and/or design wins for a substantial portion of our revenue; our
ability to consummate acquisitions and integrate their operations successfully, including our
pending acquisition of NetLogic Microsystems, Inc.; estimates related to the amount and/or timing
of the expensing of unearned stock-based compensation expense and stock-based compensation as a
percentage of revenue; manufacturing, assembly and test capacity; estimates related to the amount
and/or timing of restructuring charges in our Broadband Communications operating segment; the
effect that economic conditions, seasonality and volume fluctuations in the demand for our
customers consumer-oriented products will have on our quarterly operating results; 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; our success in pending
intellectual property litigation matters; our potential needs for additional capital; inventory and
accounts receivable levels; the amount of research and development tax credits we expect to
generate during 2011; the effect of potential changes in U.S. or foreign tax laws and regulations
or the interpretation thereof; the level of accrued rebates; and income we expect to record in
connection with the Qualcomm Agreement or similar arrangements in the future. 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 to reflect future events or circumstances.
Overview
Broadcom Corporation (including our subsidiaries, referred to collectively in this Report as
Broadcom, we, our and us) is a global leader and innovator in semiconductor solutions for
wired and wireless communications. Our products seamlessly deliver voice, video, data and
multimedia connectivity in the home, office and mobile environment. We provide the industrys
broadest portfolio of state-of-the-art system-on-a-chip and embedded software solutions.
33
We sell our products to leading wired and wireless communications manufacturers in each of our
reportable segments: Broadband Communications (Home), Mobile & Wireless (Hand) and Infrastructure &
Networking (Infrastructure). Because we leverage our technologies across different markets, certain
of our integrated circuits may be incorporated into products used in multiple markets. We utilize
independent foundries and third-party subcontractors to manufacture, assemble and test all of our
semiconductor products.
Our diverse product portfolio includes:
|
|
|
Broadband Communications (Solutions for the Home) Highly integrated solutions for
the connected home, including set-top-boxes and media servers, residential gateways, home
networking, femtocells, high definition TV platforms, consumer electronic products and
digital video recorders (DVRs). |
|
|
|
|
Mobile & Wireless (Solutions for the Hand) Low-power, high-performance and highly
integrated solutions powering the mobile ecosystem, including Wi-Fi and Bluetooth, cellular
modems, personal navigation and global positioning, near field communications, multimedia
and application processing, and mobile power management solutions. |
|
|
|
|
Infrastructure & Networking (Solutions for Infrastructure) Highly integrated
solutions for carriers, service providers, enterprises, small-to-medium businesses and data
centers for network infrastructure needs, including switches and physical layer (PHY)
devices for local, metropolitan, wide area and storage networking; switch fabric solutions;
and high-speed controllers. |
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. 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. Our
licensing revenue and income is generated from the licensing of our intellectual property, of which
the vast majority to date has been derived from agreements with two customers, Verizon Wireless and
Qualcomm Incorporated. The licensing revenue from our agreement with Verizon Wireless ended in
March 2009 and the income from the Qualcomm Agreement is non-recurring and will terminate in 2013.
There can be no assurances that we will be able to enter into similar arrangements in the future.
At September 30, 2011 we had deferred income of $22 million related to the Qualcomm Agreement.
A detailed discussion of our business may be found in Part I, Item 1, Business, of our 2010
Annual Report on Form 10-K for the year ended December 31, 2010.
Operating Results for the Three and Nine Months Ended September 30, 2011
In the three months ended September 30, 2011 our net income was $270 million as compared to
net income of $328 million in the three months ended September 30, 2010. In the nine months ended
September 30, 2011 our net income was $673 million as compared to net income of $816 million in the
nine months ended September 30, 2010. The decrease in profitability in both periods was primarily
related to lower gross margins and an increase in research and development expenses including the
impairment of our purchased intangible assets, our charitable contribution and our restructuring
charge. Other highlights during the nine months ended September 30, 2011 include the following:
|
|
|
Our cash and cash equivalents and marketable securities were $4.24 billion at September
30, 2011, compared with $4.06 billion at December 31, 2010. We generated cash flow from
operations of $1.36 billion during the nine months ended September 30, 2011 as compared to
$919 million in the nine months ended September 30, 2010. |
|
|
|
|
In January 2011 our Board of Directors adopted an amendment to the existing dividend
policy pursuant to which we increased our quarterly cash dividend by 12.5% to $0.09 per
share ($0.36 per share on an annual basis) and declared a quarterly cash dividend of $0.09
per share payable to holders of our common stock. |
|
|
|
|
In January 2011 the Compensation Committee adopted a Performance Restricted Stock Units
Incentive Award Program, or the PRSU Program. Under the PRSU Program, and at the sole
discretion of the Compensation Committee, certain of our executives will annually be
designated as participants. The PRSU Program was adopted under, and all awards and grants
under the program shall be pursuant to, the Broadcom |
34
|
|
|
Corporation 1998 Stock Incentive Plan, as amended and restated. The Compensation Committee
designated the first performance cycle under the PRSU Program to be January 1, 2010 through
December 31, 2010. Pursuant to the PRSU Program, a participant has the opportunity to receive
grants of performance-based RSUs, or PRSUs if the performance targets established by the
Compensation Committee have been met for a performance cycle (typically, January 1 through
December 31 of a subject year). In 2011, our executive officers received PRSUs, in lieu of
stock options, and additionally, continued to receive time-based grants of RSUs. In 2011 we
granted 0.2 million PRSUs that were based on 2010 performance targets under the PRSU Program.
Under the terms of the PRSU Program, the award recipients were also awarded grants of the
same number of PRSUs to be made in the subsequent two calendar years on the basis of having
met the 2010 performance targets. These PRSU grants were included in both the computation of
stock-based compensation expense and diluted net income per share. |
|
|
|
|
In February 2011 we entered into an accelerated share repurchase, or ASR, agreement to
repurchase $300 million dollars of our Class A common stock, which was recorded as a
reduction to shareholders equity. Under the ASR program we received and cancelled 7
million shares of our Class A common stock with a weighted average price of $42.64 per
share. In addition to the shares repurchased under the ASR in February 2011, we
repurchased 10 million shares at a weighted average price of $36.84 per share. |
|
|
|
|
In April 2011 we completed our acquisition of Provigent Inc., a privately-held company
that provides highly integrated, high performance, mixed signal semiconductors for
microwave backhaul systems. In connection with the acquisition, we paid $314 million,
exclusive of cash assumed, to acquire all of the outstanding shares of capital stock and
other equity rights of Provigent. The purchase price was paid in cash, except that a
portion attributable to certain unvested employee stock options was paid in the form of
Broadcom equity awards. The equity awards had a fair value of $4 million, of which
substantially all will be recognized as stock-based compensation expense over the next
three years. A portion of the cash consideration was placed into escrow pursuant to the
terms of the acquisition agreement. |
|
|
|
|
In May 2011 we completed our acquisition of SC Square Ltd., a leading security software
developer for $40 million, exclusive of cash acquired. The purchase price was paid in cash,
with a portion of the consideration placed into escrow, pursuant to the terms of the
acquisition agreement. |
|
|
|
|
In May 2011 the court entered an order granting final approval of the Stipulation and
Agreement of Settlement, or Derivative Settlement. In connection with the Derivative
Settlement, we recorded a $43 million settlement gain in our unaudited condensed
consolidated statements of income and paid plaintiffs counsel $25 million of the
settlement proceeds for attorneys fees, expenses, and costs, which was recorded as an
operating expense in our unaudited condensed consolidated statements of income. In
September 2011, we also recorded net settlement costs of $27 million related to patent
infringement claims. |
|
|
|
|
In June 2011 we contributed $25 million to the Broadcom Foundation to support science,
technology, engineering and mathematics programs, as well as a broad range of community
services which was recorded as an operating expense in our unaudited condensed consolidated
statements of income. |
|
|
|
|
In June 2011 we recorded a purchased intangible impairment charge of $74 million
related to our acquisition of Beceem Communications, Inc. in 2010. The primary factor
contributing to this impairment charge was a reduction in the forecasted cash flows related
to WiMAX products, as wireless service providers have accelerated their adoption of Long
Term Evolution, or LTE, products. |
|
|
|
|
In June 2011 we completed the Internal Revenue Service (IRS) examination of our income
tax returns for 2004 to 2006, executed a closing agreement covering the 2001 to 2006 tax
years, and agreed to certain adjustments for the 2001 to 2006 tax years, primarily related
to intercompany transfer pricing transactions. Such adjustments were offset by net
operating losses and credits, and did not result in any income tax expense or cash tax
liability. |
|
|
|
|
In September 2011 we signed a definitive agreement to acquire NetLogic Microsystems,
Inc., or NetLogic, a publicly traded company that is a leader in high performance
intelligent semiconductor solutions for next generation networks. The expected purchase
consideration is approximately $3.7 billion, net of cash assumed, based on the shares
outstanding on September 11, 2011. The transaction has been approved by the
Broadcom and NetLogic boards of directors and is subject to customary closing conditions,
|
35
|
|
|
including the receipt of regulatory clearances and the approval of
NetLogics stockholders. There are no financing contingencies related to the acquisition.
The transaction is expected to close in the first half of 2012. |
|
|
|
|
As part of our regular portfolio management review process and in light of our decision
to significantly reduce our investment in our digital television and Blu-ray Disc lines of business within our Broadband
Communications operating segment, in September 2011 we began implementing a restructuring
plan to reduce our worldwide headcount by approximately 300 employees. We recorded $17
million in restructuring costs in the three months ended September 30, 2011. We currently
expect to complete the plan by the end of 2011 and record additional costs of approximately
$6 million in the three months ended December 31, 2011, primarily for additional facilities
closures. |
Business Enterprise Segments.
The following tables present details of our reportable segments and the All Other category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable Segments |
|
|
|
|
|
|
Broadband |
|
Mobile & |
|
Infrastructure & |
|
All |
|
|
|
|
Communications |
|
Wireless |
|
Networking |
|
Other |
|
Consolidated |
|
|
(In millions) |
Three Months Ended September 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
526 |
|
|
$ |
942 |
|
|
$ |
437 |
|
|
$ |
52 |
|
|
$ |
1,957 |
|
Operating income
(loss) |
|
|
99 |
|
|
|
171 |
|
|
|
144 |
|
|
|
(144 |
) |
|
|
270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
561 |
|
|
$ |
798 |
|
|
$ |
395 |
|
|
$ |
52 |
|
|
$ |
1,806 |
|
Operating income
(loss) |
|
|
118 |
|
|
|
165 |
|
|
|
141 |
|
|
|
(89 |
) |
|
|
335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable Segments |
|
|
|
|
|
|
Broadband |
|
Mobile & |
|
Infrastructure & |
|
All |
|
|
|
|
Communications |
|
Wireless |
|
Networking |
|
Other |
|
Consolidated |
|
|
(In millions) |
Nine Months Ended September 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
1,529 |
|
|
$ |
2,608 |
|
|
$ |
1,276 |
|
|
$ |
156 |
|
|
$ |
5,569 |
|
Operating income
(loss) |
|
|
282 |
|
|
|
423 |
|
|
|
440 |
|
|
|
(471 |
) |
|
|
674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
1,557 |
|
|
$ |
1,982 |
|
|
$ |
1,178 |
|
|
$ |
156 |
|
|
$ |
4,873 |
|
Operating income
(loss) |
|
|
325 |
|
|
|
330 |
|
|
|
433 |
|
|
|
(274 |
) |
|
|
814 |
|
36
Included in the All Other category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
(In millions) |
|
Net revenue |
|
$ |
52 |
|
|
$ |
52 |
|
|
$ |
156 |
|
|
$ |
156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
$ |
121 |
|
|
$ |
113 |
|
|
$ |
402 |
|
|
$ |
359 |
|
Amortization of purchased intangible assets |
|
|
21 |
|
|
|
12 |
|
|
|
65 |
|
|
|
36 |
|
Amortization of acquired inventory valuation step-up |
|
|
9 |
|
|
|
|
|
|
|
19 |
|
|
|
7 |
|
Impairments of long-lived assets |
|
|
9 |
|
|
|
2 |
|
|
|
92 |
|
|
|
2 |
|
Settlement costs (gains), net |
|
|
27 |
|
|
|
|
|
|
|
(23 |
) |
|
|
4 |
|
Restructuring costs, net |
|
|
17 |
|
|
|
|
|
|
|
17 |
|
|
|
|
|
Charitable contribution |
|
|
|
|
|
|
|
|
|
|
25 |
|
|
|
|
|
Non recurring legal fees |
|
|
|
|
|
|
|
|
|
|
25 |
|
|
|
|
|
Employer payroll tax on certain stock option exercises |
|
|
2 |
|
|
|
1 |
|
|
|
6 |
|
|
|
5 |
|
Miscellaneous corporate allocation variances |
|
|
(10 |
) |
|
|
13 |
|
|
|
(1 |
) |
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating costs and expenses |
|
$ |
196 |
|
|
$ |
141 |
|
|
$ |
627 |
|
|
$ |
430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating loss for the All Other category |
|
$ |
(144 |
) |
|
$ |
(89 |
) |
|
$ |
(471 |
) |
|
$ |
(274 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
For additional information about our business enterprise segments, see further discussion in
Note 10 of Notes to Unaudited Condensed Consolidated Financial Statements.
