UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
Form 10-Q
__________________________________
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
or
¨ 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
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Broadcom Corporation
(Exact Name of Registrant as Specified in Its Charter)
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California | 33-0480482 |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
5300 California Avenue
Irvine, California 92617-3038
(Address of Principal Executive Offices) (Zip Code)
(949) 926-5000
(Registrant’s 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 x No ¨
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 x No ¨
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):
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | 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 ¨ No x
As of September 30, 2012 the registrant had 512 million shares of Class A common stock, $0.0001 par value, and 52 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, 2012
TABLE OF CONTENTS
Page | |
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.
© 2012 Broadcom Corporation. All rights reserved.
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PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
BROADCOM CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2012 | December 31, 2011 | ||||||
(In millions) | |||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 1,416 | $ | 4,146 | |||
Short-term marketable securities | 735 | 383 | |||||
Accounts receivable, net | 864 | 678 | |||||
Inventory | 557 | 421 | |||||
Prepaid expenses and other current assets | 144 | 124 | |||||
Total current assets | 3,716 | 5,752 | |||||
Property and equipment, net | 463 | 368 | |||||
Long-term marketable securities | 1,039 | 676 | |||||
Goodwill | 3,709 | 1,787 | |||||
Purchased intangible assets, net | 1,861 | 400 | |||||
Other assets | 92 | 57 | |||||
Total assets | $ | 10,880 | $ | 9,040 | |||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 598 | $ | 442 | |||
Wages and related benefits | 235 | 175 | |||||
Deferred revenue and income | 16 | 21 | |||||
Accrued liabilities | 593 | 461 | |||||
Total current liabilities | 1,442 | 1,099 | |||||
Long-term debt | 1,693 | 1,196 | |||||
Other long-term liabilities | 297 | 224 | |||||
Commitments and contingencies | |||||||
Shareholders’ equity: | |||||||
Common stock | — | — | |||||
Additional paid-in capital | 12,291 | 11,821 | |||||
Accumulated deficit | (4,782 | ) | (5,250 | ) | |||
Accumulated other comprehensive loss | (61 | ) | (50 | ) | |||
Total shareholders’ equity | 7,448 | 6,521 | |||||
Total liabilities and shareholders’ equity | $ | 10,880 | $ | 9,040 |
See accompanying notes.
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BROADCOM CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||
(In millions, except per share data) | |||||||||||||||
Net revenue: | |||||||||||||||
Product revenue | $ | 2,078 | $ | 1,902 | $ | 5,765 | $ | 5,396 | |||||||
Income from Qualcomm Agreement | 43 | 52 | 143 | 156 | |||||||||||
Licensing revenue | 7 | 3 | 18 | 17 | |||||||||||
Total net revenue | 2,128 | 1,957 | 5,926 | 5,569 | |||||||||||
Costs and expenses: | |||||||||||||||
Cost of product revenue | 1,063 | 960 | 3,002 | 2,732 | |||||||||||
Research and development | 600 | 501 | 1,728 | 1,504 | |||||||||||
Selling, general and administrative | 174 | 166 | 524 | 525 | |||||||||||
Amortization of purchased intangible assets | 32 | 7 | 82 | 23 | |||||||||||
Impairments of long-lived assets | 48 | 9 | 85 | 92 | |||||||||||
Restructuring costs, net | 2 | 17 | 6 | 17 | |||||||||||
Settlement costs (gains) | (2 | ) | 27 | 86 | (23 | ) | |||||||||
Charitable contribution | — | — | — | 25 | |||||||||||
Total operating costs and expenses | 1,917 | 1,687 | 5,513 | 4,895 | |||||||||||
Income from operations | 211 | 270 | 413 | 674 | |||||||||||
Interest expense, net | (8 | ) | (1 | ) | (21 | ) | (1 | ) | |||||||
Other income, net | 8 | 7 | 14 | 7 | |||||||||||
Income before income taxes | 211 | 276 | 406 | 680 | |||||||||||
Provision (benefit) for income taxes | (9 | ) | 6 | (62 | ) | 7 | |||||||||
Net income | $ | 220 | $ | 270 | $ | 468 | $ | 673 | |||||||
Net income per share (basic) | $ | 0.39 | $ | 0.50 | $ | 0.84 | $ | 1.25 | |||||||
Net income per share (diluted) | $ | 0.38 | $ | 0.48 | $ | 0.82 | $ | 1.19 | |||||||
Weighted average shares (basic) | 561 | 537 | 555 | 537 | |||||||||||
Weighted average shares (diluted) | 579 | 558 | 574 | 564 | |||||||||||
Dividends per share | $ | 0.10 | $ | 0.09 | $ | 0.30 | $ | 0.27 |
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:
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||
(In millions) | |||||||||||||||
Cost of product revenue | $ | 6 | $ | 6 | $ | 21 | $ | 19 | |||||||
Research and development | 89 | 85 | 278 | 284 | |||||||||||
Selling, general and administrative | 33 | 30 | 116 | 99 |
See accompanying notes.
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BROADCOM CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||
(In millions) | |||||||||||||||
Net income | $ | 220 | $ | 270 | $ | 468 | $ | 673 | |||||||
Other comprehensive income (loss), net of tax: | |||||||||||||||
Foreign currency translation adjustments, net of $0 tax in 2012 and 2011 | 10 | (62 | ) | (15 | ) | (42 | ) | ||||||||
Unrealized gains (losses) on marketable securities, net of $0 tax in 2012 and 2011 | 2 | (4 | ) | 4 | 1 | ||||||||||
Other comprehensive income (loss) | 12 | (66 | ) | (11 | ) | (41 | ) | ||||||||
Comprehensive income | $ | 232 | $ | 204 | $ | 457 | $ | 632 |
See accompanying notes.
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BROADCOM CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended | |||||||
September 30, | |||||||
2012 | 2011 | ||||||
(In millions) | |||||||
Operating activities | |||||||
Net income | $ | 468 | $ | 673 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization | 95 | 79 | |||||
Stock-based compensation expense: | |||||||
Stock options and other awards | 58 | 100 | |||||
Restricted stock units | 357 | 302 | |||||
Acquisition-related items: | |||||||
Amortization of purchased intangible assets | 230 | 65 | |||||
Impairments of long-lived assets | 85 | 92 | |||||
Non-cash settlement gains | (1 | ) | (14 | ) | |||
Gain on strategic investments and other | (11 | ) | — | ||||
Changes in operating assets and liabilities, net of acquisitions: | |||||||
Accounts receivable | (140 | ) | 15 | ||||
Inventory | (35 | ) | 137 | ||||
Prepaid expenses and other assets | (8 | ) | (33 | ) | |||
Accounts payable | 125 | (99 | ) | ||||
Deferred revenue and income | 39 | (28 | ) | ||||
Accrued settlement costs | 51 | 31 | |||||
Other accrued and long-term liabilities | 25 | 36 | |||||
Net cash provided by operating activities | 1,338 | 1,356 | |||||
Investing activities | |||||||
Net purchases of property and equipment | (189 | ) | (141 | ) | |||
Net cash paid for acquired companies | (3,582 | ) | (347 | ) | |||
Proceeds from sales of strategic investments | 13 | — | |||||
Purchases of marketable securities | (1,854 | ) | (2,533 | ) | |||
Proceeds from sales and maturities of marketable securities | 1,192 | 3,056 | |||||
Net cash provided by (used in) investing activities | (4,420 | ) | 35 | ||||
Financing activities | |||||||
Issuance of long-term debt, net | 492 | — | |||||
Repurchases of Class A common stock | (1 | ) | (670 | ) | |||
Dividends paid | (167 | ) | (145 | ) | |||
Payment of assumed contingent consideration and debt | (57 | ) | — | ||||
Proceeds from issuance of common stock | 209 | 258 | |||||
Minimum tax withholding paid on behalf of employees for restricted stock units | (124 | ) | (123 | ) | |||
Net cash provided by (used in) financing activities | 352 | (680 | ) | ||||
Increase (decrease) in cash and cash equivalents | (2,730 | ) | 711 | ||||
Cash and cash equivalents at beginning of period | 4,146 | 1,622 | |||||
Cash and cash equivalents at end of period | $ | 1,416 | $ | 2,333 |
See accompanying notes.
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BROADCOM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
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. Broadcom® products seamlessly deliver voice, video, data and multimedia connectivity in the home, office and mobile environments. We provide the industry’s broadest portfolio of state-of-the-art system-on-a-chip, or SoC, and embedded software solutions.
Basis of Presentation
The interim 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, 2011, included in our Annual Report on Form 10-K filed with the SEC on February 1, 2012.
In February 2012 we completed our acquisition of NetLogic Microsystems, Inc., or NetLogic and in April 2012 we completed our acquisition of BroadLight, Inc., or BroadLight. The unaudited condensed consolidated financial statements include the results of operations of NetLogic and BroadLight commencing as of the acquisition dates and are included in our Infrastructure & Networking and Broadband Communications reportable segments, respectively. See Note 3 for a further discussion.
The interim condensed consolidated financial statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly our consolidated financial position at September 30, 2012 and December 31, 2011, and our consolidated results of operations for the three and nine months ended September 30, 2012 and 2011 and cash flows for the nine months ended September 30, 2012 and 2011. The results of operations for the three and nine months ended September 30, 2012 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 United States generally accepted accounting principles, or 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 obligations, inventory valuation, 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 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
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usually met at the time of product shipment. However, we do not recognize revenue when any future performance obligations remain. We record reductions of revenue for estimated product returns and pricing adjustments, such as competitive pricing programs and rebates, in the same period that the related revenue is recorded. The amount of these reductions is based on historical sales returns, analysis of credit memo data, specific criteria included in rebate agreements, and other factors known at the 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 management’s 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.
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 or the term specified. 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 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
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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.
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. 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.
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 management’s 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 instrument’s 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. The valuation techniques used to measure the fair value of our “Level 2” instruments were valued based on quoted market prices or model driven valuations using significant inputs derived from or corroborated by observable market data. 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 a 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, asset-back securities and corporate bonds. We place our cash investments in instruments that meet various parameters, including credit quality standards as specified in our investment policy. We do not use derivative financial instruments.
We account for our investments in debt 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
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value judged to be other than temporary are determined based on the specific identification method and are reported in other income, net in the 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 fourteen years using a method that reflects the pattern in which the economic benefits of the intangible assets 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.
Impairment of Goodwill and Other Long-Lived Assets
We evaluate goodwill on an annual basis in the fourth quarter or more frequently if we believe indicators of impairment exist. We first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we conclude that it is more likely than not that the fair value of a reporting units is less than its carrying amount, we conduct a two-step goodwill impairment test. The first step of the impairment test involves comparing the fair values of the applicable reporting units with their carrying values. We determine the fair values of our reporting units using the income valuation approach, as well as other generally accepted valuation methodologies. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, we perform the second step of the goodwill impairment test. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill. The amount, by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognized as an impairment loss.
During development, IPR&D is not subject to amortization and is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. We first assess qualitative factors to determine whether it is more likely than not that the fair value of IPR&D is less than its carrying amount, and if so, we conduct a quantitative impairment test. The impairment test consists of a comparison of the fair value to its carrying amount. If the carrying value exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. Once an IPR&D project is complete, it becomes a definite lived intangible asset and is evaluated for impairment in accordance with our policy for long-lived assets.
We test long-lived assets and purchased intangible assets (other than goodwill and IPR&D in development) for impairment if we believe indicators of impairment exist. We determine whether the carrying value of an asset or asset group is recoverable, based on comparisons to undiscounted expected future cash flows that the assets are expected to generate. If an asset is not recoverable, we record an impairment loss equal to the amount by which the carrying value of the asset exceeds its fair value. We primarily use the income valuation approach to determine the fair value of our long lived assets and purchased intangible assets.
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. This may include certain levels of financial support to minimize the impact of the litigation in which the other parties 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 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.
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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.
Litigation and Settlement Costs
Legal costs are expensed as incurred. We are involved in disputes, litigation and other legal actions in the ordinary course of business. We continually evaluate uncertainties associated with litigation and record a charge equal to at least the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) the loss or range of loss can be reasonably estimated. In the event of settlement discussions, this generally occurs when an agreement in principle has been reached by both parties that includes substantive terms, conditions and amounts. If a settlement has more than one element, we account for the agreement as a multiple element arrangement and allocate the consideration to the identifiable elements based on relative fair value. Past multiple element settlement agreements have included the licensing of intellectual property for future use and payments related to alleged prior infringement.
We use a relief-from-royalty method to value patented technology in settlement agreements related to alleged patent infringement, 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. Revenue is projected over the expected remaining useful life of the patented technology, or the license period if shorter. The market-derived royalty rate is then applied to estimate the royalty stream related to past revenue over the applicable alleged infringement period as well as projected revenue. We then allocate the consideration transferred to the identifiable elements based on relative fair value of the past and future royalties. The portion that is attributed to payments related to alleged prior infringement is recorded as a charge to our unaudited condensed consolidated statements of income. The remaining portion is attributed to the licensing of intellectual property for future use and is amortized to cost of revenue 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.
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 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. We adopted the provisions of this guidance effective January 1, 2012, as reflected in the unaudited condensed consolidated statements of comprehensive income herein.
In July 2012 the FASB issued new accounting guidance intended to simplify indefinite-lived intangible asset impairment testing. Entities will now be allowed to perform a qualitative assessment on indefinite-lived intangible asset impairment to determine whether a quantitative assessment is necessary. This guidance is effective for indefinite-lived intangible asset impairment tests performed in interim and annual periods for fiscal years beginning after September 15, 2012. Early adoption is permitted. We adopted the provisions of this guidance effective September 30, 2012.
