10-Q 1 a20140630-10q.htm 10-Q 2014.06.30-10Q

 
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 June 30, 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 June 30, 2014 the registrant had 541 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.
 



BROADCOM CORPORATION

QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 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


PART I. FINANCIAL INFORMATION

Item 1.
Financial Statements

BROADCOM CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
June 30,
2014
 
December 31,
2013
 
(In millions)
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
2,364

 
$
1,657

Short-term marketable securities
769

 
775

Accounts receivable, net
796

 
795

Inventory
614

 
525

Prepaid expenses and other current assets
159

 
163

Total current assets
4,702

 
3,915

Property and equipment, net
540

 
593

Long-term marketable securities
1,892

 
1,939

Goodwill
3,769

 
3,793

Purchased intangible assets, net
972

 
1,144

Other assets
96

 
111

Total assets
$
11,971

 
$
11,495

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable
$
682

 
$
585

Wages and related benefits
215

 
243

Deferred revenue and income
39

 
21

Accrued liabilities
662

 
647

Total current liabilities
1,598

 
1,496

Long-term debt
1,395

 
1,394

Other long-term liabilities
305

 
234

Commitments and contingencies


 


Shareholders’ equity:
 
 
 
Common stock

 

Additional paid-in capital
12,599

 
12,475

Accumulated deficit
(3,943
)
 
(4,107
)
Accumulated other comprehensive income
17

 
3

Total shareholders’ equity
8,673

 
8,371

Total liabilities and shareholders’ equity
$
11,971

 
$
11,495




See accompanying notes.
2


BROADCOM CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
 
(In millions, except per share data)
Net revenue:
 
 
 
 
 
 
 
Product revenue
$
2,041

 
$
2,047

 
$
4,025

 
$
4,009

Income from Qualcomm Agreement

 
43

 

 
86

Total net revenue
2,041

 
2,090

 
4,025

 
4,095

Costs and expenses:
 
 
 
 
 
 
 
Cost of product revenue
1,005

 
1,030

 
2,009

 
2,018

Research and development
634

 
619

 
1,270

 
1,234

Selling, general and administrative
182

 
174

 
367

 
353

Amortization of purchased intangible assets
9

 
14

 
18

 
29

Impairments of long-lived assets
165

 
501

 
190

 
511

Restructuring costs, net
23

 

 
28

 

Settlement costs
16

 

 
18

 

Other gains, net
(7
)
 

 
(59
)
 

Total operating costs and expenses
2,027

 
2,338

 
3,841

 
4,145

Income (loss) from operations
14

 
(248
)
 
184

 
(50
)
Interest expense, net
(5
)
 
(9
)
 
(10
)
 
(17
)
Other income (expense), net
(8
)
 
3

 
(5
)
 
6

Income (loss) before income taxes
1

 
(254
)
 
169

 
(61
)
Provision for (benefit of) income taxes
2

 
(3
)
 
5

 
(1
)
Net income (loss)
$
(1
)
 
$
(251
)
 
$
164

 
$
(60
)
Net income (loss) per share (basic)
$

 
$
(0.43
)
 
$
0.28

 
$
(0.10
)
Net income (loss) per share (diluted)
$

 
$
(0.43
)
 
$
0.28

 
$
(0.10
)
Weighted average shares (basic)
587

 
578

 
585

 
574

Weighted average shares (diluted)
587

 
578

 
593

 
574

Dividends per share
$
0.12

 
$
0.11

 
$
0.24

 
$
0.22


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
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
 
(In millions)
Cost of product revenue
$
5

 
$
6

 
$
11

 
$
13

Research and development
80

 
95

 
164

 
194

Selling, general and administrative
28

 
35

 
58

 
69



See accompanying notes.
3


BROADCOM CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
 
(In millions)
Net income (loss)
$
(1
)
 
$
(251
)
 
$
164

 
$
(60
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of $0 tax in 2014 and 2013
14

 
(1
)
 
13

 
1

Unrealized gains (losses) on marketable securities, net of $0 tax in 2014 and 2013

 
(6
)
 
1

 
(5
)
Other comprehensive income (loss)
14

 
(7
)
 
14

 
(4
)
Comprehensive income (loss)
$
13

 
$
(258
)
 
$
178

 
$
(64
)


