Broadcom Corporation
BROADCOM CORP (Form: 10-Q, Received: 04/24/2014 17:16:14)

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________ 
Form 10-Q
__________________________________
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2014
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from          to         
Commission file number: 000-23993
 __________________________________
Broadcom Corporation
(Exact Name of Registrant as Specified in Its Charter)
__________________________________
California
33-0480482
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
5300 California Avenue
Irvine, California 92617-3038
(Address of Principal Executive Offices) (Zip Code)
(949) 926-5000
(Registrant’s telephone number, including area code)
__________________________________ 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  
 
x
 
Accelerated filer
 
¨
 
 
 
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
 
Smaller reporting company  
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x
As of March 31, 2014 the registrant had 535 million  shares of Class A common stock, $0.0001 par value, and 50 million shares of Class B common stock, $0.0001 par value, outstanding.
 


Table of Contents

BROADCOM CORPORATION

QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2014

TABLE OF CONTENTS
 
 
 
 
Page
 
 



















Broadcom ® and the pulse logo are among the trademarks of Broadcom Corporation and/or its affiliates in the United States, certain other countries and/or the EU. Any other trademarks or trade names mentioned are the property of their respective owners.

© 2014 Broadcom Corporation. All rights reserved.

1

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1.
Financial Statements

BROADCOM CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
March 31,
2014
 
December 31,
2013
 
(In millions)
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
2,254

 
$
1,657

Short-term marketable securities
679

 
775

Accounts receivable, net
734

 
795

Inventory
529

 
525

Prepaid expenses and other current assets
157

 
163

Total current assets
4,353

 
3,915

Property and equipment, net
617

 
593

Long-term marketable securities
2,008

 
1,939

Goodwill
3,756

 
3,793

Purchased intangible assets, net
1,061

 
1,144

Other assets
112

 
111

Total assets
$
11,907

 
$
11,495

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable
$
580

 
$
585

Wages and related benefits
201

 
243

Deferred revenue and income
41

 
21

Accrued liabilities
770

 
647

Total current liabilities
1,592

 
1,496

Long-term debt
1,395

 
1,394

Other long-term liabilities
311

 
234

Commitments and contingencies


 


Shareholders’ equity:
 
 
 
Common stock

 

Additional paid-in capital
12,548

 
12,475

Accumulated deficit
(3,942
)
 
(4,107
)
Accumulated other comprehensive income
3

 
3

Total shareholders’ equity
8,609

 
8,371

Total liabilities and shareholders’ equity
$
11,907

 
$
11,495




See accompanying notes.
2

Table of Contents

BROADCOM CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
 
Three Months Ended
 
March 31,
 
2014
 
2013
 
(In millions, except per share data)
Net revenue:
 
 
 
Product revenue
$
1,984

 
$
1,962

Income from Qualcomm Agreement

 
43

Total net revenue
1,984

 
2,005

Costs and expenses:
 
 
 
Cost of product revenue
1,004

 
988

Research and development
636

 
615

Selling, general and administrative
185

 
179

Amortization of purchased intangible assets
9

 
15

Impairments of long-lived assets
25

 
10

Restructuring costs, net
5

 

Settlement costs
2

 

Other gains, net
(52
)
 

Total operating costs and expenses
1,814

 
1,807

Income from operations
170

 
198

Interest expense, net
(5
)
 
(8
)
Other income, net
3

 
3

Income before income taxes
168

 
193

Provision for income taxes
3

 
2

Net income
$
165

 
$
191

Net income per share (basic)
$
0.28

 
$
0.34

Net income per share (diluted)
$
0.28

 
$
0.33

Weighted average shares (basic)
584

 
570

Weighted average shares (diluted)
590

 
585

Dividends per share
$
0.12

 
$
0.11


The following table presents details of total stock-based compensation expense included in each functional line item in the unaudited condensed consolidated statements of income above:  
 
Three Months Ended
 
March 31,
 
2014
 
2013
 
(In millions)
Cost of product revenue
$
6

 
$
7

Research and development
84

 
99

Selling, general and administrative
30

 
34



See accompanying notes.
3

Table of Contents

BROADCOM CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
Three Months Ended
 
March 31,
 
2014
 
2013
 
(In millions)
Net income
$
165

 
$
191

Other comprehensive income, net of tax:
 
 
 
Foreign currency translation adjustments, net of $0 tax in 2014 and 2013
(1
)
 
2

Unrealized gains on marketable securities, net of $0 tax in 2014 and 2013
1

 
1

Other comprehensive income

 
3

Comprehensive income
$
165

 
$
194



See accompanying notes.
4

Table of Contents

BROADCOM CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Three Months Ended
 
March 31,
 
2014
 
2013
 
(In millions)
Operating activities
 
 
 
Net income
$
165

 
$
191

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
52

 
39

Stock-based compensation expense
120

 
140

Acquisition-related items:
 
 
 
Amortization of purchased intangible assets
59

 
58

Impairments of long-lived assets
25

 
10

Gain on sale of assets and other
(49
)
 

Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Accounts receivable, net
61

 
(11
)
Inventory
(5
)
 
4

Prepaid expenses and other assets
4

 
(34
)
Accounts payable
(8
)
 
109

Deferred revenue
115

 
(2
)
Other accrued and long-term liabilities
67

 
(116
)
Net cash provided by operating activities
606

 
388

Investing activities
 
 
 
Net purchases of property and equipment
(78
)
 
(41
)
Proceeds from sale of certain assets and other
90

 

Purchases of marketable securities
(477
)
 
(619
)
Proceeds from sales and maturities of marketable securities
503

 
539

Net cash provided by (used in) investing activities
38

 
(121
)
Financing activities
 
 
 
Repurchases of Class A common stock

 
(107
)
Dividends paid
(70
)
 
(63
)
Proceeds from issuance of common stock
54

 
68

Minimum tax withholding paid on behalf of employees for restricted stock units
(31
)
 
(40
)
Net cash used in financing activities
(47
)
 
(142
)
Increase in cash and cash equivalents
597

 
125

Cash and cash equivalents at beginning of period
1,657

 
1,617

Cash and cash equivalents at end of period
$
2,254

 
$
1,742



See accompanying notes.
5

Table of Contents

BROADCOM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.
Summary of Significant Accounting Policies

Our Company

Broadcom Corporation (including our subsidiaries, referred to collectively in this Report as “Broadcom,” “we,” “our” and “us”) is a global leader and innovator in semiconductor solutions for wired and wireless communications. Broadcom ® products seamlessly deliver voice, video, data and multimedia connectivity in the home, office and mobile environments. We provide the industry’s broadest portfolio of state-of-the-art system-on-a-chip solutions, or SoCs.

Basis of Presentation

The interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP, for interim financial information and with the instructions to Securities and Exchange Commission, or SEC, Form 10-Q and Article 10 of SEC Regulation S-X. They do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Therefore, these financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2013 , included in our 2013 Annual Report on Form 10-K filed with the SEC on January 30, 2014 , referred to as our 2013 Annual Report.

The interim condensed consolidated financial statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly our results of operations and financial position for the interim periods. The results of operations for the three months ended March 31, 2014 are not necessarily indicative of the results to be expected for future quarters or the full year. Additionally, certain amounts previously reported as licensing revenue have been reclassified to product revenue to conform to the current period presentation. Such reclassifications had an impact of $8 million in the three months ended March 31, 2013 , but did not affect total net revenue, net income, shareholders' equity or cash flows.