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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, | ||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||
Product sales through direct sales force | 75.7 | % | 78.1 | % | 77.7 | % | 79.0 | % | |||
Product sales maintained under fulfillment distributor arrangements | 5.8 | 6.7 | 5.8 | 5.9 | |||||||
Product sales through distributors | 18.5 | 15.2 | 16.5 | 15.1 | |||||||
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
Income from the Qualcomm Agreement is expected to be recognized as follows:
Three Months Ending | |||||||||||||||
December 31, 2012 | March 31, 2013 | June 30, 2013 | Total | ||||||||||||
(In millions) | |||||||||||||||
Income from Qualcomm Agreement | $ | 43 | $ | 44 | $ | 43 | $ | 130 |
Inventory
The following table presents details of our inventory:
September 30, 2012 | December 31, 2011 | ||||||
(In millions) | |||||||
Work in process | $ | 229 | $ | 135 | |||
Finished goods | 328 | 286 | |||||
$ | 557 | $ | 421 |
Property and Equipment
The following table presents details of our property and equipment:
Useful Life | September 30, 2012 | December 31, 2011 | |||||||
(In years) | (In millions) | ||||||||
Leasehold improvements | 1 to 10 | $ | 225 | $ | 212 | ||||
Office furniture and equipment | 3 to 7 | 40 | 38 | ||||||
Machinery and equipment | 5 | 511 | 396 | ||||||
Computer software and equipment | 2 to 10 | 173 | 128 | ||||||
Construction in progress | N/A | 33 | 26 | ||||||
982 | 800 | ||||||||
Less accumulated depreciation and amortization | (519 | ) | (432 | ) | |||||
$ | 463 | $ | 368 |
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Goodwill
The following table summarizes the activity related to the carrying value of our goodwill:
Reportable Segments | |||||||||||||||||||
Broadband Communications | Mobile & Wireless | Infrastructure & Networking | Foreign Currency | Consolidated | |||||||||||||||
(In millions) | |||||||||||||||||||
Goodwill at December 31, 2011 | $ | 597 | $ | 470 | $ | 735 | $ | (15 | ) | $ | 1,787 | ||||||||
Goodwill recorded in connection with acquisitions | 125 | — | 1,805 | — | 1,930 | ||||||||||||||
Effects of foreign currency translation | — | — | — | (8 | ) | (8 | ) | ||||||||||||
Goodwill at September 30, 2012 | $ | 722 | $ | 470 | $ | 2,540 | $ | (23 | ) | $ | 3,709 |
Purchased Intangible Assets
The following table presents details of our purchased intangible assets:
September 30, 2012 | December 31, 2011 | ||||||||||||||||||||||
Gross | Accumulated Amortization | Net | Gross | Accumulated Amortization | Net | ||||||||||||||||||
(In millions) | |||||||||||||||||||||||
Developed technology | $ | 1,763 | $ | (391 | ) | $ | 1,372 | $ | 587 | $ | (282 | ) | $ | 305 | |||||||||
In-process research and development | 317 | — | 317 | 59 | — | 59 | |||||||||||||||||
Customer relationships | 385 | (194 | ) | 191 | 173 | (117 | ) | 56 | |||||||||||||||
Other | 39 | (27 | ) | 12 | 23 | (20 | ) | 3 | |||||||||||||||
$ | 2,504 | $ | (612 | ) | $ | 1,892 | $ | 842 | $ | (419 | ) | $ | 423 | ||||||||||
Effects of foreign currency translation | (31 | ) | (23 | ) | |||||||||||||||||||
$ | 1,861 | $ | 400 |
In the nine months ended September 30, 2012 we reclassified $1 million of IPR&D costs related to previous acquisitions to developed technology and such costs will now be amortized to cost of product revenue.
For a detailed discussion of our various impairments of purchased intangible assets, see Note 10.
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, | ||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||
(In millions) | |||||||||||||||
Cost of product revenue | $ | 55 | $ | 13 | $ | 148 | $ | 42 | |||||||
Other operating expenses | 32 | 7 | 82 | 23 | |||||||||||
$ | 87 | $ | 20 | $ | 230 | $ | 65 |
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The following table presents details of the amortization of existing purchased intangible assets (including IPR&D), which is currently estimated to be expensed in the remainder of 2012 and thereafter:
Purchased Intangible Asset Amortization by Year | |||||||||||||||||||||||||||
2012 | 2013 | 2014 | 2015 | 2016 | Thereafter | Total | |||||||||||||||||||||
(In millions) | |||||||||||||||||||||||||||
Cost of product revenue | $ | 50 | $ | 173 | $ | 222 | $ | 218 | $ | 200 | $ | 800 | $ | 1,663 | |||||||||||||
Other operating expenses | 31 | 57 | 63 | 31 | 9 | 7 | 198 | ||||||||||||||||||||
$ | 81 | $ | 230 | $ | 285 | $ | 249 | $ | 209 | $ | 807 | $ | 1,861 |
Accrued Liabilities
The following table presents details of our accrued liabilities included in current liabilities:
September 30, 2012 | December 31, 2011 | ||||||
(In millions) | |||||||
Accrued rebates | $ | 380 | $ | 317 | |||
Accrued royalties | 27 | 18 | |||||
Accrued settlement charges | 72 | 28 | |||||
Accrued legal costs | 16 | 16 | |||||
Accrued taxes | 21 | 16 | |||||
Warranty reserve | 14 | 14 | |||||
Restructuring liabilities | 3 | 6 | |||||
Other | 60 | 46 | |||||
$ | 593 | $ | 461 |
Other Long-Term Liabilities
The following table presents details of our other long-term liabilities:
September 30, 2012 | December 31, 2011 | ||||||
(In millions) | |||||||
Deferred rent | $ | 54 | $ | 48 | |||
Accrued taxes | 62 | 24 | |||||
Deferred tax liabilities | 56 | 80 | |||||
Accrued settlement charges | 55 | 48 | |||||
Restructuring liabilities | 1 | 2 | |||||
Deferred revenue | 47 | 3 | |||||
Other long-term liabilities | 22 | 19 | |||||
$ | 297 | $ | 224 |
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Accrued Rebate Activity
The following table summarizes the activity related to accrued rebates:
Nine Months Ended | |||||||
September 30, | |||||||
2012 | 2011 | ||||||
(In millions) | |||||||
Beginning balance | $ | 317 | $ | 270 | |||
Charged as a reduction of revenue | 512 | 498 | |||||
Reversal of unclaimed rebates | (8 | ) | (11 | ) | |||
Payments | (441 | ) | (417 | ) | |||
Ending balance | $ | 380 | $ | 340 |
We recorded rebates to certain customers of $216 million and $184 million in the three months ended September 30, 2012 and 2011, respectively.
Warranty Reserve Activity
The following table summarizes activity related to the warranty reserve:
Nine Months Ended | |||||||
September 30, | |||||||
2012 | 2011 | ||||||
(In millions) | |||||||
Beginning balance | $ | 14 | $ | 13 | |||
Charged to costs and expenses | 4 | 8 | |||||
Payments | (4 | ) | (7 | ) | |||
Ending balance | $ | 14 | $ | 14 |
We recorded charges to costs and expenses of $2 million in each of the three months ended September 30, 2012 and 2011.
Restructuring Activity
The following table summarizes activity related to our current and long-term restructuring liabilities during the nine months ended September 30, 2012:
Nine Months Ended | |||
September 30, 2012 | |||
(In millions) | |||
Beginning balance | $ | 8 | |
Charged to expense | 6 | ||
Cash payments | (10 | ) | |
Ending balance | $ | 4 |
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.
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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, | ||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||
(In millions, except per share data) | |||||||||||||||
Numerator: Net income | $ | 220 | $ | 270 | $ | 468 | $ | 673 | |||||||
Denominator for net income per share (basic) | 561 | 537 | 555 | 537 | |||||||||||
Effect of dilutive securities: | |||||||||||||||
Stock awards | 18 | 21 | 19 | 27 | |||||||||||
Denominator for net income per share (diluted) | 579 | 558 | 574 | 564 | |||||||||||
Net income per share (basic) | $ | 0.39 | $ | 0.50 | $ | 0.84 | $ | 1.25 | |||||||
Net income per share (diluted) | $ | 0.38 | $ | 0.48 | $ | 0.82 | $ | 1.19 |
Net income per share (diluted) does not include the effect of anti-dilutive common share equivalents resulting from outstanding equity awards. There were 26 million and 23 million anti-dilutive common share equivalents in the three months ended September 30, 2012 and 2011, respectively, and 23 million and 21 million anti-dilutive common share equivalents in the nine months ended September 30, 2012 and 2011, respectively.
Supplemental Cash Flow Information
In the nine months ended September 30, 2012 we accrued $1 million related to stock option exercises that had not settled by September 30, 2012. In the nine months ended September 30, 2012, we paid $41 million for capital equipment that was accrued as of December 31, 2011 and had billings of $25 million for capital equipment that were accrued but not yet paid as of September 30, 2012.
3. | Business Combinations |
On February 17, 2012 we completed our acquisition of NetLogic, a publicly traded company that was a provider of high performance intelligent semiconductor solutions for next generation networks. Our primary reasons for acquiring NetLogic were to enhance our ability to deliver a complete, end-to-end network infrastructure solution for customers and to reduce both time-to-market and development costs. The addition of NetLogic also extends Broadcom’s infrastructure portfolio with key technologies, including multi-core embedded processor and knowledge-based processor solutions, both critical enablers of the next generation infrastructure build-out. In April 2012 we completed our acquisition of BroadLight, a provider of networking and fiber access Passive Optical Network, or PON, processors. Our primary reason for acquiring BroadLight was to extend Broadcom’s broadband access product line, enabling Broadcom to offer a complete, end-to-end PON solution for customers — from the optical line terminal at the central office to the optical network unit at the home. BroadLight also extends Broadcom’s broadband access roadmap to support customer requirements for rolling out next-generation fiber networks worldwide. In addition, these acquisitions allowed us to enter into or expand our market share in the relevant wired and wireless communications market segments, 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.
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The following table presents details of the purchase consideration related to each acquisition:
Company Acquired | Month Acquired | Business | Cash Consideration Paid | Cash Assumed | Equity Consideration Paid | Assumed Contingent Consideration | Contingent Consideration Maximum | Contingent Consideration Fair Value | ||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
2012 Acquisitions | ||||||||||||||||||||||||||||
BroadLight, Inc. | April 2012 | PON processors | $ | 200 | $ | 22 | $ | 3 | $ | — | $ | 10 | $ | — | ||||||||||||||
NetLogic Microsystems, Inc. | February 2012 | Next generation networks | 3,612 | 219 | 349 | 53 | 110 | 53 | ||||||||||||||||||||
Other | NA | NA | 11 | — | — | — | — | — | ||||||||||||||||||||
$ | 3,823 | $ | 241 | $ | 352 | $ | 53 | $ | 120 | $ | 53 |
The purchase price of the NetLogic acquisition was paid in cash, except for certain equity awards with a fair value of $349 million that were assumed. Approximately $137 million of the equity consideration was recorded as goodwill and $212 million will be recognized as stock-based compensation expense primarily over the next two to three years. A portion of the cash consideration in the BroadLight acquisition is currently held in escrow pursuant to the terms of the acquisition agreement and is reflected in goodwill as we believe the likelihood of the escrow fund being utilized by us is remote.
In connection with these acquisitions, our results of operations in the three months ended September 30, 2012 included: (i) stock-based compensation of $25 million, (ii) the amortization of purchased intangibles of $63 million, and (iii) the amortization of acquired inventory valuation step-up of $5 million. In connection with these acquisitions, our results of operations in the nine months ended September 30, 2012 included: (i) stock-based compensation of $77 million, of which $17 million related to the accelerated vesting of equity awards upon the termination of certain employees with change in control agreements, (ii) the amortization of purchased intangibles of $156 million, and (iii) the amortization of acquired inventory valuation step-up of $68 million. We also incurred certain severance and other benefit costs of $3 million in the nine months ended September 30, 2012 that are classified as restructuring costs in our unaudited condensed consolidated statement of income. Lastly, we incurred $6 million in transaction costs related to legal, accounting and other related fees, of which $1 million was recorded in the nine months ended September 30, 2012 in selling, general and administrative expense and the remaining was previously expensed in 2011.
We have estimated the fair value of the acquired assets and liabilities of BroadLight. We allocated the respective purchase prices to tangible assets, liabilities and identifiable intangible assets acquired based on their estimated respective fair values. The excess of the purchase price over the aggregate fair values was recorded as goodwill, of which $23 million is deductible for tax purposes. The principal factor that resulted in recognition of goodwill was that the purchase price for each acquisition was based on cash flow projections assuming the integration of any acquired technology and products with our products, which is of considerably greater value than utilizing each acquired company’s 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 the acquisitions.
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Based upon those calculations, the purchase prices for the acquisitions were allocated as follows:
2012 | |||
Acquisitions | |||
(In millions) | |||
Fair Market Values | |||
Cash and cash equivalents | $ | 241 | |
Short-term marketable securities | 48 | ||
Accounts receivable, net | 46 | ||
Inventory | 101 | ||
Prepaid and other current assets | 19 | ||
Property and equipment, net | 17 | ||
Other assets | 29 | ||
Purchased intangible assets | 1,782 | ||
Goodwill | 1,930 | ||
Total assets acquired | 4,213 | ||
Accounts payable | 47 | ||
Accrued liabilities | 42 | ||
Net deferred tax liabilities | 67 | ||
Contingent consideration | 53 | ||
Long-term liabilities | 44 | ||
Total liabilities assumed | 253 | ||
Purchase price allocation | $ | 3,960 |
Useful Life | 2012 | ||||
Acquisitions | |||||
(In years) | (In millions) | ||||
Purchased Intangible Assets: | |||||
Developed technology | 1 - 14 | $ | 1,288 | ||
In-process research and development | 10 - 13 | 267 | |||
Customer relationships | 1 - 5 | 212 | |||
Other | 1 - 8 | 15 | |||
$ | 1,782 |
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 or market transactions to value patented technology, based on market royalties or prices 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 from 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
17
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 forecasted revenue and costs, taking into account the expected product life cycles, market penetration and growth rates. We believe the amount recorded as IPR&D, as well as developed technology, represented the fair value and approximate the amount a market participant would pay for these projects as of the acquisition date.
The following table summarizes the significant assumptions underlying the valuation of IPR&D at the date of acquisition:
Company Acquired | Development Projects | Weighted Average Estimated Percent Complete | Average Estimated Time to Complete | Estimated Cost to Complete | Risk Adjusted Discount Rate | IPR&D | ||||||||||||
(In years) | (In millions) | (In millions) | ||||||||||||||||
NetLogic | Next generation networks | 10 | % | 4.3 | $ | 401 | 17 | % | $ | 267 |
There was no IPR&D related to our other acquisitions. 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. Actual results to date have been consistent, in all material respects, with our assumptions at the time of the acquisitions.
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.
Contingent Earn-out Consideration
In connection with our NetLogic acquisition, we assumed a liability of $53 million related to contingent consideration in connection with one of NetLogic’s prior acquisitions and subsequently paid this amount in the nine months ended September 30, 2012. Additional cash consideration of up to $57 million may be paid to the former shareholders of this prior acquisition upon satisfaction of certain future performance goals. Additional contingent earn-out consideration of up to $10 million in cash may be paid to the former holders of BroadLight capital stock and other rights upon satisfaction of certain future performance goals. As of September 30, 2012 we do not have any liabilities recorded in connection with any remaining contingent earn-out consideration, as we believe that the achievement of the future performance goals is unlikely.