Factors That May Impact Net Income
Our net income 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 and corresponding gross margin (see further
discussion below under Factors That May Impact Net Revenue and Factors That May Impact
Product Gross Margin); |
|
|
|
|
required levels of research and development and other operating costs; |
|
|
|
|
stock-based compensation expense; |
|
|
|
|
licensing and income from intellectual property; |
|
|
|
|
impairment of goodwill and other long-lived assets; |
|
|
|
|
deferral of revenue under multiple-element arrangements; |
|
|
|
|
amortization of purchased intangible assets; |
|
|
|
|
cash-based incentive compensation expense; |
|
|
|
|
litigation costs and insurance recoveries; |
|
|
|
|
settlement costs or gains; |
|
|
|
|
adjustments to tax reserves and the results of income tax audits; |
37
|
|
|
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,
dividends and acquisitions of businesses; |
|
|
|
|
charitable contributions; |
|
|
|
|
other-than-temporary impairment of marketable securities; and |
|
|
|
|
restructuring costs. |
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. For a description of our
critical accounting policies and estimates, please refer to the Critical Accounting Policies and
Estimates section of our Managements Discussion and Analysis of Financial Condition and Results
of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2010.
There have been no material changes in any of our critical accounting policies during the nine
months ended September 30, 2011.
38
Results of Operations
The following table sets forth certain Unaudited Condensed Consolidated Statements of Income
data expressed as a percentage of net revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2011 |
|
2010 |
|
2011 |
|
2010 |
Net revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue |
|
|
97.3 |
% |
|
|
96.8 |
% |
|
|
96.9 |
% |
|
|
96.4 |
% |
Income from Qualcomm Agreement |
|
|
2.6 |
|
|
|
2.9 |
|
|
|
2.8 |
|
|
|
3.2 |
|
Licensing revenue |
|
|
0.1 |
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue |
|
|
49.1 |
|
|
|
48.3 |
|
|
|
49.1 |
|
|
|
47.8 |
|
Research and development |
|
|
25.6 |
|
|
|
24.8 |
|
|
|
27.0 |
|
|
|
26.5 |
|
Selling, general and administrative |
|
|
8.4 |
|
|
|
8.1 |
|
|
|
9.4 |
|
|
|
8.7 |
|
Amortization of purchased intangible assets |
|
|
0.3 |
|
|
|
0.2 |
|
|
|
0.4 |
|
|
|
0.2 |
|
Impairments of long-lived assets |
|
|
0.5 |
|
|
|
0.1 |
|
|
|
1.7 |
|
|
|
|
|
Restructuring costs, net |
|
|
0.9 |
|
|
|
|
|
|
|
0.3 |
|
|
|
|
|
Settlement costs (gains), net |
|
|
1.4 |
|
|
|
|
|
|
|
(0.4 |
) |
|
|
0.1 |
|
Charitable contribution |
|
|
|
|
|
|
|
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
86.2 |
|
|
|
81.5 |
|
|
|
87.9 |
|
|
|
83.3 |
|
Income from operations |
|
|
13.8 |
|
|
|
18.5 |
|
|
|
12.1 |
|
|
|
16.7 |
|
Interest income (expense), net |
|
|
(0.1 |
) |
|
|
0.2 |
|
|
|
|
|
|
|
0.1 |
|
Other income (expense), net |
|
|
0.4 |
|
|
|
(0.1 |
) |
|
|
0.1 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
14.1 |
|
|
|
18.6 |
|
|
|
12.2 |
|
|
|
16.9 |
|
Provision for income taxes |
|
|
0.3 |
|
|
|
0.5 |
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
13.8 |
% |
|
|
18.1 |
% |
|
|
12.1 |
% |
|
|
16.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents details of product and total gross margin as a percentage of
product and total revenue, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2011 |
|
2010 |
|
2011 |
|
2010 |
Product gross margin |
|
|
49.5 |
% |
|
|
50.1 |
% |
|
|
49.4 |
% |
|
|
50.5 |
% |
Total gross margin |
|
|
50.9 |
|
|
|
51.7 |
|
|
|
50.9 |
|
|
|
52.2 |
|
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, |
|
|
2011 |
|
2010 |
|
2011 |
|
2010 |
Cost of product revenue |
|
|
0.3 |
% |
|
|
0.3 |
% |
|
|
0.3 |
% |
|
|
0.3 |
% |
Research and development |
|
|
4.4 |
|
|
|
4.4 |
|
|
|
5.1 |
|
|
|
5.2 |
|
Selling, general and administrative |
|
|
1.5 |
|
|
|
1.5 |
|
|
|
1.8 |
|
|
|
1.8 |
|
39
Net Revenue, Cost of Product Revenue, Product Gross Margin, and Total Gross Margin
The following tables present net revenue, cost of product revenue, product gross margin and
total gross margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
|
|
|
% |
|
|
|
September 30, 2011 |
|
|
September 30, 2010 |
|
|
|
|
|
|
Change |
|
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
Increase |
|
|
in |
|
|
|
Amount |
|
|
Revenue |
|
|
Amount |
|
|
Revenue |
|
|
(Decrease) |
|
|
Amount |
|
|
|
(In millions, except percentages) |
|
Product revenue |
|
$ |
1,902 |
|
|
|
97.3 |
% |
|
$ |
1,749 |
|
|
|
96.8 |
% |
|
$ |
153 |
|
|
|
8.7 |
% |
Income from Qualcomm Agreement |
|
|
52 |
|
|
|
2.6 |
|
|
|
52 |
|
|
|
2.9 |
|
|
|
|
|
|
|
|
|
Licensing revenue |
|
|
3 |
|
|
|
0.1 |
|
|
|
5 |
|
|
|
0.3 |
|
|
|
(2 |
) |
|
|
(40.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
$ |
1,957 |
|
|
|
100.0 |
% |
|
$ |
1,806 |
|
|
|
100.0 |
% |
|
$ |
151 |
|
|
|
8.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue(1) |
|
$ |
960 |
|
|
|
49.1 |
% |
|
$ |
872 |
|
|
|
48.3 |
% |
|
$ |
88 |
|
|
|
10.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product gross margin |
|
|
49.5 |
% |
|
|
|
|
|
|
50.1 |
% |
|
|
|
|
|
|
(0.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margin |
|
|
50.9 |
% |
|
|
|
|
|
|
51.7 |
% |
|
|
|
|
|
|
(0.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
|
|
|
|
|
% |
|
|
|
September 30, 2011 |
|
|
September 30, 2010 |
|
|
|
|
|
|
Change |
|
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
in |
|
|
|
Amount |
|
|
Revenue |
|
|
Amount |
|
|
Revenue |
|
|
Increase |
|
|
Amount |
|
|
|
(In millions, except percentages) |
|
Product revenue |
|
$ |
5,396 |
|
|
|
96.9 |
% |
|
$ |
4,700 |
|
|
|
96.4 |
% |
|
$ |
696 |
|
|
|
14.8 |
% |
Income from Qualcomm Agreement |
|
|
155 |
|
|
|
2.8 |
|
|
|
155 |
|
|
|
3.2 |
|
|
|
|
|
|
|
|
|
Licensing revenue |
|
|
18 |
|
|
|
0.3 |
|
|
|
18 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
$ |
5,569 |
|
|
|
100.0 |
% |
|
$ |
4,873 |
|
|
|
100.0 |
% |
|
$ |
696 |
|
|
|
14.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue(1) |
|
$ |
2,732 |
|
|
|
49.1 |
% |
|
$ |
2,329 |
|
|
|
47.8 |
% |
|
$ |
403 |
|
|
|
17.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product gross margin |
|
|
49.4 |
% |
|
|
|
|
|
|
50.5 |
% |
|
|
|
|
|
|
(1.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margin |
|
|
50.9 |
% |
|
|
|
|
|
|
52.2 |
% |
|
|
|
|
|
|
(1.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
|
|
|
% |
|
|
|
September 30, 2011 |
|
|
June 30, 2011 |
|
|
|
|
|
|
Change |
|
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
in |
|
|
|
Amount |
|
|
Revenue |
|
|
Amount |
|
|
Revenue |
|
|
Increase |
|
|
Amount |
|
|
|
(In millions, except percentages) |
|
Product revenue |
|
$ |
1,902 |
|
|
|
97.3 |
% |
|
$ |
1,742 |
|
|
|
97.0 |
% |
|
$ |
160 |
|
|
|
9.2 |
% |
Income from Qualcomm Agreement |
|
|
52 |
|
|
|
2.6 |
|
|
|
51 |
|
|
|
2.9 |
|
|
|
1 |
|
|
|
2.0 |
|
Licensing revenue |
|
|
3 |
|
|
|
0.1 |
|
|
|
3 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
$ |
1,957 |
|
|
|
100.0 |
% |
|
$ |
1,796 |
|
|
|
100.0 |
% |
|
$ |
161 |
|
|
|
9.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue(1) |
|
$ |
960 |
|
|
|
49.1 |
% |
|
$ |
877 |
|
|
|
48.9 |
% |
|
$ |
83 |
|
|
|
9.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product gross margin |
|
|
49.5 |
% |
|
|
|
|
|
|
49.6 |
% |
|
|
|
|
|
|
(0.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margin |
|
|
50.9 |
% |
|
|
|
|
|
|
51.1 |
% |
|
|
|
|
|
|
(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. |
40
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 & Wireless products include
wireless LAN, cellular, touch controller, GPS, Bluetooth, mobile multimedia and applications
processors, mobile power management and VoIP solutions. Our Infrastructure & Networking products
include Ethernet transceivers, controllers, switches, broadband network and security processors and
server chipsets, as well as wireless infrastructure products. Our licensing revenue and income
from the Qualcomm Agreement is generated from the licensing of intellectual property.
