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BROADCOM CORP - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
You should read the following discussion and analysis in conjunction with our
Consolidated Financial Statements and related Notes thereto included in Part IV,
Item 15 of this Report and the "Risk Factors" included in Part I, Item 1A of
this Report, as well as other cautionary statements and risks described
elsewhere in this Report, before deciding to purchase, hold or sell our common
stock.
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 and
Wireless (Hand), and Infrastructure and 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.
Operating Results for the Year Ended December 31, 2012
In 2012 our net income was $719 million as compared to net income of $927
million in 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 acquisitions of NetLogic and BroadLight Inc., or
Broadlight and (iii) organic hiring, principally in research and development. 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 consolidated financial statements include the results of operations of
NetLogic commencing as of the acquisition date and are included in our
Infrastructure and Networking reportable segment. In connection with this
acquisition, our results of operations in 2012 included: (i) stock-based
compensation of $89 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 $190
million, and (iii) the amortization of acquired inventory valuation step-up of
$63 million.
Other highlights during 2012 include the following:
• Our cash and cash equivalents and marketable securities were $3.72
billion at December 31, 2012, compared with $5.21 billion at December 31,
2011. This significant decrease was primarily the result of our
acquisitions of NetLogic and BroadLight. We generated cash flow from
operations of $1.93 billion during 2012 as compared to $1.84 billion in
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) payable to holders of our common stock.
• In February 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. 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 awards. 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 purchased intangible impairment charges of $28 million primarily related to our acquisitions of Dune Networks, Inc. and
Percello Ltd.
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• In April 2012 we completed our acquisition of BroadLight, 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 issued in exchange 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.
See Note 12 of Notes to Consolidated Financial Statements for details of our
quarterly financial data.
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 our agreement with
Qualcomm. The income from the Qualcomm Agreement is non-recurring and will
terminate in April 2013. There can be no assurances that we will be able to
enter into similar arrangements of this magnitude in the future.
The following table details the amount of income from the Qualcomm Agreement
that was recognized or is scheduled to be recognized from 2009 to 2013:
Recognized Scheduled to be Recognized
2009 2010 2011 2012 2013 Thereafter Total
(In millions)
Income from Qualcomm
Agreement $ 171 $ 206 $ 207 $ 186 $ 86 $ - $ 856
Product Cycles. The cycle for test, evaluation and adoption of our products by
customers can range from three to more than nine months, with an additional
three to more than twelve months before a customer commences volume production
of equipment or devices incorporating our products. Due to this lengthy sales
cycle, we may experience significant delays from the time we incur expenses for
research and development, selling, general and administrative efforts, and
investments in inventory, to the time we generate corresponding revenue, if any.
The rate of new orders may vary significantly from month to month and quarter to
quarter. If anticipated sales or shipments in any quarter do not occur when
expected, expenses and inventory levels could be disproportionately high, and
our results of operations for that quarter, and potentially for future quarters,
would be materially and adversely affected.
Acquisition Strategy. An element of our business strategy involves the
acquisition of businesses, assets, products or technologies that allow us to
reduce the time or costs 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. Since our initial public offering in 1998, we have
acquired over 50 companies. From 2010 through 2012, we made acquisitions
totaling $4.53 billion in net cash consideration, of which $340 million, $391
million and $3.80 billion related to our Broadband Communications, Mobile and
Wireless, and Infrastructure and Networking reportable segments, respectively.
We plan to continue to evaluate strategic opportunities as they arise, including
acquisitions and other business combination transactions, strategic
relationships, capital infusions and the purchase or sale of assets.
The accompanying Consolidated Financial Statements include the results of
operations of our acquired companies commencing on their respective acquisition
dates. See Note 3 of Notes to Consolidated Financial Statements for additional
information related to these acquisitions.
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Business Enterprise Segments.
The following tables present details of our reportable segments and the "All
Other" category:
Reportable Segments
Broadband Mobile and Infrastructure and All
Communications Wireless Networking Other Consolidated
(In millions)
Year Ended December 31, 2012
Net revenue $ 2,156 $ 3,810 $ 1,853 $ 187 $ 8,006
Operating income (loss) 504 562 483 (873 ) 676
Year Ended December 31, 2011
Net revenue $ 2,039 $ 3,483 $ 1,659 $ 208 $ 7,389
Operating income (loss) 391 572 544 (554 ) 953
Year Ended December 31, 2010
Net revenue $ 2,134 $ 2,889 $ 1,588 $ 207 $ 6,818
Operating income (loss) 446 526 579 (469 ) 1,082
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 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");
• levels of research and development and other operating costs (organic or
acquired);
• 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 obligations, inventory
valuation, stock-based compensation expense, goodwill and purchased intangible
asset recoverability, strategic investments, deferred income tax asset valuation
allowances, uncertain tax positions, tax contingencies, self-insurance
liabilities, 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
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us may differ materially and adversely from our estimates. To the extent there
are material differences between our estimates and the actual results, our
future results of operations will be affected.
We believe the following are critical accounting policies that require us to
make significant estimates, assumptions or judgments:
• Net Revenue. We recognize product revenue when all of the following
criteria are met: (i) persuasive evidence of an arrangement exists,
(ii) delivery has occurred, (iii) our price to the customer is fixed or
determinable and (iv) collection of the resulting accounts receivable is reasonably assured. These criteria are usually met at the time of product
shipment. However, we do not recognize revenue when any future performance
obligations remain. Customer purchase orders and/or contracts are generally
used to determine the existence of an arrangement. Shipping documents are
used to verify product delivery. We assess whether a price is fixed or determinable based upon the payment terms associated with the transaction
and whether the sales price is subject to refund or adjustment. We assess
the collectibility of our accounts receivable based primarily upon the
creditworthiness of the customer as determined by credit checks and
analysis, as well as the customer's payment history.
In arrangements that include a combination of semiconductor products and other
elements, 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. We allocate the arrangement
consideration based on each element's relative fair value using vendor-specific
objective evidence, or VSOE, third-party evidence, or estimated selling prices,
as the basis of fair value. Revenue is recognized for the accounting units when
the basic revenue recognition criteria are met.
A portion of our sales is made through distributors under agreements allowing
for pricing credits and/or rights of return. These pricing credits and/or rights
of return provisions prevent us from being able to reasonably estimate the final
price of the inventory to be sold and the amount of inventory that could be
returned pursuant to these agreements. As a result, the price to the customer is
not fixed or determinable at the time we deliver products to our distributors.