See accompanying notes.
4


BROADCOM CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Six Months Ended
 
June 30,
 
2014
 
2013
 
(In millions)
Operating activities
 
 
 
Net income (loss)
$
164

 
$
(60
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
99

 
78

Stock-based compensation expense
233

 
276

Acquisition-related items:
 
 
 
Amortization of purchased intangible assets
115

 
116

Impairments of long-lived assets
190

 
511

Gain on sale of assets and other
(47
)
 
(1
)
Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Accounts receivable, net
(1
)
 
(21
)
Inventory
(90
)
 
(83
)
Prepaid expenses and other assets
(4
)
 
(27
)
Accounts payable
97

 
92

Deferred revenue
105

 
(9
)
Other accrued and long-term liabilities
(30
)
 
(150
)
Net cash provided by operating activities
831

 
722

Investing activities
 
 
 
Net purchases of property and equipment
(158
)
 
(108
)
Net cash paid for acquired companies
(6
)
 

Proceeds from sale of certain assets and other
90

 

Purchases of marketable securities
(913
)
 
(1,536
)
Proceeds from sales and maturities of marketable securities
970

 
1,105

Net cash used in investing activities
(17
)
 
(539
)
Financing activities
 
 
 
Repurchases of Class A common stock
(191
)
 
(217
)
Dividends paid
(140
)
 
(127
)
Proceeds from issuance of common stock
283

 
267

Minimum tax withholding paid on behalf of employees for restricted stock units
(59
)
 
(78
)
Net cash used in financing activities
(107
)
 
(155
)
Increase in cash and cash equivalents
707

 
28

Cash and cash equivalents at beginning of period
1,657

 
1,617

Cash and cash equivalents at end of period
$
2,364

 
$
1,645



See accompanying notes.
5


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 and six months ended June 30, 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 $12 million and $20 million in the three and six months ended June 30, 2013, respectively, 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 six months ended June 30, 2014.

Use of Estimates

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of total net revenue and expenses in the reporting periods. We regularly evaluate estimates and assumptions related to revenue recognition, rebates, allowances for doubtful accounts, sales returns and allowances, warranty obligations, inventory valuation, stock-based compensation expense, long-lived 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.

Recent Accounting Pronouncements

In May 2014, the Financial Accountings Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, or ASU 2014-09, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for us on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

6



2.
Supplemental Financial Information

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

Inventory
 
June 30,
2014
 
December 31,
2013
 
(In millions)
Work in process
$
267

 
$
202

Finished goods
347

 
323

 
$
614

 
$
525


Accrued Liabilities
 
June 30,
2014
 
December 31,
2013
 
(In millions)
Accrued rebates
$
431

 
$
409

Accrued royalties
20

 
15

Accrued settlement charges
42

 
66

Accrued legal costs
10

 
15

Accrued taxes
14

 
20

Warranty reserve
16

 
19

Restructuring liabilities
26

 
17

Other
103

 
86

 
$
662

 
$
647


Other Long-Term Liabilities
 
June 30,
2014
 
December 31,
2013
 
(In millions)
Deferred rent
$
43

 
$
46

Accrued taxes
72

 
72

Deferred tax liabilities
28

 
35

Accrued settlement charges
21

 
25

Deferred revenue
120

 
33

Other long-term liabilities
21

 
23

 
$
305

 
$
234


7



Accrued Rebate Activity

The following table summarizes activity related to accrued rebates:
 
Six Months Ended
 
June 30,
 
2014
 
2013
 
(In millions)
Beginning balance
$
409

 
$
383

Charged as a reduction of revenue
363

 
353

Reversal of unclaimed rebates
(19
)
 
(13
)
Payments
(322
)
 
(390
)
Ending balance
$
431

 
$
333


We recorded customer rebates of $176 million and $192 million in the three months ended June 30, 2014 and 2013, respectively.

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 operations for the six months ended June 30, 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. 

Computation of Net Income (Loss) Per Share

Net income (loss) per share (basic) is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the year. Net income (loss) 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.

