10-K 1 d257599d10k.htm FORM 10-K Form 10-K
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

(Mark One)

 

  þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

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

LOGO

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)

Registrant’s telephone number, including area code: (949) 926-5000

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Class

 

Name of Exchange on Which Registered

Class A Common Stock, $0.0001 par value  

The NASDAQ Stock Market LLC

(NASDAQ Global Select Market)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  þ      No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨      No  þ

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  þ      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  þ      No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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  þ   Accelerated filer  ¨   Non-accelerated filer  ¨   Smaller reporting company  ¨
  (Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    Yes  ¨      No  þ

The aggregate market value of the registrant’s common stock, $0.0001 par value per share, held by non-affiliates of the registrant on June 30, 2011, the last business day of the registrant’s most recently completed second fiscal quarter, was $16.19 billion (based on the closing sales price of the registrant’s common stock on that date). Shares of the registrant’s common stock held by each officer and director and each person known to the registrant to own 10% or more of the outstanding voting power of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not a determination for other purposes.

The registrant has two classes of common stock authorized, Class A common stock and Class B common stock. The rights, preferences and privileges of each class of common stock are substantially identical except for voting rights. Shares of Class B common stock are not publicly traded but are convertible at any time into shares of Class A common stock on a one-for-one basis. As of December 31, 2011 there were 492 million shares of Class A common stock and 53 million shares of Class B common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates by reference certain information from the registrant’s definitive proxy statement for the 2012 Annual Meeting of Shareholders to be filed on or before April 27, 2012.

 

 

 


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

 

©2012 Broadcom Corporation. All rights reserved.    This Annual Report on Form 10-K is printed on recycled paper.


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BROADCOM CORPORATION

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011

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          Page  
   PART I   
Item 1.    Business      1   
Item 1A.    Risk Factors      12   
Item 1B.    Unresolved Staff Comments      20   
Item 2.    Properties      20   
Item 3.    Legal Proceedings      20   
Item 4.    (Removed and Reserved)      20   
   PART II   
Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      21   
Item 6.    Selected Financial Data      25   
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      27   
Item 7A.    Quantitative and Qualitative Disclosures about Market Risk      55   
Item 8.    Financial Statements and Supplementary Data      56   
Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      56   
Item 9A.    Controls and Procedures      56   
Item 9B.    Other Information      57   
   PART III   
Item 10.    Directors, Executive Officers and Corporate Governance      58   
Item 11.    Executive Compensation      58   
Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      58   
Item 13.    Certain Relationships and Related Transactions, and Director Independence      58   
Item 14.    Principal Accounting Fees and Services      58   
   PART IV   
Item 15.    Exhibits, Financial Statement Schedules      59   


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CAUTIONARY STATEMENT

All statements included or incorporated by reference in this Annual Report on Form 10-K, other than statements or characterizations of historical fact, are forward-looking statements within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include, but are not limited to, statements concerning projected total net revenue, costs and expenses and product and total gross margin; our accounting estimates, assumptions and judgments; the demand for our products; our dependence on a few key customers and/or design wins for a substantial portion of our revenue; our ability to consummate acquisitions and integrate their operations successfully, including our pending acquisition of NetLogic Microsystems, Inc.; estimates related to the amount and/or timing of the expensing of unearned stock-based compensation expense and stock-based compensation as a percentage of revenue; manufacturing, assembly and test capacity; the effect that economic conditions, seasonality and volume fluctuations in the demand for our customers’ consumer-oriented products will have on our quarterly operating results; our ability to adjust operations in response to changes in demand for existing products and services or the demand for new products requested by our customers; the competitive nature of and anticipated growth in our markets; our ability to migrate to smaller process geometries; our success in pending intellectual property litigation matters; our potential needs for additional capital; inventory and accounts receivable levels; the impact of the Internal Revenue Service review of certain income tax returns on our results of operations; the effect of potential changes in U.S. or foreign tax laws and regulations or the interpretation thereof; the level of accrued rebates, and income we expect to record in connection with the Qualcomm Agreement or similar arrangements in the future. These forward-looking statements are based on our current expectations, estimates and projections about our industry and business, management’s beliefs, and certain assumptions made by us, all of which are subject to change. Forward-looking statements can often be identified by words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,” “ongoing,” similar expressions, and variations or negatives of these words. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors, some of which are listed under the section entitled “Risk Factors” in Part I, 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.

PART I

 

Item 1.    Business

Overview

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

Broadcom was incorporated in California in August 1991. Our Class A common stock trades on the NASDAQ Global Select Market® under the symbol BRCM. Our principal executive offices are located at 5300 California Avenue, Irvine, California 92617-3038, and our telephone number at that location is 949.926.5000. Our Internet address is www.broadcom.com. The inclusion of our Internet address in this Report does not include or incorporate by reference into this Report any information on our website. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports and other Securities and Exchange Commission (SEC) filings are available free of charge through the investor relations section of our website as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. The SEC also maintains a web site, www.sec.gov, that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

Over the past two decades, communications technologies have evolved dramatically in response to ubiquitous wireless and mobile networks, the emergence of new data-intensive computing and multimedia applications, and the continuing convergence of personal computing devices and mobile devices. The broadband transmission of digital information over wired and wireless infrastructures requires very sophisticated semiconductor solutions to perform


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critical systems functions such as complex signal processing, converting digital data to and from analog signals, and switching and routing packets of information over IP-based networks.

We currently operate our business to serve three markets: Broadband Communications, Mobile & Wireless and Infrastructure & Networking. Our diverse product portfolio includes:

 

   

Broadband Communications (Solutions for the Home) — Complete solutions for cable, xDSL, fiber, satellite and IP broadband networks to enable the connected home, including set-top-boxes and media servers, residential modems and gateways, femtocells and wired home networking solutions.

   

Mobile & Wireless (Solutions for the Hand) — Low-power, high-performance and highly integrated solutions powering the mobile and wireless ecosystem, including Wi-Fi and Bluetooth, cellular modems, personal navigation and global positioning, near field communications (NFC), Voice over IP (VoIP), multimedia and application processing, and mobile power management solutions.

   

Infrastructure & Networking (Solutions for Infrastructure) — Highly integrated solutions for carriers, service providers, enterprises, small-to-medium businesses and data centers for network infrastructure needs, including switches, physical layer (PHY) and microwave devices for local, metropolitan, wide area and storage networking; switch fabric solutions, high-speed ethernet controllers, security and embedded processors.

Net Revenue by Reportable Segment

Our semiconductor solutions are used globally by leading manufacturers and are embedded in an array of products for the home, the hand and network infrastructure. Net revenue for our reportable segments, Broadband Communications, Mobile & Wireless and Infrastructure & Networking is presented below. “All Other” includes our licensing revenue from Verizon Wireless and related income from the Qualcomm Agreement (see detailed discussion in “Overview” section in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations).

Percentage of Net Revenue

 

LOGO

Net Revenue: $7.39 billion    Net Revenue: $6.82 billion    Net Revenue: $4.49 billion

 

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Broadband Communications Reportable Segment

We offer manufacturers a range of broadband communications and consumer electronics SoC solutions that enable voice, video, data and multimedia services over wired and wireless networks for the home.

 

     Products Incorporating Our Solutions    Broadcom Solutions
Broadband Communications (Solutions for the Home)  

Modems (cable, xPON, femtocell

and DSL) and Residential Gateways

Cable Modem Termination

Systems (CMTS) and Central

Office DSLAM Solutions

Digital Cable, Digital Transport

Adapter, Direct Broadcast

Satellite, Terrestrial and IP Set-Top

Boxes

Wired Home Networking Solutions

(including Powerline Networking)

  

Cable modem SoCs

Femtocell SoCs

MPEG/AVC/VC-1 encoders and

transcoders

xDSL, xPON and cable modem

customer premises equipment and

central office solutions

Powerline Networking SoCs

Digital cable, DBS, Terrestrial and

IP set-top box SoCs

Digital Cable, Direct Broadcast Satellite, Terrestrial and IP Set-Top Boxes and Digital Transport Adapters

In an effort to increase the number of digital services available to television viewers, features such as high definition and 3D programming, digital video recording services, internet applications and connected home media networks are being offered by service providers using the same high-speed connections that bring customers broadband Internet and telephone access. To take advantage of these capabilities, viewers need a set-top box (STB) in the home to process these functions and distribute them to TVs, other connected STBs and mobile devices within the home. According to DisplaySearch, approximately 198 million STB’s were sold in 2011. We offer a complete digital cable-TV silicon platform, comprehensive direct broadcast satellite (DBS) solutions and a family of advanced SoC solutions for the Internet Protocol (IP) STB market.

Modems and Residential Gateways

According to DisplaySearch, there were nearly 562 million total global broadband subscribers in 2011. Competitive pressure among broadband providers to meet increasing consumer demand for internet video content is driving a race to provide increasing bandwidth to consumers. Broadcom offers ultra-high speed modems and end-to-end broadband solutions to provide data, voice and video services in one multi-function gateway over cable television networks, digital subscriber line (DSL) technologies and gigabit passive optical networks (GPON) to and throughout the home.

Powerline Networking

Powerline networking increases in-home networking coverage by taking advantage of the availability of existing electric outlets throughout the home to create an easier plug-and-play connected consumer experience. Broadcom’s Powerline chipset enhances our strong and diverse home network and broadband access portfolio and provides customers with a cost-effective and efficient method to connect multiple devices and deliver multimedia content throughout the home.

Mobile & Wireless Reportable Segment

Broadcom’s mobile and wireless reportable segment offers products that enable end-to-end wireless and cellular connectivity at home, at work and on-the-go. Products in this area include solutions in wireless local area networking, personal area networking, location and navigation technologies, NFC, cellular baseband SoCs, multimedia processors, and radio frequency (RF) and power management. Our portfolio of mobile and wireless products enable a broad range of connected devices including cellular handsets, personal navigation devices, tablets, PCs, wireless home routers and gateways, portable media players, gaming platforms and other wireless-enabled consumer electronic devices and peripherals.

 

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     Products Incorporating Our Solutions    Broadcom Solutions

Mobile & Wireless

(Solutions for the Hand)

 

Smartphones, Mobile phones

Wireless-enabled tablets,

laptops, netbooks, and desktop

computers

Wireless home routers and gateways

Printers

Cellular data cards

MiFi Mobile Hotspots

Handheld media devices

Personal navigation devices

Home gaming systems

VoIP phones

Wireless-enabled TV’s and Set-top

Boxes

Thermostats and Home Monitoring

equipment

  

Wi-Fi SoCs

Bluetooth SoCs

Wireless Connectivity Combo chips

GPS/GNSS SoCs

EDGE, 3G (UMTS and HSPA) and 4G

(LTE and WiMAX) baseband solutions

Multimedia processors

Applications processors

Power management chips

VoIP SoCs

Mobile TV SoCs

NFC

Cellular RF chips

Wireless Local Area and Personal Area Networking

Wi-Fi/WLAN.    Wireless local area networking, also known as Wi-Fi or WLAN, allows devices on a local area network to communicate with each other without the use of any cables. It adds the convenience of mobility to the powerful utility provided by high-speed data networks, and is a natural extension of broadband connectivity in the home, office and on the road. Wi-Fi technology has been embedded into a wide range of electronic devices including smartphones, tablets, home gateways and routers, personal computers, cameras, camcorders, printers, gaming devices, set-top boxes, HDTVs, Blu-ray Disc players and broadband modems. A total of approximately 1 billion Wi-Fi capable devices were sold in 2011 according to DisplaySearch. In 2011, we introduced a Wireless Internet Connectivity for Embedded Devices platform to simplify and extend Wi-Fi connectivity to a range of additional connected appliances, smart energy systems, and cloud-based health and home management services devices. We offer a family of high performance, low power Wi-Fi chipsets that support all current standards. We plan to continue to evolve our Wi-Fi product line and support future standards such as 802.11ac, which would improve range, bandwidth availability and battery life. We also support Wi-Fi direct across our product portfolio, allowing communication between devices without having to interact with an access point, increasing ease of use for Wi-Fi and enabling us to serve increased demand for the transfer of HD content between devices.

Bluetooth.    The Bluetooth short-range wireless networking standard is a low power wire replacement technology that enables direct connectivity among a wide variety of mainstream consumer electronic devices. According to DisplaySearch a total of approximately 1.6 billion Bluetooth-enabled devices were estimated to be sold in 2011. We offer a complete family of Bluetooth silicon and software solutions for mobile phones, PCs, wireless headphones and headsets, HDTVs, peripherals, gaming and other applications. Our family of single-chip Bluetooth devices, software applications and protocol stacks provide a complete solution that enables manufacturers to add Bluetooth functionality to almost any electronic device with a minimal amount of development time and resources. We continue to drive the evolution of Bluetooth with support of Bluetooth Low Energy (BLE), an emerging standard for supporting low power applications such as health and fitness, and the number of opportunities for Bluetooth applications, such as the industry standardization of Bluetooth for 3D glasses, continues to expand.

Wireless Connectivity Combination Chips

Consumers increasingly expect their mobile devices to be able to seamlessly communicate wirelessly with other electronics devices, such as TVs, PCs, printers, cellular phones, remote speakers, headsets and car stereos. At the same time, our customers are continually seeking to lower costs, increase performance and extend the battery life of their devices, while bringing new products to market quickly. To meet these demands, we have developed a family of combination chip (combo chip) solutions that integrate multiple discrete wireless technologies on a single chip. For

 

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example, we offer combo chip solutions that integrate a complete Bluetooth system (with BLE and Bluetooth High Speed), a complete Wi-Fi system (including 802.11n Wi-Fi Direct functionality), and a high performance FM stereo radio receiver into a single die.

Global Positioning System

Global Positioning System (GPS) has long been a standard feature in navigation devices and has become a common feature in smartphones and tablets. In addition to GPS, other satellite-based navigation systems have been deployed such as GLONASS by Russia. Global Navigation Satellite System (GNSS) technology encompasses a plurality of such satellite-based navigation systems. By making use of additional satellite coverage, significant improvement in location determination, location accuracy and time-to-first-fix can be obtained over a system that relies only on a GPS based solution, particularly in urban areas. Broadcom offers a family of GPS, assisted GPS (A-GPS) and GNSS semiconductor products, software and data services. Broadcom’s Location Based Services technology delivers assistance data to our GNSS devices further enhancing performance and reliability.

Cellular Baseband, Multimedia Processors and Power Management

Handheld devices (such as cellular phones and tablets) and portable computers (such as netbooks and laptops) have become broadband multimedia gateways, enabling end users to wirelessly download email, view web pages, stream audio and video, play games and conduct videoconferences. The evolution of the international Global System for Mobile Communication (GSM) standard to 3G and 4G technologies have enabled “always on” Internet applications and more efficient data transport. These capabilities enable a range of devices from smart feature-phones to smartphones and tablets. We develop EDGE, 3G and 4G, LTE and WiMAX chipsets and platform solutions with the associated software. We use the same technologies to deliver cellular modem cards for use in portable computers, wireless gateway devices and embedded products.

Cellular SoC’s.    We provide a family of 2.5G, 3G and 4G SoC chipsets and platform solutions with associated software. Our cellular SoC’s incorporate a high performance application processing subsystem, a 1080p multimedia/graphics subsystem and a cellular modem on a single chip. Our latest announced cellular SoC offers two integrated Cortex A9 application processor cores operating up to 1.3 GHz.

As part of our cellular platform, Broadcom provides cellular RF and a family of power management devices that intelligently manage power consumption in mobile devices to optimize system operation and improve battery life.

Mobile Multimedia Applications.    Multimedia has become a necessary component in handheld devices. To support new multimedia features, Broadcom offers our VideoCore® line of video and multimedia processors based on a low power, high performance architecture. Our family of mobile multimedia co-processors enables an array of multimedia features, including support for high megapixel digital cameras and HD video encoding and decoding.

Voice over Internet Protocol

Driven by the significant build-out of the Internet, voice over an IP packet-based network, or VoIP applications are continuing to grow. Our VoIP phone silicon and software solutions integrate packet processing, voice processing and switching technologies to provide the quality of service, high fidelity and reliability necessary for enterprise telephony applications and home routers/gateways. These products support residential VoIP services that are now being offered by a variety of broadband service providers.

Near Field Communications

Near field communications (NFC) is an ultra short-range wireless standard to enable simple connectivity and data transfer by the act of bringing two devices in close proximity. NFC has been adopted for contactless payment systems and can also be implemented in a variety of consumer devices, including mobile phones, tablets, and digital TVs, remote controls, wireless mice, 3D glasses and Bluetooth headsets, to pair two devices and enable other forms of wireless connectivity data transfer between devices. Broadcom has developed a family of NFC solutions with a combination of advanced power, size and functional requirements for original equipment manufacturers to implement low-cost NFC consumer device applications in their products.

 

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Infrastructure & Networking Reportable Segment

Through our Infrastructure & Networking reportable segment, we design and develop complete silicon and software infrastructure solutions for service provider, data center, and enterprise and small-to-medium business networks. Our solutions leverage industry-proven Ethernet technology to promote faster, “greener” and cost-efficient transport and processing of voice, video, data and multimedia across both wired and wireless networks as network data traffic increases. In September 2011 we signed a definitive agreement to acquire NetLogic Microsystems, Inc., or NetLogic, a publicly traded company that is a leader in high-performance intelligent semiconductor solutions for next generation networks, and upon closing of the acquisition, NetLogic will be incorporated into our Infrastructure & Networking reportable segment. For more information about the NetLogic acquisition see the “Overview” section in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

      Products Incorporating Our Solutions    Broadcom Solutions

Infrastructure & Networking

(Solutions for Infrastructure)

  

Service provider metro equipment

3G/4G wireless infrastructure and wireless

access points

Switches, hubs and routers Servers

Workstations

Desktop and notebook computers

Network interface cards

LAN on motherboard applications

Optical networks and dense wave division

multiplexing applications

Virtual private networks and

security appliances

Microwave links for wireless backhaul

  

Ethernet copper transceivers

Ethernet controllers

Ethernet switches

Backplane and Optical front-end

physical layer devices

Security processors and adapters

Broadband processors

Microwave modems and RF

Ethernet Networking

Ethernet has become a ubiquitous interconnection technology for providing high performance and cost effective networking infrastructure across enterprise, service provider, data center and small and medium business (SMB) market segments. Our highly integrated, low power SoC solutions enable users to access data, voice and video from their offices, homes or over wireless networks.

Ethernet Switches.    We offer a broad set of Ethernet switching products ranging from low-cost five port switch chips to complete solutions that can be used to build systems in excess of 10 terabits of switching capacity in a single chassis.

 

   

Our service provider switch portfolio enables carrier/service provider networks to support a large number of services in the wireless backhaul, access, aggregation and core of their networks.

   

Our Data Center portfolio provides high capacity, low latency switching silicon that supports advanced protocols around virtualization and multi-pathing. In addition, our SAND Ethernet switching fabric technologies provide the ability to build highly scalable flat networks supporting tens of thousands of servers.

   

For enterprise applications, our XGStm product family combines multi-layer switching capabilities with wire-speed Gigabit, 10 and 40 Gigabit Ethernet switching performance for unified wired and wireless enterprise business networks.

   

Our family of SMB Ethernet switch products are designed to support lower power modes and comply with industry standards around energy efficient Ethernet.

Ethernet Copper Transceivers.    Our high performance Ethernet transceivers are built upon a proprietary digital signal processing (DSP) communication architecture optimized for high-speed network connections and support the latest standards and advanced features, such as energy efficient Ethernet, data encryption and time synchronization at one or 10 gigabits per second.

Gigabit and 10 Gigabit Ethernet Controllers.    Our family of Ethernet controllers offers comprehensive solutions for servers, workstations, and desktop and notebook computers, supporting multiple generations of Ethernet

 

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technology. Gigabit and 10 Gigabit Ethernet controllers deliver high performance dual-port, single-chip C-NIC at 1Gbps or 10-Gbps rates, without requiring external packet memory.

Microwave Modems and RF.    Our family of microwave modems and RF chip sets allows our customers to build the highest performance wireless backhaul and LAN extension products for the service provider market. They include features such as dual polarization for increased throughput, integrated networking functionality and full path protection.