Accordingly, product revenue from sales made through these distributors is not
recognized until the distributors ship the product to their customers. In
addition, distributors provide us with periodic data regarding product, price,
quantity, and customers when products are shipped to their customers, as well as
the quantities of our products that they still have in stock. For specialized
shipping terms we may rely on data provided by our freight forwarding providers.
For our licensing revenue we rely on data provided by the licensee. Any error in
the data provided to us by customers, distributors or other third parties could
lead to inaccurate reporting of our total net revenue and net income.
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.
• 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. The Qualcomm Agreement is a multiple
element arrangement. We allocated the amount to be received under the
Qualcomm Agreement amongst several elements. A gain from the settlement of
litigation was immediately recognized and approximated 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, as well as
the settlement of all other outstanding litigation, and is being recognized
over the four year performance period as a single unit of accounting.
The value associated with the transfer of intellectual property rights and other
elements was treated as a single unit of accounting and, based on the
predominant nature of these elements, recognized within net revenue over the
contractual performance period of four years, beginning in 2009 and extending
through April 2013. The elements included: (i) an exchange of intellectual
property rights, including in certain circumstances, a series of covenants not
to assert claims of patent infringement under future patents issued within one
to four years of the execution date of the agreement, (ii) the assignment of
certain existing patents by Broadcom to Qualcomm with Broadcom retaining a
royalty-free license under these patents, and (iii) the settlement of all
outstanding litigation and claims between us and Qualcomm.
We consider the Qualcomm Agreement as predominantly related to the transfer of
current and future intellectual property rights. This conclusion was based on
(a) the amounts specifically awarded by the courts for the patents that were the
subject of litigation for which appeals had been substantially exhausted and
(b) the extensive nature of the rights transferred to Qualcomm, both for our
existing patent portfolio and for the patents we would develop during the
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next one to four years. In addition, we obtained a third party valuation of the
intellectual property rights. The inputs and assumptions we used in this
valuation were from a market participant perspective and included projected
revenue, royalty rates, estimated discount rates, useful lives and income tax
rates, among others. The development of a number of these inputs and assumptions
in our model requires a significant amount of management judgment and is based
upon a number of factors including the selection of industry comparables, market
growth rates and other relevant factors. Changes in any number of these
assumptions would have substantially changed the fair value assigned to the
intellectual property rights. These inputs and assumptions represent
management's best estimates at the time of the transaction.
• Sales Returns, Pricing Adjustments and Allowance for Doubtful Accounts. We
record reductions of revenue for estimated product returns and pricing
adjustments, such as competitive pricing programs and rebates, in the same
period that the related revenue is recorded. The amount of these reductions
is based on historical sales returns, analysis of credit memo data,
specific criteria included in rebate agreements, and other factors known at
the time. We accrue 100% of potential rebates at the time of sale and do
not apply a breakage factor. We reverse the accrual of unclaimed rebate
amounts as specific rebate programs contractually end and when we believe
unclaimed rebates are no longer subject to payment and will not be paid.
Thus the reversal of unclaimed rebates may have a positive impact on our
net revenue and net income in subsequent periods. Additional reductions of
revenue would result if actual product returns or pricing adjustments
exceed our estimates. We also maintain an allowance for doubtful accounts
for estimated losses resulting from the inability of customers to make
required payments. If the financial condition of any customer were to
deteriorate, resulting in an impairment of its ability to make payments,
additional allowances could be required.
• Inventory Write-Downs and Warranty Reserves. We write down the carrying
value of our inventory to net realizable value for estimated obsolescence
or unmarketable inventory in an amount equal to the difference between the
cost of inventory and its estimated realizable value based upon assumptions
about future demand and market conditions. If actual demand and market
conditions are less favorable than those projected by management,
additional inventory write-downs could be required. Under the hubbing
arrangements that we maintain with certain customers, we own inventory that
is physically located in a customer's or third party's warehouse. As a
result, our ability to effectively manage inventory levels may be impaired,
which would cause our total inventory turns to decrease. In that event, our
expenses associated with excess and obsolete inventory could increase and
our cash flow could be negatively impacted. Our products typically carry a
one to three year warranty. We establish reserves for estimated product
warranty costs at the time revenue is recognized. Although we engage in
extensive product quality programs and processes, our warranty obligation
has been and may in the future be affected by product failure rates,
product recalls, repair or field replacement costs and additional
development costs incurred in correcting any product failure, as well as possible claims for consequential costs. Should actual product failure
rates, use of materials or service delivery costs differ from our
estimates, additional warranty reserves could be required. In that event,
our product gross margins would be reduced.
• Stock-Based Compensation Expense. All share-based payments, including
grants of stock options, restricted stock units and employee stock purchase
rights, are recognized in our financial statements based upon their
respective grant date fair values. The fair value of each employee stock
option and employee stock purchase right is estimated on the date of grant
using an option pricing model that meets certain requirements. We currently
use the Black-Scholes option pricing model to estimate the fair value of
our stock options and stock purchase rights. Although we utilize the
Black-Scholes model, which meets established requirements, the fair values
generated by the model may not be indicative of the actual fair values of
our equity awards as it does not consider certain factors important to
those awards to employees, such as continued employment and periodic
vesting requirements as well as limited transferability. The determination
of the fair value of share-based payment awards utilizing the Black-Scholes
model is affected by our stock price and a number of assumptions, including
expected volatility, expected life, risk-free interest rate and expected
dividends. We use the implied volatility for traded options on our stock as
the expected volatility assumption required in the Black-Scholes model. Our
selection of the implied volatility approach is based on the availability
of data regarding actively traded options on our stock as we believe that
implied volatility is more representative of fair value than historical
volatility. The expected life of the stock options is based on historical
and other economic data trended into the future. The risk-free interest
rate assumption is based on observed interest rates appropriate for the
expected terms of our stock options and stock purchase rights. Prior to
2010, our dividend yield assumption excluded dividend payouts. In 2010 we
began to pay quarterly dividends and included that assumption in our fair
value calculations. 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 evaluate the assumptions used to
value stock awards on a quarterly basis. If factors change and we employ
different assumptions, stock-based compensation expense may differ
significantly from what we have recorded in the past. If there are any
modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned
stock-based compensation expense. To the
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extent that we grant additional equity securities to employees or we assume
unvested securities in connection with any acquisitions, our stock-based
compensation expense will be increased by the additional unearned compensation
resulting from those additional grants or acquisitions.