8



The following table presents the computation of net income (loss) per share: 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
 
(In millions, except per share data)
Numerator: Net income (loss)
$
(1
)
 
$
(251
)
 
$
164

 
$
(60
)
Denominator for net income (loss) per share (basic)
587

 
578

 
585

 
574

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock awards

 

 
8

 

Denominator for net income (loss) per share (diluted)
587

 
578

 
593

 
574

Net income (loss) per share (basic)
$

 
$
(0.43
)
 
$
0.28

 
$
(0.10
)
Net income (loss) per share (diluted)
$

 
$
(0.43
)
 
$
0.28

 
$
(0.10
)

Net income (loss) per share (diluted) does not include the effect of anti-dilutive potential common shares resulting from outstanding equity awards. There were 32 million and 34 million anti-dilutive potential common shares in the three months ended June 30, 2014 and 2013, respectively and 31 million and 35 million anti-dilutive potential common shares in the six months ended June 30, 2014 and 2013, respectively.

Supplemental Cash Flow Information

In the six months ended June 30, 2014, we paid $29 million for capital equipment that was accrued as of December 31, 2013 and had billings of $26 million for capital equipment that were accrued but not yet paid as of June 30, 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 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.

9



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: 
 
June 30, 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
$
609

 
$

 
$

 
$
609

 
$
609

 
$

 
$

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank and time deposits
1,118

 

 

 
1,118

 
1,118

 

 

Money market funds
210

 

 

 
210

 
210

 

 

U.S. treasury and agency obligations
1,041

 

 

 
1,041

 
5

 
214

 
822

Subtotal
2,369

 

 

 
2,369

 
1,333

 
214

 
822

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial paper
474

 

 

 
474

 
422

 
52

 

Corporate bonds
1,534

 
4

 

 
1,538

 

 
500

 
1,038

Asset-backed securities and other
35

 

 

 
35

 

 
3

 
32

Subtotal
2,043

 
4

 

 
2,047

 
422

 
555

 
1,070

Level 3:
 
 
 
 
 
 
 
 
 
 
 
 
 
None

 

 

 

 

 

 

Total
$
5,021

 
$
4

 
$

 
$
5,025

 
$
2,364

 
$
769

 
$
1,892


 
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 six months ended June 30, 2014. All of our long-term marketable securities had maturities of between one and three years in duration at June 30, 2014. Our cash, cash equivalents and marketable securities at June 30, 2014 consisted of $2.11 billion held domestically, with the remaining balance of $2.92 billion held by our foreign subsidiaries.

10



At June 30, 2014 we had 63 investments with a fair value of $504 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 June 30, 2014 were due to changes in market rates. We have determined that the gross unrealized losses on these investments at June 30, 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 $1.39 billion and $1.37 billion as of June 30, 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, 9 and 10 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
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
 
(In millions, except percentages)
Provision for (benefit of) income taxes
$
2

 
$
(3
)
 
5

 
(1
)
Effective tax rates
200.0
%
 
1.2
%
 
3.0
%
 
1.6
%

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 the impairments of long-lived assets of $165 million and $501 million for the three months ended June 30, 2014 and 2013, respectively, $23 million of restructuring costs for the three months ended June 30, 2014, $48 million gain on sale of assets for the six months ended June 30, 2014, and the impairments of long-lived assets of $190 million and $511 million for the six months ended June 30, 2014 and 2013, respectively, were treated as discrete items. As a result, we recorded discrete tax benefits for the impairments of long-lived assets of $8 million for the three months ended June 30, 2013, and $5 million and $10 million for the six months ended June 30, 2014 and 2013, respectively. We also recorded discrete tax benefits of $5 million and $4 million for the three months ended June 30, 2014 and 2013, respectively, and $9 million and $6 million for the six months ended June 30, 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 $17 million and $24 million at June 30, 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: 
 
June 30,
2014
 
(In millions)
2.375% fixed-rate notes, due November 2015
$
400

2.700% fixed-rate notes, due November 2018
500

2.500% fixed-rate notes, due August 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 and six months ended June 30, 2014 and 2013 we paid $70 million, $64 million, $140 million and $127 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. Under the evergreen program, we repurchased 6.2 million shares of our Class A common stock at a weighted average price of $30.79 in the three and six months ended June 30, 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

 
29.90

Restricted stock units cancelled
(1
)
 
33.65

Restricted stock units vested
(6
)
 
35.19

Balance at June 30, 2014
30

 
$
32.64


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
)
 
36.87

Options exercised
(8
)
 
24.12

Balance at June 30, 2014
30

 
$
31.95


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
$
227

 
$
335

 
$
216

 
$
110

 
$
17

 
$
905


If there are any modifications or cancellations of the underlying unvested awards, including the cancellation of awards held by employees impacted by our current restructuring plan, 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.  This case was later transferred to the Northern District of California (N.D. Cal.). 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.  In June 2014 the parties entered into a settlement agreement that includes a mutual release, a limited standstill period, ongoing business collaboration, and, if certain conditions are met, a future cross-license covering NFC products. In July 2014, as provided for in the agreement, the parties moved to dismiss the N.D. Cal. and C.D. Cal. litigations without prejudice.