Automotive Ethernet.    As consumer demand for in-vehicle connectivity continues to grow, automotive manufacturers are under pressure to deliver competitive, innovative features while minimizing cost. Broadcom’s BroadR-Reach® automotive solutions allow multiple in-vehicle systems (such as infotainment, on-board diagnostics and automated driver assistance) to simultaneously access information over unshielded single twisted pair cable. The Broadcom automotive Ethernet product portfolio consists of five devices (including three highly integrated switches with embedded PHYs and two stand-alone PHY solutions) that deliver high-performance bandwidth of 100Mbps and beyond while dramatically reducing connectivity costs.

Backplane and Optical Front-End Physical Layer Devices

To address increasing volumes of data traffic both in data centers and service provider networks, we offer a portfolio of 10G and 40G Ethernet transceivers, forward error correction solutions, and chips for backplanes and optical interconnect. These devices are low-power solutions for very high density 10G and 40G switching solutions. We also offer 2.5G and 10G SONET/SDH/OTN transceivers that enable the development of low-cost, high-density optical transport equipment, enabling telecommunications and service providers to efficiently deliver data and voice traffic over existing fiber networks. Our use of the complementary metal oxide semiconductor (CMOS) process allows substantially higher levels of integration and lower power consumption than competitive solutions.

Custom Silicon Products

We offer proprietary silicon devices for the LAN, WAN and PC markets that allow our customers to semi-customize by integrating their own intellectual property. For example, we have developed complex mixed-signal designs for customers that leverage our advanced design processes.

Licensing of Intellectual Property

We generate licensing revenue and related income from the licensing of our intellectual property. The vast majority of our licensing revenue and related income to date has been derived from agreements with two customers, Verizon Wireless and QUALCOMM Incorporated, or Qualcomm. See detailed discussion in the “Overview” section in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. This licensing revenue and related income represented 3.1%, 3.3% and 4.8% of our total net revenue in 2011, 2010 and 2009, respectively.

Reference Platforms

To assist our customers in developing products, we develop reference platforms designed around our integrated circuit products that represent prototypical system-level applications. These reference platforms generally include an extensive suite of software drivers, as well as protocol and application layer software. By providing reference platforms that may ultimately be incorporated into our customers’ end products, we assist our customers in transitioning from initial prototype designs to final production releases. We believe this enables our customers to achieve easier and faster transitions from the initial prototype designs through final production releases. We believe these reference platform designs also significantly enhance customers’ confidence that our products will meet their market requirements and product introduction schedules.

 

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Customers and Strategic Relationships

We sell our products to leading wired and wireless communications manufacturers. We have also established strategic relationships with multiservice operators that provide wired and wireless communications services to consumers and businesses. Customers currently shipping wired and/or wireless communications equipment and devices incorporating our products include:

 

•Alcatel

  

•Motorola

•Apple

  

•Netgear

•Cisco

  

•Nokia

•Dell

  

•Pace

•EchoStar

  

•Samsung

•Hewlett-Packard

  

•Technicolor

•Huawei Technologies

  

•ZTE

•LG

  

A small number of customers have historically accounted for a substantial portion of our net revenue. Sales to our five largest customers represented 42.6%, 38.6% and 34.6% of our net revenue in 2011, 2010 and 2009, respectively. In 2011 sales to Apple and Samsung represented 13.1% and 10.0% of our net revenue, respectively. In 2010, sales to Apple and Samsung represented 10.9% and 10.0% of our net revenue, respectively. See Note 13 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this Report. We expect that our key customers will continue to account for a substantial portion of our net revenue in 2012 and in the foreseeable future. These customers and their respective contributions to our net revenue have varied and will likely continue to vary from period to period. We typically sell products pursuant to purchase orders that customers can generally cancel, change or defer on short notice without incurring a significant penalty.

Research and Development

We have assembled a large team of experienced engineers and technologists, many of whom are leaders in their particular field or discipline. As of December 31, 2011 we had approximately 7,260 research and development employees, including over 800 employees with Ph.D.s. These key employees are involved in advancing our core technologies, as well as product development. Because SoC solutions benefit from the same underlying core technologies, we are able to address a wide range of communications markets with a relatively focused investment in research and development. Our research and development expense was $1.98 billion, $1.76 billion and $1.54 billion in 2011, 2010 and 2009, respectively. These amounts included stock-based compensation expense for employees engaged in research and development of $364 million, $341 million and $352 million in 2011, 2010 and 2009, respectively.

We believe that increased IP integration and the timely introduction of new products are essential to our growth. While we endeavor to manage our costs and expenses to attain our long-term business objectives, we plan to maintain significant research and development staffing levels for the foreseeable future. We have design centers throughout the United States, including our principal design facilities in Irvine, California and Santa Clara County, California. Internationally, we have design facilities in Asia, Europe, Israel and Canada. We anticipate establishing additional design centers in the United States and in other countries.

 

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Manufacturing

Wafer Fabrication

We depend on multiple foundry subcontractors located in Asia to manufacture a majority of our products. Our key silicon foundries are:

 

   

Taiwan Semiconductor Manufacturing Corporation in Taiwan;

   

GlobalFoundries, Inc. (formerly Chartered Semiconductor Manufacturing) in Singapore;

   

Semiconductor Manufacturing International Corporation in China; and

   

United Microelectronics Corporation in Singapore and Taiwan.

By subcontracting manufacturing, we focus resources on design and test applications where we believe we have greater competitive advantages. This strategy also eliminates the high cost of owning and operating semiconductor wafer fabrication facilities. See “Risk Factors” under Item 1A of this Report for a discussion of the risks associated with our dependence on independent foundry subcontractors.

Most of our products are manufactured using CMOS process technology. Our products are currently fabricated on a variety of processes ranging from 500 nanometers to 40 nanometers. We generally evaluate the benefits, on a product-by-product basis, of migrating to smaller geometry process technologies. Approximately 61.3% of our products are currently manufactured in 65 nanometers. We are designing most new products in 40 nanometers and 28 nanometers, and are beginning to evaluate 20 nanometers. See “Risk Factors” under Item 1A of this Report for a discussion of the risks associated with transitioning to smaller geometry process technologies.

Assembly and Test

Our products are tested either at the wafer level and/or packaged finished products level. Our product testing is conducted by independent foundries, and independent test subcontractors. The die are assembled into finished products by independent assembly and package subcontractors. A majority of our test and assembly is performed by the following independent subcontractors:

 

   

United Test and Assembly Center in Singapore, China and Thailand (test, assembly and packaging);

   

Advanced Semiconductor Engineering (ASE) in China and Taiwan (test, assembly and packaging);

   

Siliconware Precision in Taiwan (test, assembly and packaging);

   

Amkor in Korea, Philippines, Taiwan and China (assembly and packaging only);

   

Signetics in Korea (assembly and packaging only);

   

STATSChipPAC in Singapore, Korea, Malaysia and China (test, assembly and packaging);

See “Risk Factors” under Item 1A of this Report for a discussion of the risks associated with our dependence on third party assembly and test subcontractors.

Quality Assurance

We focus on product reliability from the initial stage of the design cycle through each specific design process, including layout and production test design. Our operations and quality engineering teams closely manage the interface between manufacturing and design engineering. We prequalify each assembly and foundry subcontractor. We also participate in quality and reliability monitoring by reviewing electrical and parametric data from our wafer foundry and assembly subcontractors. We closely monitor wafer foundry production to ensure consistent overall quality, reliability and yield levels. All of our principal independent foundries and package assembly facilities are currently ISO 9001 certified, a comprehensive International Standards Organization specified quality system acknowledgement. As part of our total quality program, we received ISO 9001 certification for our Singapore distribution facility.

Environmental Management

We monitor the environmental impact of our products. Our manufacturing subcontractors have registered our manufacturing flow to ISO 14000, the international standard related to environmental management. Lead-free solutions in electronic components and systems are receiving increasing attention within the semiconductor industry.

 

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Our products are compliant with the Restriction of Hazardous Substances Directive, or RoHS, the European legislation that restricts the use of a number of substances, including lead, and current European REACH (Regulation, Evaluation and Authorization of Chemicals) laws.

Product Distribution

The majority of our products are distributed internationally to customers through our distribution center in Singapore and a smaller portion domestically via an operations and distribution center in Irvine, California. Net product revenue derived from actual shipments to international destinations, primarily in Asia represented 98.5%, 97.2% and 94.8% of our net revenue in 2011, 2010 and 2009, respectively.

Sales and Marketing

Our sales and marketing strategy is to achieve design wins with technology leaders by providing quality, state-of-the-art products, superior engineering execution, and superior sales, field application and engineering support. We market and sell our products in the United States through a direct sales force, distributors and manufacturers’ representatives. The majority of our domestic sales occur through our direct sales force, which is based in offices located in California and throughout the United States.

We market and sell our products internationally through regional offices in Asia, Europe and North America, as well as through a network of independent and fulfillment distributors and representatives in Asia, Australia, Europe and North America. We or our customers select these independent entities based on their ability to provide effective field sales, marketing communications and technical support to our customers. All international sales to date have been in U.S. dollars. We present revenue from independent customers by geographic area in Note 13 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this Report.

Backlog

Our sales are primarily made through standard purchase orders for delivery of products. Due to industry practice that allows customers to cancel, change or defer orders with limited advance notice prior to shipment, we do not believe that backlog is a reliable indicator of future revenue levels.

Competition

The semiconductor industry in general, and wired and wireless communications markets in particular, are intensely competitive and are characterized by rapid change, evolving standards, short product life cycles and price erosion. We believe that the principal factors of competition for integrated circuit providers include:

 

•product quality and reputation

  

•market presence

•product capabilities

  

•standards compliance

•level of integration

  

•system cost

•engineering execution

  

•intellectual property

•reliability

  

•customer interface and support

•price

  

•time-to-market

We believe that we compete favorably with respect to each of these factors.

We compete with a number of major domestic and international suppliers of integrated circuits and related applications. We also compete with suppliers of system-level and motherboard-level solutions incorporating integrated circuits that are proprietary or sourced from manufacturers other than Broadcom. This competition has resulted and will continue to result in declining average selling prices for our products in certain markets. We also may face competition from newly established competitors, suppliers of products based on new or emerging technologies, and customers that choose to develop their own silicon solutions. We expect to encounter continuing consolidation in the markets in which we compete.

Some of our competitors operate their own fabrication facilities and have longer operating histories and presence in key markets, greater name recognition, larger customer bases and significantly greater financial, sales and marketing, manufacturing, distribution and other resources than we do. As a result, these competitors may be able to

 

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adapt more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the promotion and sale of their products. Current and potential competitors have established or may establish financial or strategic relationships among themselves or with existing or potential customers, resellers or other third parties, and may refuse to provide us with information necessary to permit the interoperability of our products with theirs. Accordingly, it is possible that new competitors or alliances among competitors could emerge and rapidly acquire significant market share. In addition, competitors may develop technologies that more effectively address our markets with products that offer enhanced features, lower power requirements or lower costs. Increased competition could result in pricing pressures, decreased gross margins and loss of market share and may materially and adversely affect our business, financial condition and results of operations. See “Risk Factors” under Item 1A of this Report for further discussion of the risks associated with competition.

Seasonality

An increasing number of our products are being incorporated into consumer electronic products, which are subject to significant seasonality and fluctuations in demand, and tend to have stronger sales in the middle of the fiscal year as manufacturers prepare for the major holiday selling seasons.

Intellectual Property

Our success and future product revenue growth depend, in part, on our ability to protect our intellectual property. We rely primarily on patents, copyrights, trademarks and trade secrets, as well as nondisclosure agreements and other methods, to protect our proprietary technologies and processes. However, these may not provide meaningful or adequate protection for our intellectual property.

We currently hold more than 6,000 U.S. and more than 2,550 foreign patents (up from more than 4,800 U.S. and more than 2,000 foreign patents from the prior year) and have more than 7,350 additional U.S. and foreign pending patent applications. We also generally enter into confidentiality agreements with our employees and strategic partners, and typically control access to and distribution of product documentation and other proprietary information. Despite these precautions, it is possible that competitors or other unauthorized third parties may obtain, copy, use or disclose our technologies and processes, develop similar technology independently, or design around our patents. As such, any rights granted under our patents may not provide us with meaningful protection. In addition, we may not be able to successfully enforce our patents against infringing products in every jurisdiction. See “Risk Factors” under Item 1A of this Report for further discussion of the risks associated with patents and intellectual property.

Some or all of our patents have in the past been licensed and likely will in the future be licensed to certain of our competitors through cross-license agreements, such as the Qualcomm Agreement. See the detailed discussion in the “Overview” section in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Moreover, because we have participated and continue to participate in developing various industry standards, we may be required to license some of our patents to others, including competitors, who develop products based on those standards.

Companies in and related to the semiconductor industry and the wired and wireless communications markets often aggressively protect and pursue their intellectual property rights. We are currently engaged in litigation and may need to engage in additional litigation to enforce our intellectual property rights or the rights of our customers, to protect our trade secrets, or to determine the validity and scope of proprietary rights of others, including our customers. In addition, we are currently engaged in litigation and may engage in future litigation with parties that claim that we infringed their patents or misappropriated or misused their trade secrets. Such litigation will result in substantial costs and diversion of our resources and could materially and adversely affect our business, financial condition and results of operations. For a detailed description of our outstanding intellectual property litigation, see Note 12 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this Report.

Employees

As of December 31, 2011 we had approximately 9,590 employees, including 7,260 individuals engaged in research and development, 910 engaged in sales and marketing, 580 engaged in manufacturing operations, and 840

 

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engaged in general and administrative activities. Our employees are not represented by any collective bargaining agreement, and we have never experienced a work stoppage. We believe our employee relations are good.

 

Item 1A.    Risk Factors

Before deciding to purchase, hold or sell our common stock, you should carefully consider the risks described below in addition to the other information contained in this Report and in our other filings with the SEC, including subsequent reports on Forms 10-Q and 8-K. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. If any of these known or unknown risks or uncertainties actually occurs with material adverse effects on Broadcom, our business, financial condition, results of operations and/or liquidity could be seriously harmed. In that event, the market price for our Class A common stock will likely decline, and you may lose all or part of your investment.

Our quarterly operating results may fluctuate significantly.

Our quarterly net revenue and operating results have fluctuated significantly in the past and are likely to continue to vary from quarter to quarter. Variability in the nature of our operating results may be attributed to the factors identified throughout this “Risk Factors” section, many of which may be outside our control, including:

 

   

changes in economic conditions in the markets we address, including the continuing volatility in the technology sector and semiconductor industry;

   

seasonality in sales of consumer and enterprise products in which our products are incorporated;

   

our dependence on a few significant customers and/or design wins for a substantial portion of our revenue;

   

timing, rescheduling or cancellation of significant customer orders and our ability, as well as the ability of our customers, to manage inventory;

   

changes in customer product needs and market acceptance of our products;

   

competitive pressures and other factors such as the qualification, availability and pricing of competing products and technologies and the resulting effects on sales and pricing of our products;

   

the impact of a significant natural disaster, such as an earthquake, severe weather, tsunami or other flooding, or a nuclear crisis, as well as interruptions or shortages in the supply of utilities such as water and electricity, on a key location such as our corporate headquarters or our Northern California facilities, both of which are located near major earthquake fault lines; and

   

the impact of tax examinations.

We depend on a few significant customers for a substantial portion of our revenue.

We derive a substantial portion of our revenue from sales to a relatively small number of customers. Sales to our five largest customers represented 42.6%, 38.6% and 34.6% of our total net revenue for 2011, 2010, and 2009, respectively. We expect that our largest customers will continue to account for a substantial portion of our total net revenue for the foreseeable future. The loss of any significant customer could materially and adversely affect our financial condition and results of operations.

A significant portion of our revenue in any period may also depend on a single product design win with a large customer. As a result, the loss of any such key design win or any significant delay in the ramp of volume production of the customer’s products into which our product is designed could materially and adversely affect our financial condition and results of operations. We may not be able to maintain sales to certain of our key customers or continue to secure key design wins for a variety of reasons, including:

 

   

agreements with our customers typically do not require them to purchase a minimum quantity of our products; and

   

our customers can stop incorporating our products into their own products with limited notice to us and suffer little or no penalty.

In addition, the majority of our licensing revenues and related income to date has been derived from agreements with two customers, Verizon Wireless and Qualcomm. From January 2008 through December 2011, we recorded $753 million in licensing revenue and related income derived from Verizon Wireless and Qualcomm and we expect

 

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to record an additional $272 million. The licensing revenue from our agreement with Verizon Wireless has ended and the income from the Qualcomm Agreement is non-recurring and will terminate in 2013. There can be no assurances that we will be able to enter into additional such arrangements in the future, or that we will be able to successfully collect the remaining payments due to us under the Qualcomm Agreement in the event of a default by Qualcomm.

The loss of a key customer or design win, a reduction in sales to any key customer, decrease in licensing revenue, significant delay in our customers’ product development plans, or our inability to attract new significant customers or secure new key design wins could seriously impact our revenue and materially and adversely affect our results of operations.

We face intense competition.

The semiconductor industry and the wired and wireless communications markets are intensely competitive. We expect competition to continue to increase as new markets develop, as industry standards become well known and as other competitors enter our business. We expect to encounter further consolidation in the markets in which we compete.

Many of our competitors have longer operating histories and presences in key markets, greater name recognition, larger customer bases, and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources than we do, and in some cases operate their own fabrication facilities. These competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements. They may also be able to devote greater resources to the promotion and sale of their products. We also face competition from newly established competitors, suppliers of products, and customers who choose to develop their own semiconductor solutions.

Existing or new competitors may develop technologies that more effectively address our markets with products that offer enhanced features and functionality, lower power requirements, greater levels of integration or lower cost. Increased competition also has resulted in and is likely to continue to result in increased expenditures on research and development, declining average selling prices, reduced gross margins and loss of market share in certain markets. These factors in turn create increased pressure to consolidate. We cannot assure you that we will be able to continue to compete successfully against current or new competitors. If we do not compete successfully, we may lose market share in our existing markets and our revenues may fail to increase or may decline.

We face risks associated with our acquisition strategy.

A key element of our business strategy involves expansion through the acquisitions of businesses, assets, products or technologies. The expansion of our business through acquisitions allows us to complement our existing product offerings, expand our market coverage, increase our engineering workforce or enhance our technological capabilities. We may not be able to identify or consummate future acquisitions or realize the desired benefit from these acquisitions.

We face a number of challenges associated with our acquisition strategy that could disrupt our ongoing business and distract our management team, including:

 

   

delays in the timing and successful integration of an acquired company’s technologies;

   

the loss of key personnel;

   

if our actual results, or the plans and estimates used in future impairment analyses, are less favorable than the original estimates used to assess the recoverability of these assets, we could incur additional impairment charges;

   

lower gross margins, revenues and operating income than originally anticipated at the time of acquisition and other financial challenges; and

   

becoming subject to intellectual property or other litigation.

Acquisitions can result in increased debt or contingent liabilities. While we believe we will have the ability to service any additional debt we may potentially issue in connection with acquisitions, our ability to make principal and interest payments when due depends upon our future performance, which will be subject to general economic

 

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conditions, industry cycles, and business and other factors affecting our operations, including the other risk factors described in this section, many of which are beyond our control. Acquisitions can also result in adverse tax consequences, warranty or product liability exposure related to acquired assets, additional stock-based compensation expense, write up of acquired inventory to fair value, and the recording and later amortization of amounts related to certain purchased intangible assets. In addition, we may record goodwill and other purchased intangible assets in connection with an acquisition and incur impairment charges in the future. Each of the above may apply equally to our pending acquisition of NetLogic Microsystems, Inc., which is our largest acquisition to date.

We may fail to adjust our operations in response to changes in demand.

Through internal growth and acquisitions, we significantly modified the scope of our operations and workforce in recent years. Our operations are characterized by a high percentage of costs that are fixed or difficult to reduce in the short term, such as research and development expenses and our highly skilled workforce. During some periods, our growth has placed a significant strain on our management personnel, systems and resources. To respond to periods of increased demand, we will be required to expand, train, manage and motivate our workforce. Alternatively, in response to the economic downturn in the markets in the semiconductor industry and communications market, we may be required to implement restructuring actions and a number of other cost saving measures. All of these endeavors require substantial management effort. If we are unable to effectively manage our expanding operations, we may be unable to adjust our business quickly enough to meet competitive challenges or exploit potential market opportunities, or conversely, we may scale our business too quickly and the rate of increase in our expenses may exceed the rate of increase in our revenue, either of which would materially and adversely affect our current or future business.

