BROADCOM CORP - 10-Q Quarterly Report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


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

		For the quarterly period ended March 31, 2005

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to

Commission file number: 000-23993

Broadcom Corporation

(Exact name of registrant as specified in its charter).


California		33-0480482
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

16215 Alton Parkway

Irvine, California 92618-3616

(Address of principal executive offices and zip code)

(949) 450-8700

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

As of March 31, 2005 the registrant had 277,013,971 shares of Class A common stock, $0.0001 par value, and 55,551,480 shares of Class B common stock, $0.0001 par value, outstanding.

BROADCOM CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE MONTHS ENDED MARCH 31, 2005

TABLE OF CONTENTS


		Page

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements		2
	Unaudited Condensed Consolidated Balance Sheets at March 31, 2005 and December 31, 2004		2
	Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2005 and 2004		3
	Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2004		4
	Notes to Unaudited Condensed Consolidated Financial Statements		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
	Risk Factors		32
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		50
Item 4.	Controls and Procedures		51

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		52
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		52
Item 3.	Defaults upon Senior Securities		52
Item 4.	Submission of Matters to a Vote of Security Holders		52
Item 5.	Other Information		52
Item 6.	Exhibits		54
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 10.3
EXHIBIT 31
EXHIBIT 32

Broadcom®, the pulse logo, ServerWorks® and SystemI/ O^tm are among the trademarks of Broadcom Corporation and/or its affiliates in the United States, certain other countries and/or the EU. Bluetooth® is a trademark of the Bluetooth SIG. Any other trademarks or tradenames mentioned are the property of their respective owners.

PART I. FINANCIAL INFORMATION


Item 1.	*Financial Statements*

BROADCOM CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS


			March 31,			December 31,
			2005			2004

			(In thousands)
ASSETS
Current assets:
	Cash and cash equivalents		$	974,915		$	858,592
	Short-term marketable securities			310,123			324,041
	Accounts receivable, net			208,096			205,135
	Inventory			108,951			128,294
	Prepaid expenses and other current assets			68,132			68,380

		Total current assets		1,670,217			1,584,442
Property and equipment, net				101,219			107,160
Long-term marketable securities				135,208			92,918
Goodwill				1,083,563			1,062,188
Purchased intangible assets, net				19,244			17,074
Other assets				20,035			22,057

		Total assets	$	3,029,486		$	2,885,839


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	198,463		$	171,248
	Wages and related benefits			58,892			42,697
	Deferred revenue			4,703			3,648
	Accrued liabilities			264,958			279,507

		Total current liabilities		527,016			497,100
Long-term liabilities				19,511			22,753
Commitments and contingencies
Shareholders’ equity:
	Common stock			33			33
	Additional paid-in capital			8,891,645			8,741,045
	Notes receivable from employees			(7,902	)		(7,955	)
	Deferred compensation			(143,526	)		(40,701	)
	Accumulated deficit			(6,258,353	)		(6,327,535	)
	Accumulated other comprehensive income			1,062			1,099

		Total shareholders’ equity		2,482,959			2,365,986

		Total liabilities and shareholders’ equity	$	3,029,486		$	2,885,839

See accompanying notes.

BROADCOM CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


		Three Months Ended
		March 31,

		2005		2004

		(In thousands, except per
		share data)
Net revenue		$	550,345	$	573,406
Cost of revenue⁽¹⁾			265,748		282,810
Cost of revenue — stock-based compensation			368		671

Gross profit			284,229		289,925
Operating expense:
	Research and development⁽¹⁾		138,845		118,949
	Research and development — stock-based compensation		7,025		24,056

	Selling, general and administrative⁽¹⁾		54,496		52,095
	Selling, general and administrative — stock-based compensation		3,901		3,701

	Amortization of purchased intangible assets		912		—
	In-process research and development		6,652		2,260
	Settlement costs		—		19,000
	Impairment of intangible assets		—		18,000


Income from operations			72,398		51,864
Interest income, net			7,958		1,903
Other income (expense), net			98		(992	)

Income before income taxes			80,454		52,775
Provision for income taxes			11,272		12,911

Net income		$	69,182	$	39,864

Net income per share (basic)		$	.21	$	.13

Net income per share (diluted)		$	.19	$	.12

Weighted average shares (basic)			331,470		309,019

Weighted average shares (diluted)			358,092		342,598


⁽¹⁾	Excludes stock-based compensation, which is presented separately by respective expense category.

See accompanying notes.