For a complete summary of our significant accounting policies, please refer to Note 1, “Summary of Significant Accounting Policies,” in Part IV, Item 15 of our 2013 Annual Report. There have been no material changes to our significant accounting policies during the three months ended March 31, 2014 .

Use of Estimates

The preparation of financial statements in accordance with United States generally accepted accounting principles, or GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of total net revenue and expenses in the reporting periods. We regularly evaluate estimates and assumptions related to revenue recognition, rebates, allowances for doubtful accounts, sales returns and allowances, warranty obligations, inventory valuation, stock-based compensation expense, goodwill and purchased intangible asset valuations, strategic investments, deferred income tax asset valuation allowances, uncertain tax positions, tax contingencies, self-insurance, restructuring costs or reversals, litigation and other loss contingencies. These estimates and assumptions are based on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs and expenses that are not readily apparent from other sources. The actual results we experience may differ materially and adversely from our estimates. To the extent there are material differences between the estimates and actual results, our future results of operations will be affected.


6


2.
Supplemental Financial Information

The following tables present details of our condensed consolidated financial statements:

Inventory
 
March 31,
2014
 
December 31,
2013
 
(In millions)
Work in process
$
247

 
$
202

Finished goods
282

 
323

 
$
529

 
$
525


Accrued Liabilities
 
March 31,
2014
 
December 31,
2013
 
(In millions)
Accrued rebates
$
516

 
$
409

Accrued royalties
14

 
15

Accrued settlement charges
71

 
66

Accrued legal costs
17

 
15

Accrued taxes
24

 
20

Warranty reserve
19

 
19

Restructuring liabilities
11

 
17

Other
98

 
86

 
$
770

 
$
647


Other Long-Term Liabilities
 
March 31,
2014
 
December 31,
2013
 
(In millions)
Deferred rent
$
43

 
$
46

Accrued taxes
71

 
72

Deferred tax liabilities
29

 
35

Accrued settlement charges
21

 
25

Deferred revenue
128

 
33

Other long-term liabilities
19

 
23

 
$
311

 
$
234


7



The following tables summarize the activity related to accrued rebates and restructuring charges:

Accrued Rebate Activity
 
Three Months Ended
 
March 31,
 
2014
 
2013
 
(In millions)
Beginning balance
$
409

 
$
383

Charged as a reduction of revenue
187

 
161

Reversal of unclaimed rebates
(6
)
 
(6
)
Payments
(74
)
 
(219
)
Ending balance
$
516

 
$
319


Restructuring Costs
 
Three Months Ended
 
March 31, 2014
 
(In millions)
Beginning balance
$
17

Charged to expense
5

Cash payments
(11
)
Ending balance
$
11


Income from the Qualcomm Agreement

For a discussion of income from our April 2009 agreement with Qualcomm Incorporated, or the Qualcomm Agreement,
please refer to Note 1, “Summary of Significant Accounting Policies,” in Part IV, Item 15 of our 2013 Annual Report. The
income from the Qualcomm Agreement terminated in April 2013.

Other Gains, Net

In March 2014 we sold certain Ethernet controller-related assets and provided non-exclusive licenses to intellectual property, including a non-exclusive patent license, to QLogic Corporation for a total of $209 million , referred to as the QLogic Transaction. The transaction was accounted for as a multiple element arrangement, which primarily included (i) the sale of certain assets (constituting a business for accounting purposes), (ii) the licensing of certain intellectual property and (iii) a long-term supply agreement. In connection with the transaction, we recorded a gain on the sale of assets of $48 million (net of a goodwill adjustment of $37 million ) and deferred revenue of $120 million . The revenue related to the license agreement ( $76 million ) and the supply agreement ( $44 million ), will be amortized over approximately seven years . The operating gain was recorded in "Other gains, net" included in our unaudited condensed consolidated statements of income for the three months ended March 31, 2014.

In determining the fair value of the license agreement we used the relief from royalty income approach, as well as a market approach utilizing another transaction that we had previously entered into for the same intellectual property, adjusted for changes in the market and other assumptions since that transaction.  The supply agreement was valued utilizing the cost savings income approach. The relief from royalty income and cost saving income approaches employ significant unobservable inputs categorized as Level 3 inputs. The key unobservable inputs utilized include discount rates of approximately 13% to 15% , a market participant tax rate of 17% , and estimated level of future volumes and pricing based on current product and market data.

The adjustment to goodwill due to the QLogic Transaction was calculated by determining the value of the business sold in relation to the value of the Infrastructure and Networking reportable segment.  The value of the business sold was determined utilizing the residual method. 

8



Computation of Net Income Per Share

Net income per share (basic) is calculated by dividing net income by the weighted average number of common shares outstanding during the year. Net income per share (diluted) is calculated by adjusting outstanding shares, assuming any dilutive effects of stock options, stock purchase rights and restricted stock units calculated using the treasury stock method. Under the treasury stock method, an increase in the fair market value of our Class A common stock results in a greater dilutive effect from outstanding stock options, stock purchase rights and restricted stock units. Additionally, the exercise of employee stock options and stock purchase rights and the vesting of restricted stock units results in a further dilutive effect on net income per share.

The following table presents the computation of net income per share:  
 
Three Months Ended
 
March 31,
 
2014
 
2013
 
(In millions, except per share data)
Numerator: Net income
$
165

 
$
191

Denominator for net income per share (basic)
584

 
570

Effect of dilutive securities:
 
 
 
Stock awards
6

 
15

Denominator for net income per share (diluted)
590

 
585

Net income per share (basic)
$
0.28

 
$
0.34

Net income per share (diluted)
$
0.28

 
$
0.33


Net income per share (diluted) does not include the effect of anti-dilutive potential common shares resulting from outstanding equity awards. There were 35 million and 21 million anti-dilutive potential common shares in the three months ended March 31, 2014 and 2013 , respectively.

Supplemental Cash Flow Information

In the three months ended March 31, 2014 , we paid $29 million for capital equipment that was accrued as of December 31, 2013 and had billings of $30 million for capital equipment that were accrued but not yet paid as of March 31, 2014 .

3.
Fair Value Measurements

Our financial instruments consist principally of cash and cash equivalents, short- and long-term marketable securities, accounts receivable, accounts payable and long-term debt. The fair value of a financial instrument is the amount that would be received in an asset sale or paid to transfer a liability in an orderly transaction between unaffiliated market participants. Assets and liabilities measured at fair value are categorized based on whether or not the inputs are observable in the market and the degree that the inputs are observable. The categorization of financial instruments within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is prioritized into three levels (with Level 3 being the lowest) defined as follows:

Level 1: Inputs are based on quoted market prices for identical assets or liabilities in active markets at the measurement date.
Level 2: Inputs include quoted prices for similar assets or liabilities in active markets and/or quoted prices for identical or similar assets or liabilities in markets that are not active near the measurement date.
Level 3: Inputs include management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument’s valuation.

The fair value of the majority of our cash equivalents and marketable securities was determined based on “Level 1” inputs. The fair value of certain marketable securities and our long-term debt were determined based on “Level 2” inputs. The valuation techniques used to measure the fair value of our “Level 2” instruments were valued based on quoted market prices or model driven valuations using significant inputs derived from or corroborated by observable market data. We do not have any

9


marketable securities in the “Level 3” category. We believe that the recorded values of all our other financial instruments approximate their current fair values because of their nature and respective relatively short maturity dates or durations.