• Goodwill and Purchased Intangible Assets. The value of our goodwill and
purchased intangible assets could be impacted by future adverse changes
such as: (i) any future declines in our operating results, (ii) a decline
in the valuation of technology company stocks, including the valuation of
our common stock, (iii) a significant slowdown in the worldwide economy or
the semiconductor industry, (iv) any failure to meet the performance
projections included in our forecasts of future operating results or
(v) the abandonment of any of our acquired in-process research and
development, or IPR&D, projects.
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. We evaluate goodwill by reporting unit on an
annual basis in the fourth quarter or more frequently if we believe indicators
of impairment exist. We have identified three reporting units consistent with
our reporting segments identified in Note 11 of Notes to the Consolidated
Financial Statements: (i) Broadband Communications, (ii) Mobile and Wireless,
and (iii) Infrastructure and Networking. In 2011 we early adopted the new
provisions issued by the Financial Accounting Standards Board, or FASB, that
intended to simplify goodwill impairment testing. The updated guidance permits
us to 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
quantitative 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 estimate the fair values of our reporting units using a
combination of the income and market approach. 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.
In 2010 we performed the first step of the quantitative goodwill impairment
assessment for each of our reporting units and determined no impairment was
indicated as the estimated fair value of each of the reporting units exceeded
its respective carrying value. In 2011 we made a qualitative assessment of
whether goodwill impairment exists and determined that it was more likely than
not that the fair value of our reporting units exceeded their carrying values.
Therefore, we did not perform the quantitative two-step goodwill impairment
test. In 2012 we performed the first step of the quantitative goodwill
impairment assessment for each of our reporting units and determined no
impairment was indicated as the estimated fair value of each of the reporting
units exceeded its respective carrying value. As a result of our NetLogic
acquisition in February 2012, we added $1.81 billion of additional goodwill,
resulting in our Infrastructure and Networking reporting unit having an
allocated goodwill balance of $2.49 billion at December 31, 2012. Based on our
asset impairment testing and the increased balance of goodwill due to our
acquisition of NetLogic and a number of other companies over the last several
years, at December 31, 2012 we determined there was a risk of our Infrastructure
and Networking reporting unit failing the first step of the goodwill impairment
test in future periods. The level of excess fair value over carrying value for
this reporting unit was approximately 19% as of October 1, 2012. For this
reporting unit, declines in our stock price or our peers' stock price,
relatively small declines in the future performance and cash flows of the
reporting unit or small changes in other key assumptions, such as revenue growth
rates and discount rates, may result in the recognition of significant
impairment charges.
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. 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 the
asset 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.
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Significant management judgment is required in the forecasts of future operating
results that are used in the discounted cash flow method of valuation. It is
possible, however, that the plans may change and estimates used may prove to be
inaccurate. If our actual results, or the plans and estimates used in future
impairment analyses, are lower than the original estimates used to assess the
recoverability of these assets, we could incur additional impairment charges.
• Deferred Taxes and Uncertain Tax Positions. We utilize the asset and
liability method of accounting for income taxes. We record a valuation
allowance to reduce our deferred tax assets to the amount that we believe
is more likely than not to be realized. In assessing the need for a
valuation allowance, we consider all positive and negative evidence,
including scheduled reversals of deferred tax liabilities, projected future
taxable income, tax planning strategies, and recent financial performance.
Forming a conclusion that a valuation allowance is not required is
difficult when there is negative evidence such as cumulative losses in
recent years. As a result of our cumulative losses in the U.S. and certain
foreign jurisdictions, our U.S. tax losses after tax deductions for
stock-based compensation, and the full utilization of our loss carryback
opportunities, we have concluded that a full valuation allowance against
our net deferred tax assets is appropriate in the U.S. and certain foreign
jurisdictions. In certain other foreign jurisdictions where we do not have
cumulative losses, we record valuation allowances to reduce our net
deferred tax assets to the amount we believe is more likely than not to be
realized. In the future, if we realize a deferred tax asset that currently
carries a valuation allowance, we may record a reduction of income tax
expense in the period of such realization. Income tax positions must meet a
more-likely-than-not recognition threshold to be recognized. Income tax
positions that previously failed to meet the more-likely-than-not threshold
are recognized in the first subsequent financial reporting period in which
that threshold is met. Previously recognized tax positions that no longer
meet the more-likely-than-not threshold are derecognized in the first
subsequent financial reporting period in which that threshold is no longer
met. As a multinational corporation, we are subject to taxation in many
jurisdictions, and the calculation of our tax liabilities involves dealing
with uncertainties in the application of complex tax laws and regulations
in various taxing jurisdictions. If we ultimately determine that the
payment of these liabilities will be unnecessary, we reverse the liability
and recognize a tax benefit during the period in which we determine the
liability no longer applies. Conversely, we record additional tax charges
in a period in which we determine that a recorded tax liability is less
than we expect the ultimate assessment to be. The application of tax laws and regulations is subject to legal and factual interpretation, judgment
and uncertainty. Tax laws and regulations themselves are subject to change
as a result of changes in fiscal policy, changes in legislation, the
evolution of regulations and court rulings. Therefore, the actual liability
for U.S. or foreign taxes may be materially different from our estimates,
which could result in the need to record additional tax liabilities or
potentially reverse previously recorded tax liabilities.
• Litigation and Settlement Costs. We are involved in disputes, litigation
and other legal proceedings. We prosecute and defend these matters
aggressively. However, there are many uncertainties associated with any
litigation, and we cannot assure you that these actions or other third
party claims against us will be resolved without costly litigation and/or
substantial settlement costs. In addition, the resolution of intellectual
property litigation may require us to pay damages for past alleged
infringement or to obtain a license under the other party's intellectual
property rights that could require one-time license fees or running
royalties, which could adversely impact product gross margins in future
periods, or could prevent us from manufacturing or selling some of our
products or limit or restrict the type of work that employees involved in
such litigation may perform for Broadcom. If any of those events were to
occur, our business, financial condition and results of operations could be
materially and adversely affected.
We account for settlement agreements as multiple element arrangements and
allocate the consideration to the identifiable elements based on relative fair
value. Generally the identifiable elements are (i) the licensing of intellectual
property for future use and (ii) payments related to alleged prior infringement.