Supplemental Pro Forma Data (Unaudited)
The unaudited pro forma statement of income data below gives effect to our 2012 and 2011 acquisitions as if they had occurred at the beginning of the year prior to their respective acquisition dates. The following data includes the effects of amortization of purchased intangible assets and acquired inventory valuation step-up, stock-based compensation expense, foregone interest as a result of cash paid to acquire the companies, and other one-time transactions costs directly associated with the acquisitions such as legal, accounting and banking fees. 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.
Nine Months Ended | |||||||
September 30, | |||||||
2012 | 2011 | ||||||
(In millions, except per share data) | |||||||
Pro forma net revenue | $ | 5,995 | $ | 5,940 | |||
Pro forma net income | $ | 579 | $ | 430 | |||
Pro forma net income per share (basic) | $ | 1.04 | $ | 0.80 | |||
Pro forma net income per share (diluted) | $ | 1.00 | $ | 0.76 |
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4. | Fair Value Measurements |
Instruments Measured at Fair Value on a Recurring Basis. The following tables present our cash and marketable securities’ costs, gross unrealized gains, gross unrealized losses and fair value by major security type recorded as cash and cash equivalents or short-term or long-term marketable securities:
September 30, 2012 | |||||||||||||||||||||||||||
Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Cash and Cash Equivalents | Short-Term Marketable Securities | Long-Term Marketable Securities | |||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||||
Cash | $ | 206 | $ | — | $ | — | $ | 206 | $ | 206 | $ | — | $ | — | |||||||||||||
Level 1: | |||||||||||||||||||||||||||
Bank and time deposits | 386 | — | — | 386 | 385 | 1 | — | ||||||||||||||||||||
Money market funds | 286 | — | — | 286 | 286 | — | — | ||||||||||||||||||||
U.S. treasury and agency obligations | 893 | 1 | — | 894 | 38 | 240 | 616 | ||||||||||||||||||||
Corporate bonds | 10 | — | — | 10 | — | 10 | — | ||||||||||||||||||||
Subtotal | 1,575 | 1 | — | 1,576 | 709 | 251 | 616 | ||||||||||||||||||||
Level 2: | |||||||||||||||||||||||||||
Commercial paper | 597 | — | — | 597 | 496 | 101 | — | ||||||||||||||||||||
Corporate bonds | 746 | 2 | — | 748 | 5 | 360 | 383 | ||||||||||||||||||||
Asset-backed securities and other | 63 | — | — | 63 | — | 23 | 40 | ||||||||||||||||||||
Subtotal | 1,406 | 2 | — | 1,408 | 501 | 484 | 423 | ||||||||||||||||||||
Level 3: | |||||||||||||||||||||||||||
None | — | — | — | — | — | — | — | ||||||||||||||||||||
Total | $ | 3,187 | $ | 3 | $ | — | $ | 3,190 | $ | 1,416 | $ | 735 | $ | 1,039 |
December 31, 2011 | |||||||||||||||||||||||||||
Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Cash and Cash Equivalents | Short-Term Marketable Securities | Long-Term Marketable Securities | |||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||||
Cash | $ | 154 | $ | — | $ | — | $ | 154 | $ | 154 | $ | — | $ | — | |||||||||||||
Level 1: | |||||||||||||||||||||||||||
Bank and time deposits | 2,717 | — | — | 2,717 | 2,716 | — | 1 | ||||||||||||||||||||
Money market funds | 914 | — | — | 914 | 914 | — | — | ||||||||||||||||||||
U.S. treasury and agency obligations | 469 | — | — | 469 | — | 90 | 379 | ||||||||||||||||||||
Corporate bonds | 7 | — | — | 7 | — | 7 | — | ||||||||||||||||||||
Subtotal | 4,107 | — | — | 4,107 | 3,630 | 97 | 380 | ||||||||||||||||||||
Level 2: | |||||||||||||||||||||||||||
Commercial paper | 381 | — | — | 381 | 311 | 70 | — | ||||||||||||||||||||
Corporate bonds | 543 | 1 | (2 | ) | 542 | 51 | 211 | 280 | |||||||||||||||||||
Asset-backed securities and other | 21 | — | — | 21 | — | 5 | 16 | ||||||||||||||||||||
Subtotal | 945 | 1 | (2 | ) | 944 | 362 | 286 | 296 | |||||||||||||||||||
Level 3: | |||||||||||||||||||||||||||
None | — | — | — | — | — | — | — | ||||||||||||||||||||
Total | $ | 5,206 | $ | 1 | $ | (2 | ) | $ | 5,205 | $ | 4,146 | $ | 383 | $ | 676 |
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There were no transfers between Level 1, Level 2 or Level 3 securities in the nine months ended September 30, 2012. All of our long-term marketable securities had maturities of between one and three years in duration at September 30, 2012. Our cash, cash equivalents and marketable securities at September 30, 2012 consisted of $1.88 billion held domestically, with the remaining balance of $1.31 billion held by foreign subsidiaries.
At September 30, 2012 we had 39 investments with a fair value of $382 million that were in an unrealized loss position for less than 12 months. Our gross unrealized losses of less than one million dollars for these investments at September 30, 2012 were due to changes in interest rates. We have determined that the gross unrealized losses on these investments at September 30, 2012 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.
Instruments Not Recorded at Fair Value on a Recurring Basis. We measure the fair value of our long-term debt carried at amortized cost quarterly for disclosure purposes. The estimated fair value of long-term debt is determined by Level 2 inputs and is based primarily on quoted market prices for the same or similar issues. Based on the market prices, the fair value of our long-term debt was $1.76 billion and $1.22 billion as of September 30, 2012 and December 31, 2011 respectively. The recorded values of all our accounts receivable and accounts payable approximate their current fair values because of their nature and respective relatively short maturity dates or durations.
Assets and Liabilities Recorded at Fair Value on a Non-Recurring Basis. We measure the fair value of our cost method investments when they are deemed to be other-than-temporarily impaired, assets acquired and liabilities assumed in a business acquisition, and goodwill and other long lived assets when they are held for sale or determined to be impaired. See Notes 3 and 10 for discussion on fair value measurements of certain assets and liabilities recorded at fair value on a non-recurring basis.
5. | Income Taxes |
We recorded tax benefits of $9 million and $62 million for the three and nine months ended September 30, 2012, respectively, and tax provisions of $6 million and $7 million for the three and nine months ended September 30, 2011, respectively. Our effective tax rates were (4.3)% and (15.3)% for the three and nine months ended September 30, 2012, respectively, and 2.2% and 1.0% for the three and nine months ended September 30, 2011, 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, 2012 and 2011, tax benefits resulting primarily from the expiration of statutes of limitations for the assessment of taxes in various foreign jurisdictions of $7 million for the nine months ended September 30, 2012, and $6 million for the nine months ended September 30, 2011, tax benefits resulting from the reduction of certain foreign deferred tax liabilities of $12 million for the three and nine months ended September 30, 2012, and tax benefits resulting from reductions in our U.S. valuation allowance on certain deferred tax assets due to recording net deferred tax liabilities for identifiable intangible assets under purchasing accounting of $47 million and $4 million for our acquisitions of NetLogic and BroadLight, respectively, for the nine months ended September 30, 2012.
During the three months ended March 31, 2012, we accessed $1.5 billion of cash from our foreign subsidiaries to facilitate the acquisition of NetLogic. This $1.5 billion was treated as includable in our U.S. taxable income for 2012. Nevertheless, this did not result in a tax liability for us because it was offset by our net operating loss and tax credit carryforwards. The $3.61 billion cash purchase price to acquire NetLogic greatly exceeded the purchase price of any prior cash acquisition we have made. The acquisition of NetLogic was unusual and nonrecurring. Our other cash acquisitions have been for significantly lower purchase prices, and we have never previously determined it prudent or necessary to access our prior years’ foreign earnings to facilitate an acquisition. We do not currently expect any future need to access our prior years’ foreign earnings, and therefore, aside from the $1.5 billion used to facilitate the NetLogic acquisition, we intend to continue to permanently reinvest our foreign earnings.
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 tax 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 $35 million and $62 million at September 30, 2012 and December 31,
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2011, respectively.
We file federal, state and foreign income tax returns in jurisdictions with varying statutes of limitations. The 2007 through 2011 tax years generally remain subject to examination by federal and most state tax authorities. In foreign jurisdictions, the 2004 through 2011 tax years generally remain subject to examination by tax authorities. Our income tax returns for the 2007, 2008 and 2009 tax years are currently under examination by the Internal Revenue Service.
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 us. As a result of the IRS examination, taking into account effects on post-audit periods, we reduced our federal and state net operating losses by approximately $620 million and $430 million, respectively, and we reduced amounts relating to federal and state uncertain tax benefits by approximately $180 million and $100 million, respectively, as of June 30, 2011. This reduction in federal and state 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.
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 the expiration date of December 31, 2011. As a result of this legislation, we generated federal research and development tax credits of $118 million 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 carryovers since we have a full valuation allowance on our U.S. net 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. We have begun discussions with the Singapore Economic Development Board with respect to tax incentives for periods after March 31, 2014.
6. | Long-Term Debt and Credit Facility |
The following table presents details of our long-term debt liabilities:
September 30, | December 31, | ||||||
2012 | 2011 | ||||||
(In millions) | |||||||
1.500% fixed-rate notes, due 2013 | $ | 300 | $ | 300 | |||
2.375% fixed-rate notes, due 2015 | 400 | 400 | |||||
2.700% fixed-rate notes, due 2018 | 500 | 500 | |||||
2.500% fixed-rate notes, due 2022 | 500 | — | |||||
$ | 1,700 | $ | 1,200 | ||||
Unaccreted discount | (7 | ) | (4 | ) | |||
$ | 1,693 | $ | 1,196 |
In August 2012 we issued senior unsecured notes in an aggregate principal amount of $500 million which mature in August 2022 and bear interest at a fixed rate of 2.500% per annum, or the 2022 Notes. Interest is payable in cash semi-annually in arrears on February 15 and August 15 of each year, beginning on February 15, 2013. The 2022 Notes were issued at an effective yield of 2.585% and an original issue discount at 99.255%.
In connection with the 2022 Notes, we entered into a registration rights agreement pursuant to which we agreed to use our reasonable commercial efforts to file with the SEC an exchange offer registration statement to issue registered notes with substantially identical terms as the 2022 Notes in exchange for any outstanding 2022 Notes, or, under certain circumstances, a shelf registration statement to register the 2022 Notes. We agreed to use our commercially reasonable efforts to consummate the exchange offer or cause the shelf registration statement to be declared effective by the SEC, in each case on or prior to 365 days after the closing of the 2022 Notes offering. If we are unable to complete our registration statement, we will be subject to interest penalties.
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We may redeem the 2022 Notes at any time, subject to a specified make-whole premium as defined in the indenture governing the 2022 Notes. In the event of a change of control triggering event, each holder of 2022 Notes will have the right to require us to purchase for cash all or a portion of their 2022 Notes at a redemption price of 101% of the aggregate principal amount of such 2022 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.
These 2022 Notes are recorded as long-term debt, net of original issue discount. The discount and debt issuance costs associated with the issuance of the 2022 Notes are amortized to interest expense over the term. The effective rates for the fixed-rate debt include the interest on the notes and the accretion of the original issue discount.
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.
We also have a credit facility with certain institutional lenders that provides for unsecured revolving facility loans, swing line loans and letters of credit in an aggregate amount of up to $500 million with a maturity date of November 19, 2016, at which time all outstanding revolving facility loans (if any) and accrued and unpaid interest must be repaid. No amounts were outstanding on our credit facility at September 30, 2012 and December 31, 2011.
The long-term debt and credit facility contain customary representations, warranties and covenants.
7. | Shareholders’ Equity |
Quarterly Dividend
In January 2012 our Board of Directors adopted an amendment to the existing dividend policy pursuant to which we increased the quarterly cash dividend by 11.1% to $0.10 per share ($0.40 per share on an annual basis) payable to holders of our common stock. In the three and nine months ended September 30, 2012 and 2011 we paid $56 million, $167 million, $48 million and $145 million, 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.
Share Repurchase Program
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 under this program (including under an accelerated share repurchase agreement 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. This program does not have an expiration date and may be suspended at any time at the discretion of the Board of Directors. It may also be complemented with an additional share repurchase program in the future. Under the evergreen program we repurchased approximately 28,000 shares of our Class A common stock at a weighted average price of $35.18 in the three and nine months ended September 30, 2012.
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.
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8. | Employee Benefit Plans |
Combined Incentive Plan Activity
Activity under all stock option incentive plans is set forth below:
Options Outstanding | ||||||||||
Number of Shares | Weighted Average Exercise Price per Share | Weighted Average Grant-Date Fair Value per Share | ||||||||
(In millions, except per share data) | ||||||||||
Balance at December 31, 2011 | 66 | $ | 27.47 | $ | 15.10 | |||||
Options assumed | 4 | 9.71 | 27.54 | |||||||
Options cancelled | (1 | ) | 35.82 | 12.83 | ||||||
Options exercised | (9 | ) | 16.83 | 11.85 | ||||||
Balance at September 30, 2012 | 60 | $ | 27.77 | $ | 14.93 |
Restricted stock unit activity is set forth below:
Restricted Stock Units Outstanding | ||||||
Number of Shares | Weighted Average Grant-Date Fair Value per Share | |||||
(In millions, except per share data) | ||||||
Balance at December 31, 2011 | 22 | $ | 32.88 | |||
Restricted stock units granted | 12 | 36.07 | ||||
Restricted stock units assumed | 6 | 37.54 | ||||
Restricted stock units cancelled | (1 | ) | 34.63 | |||
Restricted stock units vested | (11 | ) | 28.43 | |||
Balance at September 30, 2012 | 28 | $ | 35.26 |
The per share fair values of rights granted in connection with the employee stock purchase plan and stock options assumed from acquisitions in the nine months ended September 30, 2012 have been estimated with the following weighted average assumptions:
Employee Stock Purchase Rights | Assumed Employee Stock Options | ||||||
Expected life (in years) | 0.72 | 1.39 | |||||
Implied volatility | 0.36 | 0.41 | |||||
Risk-free interest rate | 0.15 | % | 0.22 | % | |||
Expected dividend yield | 1.12 | % | 1.00 | % | |||
Weighted average fair value | $ | 9.08 | $ | 27.54 |
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Stock-Based Compensation Expense
The following table presents details of total stock-based compensation expense that is included in each functional line item in the unaudited condensed consolidated statements of income:
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||
(In millions) | |||||||||||||||
Cost of product revenue | $ | 6 | $ | 6 | $ | 21 | $ | 19 | |||||||
Research and development | 89 | 85 | 278 | 284 | |||||||||||
Selling, general and administrative | 33 | 30 | 116 | 99 | |||||||||||
$ | 128 | $ | 121 | $ | 415 | $ | 402 |
The following table presents details of unearned stock-based compensation currently estimated to be expensed in the remainder of 2012 through 2016 related to unvested share-based payment awards:
2012 | 2013 | 2014 | 2015 | 2016 | Total | ||||||||||||||||||
(In millions) | |||||||||||||||||||||||
Unearned stock-based compensation | $ | 120 | $ | 384 | $ | 254 | $ | 131 | $ | 22 | $ | 911 |
The weighted-average period over which the unearned stock-based compensation is expected to be recognized is 1.40 years.