Instruments Measured at Fair Value on a Recurring Basis. The following tables present our cash and marketable securities’ costs, gross unrealized gains, gross unrealized losses and fair value by major security type recorded as cash and cash equivalents or short-term or long-term marketable securities:  
 
March 31, 2014
 
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Cash and Cash Equivalents
 
Short-Term Marketable Securities
 
Long-Term Marketable Securities
 
(In millions)
Cash
$
537

 
$

 
$

 
$
537

 
$
537

 
$

 
$

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank and time deposits
1,063

 

 

 
1,063

 
1,063

 

 

Money market funds
463

 

 

 
463

 
463

 

 

U.S. treasury and agency obligations
1,086

 
1

 

 
1,087

 
5

 
169

 
913

Subtotal
2,612

 
1

 

 
2,613

 
1,531

 
169

 
913

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial paper
188

 

 

 
188

 
166

 
22

 

Corporate bonds
1,566

 
3

 

 
1,569

 
20

 
485

 
1,064

Asset-backed securities and other
34

 

 

 
34

 

 
3

 
31

Subtotal
1,788

 
3

 

 
1,791

 
186

 
510

 
1,095

Level 3:
 
 
 
 
 
 
 
 
 
 
 
 
 
None

 

 

 

 

 

 

Total
$
4,937

 
$
4

 
$

 
$
4,941

 
$
2,254

 
$
679

 
$
2,008


 
December 31, 2013
 
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Cash and Cash Equivalents
 
Short-Term Marketable Securities
 
Long-Term Marketable Securities
 
(In millions)
Cash
$
307

 
$

 
$

 
$
307

 
$
307

 
$

 
$

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank and time deposits
474

 

 

 
474

 
474

 

 

Money market funds
277

 

 

 
277

 
277

 

 

U.S. treasury and agency obligations
1,005

 
1

 

 
1,006

 

 
205

 
801

Subtotal
1,756

 
1

 

 
1,757

 
751

 
205

 
801

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial paper
690

 

 

 
690

 
599

 
91

 

Corporate bonds
1,591

 
3

 
(1
)
 
1,593

 

 
477

 
1,116

Asset-backed securities and other
24

 

 

 
24

 

 
2

 
22

Subtotal
2,305

 
3

 
(1
)
 
2,307

 
599

 
570

 
1,138

Level 3:
 
 
 
 
 
 
 
 
 
 
 
 
 
None

 

 

 

 

 

 

Total
$
4,368

 
$
4

 
$
(1
)
 
$
4,371

 
$
1,657

 
$
775

 
$
1,939


There were no transfers between Level 1, Level 2 or Level 3 securities in the three months ended March 31, 2014 . All of our long-term marketable securities had maturities of between one and three years in duration at March 31, 2014 . Our cash,

10


cash equivalents and marketable securities at March 31, 2014 consisted of $2.21 billion held domestically, with the remaining balance of $2.73 billion held by our foreign subsidiaries.

At March 31, 2014 we had 92 investments with a fair value of $675 million that were in an unrealized loss position for less than twelve months. Our gross unrealized losses of less than $1 million for these investments at March 31, 2014 were due to changes in market rates. We have determined that the gross unrealized losses on these investments at March 31, 2014 are temporary in nature. We evaluate securities for other-than-temporary impairment on a quarterly basis. Impairment is evaluated considering numerous factors, and their relative significance varies depending on the situation. Factors considered include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the issuer, and our intent and ability to hold the investment in order to allow for an anticipated recovery in fair value.

Instruments Not Recorded at Fair Value on a Recurring Basis. We measure the fair value of our long-term debt carried at amortized cost quarterly for disclosure purposes. The estimated fair value of long-term debt is determined by Level 2 inputs and is based primarily on quoted market prices for the same or similar issues . Based on the market prices, the fair value of our long-term debt was $1.38 billion and $1.37 billion as of March 31, 2014 and December 31, 2013 , respectively. The recorded values of all our accounts receivable and accounts payable approximate their current fair values because of their nature and respective relatively short maturity dates or durations.

Assets and Liabilities Recorded at Fair Value on a Non-Recurring Basis. We measure the fair value of our cost method investments when they are deemed to be other-than-temporarily impaired, assets acquired and liabilities assumed in a business acquisition, goodwill and other long lived assets when they are held for sale or determined to be impaired, and for license and settlement agreements when they are part of a multiple element arrangement. See Notes 2 and 9 for discussion on fair value measurements of certain assets and liabilities recorded at fair value on a non-recurring basis.

4.
Income Taxes

The following table presents details of the provision for (benefit of) income taxes and our effective tax rates:
 
Three Months Ended
 
March 31,
 
2014
 
2013
 
(In millions, except percentages)
Provision for income taxes
$
3

 
$
2

Effective tax rates
1.8
%
 
1.0
%

The differences between our effective tax rates and the 35% federal statutory rate resulted primarily from foreign earnings taxed at substantially lower rates than the federal statutory rate, and domestic tax losses recorded without tax benefits. In determining our annualized effective tax rates, the tax effects of a $48 million gain on sale of assets for the three months ended March 31, 2014 , and the impairments of purchased intangible assets of $25 million and $10 million for the three months ended March 31, 2014 and 2013 , respectively, were treated as discrete items. As a result, we recorded discrete tax benefits for the impairments of purchased intangible assets of $5 million and $2 million for the three months ended March 31, 2014 and 2013 , respectively. We also recorded discrete tax benefits of $4 million and $2 million for the three months ended March 31, 2014 and 2013 , respectively, resulting primarily from the expiration of statutes of limitations for the assessment of taxes in various foreign jurisdictions.

As a result of our 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 $18 million and $24 million at March 31, 2014 and December 31, 2013 , respectively.

Our income tax returns for the 2007, 2008 and 2009 tax years are currently under examination by the Internal Revenue Service.  We do not believe the audit will have a material impact on our financial position, operating results, or cash flows.  However, our deferred tax assets could be reduced, with a corresponding reduction in the valuation allowance related to such deferred tax assets.


11


5.
Debt and Credit Facility

Senior Notes

The following table presents details of our senior notes, or the Notes:  
 
March 31,
2014
 
(In millions)
2.375% fixed-rate notes, due 2015
$
400

2.700% fixed-rate notes, due 2018
500

2.500% fixed-rate notes, due 2022
500

 
$
1,400

Unaccreted discount
(5
)
 
$
1,395


The outstanding Notes contain a number of customary representations, warranties and restrictive covenants, including, but not limited to, restrictions on our ability to grant liens on assets; enter into sale and lease-back transactions; or merge, consolidate or sell assets. Failure to comply with these covenants, or any other event of default, could result in acceleration of the principal amount and accrued but unpaid interest on the Notes.

Relative to our overall indebtedness, the outstanding Notes rank in right of payment (i) equal with all of our other existing and future senior unsecured indebtedness (ii) senior to all of our existing and future subordinated indebtedness, and (iii) effectively subordinated to all of our subsidiaries' existing and future indebtedness and other obligations (including secured and unsecured obligations) and subordinated to our existing and future secured indebtedness and other obligations, to the extent of the assets securing such indebtedness and other obligations.

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 our credit facility to date.

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.