We continually evaluate the uncertainties associated with litigation and record
a liability when it is probable that a loss has been incurred and the amount is
reasonably estimable. There is significant judgment required in both the
probability determination and as to whether a liability can be reasonably
estimated. Accordingly, the outcomes of legal proceedings and/or our ability to
settle disputes on terms acceptable to us are subject to significant
uncertainty. Should we choose to pay significant sums in settling a dispute or
should material legal matters be resolved against us, the operating results of a
particular reporting period could be materially adversely affected. Given the
complexity of evaluating the probability and range of potential litigation
losses, and with appropriately allocating the consideration in multiple element
arrangements relating to settlements of intellectual property litigation, we
frequently use third-party valuation and law firms to assist us in this regard.
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Results of Operations
The following table sets forth certain Consolidated Statements of Income data
expressed as a percentage of net revenue for the periods indicated:
Year Ended December 31,
2012 2011 2010
Net revenue:
Product revenue 97.4 % 96.9 % 96.7 %
Income from Qualcomm Agreement 2.3 2.8 3.0
Licensing revenue 0.3 0.3 0.3
Total net revenue 100.0 100.0 100.0
Costs and expenses:
Cost of product revenue 50.3 49.1 48.2
Research and development 29.0 26.8 25.9
Selling, general and administrative 8.7 9.2 8.5
Amortization of purchased intangible assets 1.4 0.4 0.4
Impairments of long-lived assets
1.1 1.2 0.3
Restructuring costs, net 0.1 0.2 -
Settlement costs (gains), net 1.0 (0.1 ) 0.8
Charitable contribution - 0.3 -
Total operating costs and expenses 91.6 87.1 84.1
Income from operations 8.4 12.9 15.9
Interest income (expense), net (0.4 ) (0.1 ) 0.1
Other income, net 0.2 0.1 0.1
Income before income taxes 8.2 12.9 16.1
Provision for (benefit of) income taxes (0.8 ) 0.4 0.2
Net income
9.0 % 12.5 % 15.9 %
The following table presents details of product and total gross margin as a
percentage of product and total revenue, respectively:
Year Ended December 31,
2012 2011 2010
Product gross margin 48.3 % 49.4 % 50.2 %
Total gross margin 49.7 50.9 51.8
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
consolidated statements of income data above:
Year Ended December 31,
2012 2011 2010
Cost of product revenue 0.3 % 0.3 % 0.3 %
Research and development 4.6 4.9 5.0
Selling, general and administrative 1.8 1.7 1.7
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Net Revenue By Reportable Segments
The following table presents net revenue from each of our reportable segments
and such segments' respective contribution to net revenue:
2012 vs 2011 2011 vs 2010
2012 2011 2010 $ Change % Change $ Change % Change
(In millions, except percentages)
Broadband
Communications $ 2,156 $ 2,039 $ 2,134 $ 117 5.7 % $ (95 ) (4.5 )%
Mobile and Wireless 3,810 3,483 2,889 327 9.4 594 20.6
Infrastructure and
Networking 1,853 1,659 1,588 194 11.7 71 4.5
All other(1) 187 208 207 (21 ) (10.1 ) 1 0.5
Total net revenue $ 8,006 $ 7,389 $ 6,818 $ 617 8.4 $ 571 8.4
(1) Includes (i) income relating to the Qualcomm Agreement that was entered
into in April 2009 and (ii) other revenue from certain patent license
agreements. See Notes 1 and 2 of Notes to the Consolidated Financial
Statements.
Broadband Communications. The increase in 2012 net revenue resulted primarily
from an increase in sales of our broadband modems and set-top box, or STB,
solutions of $196 million partially offset by a reduction in sales of our
digital television and Blu-ray Disc products of $79 million. The decrease in
2011 net revenue resulted primarily from a decrease in sales of our digital
television and Blu-ray Disc product lines of $71 million. Broadband modem and
STB 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 modems and the roll-out of more highly integrated STB platforms by global
service providers. For example, the STB market will be transitioning to UltraHD
over the next several years. UltraHD roughly quadruples the resolution of
traditional high definition broadcasts, providing a much richer customer
experience, and requiring more highly-integrated SoC solutions in a STB. In
broadband access, the market is transitioning to higher speed DOCSIS, PON and
DSL. These transitions generally demand more advanced semiconductor content.
The decrease in sales of our digital television and Blu-ray Disc products was
the result of our decision to exit from those particular consumer electronic
markets and reallocate funding to more attractive opportunities.
Mobile and Wireless. The increase in 2012 net revenue resulted primarily from an
increase in sales of our cellular SoCs and wireless connectivity products of
$304 million and other wireless technology products of $149 million, partially
offset by a decrease in sales of our multimedia co-processors of $126 million.
The increase in 2011 net revenue resulted primarily from an increase in sales of
our wireless connectivity and cellular SoC solutions of $393 million, multimedia
co-processors of $96 million and other wireless technology products of $105
million. Growth in our cellular SoCs and wireless connectivity businesses has
been driven by increased demand for our 3G SoC solutions and higher-end
end-devices which require Wi-Fi and Bluetooth connectivity. Growth is also
driven by the ramp up of faster cellular modems, new connectivity technologies,
and richer connectivity features. For example, we have transitioned our
cellular SoC business from EDGE to 3G and now HSPA+ modem standards and from
single-core integrated application processing to multi-core. In connectivity,
we are seeing the transition from single-band to dual-band WiFi and to 802.11n
to 802.11ac. We are also ramping new connectivity technologies, including near
field communication (NFC). The multimedia co-processor business has declined
due to the end of life of certain customer products and the integration of
multi-media co-processor into our 3G SoC solutions.
Infrastructure and Networking. The increase in 2012 net revenue resulted
primarily from sales of our communication processors of $270 million, partially
offset by softness in sales of Ethernet switches, PHYs and controller products
of $76 million. The increase in 2012 net revenue for our communication
processors was the result of our acquisition of NetLogic in February 2012. The
decrease in Ethernet switches, PHYs and controller products was primarily due to
softness in service provider spending as compared to the corresponding periods
in 2011. The increase in 2011 net revenue resulted primarily from an increase
in sales of our Ethernet switches and PHYs of $83 million. Ethernet Switch and
PHY growth is driven by increases in network traffic driven by the proliferation
of mobile devices and an increase in hosted services and cloud computing.