The following table presents net revenue from each of our reportable segments and its
respective contribution to net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
|
|
|
% |
|
|
|
September 30, 2011 |
|
|
September 30, 2010 |
|
|
|
|
|
|
Change |
|
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
Increase |
|
|
in |
|
|
|
Amount |
|
|
Revenue |
|
|
Amount |
|
|
Revenue |
|
|
(Decrease) |
|
|
Amount |
|
|
|
(In millions, except percentages) |
|
Broadband Communications |
|
$ |
526 |
|
|
|
26.9 |
% |
|
$ |
561 |
|
|
|
31.1 |
% |
|
$ |
(35 |
) |
|
|
(6.2 |
)% |
Mobile & Wireless |
|
|
942 |
|
|
|
48.1 |
|
|
|
798 |
|
|
|
44.2 |
|
|
|
144 |
|
|
|
18.0 |
|
Infrastructure & Networking |
|
|
437 |
|
|
|
22.3 |
|
|
|
395 |
|
|
|
21.8 |
|
|
|
42 |
|
|
|
10.6 |
|
All other(1) |
|
|
52 |
|
|
|
2.7 |
|
|
|
52 |
|
|
|
2.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
$ |
1,957 |
|
|
|
100.0 |
% |
|
$ |
1,806 |
|
|
|
100.0 |
% |
|
$ |
151 |
|
|
|
8.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes (i) income relating to the Qualcomm Agreement that was entered into in April 2009
and (ii) other revenue from certain patent agreements. See Notes 1 and 2 of Notes to Unaudited
Condensed Consolidated Financial Statements. |
The decrease in net revenue from our Broadband Communications reportable segment resulted
primarily from a decrease in demand for our consumer electronics products and set top boxes. The
increase in net revenue from our Mobile & Wireless reportable segment resulted primarily from an
increase in demand for our cellular solutions and wireless connectivity. The increase in net
revenue from our Infrastructure & Networking reportable segment resulted primarily from an increase
in demand for our Ethernet switching and wireless infrastructure products, offset in part by a
reduction in demand for our Ethernet controller products.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
|
|
|
|
|
% |
|
|
|
September 30, 2011 |
|
|
September 30, 2010 |
|
|
|
|
|
|
Change |
|
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
Increase |
|
|
in |
|
|
|
Amount |
|
|
Revenue |
|
|
Amount |
|
|
Revenue |
|
|
(Decrease) |
|
|
Amount |
|
|
|
(In millions, except percentages) |
|
Broadband Communications |
|
$ |
1,529 |
|
|
|
27.5 |
% |
|
$ |
1,557 |
|
|
|
32.0 |
% |
|
$ |
(28 |
) |
|
|
(1.8 |
)% |
Mobile & Wireless |
|
|
2,608 |
|
|
|
46.8 |
|
|
|
1,982 |
|
|
|
40.7 |
|
|
|
626 |
|
|
|
31.6 |
|
Infrastructure & Networking |
|
|
1,276 |
|
|
|
22.9 |
|
|
|
1,178 |
|
|
|
24.1 |
|
|
|
98 |
|
|
|
8.3 |
|
All other(1) |
|
|
156 |
|
|
|
2.8 |
|
|
|
156 |
|
|
|
3.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
$ |
5,569 |
|
|
|
100.0 |
% |
|
$ |
4,873 |
|
|
|
100.0 |
% |
|
$ |
696 |
|
|
|
14.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes (i) income relating to the Qualcomm Agreement that was entered into in April 2009
and (ii) other revenue from certain patent agreements. See Notes 1 and 2 of Notes to Unaudited
Condensed Consolidated Financial Statements. |
The decrease in net revenue from our Broadband Communications reportable segment resulted
primarily from a decrease in demand for our consumer electronics products and set top boxes,
partially offset by an increase in demand for our broadband modems. The increase in net revenue
from our Mobile & Wireless reportable segment resulted primarily from an increase in demand for our
wireless connectivity and cellular solutions. The increase in net revenue from our Infrastructure &
Networking reportable segment resulted primarily from an increase in demand for our Ethernet
switching and wireless infrastructure products offset in part by a reduction in demand for our
Ethernet controller products.
41
The following table presents net revenue from each of our reportable segments and its
respective contribution to net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
|
|
|
% |
|
|
|
September 30, 2011 |
|
|
June 30, 2011 |
|
|
|
|
|
|
Change |
|
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
in |
|
|
|
Amount |
|
|
Revenue |
|
|
Amount |
|
|
Revenue |
|
|
Increase |
|
|
Amount |
|
|
|
(In millions, except percentages) |
|
Broadband Communications |
|
$ |
526 |
|
|
|
26.9 |
% |
|
$ |
513 |
|
|
|
28.6 |
% |
|
$ |
13 |
|
|
|
2.5 |
% |
Mobile & Wireless |
|
|
942 |
|
|
|
48.1 |
|
|
|
811 |
|
|
|
45.2 |
|
|
|
131 |
|
|
|
16.2 |
|
Infrastructure & Networking |
|
|
437 |
|
|
|
22.3 |
|
|
|
420 |
|
|
|
23.3 |
|
|
|
17 |
|
|
|
4.0 |
|
All other(1) |
|
|
52 |
|
|
|
2.7 |
|
|
|
52 |
|
|
|
2.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
$ |
1,957 |
|
|
|
100.0 |
% |
|
$ |
1,796 |
|
|
|
100.0 |
% |
|
$ |
161 |
|
|
|
9.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes (i) income relating to the Qualcomm Agreement that was entered into in April 2009
and (ii) other revenue from certain patent agreements. See Notes 1 and 2 of Notes to Unaudited
Condensed Consolidated Financial Statements. |
The increase in net revenue from our Broadband Communications reportable segment resulted
primarily from an increase in demand for our consumer electronic products and set top boxes, offset
by a decrease in demand for our broadband modems. The increase in
net revenue from our Mobile &
Wireless reportable segment resulted from an increase in demand for our wireless connectivity and
cellular solutions. The increase in net revenue from our Infrastructure & Networking reportable
segment resulted primarily from an increase in demand for our Ethernet switching, wireless
infrastructure and controller products.
We recorded rebates to certain customers of $184 million, or 9.4% of net revenue, $163
million, or 9.1% of net revenue, and $145 million, or 8.0% of net revenue, in the three months
ended September 30, 2011, June 30, 2011, and September 30, 2010, respectively. We recorded rebates
of $498 million, or 8.9% of net revenue and $381 million, or 7.8% of net revenue in the nine months
ended September 30, 2011 and 2010, respectively. The increase in rebates in 2011 was attributable
to a change to the mix in sales to customers that participate in our rebate programs, primarily an
increase in the Mobile & Wireless area. 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 rebates 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 $4 million and $1 million in the three months ended September 30, 2011
and 2010, respectively and $11 million and $3 million in the nine months ended September 30, 2011
and 2010, respectively.
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 variations in consumer products and changes in the overall economic
environment. 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
products and negatively impact our cash flow.
For these and other reasons, our total net revenue and results of operations for the three and
nine months ended September 30, 2011 and prior periods may not necessarily be indicative of future
net revenue and results of operations.
42
Concentration of Net Revenue
Income from the Qualcomm Agreement is expected to be recognized in the remainder of 2011
through 2013 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
2012 |
|
2013 |
|
Thereafter |
|
Total |
|
|
(In millions) |
Income from Qualcomm Agreement |
|
$ |
52 |
|
|
$ |
186 |
|
|
$ |
86 |
|
|
$ |
|
|
|
$ |
324 |
|
The following table presents details of our product net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2011 |
|
2010 |
|
2011 |
|
2010 |
Product sales made through direct sales force (1) |
|
|
76.6 |
% |
|
|
77.6 |
% |
|
|
76.9 |
% |
|
|
78.2 |
% |
Product sales made through distributors(2) |
|
|
23.4 |
|
|
|
22.4 |
|
|
|
23.1 |
|
|
|
21.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes 8.6% and 8.3% of product sales maintained under hubbing arrangements with certain of
our customers in the three months ended September 30, 2011 and 2010, respectively, and 9.0%
and 6.6% in the nine months ended September 30, 2011 and 2010. |
|
(2) |
|
Includes 8.1% and 8.6% of product sales maintained under fulfillment distributor arrangements
in the three months ended September 30, 2011 and 2010, respectively, respectively, and 7.3%
and 7.4% in the nine months ended September 30, 2011 and 2010. |
Sales to our significant customers, including sales to their manufacturing subcontractors, as a
percentage of net revenue were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2011 |
|
2010 |
|
2011 |
|
2010 |
Five largest customers as a group |
|
|
44.0 |
% |
|
|
39.2 |
% |
|
|
41.6 |
% |
|
|
36.7 |
% |
We expect that our largest customers will continue to account for a substantial portion of our
total net revenue for the remainder of 2011 and for the foreseeable future. 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 shipments to international destinations, as a percentage of
product revenue was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2011 |
|
2010 |
|
2011 |
|
2010 |
China (exclusive of Hong Kong) |
|
|
34.6 |
% |
|
|
30.9 |
% |
|
|
33.6 |
% |
|
|
29.5 |
% |
Hong Kong |
|
|
26.5 |
|
|
|
26.4 |
|
|
|
26.3 |
|
|
|
26.2 |
|
Singapore, Taiwan and Japan |
|
|
21.9 |
|
|
|
25.8 |
|
|
|
22.4 |
|
|
|
25.2 |
|
Europe |
|
|
1.8 |
|
|
|
2.4 |
|
|
|
2.0 |
|
|
|
2.4 |
|
Other |
|
|
13.7 |
|
|
|
12.2 |
|
|
|
14.2 |
|
|
|
13.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98.5 |
% |
|
|
97.7 |
% |
|
|
98.5 |
% |
|
|
97.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
All of our revenue to date has been denominated in U.S. dollars.
Factors That May Impact Net Revenue
The demand for our products and the subsequent recognition of net 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:
|
|
|
general economic and specific conditions in the markets we address, including the
continuing volatility in the technology sector and semiconductor industry, trends in the
wired and wireless communications markets in various geographic regions, including
seasonality in sales of consumer products into which our products are incorporated; |
|
|
|
|
the timing, rescheduling or cancellation of significant customer orders and our
ability, as well as the ability of our customers and distributors, to manage inventory; |
|
|
|
|
the timing of our distributors shipments to their customers or when products are taken
by our customers under hubbing arrangements; |
|
|
|
|
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/ramp our
products and technologies; |
|
|
|
|
the qualification, availability and pricing of competing products and technologies and
the resulting effects on sales and pricing of our products; and |
|
|
|
|
the availability of credit and financing, which may lead certain of our customers to
reduce their level of purchases or to seek credit or other accommodations from us. |
Cost of Product Revenue and Product 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 income from the Qualcomm Agreement and revenue from the licensing of
intellectual property. Total gross margin is total net revenue less cost of product revenue divided
by total net revenue.
Product gross margin decreased to 49.5% in the three months ended September 30, 2011 as
compared to 50.1% in the three months ended September 30, 2010 primarily as a result of (i) an
increase in amortization of purchased intangibles and inventory step-up of $15 million due, in part
to our acquisitions completed over the last twelve months, (ii) a shift in the mix of our product
revenues with more revenues attributable to mobile and wireless products, which typically have
lower margins and (iii) an increase in warranty provisions of $6 million, offset in part by a
decrease in excess and obsolete inventory provisions of $16 million.
Product gross margin decreased to 49.4% in the nine months ended September 30, 2011 as
compared to 50.5% in the nine months ended September 30, 2010 primarily as a result of (i) an
increase in amortization of purchased intangibles and inventory step-up of $31 million primarily
due to our acquisitions completed over the last twelve months, and (ii) a shift in the mix of our
product revenues with more revenues attributable to mobile and wireless products.
44
Product gross margin decreased to 49.5% in the three months ended September 30, 2011 from
49.6% in the three months ended June 30, 2011 primarily as a result of both (i) a shift in the mix
of our product revenues with more revenues attributable to mobile and wireless products and (ii) an
increase in amortization of inventory step-up of $4 million.