Our operating results may be adversely impacted by worldwide economic uncertainties and specific conditions in the markets we address.

We operate primarily in the semiconductor industry, which is cyclical and subject to rapid change and evolving industry standards. From time to time, the semiconductor industry has experienced significant downturns characterized by decreases in product demand, excess customer inventories and accelerated erosion of prices. The semiconductor industry also periodically experiences increased demand and production capacity constraints, which may affect our ability to ship products. An increasing number of our products are being incorporated into consumer electronic products, which are subject to significant seasonality and fluctuations in demand. Economic volatility can cause extreme difficulties for our customers and vendors in accurately forecasting and planning future business activities. This unpredictability could cause our customers to reduce spending on our products and services, which would delay and lengthen sales cycles. Furthermore, during challenging economic times our customers and vendors may face challenges in gaining timely access to sufficient credit, which could impact their ability to make timely payments to us. As a result, we may experience growth patterns that are different than the end demand for products, particularly during periods of high volatility.

We cannot predict the timing, strength or duration of any economic slowdown or recovery or the impact of such events on our customers, our vendors or us. The combination of our lengthy sales cycle coupled with challenging macroeconomic conditions and supply chain cross-dependencies could have a compound impact on our business. The impact of market volatility is not limited to revenue but may also affect our product gross margins and other financial metrics. Any downturn in the semiconductor industry may be severe and prolonged, and any failure of the industry or wired and wireless communications markets to fully recover from downturns could seriously impact our revenue and harm our business, financial condition and results of operations.

Our stock price is highly volatile.

The market price of our Class A common stock has fluctuated substantially in the past and is likely to continue to be highly volatile and subject to wide fluctuations. From January 1, 2009 through December 31, 2011 our Class A common stock has traded at prices as low as $15.31 and as high as $47.39 per share. Fluctuations have occurred and may continue to occur in response to various factors, many of which we cannot control.

In addition, the market prices of securities of Internet-related, semiconductor and other technology companies have been and remain volatile. This volatility has significantly affected the market prices of securities of many

 

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technology companies for reasons frequently unrelated to the operating performance of the specific companies. If our operating results do not meet the expectations of securities analysts or investors, who may derive their expectations by extrapolating data from recent historical operating results, the market price of our Class A common stock will likely decline. Accordingly, you may not be able to resell your shares of common stock at or above the price you paid. In the past, we, and other companies that have experienced volatility in the market price of their securities, have been the subject of securities class action litigation.

Due to the nature of our compensation programs, most of our executive officers sell shares of our common stock each quarter or otherwise periodically, often pursuant to trading plans established under Rule 10b5-1 promulgated under the Securities Exchange Act of 1934, as amended, or the Exchange Act. As a result, sales of shares by our executive officers may not be indicative of their respective opinions of Broadcom’s performance at the time of sale or of our potential future performance. Nonetheless, the market price of our stock may be affected by sales of shares by our executive officers.

We may be required to defend against alleged infringement of intellectual property rights of others and/or may be unable to adequately protect or enforce our own intellectual property rights.

Companies in the semiconductor industry and the wired and wireless communications markets aggressively protect and pursue their intellectual property rights. From time to time, we receive notices that claim we have infringed upon, misappropriated or misused other parties’ proprietary rights. Additionally, we receive notices that challenge the validity of our patents. Intellectual property litigation can be expensive, time consuming and distracting to management. An adverse determination in any of these types of disputes could prevent us from manufacturing or selling some of our products or could prevent us from enforcing our intellectual property rights.

We may also be required to indemnify some customers and strategic partners under our agreements if a third party alleges or if a court finds that our products or activities have infringed upon, misappropriated or misused another party’s proprietary rights. We have received requests from certain customers and strategic partners to include increasingly broad indemnification provisions in our agreements with them. These indemnification provisions may, in some circumstances, extend our liability beyond the products we provide to include liability for combinations of components or system level designs and for consequential damages and/or lost profits. Even if claims or litigation against us are not valid or successfully asserted, these claims could result in significant costs and diversion of the attention of management and other key employees to defend.

Our products may contain technology provided to us by other parties such as contractors, suppliers or customers. We may have little or no ability to determine in advance whether such technology infringes the intellectual property rights of a third party. Our contractors, suppliers and licensors may not be required to indemnify us in the event that a claim of infringement is asserted against us, or they may be required to indemnify us only up to a maximum amount, above which we would be responsible for any further costs or damages. Any of these claims or litigation may materially and adversely affect our business, financial condition and results of operations.

Furthermore, our success and future revenue growth will depend, in part, on our ability to protect our intellectual property. It is possible that competitors or other unauthorized third parties may obtain, copy, use or disclose our technologies and processes. Any of our existing or future patents may be challenged, invalidated or circumvented. We engage in litigation to enforce or defend our intellectual property rights, protect our trade secrets, or determine the validity and scope of the proprietary rights of others, including our customers. If our intellectual property rights do not adequately protect our technology, our competitors may be able to offer products similar to ours.

Our software may be derived from “open source” software, which is generally made available to the public by its authors and/or other third parties. Open source software is often made available under licenses, which impose certain obligations in the event we distribute derivative works of the open source software. These obligations may require us to make source code for the derivative works available to the public, and/or license such derivative works on different terms than those customarily used to protect our intellectual property. With respect to our proprietary software, we generally license such software under terms that prohibit combining it with open source software. Despite these restrictions, parties may combine our proprietary software with open source software without our authorization, in which case we might nonetheless be required to release the source code of our proprietary software.

 

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We enter into confidentiality agreements with our employees, consultants and strategic partners. We also control access to and distribution of our technologies, documentation and other proprietary information. Despite these efforts, internal or external parties may attempt to copy, disclose, obtain or use our products, services or technology without our authorization. Additionally, current, departing or former employees or third parties could attempt to penetrate our computer systems and networks to misappropriate our proprietary information and technology or interrupt our business. Because the techniques used by computer hackers and others to access or sabotage networks change frequently and generally are not recognized until launched against a target, we may be unable to anticipate, counter or ameliorate these techniques. As a result, our technologies and processes may be misappropriated.

We cannot assure you that our efforts to prevent the misappropriation or infringement of our intellectual property or the intellectual property of our customers will succeed. Identifying unauthorized use of our products and technologies is difficult and time consuming. The initiation of litigation may adversely affect our relationships and agreements with certain customers that have a stake in the outcome of the litigation proceedings. Litigation is very expensive and may divert the attention of management and other key employees from the operation of the business, which could negatively impact our business and results of operations.

We are subject to order and shipment uncertainties.

It is difficult to accurately predict demand for our semiconductor products. We typically sell products pursuant to purchase orders rather than long-term purchase commitments. Customers can generally cancel, change or defer purchase orders on short notice without incurring a significant penalty. Our ability to accurately forecast customer demand is further impaired by delays inherent in our lengthy sales cycle. We operate in a dynamic industry and use significant resources to develop new products for existing and new markets. After we have developed a product, there is no guarantee that our customers will integrate our product into their equipment or devices and, ultimately, bring those equipment and devices incorporating our product to market. In these situations, we may never produce or deliver a significant number of our products, even after incurring substantial development expenses. From the time a customer elects to integrate our solution into their product, it is typically six to 24 months before high volume production of that product commences. After volume production begins, we cannot be assured that the equipment or devices incorporating our product will gain market acceptance.

Our products are incorporated into complex devices and systems, creating supply chain cross-dependencies. Accordingly, supply chain disruptions affecting components of our customers’ devices and/or systems could negatively impact the demand for our products, even if the supply of our products is not directly affected.

Our product demand forecasts are based on multiple assumptions, each of which may introduce error into our estimates. In the event we overestimate customer demand, we may allocate resources to manufacturing products that we may not be able to sell. As a result, we could hold excess or obsolete inventory, which would reduce our profit margins and adversely affect our financial results. Conversely, if we underestimate customer demand or if insufficient manufacturing capacity is available, we could forego revenue opportunities and potentially lose market share and damage our customer relationships. Also, due to our industry’s shift to “just-in-time” inventory management, any disruption in the supply chain could lead to more immediate shortages in product or component supply. In addition, an increasing percentage of our inventory is maintained under hubbing arrangements whereby products are delivered to a customer or third party warehouse based upon the customer’s projected needs. Under these arrangements, we do not recognize product revenue until the customer reports that it has removed our product from the warehouse to incorporate into its end products. Our ability to effectively manage inventory levels may be impaired under our hubbing arrangements, which could increase expenses associated with excess and obsolete product inventory and negatively impact our cash flow.

We manufacture and sell complex products and may be unable to successfully develop and introduce new products.

We expect that a high percentage of our future sales will come from sales of new products. We sell products in markets that are characterized by rapid technological change, evolving industry standards, frequent new product introductions and short product life cycles. The markets for some of these products are new to us and may be immature and/or unpredictable. These markets may not develop into profitable opportunities and we have invested substantial resources in emerging technologies that did not achieve the market acceptance that we had expected. As a result, it is difficult to anticipate our future revenue streams from, or the sustainability of, our new products.

 

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Our industry is dynamic and we are required to devote significant resources to research and development to remain competitive. The development of new silicon devices is highly complex, and due to supply chain cross-dependencies and other issues, we may experience delays in completing the development, production and introduction of our new products. We may choose to discontinue one or more products or product development programs to dedicate more resources to other products. The discontinuation of an existing or planned product may adversely affect our relationship with one or more of our customers.

Our ability to successfully develop and deliver new products will depend on various factors, including our ability to:

 

   

effectively identify and capitalize upon opportunities in new markets;

   

timely complete and introduce new integrated products;

   

transition our semiconductor products to increasingly smaller line width geometries;

   

license any desired third party technology or intellectual property rights;

   

obtain sufficient foundry capacity and packaging materials; and

   

qualify and obtain industry interoperability certification of our products.

If we are not able to develop and introduce new products in a cost effective and timely manner, we will be unable to attract new customers or to retain our existing customers which would materially and adversely affect our results of operations.

We have experienced hardware and software defects and bugs associated with the introduction of our highly complex products. If any of our products contain defects or bugs, or have reliability, quality or compatibility problems, our reputation may be damaged and customers may be reluctant to buy our products. These problems could interrupt or delay sales and shipments of our products to customers. To alleviate these problems, we may have to divert our resources from other development efforts. In addition, these problems could result in claims against us by our customers or others, including possible claims for consequential damages and/or lost profits.

We are exposed to risks associated with our international operations.

We currently obtain substantially all of our manufacturing, assembly and testing services from suppliers located outside the United States. Products shipped to international destinations, primarily in Asia, represented 98.5%, 97.2% and 94.8% of our product revenue in 2011, 2010 and 2009, respectively. In addition, we undertake various sales and marketing activities through regional offices in a number of countries. We intend to continue expanding our international business activities and to open other design and operational centers abroad.

International operations are subject to many inherent risks, including but not limited to:

 

   

political, social and economic instability;

   

exposure to different business practices and legal standards, particularly with respect to intellectual property;

   

continuation of overseas conflicts and the risk of terrorist attacks and resulting heightened security;

   

the imposition of governmental controls and restrictions and unexpected changes in regulatory requirements;

   

nationalization of business and blocking of cash flows;

   

changes in taxation and tariffs; and

   

difficulties in staffing and managing international operations.

Economic conditions in our primary overseas markets, particularly in Asia, may negatively impact the demand for our products abroad. Also, all of our international sales to date have been denominated in U.S. dollars. Accordingly, an increase in the value of the U.S. dollar relative to foreign currencies could make our products less competitive in international markets or require us to assume the risk of denominating certain sales in foreign currencies. We anticipate that these factors will impact our business to a greater degree as we further expand our international business activities.

We depend on third parties to fabricate, assemble and test our products.

As a fabless semiconductor company, we do not own or operate fabrication, assembly or test facilities. We rely on third parties to manufacture, assemble and test substantially all of our semiconductor devices. Accordingly, we cannot directly control our product delivery schedules and quality assurance. This lack of control could result in

 

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product shortages or quality assurance problems. These issues could delay shipments of our products or increase our assembly or testing costs. In addition, the consolidation of foundry subcontractors, as well as the increasing capital intensity and complexity associated with fabrication in smaller process geometries may limit our diversity of suppliers, potentially driving increased wafer prices and adversely affecting our results of operations, including our product gross margins.

We do not have long-term agreements with any of our direct or indirect suppliers, including our manufacturing, assembly or test subcontractors. We typically procure services from these suppliers on a per order basis. In the event our third-party foundry subcontractors experience a disruption or limitation of manufacturing, assembly or testing capacity, we may not be able to obtain alternative manufacturing, assembly and testing services in a timely manner, or at all. Furthermore, our foundries must have new manufacturing processes qualified if there is a disruption in an existing process, which could be time-consuming. We could experience significant delays in product shipments if we are required to find alternative manufactures, assemblers or testers for our products. We are continuing to develop relationships with additional third-party subcontractors to assemble and test our products.

Because we rely on outside foundries and other third party suppliers, we face several significant risks in addition to those discussed above, including:

 

   

a lack of guaranteed supply of wafers and other components and potential higher wafer and component prices due to supply constraints;

   

the limited availability of, or potential delays in obtaining access to, key process technologies; and

   

the location of foundries and other suppliers in regions that are subject to earthquakes, tsunamis and other natural disasters.

The manufacture of integrated circuits is a highly complex and technologically demanding process. Our foundries have from time to time experienced lower than anticipated manufacturing yields. This often occurs during the production of new products or the installation and start-up of new process technologies. In addition, we are dependent on our foundry subcontractors to successfully transition to smaller geometry processes.

There can be no assurance that we will continue to declare cash dividends.

In January 2010, our Board of Directors adopted a dividend policy pursuant to which Broadcom would pay quarterly dividends on our common stock. In January 2011, our Board of Directors increased the quarterly dividend payment. We intend to continue to pay such dividends subject to capital availability and periodic determinations by our Board of Directors that cash dividends are in the best interest of our shareholders and are in compliance with all laws and agreements of Broadcom applicable to the declaration and payment of cash dividends.

Future dividends may be affected by, among other factors:

 

   

our views on potential future capital requirements for investments in acquisitions and the funding of our research and development;

   

use of cash to consummate various acquisition transactions;

   

stock repurchase programs;

   

changes in federal and state income tax laws or corporate laws; and

   

changes to our business model.

Our dividend payments may change from time to time, and we cannot provide assurance that we will continue to increase our dividend payment or declare dividends in any particular amounts or at all. A reduction in our dividend payments could have a negative effect on our stock price.

We may be unable to attract, retain or motivate key personnel.

Our future success depends on our ability to attract, retain and motivate senior management and qualified technical personnel. Competition for these employees is intense. If we are unable to attract, retain and motivate such personnel in sufficient numbers and on a timely basis, we will experience difficulty in implementing our current business and product plans. In that event, we may be unable to successfully meet competitive challenges or to exploit potential market opportunities, which could adversely affect our business and results of operations.

 

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Government regulation may adversely affect our business.

The effects of regulation on our customers or the industries in which they operate may materially and adversely impact our business. For example, the Federal Communications Commission, or FCC, has broad jurisdiction in the United States over many of the devices into which our products are incorporated. FCC regulatory policies that affect the ability of cable or satellite operators or telephone companies to offer certain services to their customers or other aspects of their business may impede sales of our products in the United States. In addition, we may experience delays if a product incorporating our chips fails to comply with FCC emissions specifications.

We and our customers are subject to various import and export laws and regulations. Government export regulations apply to the encryption or other features contained in some of our products. If we fail to continue to receive licenses or otherwise comply with these regulations, we may be unable to manufacture the affected products at foreign foundries or ship these products to certain customers, or we may incur penalties or fines.

Our business may also be subject to regulation by countries other than the United States. Foreign governments may impose tariffs, duties and other import restrictions on components that we obtain from non-domestic suppliers and may impose export restrictions on products that we sell internationally. These tariffs, duties or restrictions could materially and adversely affect our business, financial condition and results of operations.

Our product or manufacturing standards could also be impacted by new or revised environmental rules and regulations or other social initiatives. For instance, the U.S. Securities and Exchange Commission proposed new disclosure requirements relating to the sourcing of certain minerals from the Democratic Republic of Congo and certain other adjoining countries. When these new requirements are in effect, they could adversely affect our costs, the availability of minerals used in our products and our relationships with customers and suppliers.

Our business is subject to potential tax liabilities.

We are subject to income taxes in the United States and various foreign jurisdictions. The amount of income taxes we pay is subject to our interpretation and application of tax laws in jurisdictions in which we file. Changes in current or future laws or regulations, or the imposition of new or changed tax laws or regulations or new related interpretations by taxing authorities in the U.S. or foreign jurisdictions, could adversely affect our results of operations. We are subject to examinations and tax audits. There can be no assurance that the outcomes from these audits will not have an adverse effect on our net operating loss and research and development tax credit carryforwards, our financial position, or our operating results.

In certain foreign jurisdictions, we operate under tax holidays and favorable tax incentives. For instance, in Singapore we operate under tax holidays, which are effective through March 31, 2014, that reduce taxes on substantially all of our operating income in that jurisdiction. Such tax holidays and incentives often require us to meet specified employment and investment criteria in such jurisdictions. In a period of tight manufacturing capacity, our ability to meet Singaporean content in our products may be more limited, which may have adverse tax consequences. More generally, if any of our tax holidays or incentives are terminated or if we fail to meet the criteria to continue to enjoy such holidays or incentives, our results of operations may be materially and adversely affected. We have begun discussions with the Singapore Economic Development Board with respect to tax incentives for periods after March 31, 2014. No assurances can be given that such discussions will be successful. If we are unable to reach an agreement with Singapore (or another jurisdiction that provides similar benefits to those we realize from our current incentives in Singapore), our results of operations and financial position for periods after March 31, 2014 will be adversely affected.

Our articles of incorporation and bylaws contain anti-takeover provisions.

Our articles of incorporation and bylaws contain provisions that could make it more difficult for a third party to acquire a majority of our outstanding voting stock. For example, our Board of Directors may also issue shares of Class B common stock in connection with certain acquisitions, which have superior voting rights entitling the holder to ten votes for each share held on matters that we submit to a shareholder vote (as compared to one vote per share in the case of our Class A common stock) as well as the right to vote separately as a class. In addition, our Board of

 

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Directors has the authority to fix the rights and preferences of shares of our preferred stock and to issue shares of common or preferred stock without a shareholder vote. These provisions, among others, may discourage certain types of transactions involving an actual or potential change in our control.

Our co-founders and their affiliates may control the outcome of matters that require the approval of our shareholders.

As of December 31, 2011 our co-founders, directors, executive officers and their respective affiliates beneficially owned 10.8% of our outstanding common stock and held 51.9% of the total voting power held by our shareholders. Accordingly, these shareholders currently have enough voting power to control the outcome of matters that require the approval of our shareholders. These matters include the election of our Board of Directors, the issuance of additional shares of Class B common stock, and the approval of most significant corporate transactions, including certain mergers and consolidations and the sale of all or substantially all of our assets. In particular, as of December 31, 2011 our two founders, Dr. Henry T. Nicholas III and Dr. Henry Samueli, beneficially owned a total of 9.7% of our outstanding common stock and held 51.5% of the total voting power held by our shareholders. Because of their significant voting stock ownership, we will not be able to engage in certain transactions, and our shareholders will not be able to effect certain actions or transactions, without the approval of one or both of these shareholders. Repurchases of shares of our Class A common stock under our share repurchase program would result in an increase in the total voting power of our co-founders, directors, executive officers and their affiliates, as well as other continuing shareholders.

Item 1B.    Unresolved Staff Comments

None.

Item 2.    Properties

We lease facilities in Irvine (our corporate headquarters), Sunnyvale, Santa Clara, San Jose and San Diego, California. These facilities are our principal design facilities and each includes administration, sales and marketing, research and development and operations functions. We lease additional design facilities throughout the United States.

Internationally, we lease a distribution center that includes engineering design and administrative facilities in Singapore as well as engineering design and administrative facilities in Asia, Israel, Europe and Canada.

In addition, we lease various sales and marketing facilities in the United States and several other countries.

We lease our facilities and certain engineering design tools and information systems equipment under operating lease agreements. Our leased facilities comprise an aggregate of 3.6 million square feet. Our principal facilities in Irvine comprise 0.88 million square feet and have lease terms that expire at various dates through 2017.

