1.    Summary of Significant Accounting Policies

Our Company

Broadcom Corporation (including our subsidiaries, referred to collectively in this Report as “Broadcom,” “we,” “our” and “us”) is a global 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.

Basis of Presentation

Our consolidated financial statements include the accounts of Broadcom and our subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

In 2011 we early adopted the provisions of Financial Accounting Standards Board, or FASB, Accounting Standards Codification (ASC) Topic 350, Testing Goodwill for Impairment. In 2010 we adopted the provisions of FASB ASC Topic 605, Multiple-Deliverable Revenue Arrangement, and FASB ASC Topic 985, Certain Revenue Arrangements That Include Software Elements. The adoption of these accounting standards did not have a material impact on our consolidated financial statements.

Foreign Currency

The functional currency for most of our international operations is the U.S. dollar. Assets and liabilities denominated in foreign currencies are translated using the exchange rates on the balance sheet dates. Revenues and expenses are translated using the average exchange rates prevailing during the year. Any translation adjustments resulting from this process are shown separately as a component of accumulated other comprehensive income (loss) within shareholders’ equity in the consolidated balance sheets. Foreign currency transaction gains and losses are reported in other income, net in the consolidated statements of income.

Use of Estimates

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

Revenue Recognition

We derive revenue principally from sales of integrated circuit products, royalties and license fees for our intellectual property and software and related services. The timing of revenue recognition and the amount of revenue actually recognized for each arrangement depends upon a variety of factors, including the specific terms of each arrangement and the nature of our deliverables and obligations. Determination of the appropriate amount of revenue recognized involves judgments and estimates that we believe are reasonable, but actual results may differ from our estimates. We recognize product revenue when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (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, we do not recognize revenue when any future performance obligations remain. 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 for 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. See Note 2 for a summary of our rebate activity.

Multiple Element Arrangements Excluding Software

We occasionally enter into revenue arrangements that contain multiple deliverables. 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. Moreover, judgment is used in interpreting the commercial terms and determining when all criteria of revenue recognition have been met for each deliverable in order for revenue recognition to occur in the appropriate accounting period. While changes in the allocation of the arrangement consideration between the units of accounting will not affect the amount of total revenue recognized for a particular sales arrangement, any material changes in these allocations could impact the timing of revenue recognition, which could affect our results of operations. When we enter into an arrangement that includes multiple elements, the allocation of value to each element is derived based on management’s best estimate of selling price when vendor specific evidence or third party evidence is unavailable.

Distributor Revenue

A portion of our product sales is made through distributors under agreements allowing for pricing credits and/or rights of return. These pricing credits and/or right 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 fixed and determinable revenue recognition criterion has not been met 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.

Software, Royalties and Cancellation Fee Revenue

Revenue from software licenses is recognized when all of the software revenue recognition criteria are met and, if applicable, when vendor specific objective evidence, or VSOE, exists to allocate the total license fee to each element of multiple-element software arrangements, including post-contract customer support. Post-contract support is recognized ratably over the support period. When a contract contains multiple elements wherein the only undelivered element is post-contract customer support and VSOE of the fair value of post-contract customer support does not exist, revenue from the entire arrangement is recognized ratably over the support period. Software royalty revenue is recognized in arrears on a quarterly basis, based upon reports received from licensees during the period, unless collectability is not reasonably assured, in which case revenue is recognized when payment is received from the licensee. Revenue from cancellation fees is recognized when cash is received from the customer.

Licensing Revenue

We license or otherwise provide rights to use portions of our intellectual property, which includes certain patent rights essential to and/or utilized in the manufacture and sale of certain wireless products. Licensees typically pay a license fee in one or more installments and ongoing royalties based on their sales of products incorporating or using our licensed intellectual property. License fees are recognized over the estimated period of benefit to the licensee, typically five to ten years. We recognize licensing revenue on the sale of patents when all of the following criteria are met: (i) persuasive evidence of an arrangement exist, (ii) delivery has occurred, (iii) the price to be paid by the purchaser is fixed or determinable and (iv) collection of the resulting accounts receivable is reasonably assured. These criteria are usually met at the time of patent transfer. We recognize royalty revenues based on royalties reported by licensees and when other revenue recognition criteria are met, which is generally a quarter in arrears from the period earned.