9. | Commitments and Contingencies |
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 withdrew six patents, bringing the total to six asserted patents: U.S. Patents Nos. 7,058,150; 7,471,691; 7,450,500; 6,424,194; 7,486,124, and 7,724,057 (referred to as the 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, and the Court heard post-trial motions in December 2011. The Court found that the Asserted Patents are not invalid. The Court further found Emulex infringed the ‘150 and ‘691 patents. In March 2012, the Court granted Broadcom’s motion for an injunction on the ‘150 and ‘691 patents and in April 2012, the Court entered an injunction against Emulex. Emulex filed an appeal of the Court’s rulings on the ‘150 and ‘691 patents to the Federal Circuit. On the remaining Asserted Patents, the jury found the ‘500 patent was not infringed and failed to reach a
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verdict on infringement for the ‘194, ‘124, and ‘057 patents. The Court has scheduled a new trial regarding the ‘194, ‘124, and ‘057 patents for April 2013.
On July 3, 2012, Broadcom and Emulex entered into a partial settlement and license agreement for the Asserted Patents. Under the terms of the agreement, the parties dismissed their respective claims on the ‘691 and ‘500 patents, Emulex received a license and release related to the Asserted Patents for certain products for certain fields of use and Emulex was required to make a payment of certain amounts to Broadcom. The litigation proceedings for the ‘150, ‘194, ‘124, and ‘057 patents will continue relating to Emulex’s unlicensed activity.
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 answered the complaint and counterclaimed for infringement against Broadcom wireless LAN products and sought damages, attorney’s fees, and an injunction. Following a court ordered mediation session in March 2012, Broadcom and CSIRO entered into a settlement agreement resolving the litigation and the Court dismissed the parties’ claims with prejudice. The terms of the settlement agreement included a full release from liability for all asserted claims, the grant of a perpetual license under the asserted patent and all related patents to Broadcom, and the payment of certain amounts by Broadcom.
In August 2010, we 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 of our customers, infringe patents relating generally to Ethernet technology. USEI seeks monetary damages, attorney’s fees, and an injunction. Defendants have filed answers denying the allegations in USEI’s complaint and asserting counterclaims for declaratory judgment that USEI’s patents are invalid, unenforceable, and not infringed. We contend that we have a license related to USEI’s patents and are seeking to assert this license as a defense. In December 2010, the Court granted our motion to intervene. No trial date has been set.
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 Proceedings
In November 2009 Emulex filed a complaint in the Central District of California against us 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 April 2012, the Court granted a joint stipulation to dismiss Emulex’s antitrust, defamation, and unfair competition case against us without prejudice. Under the July 3, 2012 agreement referenced above, Emulex released these claims against Broadcom.
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 our 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 arbitration hearing has been scheduled for January 2013.
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In September 2011, two lawsuits were filed by stockholders of NetLogic purporting to assert claims arising from our entry into a definitive merger agreement with NetLogic under which a subsidiary of Broadcom, I&N Acquisition Corp., was to be merged with and into NetLogic. On November 11, 2011, all parties to these actions, captioned New Jersey Carpenters’ Pension Fund v. Broyles et al., (Cal. Super. Ct. County of Santa Clara, Case No. 1-11-CV-209381) (referred to as the California Action), and Danielo v. NetLogic Microsystems, et al., (Del. Ct. of Chancery, Case No. 6881-VCG) (referred to as the Delaware Action), executed a Memorandum of Understanding, or MOU, respecting a proposed settlement of the claims in each of those actions. The California court entered a final order approving the settlement, and the Delaware court has dismissed the case with prejudice. The terms of the settlement required NetLogic to make certain supplemental disclosures regarding the merger in a Form 8-K filed with the SEC by NetLogic on November 14, 2011, and the payment by NetLogic of attorneys fees’ and costs to counsel representing the plaintiffs in the amount of $795,000.
In February 2012 we were notified by the SEC’s Division of Enforcement - Los Angeles Regional office that it is conducting a formal investigation of our accounting practices related to litigation reserves. The SEC has requested documents and information for the time period commencing June 1, 2010 to the present. We believe that the SEC’s investigation was prompted by allegations of a former employee relating to our processes and decisions regarding litigation reserves in the first quarter of 2011 in connection with asserted and unasserted intellectual property claims. Following our receipt of these allegations in April 2011, we, with oversight from the Audit Committee of the Board of Directors, conducted an internal review of these allegations with the assistance of independent outside counsel and did not identify any improprieties. This investigation was completed during the three months ended June 30, 2011. In addition, based on the internal review, the results of which were discussed with the our independent registered public accounting firm, we determined that no adjustments to our fiscal 2010 and March 31, 2011 consolidated financial statements were necessary relating to the subject matter of the review. We are cooperating with the SEC’s investigation.
In July 2012, a former employee filed a lawsuit against us alleging wrongful termination in violation of the Dodd-Frank Wall Street Reform and Consumer Protection Act and fundamental public policy under state law. The former employee alleges that he was terminated in June 2011 because he raised concerns that Broadcom did not appropriately accrue for and report certain loss contingencies in the three months ended March 31, 2011. We believe the lawsuit is without merit.
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 loss is probable and the settlement amount is estimable we may record settlement costs, notwithstanding not having reached a final settlement agreement. The settlement of any pending litigation or other proceedings 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. See Note 1 for an additional discussion of our accounting policy under “Litigation and Settlement Costs”.
Settlement Costs (Gains) and Other Related Items
In three months ended September 30, 2012 we received a payment of $58 million related to a partial settlement and license agreement. We accounted for this transaction as a multiple element arrangement and immediately recognized a $2 million gain on settlement of litigation and allocated the remaining $56 million to the licensing of intellectual property. The licensing portion will be recorded as net revenue over the ten year term of the license. In the nine months ended September 30, 2012 we recorded settlement costs of $88 million related to the settlement of patent infringement claims.
In the three months ended September 30, 2011 we recorded net settlement costs of $27 million related to the settlement of patent infringement claims, which net amount was comprised of $30 million of settlement costs, offset by $3 million of settlement gains. In the nine months ended September 30, 2011 we recorded net settlement gains of $23 million which was comprised of $54 million of settlement gains primarily related to the settlement of our shareholder derivative action, offset by settlement costs of $31 million related to the settlement of patent infringement claims. Upon the occurrence of certain events,
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we may be required to record additional settlement costs of up to $20 million related to a patent infringement case that settled in 2011.
Commitments and Other Contractual Obligations
The following table presents details of our commitments and other contractual obligations, which are currently estimated to be paid in the remainder of 2012 and thereafter:
Payment Obligations by Year | |||||||||||||||||||||||||||
2012 | 2013 | 2014 | 2015 | 2016 | Thereafter | Total | |||||||||||||||||||||
(In millions) | |||||||||||||||||||||||||||
Operating leases | $ | 36 | $ | 132 | $ | 99 | $ | 84 | $ | 77 | $ | 135 | $ | 563 | |||||||||||||
Inventory and related purchase obligations | 579 | — | — | — | — | — | 579 | ||||||||||||||||||||
Other obligations | 111 | 89 | 72 | 30 | 23 | 3 | 328 | ||||||||||||||||||||
Long-term debt and related interest | 14 | 340 | 35 | 436 | 26 | 1,102 | 1,953 | ||||||||||||||||||||
$ | 740 | $ | 561 | $ | 206 | $ | 550 | $ | 126 | $ | 1,240 | $ | 3,423 |
Inventory and related purchase obligations represent purchase commitments for silicon wafers and assembly and test services. We depend upon third party subcontractors to manufacture our silicon wafers and provide assembly and test services. Due to lengthy subcontractor lead times, we must order these materials and services from subcontractors well in advance. We expect to receive and pay for these materials and services within the ensuing six months. Our subcontractor relationships typically allow for the cancellation of outstanding purchase orders, but require payment of all expenses incurred through the date of cancellation.
Other obligations represent purchase commitments for lab test equipment, computer hardware, information systems infrastructure, mask and prototyping costs, intellectual property licensing arrangements and other commitments made in the ordinary course of business.
For purposes of the table above, obligations for the purchase of goods or services are defined as agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Our purchase orders are based on current manufacturing needs and are typically fulfilled by our vendors within a relatively short time horizon. We have additional purchase orders (not included in the table above) that represent authorizations to purchase rather than binding agreements. We do not have significant agreements for the purchase of inventories or other goods specifying minimum quantities or set prices that exceed our expected requirements.
10. | Impairment of Long-Lived Assets |
In September 2012 we recorded impairment charges for developed technology of $48 million, primarily related to our 2011 acquisition of Provigent, Inc. included in our Infrastructure & Networking reportable segment. The primary factor contributing to this impairment charge was the reduction of forecasted cash flows related to certain legacy microwave technology products. In June 2012 we recorded impairment charges for developed technology of $6 million, primarily related to our 2010 acquisition of Beceem Communications, Inc., or Beceem, included in our Mobile & Wireless reportable segment. The primary factor contributing to this impairment charge was the continued reduction in the forecasted cash flows derived from the acquired WiMAX products as wireless service providers have accelerated their adoption of Long Term Evolution, LTE, products. Additionally, we recorded an impairment charge of $3 million related to certain computer software and equipment in June 2012. In March 2012 we recorded impairment charges for developed technology of $28 million, primarily related to our acquisitions of Dune Networks, Inc. and Percello Ltd. included in our Infrastructure & Networking and Broadband Communications reportable segments, respectively. The primary factor contributing to these impairment charges was the reduction in the revenue outlook for certain products and the resulting decrease to the estimated cash flows identified with the impaired 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 this networking business. In June 2011 we recorded a purchased intangible impairment charge of $74 million related to our acquisition of Beceem. The primary factor contributing to this impairment charge was a reduction
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in the forecasted cash flows derived from the acquired WiMAX products as discussed above. 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 our revenue outlook for our Blu-ray business, and the related decrease to the estimated cash flows identified with the impaired assets.
In determining the amount of the impairment charges we calculated fair values as of the impairment date for acquired developed technology. The fair value was determined using the multiple period excess earnings method, described in Note 3. The fair values were determined using significant unobservable inputs categorized as Level 3 inputs. The key unobservable inputs utilized in the model include discount rates ranging from 15% to 25%, a market participant tax rate of 15%, and a probability adjusted level of future cash flows based on current product and market data.
11. | 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 reportable segment level.
Our net revenue is generated principally from sales of integrated circuit products, the income we receive from our agreement with Qualcomm and licensing revenue. While we derive some revenue from other sources, that revenue is not material as it represents approximately 1% of our total net revenue. Such revenue is classified under product revenue for reporting purposes. We group our net revenue consistent with our three target markets which comprise our reportable segments, as discussed above.
With respect to the sales of integrated circuit products, we have approximately 600 products that are grouped into approximately 60 product lines. We have concluded that these products constitute a group of similar products within each reportable segment in each of the following respects:
• | the integrated circuits marketed by each of our reportable segments are sold to one type of customer: manufacturers of wired and wireless communications equipment, which incorporate our integrated circuits into their electronic products; |
• | the integrated circuits sold by each of our reportable segments use the same standard CMOS manufacturing processes; and |
• | all of our integrated circuits are sold through a centralized sales force and common wholesale distributors. |
We also report an “All Other” category that primarily includes licensing revenue and income from the Qualcomm Agreement since it is 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, amortization of acquired inventory valuation step-up, 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. 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.
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The following tables present details of our reportable segments and the “All Other” category:
Reportable Segments | |||||||||||||||||||
Broadband Communications | Mobile & Wireless | Infrastructure & Networking | All Other | Consolidated | |||||||||||||||
(In millions) | |||||||||||||||||||
Three Months Ended September 30, 2012 | |||||||||||||||||||
Net revenue | $ | 557 | $ | 1,023 | $ | 505 | $ | 43 | $ | 2,128 | |||||||||
Operating income (loss) | 131 | 157 | 140 | (217 | ) | 211 | |||||||||||||
Three Months Ended September 30, 2011 | |||||||||||||||||||
Net revenue | $ | 526 | $ | 942 | $ | 437 | $ | 52 | $ | 1,957 | |||||||||
Operating income (loss) | 100 | 171 | 143 | (144 | ) | 270 |
Reportable Segments | |||||||||||||||||||
Broadband Communications | Mobile & Wireless | Infrastructure & Networking | All Other | Consolidated | |||||||||||||||
(In millions) | |||||||||||||||||||
Nine Months Ended September 30, 2012 | |||||||||||||||||||
Net revenue | $ | 1,594 | $ | 2,798 | $ | 1,391 | $ | 143 | $ | 5,926 | |||||||||
Operating income (loss) | 365 | 403 | 363 | (718 | ) | 413 | |||||||||||||
Nine Months Ended September 30, 2011 | |||||||||||||||||||
Net revenue | $ | 1,529 | $ | 2,608 | $ | 1,276 | $ | 156 | $ | 5,569 | |||||||||
Operating income (loss) | 283 | 423 | 439 | (471 | ) | 674 |
Included in the “All Other” category:
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||
(In millions) | |||||||||||||||
Net revenue | $ | 43 | $ | 52 | $ | 143 | $ | 156 | |||||||
Stock-based compensation | $ | 128 | $ | 121 | $ | 415 | $ | 402 | |||||||
Amortization of purchased intangible assets | 87 | 20 | 230 | 65 | |||||||||||
Amortization of acquired inventory valuation step-up | 7 | 9 | 72 | 19 | |||||||||||
Impairments of long-lived assets | 48 | 9 | 85 | 92 | |||||||||||
Settlement costs (gains) | (2 | ) | 27 | 86 | (23 | ) | |||||||||
Restructuring costs, net | 2 | 17 | 6 | 17 | |||||||||||
Charitable contribution | — | — | — | 25 | |||||||||||
Non recurring legal fees | — | — | — | 25 | |||||||||||
Employer payroll tax on certain stock option exercises | 4 | — | 8 | 5 | |||||||||||
Miscellaneous corporate allocation variances | (14 | ) | (7 | ) | (41 | ) | — | ||||||||
Total other operating costs and expenses | $ | 260 | $ | 196 | $ | 861 | $ | 627 | |||||||
Total operating loss for the “All Other” category | $ | (217 | ) | $ | (144 | ) | $ | (718 | ) | $ | (471 | ) |
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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, | ||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||
Five largest customers as a group | 45.3 | % | 44.0 | % | 46.6 | % | 41.6 | % |
The geographical distribution of our shipments, as a percentage of product revenue was as follows:
Three Months Ended | Nine Months Ended | ||||||||||
September 30, | September 30, | ||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||
China (exclusive of Hong Kong) | 31.9 | % | 35.0 | % | 31.7 | % | 33.9 | % | |||
Hong Kong | 27.9 | 26.8 | 26.8 | 26.6 | |||||||
Singapore, Taiwan, Thailand and Japan | 28.0 | 23.1 | 27.8 | 23.9 | |||||||
United States | 2.9 | 3.1 | 3.2 | 3.4 | |||||||
Europe | 1.9 | 1.9 | 1.8 | 2.1 | |||||||
Other | 7.4 | 10.1 | 8.7 | 10.1 | |||||||
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
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Item 2. | Management’s 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, 2011 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; 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; 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; our ability to obtain future tax holidays in Singapore; our ability to permanently reinvest our foreign earnings; 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, management’s 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. Broadcom products seamlessly deliver voice, video, data and multimedia connectivity in the home, office and mobile environments. We provide the industry’s broadest portfolio of state-of-the-art system-on-a-chip, or SoC, and embedded software solutions.