Growth is also driven by the ramp of increased networking speeds and new
features, including deep packet inspection. For example, in the data center
market, we have benefited from the ramp up of 10G networking in top-of-rack
implementations. We have also benefited from meaningfully expanding the
addressable market for our infrastructure and networking products. For example,
the acquisition of NetLogic expanded the company into multi-core embedded
processing and knowledge-based processing. The acquisition of Provigent
expanded our infrastructure portfolio into microwave backhaul.
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Concentration of Net Revenue
Sales to our significant customers, including sales to their manufacturing
subcontractors, as a percentage of net revenue were as follows:
Year Ended December 31,
2012 2011 2010
Samsung 17.3 % 10.0 % 10.0 %
Apple 14.6 13.1 10.9
Five largest customers as a group 47.2 42.6 38.6
No other customer represented more than 10% of our annual net revenue in these
years.
We expect that our largest customers will continue to account for a substantial
portion of our total net revenue for the foreseeable future. Contributions to
our net revenue by these customers have increased over the last several years.
For additional information about geographical information of our net revenue,
see further discussion in Note 11 of Notes to Consolidated Financial Statements.
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.
Rebates. We recorded rebates to certain customers of $727 million, or 9.1% of
net revenue, $643 million, or 8.7% of net revenue and $526 million, or 7.7% of
net revenue, in 2012, 2011 and 2010, respectively. The increase in rebates as a
percent of net revenue was attributable to a change in the mix of sales to
customers that participate in rebate programs, primarily in the Mobile and
Wireless reportable segment. 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 $18 million, $13 million and $4 million, in 2012, 2011 and
2010, 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 year ended December 31, 2012 and prior periods may not necessarily be
indicative of future net revenue and results of operations.
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Net Revenue, Cost of Product Revenue, Product Gross Margin, and Total Gross
Margin
2012 vs 2011 2011 vs 2010
2012 2011 2010 $ Change % Change $ Change % Change
(In millions, except percentages)
Product revenue $ 7,793 $ 7,159 $ 6,589 $ 634 8.9 % $ 570 8.7 %
Income from
Qualcomm Agreement 186 207 206 (21 ) (10.1 ) 1 0.5
Licensing revenue 27 23 23 4 17.4 - -
Total net revenue $ 8,006 $ 7,389 $ 6,818 $ 617 8.4 $ 571 8.4
Cost of product
revenue $ 4,027 $ 3,626 $ 3,284 $ 401 11.1 $ 342 10.4
Product gross
margin 48.3 % 49.4 % 50.2 %
Total gross margin 49.7 % 50.9 % 51.8 %
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 to non-practicing entities, or NPEs. 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 in 2012 decreased to 48.3% primarily because of increases
in amortization of purchased intangibles and inventory valuation step-up of $144
million and $48 million, respectively, offset in part by revenue generated by
our acquisition of NetLogic (which business generally has higher product gross
margins), and increases in cancellation fees received of $11 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 in 2011 decreased to 49.4% primarily as a
result of (i) an increase in amortization of purchased intangibles and inventory
valuation step-up of $23 million and $14 million, respectively, primarily due to
our acquisitions completed in 2011, and (ii) a shift in the mix of our product
revenues, with more revenues attributable to Mobile and Wireless products, which
generally have lower gross margins. Product gross margin also includes $27
million and $8 million of licensing costs related to NPEs in 2012 and 2011,
respectively.
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);
• introduction of products with lower margins;
• the positions of our products in their respective life cycles;
• 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;
• 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
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• 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 table presents details of research and development expense:
2012 vs 2011 2011 vs 2010
2012 2011 2010 $ Change % Change $ Change % Change
(In millions, except percentages)
Salaries and
benefits $ 1,293 $ 1,096 $ 929 $ 197 18.0 % $ 167 18.0 %
Stock-based
compensation 368 363 342 5 1.4 21 6.1
Development and
design costs 351 278 274 73 26.3 4 1.5
Other 306 246 218 60 24.4 28 12.8
Research and
development $ 2,318 $ 1,983 $ 1,763 $ 335 16.9 % $ 220 12.5 %
The increase in 2012 salaries and benefits was primarily attributable to an
increase in headcount of approximately 1,450 personnel, bringing headcount to
over 8,700 at December 31, 2012, which represents a 20.0% increase from our
December 31, 2011 levels. Approximately 40% 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 2012 due
to increases in prototyping costs, engineering design tool expenses and
licensing fees. The increase in 2011 salaries and benefits and stock-based
compensation were primarily attributable to an increase in headcount of
approximately 450 personnel, bringing headcount to approximately 7,250 at
December 31, 2011, which represents a 6.6% increase from our December 31, 2010
levels. Development and design costs vary from period to period depending on the
timing development and tape-out of various products. As we transition to 40
nanometers and 28 nanometers products, tape-out costs could increase. The
increase in the Other line item in the above table is primarily attributable to
an increase in depreciation and facility expenses.
We remain committed to significant research and development efforts to extend
our technology leadership in the wired and wireless communications markets in
which we operate. We 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. 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, 28 nanometers and 20 nanometers and are beginning to evaluate FinFET
technologies. We currently hold more than 7,800 U.S. and more than 3,100 foreign
patents and more than 7,700 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.
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The following table presents details of selling, general and administrative
expense:
2012 vs 2011 2011 vs 2010
2012 2011 2010 $ Change % Change $ Change % Change
(In millions, except percentages)
Salaries and
benefits $ 344 $ 293 $ 240 $ 51 17.4 % $ 53 22.1 %
Stock-based
compensation 148 126 119 22 17.5 7 5.9
Legal and
accounting fees 84 149 140 (65 ) (43.6 ) 9 6.4
Other 120 114 90 6 5.3 24 26.7
Selling, general
and administrative $ 696 $ 682 $ 589 $ 14 2.1 % $ 93 15.8 %
The increase in 2012 salaries and benefits was primarily attributable to an
increase in headcount of approximately 150 personnel, bringing headcount to over
1,900 at December 31, 2012, which represents a 8.6% increase from our
December 31, 2011 levels. Approximately 90% 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 2012 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. The increase in 2011
salaries and benefits and stock-based compensation were primarily attributable
to an increase in headcount of approximately 140 personnel, bringing headcount
to approximately 1,750 at December 31, 2011, which represents an 8.9% increase
from our December 31, 2010 levels. The increase in 2011 legal and accounting
fees primarily related to legal fees associated with the settlement of a federal
consolidated shareholder derivative action, which included a final $25 million
payment to the plaintiffs' counsel for attorneys' fees, expenses and costs.