We believe that the facilities under lease will be adequate for at least the next 12 months. For additional information regarding our obligations under property leases, see Note 7 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this Report.

Item 3.    Legal Proceedings

The information set forth under Note 12 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this Report, is incorporated herein by reference.

Item 4.    (Removed and Reserved)

Not Applicable.

 

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PART II

 

Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information and Holders

Our Class A common stock is traded on the NASDAQ Global Select Market under the symbol BRCM. The following table sets forth, for the periods indicated, the high and low sale prices for our Class A common stock on the NASDAQ Global Select Market:

 

     2011      2010  
     High      Low      High      Low  

Fourth Quarter

   $ 38.37       $ 27.59       $ 47.00       $ 34.34   

Third Quarter

     38.88         30.98         38.47         29.90   

Second Quarter

     41.00         30.71         36.94         29.05   

First Quarter

     47.39         38.60         34.30         26.40   

As of December 31, 2011 and 2010 there were 1,005 and 1,070 record holders of our Class A common stock and 147 and 154 record holders of our Class B common stock, respectively. On January 31, 2012, the last reported sale price of our Class A common stock on the NASDAQ Global Select Market was $34.35 per share.

Our Class B common stock is not publicly traded. Each share of Class B common stock is convertible at any time at the option of the holder into one share of Class A common stock and in most instances automatically converts upon sale or other transfer.

 

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Stock Performance Graph

The following graphs compare the cumulative five-year and seven-year total return attained by shareholders on Broadcom Corporation’s common stock relative to the cumulative total returns of the S&P 500 index, the PHLX Semiconductor index, and the NASDAQ Composite index. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in each index on December 31, 2006 (for the five-year graph) and December 31, 2004 (for the seven-year graph) and its relative performance is tracked through December 31, 2011. Shareholder returns over the indicated periods should not be considered indicative of future stock prices or shareholder returns.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN

AMONG BROADCOM CORPORATION, THE S&P 500 INDEX,

THE NASDAQ COMPOSITE INDEX AND THE PHLX SEMICONDUCTOR INDEX

LOGO

 

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COMPARISON OF 7 YEAR CUMULATIVE TOTAL RETURN

AMONG BROADCOM CORPORATION, THE S&P 500 INDEX,

THE NASDAQ COMPOSITE INDEX AND THE PHLX SEMICONDUCTOR INDEX

LOGO

Dividend Policy

In January 2010 our Board of Directors adopted a dividend policy pursuant to which we intend to pay quarterly cash dividends on our common stock. Our Board of Directors declared quarterly cash dividends of $0.08 per common share payable to holders of our common stock in each quarter of 2010. In January 2011 our Board of Directors adopted an amendment to the existing dividend policy pursuant to which we increased the quarterly cash dividend by 12.5% to $0.09 per common share ($0.36 per share on an annual basis) and declared quarterly cash dividends of $0.09 per share payable to holders of our common stock in each quarter of 2011. In 2011 and 2010 we paid $194 million and $163 million, respectively, in dividends to holders of our Class A and Class B common stock. These dividends were paid from U.S. domestic sources other than our retained earnings and are accounted for as reductions of shareholders’ equity.

The cash dividend policy and the payment of future cash dividends under that policy are subject to the Board’s continuing determination that the dividend policy and the declaration of dividends thereunder are in the best interests of our shareholders and are in compliance with all laws and agreements of Broadcom applicable to the declaration and payment of cash dividends.

Recent Sales of Unregistered Securities

In 2011 we issued an aggregate of 1 million shares of Class A common stock upon conversion of a like number of shares of Class B common stock in connection with their disposition. Each share of Class B common stock is convertible at any time into one share of Class A common stock at the option of the holder. The offers and sales of those securities were effected without registration in reliance on the exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933, as amended, or the Securities Act.

Issuer Purchases of Equity Securities

From time to time our Board of Directors has authorized various programs to repurchase shares of our Class A common stock depending on market conditions and other factors. In February 2010 we announced that our Board of Directors had authorized an evergreen share repurchase program intended to offset dilution of incremental grants

 

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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 (including under an ASR or other arrangement) is equal to the total number of shares issued pursuant to our equity awards in the previous year and the current year. Our February 2010 share repurchase program does not have an expiration date and may be suspended at any time at the discretion of the Board of Directors.

In February 2011 we entered into an accelerated share repurchase, or ASR, agreement to repurchase $300 million of our Class A common stock, which was recorded as a reduction to shareholders’ equity. Under the ASR program we received and cancelled 7 million shares of our Class A common stock with a weighted average price of $42.64 per share.

In addition to the shares repurchased under the ASR, we repurchased 10 million shares of our Class A common stock at a weighted average price of $36.84 per share in 2011. We repurchased 9 million and 15 million shares of our Class A common stock at weighted average prices of $30.86 and $28.12 per share in 2010 and 2009, respectively.

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 Exchange Act.

 

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Item 6.    Selected Consolidated Financial Data

 

     Year Ended December 31,  
     2011     2010      2009      2008     2007  
     (In millions, except per share data)  

Consolidated Statements of Income Data

            

Net revenue:

            

Product revenue

   $ 7,160      $ 6,589       $ 4,273       $ 4,485      $ 3,739   

Income from Qualcomm Agreement(1)

     207        207         171                  

Licensing revenue(2)

     22        22         46         173        37   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total net revenue

     7,389        6,818         4,490         4,658        3,776   

Costs and expenses:

            

Cost of product revenue(3)

     3,626        3,284         2,211         2,213        1,832   

Research and development(3)

     1,983        1,762         1,535         1,498        1,349   

Selling, general and administrative(3)

     682        590         479         543        492   

Amortization of purchased intangible assets

     30        28         15         3        1   

Impairment of long-lived assets

     92        19         19         172        2   

Settlement costs (gains), net

     (18     53         118         16          

Restructuring costs (reversals), net

     16                7         (1       

In-process research and development

                            42        15   

Charitable contributions

     25                50                  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total operating costs and expenses

     6,436        5,736         4,434         4,486        3,691   

Income from operations

     953        1,082         56         172        85   

Interest income (expense), net

     (5     9         14         52        131   

Other income (expense), net

     8        6         2         (2     3   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Income before income taxes

     956        1,097         72         222        219   

Provision for income taxes

     29        15         7         7        6   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 927      $ 1,082       $ 65       $ 215      $ 213   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net income per share (basic)(4)

   $ 1.72      $ 2.13       $ 0.13       $ 0.42      $ 0.39   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net income per share (diluted)(4)

   $ 1.65      $ 1.99       $ 0.13       $ 0.41      $ 0.37   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
     December 31,  
     2011     2010      2009      2008     2007  
     (In millions)  

Consolidated Balance Sheet Data

            

Cash and cash equivalents and short-and long-term marketable securities

   $ 5,205      $ 4,058       $ 2,368       $ 1,898      $ 2,404   

Working capital

     4,653        2,913         1,766         2,034        2,323   

Goodwill and purchased intangible assets, net

     2,187        2,043         1,481         1,341        1,424   

Total assets

     9,040        7,944         5,127         4,393        4,838   

Total long-term debt

     1,196        697                          

Total shareholders’ equity

     6,521        5,826         3,892         3,607        4,036   

 

(1) Includes income relating to the Qualcomm Agreement that was entered into with Qualcomm in April 2009. See “Overview” section in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Notes 1 and 2 to Notes to Consolidated Financial Statements for a further discussion, included in Part IV, Item 15 of this Report.

 

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(2) Includes royalties of $19 million, $149 million and $32 million in 2009, 2008 and 2007, respectively, received pursuant to a patent license agreement that was entered into with Verizon Wireless in July 2007, which was completed in March 2009.

 

(3) Includes stock-based compensation expense resulting from stock options and restricted stock units we issued or assumed in acquisitions. See Note 9 of Notes to Consolidated Financial Statements.

 

(4) See Notes 1 and 2 of Notes to Consolidated Financial Statements for an explanation of the calculation of net income per share.

The following table presents details of product and total gross margin as a percentage of product and total revenue, respectively:

 

     Year Ended December 31,  
     2011     2010     2009     2008     2007  

Supplemental Gross Margin Data

          

Product gross margin

     49.4     50.2     48.3     50.7     51.0

Total gross margin

     50.9        51.8        50.8        52.5        51.5   

The following table presents details of total stock-based compensation expense that is included in each functional line item in the consolidated statements of income data above:

 

     Year Ended December 31,  
     2011      2010      2009      2008      2007  
     (In millions)  

Supplemental Data on Stock-Based Compensation Expense

              

Cost of product revenue

   $ 24       $ 23       $ 25       $ 25       $ 26   

Research and development

     364         341         352         358         354   

Selling, general and administrative

     126         119         120         126         140   

The tables above set forth our selected consolidated financial data. We prepared this information using the consolidated financial statements of Broadcom for each of the five years ended December 31, 2011. In addition, the consolidated financial statements include the results of operations of acquisitions commencing on their respective acquisition dates. See Note 3 of Notes to Consolidated Financial Statements.

You should read this selected consolidated financial data together with the Consolidated Financial Statements and related Notes contained in this Report and in our prior and subsequent reports filed with the SEC, as well as the section of this Report and our other reports entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis in conjunction with our Consolidated Financial Statements and related Notes thereto included in Part IV, Item 15 of this Report and the “Risk Factors” included in Part I, Item 1A of this Report, as well as other cautionary statements and risks described elsewhere in this Report, before deciding to purchase, hold or sell our common stock.

Overview

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

We sell our products to leading wired and wireless communications manufacturers in each of our reportable segments: Broadband Communications (Home), Mobile & Wireless (Hand) and Infrastructure & Networking (Infrastructure). Because we leverage our technologies across different markets, certain of our integrated circuits may be incorporated into products used in multiple markets. We utilize independent foundries and third-party subcontractors to manufacture, assemble and test all of our semiconductor products.

Our diverse product portfolio includes:

 

   

Broadband Communications (Solutions for the Home) — Complete solutions for cable, xDSL, fiber, satellite and IP broadband networks to enable the connected home, including set-top-boxes and media servers, residential modems and gateways, femtocells and wired home networking solutions.

   

Mobile & Wireless (Solutions for the Hand) — Low-power, high-performance and highly integrated solutions powering the mobile and wireless ecosystem, including Wi-Fi and Bluetooth, cellular modems, personal navigation and global positioning, near field communications (NFC), Voice over IP (VoIP), multimedia and application processing, and mobile power management solutions.

   

Infrastructure & Networking (Solutions for Infrastructure) — Highly integrated solutions for carriers, service providers, enterprises, small-to-medium businesses and data centers for network infrastructure needs, including switches, physical layer (PHY) and microwave devices for local, metropolitan, wide area and storage networking; switch fabric solutions, high-speed ethernet controllers, security and embedded processors.

Our product revenue consists principally of sales of semiconductor devices and, to a lesser extent, software licenses and royalties, development, support and maintenance agreements, data services and cancellation fees. The majority of our product sales occur through the efforts of our direct sales force. The remaining balance of our product sales occurs through distributors. Our licensing revenue and income is generated from the licensing of our intellectual property, of which the vast majority to date has been derived from agreements with two customers, Verizon Wireless and Qualcomm. The licensing revenue from our agreement with Verizon Wireless ended in March 2009 and the income from the Qualcomm Agreement is non-recurring and will terminate in 2013. There can be no assurances that we will be able to enter into similar arrangements in the future. At December 31, 2011 we had deferred income of $13 million related to the Qualcomm Agreement.

The following table details the amount of licensing revenue from our agreement with Verizon Wireless and income from the Qualcomm Agreement that was recognized or is scheduled to be recognized from 2008 to 2013:

 

     Recognized      Scheduled to be Recognized  
     2008      2009      2010      2011      2012      2013      Thereafter      Total  
     (In millions)  

Income from Qualcomm Agreement

   $       $ 171       $ 207       $ 207       $ 186       $ 86       $       $ 857   

Licensing revenue from Verizon Wireless

     149         19                                                 168   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 149       $ 190       $ 207       $ 207       $ 186       $ 86       $       $ 1,025   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Product Cycles.    The cycle for test, evaluation and adoption of our products by customers can range from three to more than nine months, with an additional three to more than twelve months before a customer commences

 

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volume production of equipment or devices incorporating our products. Due to this lengthy sales cycle, we may experience significant delays from the time we incur expenses for research and development, selling, general and administrative efforts, and investments in inventory, to the time we generate corresponding revenue, if any. The rate of new orders may vary significantly from month to month and quarter to quarter. If anticipated sales or shipments in any quarter do not occur when expected, expenses and inventory levels could be disproportionately high, and our results of operations for that quarter, and potentially for future quarters, would be materially and adversely affected.

Acquisition Strategy.    An element of our business strategy involves the acquisition of businesses, assets, products or technologies that allow us to reduce the time or costs required to develop new technologies and products and bring them to market, incorporate enhanced functionality into and complement our existing product offerings, augment our engineering workforce, and enhance our technological capabilities. Since our initial public offering, we have acquired over 50 companies. From 2009 through 2011, we made acquisitions totaling $1.11 billion in purchase consideration, of which $155 million, $387 million and $569 million related to our Broadband Communications, Mobile & Wireless and Infrastructure & Networking reportable segments, respectively. We plan to continue to evaluate strategic opportunities as they arise, including acquisitions and other business combination transactions, strategic relationships, capital infusions and the purchase or sale of assets.

In September 2011 we signed a definitive agreement to acquire NetLogic Microsystems, Inc., or NetLogic, a publicly traded company that is a leader in high performance intelligent semiconductor solutions for next generation networks. The expected purchase consideration is approximately $3.7 billion, net of cash assumed, based on the shares outstanding on September 11, 2011. The transaction has been approved by the Broadcom and NetLogic boards of directors and is subject to customary closing conditions, including the receipt of clearance by the Chinese Ministry of Commerce under Chinese Antimonopoly Law. There are no financing contingencies related to the acquisition. The transaction is expected to close in the first half of 2012.

The accompanying Consolidated Financial Statements include the results of operations of our acquired companies commencing on their respective acquisition dates. See Note 3 of Notes to Consolidated Financial Statements for additional information related to these acquisitions.

Operating Results for the Year Ended December 31, 2011

In 2011 our net income was $927 million as compared to net income of $1.08 billion in 2010. The decrease in profitability was primarily related to lower gross margins and an increase in research and development expenses, as well as the impairment of certain of our purchased intangible assets, our charitable contribution and our restructuring charge.

Other highlights during 2011 include the following:

 

   

Our cash and cash equivalents and marketable securities were $5.20 billion at December 31, 2011, compared with $4.06 billion at December 31, 2010. We generated cash flow from operations of $1.84 billion during 2011 as compared to $1.37 billion in 2010.

   

In January 2011 our Board of Directors adopted an amendment to the existing dividend policy pursuant to which we increased our quarterly cash dividend by 12.5% to $0.09 per share ($0.36 per share on an annual basis) and declared a dividend of $0.09 per share payable to holders of our common stock in each quarter of 2011.

   

In February 2011 we entered into an accelerated share repurchase, or ASR, agreement to repurchase $300 million dollars of our Class A common stock, which was recorded as a reduction to shareholders’ equity. Under the ASR program we received and cancelled 7 million shares of our Class A common stock with a weighted average price of $42.64 per share. In addition to the shares repurchased under the ASR in February 2011, we repurchased 10 million shares at a weighted average price of $36.84 per share.

   

In April 2011 we completed our acquisition of Provigent Inc., a privately-held company that provides highly integrated, high performance, mixed signal semiconductors for microwave backhaul systems. In connection with the acquisition, we paid $314 million, exclusive of cash assumed, to acquire all of the outstanding shares of capital stock and other equity rights of Provigent.

   

In May 2011 we completed our acquisition of SC Square Ltd., a leading security software developer for $40 million, exclusive of cash acquired.

 

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In May 2011 the court entered an order granting final approval of a Stipulation and Agreement of Settlement, or Derivative Settlement related to our federal consolidated shareholder derivative action. In connection with the Derivative Settlement, we recorded a $43 million settlement gain in our consolidated statements of income and paid plaintiffs’ counsel $25 million of the settlement proceeds for attorneys’ fees, expenses, and costs, which was recorded as an operating expense in our consolidated statements of income. In September and December 2011 we also recorded total net settlement costs of $32 million related to patent infringement claims.

   

In June 2011 we contributed $25 million to the Broadcom Foundation to support science, technology, engineering and mathematics programs, as well as a broad range of community services which was recorded as an operating expense in our consolidated statements of income.

   

In June 2011 we recorded a purchased intangible impairment charge of $74 million related to our acquisition of Beceem Communications, Inc. in 2010. The primary factor contributing to this impairment charge was a reduction in the forecasted cash flows related to WiMAX products, as wireless service providers have accelerated their adoption of Long Term Evolution, or LTE, products. We also recorded other impairment charges of $18 million in 2011.

   

In June 2011 we completed the Internal Revenue Service (IRS) examination of our income tax returns for 2004 to 2006, executed a closing agreement covering the 2001 to 2006 tax years, and agreed to certain adjustments for the 2001 to 2006 tax years, primarily related to intercompany transfer pricing transactions. Such adjustments were offset by net operating losses and credits, and did not result in any income tax expense or cash tax liability. As a result, our federal and state net operating loss carryforwards were reduced by $620 million and $430 million, respectively, which were offset with corresponding reductions in valuation allowance for deferred tax assets.

   

As part of our regular product portfolio management review process and in light of our decision to significantly reduce our investment in our digital television and Blu-ray Disc product lines within our Broadband Communications operating segment, in September 2011 we implemented a restructuring plan to reduce our worldwide headcount by approximately 300 employees. We recorded an aggregate of $16 million in net restructuring costs in 2011.

   

In November 2011 we completed a debt offering of $500 million aggregate principal amount of 2.700% Senior Notes due 2018. We also amended our credit facility in October 2011 to primarily extend the maturity date by two years to November 19, 2016. To date, we have not drawn on this credit facility.

Business Enterprise Segments

The following tables present details of our reportable segments and the “All Other” category:

 

     Reportable Segments               
     Broadband
Communications
     Mobile &
Wireless
     Infrastructure &
Networking
     All
Other
    Consolidated  
     (In millions)  

Year ended December 31, 2011

             

Net revenue

   $ 2,039       $ 3,484       $ 1,658       $ 208      $ 7,389   

Operating income (loss)

     391         573         545         (556     953   

Year ended December 31, 2010

             

Net revenue

   $ 2,134       $ 2,889       $ 1,588       $ 207      $ 6,818   

Operating income (loss)

     447         526         578         (469     1,082   

Year ended December 31, 2009

             

Net revenue

   $ 1,525       $ 1,720       $ 1,056       $ 189      $ 4,490   

Operating income (loss)

     180         117         288         (529     56   

 

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Included in the “All Other” category:

 

     Year Ended December 31,  
     2011     2010     2009  
     (In millions)  

Net revenue

   $ 208      $ 207      $ 189   
  

 

 

   

 

 

   

 

 

 

Stock-based compensation

   $ 514      $ 483      $ 497   

Amortization of purchased intangible assets

     84        59        31   

Amortization of acquired inventory valuation step-up

     24        10        9   

Impairment of long-lived assets

     92        19        19   

Settlement costs (gains), net

     (18     53        118   

Restructuring costs, net

     16               7   

Charitable contributions

     25               50   

Non-recurring legal fees

     25               12   

Change in contingent earnout liability

     (1              

Employer payroll tax on certain stock option exercises

     8        13        5   

Miscellaneous corporate allocation variances

     (5     39        (30
  

 

 

   

 

 

   

 

 

 

Total other operating costs and expenses

   $ 764      $ 676      $ 718   
  

 

 

   

 

 

   

 

 

 

Total operating loss for the “All Other” category

   $ (556   $ (469   $ (529
  

 

 

   

 

 

   

 

 

 

For additional information about our business enterprise segments, see Note 13 of Notes to Consolidated Financial Statements.

