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| BRCM > SEC Filings for BRCM > Form 10-Q on 1-May-2012 | All Recent SEC Filings |
1-May-2012
Quarterly Report
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, including our acquisition of NetLogic Microsystems, Inc.; estimates related to the amount and/or timing of the expensing of unearned stock-based compensation expense and stock-based compensation as a percentage of revenue; manufacturing, assembly and test capacity; 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 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 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 in the future. At March 31, 2012 we had deferred income of $5 million related to the Qualcomm Agreement.
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 Months Ended March 31, 2012
In the three months ended March 31, 2012 our net income was $88 million as compared to net income of $228 million in the three months ended March 31, 2011. The decrease in profitability was primarily related to 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, an increase in research and development and stock-based compensation expenses associated with the NetLogic acquisition. In addition, we incurred charges related to settlement costs and the impairment of certain purchased intangible assets, offset by a non-recurring income tax benefit.
The unaudited consolidated financial statements include the results of operations of NetLogic commencing as of the acquisition date and are included in our Infrastructure & Networking reportable segment. Included in the unaudited consolidated statement of income for the three months ended March 31, 2012 was net revenue of $33 million for NetLogic and an operating loss of $73 million. In connection with the acquisition, our results of operations for the three months ended March 31, 2012 included: (i) stock-based compensation of $27 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 $27 million, and (iii) the amortization of acquired inventory valuation step-up of $20 million.
Other highlights during the three months ended March 31, 2012 include the following:
• Our cash and cash equivalents and marketable securities were $2.06 billion at March 31, 2012, compared with $5.20 billion at December 31, 2011. This significant decrease was primarily the result of our acquisition of NetLogic discussed below. We generated cash flow from operations of $368 million during the three months ended March 31, 2012 as compared to $333 million in the three months ended March 31, 2011.
• 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) and declared a quarterly cash dividend of $0.10 per share payable to holders of our common stock.
• In February 2012 we completed our acquisition of NetLogic, a publicly traded company that is a leader in 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 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 will be recognized as stock-based compensation expense primarily over the next two to three years.
• 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 charge of $28 million primarily related to our acquisitions of Dune Networks, Inc. and Percello Ltd.
• In April 2012 we completed our previously announced acquisition of BroadLight, Inc., a privately held provider of highly integrated networking and fiber access passive optical network processors. We paid $203 million, exclusive of cash assumed, to acquire all of the outstanding shares of capital stock and other equity rights of BroadLight, of which $3 million will be paid in Broadcom restricted stock units for certain unvested employee stock options. 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. The results of operations of BroadLight will be included as of the acquisition date in our unaudited consolidated financial statement beginning in three months ended June 30, 2012.
Business Enterprise Segments.
The following tables present details of our reportable segments and the "All
Other" category:
Reportable Segments
Infrastructure
Broadband Mobile & & All
Communications Wireless Networking Other Consolidated
(In millions)
Three Months Ended March 31, 2012
Net revenue $ 494 $ 875 $ 406 $ 52 $ 1,827
Operating income (loss) 104 124 107 (285 ) 50
Three Months Ended
March 31, 2011
Net revenue $ 490 $ 854 $ 419 $ 53 $ 1,816
Operating income (loss) 84 138 154 (142 ) 234
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Included in the "All Other" category:
Three Months Ended
March 31,
2012 2011
(In millions)
Net revenue $ 52 $ 53
Stock-based compensation $ 150 $ 145
Amortization of purchased intangible assets 54 22
Amortization of acquired inventory valuation step-up 22 5
Impairments of long-lived assets 28 9
Settlement costs (gains), net 86 (5 )
Restructuring costs, net 3 -
Employer payroll tax on certain stock option exercises 2 3
Miscellaneous corporate allocation variances (8 ) 16
Total other operating costs and expenses $ 337 $ 195
Total operating loss for the "All Other" category $ (285 ) $ (142 )
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For additional information about our business enterprise segments and "all other" category, see further discussion in Note 10 of Notes to Unaudited Condensed Consolidated Financial Statements.
Factors That May Impact Net Income
Our net income has been affected in the past, and may continue to be affected in the future, by various factors, including, but not limited to, the following:
• our product mix and volume of product sales and corresponding gross margin (see further discussion below under "Factors That May Impact Net Revenue" and "Factors That May Impact Product Gross Margin");
• required levels of research and development and other operating costs;
• stock-based compensation expense;
• licensing and income from intellectual property;
• impairment of goodwill and other long-lived assets;
• deferral of revenue 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;
• 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 three months ended March 31, 2012.