Legal fees consist primarily of attorneys' fees and expenses related to our
outstanding intellectual property and prior years' securities litigation, patent
prosecution and filings and various other transactions. Legal fees fluctuate
from period to period due to the nature, scope, timing and costs of the matters
in litigation. See Note 9 of Notes to the Consolidated Financial Statements for
further information. The increase in the Other line item in the above table is
primarily attributable to an increase in travel and facilities expense.
Stock-Based Compensation Expense
The following table presents details of total stock-based compensation expense
that is included in each functional line item in our consolidated statements of
income:
2012 vs 2011 2011 vs 2010
2012 2011 2010 $ Change % Change $ Change % Change
(In millions, except percentages)
Cost of product
revenue $ 27 $ 24 $ 23 $ 3 12.5 % $ 1 4.3 %
Research and
development 368 363 342 5 1.4 21 6.1
Selling, general
and administrative 148 126 119 22 17.5 7 5.9
$ 543 $ 513 $ 484 $ 30 5.8 % $ 29 6.0 %
In 2012 we (i) granted equity awards with a fair value of $453 million,
primarily related to our regular annual equity compensation review program,
which will be expensed over the next four years, and (ii) assumed NetLogic and
BroadLight equity awards with a fair value of $215 million, which will be
expensed primarily over the next two to three years.
The following table presents details of unearned stock-based compensation
currently estimated to be expensed in 2013 through 2017 related to unvested
share-based payment awards:
2013 2014 2015 2016 2017 Total
(In millions)
Unearned stock-based compensation $ 434 $ 272 $ 133 $ 24 $ 1
$ 864
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
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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 Consolidated Financial
Statements for a discussion of activity related to share-based awards.
Amortization of Purchased Intangible Assets
The following table presents details of the amortization of purchased intangible
assets included in the cost of product revenue and other operating expense
categories:
2012 vs 2011 2011 vs 2010
2012 2011 2010 $ Change % Change $ Change % Change
(In millions, exceptpercentages)
Cost of product revenue $ 198 $ 54 $ 31 $ 144 266.7 %
$ 23 74.2 %
Other operating expenses 113 30 28 83 276.7 2 7.1
$ 311 $ 84 $ 59 $ 227 270.2 $ 25 42.4
In 2012 we recorded purchased intangible assets of $1.78 billion primarily
related to our acquisitions of NetLogic and BroadLight. The increase in 2012
amortization of purchased intangible assets primarily related to our
acquisitions of NetLogic and BroadLight in 2012 and Provigent in 2011. The
increase in amortization of purchased intangible assets in 2011 was primarily
related to our acquisitions of Beceem Communications, Inc., or Beceem, in late
2010 and Provigent in 2011.
The following table presents details of the amortization of existing purchased
intangible assets (including IPR&D), which is currently estimated to be expensed
in 2013 and thereafter:
Purchased Intangible Asset Amortization by Year
2013 2014 2015 2016 2017 Thereafter Total
(In millions)
Cost of product revenue $ 174 $ 221 $ 218 $ 200 $ 188 $ 615 $ 1,616
Other operating expenses 57 64 32 9 3 5 170
$ 231 $ 285 $ 250 $ 209 $ 191 $ 620 $ 1,786
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 2012 we capitalized IPR&D of $267 million related to our acquisition of
NetLogic. In 2011 and 2010 we capitalized IPR&D of $45 million and $55 million,
respectively, for various acquisitions. 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 Consolidated
Financial Statements. In addition, in 2012, 2011 and 2010 we reclassified $1
million, $3 million and $51 million, respectively, of IPR&D costs to developed
technology, primarily related to our acquisition of Dune Networks, which will
now be amortized to cost of product revenue.
Impairment of Goodwill and Other Long-Lived Assets
We performed annual impairment assessments of the carrying value of goodwill in
October 2012, 2011 and 2010. Upon completion of these assessments, we determined
no impairment was indicated as the estimated fair value of each of the reporting
units exceeded its respective carrying value.
In 2012 we recorded a purchased intangible impairment charge of $49 million
related to our 2011 acquisition of Provigent included in our Infrastructure and
Networking reportable segment and other impairment charges of $38 million
related to six
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other acquisitions. The primary factor contributing to Provigent impairment
charge was the reduction of forecasted cash flows related to certain legacy
microwave technology products. The primary factor contributing to the other
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. Additionally, we recorded an impairment charge of $3 million
related to certain computer software and equipment in June 2012.
In 2011 we recorded a purchased intangible impairment charge of $74 million
related to our 2010 acquisition of Beceem, included in our Mobile and Wireless
reportable segment, and other impairment charges of $18 million. The primary
factor contributing to the Beceem 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, or LTE, products.
In 2010 we recorded an impairment charge of $19 million, primarily related to a
technology license that was acquired in 2008 from Sunext Design, Inc. The
primary factor contributing to this impairment charge was the continued
reduction in our revenue outlook for our Blu-ray product line, which were
ultimately discontinued, and the related decrease to the estimated cash flows
identified with the impaired assets.
For the carrying balances of our goodwill by reporting segment and a description
of our valuation techniques and significant assumptions as well as details of
our other long-lived assets and related impairment charges taken, see the
discussions in Notes 2 and 10 of Notes to the Consolidated Financial Statements.
Settlement Costs (Gains)
In 2012 we recorded net settlement costs of $79 million, which was comprised of
$88 million of settlement costs related to patent infringement claims, offset by
settlement gains of $9 million (primarily related to the resolution of certain
employment tax matters). In 2011 we recorded net settlement gains of $18
million, which was comprised of $55 million of settlement gains (primarily
related to the settlement of a shareholder derivative action), offset by
settlement costs of $37 million (related to the settlement of patent
infringement claims). Upon the occurrence of certain events, we may be required
to record additional settlement costs of up to $20 million related to a patent
infringement case that settled in 2011. In 2010 we recorded settlement costs of
$53 million primarily related to licensing and settlement agreements and certain
employment tax items. For a further discussion of our settlement costs and
litigation matters, see Note 9 of Notes to the Consolidated Financial
Statements.