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) Complete solutions for cable, xDSL, fiber, satellite and IP broadband networks to enable the connected home, including set-top boxes and media servers, residential |
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modems and gateways, femtocells and wired home networking solutions.
• | Mobile & Wireless (Solutions for the Hand) — Low-power, high-performance and highly integrated solutions powering the mobile and wireless ecosystem, including Wi-Fi and Bluetooth, cellular modems, personal navigation and global positioning, near field communications (NFC), Voice over IP (VoIP), 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 Ethernet switches, physical layer (PHY), multicore embedded processors, knowledge-based processors, digital front ends for wireless infrastructure, switch fabric solutions, high-speed Ethernet controllers and microwave backhaul devices. |
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 the three months ending June 30, 2013. There can be no assurances that we will be able to enter into similar arrangements of this magnitude in the future.
A detailed discussion of our business may be found in Part I, Item 1, “Business,” of our 2011 Annual Report on Form 10-K for the year ended December 31, 2011.
Operating Results for the Three and Nine months ended September 30, 2012
In the three months ended September 30, 2012 our net income was $220 million as compared to net income of $270 million in the three months ended September 30, 2011. In the nine months ended September 30, 2012 our net income was $468 million as compared to net income of $673 million in the nine months ended September 30, 2011. The decrease in profitability was primarily related to (i) lower gross margins due to the amortization of purchased intangible assets and inventory valuation step-up from our acquisition of NetLogic Microsystems, Inc., or NetLogic, in February 2012, (ii) an increase in research and development expenses associated with the NetLogic and BroadLight acquisitions and (iii) organic hiring. In addition, we recorded varying charges related to settlement costs, impairment of certain purchased intangible assets, charitable contributions and non-recurring income tax benefits.
The unaudited condensed consolidated financial statements include the results of operations of NetLogic and BroadLight commencing as of the acquisition dates and are included in our Infrastructure & Networking and Broadband Communications reportable segments, respectively. In connection with these acquisitions, our results of operations in the three months ended September 30, 2012 included: (i) stock-based compensation of $25 million, (ii) the amortization of purchased intangibles of $63 million, and (iii) the amortization of acquired inventory valuation step-up of $5 million. In connection with these acquisitions, our results of operations in the nine months ended September 30, 2012 included: (i) stock-based compensation of $77 million, of which $17 million related to the accelerated vesting of equity awards upon the termination of certain employees with change in control agreements, (ii) the amortization of purchased intangibles of $156 million, and (iii) the amortization of acquired inventory valuation step-up of $68 million.
Other highlights during the nine months ended September 30, 2012 include the following:
• | Our cash and cash equivalents and marketable securities were $3.19 billion at September 30, 2012, compared with $5.21 billion at December 31, 2011. This significant decrease was primarily the result of our acquisitions of NetLogic and BroadLight discussed below. We generated cash flow from operations of $1.34 billion during the nine months ended September 30, 2012 as compared to $1.36 billion in the nine months ended September 30, 2011 due to lower net income. |
• | In January 2012 our Board of Directors adopted an amendment to the existing dividend policy pursuant to which we increased our quarterly cash dividend by 11.1% to $0.10 per share ($0.40 per share on an annual basis) payable to holders of our common stock. |
• | In February 2012 we completed our acquisition of NetLogic, a publicly traded company providing high performance intelligent semiconductor solutions for next generation networks. In connection with the acquisition, we paid $3.61 billion, exclusive of cash assumed, to acquire all of the outstanding shares of |
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capital stock and other equity rights of NetLogic. The purchase price was paid in cash, except for a portion attributable to certain equity awards which were paid in the form of Broadcom equity. The equity awards had a fair value of $349 million, of which $137 million was considered part of the purchase price, and the remaining $212 million was and will be recognized as stock-based compensation expense primarily over the next two to three years from the acquisition date.
• | In February 2012 we recorded a favorable adjustment to the provision for income taxes of $46 million relating to the reversal of our valuation allowance. This was directly related to the establishment of a deferred tax liability associated with the step-up of NetLogic acquired identifiable intangible assets allocated to jurisdictions in which the statutory tax rate is above zero. |
• | In March 2012 we recorded settlement costs of $86 million related to the settlement of patent infringement claims. |
• | In March 2012 we recorded a purchased intangible impairment charges of $28 million primarily related to our acquisitions of Dune Networks, Inc. and Percello Ltd. |
• | In April 2012 we completed our acquisition of BroadLight, Inc., a privately held provider of networking and fiber access passive optical network processors. We paid $200 million, exclusive of cash assumed, to acquire all of the outstanding shares of capital stock and other equity rights of BroadLight. The consideration also included Broadcom restricted stock units for certain unvested employee stock options valued at $3 million. Additional consideration of up to $10 million in cash may be paid to the former holders of BroadLight capital stock and other rights upon satisfaction of certain future performance goals. |
• | In August 2012 we completed a private offering of $500 million aggregate principal amount of 2.500% Senior Notes due 2022. |
• | In September 2012 we recorded purchased intangible impairment charges of $48 million primarily related to our acquisition of Provigent, Inc. |
Business Enterprise Segments.
The following tables present details of our reportable segments and the “All Other” category:
Reportable Segments | |||||||||||||||||||
Broadband Communications | Mobile & Wireless | Infrastructure & Networking | All Other | Consolidated | |||||||||||||||
(In millions) | |||||||||||||||||||
Three Months Ended September 30, 2012 | |||||||||||||||||||
Net revenue | $ | 557 | $ | 1,023 | $ | 505 | $ | 43 | $ | 2,128 | |||||||||
Operating income (loss) | 131 | 157 | 140 | (217 | ) | 211 | |||||||||||||
Three Months Ended September 30, 2011 | |||||||||||||||||||
Net revenue | $ | 526 | $ | 942 | $ | 437 | $ | 52 | $ | 1,957 | |||||||||
Operating income (loss) | 100 | 171 | 143 | (144 | ) | 270 |
Reportable Segments | |||||||||||||||||||
Broadband Communications | Mobile & Wireless | Infrastructure & Networking | All Other | Consolidated | |||||||||||||||
(In millions) | |||||||||||||||||||
Nine Months Ended September 30, 2012 | |||||||||||||||||||
Net revenue | $ | 1,594 | $ | 2,798 | $ | 1,391 | $ | 143 | $ | 5,926 | |||||||||
Operating income (loss) | 365 | 403 | 363 | (718 | ) | 413 | |||||||||||||
Nine Months Ended September 30, 2011 | |||||||||||||||||||
Net revenue | $ | 1,529 | $ | 2,608 | $ | 1,276 | $ | 156 | $ | 5,569 | |||||||||
Operating income (loss) | 283 | 423 | 439 | (471 | ) | 674 |
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For additional information about our business enterprise segments and “All Other” category (including revenue and expense items reported under the "All Other" category), see further discussion in Note 11 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 and costs under multiple-element arrangements; |
• | amortization of purchased intangible assets; |
• | settlement costs or gains; |
• | cash-based incentive compensation expense; |
• | litigation costs and insurance recoveries; |
• | changes in tax laws, adjustments to tax reserves and the results of income tax audits; |
• | 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; |
• | restructuring costs; |
• | other-than-temporary impairment of marketable securities; and |
• | charitable contributions. |
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 Management’s 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, 2011. There have been no material changes in any of our critical accounting policies during the nine months ended September 30, 2012.
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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, | ||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||
Net revenue: | |||||||||||
Product revenue | 97.7 | % | 97.1 | % | 97.3 | % | 96.9 | % | |||
Income from Qualcomm Agreement | 2.0 | 2.7 | 2.4 | 2.8 | |||||||
Licensing revenue | 0.3 | 0.2 | 0.3 | 0.3 | |||||||
Total net revenue | 100.0 | 100.0 | 100.0 | 100.0 | |||||||
Costs and expenses: | |||||||||||
Cost of product revenue | 50.0 | 49.1 | 50.7 | 49.1 | |||||||
Research and development | 28.2 | 25.6 | 29.2 | 27.0 | |||||||
Selling, general and administrative | 8.2 | 8.5 | 8.8 | 9.4 | |||||||
Amortization of purchased intangible assets | 1.4 | 0.3 | 1.3 | 0.4 | |||||||
Impairments of long-lived assets | 2.3 | 0.4 | 1.4 | 1.7 | |||||||
Restructuring costs, net | 0.1 | 0.9 | 0.1 | 0.3 | |||||||
Settlement costs (gains) | (0.1 | ) | 1.4 | 1.5 | (0.4 | ) | |||||
Charitable contribution | — | — | — | 0.4 | |||||||
Total operating costs and expenses | 90.1 | 86.2 | 93.0 | 87.9 | |||||||
Income from operations | 9.9 | 13.8 | 7.0 | 12.1 | |||||||
Interest expense, net | (0.4 | ) | (0.1 | ) | (0.3 | ) | — | ||||
Other income, net | 0.4 | 0.4 | 0.2 | 0.1 | |||||||
Income before income taxes | 9.9 | 14.1 | 6.9 | 12.2 | |||||||
Provision (benefit) for income taxes | (0.4 | ) | 0.3 | (1.0 | ) | 0.1 | |||||
Net income | 10.3 | % | 13.8 | % | 7.9 | % | 12.1 | % |
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, | ||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||
Product gross margin | 48.8 | % | 49.5 | % | 47.9 | % | 49.4 | % | |||
Total gross margin | 50.0 | 50.9 | 49.3 | 50.9 |
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, | ||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||
Cost of product revenue | 0.3 | % | 0.3 | % | 0.4 | % | 0.3 | % | |||
Research and development | 4.2 | 4.3 | 4.7 | 5.1 | |||||||
Selling, general and administrative | 1.6 | 1.5 | 2.0 | 1.8 |
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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, 2012 | September 30, 2011 | |||||||||||||||||||
% of Net | % of Net | |||||||||||||||||||
Amount | Revenue | Amount | Revenue | $ Change | % Change | |||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||
Product revenue | $ | 2,078 | 97.7 | % | $ | 1,902 | 97.1 | % | $ | 176 | 9.3 | % | ||||||||
Income from Qualcomm Agreement | 43 | 2.0 | 52 | 2.7 | (9 | ) | (17.3 | ) | ||||||||||||
Licensing revenue | 7 | 0.3 | 3 | 0.2 | 4 | 133.3 | ||||||||||||||
Total net revenue | $ | 2,128 | 100.0 | % | $ | 1,957 | 100.0 | % | $ | 171 | 8.7 | % | ||||||||
Cost of product revenue | $ | 1,063 | 50.0 | % | $ | 960 | 49.1 | % | $ | 103 | 10.7 | % | ||||||||
Product gross margin | 48.8 | % | 49.5 | % | (0.7 | )% | ||||||||||||||
Total gross margin | 50.0 | % | 50.9 | % | (0.9 | )% |
Nine Months Ended | Nine Months Ended | |||||||||||||||||||
September 30, 2012 | September 30, 2011 | |||||||||||||||||||
% of Net | % of Net | |||||||||||||||||||
Amount | Revenue | Amount | Revenue | $ Change | % Change | |||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||
Product revenue | $ | 5,765 | 97.3 | % | $ | 5,396 | 96.9 | % | $ | 369 | 6.8 | % | ||||||||
Income from Qualcomm Agreement | 143 | 2.4 | 156 | 2.8 | (13 | ) | (8.3 | ) | ||||||||||||
Licensing revenue | 18 | 0.3 | 17 | 0.3 | 1 | 5.9 | ||||||||||||||
Total net revenue | $ | 5,926 | 100.0 | % | $ | 5,569 | 100.0 | % | $ | 357 | 6.4 | % | ||||||||
Cost of product revenue | $ | 3,002 | 50.7 | % | $ | 2,732 | 49.1 | % | $ | 270 | 9.9 | % | ||||||||
Product gross margin | 47.9 | % | 49.4 | % | (1.5 | )% | ||||||||||||||
Total gross margin | 49.3 | % | 50.9 | % | (1.6 | )% |
Three Months Ended | Three Months Ended | |||||||||||||||||||
September 30, 2012 | June 30, 2012 | |||||||||||||||||||
% of Net | % of Net | |||||||||||||||||||
Amount | Revenue | Amount | Revenue | $ Change | % Change | |||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||
Product revenue | $ | 2,078 | 97.7 | % | $ | 1,917 | 97.3 | % | $ | 161 | 8.4 | % | ||||||||
Income from Qualcomm Agreement | 43 | 2.0 | 48 | 2.4 | (5 | ) | (10.4 | ) | ||||||||||||
Licensing revenue | 7 | 0.3 | 6 | 0.3 | 1 | 16.7 | ||||||||||||||
Total net revenue | $ | 2,128 | 100.0 | % | $ | 1,971 | 100.0 | % | $ | 157 | 8.0 | % | ||||||||
Cost of product revenue | $ | 1,063 | 50.0 | % | $ | 1,021 | 51.8 | % | $ | 42 | 4.1 | % | ||||||||
Product gross margin | 48.8 | % | 46.7 | % | 2.1 | % | ||||||||||||||
Total gross margin | 50.0 | % | 48.2 | % | 1.8 | % |
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Net Revenue. The following tables present net revenue from each of our reportable segments and its respective contribution to net revenue:
Three Months Ended | Three Months Ended | |||||||||||||||||||
September 30, 2012 | September 30, 2011 | |||||||||||||||||||
% of Net | % of Net | |||||||||||||||||||
Amount | Revenue | Amount | Revenue | $ Change | % Change | |||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||
Broadband Communications | $ | 557 | 26.2 | % | $ | 526 | 26.9 | % | $ | 31 | 5.9 | % | ||||||||
Mobile & Wireless | 1,023 | 48.1 | 942 | 48.1 | 81 | 8.6 | ||||||||||||||
Infrastructure & Networking | 505 | 23.7 | 437 | 22.3 | 68 | 15.6 | ||||||||||||||
All other(1) | 43 | 2.0 | 52 | 2.7 | (9 | ) | (17.3 | ) | ||||||||||||
Total net revenue | $ | 2,128 | 100 | % | $ | 1,957 | 100.0 | % | $ | 171 | 8.7 | % |
Nine Months Ended | Nine Months Ended | |||||||||||||||||||
September 30, 2012 | September 30, 2011 | |||||||||||||||||||
% of Net | % of Net | |||||||||||||||||||
Amount | Revenue | Amount | Revenue | $ Change | % Change | |||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||
Broadband Communications | $ | 1,594 | 26.9 | % | $ | 1,529 | 27.5 | % | $ | 65 | 4.3 | % | ||||||||
Mobile & Wireless | 2,798 | 47.2 | 2,608 | 46.8 | 190 | 7.3 | ||||||||||||||
Infrastructure & Networking | 1,391 | 23.5 | 1,276 | 22.9 | 115 | 9.0 | ||||||||||||||
All other(1) | 143 | 2.4 | 156 | 2.8 | (13 | ) | (8.3 | ) | ||||||||||||
Total net revenue | $ | 5,926 | 100.0 | % | $ | 5,569 | 100.0 | % | $ | 357 | 6.4 | % |
Three Months Ended | Three Months Ended | |||||||||||||||||||
September 30, 2012 | June 30, 2012 | |||||||||||||||||||
% of Net | % of Net | |||||||||||||||||||
Amount | Revenue | Amount | Revenue | $ Change | % Change | |||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||
Broadband Communications | $ | 557 | 26.2 | % | $ | 543 | 27.5 | % | $ | 14 | 2.6 | % | ||||||||
Mobile & Wireless | 1,023 | 48.1 | 900 | 45.7 | 123 | 13.7 | ||||||||||||||
Infrastructure & Networking | 505 | 23.7 | 480 | 24.4 | 25 | 5.2 | ||||||||||||||
All other(1) | 43 | 2.0 | 48 | 2.4 | (5 | ) | (10.4 | ) | ||||||||||||
Total net revenue | $ | 2,128 | 100.0 | % | $ | 1,971 | 100.0 | % | $ | 157 | 8.0 | % |
(1) | Includes (i) income relating to the Qualcomm Agreement that was entered into in April 2009 and (ii) other revenue from certain patent license agreements. See Notes 1 and 2 of Notes to Unaudited Condensed Consolidated Financial Statements. |
Broadband Communications. The increase in net revenue in the three months ended September 30, 2012 as compared to three months ended September 30, 2011 resulted primarily from an increase in demand for our broadband modems of $57 million, partially offset by a reduction in demand for our digital television and Blu-ray Disc products of $31 million. The increase in net revenue in the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011 resulted primarily from an increase in demand for our broadband modems of $122 million, partially offset by a reduction in demand for our digital television and Blu-ray Disc products of $63 million. The increase in net revenue in the three months ended September 30, 2012 as compared to the three months ended June 30, 2012, resulted primarily from an increase in demand for our set-top box products of $22 million. Broadband modem and set-top box growth is generally driven by an increase in the number of global subscribers for broadband access and pay-TV services, as well as the adoption of faster
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modems and the roll out of more highly integrated set-top box platforms by global service providers. The decrease in our digital television and Blu-ray Disc products was the result of our decision to move away from those particular consumer electronic markets.