Factors That May Impact Product Gross Margin
Our product gross margin 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); |
|
|
|
|
the positions of our products in their respective life cycles; |
|
|
|
|
introduction of products with lower margins; |
|
|
|
|
the effects of competition; |
|
|
|
|
the effects of competitive pricing programs and rebates; |
|
|
|
|
provisions for excess and obsolete inventories and their relationship to demand
volatility; |
|
|
|
|
manufacturing cost efficiencies and inefficiencies; |
|
|
|
|
fluctuations in direct product costs such as silicon wafer costs and assembly,
packaging and testing costs, and other fixed costs; |
|
|
|
|
our ability to create cost advantages through successful integration and convergence; |
|
|
|
|
our ability to advance to the next technology node faster than our competitors; |
|
|
|
|
licensing royalties payable by us; |
|
|
|
|
product warranty costs; |
|
|
|
|
fair value of acquired tangible and intangible assets; and |
|
|
|
|
amortization of acquired inventory valuation step-up. |
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 and total 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 costs related to
facilities and equipment expense, among other items.
45
The following table presents details of research and development expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
|
|
|
% |
|
|
|
September 30, 2011 |
|
|
September 30, 2010 |
|
|
|
|
|
|
Change |
|
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
Increase |
|
|
in |
|
|
|
Amount |
|
|
Revenue |
|
|
Amount |
|
|
Revenue |
|
|
(Decrease) |
|
|
Amount |
|
|
|
(In millions, except percentages) |
|
Salaries and benefits |
|
$ |
281 |
|
|
|
14.4 |
% |
|
$ |
235 |
|
|
|
13.0 |
% |
|
$ |
46 |
|
|
|
19.6 |
% |
Stock-based compensation(1) |
|
|
85 |
|
|
|
4.4 |
|
|
|
80 |
|
|
|
4.4 |
|
|
|
5 |
|
|
|
6.3 |
|
Development and design costs |
|
|
73 |
|
|
|
3.7 |
|
|
|
77 |
|
|
|
4.3 |
|
|
|
(4 |
) |
|
|
(5.2 |
) |
Other |
|
|
63 |
|
|
|
3.1 |
|
|
|
56 |
|
|
|
3.1 |
|
|
|
7 |
|
|
|
12.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
$ |
502 |
|
|
|
25.6 |
% |
|
$ |
448 |
|
|
|
24.8 |
% |
|
$ |
54 |
|
|
|
12.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
|
|
|
|
|
% |
|
|
|
September 30, 2011 |
|
|
September 30, 2010 |
|
|
|
|
|
|
Change |
|
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
Increase |
|
|
in |
|
|
|
Amount |
|
|
Revenue |
|
|
Amount |
|
|
Revenue |
|
|
(Decrease) |
|
|
Amount |
|
|
|
(In millions, except percentages) |
|
Salaries and benefits |
|
$ |
826 |
|
|
|
14.8 |
% |
|
$ |
682 |
|
|
|
14.0 |
% |
|
$ |
144 |
|
|
|
21.1 |
% |
Stock-based compensation(1) |
|
|
284 |
|
|
|
5.1 |
|
|
|
253 |
|
|
|
5.2 |
|
|
|
31 |
|
|
|
12.3 |
|
Development and design costs |
|
|
210 |
|
|
|
3.8 |
|
|
|
196 |
|
|
|
4.0 |
|
|
|
14 |
|
|
|
7.1 |
|
Other |
|
|
184 |
|
|
|
3.3 |
|
|
|
159 |
|
|
|
3.3 |
|
|
|
25 |
|
|
|
15.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
$ |
1,504 |
|
|
|
27.0 |
% |
|
$ |
1,290 |
|
|
|
26.5 |
% |
|
$ |
214 |
|
|
|
16.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 and stock based compensation increases were primarily
attributable to an increase in headcount of approximately 950 personnel, bringing headcount to
approximately 7,550 at September 30, 2011, which represents a 14.4% increase from our September 30,
2010 levels. Development
and design costs increased in the nine months ended September 30, 2011 due to increases in
prototyping, engineering costs and manufacturing expenses. Development and design costs vary from
period to period depending on the timing development and tape-out of various products. The increase
in the Other line item in the above table is primarily attributable to an increase in depreciation,
travel and facilities expenses.
We expect research and development costs to increase 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.
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. Substantially all
of our new products are now designed in 40 nanometer CMOS processes, and we are currently designing
products in 28 nanometer processes. We currently hold more than 5,700 U.S. and more than 2,400
foreign patents and more than 7,600 additional U.S. and foreign pending patent applications. We
maintain an active program of filing for and acquiring additional U.S. and foreign patents in wired
and wireless communications and other fields.
46
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 table presents details of selling, general and administrative expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
|
|
|
% |
|
|
|
September 30, 2011 |
|
|
September 30, 2010 |
|
|
|
|
|
|
Change |
|
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
Increase |
|
|
in |
|
|
|
Amount |
|
|
Revenue |
|
|
Amount |
|
|
Revenue |
|
|
(Decrease) |
|
|
Amount |
|
|
|
(In millions, except percentages) |
|
Salaries and benefits |
|
$ |
76 |
|
|
|
3.9 |
% |
|
$ |
62 |
|
|
|
3.4 |
% |
|
$ |
14 |
|
|
|
22.6 |
% |
Stock-based compensation(1) |
|
|
30 |
|
|
|
1.5 |
|
|
|
28 |
|
|
|
1.5 |
|
|
|
2 |
|
|
|
7.1 |
|
Legal and accounting fees |
|
|
28 |
|
|
|
1.4 |
|
|
|
32 |
|
|
|
1.8 |
|
|
|
(5 |
) |
|
|
(15.6 |
) |
Other |
|
|
30 |
|
|
|
1.6 |
|
|
|
22 |
|
|
|
1.4 |
|
|
|
9 |
|
|
|
40.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
$ |
164 |
|
|
|
8.4 |
% |
|
$ |
144 |
|
|
|
8.1 |
% |
|
$ |
20 |
|
|
|
13.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
|
|
|
|
|
% |
|
|
|
September 30, 2011 |
|
|
September 30, 2010 |
|
|
|
|
|
|
Change |
|
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
Increase |
|
|
in |
|
|
|
Amount |
|
|
Revenue |
|
|
Amount |
|
|
Revenue |
|
|
(Decrease) |
|
|
Amount |
|
|
|
(In millions, except percentages) |
|
Salaries and benefits |
|
$ |
221 |
|
|
|
4.0 |
% |
|
$ |
176 |
|
|
|
3.6 |
% |
|
$ |
45 |
|
|
|
25.6 |
% |
Stock-based compensation(1) |
|
|
99 |
|
|
|
1.8 |
|
|
|
89 |
|
|
|
1.8 |
|
|
|
10 |
|
|
|
11.2 |
|
Legal and accounting fees |
|
|
123 |
|
|
|
2.2 |
|
|
|
90 |
|
|
|
1.8 |
|
|
|
33 |
|
|
|
36.7 |
|
Other |
|
|
82 |
|
|
|
1.4 |
|
|
|
66 |
|
|
|
1.5 |
|
|
|
16 |
|
|
|
24.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
$ |
525 |
|
|
|
9.4 |
% |
|
$ |
421 |
|
|
|
8.7 |
% |
|
$ |
104 |
|
|
|
24.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 and stock based compensation were primarily attributable
to an increase in headcount of approximately 240 personnel, bringing headcount to approximately
1,800 at September 30, 2011, which represents a 15.4% increase from our September 30, 2010 levels.
The increase in legal and accounting fees primarily related to legal fees associated with the
Derivative Settlement, which included a final $25 million payment to the plaintiffs counsel for
attorneys fees, expenses and costs. Legal fees consist primarily of attorneys fees and expenses
related to our outstanding intellectual property and prior years securities litigation, patent
prosecution and filings and various other transactions. Legal fees fluctuate from period to period
due to the nature, scope, timing and costs of the matters in litigation. See Note 9 of Notes to
Unaudited Condensed Consolidated Financial Statements for further information. The increase in the
Other line item in the above table is primarily attributable to an increase in travel and
facilities expense.
47
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 |
|
|
Three Months Ended |
|
|
|
|
|
|
% |
|
|
|
September 30, 2011 |
|
|
September 30, 2010 |
|
|
|
|
|
|
Change |
|
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
in |
|
|
|
Amount |
|
|
Revenue |
|
|
Amount |
|
|
Revenue |
|
|
Increase |
|
|
Amount |
|
|
|
(In millions, except percentages) |
|
Cost of product revenue |
|
$ |
6 |
|
|
|
0.3 |
% |
|
$ |
5 |
|
|
|
0.3 |
% |
|
$ |
1 |
|
|
|
20.0 |
% |
Research and development |
|
|
85 |
|
|
|
4.4 |
|
|
|
80 |
|
|
|
4.4 |
|
|
|
5 |
|
|
|
6.3 |
|
Selling, general and administrative |
|
|
30 |
|
|
|
1.5 |
|
|
|
28 |
|
|
|
1.5 |
|
|
|
2 |
|
|
|
7.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
121 |
|
|
|
6.2 |
% |
|
$ |
113 |
|
|
|
6.2 |
% |
|
$ |
8 |
|
|
|
7.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
|
|
|
|
|
% |
|
|
|
September 30, 2011 |
|
|
September 30, 2010 |
|
|
|
|
|
|
Change |
|
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
in |
|
|
|
Amount |
|
|
Revenue |
|
|
Amount |
|
|
Revenue |
|
|
Increase |
|
|
Amount |
|
|
|
(In millions, except percentages) |
|
Cost of product revenue |
|
$ |
19 |
|
|
|
0.3 |
% |
|
$ |
17 |
|
|
|
0.3 |
% |
|
$ |
2 |
|
|
|
11.8 |
% |
Research and development |
|
|
284 |
|
|
|
5.1 |
|
|
|
253 |
|
|
|
5.2 |
|
|
|
31 |
|
|
|
12.3 |
|
Selling, general and administrative |
|
|
99 |
|
|
|
1.8 |
|
|
|
89 |
|
|
|
1.8 |
|
|
|
10 |
|
|
|
11.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
402 |
|
|
|
7.2 |
% |
|
$ |
359 |
|
|
|
7.3 |
% |
|
$ |
43 |
|
|
|
12.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We recognize stock-based compensation expense related to share-based awards, resulting from
stock options, stock purchase rights and restricted stock units we issued or assumed in
acquisitions 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. The increase in stock-based compensation in the three and nine months ended September
30, 2011 as compared to the three and nine months ended September 30, 2010 primarily related to an
increase in headcount, as well as the commencement of a new two-year offering period under our
employee stock purchase program, which resulted in a $12 million and $39 million increase in
stock-based compensation expense as compared to the three and nine months ended September 30, 2010,
respectively.
It is our long-term objective that total stock-based compensation approximates 5% of total net
revenue.
The following table presents details of unearned stock-based compensation currently estimated
to be expensed in the remainder of 2011 through 2015 related to unvested share-based payment
awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
2012 |
|
2013 |
|
2014 |
|
2015 |
|
Total |
|
|
(In millions) |
Unearned stock-based compensation |
|
$ |
115 |
|
|
$ |
354 |
|
|
$ |
226 |
|
|
$ |
116 |
|
|
$ |
15 |
|
|
$ |
826 |
|
The weighted-average period over which the unearned stock-based compensation is expected to be
recognized is 1.4 years. See Note 8 of Notes to Unaudited Condensed Consolidated Financial
Statements for a discussion of activity related to share-based awards.