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.

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.


14


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.

Settlement Costs

We recorded settlement costs of $16 million and $18 million in the three and six months ended June 30, 2014, respectively, related to the settlement of patent infringement claims. We did not record any settlement costs in the three and six months ended June 30, 2013.

9.
Exit of Cellular Baseband Business

Restructuring Costs

On June 2, 2014, we announced that we were exploring strategic alternatives, including a potential sale and/or wind-down, for our cellular baseband business, included in our Mobile and Wireless reportable segment. We reached this decision based on our conclusion that the commercial and economic opportunity in this business was not sufficiently compelling to justify the continued investment, especially when compared to other opportunities within our product portfolio. On June 26, 2014, the Audit Committee of our Board of Directors approved a global restructuring plan, or the 2014 Plan, that focuses on cost reductions and operating efficiencies and better aligns our resources to areas of strategic focus.

We have evaluated the number of employees and other resources necessary to support the ongoing business and recorded $23 million in restructuring charges in the three months ended June 30, 2014. These charges are comprised of (i) $18 million for ongoing termination benefits for approximately 250 employees related to selling, general and administrative and other corporate functions and (ii) $5 million for certain non-cancelable contract costs. Communications to the impacted employees began in July 2014. We expect to record additional costs of approximately $5 million over the next twelve months for one-time termination benefits for these employees.

As of June 30, 2014 we had not made a determination as to whether we would exit the cellular baseband business through a sale or wind-down.  Therefore, the restructuring plan relating to cellular baseband employees (who are primarily engaged in research and development) was subject to significant change and uncertainty since it was dependent upon the outcome of our effort to sell the business. In July 2014 we determined to pursue a wind-down of the cellular baseband business. As a result, we currently expect to (i) reduce our worldwide headcount by approximately an additional 2,250 employees, (ii) close or consolidate up to 18 locations and (iii) terminate certain contracts, which is expected to result in approximately $225 million of additional restructuring charges over the next twelve months.  Communications to these impacted employees also began in July 2014. These restructuring charges are considered a non-recognizable subsequent event for financial reporting purposes for the three months ended June 30, 2014.

Restructuring costs are primarily comprised of cash-based termination benefits and contract costs to be incurred without economic benefit. Due to various complexities in our international locations, some employee terminations may not be in effect for some time. We anticipate most of the expenses associated with this plan will be recognized within the next twelve months.


15


The following table summarizes activity related to our restructuring liabilities:
 
2014 Plan
 
2013 Plan
 
Total
 
(In millions)
Balance at December 31, 2013
$

 
$
17

 
17

Charged to expense
23

 
5

 
28

Cash payments

 
(19
)
 
(19
)
Balance at June 30, 2014
$
23

 
$
3

 
$
26


As described in our 2013 Annual Report, we implemented a restructuring plan in the third quarter of 2013. The plan focused primarily on workforce reductions and included employees from our transaction with Renesas Electronics Corporation. 

Impairment Charges

In connection with our decision to exit the cellular baseband business, which is included in our Mobile and Wireless reportable segment, we recorded $130 million of non-cash charges for the impairment of certain long-lived assets and $34 million of inventory charges in the three months ending June 30, 2014. We wrote down the value of property and equipment related to the cellular baseband business by $104 million to reflect the fair value of these assets on an in-exchange basis. In determining the fair value of the assets, we used a market based approach to estimate the value we could receive in the open market, and subtracted the cost to sell those assets. We also performed a detailed analysis of our electronic design automation, or EDA, tools and technology licenses that relate to our cellular baseband business. Because the majority of these EDA tools and technology licenses are not transferable and will have no useful applications for our remaining operations, we recorded an impairment charge of $19 million related to these licenses. We also recorded impairment charges of purchased intangible assets of $2 million and other assets of $5 million. The impairment charges were recorded in "Impairment of Long-Lived Assets" and the inventory charge were recorded in "Cost of Product Revenue" included in our unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2014.