Factors That May Impact Net Income

Our net income has been affected in the past, and may continue to be affected in the future, by various factors, including, but not limited to, the following:

 

   

our product mix and volume of product sales and corresponding gross margin (see further discussion below under “Factors That May Impact Net Revenue” and “Factors That May Impact Product Gross Margin”);

   

required levels of research and development and other operating costs;

   

stock-based compensation expense;

   

licensing and income from intellectual property;

   

impairment of goodwill and other long-lived assets;

   

deferral of revenue and costs under multiple-element arrangements;

   

amortization of purchased intangible assets;

   

cash-based incentive compensation expense;

   

litigation costs and insurance recoveries;

   

settlement costs or gains;

   

changes in tax laws, adjustments to tax reserves and the results of income tax audits;

   

the loss of interest income resulting from lower average interest rates and investment balance reductions resulting from expenditures on repurchases of our Class A common stock, dividends and acquisitions of businesses;

   

charitable contributions;

   

other-than-temporary impairment of marketable securities; and

   

restructuring costs.

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

 

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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, 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.

We believe the following are critical accounting policies that require us to make significant estimates, assumptions or judgments:

 

   

Net Revenue.    We recognize product revenue when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) our price to the customer is fixed or determinable and (iv) collection of the resulting accounts receivable is reasonably assured. These criteria are usually met at the time of product shipment. However, we do not recognize revenue when any future performance obligations remain. Customer purchase orders and/or contracts are generally used to determine the existence of an arrangement. Shipping documents are used to verify product delivery. We assess whether a price is fixed or determinable based upon the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. We assess the collectibility of our accounts receivable based primarily upon the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer’s payment history.

In arrangements that include a combination of semiconductor products and other elements, judgment is required to properly identify the accounting units of the multiple deliverable transactions and to determine the manner in which revenue should be allocated among the accounting units. We allocate the arrangement consideration based on each element’s relative fair value using vendor-specific objective evidence, or VSOE, third-party evidence, or estimated selling prices, as the basis of fair value. Revenue is recognized for the accounting units when the basic revenue recognition criteria are met.

A portion of our sales is made through distributors under agreements allowing for pricing credits and/or rights of return. These pricing credits and/or rights of return provisions prevent us from being able to reasonably estimate the final price of the inventory to be sold and the amount of inventory that could be returned pursuant to these agreements. As a result, the price to the customer is not fixed or determinable at the time we deliver products to our distributors. Accordingly, product revenue from sales made through these distributors is not recognized until the distributors ship the product to their customers. In addition, distributors provide us with periodic data regarding product, price, quantity, and customers when products are shipped to their customers, as well as the quantities of our products that they still have in stock. For specialized shipping terms we may rely on data provided by our freight forwarding providers. For our licensing revenue we rely on data provided by the licensee. Any error in the data provided to us by customers, distributors or other third parties could lead to inaccurate reporting of our total net revenue and net income.

We defer revenue and income when advance payments are received from customers before performance obligations have been completed and/or services have been performed. Deferred revenue does not include amounts from products delivered to distributors that the distributors have not yet sold through to their end customers.

 

   

Income from the Qualcomm Agreement.    On April 26, 2009 we entered into a four-year Settlement and Patent License and Non-Assert Agreement, or the Qualcomm Agreement, with QUALCOMM Incorporated, or Qualcomm. The Qualcomm Agreement is a multiple element arrangement. We allocated the amount to be received under the Qualcomm Agreement amongst several elements. A gain from the settlement of litigation was immediately recognized and approximated the value of awards determined by the United States District Court for the Central District of California. The remaining consideration was predominantly associated with the transfer of current and future intellectual property rights, as well as the settlement of all other outstanding litigation, and is being recognized over the four year performance period as a single unit of accounting.

 

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The value associated with the transfer of intellectual property rights and other elements was treated as a single unit of accounting and, based on the predominant nature of these elements, recognized them within net revenue over the contractual performance period of four years, beginning in 2009 and extending through 2013. The elements included: (i) an exchange of intellectual property rights, including in certain circumstances, a series of covenants not to assert claims of patent infringement under future patents issued within one to four years of the execution date of the agreement, (ii) the assignment of certain existing patents by Broadcom to Qualcomm with Broadcom retaining a royalty-free license under these patents, and (iii) the settlement of all outstanding litigation and claims between us and Qualcomm.

We consider the Qualcomm Agreement as predominantly related to the transfer of current and future intellectual property rights. This conclusion was based on (a) the amounts specifically awarded by the courts for the patents that were the subject of litigation for which appeals had been substantially exhausted and (b) the extensive nature of the rights transferred to Qualcomm, both for our existing patent portfolio and for the patents we would develop during the next one to four years. In addition, we obtained a third party valuation of the intellectual property rights. The inputs and assumptions we used in this valuation were from a market participant perspective and included projected revenue, royalty rates, estimated discount rates, useful lives and income tax rates, among others. The development of a number of these inputs and assumptions in our model requires a significant amount of management judgment and is based upon a number of factors including the selection of industry comparables, market growth rates and other relevant factors. Changes in any number of these assumptions would have substantially changed the fair value assigned to the intellectual property rights. These inputs and assumptions represent management’s best estimates at the time of the transaction.

 

   

Sales Returns, Pricing Adjustments and Allowance for Doubtful Accounts.    We record reductions of revenue for estimated product returns and pricing adjustments, such as competitive pricing programs and rebates, in the same period that the related revenue is recorded. The amount of these reductions is based on historical sales returns, analysis of credit memo data, specific criteria included in rebate agreements, and other factors known at the time. We accrue 100% of potential rebates at the time of sale and do not apply a breakage factor. We reverse the accrual of unclaimed rebate amounts as specific rebate programs contractually end and when we believe unclaimed rebates are no longer subject to payment and will not be paid. Thus the reversal of unclaimed rebates may have a positive impact on our net revenue and net income in subsequent periods. Additional reductions of revenue would result if actual product returns or pricing adjustments exceed our estimates. We also maintain an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. If the financial condition of any customer were to deteriorate, resulting in an impairment of its ability to make payments, additional allowances could be required.

 

   

Inventory Write-Downs and Warranty Reserves.    We write down the carrying value of our inventory to net realizable value for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and its estimated realizable value based upon assumptions about future demand and market conditions. If actual demand and market conditions are less favorable than those projected by management, additional inventory write-downs could be required. Under the hubbing arrangements that we maintain with certain customers, we own inventory that is physically located in a customer’s or third party’s warehouse. As a result, our ability to effectively manage inventory levels may be impaired, which would cause our total inventory turns to decrease. In that event, our expenses associated with excess and obsolete inventory could increase and our cash flow could be negatively impacted. Our products typically carry a one to three year warranty. We establish reserves for estimated product warranty costs at the time revenue is recognized. Although we engage in extensive product quality programs and processes, our warranty obligation has been and may in the future be affected by product failure rates, product recalls, repair or field replacement costs and additional development costs incurred in correcting any product failure, as well as possible claims for consequential costs. Should actual product failure rates, use of materials or service delivery costs differ from our estimates, additional warranty reserves could be required. In that event, our product gross margins would be reduced.

 

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Stock-Based Compensation Expense.    All share-based payments, including grants of stock options, restricted stock units and employee stock purchase rights, are recognized in our financial statements based upon their respective grant date fair values. The fair value of each employee stock option and employee stock purchase right is estimated on the date of grant using an option pricing model that meets certain requirements. We currently use the Black-Scholes option pricing model to estimate the fair value of our stock options and stock purchase rights. Although we utilize the Black-Scholes model, which meets established requirements, the fair values generated by the model may not be indicative of the actual fair values of our equity awards as it does not consider certain factors important to those awards to employees, such as continued employment and periodic vesting requirements as well as limited transferability. The determination of the fair value of share-based payment awards utilizing the Black-Scholes model is affected by our stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends. We use the implied volatility for traded options on our stock as the expected volatility assumption required in the Black-Scholes model. Our selection of the implied volatility approach is based on the availability of data regarding actively traded options on our stock as we believe that implied volatility is more representative of fair value than historical volatility. The expected life of the stock options is based on historical and other economic data trended into the future. The risk-free interest rate assumption is based on observed interest rates appropriate for the expected terms of our stock options and stock purchase rights. Prior to 2010, our dividend yield assumption excluded dividend payouts. In 2010 we began to pay quarterly dividends and included that assumption in our fair value calculations. The fair value of our restricted stock units is based on the closing market price of our Class A common stock on the date of grant less our expected dividend yield. We evaluate the assumptions used to value stock awards on a quarterly basis. If factors change and we employ different assumptions, stock-based compensation expense may differ significantly from what we have recorded in the past. If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. To the extent that we grant additional equity securities to employees or we assume unvested securities in connection with any acquisitions, our stock-based compensation expense will be increased by the additional unearned compensation resulting from those additional grants or acquisitions.

 

   

Goodwill and Purchased Intangible Assets.    The value of our goodwill and purchased intangible assets could be impacted by future adverse changes such as: (i) any future declines in our operating results, (ii) a decline in the valuation of technology company stocks, including the valuation of our common stock, (iii) a significant slowdown in the worldwide economy or the semiconductor industry, (iv) any failure to meet the performance projections included in our forecasts of future operating results or (v) the abandonment of any of our acquired in-process research and development, or IPR&D, projects.

Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the acquired net tangible and intangible assets. We evaluate goodwill on an annual basis in the fourth quarter or more frequently if we believe indicators of impairment exist. In 2011 we early adopted the new provisions issued by the Financial Accounting Standards Board, or FASB, that intended to simplify goodwill impairment testing. The updated guidance permits us to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we conclude that it is more likely than not that the fair value of a reporting units is less than its carrying amount, we conduct a two-step goodwill impairment test. The first step of the impairment test involves comparing the fair values of the applicable reporting units with their carrying values. We determine the fair values of our reporting units using the income valuation approach, as well as other generally accepted valuation methodologies. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, we perform the second step of the goodwill impairment test. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill. The amount, by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognized as an impairment loss.

During development, IPR&D is not subject to amortization and is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of the fair value to its carrying amount. If the carrying value exceeds its fair value,

 

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an impairment loss is recognized in an amount equal to that excess. Once an IPR&D project is complete, it becomes a definite lived intangible asset and is evaluated for impairment in accordance with our policy for long-lived assets.

We test long lived assets and purchased intangible assets (other than goodwill and IPR&D in development) for impairment if we believe indicators of impairment exist. We determine whether the carrying value of an asset or asset group is recoverable, based on comparisons to undiscounted expected future cash flows the asset are expected to generate. If an asset is not recoverable, we record an impairment loss equal to the amount by which the carrying value of the asset exceeds its fair value. We primarily use the income valuation approach to determine the fair value of our long lived assets and purchased intangible assets.

Significant management judgment is required in the forecasts of future operating results that are used in the discounted cash flow method of valuation. It is possible, however, that the plans may change and estimates used may prove to be inaccurate. If our actual results, or the plans and estimates used in future impairment analyses, are lower than the original estimates used to assess the recoverability of these assets, we could incur additional impairment charges.

 

   

Deferred Taxes and Uncertain Tax Positions.    We utilize the asset and liability method of accounting for income taxes. We record a valuation allowance to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized. In assessing the need for a valuation allowance, we consider all positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. Forming a conclusion that a valuation allowance is not required is difficult when there is negative evidence such as cumulative losses in recent years. As a result of our cumulative losses in the U.S. and certain foreign jurisdictions, our U.S. tax losses after tax deductions for stock-based compensation, and the full utilization of our loss carryback opportunities, we have concluded that a full valuation allowance against our net deferred tax assets is appropriate in the U.S. and certain foreign jurisdictions. In certain other foreign jurisdictions where we do not have cumulative losses, we record valuation allowances to reduce our net deferred tax assets to the amount we believe is more likely than not to be realized. In the future, if we realize a deferred tax asset that currently carries a valuation allowance, we may record a reduction of income tax expense in the period of such realization. Income tax positions must meet a more-likely-than-not recognition threshold to be recognized. Income tax positions that previously failed to meet the more-likely-than-not threshold are recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not threshold are derecognized in the first subsequent financial reporting period in which that threshold is no longer met. As a multinational corporation, we are subject to taxation in many jurisdictions, and the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in various taxing jurisdictions. If we ultimately determine that the payment of these liabilities will be unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine the liability no longer applies. Conversely, we record additional tax charges in a period in which we determine that a recorded tax liability is less than we expect the ultimate assessment to be. The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings. Therefore, the actual liability for U.S. or foreign taxes may be materially different from our estimates, which could result in the need to record additional tax liabilities or potentially reverse previously recorded tax liabilities.

 

   

Litigation and Settlement Costs.    We are involved in disputes, litigation and other legal proceedings. We prosecute and defend these matters aggressively. However, there are many uncertainties associated with any litigation, and we cannot assure you that these actions or other third party claims against us will be resolved without costly litigation and/or substantial settlement costs. In addition, the resolution of intellectual property litigation may require us to pay damages for past alleged infringement or to obtain a license under the other party’s intellectual property rights that could require one-time license fees or running royalties, which could adversely impact product gross margins in future periods, or could prevent us from manufacturing or selling some of our products or limit or restrict the type of work that employees involved in such litigation may

 

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perform for Broadcom. We account for settlement agreements as multiple element arrangements and allocate the consideration to the identifiable elements based on relative fair value. Generally the identifiable elements are the licensing of intellectual property for future use and payments related to alleged prior infringement. If any of those events were to occur, our business, financial condition and results of operations could be materially and adversely affected. We continually evaluate the uncertainties associated with litigation and record a liability when it is probable that a loss has been incurred and the amount is reasonably estimable. There is significant judgment required in both the probability determination and as to whether an exposure can be reasonably estimated. However, the outcomes of legal proceedings and/or our ability to settle disputes on terms acceptable to us are subject to significant uncertainty. Should we choose to pay significant sums in settling a dispute or should material legal matters be resolved against the Company, the operating results of a particular reporting period could be materially adversely affected.

Results of Operations

The following table sets forth certain Consolidated Statements of Income data expressed as a percentage of net revenue for the periods indicated:

 

     Year Ended December 31,  
     2011     2010     2009  

Net revenue:

      

Product revenue

     96.9     96.7     95.2

Income from Qualcomm Agreement

     2.8        3.0        3.8   

Licensing revenue

     0.3        0.3        1.0   
  

 

 

   

 

 

   

 

 

 

Total net revenue

     100.0     100.0     100.0

Costs and expenses:

      

Cost of product revenue

     49.1        48.2        49.2   

Research and development

     26.8        25.7        34.2   

Selling, general and administrative

     9.2        8.7        10.7   

Amortization of purchased intangible assets

     0.4        0.4        0.3   

Impairment of long-lived assets

     1.2        0.3        0.4   

Settlement costs (gains), net

     (0.1     0.8        2.7   

Restructuring costs, net

     0.2               0.2   

Charitable contributions

     0.3               1.1   
  

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     87.1        84.1        98.8   

Income from operations

     12.9        15.9        1.2   

Interest income (expense), net

     (0.1     0.1        0.3   

Other income, net

     0.1        0.1        0.1   
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     12.9        16.1        1.6   

Provision for income taxes

     0.3        0.2        0.1   
  

 

 

   

 

 

   

 

 

 

Net income

     12.6     15.9     1.5
  

 

 

   

 

 

   

 

 

 

The following table presents details of product and total gross margin as a percentage of product and total revenue, respectively:

     Year Ended December 31,  
       2011         2010         2009    

Product gross margin

     49.4     50.2     48.3

Total gross margin

     50.9        51.8        50.8   

 

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The following table presents details of total stock-based compensation expense as a percentage of net revenue included in each functional line item in the consolidated statements of income data above:

 

     Year Ended December 31,  
       2011         2010         2009    

Cost of product revenue

     0.3     0.3     0.5

Research and development

     4.9        5.0        7.8   

Selling, general and administrative

     1.7        1.7        2.7   

Years Ended December 31, 2011 and 2010

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

The following tables present net revenue, cost of product revenue, product gross margin and total gross margin:

 

     Year Ended December 31,              
     2011     2010              
     Amount     % of Net
Revenue
    Amount     % of Net
Revenue
    Increase     %
Change
 
     (In millions, except percentages)  

Product revenue

   $ 7,160        96.9   $ 6,589        96.7   $ 571        8.7

Income from Qualcomm Agreement

     207        2.8        207        3.0                 

Licensing revenue

     22        0.3        22        0.3                 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total net revenue

   $ 7,389        100.0   $ 6,818        100.0   $ 571        8.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Cost of product revenue

   $ 3,626        49.1   $ 3,284        48.2   $ 342        10.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Product gross margin

     49.4       50.2       (0.8 )%   
  

 

 

     

 

 

     

 

 

   

Total gross margin

     50.9       51.8       (0.9 )%   
  

 

 

     

 

 

     

 

 

   

 

     Three Months Ended              
     December 31, 2011     September 30, 2011              
     Amount     % of Net
Revenue
    Amount     % of Net
Revenue
    Increase
(Decrease)
    %
Change
 
     (In millions, except percentages)  

Product revenue

   $ 1,764        96.9   $ 1,902        97.2   $ (138     (7.3 )% 

Income from Qualcomm Agreement

     52        2.9        52        2.7                 

Licensing revenue

     4        0.2        3        0.1        1        33.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total net revenue

   $ 1,820        100.0   $ 1,957        100.0   $ (137     (7.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Cost of product revenue

   $ 894        $ 960        49.1   $ (66     (6.9
  

 

 

     

 

 

   

 

 

   

 

 

   

Product gross margin

     49.3       49.5       (0.2 )%   
  

 

 

     

 

 

     

 

 

   

Total gross margin

     50.9       50.9       0.0  
  

 

 

     

 

 

     

 

 

   

 

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Net Revenue.

The following table presents net revenue from each of our reportable segments and its respective contribution to net revenue:

 

     Year Ended December 31,              
     2011     2010              
     Amount      % of Net
Revenue
    Amount      % of Net
Revenue
    Increase
(Decrease)
    %
Change
 
     (In millions, except percentages)  

Broadband Communications

   $ 2,039         27.6   $ 2,134         31.3   $ (95     (4.5 )% 

Mobile & Wireless

     3,484         47.2        2,889         42.4        595        20.6   

Infrastructure & Networking

     1,658         22.4        1,588         23.3        70        4.4   

All other(1)

     208         2.8        207         3.0        1        0.5   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Total net revenue

   $ 7,389         100.0   $ 6,818         100.0   $ 571        8.4   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

(1) Includes (i) income relating to the Qualcomm Agreement that was entered into in April 2009 and (ii) other revenue from certain patent agreements. See discussion above in the “Overview” section and Notes 1 and 2 of Notes to Consolidated Financial Statements.

The decrease in net revenue from our Broadband Communications reportable segment resulted primarily from a decrease in demand for our digital television and Blu-ray Disc product lines and set top boxes, offset in part by an increase in demand for our broadband modems. As a result, we decided to reduce our investment in our digital television and Blu-ray Disc product lines and reallocate funding to higher return opportunities. The increase in net revenue from our Mobile & Wireless reportable segment resulted primarily from an increase in demand for our wireless connectivity and cellular solutions. The increase in net revenue from our Infrastructure & Networking reportable segment resulted primarily from an increase in demand for our Ethernet switching and wireless infrastructure products, offset in part by a reduction in demand for our Ethernet controller products.

The following table presents net revenue from each of the reportable segments and its respective contribution to net revenue:

 

     Three Months Ended     Decrease     %
Change
 
     December 31,
2011
    September 30,
2011
     
     Amount      % of  Net
Revenue
    Amount      % of  Net
Revenue
     
     (In millions, except percentages)  

Broadband Communications

   $ 510         28.0   $ 526         26.9   $ (16     (3.0 )% 

Mobile & Wireless

     876         48.1        942         48.1        (66     (7.0

Infrastructure & Networking

     382         21.0        437         22.3        (55     (12.6

All other(1)

     52         2.9        52         2.7                 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Total net revenue

   $  1,820         100.0   $ 1,957         100.0   $ (137     (7.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

(1) Includes (i) income relating to the Qualcomm Agreement that was entered into in April 2009 and (ii) other revenue from certain patent agreements. See discussion above in the “Overview” section and Notes 1 and 2 of Notes to Consolidated Financial Statements.

The decrease in net revenue from our Broadband Communications reportable segment resulted primarily from a decrease in demand for our digital television and Blu-ray Disc product lines. The decrease in net revenue from our Mobile & Wireless reportable segment resulted from a decrease in demand for our wireless connectivity solutions. The decrease in net revenue from our Infrastructure & Networking reportable segment resulted primarily from a decrease in demand for most product lines.