48
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 |
|
|
Three Months Ended |
|
|
|
|
|
|
% |
|
|
|
September 30, 2011 |
|
|
September 30, 2010 |
|
|
|
|
|
|
Change |
|
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
in |
|
|
|
Amount |
|
|
Revenue |
|
|
Amount |
|
|
Revenue |
|
|
Increase |
|
|
Amount |
|
|
|
(In millions, except percentages) |
|
Cost of product revenue |
|
$ |
13 |
|
|
|
0.7 |
% |
|
$ |
7 |
|
|
|
0.3 |
% |
|
$ |
6 |
|
|
|
85.7 |
% |
Other operating expenses |
|
|
8 |
|
|
|
0.3 |
|
|
|
5 |
|
|
|
0.2 |
|
|
|
3 |
|
|
|
60.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
21 |
|
|
|
1.0 |
% |
|
$ |
12 |
|
|
|
0.5 |
% |
|
$ |
9 |
|
|
|
75.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
|
|
|
|
|
% |
|
|
|
September 30, 2011 |
|
|
September 30, 2010 |
|
|
|
|
|
|
Change |
|
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
in |
|
|
|
Amount |
|
|
Revenue |
|
|
Amount |
|
|
Revenue |
|
|
Increase |
|
|
Amount |
|
|
|
(In millions, except percentages) |
|
Cost of product revenue |
|
$ |
42 |
|
|
|
0.8 |
% |
|
$ |
23 |
|
|
|
0.5 |
% |
|
$ |
19 |
|
|
|
82.6 |
% |
Other operating expenses |
|
|
23 |
|
|
|
0.4 |
|
|
|
13 |
|
|
|
0.2 |
|
|
|
10 |
|
|
|
76.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
65 |
|
|
|
1.2 |
% |
|
$ |
36 |
|
|
|
0.7 |
% |
|
$ |
29 |
|
|
|
80.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in amortization of purchased intangible assets in the three and nine months ended
September 30, 2011 as compared to the three and nine months ended September 30, 2010 primarily
related to our acquisitions of Beceem Communications, Inc. in late 2010 and Provigent Inc. in 2011.
The following table presents details of the amortization of existing purchased intangible
assets, including IPR&D, that is currently estimated to be expensed in the remainder of 2011 and
thereafter:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased Intangible Asset Amortization by Year |
|
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2015 |
|
|
Thereafter |
|
|
Total |
|
|
|
(In millions) |
|
Cost of product revenue |
|
$ |
12 |
|
|
$ |
78 |
|
|
$ |
73 |
|
|
$ |
61 |
|
|
$ |
47 |
|
|
$ |
92 |
|
|
$ |
363 |
|
Other operating expenses |
|
|
7 |
|
|
|
28 |
|
|
|
10 |
|
|
|
4 |
|
|
|
4 |
|
|
|
11 |
|
|
|
64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
19 |
|
|
$ |
106 |
|
|
$ |
83 |
|
|
$ |
65 |
|
|
$ |
51 |
|
|
$ |
103 |
|
|
$ |
427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
If we acquire additional purchased intangible assets in the future, including our proposed
acquisition of NetLogic, our cost of product revenue or operating expenses will be increased by the
amortization of those assets.
Impairment of Long-Lived Assets
In September 2011 we recorded a purchased intangible impairment charge of $9 million primarily
related to our acquisition of Teknovus, Inc. in 2010. The primary factor contributing to this
impairment charge was a reduction in the forecasted cash flows related to networking business. In
June 2011 we recorded a purchased intangible impairment charge of $74 million related to our
acquisition of Beceem in 2010. The primary factor contributing to this impairment charge was a
reduction in the forecasted cash flows related to WiMAX products, as wireless service providers
have accelerated their adoption of competing Long Term Evolution, LTE, products. In March 2011 we
recorded an impairment charge of $9 million primarily related to a technology license that was
acquired in 2008. The primary factor contributing to this impairment charge was the continued
reduction in the forecasted cash flows for our Blu-ray Disc business. In the three and nine months
ended September 30, 2010 we recorded an impairment charge to developed technology of $2 million.
49
In determining the amount of these impairment charges, we calculated fair values as of the
impairment date for acquired developed technology, in-process research and development and customer
relationships. The fair value for the first two assets was determined using the multiple period
excess earnings method. The fair value of acquired customer relationships was based on the benefit
derived from the incremental revenue and related cash flow as a direct result of the customer
relationship. The fair values were determined using significant unobservable inputs, categorized as
Level 3 inputs.
Restructuring Costs
As part of our regular portfolio
management review process and in light of our decision to significantly reduce our investment in our digital television
and Blu-ray Disc lines of business within our Broadband Communications operating segment, in September 2011 we
began implementing a restructuring plan to reduce our worldwide headcount by approximately 300 employees. We recorded $17 million in restructuring costs
in the three months ended September 30, 2011, of which $15 million was related to severance and
other charges associated with our reduction in workforce across multiple locations and functions,
and $2 million was related to the closure of one of our facilities. Most of these expenses will be
paid in the three months ended December 31, 2011. We currently expect to complete this plan by the
end of 2011 and will record additional costs of approximately $6 million in the three months ended
December 31, 2011, primarily for additional facilities closures. Overall we currently dont
expect any cost savings as we expect to reallocate funding to higher return opportunities.
Settlement Costs (Gains)
In the three and nine months ended September 30, 2011 we recorded a net settlement loss of $27
million and a net settlement gain of $23 million, primarily related to patent infringement claims
and the Derivative Settlement. We recorded settlement charges of $4 million in the nine months
ended September 30, 2010.
On March 18, 2011 Broadcom announced that the remaining defendants in the federal consolidated
shareholder derivative action relating to the companys historical stock option accounting
practices entered into a settlement. On May 23, 2011, the District Court entered an order granting
final approval of the Derivative Settlement. Pursuant to the Derivative Settlement:
|
- |
|
Broadcom received a payment from Henry T. Nicholas, III, our former President and Chief Executive Officer and former Co-Chairman
of the Board, of approximately $27 million; |
|
|
- |
|
Broadcom cancelled unexercised Broadcom stock options held by Dr. Henry Samueli, our Chief Technical Officer and member of our Board of
Directors, valued at
approximately $14 million, using a Black-Scholes analysis based on the closing price of
Broadcoms Class A common stock on the date the settlement was deemed final; Such stock
options were originally valued at $24 million for purposes of the settlement (using the
same methodology used to value equity granted to employees in the February annual focal
compensation review); and |
|
|
- |
|
Dr. Samueli contributed approximately $2 million in cash to the Broadcom Foundation
(through Broadcom Corporation). |
These amounts were recorded as settlement gains in our unaudited condensed consolidated
statements of income. For a further discussion of litigation matters, see Note 9 of Notes to the
Unaudited Condensed Consolidated Financial Statements.
Charitable Contribution
In June 2011 we contributed $25 million to the Broadcom Foundation to support science,
technology, engineering and mathematics programs, as well as a broad range of community services.
This payment was recorded as an operating expense in our unaudited condensed consolidated
statements of income in the nine months ended September 30, 2011. Approximately $2 million of the
$25 million contribution came from Dr. Samueli, who made such payment to Broadcom Corporation in
connection with the settlement of the shareholder derivative litigation as further described in
Note 9.
50
Interest and Other Income (Expense), Net
The following table presents interest and other income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Three Months Ended |
|
|
|
|
|
% |
|
|
September 30, 2011 |
|
September 30, 2010 |
|
|
|
|
|
Change |
|
|
|
|
|
|
% of Net |
|
|
|
|
|
% of Net |
|
Increase |
|
in |
|
|
Amount |
|
Revenue |
|
Amount |
|
Revenue |
|
(Decrease) |
|
Amount |
|
|
(In millions, except percentages) |
Interest income (expense), net |
|
$ |
(1 |
) |
|
|
(0.1 |
)% |
|
$ |
2 |
|
|
|
0.2 |
% |
|
$ |
(3 |
) |
|
|
(150.0 |
)% |
Other income (expense), net |
|
|
7 |
|
|
|
0.4 |
|
|
|
(1 |
) |
|
|
(0.1 |
) |
|
|
8 |
|
|
|
(800.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
Nine Months Ended |
|
|
|
|
|
% |
|
|
September 30, 2011 |
|
September 30, 2010 |
|
|
|
|
|
Change |
|
|
|
|
|
|
% of Net |
|
|
|
|
|
% of Net |
|
Increase |
|
in |
|
|
Amount |
|
Revenue |
|
Amount |
|
Revenue |
|
(Decrease) |
|
Amount |
|
|
(In millions, except percentages) |
Interest income (expense), net |
|
$ |
(1 |
) |
|
|
0.0 |
% |
|
$ |
7 |
|
|
|
0.1 |
% |
|
$ |
(8 |
) |
|
|
(114.3 |
)% |
Other income (expense), net |
|
|
7 |
|
|
|
0.1 |
|
|
|
4 |
|
|
|
0.1 |
|
|
|
3 |
|
|
|
75.0 |
|
Interest income (expense), net, reflects interest income earned on cash, cash equivalents and
marketable securities balances offset by interest expense. Other income (expense), net, primarily
includes gains and losses on foreign currency transactions.
The decrease in interest income (expense), net, for the three and nine months ended September
30, 2011 as compared to the three and nine months ended September 30, 2010 was driven primarily by
interest expense related to our long-term debt and the current interest rate environment. Our cash
and marketable securities balances increased from $2.91 billion at September 30, 2010 to $4.24
billion at September 30, 2011, primarily due to net cash provided by operating activities, proceeds
from exercise of stock options and stock purchase rights and proceeds from the issuance of our
long-term debt. The annualized average interest rates earned in the three months ended September
30, 2011 and 2010 were 0.38% and 0.47%, respectively. The average interest rates earned in the nine
months ended September 30, 2011 and 2010 were 0.47% and 0.42%, respectively. The average interest
rate for our long-term debt in the three and nine months ended September 30, 2011 were 0.43% and
0.43%, respectively.
Provision for Income Taxes
We recorded tax provisions of $6 million and $7 million for the three and nine months ended
September 30, 2011, respectively, and tax provisions of $8 million and $9 million for the three and
nine months ended September 30, 2010, respectively. Our effective tax rates were 2.2% and 1.0% for
the three and nine months ended September 30, 2011, respectively, and 2.4% and 1.1% for the three
and nine months ended September 30, 2010, 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 in the three and nine months ended September 30, 2011 and
2010, and tax benefits resulting primarily from the expiration of statutes of limitations for the
assessment of taxes in various foreign jurisdictions of $6 million for the nine months ended
September 30, 2011, and $7 million for the nine months ended September 30, 2010. As part of our
acquisition of Innovision Research & Technology plc, we recorded a tax provision of $3 million for
the three and nine months ended September 30, 2010 for certain acquired deferred tax assets. We
also recorded a tax benefit of approximately $3 million in the nine months ended September 30, 2010
resulting primarily from the March 22, 2010 decision in the U.S. Court of Appeals for the Ninth
Circuit case concerning Xilinx (as disclosed in prior periods). During the quarter ended June 30,
2011 we completed our analysis under Internal Revenue Code Sections 382 and 383 for our 2010
acquisition of Beceem Communications, Inc., and determined there was no resulting material
limitation on our ability to utilize the acquired net operating loss and tax credit carryforwards.
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
51
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 liabilities of $50 million and $17 million
at September 30, 2011 and December 31, 2010, respectively. The increase in net deferred tax
liabilities for the nine months ended September 30, 2011 primarily related to $43 million of net
deferred tax liabilities from our acquisition of Provigent Inc. in April 2011.
We file federal, state and foreign income tax returns in jurisdictions with varying statutes
of limitations. The 2007 through 2010 tax years generally remain subject to examination by federal
and most state tax authorities. In foreign jurisdictions, the 2002 through 2010 tax years generally
remain subject to examination by tax authorities.
On June 30, 2011 we concluded the Internal Revenue Service (IRS) examination of our income tax
returns for 2004 through 2006, executed a closing agreement covering the 2001 through 2006 tax
years, and agreed to certain adjustments for the 2001 through 2006 tax years, primarily related to
intercompany transfer pricing transactions. Those audit adjustments were offset by federal net
operating losses and credits, and did not result in any income tax expense or cash tax liability
for the Company. As a result of the IRS examination, taking into account effects on post-audit
periods, we reduced our federal net operating losses by approximately $620 million and we reduced
amounts relating to uncertain tax benefits by approximately $180 million as of September 30, 2011.