BROADCOM CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


				Three Months Ended
				March 31,

				2005			2004

				(In thousands)
Operating activities
Net income				$	69,182		$	39,864
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization				14,513			21,853
	Stock-based compensation expense				11,294			28,428
	Amortization of purchased intangible assets				3,202			2,092
	In-process research and development				6,652			2,260
	Impairment of intangible assets				—			18,000
	Tax benefit realized from stock plans				8,255			11,799
	Change in operating assets and liabilities:
		Accounts receivable			(2,153	)		(14,020	)
		Inventory			20,386			(41,188	)
		Prepaid expenses and other assets			2,890			(44,952	)
		Accounts payable			20,008			11,948
		Other accrued liabilities			(3,130	)		42,016

			Net cash provided by operating activities		151,099			78,100
Investing activities
Purchases of property and equipment					(8,054	)		(8,516	)
Net cash paid for acquisitions					(24,028	)		(9,858	)
Purchases of strategic investments					(119	)		(2,216	)
Purchases of marketable securities					(133,323	)		(134,509	)
Proceeds from sale of available for sale marketable securities					—			39,200
Proceeds from maturities of marketable securities					104,951			25,088

			Net cash used in investing activities		(60,573	)		(90,811	)
Financing activities
Payment on assumed debt					(2,482	)		—
Net proceeds from issuance of common stock					28,226			64,601
Proceeds from repayment of notes receivable from employees					53			1,193

			Net cash provided by financing activities		25,797			65,794

Increase in cash and cash equivalents					116,323			53,083
Cash and cash equivalents at beginning of period					858,592			558,669

Cash and cash equivalents at end of period				$	974,915		$	611,752

See accompanying notes.

BROADCOM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2005


1.	Summary of Significant Accounting Policies


	*The Company*

Broadcom Corporation (the “Company”) is a global leader in wired and wireless broadband communications semiconductors. Its products enable the convergence of high-speed data, high definition video, voice and audio at home, in the office and on the go. The Company provides manufacturers of computing and networking equipment, digital entertainment and broadband access products, and mobile devices with complete system-on-a-chip and software solutions. Its diverse product portfolio addresses every major broadband communications market, and includes solutions for digital cable, satellite and Internet Protocol set-top boxes; high definition television (HDTV); cable and DSL modems and residential gateways; high-speed transmission and switching for local, metropolitan, wide area and storage networking; home and wireless networking; cellular and terrestrial wireless communications; Voice over Internet Protocol (VoIP) gateway and telephony systems; broadband network and security processors; and SystemI/ O^tm server solutions.


	*Basis of Presentation*

The unaudited condensed consolidated financial statements have been prepared in accordance with principles generally accepted in the United States for interim financial information and with the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and Article 10 of SEC Regulation S-X. They do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Therefore, these financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2004, included in the Company’s Annual Report on Form 10-K filed March 1, 2005 with the SEC.

The condensed consolidated financial statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly the Company’s consolidated financial position at March 31, 2005 and December 31, 2004, and the consolidated results of its operations and consolidated cash flows for the three months ended March 31, 2005 and 2004. The results of operations for the three months ended March 31, 2005 are not necessarily indicative of the results to be expected for future quarters or the year.


	*Use of Estimates*

The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management 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. The Company regularly evaluates estimates and assumptions related to allowances for doubtful accounts, sales returns and allowances, warranty reserves, inventory reserves, stock-based compensation, goodwill and purchased intangible asset valuations, strategic investments, deferred income tax asset valuation allowances, restructuring costs, litigation and other loss contingencies. The Company bases its estimates and assumptions on current facts, historical experience and on various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from management’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

BROADCOM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	*Revenue Recognition*

The Company’s net revenue is generated principally by sales of its semiconductor products. Such sales represented approximately 98.5% and 99.4% of its total net revenue in the three months ended March 31, 2005 and 2004, respectively. The Company derives the remaining balance of its net revenue predominantly from development agreements, software licenses and maintenance agreements and cancellation fees.

The majority of the Company’s sales occur through the efforts of its direct sales force. However, the Company derived approximately 14.1% and 8.8% of its total net revenue from sales made through distributors in the three months ended March 31, 2005 and 2004, respectively.

In accordance with SEC Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements (“SAB 101”) as well as SAB No. 104, Revenue Recognition (“SAB 104”), the Company recognizes product revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price to the customer is fixed or determinable and (iv) collection of the resulting receivable is reasonably assured. These criteria are usually met at the time of product shipment. However, the Company does not recognize revenue until all customer acceptance requirements have been met, when applicable. Also, a portion of the Company’s sales are made through distributors under agreements allowing for pricing credits and/or rights of return. Product revenue on sales made through these distributors is not recognized until the distributors ship the product to their customers. The Company records reductions to 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.