We recorded rebates to certain customers of $643 million, or 8.7% of net revenue and $526 million, or 7.7% of net revenue in 2011 and 2010, respectively. The increase in rebates in 2011 was attributable to a change in the mix of sales to customers that participate in our rebate programs, primarily an increase in the Mobile & Wireless area. We

 

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anticipate that accrued rebates will vary in future periods based upon the level of overall sales to customers that participate in our rebate programs. 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 $13 million and $4 million in 2011 and 2010, respectively.

From time to time, our key customers place large orders causing our quarterly net revenue to fluctuate significantly. We expect that these fluctuations will continue and that they may be exaggerated by the seasonal variations in consumer products and changes in the overall economic environment. Additionally, since we own inventory that is physically located in a third party’s warehouse, our ability to effectively manage inventory levels may be impaired, causing our total inventory turns to decrease, which could increase expenses associated with excess and obsolete products and negatively impact our cash flow.

For these and other reasons, our total net revenue and results of operations for the year ended December 31, 2011 and prior periods may not necessarily be indicative of future net revenue and results of operations.

Concentration of Net Revenue

The following table presents details of our product net revenue:

 

      Year Ended December 31,  
      2011     2010     2009  

Product sales through direct sales force

     76.8     77.6     78.8

Product sales maintained under fulfillment distributor arrangements

     7.5        7.9        8.1   

Product sales through distributors

     15.7        14.5        13.1   
  

 

 

   

 

 

   

 

 

 
     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

 

Sales to our significant customers, including sales to their manufacturing subcontractors, as a percentage of net revenue were as follows:

 

      Year Ended
December 31,
 
      2011     2010     2009  

Apple

     13.1     10.9     *   

Samsung

     10.0        10.0        10.3

Five largest customers as a group

     42.6        38.6        34.6   

 

* Less than 10% of net revenue.

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

Product revenue derived from shipments to international destinations, as a percentage of product revenue was as follows:

 

      Year Ended
December 31,
 
      2011     2010     2009  

China (exclusive of Hong Kong)

     33.4     30.4     28.3

Hong Kong

     26.4        26.0        24.8   

Singapore, Taiwan and Japan

     22.9        25.3        26.3   

Europe

     1.8        2.4        2.7   

Other

     14.0        13.1        12.7   
  

 

 

   

 

 

   

 

 

 
     98.5     97.2     94.8
  

 

 

   

 

 

   

 

 

 

All of our revenue to date has been denominated in U.S. dollars.

 

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Factors That May Impact Net Revenue

The demand for our products and the subsequent recognition of net revenue has been affected in the past, and may continue to be affected in the future, by various factors, including, but not limited to, the following:

 

   

general economic and specific conditions in the markets we address, including the continuing volatility in the technology sector and semiconductor industry, trends in the wired and wireless communications markets in various geographic regions, including seasonality in sales of consumer products into which our products are incorporated;

   

the timing, rescheduling or cancellation of significant customer orders and our ability, as well as the ability of our customers and distributors, to manage inventory;

   

the timing of our distributors’ shipments to their customers or when products are taken by our customers under hubbing arrangements;

   

our ability to specify, develop or acquire, complete, introduce, market and transition to volume production new products and technologies in a cost effective and timely manner;

   

the rate at which our present and future customers and end-users adopt/ramp our products and technologies;

   

the qualification, availability and pricing of competing products and technologies and the resulting effects on sales and pricing of our products; and

   

the availability of credit and financing, which may lead certain of our customers to reduce their level of purchases or to seek credit or other accommodations from us.

Cost of Product Revenue and Product Gross Margin.    Cost of product revenue comprises the cost of our semiconductor devices, which consists of the cost of purchasing finished silicon wafers manufactured by independent foundries, costs associated with our purchase of assembly, test and quality assurance services and packaging materials for semiconductor products, as well as royalties paid to vendors for use of their technology. Also included in cost of product revenue is the amortization of purchased technology and inventory valuation step-up, and manufacturing overhead, including costs of personnel and equipment associated with manufacturing support, product warranty costs, provisions for excess and obsolete inventories, and stock-based compensation expense for personnel engaged in manufacturing support. Product gross margin is product revenue less cost of product revenue divided by product revenue and does not include income from the Qualcomm Agreement and revenue from the licensing of intellectual property. Total gross margin is total net revenue less cost of product revenue divided by total net revenue.

Product gross margin decreased to 49.4% in 2011 as compared to 50.2% in 2010 primarily as a result of (i) an increase in amortization of purchased intangibles and inventory valuation step-up of $37 million primarily due to our acquisitions completed over the last twelve months, and (ii) a shift in the mix of our product revenues with more revenues attributable to Mobile & Wireless products.

Product gross margin decreased to 49.3% in the three months ended December 31, 2011 from 49.5% in the three months ended September 30, 2011 primarily as a result of a shift in the mix of our product revenues, offset in part by a decrease in amortization of inventory valuation step-up of $4 million.

Factors That May Impact Product and Total Gross Margin

Our product gross margin has been affected in the past, and may continue to be affected in the future, by various factors, including, but not limited to, the following:

 

   

our product mix and volume of product sales (including sales to high volume customers);

   

the positions of our products in their respective life cycles;

   

introduction of products with lower margins;

   

the effects of competition;

   

the effects of competitive pricing programs and rebates;

   

provisions for excess and obsolete inventories and their relationship to demand volatility;

   

manufacturing cost efficiencies and inefficiencies;

   

fluctuations in direct product costs such as silicon wafer costs and assembly, packaging and testing costs, and other fixed costs;

   

our ability to create cost advantages through successful integration and convergence;

 

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our ability to advance to the next technology node faster than our competitors;

   

the consolidation of foundry subcontractors that could potentially drive increased wafer prices;

   

licensing royalties payable by us;

   

product warranty costs;

   

fair value and related amortization of acquired tangible and intangible assets; and

   

amortization of acquired inventory valuation step-up.

Our product and total gross margin may also be impacted by additional stock-based compensation expense and changes therein, as discussed below, and the amortization of purchased intangible assets related to future acquisitions.

Research and Development Expense

Research and development expense consists primarily of salaries and related costs of employees engaged in research, design and development activities, including stock-based compensation expense. Development and design costs consist primarily of costs related to engineering design tools, mask and prototyping costs, testing and subcontracting costs. In addition, we incur costs related to facilities and equipment expense, among other items.

The following table presents details of research and development expense:

 

      Year Ended December 31,     Increase      %
Change
 
      2011     2010       
      Amount      % of  Net
Revenue
    Amount      % of  Net
Revenue
      
     (In millions, except percentages)  

Salaries and benefits

   $ 1,097         14.8   $ 929         13.6   $ 168         18.1

Stock-based compensation

     364         4.9        341         5.0        23         6.7   

Development and design costs

     278         3.8        274         4.0        4         1.5   

Other

     244         3.3        218         3.1        26         11.9   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Research and development

   $ 1,983         26.8   $ 1,762         25.7   $ 221         12.5   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

The increase in salaries and benefits and stock-based compensation were primarily attributable to an increase in headcount of approximately 460 personnel, bringing headcount to approximately 7,260 at December 31, 2011, which represents a 6.8% increase from our December 31, 2010 levels. Development and design costs vary from period to period depending on the timing development and tape-out of various products. The increase in the Other line item in the above table is primarily attributable to an increase in depreciation, travel and facilities expenses.

We expect research and development costs to increase as a result of growth in, and the diversification of, the markets we serve, new product opportunities, the number of design wins that go into production, changes in our compensation policies, and any expansion into new markets and technologies.

We remain committed to significant research and development efforts to extend our technology leadership in the wired and wireless communications markets in which we operate. Approximately 61.3% of our products are currently manufactured in 65 nanometers. We are designing most new products in 40 nanometers and 28 nanometers, and are beginning to evaluate 20 nanometers. We currently hold more than 6,000 U.S. and more than 2,550 foreign patents and more than 7,350 additional U.S. and foreign pending patent applications. We maintain an active program of filing for and acquiring additional U.S. and foreign patents in wired and wireless communications and other fields.

Selling, General and Administrative Expense

Selling, general and administrative expense consists primarily of personnel-related expenses, including stock-based compensation expense, legal and other professional fees, facilities expenses and communications expenses.

 

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The following table presents details of selling, general and administrative expense:

 

      Year Ended December 31,     Increase      %
Change
 
      2011     2010       
      Amount      % of Net
Revenue
    Amount      % of Net
Revenue
      
     (In millions, except percentages)  

Salaries and benefits

   $ 293         4.0   $ 240         3.5   $ 53         22.1

Stock-based compensation

     126         1.7        119         1.7        7         5.9   

Legal and accounting fees

     149         2.0        140         2.1        9         6.4   

Other

     114         1.5        91         1.4        23         25.3   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Selling, general and administrative

   $ 682         9.2   $ 590         8.7   $ 92         15.6   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

The increase in salaries and benefits and stock-based compensation were primarily attributable to an increase in headcount of approximately 140 personnel, bringing headcount to approximately 1,750 at December 31, 2011, which represents an 8.9% increase from our December 31, 2010 levels. The increase in legal and accounting fees primarily related to legal fees associated with the federal consolidated shareholder derivative settlement, which included a final $25 million payment to the plaintiffs’ counsel for attorneys’ fees, expenses and costs. Legal fees consist primarily of attorneys’ fees and expenses related to our outstanding intellectual property and prior years’ securities litigation, patent prosecution and filings and various other transactions. Legal fees fluctuate from period to period due to the nature, scope, timing and costs of the matters in litigation. See Note 12 of Notes to the Consolidated Financial Statements for further information. The increase in the Other line item in the above table is primarily attributable to an increase in travel and facilities expense.

Stock-Based Compensation Expense

The following table presents details of total stock-based compensation expense that is included in each functional line item in our consolidated statements of income discussed above:

 

      Year Ended December 31,     Increase      %
Change
 
      2011     2010       
      Amount      % of Net
Revenue
    Amount      % of Net
Revenue
      
     (In millions, except percentages)  

Cost of product revenue

   $ 24         0.3   $ 23         0.3   $ 1         4.3

Research and development

     364         4.9        341         5.0        23         6.7   

Selling, general and administrative

     126         1.7        119         1.7        7         5.9   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    
   $ 514         6.9   $ 483         7.0   $ 31         6.4   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

The following table presents details of unearned stock-based compensation currently estimated to be expensed in 2012 through 2015 related to unvested share-based payment awards:

 

     2012      2013      2014      2015      Total  
     (In millions)  

Unearned stock-based compensation

   $ 357       $ 228       $ 119       $ 21       $ 725   

If there are any modifications or cancellations of the underlying unvested awards, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that we grant additional equity awards to employees or assume unvested equity awards in connection with acquisitions. The increase in stock-based compensation in 2011 as compared to 2010 primarily related to the commencement of a new two-year offering period under our employee stock purchase program, which resulted in a $36 million increase in stock-based compensation expense as compared to 2010.

It is our long-term objective that total stock-based compensation approximates 5% of total net revenue.

 

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See Note 9 of Notes to Consolidated Financial Statements for a discussion of share-based awards.

Amortization of Purchased Intangible Assets

The following table presents details of the amortization of purchased intangible assets included in the cost of product revenue and other operating expense categories:

 

      Year Ended December 31,     Increase      %
Change
 
      2011     2010       
      Amount      % of Net
Revenue
    Amount      % of Net
Revenue
      
     (In millions, except percentages)  

Cost of product revenue

   $ 54         0.7   $ 31         0.5   $ 23         74.2

Other operating expenses

     30         0.4        28         0.4        2         7.1   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    
   $ 84         1.1   $ 59         0.9   $ 25         42.4   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

The increase in amortization of purchased intangible assets in 2011 as compared to 2010 was primarily related to our acquisitions of Beceem Communications, Inc. in late 2010 and Provigent in 2011.

The following table presents details of the amortization of existing purchased intangible assets, including IPR&D, which is currently estimated to be expensed in 2012 and thereafter.

 

      Purchased Intangible Assets Amortization by Year  
      2012      2013      2014      2015      2016      Thereafter      Total  
     (In millions)  

Cost of product revenue

   $ 77       $ 72       $ 60       $ 46       $ 33       $ 56       $ 344   

Other operating expenses

     27         10         4         4         4         7         56   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 104       $ 82       $ 64       $ 50       $ 37       $ 63       $ 400   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

If we acquire additional purchased intangible assets in the future, including purchased intangible assets related to our pending acquisition of NetLogic, our cost of product revenue or operating expenses will be increased by the amortization of those assets.

Impairment of Goodwill and Other Long-Lived Assets

We performed annual impairment assessments of the carrying value of goodwill in October 2011 and 2010. Upon completion of these assessments, we determined no impairment was indicated as the estimated fair value of each of the reporting units exceeded its respective carrying value. We also believe that we have no at-risk goodwill. We recorded a purchased intangible impairment charge of $74 million related to our acquisition of Beceem and other impairment charges of $18 million in 2011. The primary factor contributing to the Beceem impairment charge was a reduction in the forecasted cash flows related to WiMAX products, as wireless service providers have accelerated their adoption of LTE products. In 2010 we recorded an impairment charge of $19 million, primarily related to a technology license that was acquired in 2008 from Sunext Design, Inc. For the carrying balances of our goodwill by reporting segment and a description of our valuation techniques and significant assumptions as well as details of our other long-lived assets impairment charges taken, see the discussions in Notes 2 and 10 of Notes to the Consolidated Financial Statements.

Restructuring Costs

As discussed above in “Operating Results for the Year Ended December 31, 2011,” we recorded an aggregate of $16 million in net restructuring costs in 2011, of which $12 million was related to severance and other charges associated with our reduction in workforce across multiple locations and functions, and $4 million was related to the closure of three of our facilities. We do not expect any cost savings as we plan to reallocate funding to higher return opportunities. We currently expect to complete this plan and record additional costs of approximately $1 million in the three months ended March 31, 2012.

 

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Settlement Costs (Gains), Net

In 2011 we recorded settlement gains of $55 million primarily related to the settlement of our shareholder derivative action, partially offset by net settlement costs of $37 million related to patent infringement claims, resulting in net settlement gains of $18 million. In 2010 we recorded settlement costs of $53 million primarily related to licensing and settlement agreements and certain employment tax items.

For a further discussion of our settlement costs and litigation matters, see Notes 11 and 12 of Notes to the Consolidated Financial Statements.

In-Process Research and Development

In 2011 and 2010 we capitalized IPR&D of $45 million and $55 million, respectively. For a description of our valuation techniques and significant assumptions underlying the valuation of the ongoing development projects that were in process at the date of acquisition and were capitalized as IPR&D in 2011 and 2010, see the discussion in Note 3 of Notes to the Consolidated Financial Statements. In addition, in 2011 and 2010 we reclassified $3 million and $51 million, respectively, of IPR&D costs to developed technology, primarily related to our acquisition of Dune Networks, Inc., which will now be amortized to cost of product revenue.

Charitable Contributions

In April 2009 we established the Broadcom Foundation, or the Foundation, to support science, technology, engineering and mathematics programs, as well as a broad range of community services. In June 2011 we contributed an additional $25 million to the Foundation. Approximately $2 million of the $25 million contribution came from Dr. Henry Samueli, our Chief Technical Officer and member of the Board of Directors, who made such payment to Broadcom in connection with the settlement of the shareholder derivative litigation as further described in Note 12 of Notes to the Consolidated Financial Statements. This payment was recorded as an operating expense in consolidated statement of income in 2011.

Interest and Other Income, Net

The following table presents interest and other income, net:

 

     Year Ended December 31,     Increase
(Decrease)
    %
Change
 
     2011     2010      
     Amount     % of Net
Revenue
    Amount      % of Net
Revenue
     
     (In millions, except percentages)  

Interest income (expense), net

   $ (5     (0.1 %)    $ 9         0.1   $ (14     (155.6 )% 

Other income, net

     8        0.1        6         0.1        2        33.3   

Interest income (expense), net, reflects interest income earned on cash, cash equivalents and marketable securities balances offset by interest expense on our Senior Notes totaling $1.20 billion. Other income, net, primarily includes gains on foreign currency transactions.

The decrease in interest income (expense), net, for 2011 as compared to 2010 was driven primarily by interest expense related to our newly issued long-term debt. See Note 6 of Notes to the Consolidated Financial Statements.

Provision for Income Taxes

 

     Year Ended December 31,     Increase      %
Change
 
     2011     2010       
     Amount      % of Net
Revenue
    Amount      % of Net
Revenue
      
     (In millions, except percentages)  

Income tax provision

   $ 29         0.3   $ 15         0.2   $ 14         93.3

The federal statutory rate was 35% for 2011 and 2010. Our effective tax rates were 3.0% and 1.4% for 2011 and 2010, respectively. The differences between our effective tax rates and the federal statutory tax rate primarily

 

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relate to foreign earnings taxed at substantially lower rates than the federal statutory rate for 2011 and 2010 due principally to our tax holiday in Singapore, and for 2011 and 2010 domestic tax losses recorded without tax benefits. We recorded a tax provision of $13 million in 2011 resulting from legislation enacted in Israel on December 5, 2011 which increased tax rates for 2012 and later years applicable to our Israel net deferred tax liabilities, principally related to purchased intangible assets. We realized tax benefits resulting from the reversal of certain prior period tax accruals of $9 million and $12 million in 2011 and 2010, respectively. These reversals resulted primarily from the expiration of the statutes of limitation for the assessment of taxes related to certain foreign subsidiaries. Additionally, as a result of the March 22, 2010 decision in the U.S. Court of Appeals for the Ninth Circuit case concerning Xilinx, we recorded a tax benefit of approximately $3 million in 2010 to reverse the approximately $3 million of related exposure previously recorded in 2009. See Note 5 of Notes to Consolidated Financial Statements for detailed discussions of our income taxes.

We operate under tax holidays in Singapore, which are effective through March 2014. The tax holidays are conditional upon our meeting certain employment and investment thresholds. The impact of the Singapore tax holidays decreased Singapore taxes by $368 million and $330 million for 2011 and 2010, respectively. The benefit of the tax holidays on net income per share (diluted) was $0.65 and $0.61 for 2011 and 2010, respectively. We have begun discussions with the Singapore Economic Development Board with respect to tax incentives for periods after March 31, 2014.

Years Ended December 31, 2010 and 2009

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

The following tables present net revenue, cost of product revenue, product gross margin and total gross margin:

 

     Year Ended December 31,     Increase
(Decrease)
    %
Change
 
     2010     2009      
     Amount     % of Net
Revenue
    Amount     % of Net
Revenue
     
     (In millions, except percentages)  

Product revenue

   $ 6,589        96.7   $ 4,273        95.2   $ 2,316        54.2

Income from Qualcomm Agreement

     207        3.0        171        3.8        36        21.1   

Licensing revenue

     22        0.3        46        1.0        (24     (52.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total net revenue

   $ 6,818        100.0   $ 4,490        100.0   $ 2,328        51.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Cost of product revenue

   $ 3,284        48.2   $ 2,211        49.2   $ 1,073        48.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Product gross margin

     50.2       48.3       1.9  
  

 

 

     

 

 

     

 

 

   

Total gross margin

     51.8       50.8       1.0  
  

 

 

     

 

 

     

 

 

   

The following table presents net revenue from each of our reportable segments and its respective contribution to net revenue:

 

     Year Ended December 31,     Increase      %
Change
 
     2010     2009       
     Amount      % of Net
Revenue
    Amount      % of Net
Revenue
      
     (In millions, except percentages)  

Broadband Communications

   $ 2,134         31.3   $ 1,525         34.0   $ 609         39.9

Mobile & Wireless

     2,889         42.4        1,720         38.3        1,169         68.0   

Infrastructure & Networking

     1,588         23.3        1,056         23.5        532         50.4   

All other(1)

     207         3.0        189         4.2        18         9.5   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total net revenue

   $ 6,818         100.0   $ 4,490         100.0   $ 2,328         51.8   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

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(1) Includes (i) income relating to the Qualcomm Agreement that was entered into in April 2009, (ii) royalties received pursuant to a patent license agreement that was entered into with Verizon Wireless in July 2007 which was completed in March 2009 and (iii) other revenue from certain patent agreements, each previously reported in our Mobile & Wireless reportable segment. See Notes 1 and 2 of Notes to Consolidated Financial Statements.