This reduction in federal net operating loss carryforwards was fully offset with a reduction in our
valuation allowance for deferred tax assets, and had no impact on our operating results or
financial position. We are currently calculating the reduction of our state net operating loss
carryforwards resulting from the IRS audit, and such reduction will be fully offset with a
corresponding reduction in our valuation allowance for deferred tax assets and will not impact our
operating results or financial position.
In December, 2010 the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act
of 2010 was enacted. A provision in this legislation provided for the extension of the research and
development tax credit for qualifying expenditures paid or incurred from January 1, 2010 through
December 31, 2011. As a result of this legislation, we generated federal research and development
tax credits of $145 million for the year ended December 31, 2010 and expect to generate additional
research and development tax credits for the year ended December 31, 2011. These tax credits, if
unutilized, will carry forward to future periods. No tax benefit was recorded for these
carryforwards since we have a full valuation allowance on our U.S. deferred tax assets.
We operate under tax holidays in Singapore, which are effective through March 2014. The tax
holidays are conditional upon our meeting certain employment and investment thresholds.
Recent Accounting Pronouncements
See Note 1 of Notes to Unaudited Condensed Consolidated Financial Statements for a description
of recent accounting pronouncements.
52
Liquidity and Capital Resources
Working Capital and Cash and Marketable Securities. The following table presents working
capital, and cash and cash equivalents and marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
Increase |
|
|
|
2011 |
|
|
2010 |
|
|
(Decrease) |
|
|
|
(In millions) |
|
Working capital |
|
$ |
3,261 |
|
|
$ |
2,913 |
|
|
$ |
348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
2,333 |
|
|
$ |
1,622 |
|
|
$ |
711 |
|
Short-term marketable securities |
|
|
726 |
|
|
|
1,035 |
|
|
|
(309 |
) |
Long-term marketable securities |
|
|
1,184 |
|
|
|
1,401 |
|
|
|
(217 |
) |
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents and marketable securities |
|
$ |
4,243 |
|
|
$ |
4,058 |
|
|
$ |
185 |
|
|
|
|
|
|
|
|
|
|
|
See 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, 2011 and 2010
Cash and cash equivalents increased to $2.33 billion at September 30, 2011 from $1.62 billion
at December 31, 2010 as a result of cash provided by operating activities, proceeds from marketable
securities and the issuance of our Class A common stock, offset in part by repurchases of our Class
A common stock, net cash paid for acquired companies, our quarterly dividend payments and net
purchases of property and equipment.
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In millions) |
|
Net cash provided by operating activities |
|
$ |
1,356 |
|
|
$ |
919 |
|
Net cash provided by (used in) investing activities |
|
|
35 |
|
|
|
(934 |
) |
Net cash used in financing activities |
|
|
(680 |
) |
|
|
(136 |
) |
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
$ |
711 |
|
|
$ |
(151 |
) |
Cash and cash equivalents at beginning of period |
|
|
1,622 |
|
|
|
1,397 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
2,333 |
|
|
$ |
1,246 |
|
|
|
|
|
|
|
|
Operating Activities
In the nine months ended September 30, 2011 our operating activities provided $1.36 billion in
cash. This was primarily the result of net income of $673 million, net non-cash operating expenses
of $624 million and net cash provided by changes in operating assets and liabilities of $59
million. In the nine months ended September 30, 2010 our operating activities provided $919 million
in cash. This was primarily the result of net income of $816 million and net non-cash operating
expenses of $455 million, offset in part by net cash used by changes in operating assets and
liabilities of $352 million including our $161 million payment of previously accrued securities
litigation settlement costs.
Our days sales outstanding remained flat at 38 days for the three months ended September 30,
2011 as compared to the three months ended December 31, 2010. 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 have difficulty gaining access to sufficient credit on a timely basis.
Our inventory days on hand decreased from 57 days at December 31, 2010 to 47 days at September
30, 2011. In the future, our inventory levels will continue to be determined by the level of
purchase orders we receive and the
53
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.
Investing Activities
Investing activities provided $35 million in cash in the nine months ended September 30, 2011,
which was primarily the result of $523 million in net proceeds from sales and maturities of
marketable securities, offset in part by $347 million in net cash paid for our acquisitions of
Provigent and SC Square and $141 million of capital equipment purchases to support our research and
development efforts. Investing activities used $934 million in cash in the nine months ended
September 30, 2010, which was primarily the result of $694 million in net purchases of marketable
securities, $150 million in net cash paid primarily for the acquisitions of Teknovus and Innovision
and $82.0 million of capital equipment purchases, mostly to support our research and development
efforts.
Financing Activities
Our financing activities used $680 million in cash in the nine months ended September 30,
2011, which was primarily the result of $670 million in repurchases of shares of our Class A common
stock, dividends paid of $145 million, and $123 million in minimum tax withholding paid on behalf
of employees for shares issued pursuant to restricted stock units, offset in part by $258 million
in proceeds received from issuances of common stock upon the exercise of stock options and pursuant
to our employee stock purchase plan. Our financing activities used $136 million in cash in the nine
months ended September 30, 2010, which was primarily the result of $275 million in repurchases of
shares of our Class A common stock, dividends paid of $121 million, repayment of debt assumed in
our Teknovus acquisition of $15 million and $97 million in minimum tax withholding paid on behalf
of employees for shares issued pursuant to restricted stock units, offset in part by $372 million
in proceeds received from issuances of common stock upon exercise of stock options and pursuant to
our employee stock purchase plan.
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 general practice to issue a combination of time-based and
performance-based RSUs only to certain employees and, in most cases to issue solely time-based
RSUs. We may issue stock options in the future and currently plan to only do so in connection with
acquisitions. 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.
Senior Notes
The following table summarizes the principal amount of our senior unsecured notes:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In millions) |
|
1.500% fixed-rate notes, due 2013 |
|
$ |
300 |
|
|
$ |
300 |
|
2.375% fixed-rate notes, due 2015 |
|
|
400 |
|
|
|
400 |
|
|
|
|
|
|
|
|
|
|
$ |
700 |
|
|
$ |
700 |
|
|
|
|
|
|
|
|
In November 2010 we issued senior unsecured notes in an aggregate principal amount of $700
million. These Notes consist of $300 million aggregate principal amount of notes which mature in
November 2013, or the 2013 Notes, and bear interest at a fixed rate of 1.500% per annum, and $400
million aggregate principal amount of notes which mature in November 2015, or the 2015 Notes, and
bear interest at a fixed rate of 2.375% per annum. Interest is payable in cash semi-annually in
arrears on May 1 and November 1 of each year, beginning on May 1, 2011. The 2013 Notes were issued
with an original issue discount at 99.694% and the 2015 Notes were issued with an original
54
issue
discount at 99.444% and are recorded as long-term debt, net of original issue discount. The
discount and debt issuance costs associated with the issuance of the Notes are amortized to
interest expense over their respective terms.
In the three months ended September 30, 2011 we entered into and completed an exchange offer
registration statement to issue registered notes with substantially identical terms as the original
Notes. Nearly all of the original notes were exchanged. The exchange offer was made in order to
satisfy certain obligations of Broadcom contained in a Registration Rights Agreement, dated as of
November 1, 2010.
We may redeem the Notes at any time, subject to a specified make-whole premium as defined in
the indenture governing the Notes. In the event of a change of control triggering event, each
holder of Notes will have the right to require us to purchase for cash all or a portion of their
Notes at a redemption price of 101% of the aggregate principal amount of such Notes, plus accrued
and unpaid interest. Default can be triggered by any missed interest or principal payment, breach
of covenant, or in certain events of bankruptcy, insolvency or reorganization.
The Notes contain a number of restrictive covenants, including, but not limited to,
restrictions on our ability to grant liens on assets; enter into sale and lease-back transactions;
or merge, consolidate or sell assets. Failure to comply with these covenants, or any other event of
default, could result in acceleration of the principal amount and accrued but unpaid interest on
the Notes.
We were in compliance with all debt covenants as of September 30, 2011.
Credit Facility
In November 2010 we entered into a credit facility with certain institutional lenders that
provides for unsecured revolving facility loans, swingline loans and letters of credit in an
aggregate amount of up to $500 million. The credit facility matures on November 19, 2014, at which
time all outstanding revolving facility loans and accrued and unpaid interest must be repaid. We
did not draw on our credit facility in 2010 or in the nine months ended September 30, 2011.
Any advances under a Eurodollar Rate Committed Loan will accrue interest at the British
Bankers Association LIBOR, or BBA LIBOR, plus the Applicable Rate. Any advances under a US Dollar
Base Rate Committed Loan will accrue interest at rates that are equal to the higher of (a) the
Federal Funds Rate plus 0.5% (b) Bank of Americas prime rate as announced from time to time, or
(c) BBA LIBOR plus the Applicable Rate. The Applicable Rate is based on our senior debt credit
ratings as published by Standard & Poors Rating Services and Moodys Investors Service, Inc. We
are also required to pay a commitment fee on the actual daily unused amount of commitments. We may
also, upon the agreement of the existing lenders, increase the commitments under the credit
facility by up to an additional $100 million.
The Credit Facility contains customary representations and warranties as well as affirmative,
negative and financial covenants. Financial covenants require us to maintain a consolidated
leverage ratio of no more than 3.25 to 1.00 and a consolidated interest coverage ratio of no less
than 3.00 to 1.00.
We were in compliance with all debt covenants as of September 30, 2011.
Other Notes and Borrowings
We had no other significant notes or borrowings as of September 30, 2011.
Prospective Capital Needs
We believe that our existing cash, cash equivalents and marketable securities, together with
cash generated from operations and from the issuance of common stock through our employee stock
option and purchase plans, will be sufficient to cover our working capital needs, capital
expenditures, investment requirements, commitments, repurchases of our Class A common stock and
quarterly dividends for at least the next 12 months. However, it is possible that we may choose to
raise additional funds or draw on our existing credit facility to finance our activities
55
beyond the
next 12 months or to consummate acquisitions of other businesses, assets, products or technologies,
including our pending acquisition of NetLogic. 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.
We expect our acquisition of NetLogic for $50 per share, or approximately $3.7 billion, to
close in the first half of 2012. We currently expect to fund the acquisition with our available
cash and cash equivalents and marketable securities or alternatively we may consider a capital
markets transaction.
We earn a significant amount of our operating income outside the U.S., which income is deemed
to be permanently reinvested in foreign jurisdictions. For at least the next 12 months, we have
sufficient cash in the U.S. and expect domestic cash flow to sustain our operating activities and
cash commitments for investing and financing activities, such as acquisitions, quarterly dividends,
share buy-backs and repayment of debt. In addition, we expect existing foreign cash, cash
equivalents, short-term investments, and cash flows from operations to continue to be sufficient to
fund our foreign operating activities and cash commitments for investing activities, such as
material capital expenditures, for at least the next 12 months.
If we require more capital in the U.S. than is generated by our domestic operations, any
taxable income that could result from the repatriation of our foreign earnings would be offset by
our net operating loss and research and development tax credit carryforwards, which are currently
subject to a full valuation allowance on our deferred tax assets, and would not be expected to have
a material effect on our operating results or financial position.
In addition, even though we may not need additional funds, we may still elect to sell
additional equity or debt securities or utilize or increase our existing credit facilities for
other reasons. We intend to actively explore the bank lending and bond markets in the fourth
quarter ending December 31, 2011 and will be opportunistic about borrowing should we be able to
obtain the right terms. However, we may not be able to obtain additional funds on a timely basis at
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.