Restructuring Costs
As part of our regular portfolio management review process and in light of our
decision to significantly reduce our investment in our digital television and
Blu-ray Disc product lines within our Broadband Communications operating
segment, in September 2011 we implemented a restructuring plan to reduce our
worldwide headcount by approximately 300 employees. In connection with this
plan, in 2011 we recorded $16 million in net restructuring costs, of which $12
million was related to severance and other charges associated with our reduction
in workforce across multiple locations and functions, and $4 million was related
to the closure of three of our facilities. We do not expect any net cost savings
from this restructuring plan as we plan to reallocate funding to higher return
opportunities. In 2012 we incurred $7 million in restructuring costs primarily
associated with additional costs for retention bonuses and facilities relating
to the restructuring plan noted above, and severance and facility charges
associated with synergies identified during the integration of our acquisition
of NetLogic. These restructuring plans were completed in 2012.
Charitable Contribution
In April 2009 we established the Broadcom Foundation, or the Foundation, to
support science, technology, engineering and mathematics programs, as well as a
broad range of community services. In June 2011 we contributed an additional $25
million to the Foundation. Approximately $2 million of the $25 million
contribution came from Dr. Henry Samueli, our Chief Technical Officer and
Chairman of the Board of Directors, who made such payment to Broadcom in
connection with the settlement of a shareholder derivative action as further
described in Note 9 of Notes to the Consolidated Financial Statements. This
payment was recorded as an operating expense in consolidated statement of income
in 2011.
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Interest and Other Income (Expense), Net
The following table presents interest and other income, net:
2012 vs 2011 2011 vs 2010
2012 2011 2010 $ Change $ Change
(In millions)
Interest income (expense), net $ (30 ) $ (5 ) $ 9 $ (25 ) $ (14 )
Other income, net 10 8 7 2 1
$ (20 ) $ 3 $ 16 $ (23 ) $ (13 )
Interest income (expense), net, reflects interest expense on our senior
unsecured 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 increases in interest expense from 2010 through 2012 was driven primarily by
interest expense related to our senior unsecured notes of $700 million issued in
November 2010, $500 million issued in November 2011, and $500 million issued in
August 2012.
Provision for (Benefit of) Income Taxes
The federal statutory rate was 35% for 2012, 2011 and 2010. Our effective tax
rates were (9.6%), 3.0% and 1.4% for 2012, 2011 and 2010, respectively. The
differences between our effective tax rates and the federal statutory tax rate,
primarily relate to foreign earnings taxed at substantially lower rates than the
federal statutory rate due principally to our tax holiday in Singapore and
domestic tax losses recorded without tax benefits. During 2012, we recorded tax
benefits resulting from the reduction of certain foreign deferred tax
liabilities of $12 million 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 $51 million for our acquisitions of NetLogic and BroadLight. We
realized tax benefits resulting from the reversal of certain prior period
tax accruals of $13 million and $9 million in 2012 and 2011, respectively. These
reversals resulted primarily from the expiration of the statutes of limitation
for the assessment of taxes related to certain foreign subsidiaries. We recorded
a tax provision of $13 million in 2011 resulting from legislation enacted in
Israel on December 5, 2011, which increased tax rates for 2012 and later years
applicable to our Israel net deferred tax liabilities, principally related to
purchased intangible assets.
We utilize the asset and liability method of accounting for income taxes. We
record net deferred tax assets to the extent we believe these assets will more
likely than not be realized. In making such determination, we consider all
available positive and negative evidence, including scheduled reversals of
deferred tax liabilities, projected future taxable income, tax planning
strategies and recent financial performance. Forming a conclusion that a
valuation allowance is not required is difficult when there is negative evidence
such as cumulative losses in recent years. As a result of our recent cumulative
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 $29 million and $62 million at December 31, 2012 and
December 31, 2011, respectively.
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. The impact of the Singapore tax holidays decreased
Singapore taxes by $399 million, $368 million and $330 million for 2012, 2011
and 2010, respectively. The benefit of the tax holidays on net income per share
(diluted) was $0.69, $0.65 and $0.61 for 2012, 2011 and 2010, respectively. We
are in discussions with the Singapore Economic Development Board with respect to
tax incentives for periods after March 31, 2014.
Subsequent Events
In January 2013 our Board of Directors adopted an amendment to our existing
dividend policy pursuant to which we intend to increase the quarterly cash
dividend by 10% to $0.11 per share ($0.44 per share on an annual basis) and
declared a quarterly cash dividend of $0.11 per share payable to holders of our
common stock.
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Liquidity and Capital Resources
Working Capital and Cash and Marketable Securities. The following table presents
working capital, cash and cash equivalents, and marketable securities:
December 31,
2012 2011 $ Change
(In millions)
Working capital $ 2,099 $ 4,653 $ (2,554 )
Cash and cash equivalents $ 1,617 $ 4,146 (2,529 )
Short-term marketable securities 757 383 374
Long-term marketable securities 1,348 676 672
Total cash and cash equivalents and marketable securities $ 3,722 $ 5,205 $ (1,483 )
See the summary of cash, cash equivalents, short and long-term marketable
securities by major security type and discussion of market risk that follows in
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Cash Provided and Used in 2012 and 2011
Cash and cash equivalents decreased to $1.62 billion at December 31, 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 net
purchases of marketable securities and purchases of property and equipment,
offset by cash provided by operating activities and proceeds from the issuance
of long-term debt.
Year Ended December 31,
2012 2011 2010
(In millions)
Net cash provided by operating activities $ 1,931 $ 1,838 $ 1,371
Net cash provided by (used in) investing activities (4,796 ) 863 (2,179 )
Net cash provided by (used in) financing activities 336 (177 ) 1,033
Increase (decrease) in cash and cash equivalents (2,529 ) 2,524
225
Cash and cash equivalents at beginning of period 4,146 1,622
1,397
Cash and cash equivalents at end of period $ 1,617 $ 4,146 $ 1,622
Operating Activities
In 2012 our operating activities provided $1.93 billion in cash. This was
primarily the result of net income of $719 million, net non-cash operating
expenses of $1.06 billion and changes in operating assets and liabilities of
$152 million. In 2011 our operating activities provided $1.84 billion in cash.
This was primarily the result of net income of $927 million, net non-cash
operating expenses of $782 million and changes in operating assets and
liabilities of $129 million. In 2010 our operating activities provided $1.37
billion in cash. This was primarily the result of net income of $1.08 billion
and net non-cash operating expenses of $638 million, offset in part by changes
in operating assets and liabilities of $349 million, which includes our $161
million payment of previously accrued securities litigation settlement costs.