10.
Goodwill and 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

Goodwill recorded in connection with acquisitions

 
5

 

 

 
5

Adjustment due to sale of certain assets (Note 2)

 

 
(37
)
 

 
(37
)
Effects of foreign currency translation

 

 

 
8

 
8

Goodwill at June 30, 2014
$
770

 
$
515

 
$
2,455

 
$
29

 
$
3,769


Purchased Intangible Assets

The following table presents details of our purchased intangible assets: 

16


 
June 30, 2014
 
December 31, 2013
 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
 
(In millions)
Developed technology
$
1,495

 
$
(618
)
 
$
877

 
$
1,492

 
$
(539
)
 
$
953

In-process research and development
52

 

 
52

 
130

 

 
130

Customer relationships
233

 
(192
)
 
41

 
232

 
(176
)
 
56

Other
32

 
(30
)
 
2

 
34

 
(29
)
 
5

 
$
1,812

 
$
(840
)
 
$
972

 
$
1,888

 
$
(744
)
 
$
1,144


In the six months ended June 30, 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 Purchased Intangible Assets

In the three months ended March 31, 2014 we recorded impairment charges primarily for developed 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 purchase of LTE-related assets from affiliates of Renesas Electronics Corporation, or the Renesas Transaction, each included in our Mobile and Wireless reportable segment. The primary factors contributing to these 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 the three months ended June 30, 2014, we recorded impairment charges of $35 million, primarily for developed technology related to our acquisition of NetLogic, included in our Infrastructure and Networking reportable segment. During the six months ended June 30, 2014, we have seen a reduction in customer design activity for MIPS-based embedded processors compared to our previous forecast primarily due to customers increasingly selecting ARM-based solutions for next generation core network architectures. This reduction in design activity resulted in a reduction in revenue and estimated cash flows related to our legacy embedded processor products compared to our previous forecasts. 

In the three months ended June 30, 2013 we recorded impairment charges of $501 million, of which $461 million also related to our acquisition of NetLogic. The remaining $40 million of the impairment is primarily related to our acquisition of Provigent, Inc. Both of these acquisitions are included in our Infrastructure and Networking reportable segment. Based on our impairment analysis, as further detailed below, we impaired $358 million of completed technology, $91 million of IPR&D, $50 million of customer relationships, and $2 million of other purchased intangible assets.

During the six months ended June 30, 2013, there was a steady reduction in near-term sales forecasts for NetLogic products sold into the service provider market, which caused us to review our long-term forecasts. In addition, we downwardly revised our longer term expectations of the size of the addressable market for these products. As a result of these triggering events, we performed a detailed impairment analysis of the long-lived assets associated with these products during the three months ended June 30, 2013. Based on our analysis, we determined certain assets acquired from NetLogic were not recoverable and impaired, requiring us to reduce the associated carrying value to fair value. Specifically, we impaired $238 million of developed technology, $88 million of IPR&D and $48 million of customer relationships related to our embedded and knowledge-based processor products. We also impaired $87 million of developed technology related to our DFE processor products. For DFE, one of our smaller product lines, our customers indicated that they prefer custom solutions as opposed to standard merchant solutions. In response, we have decided to redirect our efforts by focusing on developing customized solutions, and have consequently fully impaired the assets related to the acquired DFE merchant product line.

The primary factor contributing to the Provigent impairment for developed technology in the three months ended June 30, 2013 and the charge taken in the three months ended March 31, 2013, primarily for IPR&D of $10 million, was the continued reduction in revenue outlook for certain products and the resulting decrease to the estimated cash flows identified with impaired assets.


17


Valuation Information

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 discount rates ranging from 16% and 22%, a market participant tax rate of 17%, and estimated level of future cash flows based on current product and market data.