Mobile & Wireless. The increase in net revenue in the three months ended September 30, 2012 as compared to the three months ended September 30, 2011 resulted primarily from an increase in demand for our cellular baseband and wireless connectivity products of $96 million and other wireless technology products of $39 million, partially offset by a decrease in demand for our multimedia co-processors of $54 million. The increase in net revenue in the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011 resulted primarily from an increase in demand for our cellular baseband and wireless connectivity products of $223 million and other wireless technology products of $59 million, partially offset by a decrease in demand for our multimedia co-processors of $92 million. The increase in net revenue in the three months ended September 30, 2012 as compared to the three months ended June 30, 2012 resulted primarily from an increase in demand for cellular baseband and wireless connectivity products of $103 million and other wireless technology products of $33 million, partially offset by a decrease in demand for our multimedia co-processors of $13 million. Growth in our baseband and wireless connectivity businesses has been driven by increased demand for our 3G baseband solutions and higher-end devices which require Wi-Fi and Bluetooth connectivity. This growth more than offset the reduction in demand for our 2G basebands. The multimedia co-processors business has declined due to the end of life of certain customer products.
Infrastructure & Networking. The increase in net revenue for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011 resulted primarily from an increase in demand for our communication processors of $86 million. The increase in net revenue for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011 resulted primarily from an increase in demand for our communication processors of $193 million, partially offset by softness in sales of Ethernet switches, PHYs and controller products of $83 million. The increase in net revenue for our communication processors for the three and nine month ended September 30, 2012 was the result of our acquisition of NetLogic in February 2012. The decrease in Ethernet switches and PHYs was primarily due to softness in service provider spending as compared to the corresponding periods in 2011. The increase in net revenue for the three months ended September 30, 2012 as compared to the three months ended June 30, 2012 resulted primarily from an increase in revenue from our Ethernet switches and PHYs of $21 million driven primarily from growth in the service provider market.
Rebates. We recorded rebates to certain customers of $216 million, or 10.2% of net revenue, $149 million, or 7.6% of net revenue, and $184 million, or 9.4% of net revenue, in the three months ended September 30, 2012, June 30, 2012, and September 30, 2011, respectively. We recorded rebates to certain customers of $512 million, or 8.6% of net revenue, and $498 million, or 8.9% of net revenue in the nine months ended September 30, 2012 and 2011, respectively. We reverse the accrual of unclaimed rebate amounts as specific rebate programs contractually end or when we believe unclaimed rebates are no longer subject to payment and will not be paid. We reversed accrued rebates of $3 million, $2 million and $4 million in the three months ended September 30, 2012, June 30, 2012 and September 30, 2011, respectively. We reversed accrued rebates of $8 million and $11 million in the nine months ended September 30, 2012 and 2011, respectively. 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.
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 party’s 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, 2012 and prior periods may not necessarily be indicative of future net revenue and results of operations.
Concentration of Net 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 45.3% and 46.6% of our total net revenue in the three and nine months ended September 30, 2012, respectively, and 44.0% and 41.6% in the three and nine months ended September 30, 2011, respectively. We expect that our largest customers will continue to account for a substantial portion of our total net revenue for the foreseeable future. Our largest customers and their respective contributions to our total net revenue have varied and will likely continue to vary from period to period.
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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, and 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 and 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 and license fees paid to vendors and non-practicing entities, or NPEs, for use of their technology. Also included in cost of product revenue is the amortization of purchased technology and inventory valuation step-up, 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 or 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 48.8% in the three months ended September 30, 2012 as compared to 49.5% in the three months ended September 30, 2011 primarily because of increases in amortization of purchased intangibles and excess and obsolete inventory provisions of $42 million and $4 million, respectively. The increase in the amortization of purchased intangibles was primarily the result of our acquisitions of NetLogic and BroadLight. Product gross margin also includes $8 million and $2 million of licensing costs related to NPEs in the three months ended September 30, 2012 and 2011, respectively.
Product gross margin decreased to 47.9% in the nine months ended September 30, 2012 as compared to 49.4% in the nine months ended September 30, 2011 primarily because of increases in amortization of purchased intangibles and inventory valuation step-up of $106 million and $53 million, respectively, offset in part by increases in cancellation fees received of $10 million. The increase in the amortization of purchased intangibles and inventory valuation step-up were primarily the result of our acquisitions of NetLogic and BroadLight. Product gross margin also includes $19 million and $6 million of licensing costs related to NPEs in the nine months ended September 30, 2012 and 2011, respectively.
Product gross margin increased to 48.8% in the three months ended September 30, 2012 as compared to 46.7% in the three months ended June 30, 2012 primarily because of a decrease in amortization of purchased intangibles, inventory valuation step-up, and excess and obsolete inventory provisions of $1 million, $36 million and $4 million, respectively, offset in part by a reduction in cancellation fees received of $7 million. The decrease in inventory step-up was primarily the result of the sell through of inventory assumed in our acquisition of NetLogic. Product gross margin also includes $8 million of licensing costs related to NPEs in each of the three months ended September 30, 2012 and June 30, 2012.
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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; |
• | our ability to create cost advantages through successful integration and convergence; |
• | fluctuations in direct product costs such as silicon wafer costs and assembly, packaging and testing costs, and other fixed costs; |
• | our ability to advance to the next technology node faster than our competitors; |
• | licensing royalties payable by us, including licensing fees paid to NPEs; |
• | the consolidation of foundry subcontractors that could potentially drive increased wafer prices; |
• | product warranty costs; |
• | fair value and related amortization of acquired tangible and intangible assets; and |
• | amortization of acquired inventory valuation step-up. |
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.
The following tables present details of research and development expense:
Three Months Ended | Three Months Ended | |||||||||||||||||||
September 30, 2012 | September 30, 2011 | |||||||||||||||||||
% of Net | % of Net | |||||||||||||||||||
Amount | Revenue | Amount | Revenue | $ Change | % Change | |||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||
Salaries and benefits | $ | 342 | 16.1 | % | $ | 281 | 14.4 | % | $ | 61 | 21.7 | % | ||||||||
Stock-based compensation | 89 | 4.2 | 85 | 4.3 | 4 | 4.7 | ||||||||||||||
Development and design costs | 88 | 4.1 | 73 | 3.7 | 15 | 20.5 | ||||||||||||||
Other | 81 | 3.8 | 62 | 3.2 | 19 | 30.6 | ||||||||||||||
Research and development | $ | 600 | 28.2 | % | $ | 501 | 25.6 | % | $ | 99 | 19.8 | % |
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Nine Months Ended | Nine Months Ended | |||||||||||||||||||
September 30, 2012 | September 30, 2011 | |||||||||||||||||||
% of Net | % of Net | |||||||||||||||||||
Amount | Revenue | Amount | Revenue | $ Change | % Change | |||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||
Salaries and benefits | $ | 967 | 16.3 | % | $ | 826 | 14.8 | % | $ | 141 | 17.1 | % | ||||||||
Stock-based compensation | 278 | 4.7 | 284 | 5.1 | (6 | ) | (2.1 | ) | ||||||||||||
Development and design costs | 255 | 4.3 | 210 | 3.8 | 45 | 21.4 | ||||||||||||||
Other | 228 | 3.9 | 184 | 3.3 | 44 | 23.9 | ||||||||||||||
Research and development | $ | 1,728 | 29.2 | % | $ | 1,504 | 27.0 | % | $ | 224 | 14.9 | % |
The increase in salaries and benefits for the three and nine months ended September 30, 2012 as compared to the three and nine months ended September 30, 2011 was primarily attributable to an increase in headcount of approximately 1,225 personnel, bringing headcount to approximately 8,600 at September 30, 2012, which represents a 16.6% increase from our September 30, 2011 levels. Approximately 50% of the increase in headcount was the result of our acquisitions of NetLogic and BroadLight. See below for discussion of stock-based compensation. Development and design costs increased in the three and nine months ended September 30, 2012 due to increases in prototyping costs, engineering design tool expenses and licensing fees. Development and design costs vary from period to period depending on the timing of 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 and facility 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, including acquisitions.
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. Approximately 60% of our products are currently manufactured in 65 nanometers (with an increasing number of products being manufactured in 40 nanometers). We are designing most new products in 40 nanometers and 28 nanometers, and are beginning to evaluate 20 nanometers. We currently hold more than 7,500 U.S. and more than 2,800 foreign patents and more than 7,500 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.
Selling, General and Administrative Expense
Selling, general and administrative expense consists primarily of personnel-related expenses, including stock-based compensation expense, legal and other professional fees, facilities expenses and communications expenses.
The following tables present details of selling, general and administrative expense:
Three Months Ended | Three Months Ended | |||||||||||||||||||
September 30, 2012 | September 30, 2011 | |||||||||||||||||||
% of Net | % of Net | |||||||||||||||||||
Amount | Revenue | Amount | Revenue | $ Change | % Change | |||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||
Salaries and benefits | $ | 91 | 4.3 | % | $ | 76 | 3.9 | % | $ | 15 | 19.7 | % | ||||||||
Stock-based compensation | 33 | 1.6 | 30 | 1.5 | 3 | 10.0 | ||||||||||||||
Legal and accounting fees | 21 | 1.0 | 28 | 1.4 | (7 | ) | (25.0 | ) | ||||||||||||
Other | 29 | 1.3 | 32 | 1.7 | (3 | ) | (9.4 | ) | ||||||||||||
Selling, general and administrative | $ | 174 | 8.2 | % | $ | 166 | 8.5 | % | $ | 8 | 4.8 | % |
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Nine Months Ended | Nine Months Ended | |||||||||||||||||||
September 30, 2012 | September 30, 2011 | |||||||||||||||||||
% of Net | % of Net | |||||||||||||||||||
Amount | Revenue | Amount | Revenue | $ Change | % Change | |||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||
Salaries and benefits | $ | 257 | 4.3 | % | $ | 221 | 4.0 | % | $ | 36 | 16.3 | % | ||||||||
Stock-based compensation | 116 | 2.0 | 99 | 1.8 | 17 | 17.2 | ||||||||||||||
Legal and accounting fees | 63 | 1.1 | 123 | 2.2 | (60 | ) | (48.8 | ) | ||||||||||||
Other | 88 | 1.4 | 82 | 1.4 | 6 | 7.3 | ||||||||||||||
Selling, general and administrative | $ | 524 | 8.8 | % | $ | 525 | 9.4 | % | $ | (1 | ) | (0.2 | )% |
The increase in salaries and benefits for the three and nine months ended September 30, 2012 as compared to the three and nine months ended September 30, 2011 was primarily attributable to an increase in headcount of approximately 200 personnel, bringing headcount to approximately 1,925 at September 30, 2012, which represents a 12% increase from our September 30, 2011 levels. Approximately 60% of the increase in headcount was the result of our acquisitions of NetLogic and BroadLight. See below for discussion of stock-based compensation. The decreases in legal and accounting fees was primarily driven by the conclusion of several outstanding legal matters, including the settlement of a shareholder derivative action in the three months ended June 30, 2011 and certain patent infringement claims. 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.