6.
Shareholders’ Equity

Quarterly Dividend

In January 2014 our Board of Directors adopted an amendment to the existing dividend policy pursuant to which we increased the quarterly cash dividend by 9% to $0.12 per share ( $0.48 per share on an annual basis) payable to holders of our common stock. In the three months ended March 31, 2014 and 2013 we paid $70 million and $63 million , respectively, in dividends to holders of our Class A and Class B common stock.

Share Repurchase Programs

In February 2010 we announced that our Board of Directors had authorized an "evergreen" share repurchase program intended to offset dilution of incremental grants of stock awards associated with our stock incentive plans. The maximum number of shares of our Class A common stock that may be repurchased in any one year under this program (including under an accelerated share repurchase agreement or similar arrangement) is equal to the total number of shares issued pursuant to our equity awards in the previous year and the current year. This program does not have an expiration date and may be suspended at any time at the discretion of the Board of Directors. It may also be complemented with one or more additional share

12


repurchase programs in the future. We did not repurchase any shares in the three months ended March 31, 2014 .

Repurchases under our share repurchase programs were and are intended to be made in open market or privately negotiated transactions in compliance with Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended. Our share repurchase programs do not obligate us to acquire any particular amount of our stock and may be suspended at any time at our discretion.

7.
Employee Benefit Plans

Combined Incentive Plan Activity

Restricted stock unit activity is set forth below:
 
Restricted Stock Units
Outstanding
 
Number of
Shares
 
Weighted
Average
Grant-Date
Fair Value
per Share
 
(In millions, except per share data)
Balance at December 31, 2013
24

 
$
34.91

Restricted stock units granted
13

 
29.93

Restricted stock units cancelled
(1
)
 
34.67

Restricted stock units vested
(3
)
 
36.04

Balance at March 31, 2014
33

 
$
32.85


Stock option activity is set forth below:  
 
Options Outstanding
 
Number of
Shares
 
Weighted
Average
Exercise
Price
per Share
 
(In millions, except per share data)
Balance at December 31, 2013
39

 
$
30.39

Options cancelled
(1
)
 
36.55

Options exercised
(2
)
 
23.57

Balance at March 31, 2014
36

 
$
30.70


The following table presents details of unearned stock-based compensation currently estimated to be expensed in the remainder of 2014 through 2018 related to unvested share-based payment awards:  
 
2014
 
2015
 
2016
 
2017
 
2018
 
Total
 
(In millions)
Unearned stock-based compensation
$
356

 
$
341

 
$
219

 
$
110

 
$
15

 
$
1,041


If there are any modifications or cancellations of the underlying unvested awards, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that we grant additional equity awards or assume unvested equity awards in connection with acquisitions.



13


8.
Commitments and Contingencies

Litigation

We and certain of our subsidiaries are currently parties to various legal proceedings, including those noted in this section. Unless otherwise noted below, during the periods presented we have not: recorded any accrual for loss contingencies associated with such legal proceedings; determined that an unfavorable outcome is probable or reasonably possible; or determined that the amount or range of any possible loss is reasonably estimable. We are engaged in numerous other legal actions not described below arising in the ordinary course of our business and, while there can be no assurance, we believe that the ultimate outcome of these actions will not have a material adverse effect on our operating results, liquidity or financial position.

From time to time we may conclude it is in the best interests of our shareholders, employees, and customers to settle one or more litigation matters, and any such settlement could include substantial payments; however, other than as noted below, we have not reached this conclusion with respect to any particular matter at this time. There are a variety of factors that influence our decisions to settle and the amount we may choose to pay, including the strength of our case, developments in the litigation, the behavior of other interested parties, the demand on management time and the possible distraction of our employees associated with the case and/or the possibility that we may be subject to an injunction or other equitable remedy. It is difficult to predict whether a settlement is possible, the amount of an appropriate settlement or when is the opportune time to settle a matter in light of the numerous factors that go into the settlement decision.

Intellectual Property Proceedings

In March 2013, NXP B.V. sued Nintendo, our customer, in the U.S. District Court for the District of Nevada, asserting five patents against the Wii U, a Nintendo product.  In October 2013, NXP B.V. withdrew its complaint against Nintendo and filed a new complaint against us, Case No. 2-13-cv-01883 (D. Nev.), asserting the same five patents against our near field communications (NFC) products.  We have not yet responded to the complaint.  No trial date has been set. At the request of the parties, the Court has granted a temporary stay while the parties pursue settlement discussions.

In May 2013, we sued NXP Semiconductors USA, Inc. for patent infringement in the U.S. District Court for the Central District of California, Case No. SACV13-829-MRP-MAN (C.D. Cal.).  The complaint accuses the NXP entities of infringing five of our patents and identifies certain NXP NFC and Secure Element products as representative accused products.  No trial date has been set. At the request of the parties, the Court has granted a temporary stay while the parties pursue settlement discussions.

We and our subsidiaries are also involved in other intellectual property proceedings, claims and litigation. We will disclose the nature of any such matter if we believe it to be material. Particularly in the early stages of such proceedings, an assessment of materiality may be complicated by limited information, including, without limitation, limited information about the patents-in-suit and Broadcom products against which the patents are being asserted. Accordingly, our assessment of materiality may change in the future based upon availability of discovery and further developments in the proceedings at issue. Some of these intellectual property proceedings may involve, for example, “non-practicing entities” asserting claims addressing certain of our products. The resolution of intellectual property litigation can include, among other things, payment of damages, royalties, or other amounts, which could adversely impact our product gross margins in future periods, or could prevent us from manufacturing or selling some of our products or limit or restrict the type of work that employees may perform for us. In addition, from time to time we are approached by holders of intellectual property, including non-practicing entities, to engage in discussions about our obtaining licenses to their intellectual property. We will disclose the nature of any such discussion if we determine that (i) it is probable an intellectual property holder will assert a claim of infringement, (ii) there is a reasonable possibility the outcome (assuming assertion) will be unfavorable, and (iii) the resulting liability would be material to our financial condition or results of operations.

Other Proceedings

In September 2013 the State Administration for Industry and Commerce, a Chinese regulatory agency, commenced an informal review of our compliance with China’s antitrust laws. We fully cooperated with this review and made our last submission of information to the SAIC in October 2013.


14


General

We and our subsidiaries are also involved in other legal proceedings, claims and litigation arising in the ordinary course of business. We will disclose the nature of any such matter if we believe it to be material.

The pending proceedings described above involve complex questions of fact and law and may require the expenditure of significant funds and the diversion of other resources to prosecute and defend. The results of legal proceedings are inherently uncertain, and material adverse outcomes are possible. From time to time we may enter into confidential discussions regarding the potential settlement of pending intellectual property or other litigation or other proceedings; however, there can be no assurance that any such discussions will occur or will result in a settlement. In the course of such settlement discussions, if we conclude that a settlement loss is probable and the settlement amount is estimable we may record settlement costs, notwithstanding not having reached a final settlement agreement. The settlement of any pending litigation or other proceedings could require us to incur substantial settlement payments and costs. Furthermore, the settlement of any intellectual property proceeding may require us to grant a license to certain of our intellectual property rights to the other party under a cross-license agreement. If any of those events were to occur, our business, financial condition and results of operations could be materially and adversely affected.