As of September 30, 2011, we have approximately $1.21 billion of cash, cash equivalents, and
short-term investments held by our foreign subsidiaries. As a result of the June 30, 2011 closing
of our IRS audit and agreed adjustments to income for the 2001 through 2006 tax years, $802 million
was paid from our foreign subsidiaries to Broadcom Corporation during the three months ended
September 30, 2011. This amount was not subject to additional income tax. The income resulting
from the IRS adjustments was offset by net operating loss carryforwards. Any potential additional
income, which could result if we were to repatriate the remaining $1.21 billion of foreign cash, cash
equivalents and short-term investments would be offset by existing net operating loss and research
and development tax credit carryforwards and should not have a material effect on our tax
liabilities. Our net operating loss and research and development tax credit carryforwards are
currently subject to a full valuation allowance.
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:
|
|
|
general economic and specific conditions in the markets we address, including the
continuing volatility in the technology sector and semiconductor industry, trends in the
wired and wireless communications markets in various geographic regions, including
seasonality in sales of consumer products into which our products are incorporated; |
|
|
|
|
acquisitions of businesses, assets, products or technologies; |
|
|
|
|
the unavailability of credit and financing, which may lead certain of our customers to
reduce their levels of purchases or to seek credit or other accommodations from us; |
|
|
|
|
litigation expenses, settlements and judgments; |
56
|
|
|
the overall levels of sales of our semiconductor products, licensing revenue, income
from the Qualcomm Agreement and product gross margins; |
|
|
|
|
our business, product, capital expenditure and research and development plans, and
product and technology roadmaps; |
|
|
|
|
the market acceptance of our products; |
|
|
|
|
repurchases of our Class A common stock; |
|
|
|
|
payment of cash dividends; |
|
|
|
|
required levels of research and development and other operating costs; |
|
|
|
|
volume price discounts and customer rebates; |
|
|
|
|
intellectual property disputes, customer indemnification claims and other types of
litigation risks; |
|
|
|
|
the levels of inventory and accounts receivable that we maintain; |
|
|
|
|
licensing royalties payable by us; |
|
|
|
|
changes in our compensation policies; |
|
|
|
|
the issuance of restricted stock units and the related cash payments we make for
withholding taxes due from employees; |
|
|
|
|
capital improvements for new and existing facilities; |
|
|
|
|
technological advances; |
|
|
|
|
our competitors responses to our products and our anticipation of and responses to
their products; |
|
|
|
|
our relationships with suppliers and customers; |
|
|
|
|
the availability and cost of sufficient foundry, assembly and test capacity and
packaging materials; and |
|
|
|
|
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, 2011 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
We manage our total portfolio to encompass a diversified pool of investment-grade securities
to preserve principal and maintain liquidity. The average credit rating of our marketable
securities portfolio by major credit rating agencies was Aa3/AA-. 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
57
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, 2011, a 100 basis point increase in interest rates across
all maturities would result in a $16 million incremental decline in the fair market value of the
portfolio. As of December 31, 2010, a similar 100 basis point increase in interest rates across all
maturities would result in a $23 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, 2011 due to the inherent limitations associated with
predicting the changes in the timing and level of interest rates and our actual exposures and
positions.
A hypothetical increase of 100 basis points in short-term interest rates would not have a
material impact on our revolving credit facility, which bears a floating interest rate. This
sensitivity analysis assumes all other variables will remain constant in future periods.
Our Senior Notes bear fixed interest rates, and therefore, would not be subject to interest
rate risk.
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.
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 Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure
controls and procedures, as such term is
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defined under Rules 13a-15(e) and 15d-15(e) promulgated
under the Exchange Act. Based on this evaluation, our Chief Executive Officer and our Chief
Financial Officer concluded that our disclosure controls and procedures were effective at a
reasonable assurance level as of September 30, 2011, 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, 2011 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 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, 2010 and subsequent reports on Forms 10-Q and 8-K. 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 quarterly operating results may fluctuate significantly.
Our quarterly net revenue and operating results have fluctuated significantly in the past and
are likely to continue to vary from quarter to quarter. Variability in the nature of our operating
results may be attributed to the factors identified throughout this Risk Factors section, many of
which may be outside our control, including:
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changes in economic conditions in the markets we address, including the continuing
volatility in the technology sector and semiconductor industry; |
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seasonality in sales of consumer and enterprise products in which our products are
incorporated; |
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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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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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changes in customer product needs and market acceptance of our products; |
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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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the impact of a significant natural disaster, such as an earthquake, severe weather,
tsunamis or other flooding, or a nuclear crisis, as well as interruptions or shortages in
the supply of utilities such as water and electricity, on a key location such as our
corporate headquarters or our Northern California facilities, both of which are located
near major earthquake fault lines; and |
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the impact of tax examinations. |
We depend on a few significant customers for a substantial portion of our revenue.
We derive a substantial portion of our revenue from sales to a relatively small number of
customers. Sales to our five largest customers represented 41.6% and 36.7% of our total net revenue
in the nine months ended September 30, 2011 and 2010, respectively. We expect that our largest
customers will continue to account for a substantial portion of our total net revenue for the
foreseeable future. The loss of any significant customer could materially and adversely affect our
financial condition and results of operations.
A significant portion of our revenue in any period 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.
We may not be able to maintain sales to certain of our key customers or continue to secure key
design wins for a variety of reasons, including:
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agreements with our customers typically do not require them to purchase a minimum
quantity of our products; and |
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our customers can stop incorporating our products into their own products with limited
notice to us and suffer little or no penalty. |
In addition, the majority of our licensing revenues and related income to date has been
derived from agreements with two customers, Verizon Wireless and Qualcomm. Our patent license
agreements with these two customers are expected to result in licensing revenue and related income
of approximately $1.02 billion over a six year period. From January 2008 through September 2011, we
recorded $700 million in licensing revenue and related income derived from Verizon Wireless and
Qualcomm. The licensing revenue from our agreement with Verizon Wireless has ended and the income
from the Qualcomm Agreement is non-recurring and will terminate in 2013. There can be no assurances
that we will be able to enter into additional such arrangements in the future, or that we will be
able to successfully collect the remaining payments due to us under the Qualcomm Agreement in the
event of a default by Qualcomm.
The loss of a key customer or design win, a reduction in sales to any key customer, decrease
in licensing revenue, 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.
We face intense competition.
The semiconductor industry in particular and the wired and wireless communications markets are
intensely competitive. We expect competition to continue to increase as new markets develop, as
industry standards become well known and as other competitors enter our business. We expect to
encounter further consolidation in the markets in which we compete.
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Many of our competitors have longer operating histories and presences 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, and in some cases operate
their own fabrication facilities. 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. We also face competition from newly
established competitors, suppliers of products, and customers who choose to develop their own
semiconductor solutions.
Existing or new competitors may 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 also has resulted in and is likely to
continue to result in increased expenditures on research and development, declining average selling
prices, reduced gross margins and loss of market share in certain markets. These factors in turn
create increased pressure to consolidate. 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 face risks associated with our acquisition strategy.
A key element of our business strategy involves expansion through the acquisitions of
businesses, assets, products or technologies. The expansion of our business through acquisitions
allows us to complement our existing product offerings, expand our market coverage, increase our
engineering workforce or enhance our technological capabilities. We may not be able to identify or
consummate future acquisitions or realize the desired benefit from these acquisitions.
We face a number of challenges associated with our acquisition strategy that could disrupt our
ongoing business and distract our management team, including:
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delays in the timing and successful integration of an acquired companys technologies; |
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the loss of key personnel; |
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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; |
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lower gross margins, revenues and operating income than originally anticipated at the
time of acquisition and other financial challenges; and |
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becoming subject to intellectual property or other litigation. |
Acquisitions can result in increased debt or contingent liabilities. While we believe we will
have the ability to service any additional debt we may potentially issue in connection with
acquisitions, our ability to make principal and interest payments when due depends upon our future
performance, which will be subject to general economic conditions, industry cycles, and business
and other factors affecting our operations, including the other risk factors described in this
section, many of which are beyond our control. Acquisitions can also result in adverse tax
consequences, warranty or product liability exposure related to acquired assets, additional
stock-based compensation expense, write up of acquired inventory to fair value, and the recording
and later amortization of amounts related to certain purchased intangible assets. In addition, we
may record goodwill and other purchased intangible assets in connection with an acquisition and
incur impairment charges in the future. Each of the above may apply equally to our pending
acquisition of NetLogic Microsystems, Inc., which is our largest acquisition to date.
Our operating results may be adversely impacted by worldwide economic uncertainties and specific
conditions in the markets we address.
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
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characterized by decreases in product demand, excess customer
inventories and accelerated erosion of prices. The semiconductor industry also periodically
experiences increased demand and production capacity constraints, which may affect our ability to
ship products. An increasing number of our products are being incorporated into consumer electronic
products, which are subject to significant seasonality and fluctuations in demand. Economic
volatility can cause extreme difficulties for our customers and vendors to accurately forecast and
plan future business activities. This unpredictability could cause our customers to reduce spending
on our products and services, which would delay and lengthen sales cycles. Furthermore, during
challenging economic times our customers and vendors may face issues gaining timely access to
sufficient credit, which could impact their ability to make timely payments to us. As a result, we
may experience growth patterns that are different than the end demand for products, particularly
during periods of high volatility.
We cannot predict the timing, strength or duration of any economic slowdown or recovery or the
impact of such events on our customers, our vendors or us. The combination of our lengthy sales
cycle coupled with challenging macroeconomic conditions and supply chain cross-dependencies could
have a compound impact on our business. The impact of market volatility is not limited to revenue
but may also affect our product gross margins and other financial metrics. Any downturn 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.
We may fail to adjust our operations in response to changes in demand.
Through internal growth and acquisitions, we significantly modified the scope of our
operations and workforce in recent years. 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 and our highly skilled workforce. During some periods, our growth has placed a significant
strain on our management personnel, systems and resources. To respond to periods of increased
demand, we will be required to expand, train, manage and motivate our workforce. Alternatively, in
response to the economic downturn in the markets in the semiconductor industry and communications
market, we may be required to implement restructuring actions and a number of other cost saving
measures, such as we did with our
digital television and Blu-ray Disc lines of businesses within our Broadband Communications
operating segment in September 2011. All of these endeavors require substantial management effort.
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.
Our stock price is highly volatile.
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, 2009
through September 30, 2011 our Class A common stock has traded at prices as low as $15.31 and as
high as $47.39 per share. Fluctuations have occurred and may continue to occur in response to
various factors, many of which we cannot control.
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. 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 decline. 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 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.
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We may be required to defend against alleged infringement of intellectual property rights of others
and/or may be unable to adequately protect or enforce our own intellectual property rights.
Companies in the semiconductor industry and the wired and wireless communications markets
aggressively protect and pursue their intellectual property rights. From time to time, we receive
notices that claim we have infringed upon, misappropriated or misused other parties proprietary
rights. Additionally, we receive notices that challenge the validity of our patents. Intellectual
property litigation can be expensive, time consuming and distracting to management. An adverse
determination in any of these types of disputes could prevent us from manufacturing or selling some
of our products or could prevent us from enforcing our intellectual property rights.
We may also be required to indemnify some customers and strategic partners under our
agreements 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.
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. Any of these claims or litigation
may materially and adversely affect our business, financial condition and results of operations.
Furthermore, our success and future revenue growth will depend, in part, on our ability to
protect our intellectual property. It is possible that competitors or other unauthorized third
parties may obtain, copy, use or disclose our technologies and processes. Any of our existing or
future patents may be challenged, invalidated or circumvented. We engage 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. If our intellectual
property rights do not adequately protect our technology, our competitors may be able to offer
products similar to ours.
Our software may be derived from open source software, which is generally made available to
the public by its authors and/or other third parties. Open source software is often made available
under licenses, which impose certain obligations in the event we 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 on different terms than those
customarily used to protect our intellectual property. With respect to our proprietary software, we
generally license such software under terms that prohibit combining it with open source software.
Despite these restrictions, parties may combine our 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 enter into confidentiality agreements with our employees, consultants and strategic
partners. We also 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.
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.