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:
0000 0000
Three Months Ended
March 31,
2012 2011
Net revenue:
Product revenue 96.9 % 96.4 %
Income from Qualcomm Agreement 2.8 2.9
Licensing revenue 0.3 0.7
Total net revenue 100.0 100.0
Costs and expenses:
Cost of product revenue 50.2 49.2
Research and development 29.9 27.4
Selling, general and administrative 9.8 9.9
Amortization of purchased intangible assets 0.9 0.4
Impairments of long-lived assets 1.5 0.5
Restructuring costs, net 0.3 -
Settlement costs (gains), net 4.7 (0.3 )
Total operating costs and expenses 97.3 87.1
Income from operations 2.7 12.9
Interest expense, net (0.3 ) -
Other expense, net (0.1 ) (0.1 )
Income before income taxes 2.3 12.8
Provision (benefit) for income taxes (2.5 ) 0.2
Net income 4.8 % 12.6 %
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The following table presents details of product and total gross margin as a percentage of product and total revenue, respectively:
0000 0000
Three Months Ended
March 31,
2012 2011
Product gross margin 48.1 % 49.0 %
Total gross margin 49.8 50.8
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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:
0000 0000
Three Months Ended
March 31,
2012 20111
Cost of product revenue 0.5 % 0.4 %
Research and development 5.1 5.6
Selling, general and administrative 2.6 2.0
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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:
$0,000 $0,000 $0,000 $0,000 $0,000 $0,000
Three Months Ended Three Months Ended %
March 31, 2012 March 31, 2011 Change
% of Net % of Net Increase in
Amount Revenue Amount Revenue (Decrease) Amount
(In millions, except percentages)
Product revenue $ 1,770 96.9 % $ 1,752 96.4 % $ 18 1.0 %
Income from Qualcomm Agreement 52 2.8 52 2.9 - -
Licensing revenue 5 0.3 12 0.7 (7 ) (58.3 )
Total net revenue $ 1,827 100.0 % $ 1,816 100.0 % $ 11 0.6 %
Cost of product revenue $ 918 50.2 % $ 894 49.2 % $ 24 2.7 %
Product gross margin 48.1 % 49.0 % (0.9 )%
Total gross margin 49.8 % 50.8 % (1.0 )%
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$0,000 $0,000 $0,000 $0,000 $0,000 $0,000
Three Months Ended Three Months Ended %
March 31, 2012 December 31, 2011 Change
% of Net % of Net in
Amount Revenue Amount Revenue Increase Amount
(In millions, except percentages)
Product revenue $ 1,770 96.9 % $ 1,763 96.8 % $ 7 0.4 %
Income from Qualcomm Agreement 52 2.8 52 2.9 - -
Licensing revenue 5 0.3 5 0.3 - -
Total net revenue $ 1,827 100.0 % $ 1,820 100.0 % $ 7 0.4 %
Cost of product revenue $ 918 50.2 % $ 894 49.1 % $ 24 2.7 %
Product gross margin 48.1 % 49.3 % (1.2 )%
Total gross margin 49.8 % 50.9 % (1.1 )%
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Net Revenue. The following table presents net revenue from each of our reportable segments and its respective contribution to net revenue:
$00,000 $00,000 $00,000 $00,000 $00,000 $00,000
Three Months Ended Three Months Ended %
March 31, 2012 March 31, 2011 Change
% of Net % of Net Increase in
Amount Revenue Amount Revenue (Decrease) Amount
(In millions, except percentages)
Broadband Communications $ 494 27.0 % $ 490 27.0 % $ 4 0.8 %
Mobile & Wireless 875 48.0 854 47.0 21 2.5
Infrastructure & Networking 406 22.2 419 23.1 (13 ) (3.1 )
All other(1) 52 2.8 53 2.9 (1 ) (1.9 )
Total net revenue $ 1,827 100.0 % $ 1,816 100.0 % $ 11 0.6 %
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(1) Includes (i) income relating to the Qualcomm Agreement that was entered into in April 2009 and (ii) other revenue from certain patent agreements. See Notes 1 and 2 of Notes to Unaudited Condensed Consolidated Financial Statements.
The increase in net revenue from our Broadband Communications reportable segment resulted primarily from an increase in demand for our broadband modems and set top boxes, partially offset by a reduction in demand for our digital television and Blue-ray Disc products. The increase in net revenue from our Mobile & Wireless
. . .
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