The increase in net revenue from our Broadband Communications reportable segment resulted primarily from an increase in demand for digital set-top boxes and broadband modems. The increase in net revenue from our Mobile & Wireless reportable segment resulted primarily from the increase in demand for our wireless connectivity combo solutions, as well as the ramp of our cellular products. The increase in net revenue from our Infrastructure & Networking reportable segment resulted primarily from an increase in demand for our Ethernet switching products. The increase in our “All Other” category was the result of a $36 million increase in income received from the Qualcomm Agreement, offset in part by a $19 million decrease in licensing revenue from our agreement with Verizon Wireless, which was completed in March 2009.

We recorded rebates to certain customers of $526 million, or 7.7% of net revenue and $312 million, or 6.9% of net revenue in 2010 and 2009, respectively. The increase in rebates in 2010 was attributable to the increase in net revenue along with a change to the mix in sales to customers that participate in our rebate programs, primarily an increase in the Mobile & Wireless reportable segment. We reversed accrued rebates of $4 million and $11 million in 2010 and 2009, respectively.

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

Product gross margin increased from 48.3% in 2009 to 50.2% in 2010 primarily as a result of cost reductions in each of our reportable segments as we continued our transition to 40 nanometer process technology. Other factors that contributed to the increase in product gross margin were: (i) fixed costs being spread over a higher revenue base (ii) higher margins in our infrastructure and networking products offset by (iii) a net increase in excess and obsolete inventory provisions of $7 million due to an increase in the provision for digital TV products.

Research and Development Expense

The following table presents details of research and development expense:

 

     Year Ended December 31,     Increase
(Decrease)
    %
Change
 
     2010     2009      
     Amount      % of Net
Revenue
    Amount      % of Net
Revenue
     
     (In millions, except percentages)  

Salaries and benefits

   $ 929         13.6   $ 770         17.2   $ 159        20.6

Stock-based compensation

     341         5.0        352         7.8        (11     (3.1

Development and design costs

     274         4.0        211         4.7        63        29.9   

Other

     218         3.1        202         4.5        16        7.9   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Research and development

   $ 1,762         25.7   $ 1,535         34.2   $ 227        14.8   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

The increase in salaries and benefits was primarily attributable to an increase in headcount of approximately 1,300 personnel; bringing total headcount to approximately 6,800 personnel. This represents a 23.6% increase from our December 31, 2009 levels, and was predominantly in each of our reportable segments as a result of both organic growth and our 2010 acquisitions. Salary increases were also attributable to increased incentive compensation. Development and design costs increased due to increases in mask, prototyping, testing and engineering design tool costs stemming from our continued transition of products to 40 nanometer process technologies. Development and design costs vary from period to period depending on the timing, development and tape-out of various products.

 

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Selling, General and Administrative Expense

The following table presents details of selling, general and administrative expense:

 

     Year Ended December 31,     Increase
(Decrease)
    %
Change
 
     2010     2009      
     Amount      % of Net
Revenue
    Amount      % of Net
Revenue
     
     (In millions, except percentages)  

Salaries and benefits

   $ 240         3.5   $ 194         4.3   $ 46        23.7

Stock-based compensation

     119         1.7        120         2.7        (1     (0.8

Legal and accounting fees

     140         2.1        110         2.5        30        27.3   

Other

     91         1.4        55         1.2        36        65.5   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Selling, general and administrative

   $ 590         8.7   $ 479         10.7   $ 111        23.2   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

The increase in salaries and benefits was primarily attributable to an increase in headcount of approximately 300 personnel, which represents a 23.1% increase from our December 31, 2009 levels, as well as higher incentive compensation. The increase in legal and accounting fees in 2010 was primarily related to a 2009 recovery of legal fees of $91 million under our directors’ and officers’ insurance policies, which reduced our 2009 legal fees. Legal fees consist primarily of attorneys’ fees and expenses related to our outstanding intellectual property and prior years’ stock option backdating securities litigation, patent prosecution and filings and various other transactions. Legal fees fluctuate from period to period due to the nature, scope, timing and costs of the matters in litigation. See Note 12 of Notes to Consolidated Financial Statements for further information. The increase in the Other line item in the above table is primarily attributable to an increase in facilities and travel expenses.

Stock-Based Compensation Expense

The following table presents details of total stock-based compensation expense that is included in each functional line item in our consolidated statements of income discussed above:

 

     Year Ended December 31,     Decrease     %
Change
 
     2010     2009      
     Amount      % of Net
Revenue
    Amount      % of Net
Revenue
     
     (In millions, except percentages)  

Cost of product revenue

   $ 23         0.3   $ 25         0.5   $ (2     (8.0 )% 

Research and development

     341         5.0        352         7.8        (11     (3.1

Selling, general and administrative

     119         1.7        120         2.7        (1     (0.8
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   
   $ 483         7.0   $ 497         11.0   $ (14     (2.8
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

See Note 9 of Notes to Consolidated Financial Statements for a discussion of share-based awards.

Amortization of Purchased Intangible Assets

The following table presents details of the amortization of purchased intangible assets included in the cost of product revenue and other operating expense categories:

 

     Year Ended December 31,     Increase      %
Change
 
     2010     2009       
     Amount      % of Net
Revenue
    Amount      % of Net
Revenue
      
     (In millions, except percentages)  

Cost of product revenue

   $ 31         0.5   $ 16         0.4   $ 15         93.8

Other operating expenses

     28         0.4        15         0.3        13         86.7   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    
   $ 59         0.9   $ 31         0.7   $ 28         90.3   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

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Impairment of Goodwill and Other Long-Lived Assets

We performed annual impairment assessments of the carrying value of goodwill in October 2010 and 2009. Upon completion of our October 2010 and 2009 annual impairment assessments, we determined no impairment was indicated as the estimated fair value of each of the reporting units exceeded its respective carrying value. In 2010 we recorded a purchased intangible impairment charge of $19 million, primarily related to a technology license that was acquired in 2008 from Sunext. In 2009 we recorded impairment charges to customer relationships, developed technology and certain other assets of $19 million related to the acquisition of the DTV Business of AMD in 2008. For a description of our valuation techniques and significant assumptions as well as details of our other long-lived assets impairment charges taken, see the discussions in Note 2 and Note 10 of Notes to the Consolidated Financial Statements.

Settlement Costs (Gains)

We recorded settlement costs of $53 million in 2010 primarily related to licensing and settlement agreements and certain employment tax items. In 2009 we incurred settlement costs of $184 million, partially offset by settlement gains of $66 million, resulting in $118 million of net settlement costs.

In December 2009 we agreed in principle to the settlement of the Stock Option Class Actions. We subsequently entered into a stipulation and agreement of settlement of the Stock Option Class Actions dated as of April 30, 2010, which provides for the claims against Broadcom and its current and former officers and directors to be dismissed with prejudice and released in exchange for a $161 million cash payment by Broadcom. We recorded the settlement amount as a one-time charge in our statement of income for the three months and year ended December 31, 2009 and subsequent payment was made in June 2010 into a settlement fund.

For further discussion of our settlement costs and litigation matters, see Notes 11 and 12 of Notes to the Consolidated Financial Statements.

We recorded settlement gains of $65 million related to the Qualcomm Agreement in 2009. In addition, we recorded settlement costs of $12 million related to a payment to the Israeli government associated with a post-acquisition technology transfer fee related to our acquisition of Dune Networks, Inc. We also recorded $11 million in settlement costs in 2009 for estimated settlements associated with certain employment tax items, other employment matters and a patent infringement claim.

In-Process Research and Development

In 2010 and 2009 we capitalized IPR&D of $55 million and $50 million, respectively. For a description of our valuation techniques and significant assumptions underlying the valuation of the ongoing development projects that were in process at the date of acquisition and were capitalized as IPR&D in 2011 and 2010, see the discussion Note 3 of Notes to the Consolidated Financial Statements. In addition, in 2010 we reclassified $51 million of IPR&D costs to developed technology, primarily related to our acquisition of Dune Networks, Inc., which will now be amortized to cost of product revenue.

Charitable Contribution

In 2009 we made an unrestricted grant of $50 million to the Foundation upon receiving a determination letter from the Internal Revenue Service of the exemption from federal income taxation under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended. We recorded an operating expense for the contribution of $50 million in 2009. We did not make any contributions to the Foundation in 2010.

 

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Interest and Other Income (Expense), Net

The following table presents interest and other income (expense), net:

 

     Year Ended December 31,     Increase
(Decrease)
    %
Change
 
     2010     2009      
     Amount      % of Net
Revenue
    Amount      % of Net
Revenue
     
     (In millions, except percentages)  

Interest income, net

   $ 9         0.1   $ 14         0.3   $ (5     (35.7 )% 

Other income, net

     6         0.1        2         0.1        4        200.0   

The decrease in interest income, net, was the result of interest expense related to long-term debt and the overall decrease in market interest rates. Our cash and marketable securities balances increased from $2.37 billion at December 31, 2009 to $4.06 billion at December 31, 2010, primarily due to net cash provided by operating activities, proceeds from exercise of stock options and stock purchase rights and proceeds from the issuance of our long-term debt. The average interest rates earned in 2010 and 2009 were 0.43% and 0.63%, respectively. The decrease in the average interest rate is a reflection of reinvestment in the current low interest rate environment.

The increase in other income, net was primarily the result of a gain on strategic investments.

Provision for Income Taxes

 

     Year Ended December 31,     Increase      %
Change
 
     2010     2009       
     Amount      % of Net
Revenue
    Amount      % of Net
Revenue
      
     (In millions, except percentages)  

Income tax provision

   $ 15         0.2   $ 7         0.1   $ 8         114.3

The federal statutory rate was 35% for 2010 and 2009. Our effective tax rates were 1.4% and 9.6% for 2010 and 2009, respectively. The differences between our effective tax rates and the federal statutory tax rate primarily relate to foreign earnings taxed at substantially lower rates than the federal statutory rate for 2010 and 2009 due principally to our tax holiday in Singapore, and for 2010 and 2009 domestic tax losses recorded without tax benefits. We recognized federal tax benefits of approximately $3 million in 2009, which resulted from the utilization of a portion of our federal credits for increasing research activities (research and development tax credits) pursuant to a provision contained in the American Recovery and Reinvestment Tax Act of 2009, which was enacted in February, 2009. In addition, we realized tax benefits resulting from the reversal of certain prior period tax accruals of $12 million and $8 million in 2010 and 2009, respectively. These reversals resulted primarily from the expiration of the statutes of limitation for the assessment of taxes related to certain foreign subsidiaries. Additionally, as a result of the May 27, 2009 and March 22, 2010 decisions in the U.S. Court of Appeals for the Ninth Circuit case concerning Xilinx, we recorded a tax benefit of approximately $3 million in 2010 to reverse the approximately $3 million of related exposure previously recorded in 2009. See Note 5 of Notes to Consolidated Financial Statements for detailed discussions of our income taxes.

We operate under tax holidays in Singapore, which are effective through March 2014. The tax holidays are conditional upon our meeting certain employment and investment thresholds. The impact of the Singapore tax holidays decreased Singapore taxes by $330 million and $225 million for 2010 and 2009, respectively. The benefit of the tax holidays on net income per share (diluted) was $0.61 and $0.44 for 2010 and 2009, respectively.

At December 31, 2010 we had unrecognized tax benefits in the amount of $188 million which included $23 million of tax benefits that, if recognized, would reduce our annual effective tax rate. Approximately $12 million of the tax benefit, if recognized would be credited to shareholder’s equity. The remaining $153 million, if recognized, would not result in a tax benefit since it would be fully offset with a valuation allowance. We also accrued potential penalties and interest of $2 million and $1 million, respectively, related to these unrecognized tax benefits during 2010, and in total, as of December 31, 2010, we had recorded liabilities for potential penalties and interest of $14 million and $2 million, respectively. We recognize potential accrued interest and penalties related to

 

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unrecognized tax benefits within the consolidated statements of income as income tax expense. In 2010 we had a decrease in unrecognized tax benefits of approximately $273 million relating to increases to our federal and state net operating loss carryforwards, capitalized research and development costs, and tax credit carryforwards for previous years primarily resulting from the U.S. Court of Appeals for the Ninth Circuit March 22, 2010 ruling in the case between Xilinx, Inc. and the Commissioner of Internal Revenue. In addition, we had an increase in unrecognized tax benefits of approximately $39 million primarily relating to transactions with certain foreign subsidiaries. In 2009 our judgment changed with respect to prior period uncertain tax positions, which resulted in additional unrecognized tax benefits in the amount of approximately $380 million as of December 31, 2009. In 2010 we reversed approximately $273 million of this amount due to the March 22, 2010 decision in the Xilinx case as discussed above, and recorded $23 million of unrecognized tax benefits resulting from a 2010 change in judgment regarding certain tax accruals.

Quarterly Financial Data

The following table presents our quarterly financial data. In our opinion, this information has been prepared on a basis consistent with that of our audited consolidated financial statements and all necessary material adjustments, consisting of normal recurring accruals and adjustments, have been included to present fairly the quarterly financial data. Our quarterly results of operations for these periods are not necessarily indicative of future results of operations.

 

     Total Net
Revenue
     Gross
Profit
     Net
Income
    Diluted Net
Income
Per
Share
 
     (In millions, except per share data)  

Year Ended December 31, 2011

          

Fourth Quarter

   $ 1,820       $ 926       $ 254      $ 0.45   

Third Quarter

     1,957         997         270 (1)      0.48   

Second Quarter

     1,796         919         175 (2)      0.31   

First Quarter

     1,816         921         228        0.40   

Year Ended December 31, 2010

          

Fourth Quarter

   $ 1,945       $ 990       $ 266 (3)    $ 0.47   

Third Quarter

     1,806         934         328        0.60   

Second Quarter

     1,605         843         278        0.52   

First Quarter

     1,462         767         210        0.40   

 

(1) Includes settlement costs of $27 million and a restructuring charge of $17 million.

 

(2) Includes settlement gains of $45 million, an impairment of long-lived assets charge of $74 million, a charitable contribution of $25 million and non-recurring legal expenses of $25 million.

 

(3) Includes settlement costs of $49 million and an impairment of long-lived assets charge of $17 million.

Subsequent Events

In January 2012 our Board of Directors adopted an amendment to the existing dividend policy pursuant to which we intend to increase the quarterly cash dividend by 11.1% to $0.10 per share ($0.40 per share on an annual basis) and declared a quarterly cash dividend of $0.10 per share payable to holders of our common stock.

Recent Accounting Pronouncements

In May 2011 the FASB issued additional guidance on fair value measurements that clarifies the application of existing guidance and disclosure requirements, changes certain fair value measurement principles and requires additional disclosures about fair value measurements. The updated guidance is effective on a prospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The adoption of this guidance will not have a material impact on our financial statements.

In June 2011 the FASB issued guidance regarding the presentation of comprehensive income. The new standard requires the presentation of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but

 

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consecutive statements. The updated guidance is effective on a retrospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The adoption of this guidance will not have a material impact on our financial statements.

Liquidity and Capital Resources

Working Capital and Cash and Marketable Securities.    The following table presents working capital, and cash and cash equivalents and marketable securities:

 

     December 31,      Increase
(Decrease)
 
     2011      2010     
     (In millions)  

Working capital

   $ 4,653       $ 2,913       $ 1,740   
  

 

 

    

 

 

    

 

 

 

Cash and cash equivalents

   $ 4,146       $ 1,622       $ 2,524   

Short-term marketable securities

     383         1,035         (652

Long-term marketable securities

     676         1,401         (725
  

 

 

    

 

 

    

 

 

 
   $ 5,205       $ 4,058       $ 1,147   
  

 

 

    

 

 

    

 

 

 

See the summary of cash, cash equivalents, short and long-term marketable securities by major security type and discussion of market risk that follows in Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

Cash Provided and Used in 2011 and 2010

Cash and cash equivalents increased to $4.15 billion at December 31, 2011 from $1.62 billion at December 31, 2010 as a result of cash provided by operating activities, proceeds from marketable securities, proceeds from the issuance of our long-term debt, and the issuance of our Class A common stock, offset in part by repurchases of our Class A common stock, net cash paid for acquired companies, our quarterly dividend payments and net purchases of property and equipment.

 

     Year Ended December 31,  
     2011     2010     2009  
     (In millions)  

Net cash provided by operating activities

   $ 1,838      $ 1,371      $ 987   

Net cash provided by (used in) investing activities

     863        (2,179     (502

Net cash provided by (used in) financing activities

     (177     1,033        (279
  

 

 

   

 

 

   

 

 

 

Increase in cash and cash equivalents

     2,524        225        206   

Cash and cash equivalents at beginning of year

     1,622        1,397        1,191   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 4,146      $ 1,622      $ 1,397   
  

 

 

   

 

 

   

 

 

 

Operating Activities

In 2011 our operating activities provided $1.84 billion in cash. This was primarily the result of net income of $927 million, net non-cash operating expenses of $784 million and net cash provided by changes in operating assets and liabilities of $127 million. In 2010 our operating activities provided $1.37 billion in cash. This was primarily the result of net income of $1.08 billion and net non-cash operating expenses of $638 million, offset in part by net cash used by changes in operating assets and liabilities of $349 million, which includes our $161 million payment of previously accrued securities litigation settlement costs.

Our days sales outstanding decreased to 34 days for the three months ended December 31, 2011 as compared to 38 days for the three months ended December 31, 2010 due to our revenue linearity. We typically bill customers on an open account basis subject to our standard net thirty day payment terms. If, in the longer term, our revenue increases, it is likely that our accounts receivable balance will also increase. Our accounts receivable could also

 

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increase if customers delay their payments or if we grant extended payment terms to customers, both of which are more likely to occur during challenging economic times when our customers may have difficulty gaining access to sufficient credit on a timely basis.

Our inventory days on hand decreased from 57 days at December 31, 2010 to 43 days at December 31, 2011, primarily attributable to inventory management. In the future, our inventory levels will continue to be determined by the level of purchase orders we receive and the stage at which our products are in their respective product life cycles, our ability, and the ability of our customers, to manage inventory under hubbing arrangements, and competitive situations in the marketplace. Such considerations are balanced against the risk of obsolescence or potentially excess inventory levels.

Investing Activities

Investing activities provided $863 million in cash in 2011. This was primarily the result of $1.38 billion in net proceeds from sales and maturities of marketable securities in anticipation of our acquisition of NetLogic in the first half of 2012, offset in part by $347 million in net cash paid for our acquisitions of Provigent and SC Square and $163 million of capital equipment purchases to support our research and development efforts. Investing activities used $2.18 billion in cash in 2010, which was primarily the result of $1.47 billion in net purchases of marketable securities, $599 million in net cash paid primarily for the acquisitions of Teknovus, Innovision, Percello, Beceem and Gigle, and $109 million of capital equipment purchases, mostly to support our research and development efforts.

Financing Activities

Our financing activities used $177 million in cash in 2011. This was primarily the result of $670 million in repurchases of shares of our Class A common stock, dividends paid of $194 million, and $155 million in minimum tax withholding paid on behalf of employees for shares issued pursuant to restricted stock units, offset in part by $494 million in proceeds from the issuance of our long-term debt and $348 million in proceeds received from issuances of common stock upon the exercise of stock options and pursuant to our employee stock purchase plan. Our financing activities provided $1.03 billion in cash in 2010, which was primarily the result of $936 million in proceeds received from issuances of common stock upon exercise of stock options and pursuant to our employee stock purchase plan and $691 million in proceeds from the issuance of our long-term debt, offset in part by $280 million in repurchases of shares of our Class A common stock, dividends paid of $163 million, repayment of debt assumed in our Teknovus acquisition of $15 million, and $136 million in minimum tax withholding paid on behalf of employees for shares issued pursuant to restricted stock units.

The timing and number of stock option exercises and employee stock purchases and the amount of cash proceeds we receive through those exercises and purchases are not within our control, and in the future we may not generate as much cash from the exercise of stock options as we have in the past. Moreover, it is now our general practice to issue a combination of time-based and performance-based RSUs only to certain employees and, in most cases to issue solely time-based RSUs. While we may issue stock options in the future, we currently plan to do so only in connection with acquisitions. Unlike the exercise of stock options, the issuance of shares upon vesting of restricted stock units does not result in any cash proceeds to Broadcom and requires the use of cash, as we currently allow employees to elect to have a portion of the shares issued upon vesting of restricted stock units withheld to satisfy minimum statutory withholding taxes, which we then pay in cash to the appropriate tax authorities on each participating employee’s behalf.