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. Identifying
unauthorized use of our products and technologies is difficult and time consuming. The initiation
of litigation may adversely affect our relationships and agreements with certain customers that
have a stake in the outcome of the litigation proceedings. Litigation is very expensive and may
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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We are subject to order and shipment uncertainties.
It is difficult to accurately predict demand for our semiconductor products. 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. Our ability to accurately forecast customer demand is further impaired by delays inherent
in our lengthy sales cycle. We operate in a dynamic industry and use significant resources to
develop new products for existing and new markets. After we have developed a product, there is no
guarantee that our customers will integrate our product into their equipment or devices and,
ultimately, bring those equipment and devices incorporating our product to market. In these
situations, we may never produce or deliver a significant number of our products, even after
incurring substantial development expenses. From the time a customer elects to integrate our
solution into their product, it is typically six to 24 months before high volume production of that
product commences. After volume production begins, we cannot be assured that the equipment or
devices incorporating our product will gain market acceptance.
Our products are incorporated into complex devices and systems, creating supply chain cross-
dependencies. Accordingly, supply chain disruptions affecting
components of our customers devices and/or systems could negatively impact the demand for our
products, even if the supply of our products is not directly affected.
Our product demand forecasts are based on multiple assumptions, each of which may introduce
error into our estimates. In the event we overestimate customer demand, we may allocate resources
to manufacturing products that we may not be able to sell. 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. Also, due to our industrys shift to just-in-time inventory
management, any disruption in the supply chain could lead to more immediate shortages in product or
component supply. In addition, an increasing percentage of our inventory is maintained under
hubbing arrangements whereby products are delivered to a customer or third party warehouse based
upon the customers projected needs. Under these arrangements, we do not recognize product revenue
until the customer reports that it has removed our product from the warehouse to incorporate into
its end products. Our ability to effectively manage inventory levels may be impaired under our
hubbing arrangements, which could increase expenses associated with excess and obsolete product
inventory and negatively impact our cash flow.
We manufacture and sell complex products and may be unable to successfully develop and introduce
new products.
We expect that a high percentage of our future sales will come from sales of new products. We
sell products in markets that are characterized by rapid technological change, evolving industry
standards, frequent new product introductions and short product life cycles. The markets for some
of these products are new to us and may be immature and/or unpredictable. These markets may not
develop into profitable opportunities and we have invested substantial resources in emerging
technologies that did not achieve the market acceptance that we had expected. As a result, it is
difficult to anticipate our future revenue streams from, or the sustainability of, our new
products.
Our industry is dynamic and we are required to devote significant resources to research and
development to remain competitive. The development of new silicon devices is highly complex, and
due to supply chain cross-dependencies and other issues, we may experience delays in completing the
development, production and introduction of our new products. We may choose to discontinue one or
more products or product development programs to dedicate more resources to other products. The
discontinuation of an existing or planned product may adversely affect our relationship with one or
more of our customers.
Our ability to successfully develop and deliver new products will depend on various factors,
including our ability to:
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effectively identify and capitalize upon opportunities in new markets; |
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timely complete and introduce new integrated products; |
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transition our semiconductor products to increasingly smaller line width geometries; |
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license any desired third party technology or intellectual property rights; |
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obtain sufficient foundry capacity and packaging materials; and |
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qualify and obtain industry interoperability certification of our products. |
If we are not able to develop and introduce new products in a cost effective and timely
manner, we will be unable to attract new customers or to retain our existing customers which would
materially and adversely affect our results of operations.
We have experienced hardware and software defects and bugs associated with the introduction of
our highly complex products. If any of our products contain defects or bugs, or have reliability,
quality or compatibility problems, our reputation may be damaged and customers may be reluctant to
buy our products. These problems could interrupt or delay sales and shipments of our products to
customers. To alleviate these problems, we may have to divert our resources from other development
efforts. In addition, these problems could result in claims against us by our customers or others,
including possible claims for consequential damages and/or lost profits.
We are exposed to 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. Products shipped to international destinations,
primarily in Asia, represented 98.5%, and 97.0% of our product revenue in the nine months ended
September 30, 2011 and 2010, respectively. In addition, we undertake various sales and marketing
activities through regional offices in a number of countries. We intend to continue expanding our
international business activities and to open other design and operational centers abroad.
International operations are subject to many 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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continuation of overseas conflicts and the risk of terrorist attacks and resulting
heightened security; |
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the imposition of governmental controls and restrictions and unexpected changes in
regulatory requirements; |
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nationalization of business and blocking of cash flows; |
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changes in taxation and tariffs; and |
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difficulties in staffing and managing international operations. |
Economic conditions in our primary overseas markets, particularly in Asia, may negatively
impact the demand for our products abroad. Also, 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.
We depend on third parties to fabricate, assemble and test our products.
As a fabless semiconductor company, we do not own or operate fabrication, assembly or test
facilities. We rely on third parties to manufacture, assemble and test substantially all of our
semiconductor devices. Accordingly, 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. In addition, the increasing capital intensity associated with fabrication in smaller process geometries may limit our diversity of suppliers.
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We do not have long-term agreements with any of our direct or indirect suppliers, including
our manufacturing, assembly or test subcontractors. We typically procure services from these
suppliers on a per order basis. In the event our third-party foundry subcontractors experience a
disruption or limitation of manufacturing, assembly or testing capacity, we may not be able to
obtain alternative manufacturing, assembly and testing services in a timely manner, or at all.
Furthermore, our foundries must have new manufacturing processes qualified if there is a disruption
in an existing process, which could be time-consuming. We could experience significant delays in
product shipments if we are required to find alternative manufactures, assemblers or testers for
our products. We are continuing to develop relationships with additional third-party subcontractors
to assemble and test our products.
Because we rely on outside foundries and other third party suppliers, we face several
significant risks in addition to those discussed above, including:
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a lack of guaranteed supply of wafers and other components and potential higher wafer
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the limited availability of, or potential delays in obtaining access to, key process
technologies; and |
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the location of foundries and other suppliers in regions that are subject to
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The manufacture of integrated circuits is a highly complex and technologically demanding
process. Our foundries have 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. In addition, we are dependent on our foundry subcontractors to
successfully transition to smaller geometry processes.
There can be no assurance that we will continue to declare cash dividends.
In January 2010, our Board of Directors adopted a dividend policy pursuant to which Broadcom
would pay quarterly dividends on our common stock. In January 2011, our Board of Directors
increased the quarterly dividend payment. We intend to continue to pay such dividends subject to
capital availability and periodic determinations by our Board of Directors that cash dividends are
in the best interest of our shareholders and are in compliance with all laws and agreements of
Broadcom applicable to the declaration and payment of cash dividends.
Future dividends may be affected by, among other factors:
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our views on potential future capital requirements for investments in acquisitions and
the funding of our research and development; |
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use of cash to consummate various acquisition transactions; |
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stock repurchase programs; |
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changes in federal and state income tax laws or corporate laws; and |
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changes to our business model. |
Our dividend payments may change from time to time, and we cannot provide assurance that we
will continue to increase our dividend payment or declare dividends in any particular amounts or at
all. A reduction in our dividend payments could have a negative effect on our stock price.
We may be unable to attract, retain or motivate key personnel.
Our future success depends on our ability to attract, retain and motivate senior management
and qualified technical personnel. Competition for these employees is intense. If we are unable to
attract, retain and motivate such
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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.
Government regulation may adversely affect our business.
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,
or FCC, has broad jurisdiction in the United States over many of the devices 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. In addition, we may
experience delays if a product incorporating our chips fails to comply with FCC emissions
specifications.
We and our customers are subject to various import and export laws and regulations. Government
export regulations apply to the encryption or other features contained in some of our products. 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.
Our business 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.
Our business is subject to potential tax liabilities.
We are subject to income taxes in the United States and various foreign jurisdictions. The
amount of income taxes we pay is subject to our interpretation and application of tax laws in
jurisdictions in which we file. Changes in current or future laws or regulations, or the imposition
of new or changed tax laws or regulations or new related interpretations by taxing authorities in
the U.S. or foreign jurisdictions, could adversely affect our results of operations. We are subject
to examinations and tax audits. There can be no assurance that the outcomes from these audits will
not have an adverse effect on our net operating loss and research and development tax credit
carryforwards, our financial position, or our operating results.
In certain foreign jurisdictions, we operate under tax holidays and favorable tax incentives.
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. In a period of tight
manufacturing capacity, our ability to meet Singaporean content in our products may be more
limited, which may have adverse tax consequences. More generally, if any of our tax holidays or
incentives are terminated or if we fail to meet the criteria to continue to enjoy such holidays or
incentives, our results of operations may be materially and adversely affected.
Our articles of incorporation and bylaws contain anti-takeover provisions.
Our articles of incorporation and bylaws contain provisions that could make it more difficult
for a third party to acquire a majority of our outstanding voting stock. For example, our Board of
Directors may also issue shares of Class B common stock in connection with certain acquisitions,
which 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. In addition, our Board of
Directors 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. These provisions, among
others, may discourage certain types of transactions involving an actual or potential change in our
control.
Our co-founders and their affiliates may control the outcome of matters that require the approval
of our shareholders.
As of September 30, 2011 our co-founders, directors, executive officers and their respective
affiliates beneficially owned 10.9% of our outstanding common stock and held 52.2% of the total
voting power held by our
67
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, 2011 our two founders, Dr. Henry T. Nicholas III and Dr. Henry Samueli, beneficially
owned a total of 9.8% of our outstanding common stock and held 51.8% 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. Repurchases of shares of
our Class A common stock under our share repurchase program would 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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In the three months ended September 30, 2011 we issued an aggregate of 200,600 shares of Class
A common stock upon conversion of a like number of shares of Class B common stock in connection
with their disposition. 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 of 1933, as amended, or the Securities Act.
Issuer Purchases of Equity Securities
In February 2010, we announced that our Board of Directors had authorized an evergreen share
repurchase program intended to offset dilution associated with our stock incentive plans. The
maximum number of shares of our Class A common stock that may be repurchased in any one year
(including under an ASR or other arrangement) is equal to the total number of shares issued
pursuant to our equity awards in the previous year and the current year. The February 2010 share
repurchase program does not have an expiration date and may be suspended at any time at the
discretion of the Board of Directors.
In February 2011 we entered into an accelerated share repurchase, or ASR, agreement to
repurchase $300 million of our Class A common stock, which was recorded as a reduction to
shareholders equity. Under the ASR program we received and cancelled 7 million shares of our Class
A common stock with a weighted average price of $42.64 per share.
In addition to the shares repurchased under the ASR, we repurchased 10 million shares of our
Class A common stock at a weighted average price of $36.84 per share in the nine months ended
September 30, 2011. In the nine months ended September 30, 2010, we repurchased 9 million shares
of our Class A common stock at a weighted average price of $30.65 per share. We did not repurchase
any shares of our Class A common stock in the three months ended September 30, 2011 and 2010. We
did not have any repurchases during the three months ended September 30, 2011 in anticipating the
use of cash for the purchase of NetLogic.
Item 3. Defaults upon Senior Securities
None.
Item 4. (Removed and Reserved)
Item 5. Other Information
None.
Item 6. Exhibits
(a) Exhibits. The following Exhibits are attached hereto and incorporated herein by reference:
68
|
|
|
Exhibit |
|
|
Number |
|
Description |
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 |
|
|
|
* |
|
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. |
69
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.
|
|
|
|
|
|
BROADCOM CORPORATION,
a California corporation
(Registrant)
|
|
|
/s/ Eric K. Brandt
|
|
|
Eric K. Brandt |
|
|
Executive Vice President and Chief Financial Officer
(Principal Financial Officer) |
|
|
|
|
|
|
/s/ Robert L. Tirva
|
|
|
Robert L. Tirva |
|
|
Senior Vice President, Corporate Controller
and Principal Accounting Officer |
|
|
October 25, 2011
70
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
Number |
|
Description |
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 |
|
|
|
* |
|
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. |
71