Revenue under development agreements is recognized when applicable contractual milestones have been met, including deliverables, and in any case, does not exceed the amount that would be recognized using the percentage-of-completion method in accordance with the American Institute of Certified Public Accountants Statement of Position (“SOP”) 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts (“SOP 81-1”). The costs associated with development agreements are included in cost of revenue. Revenue from licensed software and maintenance agreements is recognized in accordance with the provisions of SOP 97-2, Software Revenue Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions. Revenue from cancellation fees is recognized when cash is received from the customer.


	*Inventory*

Inventory consists of work in process and finished goods and is stated at the lower of cost (first-in, first-out) or market. The Company establishes inventory allowances for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated realizable value based upon assumptions about future demand and market conditions. Shipping and handling costs are classified as a component of cost of revenue in the consolidated statements of operations.


	*Rebates*

The Company accounts for rebates in accordance with Emerging Issues Task Force (“EITF”) Issue No. 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products), and, accordingly, records reductions to revenue for rebates in the same period that the related revenue is recorded. The amount of these reductions is based upon the terms included in the Company’s various rebate agreements.

BROADCOM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	*Warranty*

The Company’s products typically carry a one to three year warranty. The Company establishes reserves for estimated product warranty costs at the time revenue is recognized based upon its historical warranty experience, and additionally for any known product warranty issues.


	*Stock-Based Compensation*

The Company has in effect several stock incentive plans under which incentive stock options and restricted stock units (“RSUs”) have been granted to employees and non-qualified stock options have been granted to employees, non-employee members of the Board of Directors and other non-employees. The Company also has an employee stock purchase plan for all eligible employees. The Company accounts for stock-based awards to employees in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”) and related interpretations, and has adopted the disclosure-only alternative of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation (“SFAS 123”) and SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure. The fair value of options granted to non-employees, as defined under SFAS 123, has been expensed in accordance with SFAS 123.

In accordance with APB 25, stock-based compensation expense is not recorded in connection with stock options granted with exercise prices equal to or greater than the fair market value of the Company’s Class A common stock on the date of grant, unless certain modifications are subsequently made. The Company records deferred compensation in connection with stock options granted, as well as stock options assumed in acquisitions, with exercise prices less than the fair market value of the Class A common stock on the date of grant or assumption. The amount of such deferred compensation per share is equal to the excess of fair market value over the exercise price. In addition, the Company records deferred compensation in connection with RSU awards equal to the fair market value of the Class A common stock on the date of grant. Recorded deferred compensation is recognized as stock-based compensation expense ratably over the applicable vesting periods.

The results of applying the requirements of the disclosure-only alternative of SFAS 123 to the Company’s stock-based awards to employees, assuming the application of the Black-Scholes model, would approximate the following:


	Three Months Ended
	March 31,

	2005			2004

	(In thousands, except per
	share data)
Net income — as reported	$	69,182		$	39,864
Add: Stock-based compensation expense included in net income — as reported		11,294			28,428
Deduct: Stock-based compensation expense determined under the fair value method		(142,004	)		(213,451	)

Net loss — pro forma	$	(61,528	)	$	(145,159	)

Net income per share (basic) — as reported	$	.21		$	.13

Net income per share (diluted) — as reported	$	.19		$	.12

Net loss per share (basic and diluted) — pro forma	$	(.19	)	$	(.47	)

BROADCOM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For purposes of this illustration, the value of each stock award has been estimated as of the date of grant or assumption using the Black-Scholes model, which was developed for use in estimating the value of traded options that have no vesting restrictions and that are freely transferable. The Black-Scholes model considers, among other factors, the expected life of the option and the expected volatility of the Company’s stock price. Because it does not consider other factors important to stock-based awards, such as continued employment and periodic vesting requirements and limited transferability, the fair value generated by the Black-Scholes option pricing model may not be indicative of the actual fair value of the Company’s stock-based awards. For pro forma illustration purposes, the Black-Scholes value of the Company’s stock-based awards is assumed to be amortized on a straight-line basis over their respective vesting periods.

The Company evaluates the assumptions used to value stock awards under SFAS 123 on a quarterly basis. Based on guidance provided in SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”), and SAB No. 107, Share-Based Payment, in the three months ended March 31, 2005 the Company refined its expected life assumption from 4 years to 3.25 years based on historical information and changed its volatility assumption from 0.50 to 0.41 based on implied volatility. The Company believes that its current assumptions generate a more representative estimate of fair value. Had the Company used the assumptions applied during the three months ended December 31, 2004, the Company’s pro forma net loss in the three months ended March 31, 2005 would have been $3.3 million greater.