9.
Goodwill and Other Purchased Intangible Assets

Goodwill

The following table summarizes the activity related to the carrying value of our goodwill:  
 
Reportable Segments
 
 
 
 
 
Broadband
Communications
 
Mobile and
Wireless
 
Infrastructure
and Networking
 
Foreign
Currency
 
Consolidated
 
(In millions)
Goodwill
$
770

 
$
1,053

 
$
3,778

 
$
21

 
$
5,622

Accumulated impairment losses

 
(543
)
 
(1,286
)
 

 
(1,829
)
Goodwill at December 31, 2013
$
770

 
$
510

 
$
2,492

 
$
21

 
$
3,793

Adjustment due to sale of certain assets (Note 2)

 

 
(37
)
 

 
(37
)
Goodwill at March 31, 2014
$
770

 
$
510

 
$
2,455

 
$
21

 
$
3,756


Purchased Intangible Assets

The following table presents details of our purchased intangible assets:  
 
March 31, 2014
 
December 31, 2013
 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
 
(In millions)
Developed technology
$
1,543

 
$
(586
)
 
$
957

 
$
1,492

 
$
(539
)
 
$
953

In-process research and development
51

 

 
51

 
130

 

 
130

Customer relationships
232

 
(184
)
 
48

 
232

 
(176
)
 
56

Other
34

 
(29
)
 
5

 
34

 
(29
)
 
5

 
$
1,860

 
$
(799
)
 
$
1,061

 
$
1,888

 
$
(744
)
 
$
1,144


In the three months ended March 31, 2014 we reclassified $78 million of in-process research and development, or
IPR&D costs, to developed technology primarily related to knowledge-based processors from our acquisition of NetLogic Microsystems, Inc., or NetLogic.

Impairment of Long-Lived Assets

In the three months ended March 31, 2014 we recorded impairment charges primarily for completed technology of $25 million , of which $19 million was related to our acquisition of SC Square Ltd., or SC Square, and $5 million related to the

15


purchase of LTE-related assets from affiliates of Renesas Electronics Corporation, or the Renesas Transaction, each included in our Mobile and Wireless reportable segment. In the three months ended March 31, 2013 we recorded impairment charges primarily for IPR&D costs of $10 million , related to our acquisition of Provigent, Inc. included in our Infrastructure and Networking reportable segment. The primary factors contributing to the 2014 impairment charges were (i) for SC Square, the discontinuation of certain security solutions and (ii) for the Renesas Transaction, a reduction in revenue expectations related to an acquired legacy LTE modem product and an associated decrease to the respective estimated cash flows. 

In determining the amount of the impairment charges we calculated fair values as of the impairment dates for acquired intangible assets. We used several variations of the income approach to compute the fair values, including the multiple period excess earnings , relief from royalty, and incremental cash flow methods. These methods employ significant unobservable inputs categorized as Level 3 inputs. The key unobservable inputs utilized include a discount rate of approximately 22% , a market participant tax rate of 17% , and estimated level of future cash flows based on current product and market data.

The following table presents details of the amortization of purchased intangible assets included in the cost of product revenue and other operating expense categories:
 
Three Months Ended
 
March 31,
 
2014
 
2013
 
(In millions)
Cost of product revenue
$
50

 
$
43

Other operating expenses
9

 
15

 
$
59

 
$
58


The following table presents details of the amortization of existing purchased intangible assets (including IPR&D), which is currently estimated to be expensed in the remainder of 2014 and thereafter:  
 
Purchased Intangible Asset Amortization by Year
 
2014
 
2015
 
2016
 
2017
 
2018
 
Thereafter
 
Total
 
(In millions)
Cost of product revenue
$
142

 
$
175

 
$
154

 
$
133

 
$
113

 
$
291

 
$
1,008

Other operating expenses
26

 
14

 
5

 
3

 
2

 
3

 
53

 
$
168

 
$
189

 
$
159

 
$
136

 
$
115

 
$
294

 
$
1,061


10.
Reportable Segments, Significant Customer and Geographical Information

Reportable Segments

Broadcom has three reportable segments consistent with our target markets. Our three reportable segments are: Broadband Communications (Home), Mobile and Wireless (Hand), and Infrastructure and Networking (Infrastructure). Our Chief Executive Officer, who is our chief operating decision maker, or CODM, regularly reviews financial information at the reportable segment level.

Our net revenue is generated principally from sales of integrated circuit products. While we derive some revenue from other sources, that revenue is not material as it represents less than 1% of our total net revenue. Such revenue is classified under product revenue for reporting purposes. We group our net revenue consistent with our three target markets which comprise our reportable segments, as discussed above.

With respect to the sales of integrated circuit products, we have approximately 550 products that are grouped into approximately 70 product lines. We have concluded that these products constitute a group of similar products within each reportable segment in each of the following respects:

the integrated circuits marketed by each of our reportable segments are sold to one type of customer: manufacturers of wired and wireless communications equipment, which incorporate our integrated circuits into their electronic products;

16


the integrated circuits sold by each of our reportable segments use the same standard CMOS manufacturing processes; and
all of our integrated circuits are sold through a centralized sales force and common wholesale distributors.

We also report an “All Other” category, which included income from the Qualcomm Agreement in prior periods, since it was principally the result of corporate efforts, and also includes operating expenses that we do not allocate to our reportable segments as these expenses are not included in the segment operating performance measures evaluated by our CODM. Operating costs and expenses that are not allocated include stock-based compensation, amortization of purchased intangible assets, amortization of acquired inventory valuation step-up, impairment of goodwill and other long-lived assets, net settlement costs (gains), net restructuring costs, charitable contributions, non-recurring legal fees, change in contingent earnout liability, gain (loss) on sale of assets, employer payroll tax on certain stock option exercises, and other miscellaneous expenses related to corporate allocations that were either over or under the original projections at the beginning of the year. We include stock-based compensation and acquisition-related items in the “All Other” category as decisions regarding equity compensation are made at the corporate level and our CODM reviews reportable segment performance exclusive of these charges. Our CODM does not review information regarding total assets, interest income or income taxes on a segment basis. The accounting policies for segment reporting are the same as for Broadcom as a whole.

The following tables present details of our reportable segments and the “All Other” category:  
 
Reportable Segments
 
 
 
 
 
Broadband Communications
 
Mobile and Wireless
 
Infrastructure and Networking
 
All Other
 
Consolidated
 
(In millions)
Three Months Ended March 31, 2014
 
 
 
 
 
 
 
 
 
Net revenue
$
559

 
$
846

 
$
579

 
$

 
$
1,984

Operating income (loss)
136

 
(32
)
 
204

 
(138
)
 
170

Three Months Ended March 31, 2013
 
 
 
 
 
 
 
 
 
Net revenue
$
537

 
$
995

 
$
430

 
$
43

 
$
2,005

Operating income (loss)
124

 
123

 
98

 
(147
)
 
198


Included In All Other Category:
Three Months Ended
 
March 31,
 
2014
 
2013
 
(In millions)
Net revenue
$

 
$
43

Stock-based compensation
$
120

 
$
140

Amortization of purchased intangible assets
59

 
58

Amortization of acquired inventory valuation step-up

 
1

Impairments of long-lived assets
25

 
10

Settlement costs (gains)
2

 

Restructuring costs, net
5

 

Other gains, net
(52
)
 

Employer payroll tax on certain stock option exercises
1

 
2

Miscellaneous corporate allocation variances
(22
)
 
(21
)
Total other operating costs and expenses
$
138

 
$
190

Total operating loss for the “All Other” category
$
(138
)
 
$
(147
)