Our days sales outstanding decreased from 34 days at December 31, 2011 to 32
days at December 31, 2012 due to revenue linearity (meaning a percentage of
sales occurring in the final month of the quarter) and the increase in total net
revenue as compared to the three months ended December 31, 2011. 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 47
days at 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
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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 $4.80 billion in cash in 2012, which was primarily the
result of $3.58 billion in net cash paid for our acquisitions, primarily
NetLogic and BroadLight, $244 million of capital equipment purchases to support
our research and development efforts and $997 million in net purchases from
sales and maturities of marketable securities, offset in part by $27 million of
proceeds from the sale of strategic investments. Investing activities provided
$863 million in cash in 2011, which was primarily the result of $1.38 billion 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
Ltd. and $163 million of capital equipment purchases to support our research and
development efforts.
Investing activities used $2.18 billion in cash in 2010, which was primarily the
result of $1.47 billion in net purchases of marketable securities, $599 million
in net cash paid primarily for the acquisitions of Teknovus, Inc., Innovision
Research & Technology PLC, Percello, Beceem and Gigle Networks, Inc., and $109
million of capital equipment purchases, mostly to support our research and
development efforts.
Financing Activities
Our financing activities provided $336 million in cash in 2012, which was
primarily the result of the net proceeds from the issuance of long-term debt of
$492 million and $311 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 $224
million, repurchases of our Class A common stock of $33 million and $153 million
in minimum tax withholding paid on behalf of employees for shares issued
pursuant to restricted stock units. Our financing activities used $177 million
in cash in 2011, which was primarily the result of $670 million in repurchases
of shares of our Class A common stock, dividends paid of $194 million, and $155
million in minimum tax withholding paid on behalf of employees for shares issued
pursuant to restricted stock units, offset in part by $494 million in proceeds
from the issuance of long-term debt and $348 million in proceeds received from
issuances of common stock upon the exercise of stock options and pursuant to our
employee stock purchase plan.
Our financing activities provided $1.03 billion in cash in 2010, which was
primarily the result of net proceeds of $936 million in proceeds received from
issuances of common stock upon exercise of stock options and pursuant to our
employee stock purchase plan and $691 million in proceeds from the issuance of
our long-term debt, offset in part by $280 million in repurchases of shares of
our Class A common stock, dividends paid of $164 million, repayment of debt
assumed in our Teknovus acquisition of $14 million, and $136 million in minimum
tax withholding paid on behalf of employees for shares issued pursuant to
restricted stock units.
The timing and number of stock option exercises and employee stock purchases and
the amount of cash proceeds we receive from these equity awards are not within
our control. As it is now our general practice to issue restricted stock units,
or RSUs, instead of stock options we will likely not generate as much cash from
the exercise of stock options as we have in the past. Unlike the exercise of
stock options, the issuance of shares upon vesting of RSUs does not result in
any cash proceeds to Broadcom and in fact requires the use of cash, as we
currently allow employees to have a portion of the shares issued upon vesting of
RSUS withheld to satisfy minimum statutory withholding taxes. This withholding
procedure requires that we pay cash to the appropriate tax authorities on each
participating employee's behalf.
Short and Long-Term Financing Arrangements
At December 31, 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
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aggregate amount of up to $1.50 billion, expired. Our 2018 Notes, described
below, with an aggregate principal amount of $500 million that we issued in
November 2011 were issued under this Form S-3.
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 have not drawn on the credit facility since its
inception.
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
December 31, 2012.
Senior Notes
The following table summarizes details of our senior unsecured notes, or Notes:
December 31,
2012 2011 $ Change
(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 - 500
$ 1,700 $ 1,200 $ 500
Unaccreted discount (7 ) (4 ) (3 )
Less current portion of long-term debt (300 ) - (300 )
$ 1,393 $ 1,196 $ 197
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 in November 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 on or prior to
365 days after the closing of the 2022 Notes offering. If we are required to
file a shelf registration statement because one or more conditions set forth in
the registration rights agreement is satisfied, we will be required to use our
commercially reasonable efforts to cause such registration statement to be
declared effective by the SEC on or prior to 365 days after the date we become
obligated to file the shelf registration statement. If we are unable to timely
complete our registration obligation, 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.
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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 December 31, 2012.
Other Notes and Borrowings
We had no other significant notes or borrowings as of December 31, 2012.
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 2013 and thereafter:
Payment Obligations by Year
2013 2014 2015 2016 2017 Thereafter Total
(In millions)
Operating leases $ 144 $ 109 $ 85 $ 77 $ 55 $ 81 $ 551
Inventory and related
purchase obligations 609 - - - - - 609
Other obligations 196 78 36 23 3 - 336
Long-term debt and related
interest 340 35 436 26 26 1,076 1,939
$ 1,289 $ 222 $ 557 $ 126 $ 84 $ 1,157 $ 3,435
We lease our facilities and certain engineering design tools and information
systems equipment under operating lease agreements. Our leased facilities
comprise an aggregate of 3.9 million square feet. Our principal facilities in
Irvine have lease terms that expire at various dates through 2017 with an
aggregate rent of $110 million (included in the table above).
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.
Unrecognized tax benefits were $331 million, of which $49 million would result
in potential cash payment of taxes and $282 million would result in a reduction
in net operating loss and tax credit carryforwards. We are not including any
amount related to uncertain tax positions in the table presented above because
of the difficulty in making reasonably reliable estimates of the timing of
settlements with the respective taxing authorities. In addition to the
unrecognized tax benefits, we have also recorded a liability for potential tax
penalties and interest of $31 million and $5 million, respectively, at
December 31, 2012.
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Prospective Capital Needs
We believe that our existing cash, cash equivalents and marketable securities,
together with cash generated from operations and from the issuance of common
stock through our employee stock option and purchase plans, will be sufficient
to cover our working capital needs, capital expenditures, investment
requirements, commitments, repurchases of our Class A common stock and quarterly
dividends for at least the next 12 months. However, it is possible that we may
choose to raise additional funds or draw on our existing credit facility to
finance our activities 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 and payments of our quarterly dividends.
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 December 31, 2012 we have approximately $1.61 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;
• capital improvements for new and existing facilities
• changes in our compensation policies;
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• the issuance of restricted stock units and the related cash payments we
make for withholding taxes due from employees;
• repurchases of our Class A common stock;
• changes in tax laws;
• 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 December 31, 2012 we had no material off-balance sheet arrangements, other
than our facility operating leases.
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