Short and Long-Term Financing Arrangements

At December 31, 2011, we had the following resources available to obtain short-term or long-term financings if we need additional liquidity:

Registration Statements

We have a Form S-3 universal shelf registration statement and a Form S-4 acquisition shelf registration statement on file with the SEC. The universal shelf registration statement on Form S-3 permits Broadcom to sell, in one or more public offerings, shares of our Class A common stock, shares of preferred stock or debt securities, or any

 

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combination of such securities, for proceeds in an aggregate amount of up to $1.50 billion. The 2018 Notes with an aggregate principal amount of $500 million that we issued in November 2011 (more fully described in Note 6 of Notes to Consolidated Financial Statements) were issued pursuant to the Form S-3. The Form S-3 will expire in accordance with applicable SEC rules on February 27, 2012. The acquisition shelf registration statement on Form S-4 enables us to issue up to 30 million shares of our Class A common stock in one or more acquisition transactions. These transactions may include the acquisition of assets, businesses or securities by any form of business combination. To date no securities have been issued pursuant to the S-4 registration statement, which does not have an expiration date mandated by SEC rules.

Credit Facility

In November 2010 we entered into a credit facility with certain institutional lenders that provides for unsecured revolving facility loans, swing line loans and letters of credit in an aggregate amount of up to $500 million. We amended this credit facility in October 2011 primarily to extend the maturity date by two years to November 19, 2016, at which time all outstanding revolving facility loans (if any) and accrued and unpaid interest must be repaid. The amendment to the credit facility also decreased the interest rate margins applicable to loans made under the credit facility and the commitment fee paid on the amount of the unused commitments. We did not draw on our credit facility in 2011 or 2010.

The credit facility contains customary representations, warranties and covenants. Financial covenants require us to maintain a consolidated leverage ratio of no more than 3.25 to 1.00 and a consolidated interest coverage ratio of no less than 3.00 to 1.00.

We were in compliance with all debt covenants as of December 31, 2011.

Senior Notes

The following table summarizes the principal amount of our senior unsecured notes:

 

     December 31,      Increase  
     2011      2010     
     (In millions)  

1.500% fixed-rate notes, due 2013

   $ 300       $ 300       $   

2.375% fixed-rate notes, due 2015

     400         400           

2.700% fixed-rate notes, due 2018

     500                 500   
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,200       $ 700       $ 500   
  

 

 

    

 

 

    

 

 

 

In November 2010 we issued senior unsecured notes in an aggregate principal amount of $700 million. These notes consist of $300 million aggregate principal amount which mature in November 2013, or the 2013 Notes, and bear interest at a fixed rate of 1.500% per annum, and $400 million aggregate principal amount which mature in November 2015, or the 2015 Notes, and bear interest at a fixed rate of 2.375% per annum. Proceeds from the issuance of the 2013 Notes and the 2015 Notes were utilized for general corporate purposes.

In November 2011 we issued senior unsecured notes in aggregate principal amount of $500 million which mature in November 2018 and bear interest at a fixed rate of 2.700% per annum, or the 2018 Notes. Proceeds from the 2018 Notes are expected to fund a portion of the acquisition consideration for NetLogic.

The 2018 Notes are subject to a mandatory redemption in the event Broadcom’s proposed acquisition of NetLogic is not consummated on or prior to August 31, 2012, or if prior to August 31, 2012, the Agreement and Plan of Merger is terminated. In such an event, the 2018 Notes will be redeemed for cash at a price equal to 101% of the aggregate principle amount plus accrued and unpaid interest.

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

 

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We were in compliance with all debt covenants as of December 31, 2011.

See Note 6 of Notes to Consolidated Financial Statements for additional discussion on our financing arrangements.

Other Notes and Borrowings

We had no other significant notes or borrowings as of December 31, 2011.

Obligations and Commitments

The following table summarizes our contractual obligations and commitments as of December 31, 2011:

 

     Payment Obligations by Year  
     2012      2013      2014      2015      2016      Thereafter      Total  
     (In millions)  

Operating leases

   $ 121       $ 120       $ 90       $ 76       $ 69       $ 123       $ 599   

Inventory and related purchase obligations

     468                                                 468   

Other obligations

     147         35         31         30         23         3         269   

Long-term debt and related interest

     27         328         23         423         13         527         1,341   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 763       $ 483       $ 144       $ 529       $ 105       $ 653       $ 2,677   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

We lease our facilities and certain engineering design tools and information systems equipment under operating lease agreements. Our leased facilities comprise an aggregate of 3.6 million square feet. Our principal facilities in Irvine have lease terms that expire at various dates through 2017 with an aggregate rent of $130 million (included in the table above).

Inventory and related purchase obligations represent purchase commitments for silicon wafers and assembly and test services. We depend upon third party subcontractors to manufacture our silicon wafers and provide assembly and test services. Due to lengthy subcontractor lead times, we must order these materials and services from subcontractors well in advance. We expect to receive and pay for these materials and services within the ensuing six months. Our subcontractor relationships typically allow for the cancellation of outstanding purchase orders, but require payment of all expenses incurred through the date of cancellation. To date we have not incurred significant cancellation charges.

Other obligations represent purchase commitments for lab test equipment, computer hardware, information systems infrastructure, mask and prototyping costs, intellectual property licensing arrangements and other commitments made in the ordinary course of business.

For purposes of the table above, obligations for the purchase of goods or services are defined as agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Our purchase orders are based on our current manufacturing needs and are typically fulfilled by our vendors within a relatively short time horizon. We have additional purchase orders (not included in the table above) that represent authorizations to purchase rather than binding agreements. We do not have significant agreements for the purchase of inventories or other goods specifying minimum quantities or set prices that exceed our expected requirements.

Unrecognized tax benefits were $212 million, of which $25 million would result in potential cash payment of taxes and $187 million would result in a reduction in net operating loss and tax credit carryforwards. We are not including any amount related to uncertain tax positions in the table presented above because of the difficulty in making reasonably reliable estimates of the timing of settlements with the respective taxing authorities. In addition to the unrecognized tax benefits, we have also recorded a liability for potential tax penalties and interest of $11 million and $3 million, respectively, at December 31, 2011.

Prospective Capital Needs

We believe that our existing cash, cash equivalents and marketable securities, together with cash generated from operations and from the issuance of common stock through our employee stock option and purchase plans, will be

 

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sufficient to cover our working capital needs, capital expenditures, investment requirements, commitments, repurchases of our Class A common stock and quarterly dividends for at least the next 12 months. However, it is possible that we may choose to raise additional funds or draw on our existing credit facility to finance our activities beyond the next 12 months or to consummate acquisitions of other businesses, assets, products or technologies, including our pending acquisition of NetLogic. If needed, we may be able to raise such funds by selling equity or debt securities to the public or to selected investors, or by borrowing money from financial institutions. We could also reduce certain expenditures, such as repurchases of our Class A common stock.

We expect our acquisition of NetLogic for $50 per share, or approximately $3.7 billion, net of cash assumed, to close in the first half of 2012. We currently expect to fund the acquisition with our available cash and cash equivalents and marketable securities.

We earn a significant amount of our operating income outside the U.S., which is deemed to be permanently reinvested in foreign jurisdictions. For at least the next 12 months, we have sufficient cash in the U.S. and expect domestic cash flow to sustain our operating activities and cash commitments for investing and financing activities, such as acquisitions, quarterly dividends, share buy-backs and repayment of debt. In addition, we expect existing foreign cash, cash equivalents, short-term investments, and cash flows from operations to continue to be sufficient to fund our foreign operating activities and cash commitments for investing activities, such as material capital expenditures, for at least the next 12 months.

If we require more capital in the U.S. than is generated by our domestic operations, any taxable income that could result from the repatriation of our foreign earnings would be offset by our net operating loss and research and development tax credit carryforwards, which are currently subject to a full valuation allowance on our deferred tax assets, and would not be expected to have a material effect on our tax liabilities.

In addition, even though we may not need additional funds, we may still elect to sell additional equity or debt securities or utilize or increase our existing credit facilities for other reasons. However, we may not be able to obtain additional funds on a timely basis at acceptable terms, if at all. If we raise additional funds by issuing additional equity or convertible debt securities, the ownership percentages of existing shareholders would be reduced. In addition, the equity or debt securities that we issue may have rights, preferences or privileges senior to those of our Class A common stock.

As of December 31, 2011 we have approximately $1.93 billion of cash, cash equivalents, and marketable securities held by our foreign subsidiaries. As a result of the June 30, 2011 closing of our IRS audit and agreed adjustments to income for the 2001 through 2006 tax years, $802 million was paid from our foreign subsidiaries to Broadcom Corporation during the three months ended September 30, 2011. This amount was not subject to additional income tax. The income resulting from the IRS adjustments was offset by net operating loss carryforwards. Any potential additional income, which could result if we were to repatriate the remaining $1.93 billion of foreign cash, cash equivalents and marketable securities would be offset by existing net operating loss and research and development tax credit carryforwards and should not have a material effect on our tax liabilities. Our net operating loss and research and development tax credit carryforwards are currently subject to a full valuation allowance.

Although we believe that we have sufficient capital to fund our activities for at least the next 12 months, our future capital requirements may vary materially from those now planned. We anticipate that the amount of capital we will need in the future will depend on many factors, including:

 

   

general economic and specific conditions in the markets we address, including the continuing volatility in the technology sector and semiconductor industry, trends in the wired and wireless communications markets in various geographic regions, including seasonality in sales of consumer products into which our products are incorporated;

   

acquisitions of businesses, assets, products or technologies;

   

the unavailability of credit and financing, which may lead certain of our customers to reduce their levels of purchases or to seek credit or other accommodations from us;

   

litigation expenses, settlements and judgments;

   

the overall levels of sales of our semiconductor products, licensing revenue, income from the Qualcomm Agreement and product gross margins;

 

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our business, product, capital expenditure and research and development plans, and product and technology roadmaps;

   

the market acceptance of our products;

   

payment of cash dividends;

   

required levels of research and development and other operating costs;

   

repurchases of our Class A common stock;

   

volume price discounts and customer rebates;

   

intellectual property disputes, customer indemnification claims and other types of litigation risks;

   

the levels of inventory and accounts receivable that we maintain;

   

licensing royalties payable by us;

   

changes in our compensation policies;

   

the issuance of restricted stock units and the related cash payments we make for withholding taxes due from employees;

   

capital improvements for new and existing facilities;

   

technological advances;

   

our competitors’ responses to our products and our anticipation of and responses to their products;

   

our relationships with suppliers and customers;

   

the availability and cost of sufficient foundry, assembly and test capacity and packaging materials; and

   

the level of exercises of stock options and stock purchases under our employee stock purchase plan.

In addition, we may require additional capital to accommodate planned future long-term growth, hiring, infrastructure and facility needs.

Off-Balance Sheet Arrangements

At December 31, 2011 we had no material off-balance sheet arrangements not fully recorded on our consolidated balance sheets or fully disclosed in the notes to our consolidated financial statements.

 

Item 7A.    Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

We manage our total portfolio to encompass a diversified pool of investment-grade securities to preserve principal and maintain liquidity. The average credit rating of our marketable securities portfolio by major credit rating agencies was Aa2/AA. Investments in both fixed rate and floating rate instruments carry a degree of interest rate risk. Fixed rate securities may have their market value adversely impacted due to an increase in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income, net, may fall short of expectations due to changes in interest rates or if the decline in fair value of our publicly traded fixed income investments is judged to be other-than-temporary. We may suffer losses in principal if we are forced to sell securities that have declined in market value due to changes in interest rates. However, because any fixed income securities we hold are classified as available-for-sale, no gains or losses are realized in the income statement due to changes in interest rates unless such securities are sold prior to maturity or unless declines in value are determined to be other-than-temporary. These securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of shareholders’ equity, net of tax.

In the current interest rate environment, as short-term investments mature, reinvestment occurs at less favorable market rates. Given the short-term nature of certain investments, the current interest rate environment may continue to negatively impact our investment income.

To assess the interest rate risk associated with our investment portfolio, we performed a sensitivity analysis to determine the impact a change in interest rates would have on the value of the investment portfolio assuming a 100 basis point parallel shift in the yield curve. Based on investment positions as of December 31, 2011, a 100 basis point increase in interest rates across all maturities would result in a $9 million incremental decline in the fair market value of the portfolio. As of December 31, 2010, a similar 100 basis point increase in interest rates across all maturities would result in a $23 million incremental decline in the fair market value of the portfolio. Such losses would only be realized if we sold the investments prior to maturity.

 

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Actual future gains and losses associated with our investments may differ from the sensitivity analyses performed as of December 31, 2011 due to the inherent limitations associated with predicting the changes in the timing and level of interest rates and our actual exposures and positions.

A hypothetical increase of 100 basis points in short-term interest rates would not have a material impact on our revolving credit facility, which bears a floating interest rate. This sensitivity analysis assumes all other variables will remain constant in future periods.

Our Senior Notes bear fixed interest rates, and therefore, would not be subject to interest rate risk.

Exchange Rate Risk

We consider our direct exposure to foreign exchange rate fluctuations to be minimal. Currently, sales to customers and arrangements with third-party manufacturers provide for pricing and payment in United States dollars, and, therefore, are not subject to exchange rate fluctuations. Increases in the value of the United States’ dollar relative to other currencies could make our products more expensive, which could negatively impact our ability to compete. Conversely, decreases in the value of the United States dollar relative to other currencies could result in our suppliers raising their prices to continue doing business with us. Fluctuations in currency exchange rates could affect our business in the future.

Other Risks

We believe we do not have material direct or indirect exposure to European sovereign or non-sovereign debt.

 

Item 8.    Financial Statements and Supplementary Data

The financial statements and supplementary data required by this item are included in Part IV, Item 15 of this Report.

 

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

 

Item 9A.    Controls and Procedures

We are committed to maintaining disclosure controls and procedures designed to ensure that information required to be disclosed in our periodic reports filed under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures and implementing controls and procedures based on the application of management’s judgment.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2011, the end of the period covered by this Report.

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the three months ended December 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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Inherent Limitations on Internal Control

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of management override or improper acts, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to management override, error or improper acts may occur and not be detected. Any resulting misstatement or loss may have an adverse and material effect on our business, financial condition and results of operations.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework set forth in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2011. The effectiveness of our internal control over financial reporting as of December 31, 2011 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included in Part IV.

 

Item 9B.     Other Information

None.

 

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PART III

 

Item 10.    Directors, Executive Officers and Corporate Governance

(a) Identification and Business Experience of Directors; Involvement in Certain Legal Proceedings.    The information under the caption “Election of Directors,” appearing in our Definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the 2012 Annual Meeting of Shareholders, referred to as the 2012 Proxy Statement, is hereby incorporated by reference.

(b) Identification and Business Experience of Executive Officers and Certain Significant Employees.    The information under the caption “Executive Compensation and Other Information — Executive Officers and Key Employees,” appearing in the 2012 Proxy Statement, is hereby incorporated by reference.

(c) Compliance with Section 16(a) of the Exchange Act.    The information under the caption “Ownership of Securities — Section 16(a) Beneficial Ownership Reporting Compliance,” appearing in the 2012 Proxy Statement, is hereby incorporated by reference.

(d) Code of Ethics.    The information under the caption “Corporate Governance and Board Matters,” appearing in the 2012 Proxy Statement, is hereby incorporated by reference.

(e) Audit Committee.    The information under the caption “Corporate Governance and Board Matters — Audit Committee,” appearing in the 2012 Proxy Statement, is hereby incorporated by reference.

 

Item 11.    Executive Compensation

The information under the caption “Executive Compensation and Other Information” and “Corporate Governance and Board Matters — Compensation of Non-Employee Directors,” appearing in the 2012 Proxy Statement, is hereby incorporated by reference.

 

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information under the captions “Equity Compensation Plan Information” and “Ownership of Securities,” appearing in the 2012 Proxy Statement, is hereby incorporated by reference.

 

Item 13.    Certain Relationships and Related Transactions, and Director Independence

The information under the captions “Certain Relationships and Related Transactions” and “Corporate Governance and Board Matter — Director Independence” appearing in the 2012 Proxy Statement, is hereby incorporated by reference.

 

Item 14.    Principal Accounting Fees and Services

The information under the caption “Audit Information — Fees Paid to Independent Registered Public Accounting Firm,” appearing in the 2012 Proxy Statement, is hereby incorporated by reference.

 

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PART IV

 

Item 15.    Exhibits, Financial Statement Schedules

(a) 1.  Financial Statements.

The following Broadcom consolidated financial statements, and related notes thereto, and the related Reports of our Independent Registered Public Accounting Firm are filed as part of this Form 10-K:

 

     Page  

Reports of Independent Registered Public Accounting Firm

     F-1   

Consolidated Balance Sheets as of December 31, 2011 and 2010

     F-3   

Consolidated Statements of Income for the years ended December 31, 2011, 2010 and 2009

     F-4   

Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the years ended December 31, 2011, 2010 and 2009

     F-5   

Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009

     F-6   

Notes to Consolidated Financial Statements

     F-7   

2.  Financial Statement Schedules.

The following financial statement schedule of Broadcom is filed as part of this Form 10-K:

 

     Page  

Schedule II — Consolidated Valuation and Qualifying Accounts

     S-1   

All other schedules have been omitted because they are not applicable or not required, or the information is included in the Consolidated Financial Statements or Notes thereto.

3.  Exhibits.

The exhibits listed on the accompanying index to exhibits immediately following the financial statements are filed as part of, or hereby incorporated by reference into, this Report.

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Broadcom Corporation:

We have audited the accompanying consolidated balance sheets of Broadcom Corporation and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of income, shareholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2011. In connection with our audits of the consolidated financial statements, we also have audited the consolidated financial statement schedule of valuation and qualifying accounts. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Broadcom Corporation and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, in 2011 the Company adopted the provisions of FASB Accounting Standards Codification (ASC) Topic 350, Testing Goodwill for Impairment, and in 2010 the Company adopted the provisions of FASB ASC Topic 605, Multiple-Deliverable Revenue Arrangements, and FASB ASC Topic 985, Certain Revenue Arrangements That Include Software Elements.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Broadcom Corporation’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 1, 2012, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

Irvine, California

February 1, 2012

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Broadcom Corporation:

We have audited Broadcom Corporation’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Broadcom Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Broadcom Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Broadcom Corporation and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of income, shareholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2011, and our report dated February 1, 2012, expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Irvine, California

February 1, 2012

 

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CONSOLIDATED BALANCE SHEETS

(In millions, except par value)

 

     December 31,  
     2011     2010  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 4,146      $ 1,622   

Short-term marketable securities

     383        1,035   

Accounts receivable (net of allowance for doubtful accounts of $9 in 2011 and $9 in 2010)

     678        820   

Inventory

     421        598   

Prepaid expenses and other current assets

     124        109   
  

 

 

   

 

 

 

Total current assets

     5,752        4,184   

Property and equipment, net

     368        266   

Long-term marketable securities

     676        1,401   

Goodwill

     1,787        1,677   

Purchased intangible assets, net

     400        366   

Other assets

     57        50   
  

 

 

   

 

 

 

Total assets

   $ 9,040      $ 7,944   
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

    

Current liabilities:

    

Accounts payable

   $ 442      $ 604   

Wages and related benefits

     175        208   

Deferred revenue and income

     21        55   

Accrued liabilities

     461        404   
  

 

 

   

 

 

 

Total current liabilities

     1,099        1,271   

Long-term debt

     1,196        697   

Other long-term liabilities

     224        150   

Commitments and contingencies

    

Shareholders’ equity:

    

Convertible preferred stock, $.0001 par value:

    

Authorized shares — 6 — none issued and outstanding

              

Class A common stock, $.0001 par value:

    

Authorized shares — 2,500

    

Issued and outstanding shares — 492 in 2011 and 485 in 2010

              

Class B common stock, $.0001 par value:

    

Authorized shares — 400

    

Issued and outstanding shares — 53 in 2011 and 54 in 2010

              

Additional paid-in capital

     11,821        11,994   

Accumulated deficit

     (5,250     (6,177

Accumulated other comprehensive income (loss)

     (50     9   
  

 

 

   

 

 

 

Total shareholders’ equity

     6,521        5,826   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 9,040      $ 7,944   
  

 

 

   

 

 

 

See accompanying notes.

 

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CONSOLIDATED STATEMENTS OF INCOME

(In millions, except per share data)