Amortization of Purchased Intangible Assets

The following table presents details of the amortization of purchased intangible assets included in the cost of product revenue and other operating expense categories:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
 
(In millions)
Cost of product revenue
$
47

 
$
44

 
$
97

 
$
87

Other operating expenses
9

 
14

 
18

 
29

 
$
56

 
$
58

 
$
115

 
$
116


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
$
92

 
$
170

 
$
147

 
$
127

 
$
108

 
$
285

 
$
929

Other operating expenses
17

 
13

 
6

 
3

 
2

 
2

 
43

 
$
109

 
$
183

 
$
153

 
$
130

 
$
110

 
$
287

 
$
972


11.
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;
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.


18


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 June 30, 2014
 
 
 
 
 
 
 
 
 
Net revenue
$
625

 
$
781

 
$
635

 
$

 
$
2,041

Operating income (loss)
175

 
(21
)
 
253

 
(393
)
 
14

Three Months Ended June 30, 2013
 
 
 
 
 
 
 
 
 
Net revenue
$
568

 
$
969

 
$
510

 
$
43

 
$
2,090

Operating income (loss)
137

 
96

 
151

 
(632
)
 
(248
)
 
 
 
 
 
 
 
 
 
 
 
Reportable Segments
 
 
 
 
 
Broadband Communications
 
Mobile and Wireless
 
Infrastructure and Networking
 
All Other
 
Consolidated
 
(In millions)
Six Months Ended June 30, 2014
 
 
 
 
 
 
 
 
 
Net revenue
$
1,184

 
$
1,627

 
$
1,214

 
$

 
$
4,025

Operating income (loss)
311

 
(53
)
 
457

 
(531
)
 
184

Six Months Ended June 30, 2013
 
 
 
 
 
 
 
 
 
Net revenue
$
1,105

 
$
1,964

 
$
940

 
$
86

 
$
4,095

Operating income (loss)
261

 
219

 
249

 
(779
)
 
(50
)


19


Included In All Other Category:
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
 
(In millions)
Net revenue
$

 
$
43

 
$

 
$
86

Stock-based compensation
$
113

 
$
136

 
$
233

 
$
276

Amortization of purchased intangible assets
56

 
58

 
115

 
116

Inventory charges related to the exit of the cellular baseband business
34

 

 
34

 
1

Impairments of long-lived assets
165

 
501

 
190

 
511

Settlement costs
16

 

 
18

 

Restructuring costs, net
23

 

 
28

 

Other gains, net
(7
)
 

 
(59
)
 

Employer payroll tax on certain stock option exercises
3

 
1

 
4

 
3

Miscellaneous corporate allocation variances
(10
)
 
(21
)
 
(32
)
 
(42
)
Total other operating costs and expenses
$
393

 
$
675

 
$
531

 
$
865

Total operating loss for the “All Other” category
$
(393
)
 
$
(632
)
 
$
(531
)
 
$
(779
)

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
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Two largest customers
24.4
%
 
32.3
%
 
27.3
%
 
34.5
%
Five largest customers as a group
43.0

 
46.9

 
44.2

 
48.6


The geographical distribution of our shipments, as a percentage of product revenue, was as follows: 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
China (exclusive of Hong Kong)
22.1
%
 
21.9
%
 
22.4
%
 
21.7
%
Hong Kong
32.5

 
29.1

 
30.0

 
26.9

Singapore, Taiwan, Thailand and Japan
29.4

 
34.8

 
32.1

 
37.4

United States
4.9

 
2.8

 
4.6

 
3.2

Europe
2.0

 
1.7

 
2.0

 
1.7

Other
9.1

 
9.7

 
8.9

 
9.1

 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%



20



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 amount and timing of reduced research & development and selling, general & administrative expenses resulting from the exit of our cellular baseband business, our ability to drive growth through our planned reinvestments in our Broadband, Infrastructure and remaining Mobile and Wireless businesses; 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)
 

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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 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 and Six Months Ended June 30, 2014

In the three months ended June 30, 2014 our net loss was $1 million, as compared to a net loss of $251 million in the three months ended June 30, 2013. In the six months ended June 30, 2014 our net income was $164 million, as compared to a net loss of $60 million in the six months ended June 30, 2013. The resulting increases in profitability were primarily the result of charges for the impairment of purchased intangible assets of $501 million in June 2013, offset by the expiration of the Qualcomm Agreement (an agreement entered into in April 2009 with Qualcomm Incorporated) as well as the increase in our overall investment in our cellular baseband business and the subsequent impairment of long-lived assets of $130 million.
  