Stock-Based Compensation Expense
The following tables present 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, 2012 | September 30, 2011 | |||||||||||||||||||
% of Net | % of Net | |||||||||||||||||||
Amount | Revenue | Amount | Revenue | $ Change | % Change | |||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||
Cost of product revenue | $ | 6 | 0.3 | % | $ | 6 | 0.3 | % | $ | — | — | % | ||||||||
Research and development | 89 | 4.2 | 85 | 4.3 | 4 | 4.7 | ||||||||||||||
Selling, general and administrative | 33 | 1.6 | 30 | 1.5 | 3 | 10.0 | ||||||||||||||
$ | 128 | 6.1 | % | $ | 121 | 6.1 | % | $ | 7 | 5.8 | % |
Nine Months Ended | Nine Months Ended | |||||||||||||||||||
September 30, 2012 | September 30, 2011 | |||||||||||||||||||
% of Net | % of Net | |||||||||||||||||||
Amount | Revenue | Amount | Revenue | $ Change | % Change | |||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||
Cost of product revenue | $ | 21 | 0.4 | % | $ | 19 | 0.3 | % | $ | 2 | 10.5 | % | ||||||||
Research and development | 278 | 4.7 | 284 | 5.1 | (6 | ) | (2.1 | ) | ||||||||||||
Selling, general and administrative | 116 | 2.0 | 99 | 1.8 | 17 | 17.2 | ||||||||||||||
$ | 415 | 7.1 | % | $ | 402 | 7.2 | % | $ | 13 | 3.2 | % |
In the nine months ended September 30, 2012, we also granted equity awards with a fair value of $434 million, primarily related to our regular annual equity compensation review program, that will be expensed over the next four years and assumed NetLogic and BroadLight equity awards with a fair value of $215 million that will be expensed primarily over the next two to
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three years.
The following table presents details of unearned stock-based compensation currently estimated to be expensed in the remainder of 2012 through 2016 related to unvested share-based payment awards:
2012 | 2013 | 2014 | 2015 | 2016 | Total | ||||||||||||||||||
(In millions) | |||||||||||||||||||||||
Unearned stock-based compensation | $ | 120 | $ | 384 | $ | 254 | $ | 131 | $ | 22 | $ | 911 |
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.
It is our long-term objective that total stock-based compensation approximates 5% of total net revenue.
See Note 8 of Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of activity related to share-based awards.
Amortization of Purchased Intangible Assets
The following tables present 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, 2012 | September 30, 2011 | |||||||||||||||||||
% of Net | % of Net | |||||||||||||||||||
Amount | Revenue | Amount | Revenue | $ Change | % Change | |||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||
Cost of product revenue | $ | 55 | 2.6 | % | $ | 13 | 0.7 | % | $ | 42 | 323.1 | % | ||||||||
Other operating expenses | 32 | 1.4 | 7 | 0.3 | 25 | 357.1 | ||||||||||||||
$ | 87 | 4.0 | % | $ | 20 | 1.0 | % | $ | 67 | 335.0 | % |
Nine Months Ended | Nine Months Ended | |||||||||||||||||||
September 30, 2012 | September 30, 2011 | |||||||||||||||||||
% of Net | % of Net | |||||||||||||||||||
Amount | Revenue | Amount | Revenue | $ Change | % Change | |||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||
Cost of product revenue | $ | 148 | 2.5 | % | $ | 42 | 0.8 | % | $ | 106 | 252.4 | % | ||||||||
Other operating expenses | 82 | 1.3 | 23 | 0.4 | 59 | 256.5 | ||||||||||||||
$ | 230 | 3.8 | % | $ | 65 | 1.2 | % | $ | 165 | 253.8 | % |
The increase in amortization of purchased intangible assets in the three and nine months ended September 30, 2012 as compared to the three and nine months ended September 30, 2011 primarily related to our acquisitions of NetLogic and BroadLight in 2012 and Provigent in 2011. In the nine months ended September 30, 2012, we recorded purchased intangible assets of $1.78 billion primarily related to our acquisitions of NetLogic and BroadLight.
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The following table presents details of the amortization of existing purchased intangible assets (including IPR&D), which is currently estimated to be expensed in the remainder of 2012 and thereafter:
Purchased Intangible Asset Amortization by Year | |||||||||||||||||||||||||||
2012 | 2013 | 2014 | 2015 | 2016 | Thereafter | Total | |||||||||||||||||||||
(In millions) | |||||||||||||||||||||||||||
Cost of product revenue | $ | 50 | $ | 173 | $ | 222 | $ | 218 | $ | 200 | $ | 800 | $ | 1,663 | |||||||||||||
Other operating expenses | 31 | 57 | 63 | 31 | 9 | 7 | 198 | ||||||||||||||||||||
$ | 81 | $ | 230 | $ | 285 | $ | 249 | $ | 209 | $ | 807 | $ | 1,861 |
We amortize our intangible assets with definitive lives over periods ranging from one to fourteen years using a method that reflects the pattern in which the economic benefits of the intangible asset are consumed or otherwise used. In addition, based on our current assumptions, IPR&D assets will be reclassified to development technology through 2016 and amortized over their estimated useful lives. If we acquire additional purchased intangible assets in the future, our cost of product revenue or operating expenses will be increased by the amortization of those assets.
In-Process Research and Development
In the nine months ended September 30, 2012 we capitalized IPR&D of $267 million related to our NetLogic acquisition. For a description of our valuation techniques and significant assumptions underlying the valuation of the ongoing development projects that were in process at the date of acquisition and were capitalized as IPR&D, see the discussion in Note 3 of Notes to the Unaudited Condensed Consolidated Financial Statements.
Impairment of Long-Lived Assets
In September 2012 we recorded impairment charges for developed technology of $48 million, primarily related to the 2011 acquisition of Provigent included in our Infrastructure & Networking reportable segment. The primary factor contributing to this impairment charge was the reduction of forecasted cash flows related to certain legacy microwave technology products. In June 2012 we recorded impairment charges for developed technology of $6 million, primarily related to our 2010 acquisition of Beceem Communications, Inc., or Beceem, included in our Mobile & Wireless reportable segment. The primary factor contributing to this impairment charge was the continued reduction in the forecasted cash flows derived from the acquired WiMAX products as wireless service providers have accelerated their adoption of Long Term Evolution, LTE, products. Additionally, we recorded an impairment charge of $3 million related to certain computer software and equipment in June 2012. In March 2012 we recorded impairment charges for developed technology of $28 million, primarily related to our acquisitions of Dune Networks and Percello included in our Infrastructure & Networking and Broadband Communications reportable segments, respectively. The primary factor contributing to these impairment charges was the reduction in the revenue outlook for certain products and the resulting decrease to the estimated cash flows identified with the impaired 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 this networking business. In June 2011 we recorded a purchased intangible impairment charge of $74 million related to our acquisition of Beceem. The primary factor contributing to this impairment charge was a reduction in the forecasted cash flows derived from the acquired WiMAX products as discussed above. 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 our revenue outlook for our Blu-ray business, and the related decrease to the estimated cash flows identified with the impaired assets.
Settlement Costs (Gains)
In the nine months ended September 30, 2012 we recorded net settlement costs of $86 million related to patent infringement claims. We recorded net settlement gains of $23 million in the nine months ended September 30, 2011 primarily related to the settlement of our shareholder derivative action. See Note 9 of Notes to the Unaudited Condensed Consolidated Financial Statements.
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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 three and nine months ended September 30, 2011.
Interest and Other Income (Expense), Net
The following tables present interest and other income, net:
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
September 30, | September 30, | ||||||||||||||||||||||
2012 | 2011 | $ Change | 2012 | 2011 | $ Change | ||||||||||||||||||
(In millions) | |||||||||||||||||||||||
Interest expense, net | $ | (8 | ) | $ | (1 | ) | $ | (7 | ) | $ | (21 | ) | $ | (1 | ) | $ | (20 | ) | |||||
Other income, net | 8 | 7 | 1 | 14 | 7 | 7 |
Interest expense, net, reflects interest expense on our senior notes totaling $1.70 billion, offset by interest income earned on cash, cash equivalents and marketable securities balances. Other income, net, primarily includes gains and losses on foreign currency transactions, asset disposals and strategic investments.
The increase in interest expense, net, for the three and nine months ended September 30, 2012 as compared to the three and nine months ended September 30, 2011 was driven primarily by interest expense related to our long-term debt of $500 million issued in November 2011 and $500 million issued in August 2012.
Provision for Income Taxes
We recorded tax benefits of $9 million and $62 million for the three and nine months ended September 30, 2012, respectively, and tax provisions of $6 million and $7 million for the three and nine months ended September 30, 2011, respectively. Our effective tax rates were (4.3)% and (15.3)% for the three and nine months ended September 30, 2012, respectively, and 2.2% and 1.0% for the three and nine months ended September 30, 2011, 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, 2012 and 2011, tax benefits resulting primarily from the expiration of statutes of limitations for the assessment of taxes in various foreign jurisdictions of $7 million for the nine months ended September 30, 2012, and $6 million for the nine months ended September 30, 2011, tax benefits resulting from the reduction of certain foreign deferred tax liabilities of $12 million for the three and nine months ended September 30, 2012, and tax benefits resulting from reductions in our U.S. valuation allowance on certain deferred tax assets due to recording net deferred tax liabilities for identifiable intangible assets under purchasing accounting of $47 million and $4 million for our acquisitions of NetLogic and BroadLight, respectively, for the nine months ended September 30, 2012.
During the three months ended March 31, 2012, we accessed $1.5 billion of cash from our foreign subsidiaries to facilitate the acquisition of NetLogic. This $1.5 billion was treated as includable in our U.S. taxable income for 2012. Nevertheless, this did not result in a tax liability for us because it was offset by our net operating loss and tax credit carryforwards. The $3.61 billion cash purchase price to acquire NetLogic greatly exceeded the purchase price of any prior cash acquisition we have made. The acquisition of NetLogic was unusual and nonrecurring. Our other cash acquisitions have been for significantly lower purchase prices, and we have never previously determined it prudent or necessary to access our prior years’ foreign earnings to facilitate an acquisition. We do not currently expect any future need to access our prior years’ foreign earnings, and therefore, aside from the $1.5 billion used to facilitate the NetLogic acquisition, we intend to continue to permanently reinvest our foreign earnings.
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 tax losses in the U.S. and certain foreign jurisdictions, and the full utilization of our loss carryback opportunities, we have concluded that a full
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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 $35 million and $62 million at September 30, 2012 and December 31, 2011, respectively.
We file federal, state and foreign income tax returns in jurisdictions with varying statutes of limitations. The 2007 through 2011 tax years generally remain subject to examination by federal and most state tax authorities. In foreign jurisdictions, the 2004 through 2011 tax years generally remain subject to examination by tax authorities. Our income tax returns for the 2007, 2008 and 2009 tax years are currently under examination by the Internal Revenue Service.
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 us. As a result of the IRS examination, taking into account effects on post-audit periods, we reduced our federal and state net operating losses by approximately $620 million and $430 million, respectively, and we reduced amounts relating to federal and state uncertain tax benefits by approximately $180 million and $100 million, respectively, as of June 30, 2011. This reduction in federal and state 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.
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 the expiration date of December 31, 2011. As a result of this legislation, we generated federal research and development tax credits of $118 million 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 carryovers since we have a full valuation allowance on our U.S. net 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. We have begun discussions with the Singapore Economic Development Board with respect to tax incentives for periods after March 31, 2014.
Liquidity and Capital Resources
Working Capital and Cash and Marketable Securities. The following table presents working capital, cash and cash equivalents, and marketable securities:
September 30, 2012 | December 31, 2011 | $ Change | |||||||||
(In millions) | |||||||||||
Working capital | $ | 2,274 | $ | 4,653 | $ | (2,379 | ) | ||||
Cash and cash equivalents | $ | 1,416 | $ | 4,146 | (2,730 | ) | |||||
Short-term marketable securities | 735 | 383 | 352 | ||||||||
Long-term marketable securities | 1,039 | 676 | 363 | ||||||||
Total cash and cash equivalents and marketable securities | $ | 3,190 | $ | 5,205 | $ | (2,015 | ) |
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, 2012 and 2011
Cash and cash equivalents decreased to $1.42 billion at September 30, 2012 from $4.15 billion at December 31, 2011 as a result of cash used to fund our acquisitions of NetLogic and BroadLight, our quarterly dividend payments and purchases of property and equipment, offset by cash provided by operating activities and net proceeds from the sale of marketable securities.
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Nine Months Ended | |||||||
September 30, | |||||||
2012 | 2011 | ||||||
(In millions) | |||||||
Net cash provided by operating activities | $ | 1,338 | $ | 1,356 | |||
Net cash provided by (used in) investing activities | (4,420 | ) | 35 | ||||
Net cash provided by (used in) financing activities | 352 | (680 | ) | ||||
Increase (decrease) in cash and cash equivalents | (2,730 | ) | 711 | ||||
Cash and cash equivalents at beginning of period | 4,146 | 1,622 | |||||
Cash and cash equivalents at end of period | $ | 1,416 | $ | 2,333 |
Operating Activities
In the nine months ended September 30, 2012 our operating activities provided $1.34 billion in cash. This was primarily the result of net income of $468 million, net non-cash operating expenses of $813 million and changes in operating assets and liabilities of $57 million. 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 changes in operating assets and liabilities of $59 million.
Our days sales outstanding increased from 34 days at December 31, 2011 to 37 days at September 30, 2012 due to revenue linearity (meaning an increased percentage of sales occurred in the final month of the quarter). 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 increased from 43 days at December 31, 2011 to 48 days at September 30, 2012 primarily to meet the anticipated revenue levels in the three months ending December 31, 2012. In the future, our inventory levels will continue to be determined by the level of purchase orders we receive and the stage at which our products are in their respective product life cycles, our ability, and the ability of our customers, to manage inventory under hubbing arrangements, and competitive situations in the marketplace. Such considerations are balanced against the risk of obsolescence or potentially excess inventory levels.