17


Significant Customer and Geographical Information

Sales to our significant customers, including sales to their manufacturing subcontractors, as a percentage of net revenue
were as follows:
 
Three Months Ended
 
March 31,
 
2014
 
2013
Two largest customers
30.2
%
 
36.8
%
Five largest customers as a group
45.5

 
51.7


The geographical distribution of our shipments, as a percentage of product revenue, was as follows:  
 
Three Months Ended
 
March 31,
 
2014
 
2013
China (exclusive of Hong Kong)
22.6
%
 
21.6
%
Hong Kong
27.4

 
24.7

Singapore, Taiwan, Thailand and Japan
34.9

 
40.0

United States
4.3

 
3.5

Europe
2.1

 
1.7

Other
8.7

 
8.5

 
100.0
%
 
100.0
%



18



Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement

The information contained in this Quarterly Report on Form 10-Q is intended to update the information contained in our Annual Report on Form 10-K for the year ended December 31, 2013 , referred to as our 2013 Annual Report, and presumes that readers have access to, and will have read, the “Management's Discussion and Analysis of Financial Condition and Results of Operations” and other information contained in such Form 10-K. The information in this Form 10-Q is also not a complete description of our business or the risks associated with an investment in our common stock. You should read the following discussion and analysis in conjunction with our Unaudited Condensed Consolidated Financial Statements and the related Notes thereto contained in Part I, Item 1 of this Report and the various other disclosures made by us in this Report and in our other reports filed with the Securities and Exchange Commission, or SEC, including our 2013 Annual Report and subsequent reports on Forms 10-Q and 8-K, which discuss our business in greater detail.

The section entitled “Risk Factors” contained in Part II, Item 1A of this Report, and similar discussions in our other SEC filings, describe some of the important risk factors that may affect our business, financial condition, results of operations and/or liquidity. You should carefully consider those risks, in addition to the other information in this Report and in our other filings with the SEC, before deciding to purchase, hold or sell our common stock.

All statements included or incorporated by reference in this Quarterly Report on Form 10-Q, other than statements or characterizations of historical fact, are forward-looking statements within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include, but are not limited to, statements concerning projected total net revenue, costs and expenses and product and total gross margin; our accounting estimates, assumptions and judgments; the demand for our products; our dependence on a few key customers and/or design wins for a substantial portion of our revenue; our commitment to research and development efforts; the accuracy of our estimates and forecasts; estimates related to the amount and/or timing of the expensing of unearned stock-based compensation expense and stock-based compensation as a percentage of revenue; manufacturing, assembly and test capacity; the effect that economic conditions, seasonality and volume fluctuations in the demand for our customers’ consumer-oriented products will have on our quarterly operating results; our ability to adjust operations in response to changes in demand for existing products and services or the demand for new products requested by our customers; the competitive nature of and anticipated growth in our markets; our ability to consummate acquisitions and integrate their operations successfully; our ability to migrate to smaller process geometries; our success in pending intellectual property litigation matters; our potential needs for additional capital; inventory and accounts receivable levels; our ability to permanently reinvest our foreign earnings; the effect of potential changes in U.S. or foreign tax laws and regulations or the interpretation thereof; the level of accrued rebates; and our intention to continue to pay dividends. These forward-looking statements are based on our current expectations, estimates and projections about our industry and business, management’s beliefs, and certain assumptions made by us, all of which are subject to change. Forward-looking statements can often be identified by words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,” “ongoing,” similar expressions, and variations or negatives of these words. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors, some of which are listed under the section entitled “Risk Factors” in Part II, Item 1A of this Report. These forward-looking statements speak only as of the date of this Report. We undertake no obligation to revise or update publicly any forward-looking statement to reflect future events or circumstances.

Additional Information
 
Investors and others should note that we announce material financial information using our company website ( www.broadcom.com ), our investor relations website ( investors.broadcom.com ), SEC filings, press releases, public conference calls and webcasts. Information about Broadcom and our business may also be announced by posts on the following social media channels:
 
B-Connected Blog ( blog.broadcom.com
Broadcom's Twitter feed ( www.twitter.com/Broadcom
Broadcom's Facebook page ( www.facebook.com/Broadcom )
 
The information that we post on these social media channels could be deemed to be material information. As a result, we encourage investors, the media, and others interested in Broadcom to review the information that we post on these social media

19

Table of Contents

channels. These channels may be updated from time to time on our website. The information on or accessible through our websites and social media channels is not incorporated by reference in this Quarterly Report on Form 10-Q.

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 solutions, or SoCs.

Our solutions are used globally by leading manufacturers and are embedded in an array of communications products that are structured around three core platforms: Broadband Communications (Solutions for the Home) , Mobile and Wireless (Solutions for the Hand), and Infrastructure and Networking (Solutions for Infrastructure) . Because we leverage our technologies across different markets, certain of our integrated circuits may be incorporated into products used in multiple platforms. We utilize independent foundries and third-party subcontractors to manufacture, assemble and test all of our semiconductor products.

Our diverse product portfolio includes:

Solutions for the Home - Highly-integrated and complete platform solutions for set-top boxes and broadband access.

Solutions for the Hand - Platforms primarily for mobile devices that include low-power, high-performance and highly integrated wireless connectivity solutions, cellular SoCs and other technologies.

Solutions for Infrastructure - Highly-integrated platforms for Infrastructure deployments that include Ethernet switches and PHYs, automotive Ethernet, communication processors and wireless infrastructure solutions, and Ethernet controllers.

A detailed discussion of our business may be found in our 2013 Annual Report under Part I, Item 1, “Business.”

Operating Results for the Three Months Ended March 31, 2014

In the three months ended March 31, 2014 our net income was $165 million , as compared to net income of $168 million in the three months ended December 31, 2013 . The decrease in profitability was primarily the result of a 3.9% sequential decline in net revenue, partially offset by a gain on sale of assets (as discussed further below). In the three months ended March 31, 2013 our net income was $191 million . The decrease in profitability for that period was primarily the result of the expiration of the Qualcomm Agreement (an agreement entered into in April 2009 with Qualcomm Incorporated) and an increase in our investment in cellular baseband technologies, partially offset by the gain on a sale of assets.

Reportable Segments

The following table presents details of our reportable segments and the “All Other” category:  
 
Reportable Segments
 
 
 
 
 
Broadband Communications
 
Mobile and Wireless
 
Infrastructure and Networking
 
All Other
 
Consolidated
 
(In millions)
Three Months Ended March 31, 2014
 
 
 
 
 
 
 
 
 
Net revenue
$
559

 
$
846

 
$
579

 
$

 
$
1,984

Operating income (loss)
136

 
(32
)
 
204

 
(138
)
 
170

Three Months Ended December 31, 2013
 
 
 
 
 
 
 
 
 
Net revenue
$
548

 
$
940

 
$
576

 
$

 
$
2,064

Operating income (loss)
129

 
32

 
201

 
(176
)
 
186

Three Months Ended March 31, 2013
 
 
 
 
 
 
 
 
 
Net revenue
$
537

 
$
995

 
$
430

 
$
43

 
$
2,005

Operating income (loss)
124

 
123

 
98

 
(147
)
 
198



20

Table of Contents

The increase in operating income for three months ended March 31, 2014 as compared to three months ended March 31, 2013 for our Broadband Communications and Infrastructure and Networking reportable segments was driven primarily by maintaining operating expenses relatively flat, while increasing revenue by 4.1% and 34.7% , respectively. The operating loss for our Mobile and Wireless reportable segment in the three months ended March 31, 2014 , as compared to prior periods presented above, resulted primarily from a broad-based decline in revenue along with a significant year-over-year increase in research and development expense in cellular baseband technologies, principally related to our LTE product roadmap. Due to the lengthy product development and sales cycle for LTE products, our ongoing investment in LTE-related technologies negatively impacted our operating results and may continue to do so until we realize significant revenue.