Exit of Cellular Baseband Business

On June 2, 2014, we announced that we were exploring strategic alternatives, including a potential sale and/or wind-down, for our cellular baseband business, included in our Mobile and Wireless reportable segment. We reached this decision based on our conclusion that the commercial and economic opportunity in this business was not sufficiently compelling to justify the continued investment, especially when compared to other opportunities within our product portfolio. On June 26, 2014, the Audit Committee of our Board of Directors approved a global restructuring plan that focuses on cost reductions and operating efficiencies and better aligns our resources to areas of strategic focus.

We have evaluated the number of employees and other resources necessary to support the ongoing business and recorded $23 million in restructuring charges in the three months ended June 30, 2014. These charges are comprised of (i) $18 million for ongoing termination benefits for 250 employees related to selling, general and administrative and other corporate functions and (ii) $5 million for certain non-cancelable contract costs. Communications to the impacted employees began in July 2014. We expect to record additional costs of approximately $5 million over the next twelve months for one-time termination benefits for these employees.

As of June 30, 2014 we had not made a determination as to whether we would exit the cellular baseband business through a sale or wind-down.  Therefore, the restructuring plan relating to cellular baseband employees (who are primarily engaged in

22


research and development) was subject to significant change and uncertainty since it was dependent upon the outcome of our effort to sell the business. In July 2014 we determined to pursue a wind-down of the cellular baseband business. As a result, we currently expect to (i) reduce our worldwide headcount by approximately an additional 2,250 employees, (ii) close or consolidate up to 18 locations and (iii) terminate certain contracts, which is expected to result in approximately $225 million of additional restructuring charges over the next twelve months.  Communications to these impacted employees also began in July 2014. These restructuring charges are considered a non-recognizable subsequent event for financial reporting purposes for the three months ended June 30, 2014.

Restructuring costs are primarily comprised of cash-based termination benefits and contract costs to be incurred without economic benefit. Due to various complexities in our international locations, some employee terminations may not be in effect for some time. We anticipate most of the expenses associated with this plan will be recognized within the next twelve months.

As part of these actions, we also recorded $130 million of non-cash charges for the impairment of certain long-lived assets and $34 million of inventory charges in the three months ending June 30, 2014. See Note 9 of Notes to Unaudited Condensed Consolidated Financial Statements for further information.

The wind-down of the cellular baseband business and associated cost saving initiatives is currently expected to result in up to approximately $700 million reduction in annualized research and development and selling, general and administrative expenses, of which up to approximately $100 million relates to estimated reductions in stock-based compensation. We currently expect to organically reinvest approximately $50 million of these savings on an annualized basis into projects in the Broadband, Infrastructure and the remaining Mobile and Wireless businesses. This incremental spending is currently expected to strengthen and accelerate our plans in the area of small cells, embedded processing and low-power connectivity.

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 June 30, 2014
 
 
 
 
 
 
 
 
 
Net revenue
$
625

 
$
781

 
$
635

 
$

 
$
2,041

Operating income (loss)
175

 
(21
)
 
253

 
(393
)
 
14

Three Months Ended March 31, 2014
 
 
 
 
 
 
 
 
 
Net revenue
$
559

 
$
846

 
$
579

 
$

 
$
1,984

Operating income (loss)
136

 
(32
)
 
204

 
(138
)
 
170

Three Months Ended June 30, 2013
 
 
 
 
 
 
 
 
 
Net revenue
$
568

 
$
969

 
$
510

 
$
43

 
$
2,090

Operating income (loss)
137

 
96

 
151

 
(632
)
 
(248
)
 
 
 
 
 
 
 
 
 
 
 
Reportable Segments
 
 
 
 
 
Broadband Communications
 
Mobile and Wireless
 
Infrastructure and Networking
 
All Other
 
Consolidated
 
(In millions)
Six Months Ended June 30, 2014
 
 
 
 
 
 
 
 
 
Net revenue
$
1,184

 
$
1,627

 
$
1,214

 
$

 
$
4,025

Operating income (loss)
311

 
(53
)
 
457

 
(531
)
 
184

Six Months Ended June 30, 2013
 
 
 
 
 
 
 
 
 
Net revenue
$
1,105

 
$
1,964

 
$
940

 
$
86

 
$
4,095

Operating income (loss)
261

 
219

 
249

 
(779
)
 
(50
)

The increase in operating income for six months ended June 30, 2014 as compared to six months ended June 30, 2013 for our Broadband Communications and Infrastructure and Networking reportable segments was driven primarily by maintaining operating expenses relatively flat, while increasing revenue by 7.1% and 29.1%, respectively. The operating loss for our

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Mobile and Wireless reportable segment in the three and six months ended June 30, 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. As discussed above under "Exit of Cellular Baseband Business," we have decided to wind down our cellular baseband business as the commercial and economic opportunity is not sufficient to justify the continued investment.