Investing Activities
Investing activities used $4.42 billion in cash in the nine months ended September 30, 2012, which was primarily the result of $3.58 billion in net cash paid for our acquisitions, primarily NetLogic and BroadLight, $189 million of capital equipment purchases to support our research and development efforts and $662 million in net purchases from sales and maturities of marketable securities, offset in part by $13 million of proceeds from the sale of strategic investments. 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.
Financing Activities
Our financing activities provided $352 million in cash in the nine months ended September 30, 2012, which was primarily the result of the net proceeds from the issuance of long-term debt of $492 million and $209 million in proceeds received from issuances of common stock upon the exercise of stock options and pursuant to our employee stock purchase plan, offset in part by the payment of contingent consideration and debt assumed from our recent acquisitions of $57 million, dividends paid of $167 million, and $124 million in minimum tax withholding paid on behalf of employees for shares issued pursuant to restricted stock units. 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
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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.
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 restricted stock units, or RSUs, only to certain employees and, in most cases to issue solely time-based RSUs. While we may issue stock options in the future, we 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 employee’s behalf.
Short and Long-Term Financing Arrangements
At September 30, 2012, we had the following resources available to obtain short-term or long-term financings if we need additional liquidity:
Registration Statements
We have a Form S-4 acquisition shelf registration statement on file with the SEC. The registration statement on Form S-4 enables us to issue up to 30 million shares of our Class A common stock in one or more acquisition transactions. These transactions may include the acquisition of assets, businesses or securities by any form of business combination. To date no securities have been issued pursuant to the S-4 registration statement, which does not have an expiration date mandated by SEC rules. On February 27, 2012 our Form S-3 that permitted Broadcom to sell, in one or more public offerings, shares of our Class A common stock, shares of preferred stock or debt securities, or any combination of such securities, for proceeds in an aggregate amount of up to $1.50 billion expired. Our 2018 Notes with an aggregate principal amount of $500 million that we issued in November 2011 were issued under this Form S-3 (see below).
Credit Facility
In November 2010 we entered into a credit facility with certain institutional lenders that provides for unsecured revolving facility loans, swing line loans and letters of credit in an aggregate amount of up to $500 million. We amended this credit facility in October 2011 primarily to extend the maturity date by two years to November 19, 2016, at which time all outstanding revolving facility loans (if any) and accrued and unpaid interest must be repaid. The amendment to the credit facility also decreased the interest rate margins applicable to loans made under the credit facility and the commitment fee paid on the amount of the unused commitments. We did not draw on our credit facility in the nine months ended September 30, 2012 and 2011.
The credit facility contains customary representations, warranties and 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, 2012.
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Senior Notes
The following table summarizes the principal amount of our senior unsecured notes:
September 30, 2012 | December 31, 2011 | ||||||
(In millions) | |||||||
1.500% fixed-rate notes, due 2013 | $ | 300 | $ | 300 | |||
2.375% fixed-rate notes, due 2015 | 400 | 400 | |||||
2.700% fixed-rate notes, due 2018 | 500 | 500 | |||||
2.500% fixed-rate notes, due 2022 | 500 | — | |||||
$ | 1,700 | $ | 1,200 | ||||
Unaccreted discount | (7 | ) | (4 | ) | |||
$ | 1,693 | $ | 1,196 |
In August 2012 we issued senior unsecured notes in an aggregate principal amount of $500 million which mature in August 2022 and bear interest at a fixed rate of 2.500% per annum, or the 2022 Notes. Interest is payable in cash semi-annually in arrears on February 15 and August 15 of each year, beginning on February 15, 2013. Proceeds from the issuance of the 2022 notes will be utilized for general corporate purposes, which may include repayment of Broadcom’s 1.500% Senior Notes due 2013.
In connection with the 2022 Notes, we entered into a registration rights agreement pursuant to which we agreed to use our reasonable commercial efforts to file with the SEC an exchange offer registration statement to issue registered notes with substantially identical terms as the 2022 Notes in exchange for any outstanding 2022 Notes, or, under certain circumstances, a shelf registration statement to register the 2022 Notes. We agreed to use our commercially reasonable efforts to consummate the exchange offer or cause the shelf registration statement to be declared effective by the SEC, in each case on or prior to 365 days after the closing of the 2022 Notes offering. If we are unable to complete our registration statement, we will be subject to interest penalties.
In November 2011 we issued senior unsecured notes in aggregate principal amount of $500 million which mature in November 2018 and bear interest at a fixed rate of 2.700% per annum, or the 2018 Notes. Proceeds from the 2018 Notes were utilized to fund a portion of the acquisition consideration for NetLogic.
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 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 which mature in November 2015, or the 2015 Notes, and bear interest at a fixed rate of 2.375% per annum. Proceeds from the issuance of the 2013 Notes and the 2015 Notes were utilized for general corporate purposes.
Our senior unsecured notes described above 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 and unpaid interest on the Notes.
We were in compliance with all debt covenants as of September 30, 2012.
Other Notes and Borrowings
We had no other significant notes or borrowings as of September 30, 2012.
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
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additional funds or draw on our existing credit facility to finance our activities beyond the next 12 months or to consummate acquisitions of other businesses, assets, products or technologies. If needed, we may be able to raise such funds by selling equity or debt securities to the public or to selected investors, or by borrowing money from financial institutions. We could also reduce certain expenditures, such as repurchases of our Class A common stock.
We earn a significant amount of our operating income outside the U.S., which 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 were to repatriate our foreign earnings, which are permanently reinvested, it would not result in a significant tax liability because the amounts would be offset by our remaining net operating loss and tax credit carryforwards.
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. 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, 2012 we have approximately $1.31 billion of cash, cash equivalents, and marketable securities held by our foreign subsidiaries. Any potential additional income, which could result if we were to repatriate our remaining foreign cash, cash equivalents and marketable securities 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, and 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; |
• | 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; |
• | 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, including licensing fees paid to NPEs; |
• | changes in our compensation policies; |
• | the issuance of restricted stock units and the related cash payments we make for withholding taxes due from employees; |
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• | repurchases of our Class A common stock; |
• | 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, 2012 we had no material off-balance sheet arrangements, other than our facility 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 factors, our future investment income, net, may fall short of expectations due to changes in interest rates or if the decline in fair value of our publicly traded fixed income 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 fixed income 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 loss, a component of shareholders’ equity, net of tax.
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, 2012, a 100 basis point increase in interest rates across all maturities would result in a $20 million incremental decline in the fair market value of the portfolio. As of December 31, 2011, a similar 100 basis point increase in interest rates across all maturities would also result in a $9 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 analysis performed as of September 30, 2012 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
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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 SEC’s 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 management’s 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 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, 2012, 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, 2012 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, 2011 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.
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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:
• | changes in economic conditions in the markets we address, including the continuing volatility in the technology sector and semiconductor industry; |
• | seasonality in sales of consumer and enterprise products in which our products are incorporated; |
• | our dependence on a few significant customers and/or design wins for a substantial portion of our revenue; |
• | timing, rescheduling or cancellation of significant customer orders and our ability, as well as the ability of our customers, to manage inventory; |
• | changes in customer product needs and market acceptance of our products; |
• | 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; |
• | the impact of a significant natural disaster, such as an earthquake, severe weather, tsunami or other flooding, or a nuclear crisis, as well as interruptions or shortages in the supply of utilities such as water and electricity, in a key location such as our corporate headquarters or our Northern California facilities, both of which are located near major earthquake fault lines, in our Singapore distribution center or in a key location of one of our suppliers, foundries or customers; |
• | the impact of enterprise system failures or network disruptions and the failure of our disaster recovery planning to cover various unanticipated occurrences; and |
• | 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 46.6% and 41.6% of our total net revenue in the nine months ended September 30, 2012 and 2011, respectively. We expect that our largest customers will continue to account for a substantial portion of our total net revenue for the foreseeable future. Our largest customers and their respective contributions to our total net revenue have varied and will likely continue to vary from period to period. The loss of any significant customer could materially and adversely affect our financial condition and results of operations. Also, as our significant customers become larger relative to our business and the industry, they may be able to leverage pricing pressure through the supply chain, vertical integration or other avenues, thereby adversely affecting our gross margins.
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 customer’s 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:
• | agreements with our customers typically do not require them to purchase a minimum quantity of our products; and |
• | 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. From January 2008 through September 2012, we recorded $896 million in licensing revenue and related income derived from Verizon Wireless and Qualcomm and we expect to record an additional $130 million. 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 the three months ending June 30, 2013. There can be no assurances that we will be able to enter into additional such arrangements of this magnitude 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.
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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 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.
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.
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 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 in accurately forecasting and planning 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 challenges in 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, and to upgrade or enhance our existing IT systems. We may not be successful in implementing new systems, which could involve business disruptions, including impeding the shipment of our products.
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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. 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, causing the need to implement restructuring actions and a number of other cost saving measures. Any of these circumstances could 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, 2012 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 Broadcom’s 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.
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. Some of these notices involve NPEs asserting claims addressing certain of our products. 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. Further, settlements can involve royalty or other payments that could reduce our profit margins and adversely affect our financial results.
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 party’s 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, or confidential employee, customer or supplier data. 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
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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.
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 industry’s shift to “just-in-time” inventory management, any disruption in the supply chain could lead to more immediate shortages in product or component supply. Additionally, any enterprise system failures, including in connection with implementing new systems, could impact our ability to fulfill orders and interrupt other processes.
A percentage of our inventory is maintained under hubbing arrangements whereby products are delivered to a customer or third party warehouse based upon the customer’s 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.
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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:
• | 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; |
• | lower gross margins, revenues and operating income than originally anticipated at the time of acquisition and other financial challenges; |
• | delays in the timing and successful integration of an acquired company’s technologies; |
• | the loss of key personnel; and |
• | 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, all of which can adversely affect our reported results on a GAAP basis. In addition, we may record goodwill and other purchased intangible assets in connection with an acquisition and incur impairment charges in the future.
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. Such costs increase with the advancement of technologies and manufacturing in smaller geometry processes, which can adversely affect our operating margin. 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:
• | effectively identify and capitalize upon opportunities in new markets; |
• | timely complete and introduce new integrated products; |
• | transition our semiconductor products to increasingly smaller line width geometries; |
• | license any desired third party technology or intellectual property rights; |
• | 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. As we transition to manufacturing our products in smaller geometry processes, such as 40 nanometers and 28 nanometers, these risks are enhanced.
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 consolidation of foundry subcontractors, as well as the increasing capital intensity and complexity associated with fabrication in smaller process geometries may limit our diversity of suppliers, potentially driving increased wafer prices and adversely affecting our results of operations, including our product gross margins.
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 manufacturers, 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:
• | a lack of guaranteed supply of wafers and other components and potential higher wafer and component prices due to supply constraints; |
• | the limited availability of, or potential delays in obtaining access to, key process technologies; and |
• | the location of foundries and other suppliers in regions that are subject to earthquakes, tsunamis and other natural disasters. |
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.
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 96.8% and 96.6% of our product revenue in the nine months ended September 30, 2012 and 2011, respectively. Substantially all of our products are shipped through logistical facilities in Singapore. 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:
• | political, social and economic instability; |
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• | exposure to different business practices and legal standards, particularly with respect to intellectual property; |
• | continuation of overseas conflicts and the risk of terrorist attacks and resulting heightened security; |
• | the imposition of governmental controls and restrictions and unexpected changes in regulatory requirements; |
• | nationalization of business and blocking of cash flows; |
• | logistical delays or disruptions; |
• | changes in taxation and tariffs; and |
• | 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.
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 and again in January 2012, 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:
• | our views on potential future capital requirements for investments in acquisitions and the funding of our research and development; |
• | use of cash to consummate various acquisition transactions; |
• | stock repurchase programs; |
• | changes in federal and state income tax laws or corporate laws; and |
• | 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 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
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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 product or manufacturing standards could also be impacted by new or revised environmental rules and regulations or other social initiatives. For instance, the U.S. Securities and Exchange Commission recently adopted new disclosure requirements relating to the sourcing of certain minerals from the Democratic Republic of Congo and certain other adjoining countries. Those new rules, which will require reporting in 2014, could adversely affect our costs, the availability of minerals used in our products and our relationships with customers and suppliers.
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, which are effective through March 31, 2014, 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. We have begun discussions with the Singapore Economic Development Board with respect to tax incentives for periods after March 31, 2014. No assurances can be given that such discussions will be successful. If we are unable to reach an agreement with Singapore (or another jurisdiction that provides similar benefits to those we realize from our current incentives in Singapore), our results of operations and financial position for periods after March 31, 2014 will be 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, 2012 our co-founders, directors, executive officers and their respective affiliates beneficially owned 10.2% of our outstanding common stock and held 50.1% of the total voting power held by our shareholders. Accordingly, these shareholders currently have enough voting power to control the outcome of matters that require the approval of our shareholders. These matters include the election of our Board of Directors, the issuance of additional shares of Class B common stock, and the approval of most significant corporate transactions, including certain mergers and consolidations and the sale of all or substantially all of our assets. In particular, as of September 30, 2012 our two founders, Dr. Henry T. Nicholas III and Dr. Henry Samueli, beneficially owned a total of 9.1% of our outstanding common stock and held 49.7% of the total voting power held by our shareholders. Because of their significant voting stock ownership, we may not be able to engage in certain transactions, and our shareholders may not be able to effect certain actions or transactions, without the approval 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.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
In the three months ended September 30, 2012 we issued approximately 0.6 million 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.
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 under this program (including under an accelerated share repurchase 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. This program does not have an expiration date and may be suspended at any time at the discretion of the Board of Directors. It may also be complemented with an additional share repurchase program in the future.
The following table presents details of our various repurchases during the three months ended September 30, 2012:
Period | Total Number of Shares Purchased | Average Price per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans | Approximate Dollar Value of Shares That May yet be Purchased under the Plans | ||||||||||
(In thousands, except per share data) | ||||||||||||||
July 2012 | — | $ | — | — | ||||||||||
August 2012 | 28 | 35.18 | 28 | |||||||||||
September 2012 | — | — | — | |||||||||||
Total | 28 | $ | 35.18 | 28 | $ | — |
Item 3. | Defaults upon Senior Securities |
None.
Item 4. | Mine Safety Disclosures |
Not Applicable
Item 5. | Other Information |
None.
Item 6. | Exhibits |
(a)Exhibits. The following Exhibits are attached hereto and incorporated herein by reference:
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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. DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101. LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101. PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
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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 and Corporate Controller | |
(Principal Accounting Officer) |
October 23, 2012
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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. DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101. LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101. PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
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