For additional information about our reportable segments and the “All Other” category (including revenue and expense items reported under the "All Other" category), see further discussion in Note 10 of Notes to Unaudited Condensed Consolidated Financial Statements as well as "Net Revenue by Reportable Segments" discussion below.

Other highlights during the three months ended March 31, 2014 include the following:

Our cash and cash equivalents and marketable securities were $4.94 billion at March 31, 2014 , compared with $4.37 billion at December 31, 2013 .

We generated cash flow from operations of $606 million during the three months ended March 31, 2014 , as compared to $388 million in the three months ended March 31, 2013 .
In January 2014 our Board of Directors adopted an amendment to our existing dividend policy pursuant to which we increased our quarterly cash dividend by 9% to $0.12 per share ( $0.48 per share on an annual basis) payable to holders of our common stock.
In March 2014 we sold certain Ethernet controller-related assets and provided non-exclusive licenses to intellectual property, including a non-exclusive patent license, to QLogic Corporation for a total of $209 million , referred to as the QLogic Transaction. In connection with the transaction, we recorded a gain on the sale of assets of $48 million (net of a goodwill adjustment of $37 million ) and deferred revenue of $120 million .
In March 2014 we recorded impairment charges primarily for completed technology of $25 million related primarily to our acquisition of SC Square Ltd., or SC Square, and our purchase of LTE-related assets from affiliates of Renesas Electronics Corporation, or the Renesas Transaction.

Our product revenue consists principally of sales of semiconductor devices and, to a lesser extent, licensing of our intellectual property, 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.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with U.S. generally accepted accounting principles, or GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses in the reporting period. We regularly evaluate our
estimates and assumptions related to revenue recognition, rebates, allowances for doubtful accounts, sales returns and allowances, warranty reserves, inventory reserves, stock-based compensation expense, goodwill and purchased intangible asset valuations, strategic investments, deferred income tax asset valuation allowances, uncertain tax positions, tax contingencies, self-insurance, restructuring costs, litigation and other loss contingencies. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected. For a description of our critical accounting policies and estimates, please refer to the “Critical Accounting Policies and Estimates” section in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2013 Annual Report. There have been no material changes in any of our critical accounting policies and estimates during the three months ended March 31, 2014 .


21

Table of Contents

Results of Operations

The following table sets forth certain Unaudited Condensed Consolidated Statements of Operations data expressed as a percentage of net revenue for the periods indicated:  
 
Three Months Ended
 
March 31, 2014
 
December 31, 2013
 
March 31, 2013
Net revenue:
 
 
 
 
 
Product revenue
100.0
 %
 
100.0
 %
 
97.9
 %
Income from Qualcomm Agreement

 

 
2.1

Total net revenue
100.0

 
100.0

 
100.0

Costs and expenses:
 
 
 
 
 
Cost of product revenue
50.6

 
49.7

 
49.3

Research and development
31.9

 
31.2

 
30.7

Selling, general and administrative
9.3

 
8.3

 
8.9

Amortization of purchased intangible assets
0.5

 
0.7

 
0.7

Impairments of long-lived assets
1.3

 

 
0.5

Restructuring costs, net
0.3

 
0.8

 

Settlement costs
0.1

 
0.3

 

Other gains, net
(2.6
)
 

 

Total operating costs and expenses
91.4

 
91.0

 
90.1

Income from operations
8.6

 
9.0

 
9.9

Interest expense, net
(0.3
)
 
(0.3
)
 
(0.4
)
Other income, net
0.2

 
0.1

 
0.1

Income before income taxes
8.5

 
8.8

 
9.6

Provision for income taxes
0.2

 
0.7

 
0.1

Net income
8.3
 %
 
8.1
 %
 
9.5
 %

The following table presents supplementary financial data as a percentage of net revenue:  
 
Three Months Ended
 
March 31, 2014
 
December 31, 2013
 
March 31, 2013
Net Revenue By Reportable Segment
 
 
 
 
 
Broadband Communications
28.2
%
 
26.6
%
 
26.8
%
Mobile and Wireless
42.6

 
45.5

 
49.7

Infrastructure and Networking
29.2

 
27.9

 
21.4

All Other

 

 
2.1

Gross Margin Data
 
 
 
 
 
Product gross margin
49.4
%
 
50.3
%
 
49.6
%
Total gross margin
49.4

 
50.3

 
50.7

Stock-Based Compensation Expense ( included  in each functional line item)
Cost of product revenue
0.3
%
 
0.3
%
 
0.3
%
Research and development
4.2

 
4.0

 
4.9

Selling, general and administrative
1.5

 
1.4

 
1.7



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Table of Contents

Net Revenue By Reportable Segments

The following table presents net revenue from each of our reportable segments:  
 
Three Months Ended
 
Quarter over Quarter
 
Year over Year
 
March 31, 2014
 
December 31, 2013
 
March 31, 2013
 
$ Change
 
% Change
 
$ Change
 
% Change
 
(In millions, except percentages)
Broadband Communications
$
559

 
$
548

 
$
537

 
$
11

 
2.0
 %
 
$
22

 
4.1
 %
Mobile and Wireless
846

 
940

 
995

 
(94
)
 
(10.0
)
 
(149
)
 
(15.0
)
Infrastructure and Networking
579

 
576

 
430

 
3

 
0.5

 
149

 
34.7

All Other

 

 
43

 

 

 
(43
)
 
(100.0
)
Total net revenue
$
1,984

 
$
2,064

 
$
2,005

 
$
(80
)
 
(3.9
)
 
$
(21
)
 
(1.0
)

Broadband Communications. The increase in net revenue in the three months ended March 31, 2014 , as compared to the three months ended December 31, 2013 , resulted primarily from an increase in sales of our set-top box (STB) solutions of $12 million. STB growth is generally driven by global subscriber growth, the adoption of new communication features (including HEVC, transcoding and MoCA 2.0), market share gains and the roll-out of more highly integrated platforms by global service providers. The increase in net revenue in the three months ended March 31, 2014 , as compared to the three months ended March 31, 2013 , resulted primarily from an increase in sales of our broadband modem solutions of $21 million. Growth in sales of broadband modem solutions is generally driven by subscriber growth, and momentum in emerging areas, such as small cells.

Mobile and Wireless. The decrease in net revenue in the three months ended March 31, 2014 , as compared to the three months ended December 31, 2013 , resulted primarily from decreases in sales of wireless connectivity products of $43 million, other technologies incorporated primarily into handheld devices of $46 million, and our cellular SoCs of $5 million. These decreases in revenue were driven by historical softness in customer order patterns and the impact of a decelerating smartphone market, particularly in higher-end devices. The decrease in net revenue in the three months ended March 31, 2014 , as compared to the three months ended March 31, 2013 , resulted primarily from decreases in sales of wireless connectivity products of $71 million, other technologies incorporated primarily into handheld devices of $44 million, and of our cellular SoCs of $34 million. These decreases in revenue were driven by the trend in low-cost smartphones toward integrated platforms from single suppliers, which currently tend to not include Broadcom wireless connectivity solutions. In addition, the initial ramp of LTE SoCs has not offset the reduction in sales of 3G cellular SoCs. Sales of 3G cellular SOCs are also decreasing primarily due to intense price competition, particularly in low-end 3G platforms.