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 11 of Notes to Unaudited Condensed Consolidated Financial Statements as well as "Net Revenue by Reportable Segments" discussion below.

Other highlights during the six months ended June 30, 2014 include the following:
Our cash and cash equivalents and marketable securities were $5.03 billion at June 30, 2014, compared with $4.37 billion at December 31, 2013.
We generated cash flow from operations of $831 million during the six months ended June 30, 2014, as compared to $722 million in the six months ended June 30, 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.
We repurchased 6.2 million shares of our Class A common stock at a weighted average price of $30.79 during the three months ended June 30, 2014.
In June 2014 we recorded purchased intangible impairment charges of $35 million, related to our acquisition of NetLogic.
As discussed above under "Cellular Baseband Business Update and Associated Restructuring," we recorded restructuring costs of $23 million in June 2014. In addition, we recorded $130 million of non-cash charges for the impairment of certain long-lived assets and $34 million of inventory charges.

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, long-lived 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 six months ended June 30, 2014.

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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
 
Six Months Ended
 
June 30, 2014
 
March 31, 2014
 
June 30, 2013
 
June 30, 2014
 
June 30, 2013
Net revenue:
 
 
 
 
 
 
 
 
 
Product revenue
100.0
 %
 
100.0
 %
 
97.9
 %
 
100.0
 %
 
97.9
 %
Income from Qualcomm Agreement

 

 
2.1

 

 
2.1

Total net revenue
100.0

 
100.0

 
100.0

 
100.0

 
100.0

Costs and expenses:
 
 
 
 
 
 
 
 
 
Cost of product revenue
49.2

 
50.6

 
49.3

 
49.9

 
49.3

Research and development
31.1

 
31.9

 
29.6

 
31.7

 
30.1

Selling, general and administrative
8.9

 
9.3

 
8.3

 
9.1

 
8.6

Amortization of purchased intangible assets
0.4

 
0.5

 
0.7

 
0.4

 
0.7

Impairments of long-lived assets
8.1

 
1.3

 
24.0

 
4.7

 
12.5

Restructuring costs, net
1.1

 
0.3

 

 
0.7

 

Settlement costs
0.8

 
0.1

 

 
0.4

 

Other gains, net
(0.3
)
 
(2.6
)
 

 
(1.5
)
 

Total operating costs and expenses
99.3

 
91.4

 
111.9

 
95.4

 
101.2

Income (loss) from operations
0.7

 
8.6

 
(11.9
)
 
4.6

 
(1.2
)
Interest expense, net
(0.2
)
 
(0.3
)
 
(0.4
)
 
(0.2
)
 
(0.4
)
Other income (expense), net
(0.5
)
 
0.2

 
0.1

 
(0.2
)
 
0.1

Income (loss) before income taxes

 
8.5

 
(12.2
)
 
4.2

 
(1.5
)
Provision for (benefit of) income taxes

 
0.2

 
(0.2
)
 
0.1

 

Net income (loss)
 %
 
8.3
 %
 
(12.0
)%
 
4.1
 %
 
(1.5
)%

The following table presents supplementary financial data as a percentage of net revenue: 
 
Three Months Ended
 
Six Months Ended
 
June 30, 2014
 
March 31, 2014
 
June 30, 2013
 
June 30, 2014
 
June 30, 2013
Net Revenue By Reportable Segment
 
 
 
 
 
 
 
 
 
Broadband Communications
30.6
%
 
28.2
%
 
27.2
%
 
29.4
%
 
27.0
%
Mobile and Wireless
38.3

 
42.6

 
46.3

 
40.4

 
47.9

Infrastructure and Networking
31.1

 
29.2

 
24.4

 
30.2

 
23.0

All Other

 

 
2.1

 

 
2.1

Gross Margin Data