In December 2004 the FASB issued SFAS 123R, which is a revision of SFAS 123. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values and does not allow the previously permitted pro forma disclosure as an alternative to financial statement recognition. SFAS 123R supersedes APB 25 and related interpretations and amends SFAS No. 95, Statement of Cash Flows. In accordance with SEC Release No. 33-8568, SFAS 123R is currently scheduled to be effective for the Company beginning in the first quarter of 2006. SFAS 123R allows for retrospective recognition of compensation expense related to share-based payments, which recognition may date back to the original issuance of SFAS 123. The Company is currently evaluating this transition alternative.

The adoption of the SFAS 123R fair value method will have a significant impact on the Company’s reported results of operations, although it will have no impact on the Company’s overall financial position. The impact of adoption of SFAS 123R cannot be predicted at this time because it will depend in part on the fair value and number of share-based payments granted in the future. However, had the Company adopted SFAS 123R in prior periods, the magnitude of the impact of that standard would have approximated the impact of SFAS 123 assuming the application of the Black-Scholes model as illustrated in the table above. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement may reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future, the amount of operating cash flows recognized in the three months ended March 31, 2005 and 2004 related to such excess tax deductions was $8.3 million and $11.8 million, respectively.


	*Business Enterprise Segments*

The Company operates in one reportable operating segment, broadband communications. SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS 131”), establishes standards for the way public business enterprises report information about operating segments in annual consolidated financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. SFAS 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. Although the Company had four operating segments at

BROADCOM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

March 31, 2005, under the aggregation criteria set forth in SFAS 131 the Company only operates in one reportable operating segment, broadband communications.

Under SFAS 131, two or more operating segments may be aggregated into a single operating segment for financial reporting purposes if aggregation is consistent with the objective and basic principles of SFAS 131, if the segments have similar economic characteristics, and if the segments are similar in each of the following areas:


	•	the nature of products and services;

	•	the nature of the production processes;

	•	the type or class of customer for their products and services; and

	•	the methods used to distribute their products or provide their services.

The Company meets each of the aggregation criteria for the following reasons:


	•	the sale of integrated circuits is the only material source of revenue for each of its four operating segments or business groups;

	•	the integrated circuits sold by each of its operating segments use the same standard CMOS manufacturing processes;

	•	the integrated circuits marketed by each of its operating segments are sold to one type of customer: manufacturers of broadband equipment, which incorporate the Company’s integrated circuits into their electronic products; and

	•	all of its integrated circuits are sold through a centralized sales force and common wholesale distributors.

All of the Company’s business groups share similar economic characteristics as they have a similar long term business model, operate at similar gross margins, and have similar research and development expenses and similar selling, general and administrative expenses. The causes for variation among each of the business groups are the same and include factors such as (i) life cycle and price and cost fluctuations, (ii) number of competitors, (iii) product differentiation and (iv) size of market opportunity. Additionally, each business group is subject to the overall cyclical nature of the semiconductor industry. The number and composition of employees and the amounts and types of tools and materials required are similar for each business group. Finally, even though the Company periodically reorganizes its business groups based upon changes in customers, end markets or products, acquisitions, long-term growth strategies, and the experience and bandwidth of the senior executives in charge, the common financial goals for each business group remain constant.

Because the Company meets each of the criteria set forth in SFAS 131 and its four business groups as of March 31, 2005 share similar economic characteristics, the Company aggregates its results of operations in one reportable operating segment.


	*Reclassifications*

Certain amounts in the 2004 unaudited condensed consolidated financial statements have been reclassified to conform with the current period’s presentation.

BROADCOM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


2.	Supplemental Financial Information


	*Inventory*

The following table presents details of the Company’s inventory:


	March 31,		December 31,
	2005		2004

	(In thousands)
Work in process	$	46,855	$	38,659
Finished goods		62,096		89,635

	$	108,951	$	128,294


	*Purchased Intangible Assets*

The following table presents details of the Company’s purchased intangible assets:


	March 31, 2005							December 31, 2004

			Accumulated							Accumulated
	Gross		Amortization			Net		Gross		Amortization			Net

						(In thousands)
Completed technology	$	156,099	$	(142,356	)	$	13,743	$	152,230	$	(140,066	)	$	12,164
Customer relationships		46,266		(42,805	)		3,461		46,266		(41,997	)

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