Infrastructure and Networking . The increase in net revenue for the three months ended March 31, 2014 , as compared to the three months ended December 31, 2013 , resulted primarily from an increase in sales of our Ethernet switches and PHYs of $3 million. The increase in net revenue for the three months ended March 31, 2014 , as compared to the three months ended March 31, 2013 , resulted primarily from an increase in sales of Ethernet switches and PHYs of $130 million and communication processor and wireless infrastructure of $14 million, primarily driven by stronger sales into the service provider and data center markets. Growth in Ethernet switches and PHYs is generally driven by continued build outs of packet-based networks to support the delivery of video and mobile data over the Internet, an increase in hosted services and cloud computing, and the ongoing growth in unified communications in the enterprise.

Rebates. We recorded customer rebates of $187 million , or 9.4% of net revenue, $271 million , or 13.1% of net revenue, and $161 million , or 8.0% of net revenue, in the three months ended March 31, 2014 December 31, 2013 , and March 31, 2013 , respectively. We reverse the accrual of unclaimed rebate amounts as specific rebate programs contractually end or when we believe unclaimed rebates are no longer subject to payment and will not be paid. We reversed accrued rebates of $6 million in each of the three months ended March 31, 2014 December 31, 2013 and March 31, 2013 , 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.


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Table of Contents

Concentration of Net Revenue

Sales to our significant customers, including sales to their manufacturing subcontractors, as a percentage of net revenue were as follows:
 
Three Months Ended
 
March 31, 2014
 
December 31, 2013
 
March 31, 2013
Two largest customers
30.2
%
 
34.4
%
 
36.8
%
Five largest customers as a group
45.5

 
50.5

 
51.7


We expect that our largest customers will continue to account for a substantial portion of our total net revenue for the foreseeable future. Our largest customers and their respective contributions to our total net revenue have varied and will likely continue to vary from period to period.

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. For these and other reasons, our total net revenue and results of operations for the three months ended March 31, 2014 and prior periods may not necessarily be indicative of future net revenue and results of operations.

Total Net Revenue, Cost of Product Revenue, Product Gross Margin, and Total Gross Margin

The following table presents total net revenue, cost of product revenue, product gross margin and total gross margin:  
 
Three Months Ended
 
Quarter over Quarter
 
Year over Year
 
March 31, 2014
 
December 31, 2013
 
March 31, 2013
 
$ Change
 
% Change
 
$ Change
 
% Change
 
(In millions, except percentages)
Product revenue
$
1,984

 
$
2,064

 
$
1,962

 
$
(80
)
 
(3.9
)%
 
$
22

 
1.1
 %
Income from Qualcomm Agreement

 

 
43

 

 

 
(43
)
 
(100.0
)
Total net revenue
$
1,984

 
$
2,064

 
$
2,005

 
$
(80
)
 
(3.9
)
 
$
(21
)
 
(1.0
)
Cost of product revenue
$
1,004

 
$
1,026

 
$
988

 
$
(22
)
 
(2.1
)
 
$
16

 
1.6

Product gross margin
49.4
%
 
50.3
%
 
49.6
%
 
 
 
 
 
 
 
 
Total gross margin
49.4
%
 
50.3
%
 
50.7
%
 
 
 
 
 
 
 
 

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. Total gross margin is total net revenue less cost of product revenue divided by total net revenue.

Product gross margin decreased to 49.4% in the three months ended March 31, 2014 as compared to 50.3% in the three months ended December 31, 2013 . The decrease in gross margin resulted from an increase in amortization of purchased intangible assets of $8 million for newly completed technology related to our acquisition of NetLogic Microsystems, Inc. in 2012, as well as the Renesas Transaction in 2013.

Product gross margin includes $10 million , $9 million and $8 million of licensing revenue related to our intellectual property in the three months ended March 31, 2014 December 31, 2013 and March 31, 2013 , respectively. Product gross margin also includes $2 million , $6 million and $7 million of licensing costs related to NPEs in the three months ended March 31, 2014 December 31, 2013 and March 31, 2013 , respectively.

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Table of Contents


Our product and total gross margin may also be impacted by, among other items, additional stock-based compensation expense, 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:  
 
Three Months Ended
 
Quarter over Quarter
 
Year over Year
 
March 31, 2014
 
December 31, 2013
 
March 31, 2013
 
$ Change
 
% Change
 
$ Change
 
% Change
 
(In millions, except percentages)
Salaries and benefits
$
372

 
$
368

 
$
348

 
$
4

 
1.1
 %
 
$
24

 
6.9
 %
Stock-based compensation
84

 
83

 
99

 
1

 
1.2

 
(15
)
 
(15.2
)
Development and design costs
88

 
97

 
93

 
(9
)
 
(9.3
)
 
(5
)
 
(5.4
)
Other
92

 
95

 
75

 
(3
)
 
(3.2
)
 
17

 
22.7

Research and development
$
636

 
$
643

 
$
615

 
$
(7
)
 
(1.1
)%
 
$
21

 
3.4
 %

The increase in salaries and benefits for the three months ended March 31, 2014 , as compared to the three months ended March 31, 2013 , was primarily attributable to an increase in headcount of approximately 750 personnel, mostly due to the Renesas Transaction, offset by our restructuring in late 2013, bringing research and development headcount to approximately 9,600 at March 31, 2014 . This represents an 8.5% increase from March 31, 2013 . Salaries and benefits also increased as a result of an increase in cash compensation levels in connection with our annual merit review program. See below for a discussion of stock-based compensation. Development and design costs vary from period to period depending on the timing of development and tape-out of various products. Tape-out costs generally increase over time as we transition to smaller geometry process technologies. The increase in the Other line item from the three months ended March 31, 2013 is primarily attributable to an increase in depreciation expenses related to the Renesas Transaction.

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. Factors that may impact research and development costs include 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. For the three months ended March 31, 2014 , approximately 45% and 35% of our products were manufactured in 40 nanometers and 65 nanometers, respectively. We are designing most new products in 40 nanometers and 28 nanometers, and are beginning to develop products leveraging FinFET technologies. We currently hold more than 9,300 U.S. and more than 4,000 foreign patents and have more than 8,050 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.


25

Table of Contents

The following table presents details of selling, general and administrative expense:  
 
Three Months Ended
 
Quarter over Quarter
 
Year over Year
 
March 31, 2014
 
December 31, 2013
 
March 31, 2013
 
$ Change
 
% Change
 
$ Change
 
% Change
 
(In millions, except percentages)
Salaries and benefits
$
91

 
$
84

 
$
88

 
$
7

 
8.3
 %
 
$
3

 
3.4
 %
Stock-based compensation
30

 
28

 
34

 
2

 
7.1

 
(4
)
 
(11.8
)
Legal and accounting fees
21

 
24

 
23

 
(3
)
 
(12.5
)
 
(2
)
 
(8.7
)
Other
43

 
36

 
34

 
7

 
19.4

 
9

 
26.5

Selling, general and administrative
$
185

 
$
172

 
$
179

 
$
13

 
7.6