 

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 which includes: (i) an exchange of intellectual property rights, including in certain circumstances, by 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. The proceeds of the Qualcomm Agreement were allocated amongst the principal elements of the transaction. A gain of $65 million from the settlement of litigation was immediately recognized as a reduction in settlement costs that approximates 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 and is being recognized within net revenue over the performance period of four years as a single unit of accounting. However this income will be limited to the lesser of the cumulative straight-line amortization over the four year performance period or the cumulative cash proceeds received.

Deferred Revenue and 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.

Cost of Product Revenue

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 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.

Concentration of Credit Risk

We sell the majority of our products throughout North America, Asia and Europe. Sales to our recurring customers are generally made on open account while sales to occasional customers are typically made on a prepaid or letter of credit basis. We perform periodic credit evaluations of our recurring customers and generally do not require collateral. An allowance for doubtful accounts is maintained for potential credit losses, which losses historically have not been significant.

We invest our cash in U.S. Treasury instruments, in deposits and money market funds with major financial institutions and in commercial paper, asset-backed securities and corporate and agency bonds. We place our cash investments in instruments that meet high credit quality standards, as specified in our investment policy guidelines. These guidelines also limit the amount of credit exposure to any one issue, issuer or type of instrument. It is generally our policy to invest in instruments that have a final maturity of no longer than three years, with a portfolio weighted average maturity of no longer than 18 months.

Fair Value of Financial Instruments

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

Level 1:    Inputs are based on quoted market prices for identical assets or liabilities in active markets at the measurement date.

Level 2:    Inputs include quoted prices for similar assets or liabilities in active markets and/or quoted prices for identical or similar assets or liabilities in markets that are not active near the measurement date.

Level 3:    Inputs include management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument’s valuation.

The fair value of the majority of our cash equivalents and marketable securities was determined based on “Level 1” inputs. The fair value of certain marketable securities and our long-term debt were determined based on “Level 2” inputs. The valuation techniques used to measure the fair value of our “Level 2” instruments were valued based on quoted market prices or model driven valuations using significant inputs derived from or corroborated by observable market data. We do not have any marketable securities in the “Level 3” category. We believe that the recorded values of all our other financial instruments approximate their current fair values because of their nature and respective relatively short maturity dates or durations.

Cash, Cash Equivalents and Marketable Securities

We consider all highly liquid investments that are readily convertible into cash and have a maturity of three months or less at the time of purchase to be cash equivalents. The cost of these investments approximates their fair value. We maintain an investment portfolio of various security holdings, types and maturities. We define marketable securities as income yielding securities that can be readily converted into cash. Marketable securities’ short-term and long-term classifications are based on remaining maturities at each reporting period. Examples of marketable securities include U.S. Treasury and agency obligations, commercial paper, asset-back securities and corporate bonds. We place our cash investments in instruments that meet various parameters, including credit quality standards as specified in our investment policy. We do not use derivative financial instruments.

We account for our investments in debt and equity instruments as available-for-sale. Management determines the appropriate classification of such securities at the time of purchase and re-evaluates such classification as of each balance sheet date. Cash equivalents and marketable 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. We assess whether our investments with unrealized loss positions are other than temporarily impaired. Unrealized gains and losses and declines in value judged to be other than temporary are determined based on the specific identification method and are reported in other income, net in the consolidated statements of income.

Allowance for Doubtful Accounts

We evaluate the collectibility of accounts receivable based on a combination of factors. In cases where we are aware of circumstances that may impair a specific customer’s ability to meet its financial obligations subsequent to the original sale, we will record an allowance against amounts due, and thereby reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers, we recognize allowances for doubtful accounts based on the length of time the receivables are past due, industry and geographic concentrations, the current business environment and our historical experience.

Inventory

Inventory consists of work in process and finished goods and is stated at the lower of cost (first-in, first-out) or market. 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, among other factors. Shipping and handling costs are classified as a component of cost of product revenue in the consolidated statements of income. Inventory acquired through business combinations is recorded at its acquisition date fair value which is the net realizable value less a normal profit margin depending on the stage of inventory completion.

 

Property and Equipment

Property and equipment are carried at cost. Depreciation and amortization are provided using the straight-line method over the assets’ estimated remaining useful lives, ranging from one to ten years. Depreciation and amortization of leasehold improvements are computed using the shorter of the remaining lease term or ten years.

Goodwill and Other Long-Lived Assets

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. Other long-lived assets primarily represent purchased intangible assets including developed technology, customer relationships and in-process research and development, or IPR&D. We currently amortize our intangible assets with definitive lives over periods ranging from one to fifteen years using a method that reflects the pattern in which the economic benefits of the intangible asset are consumed or otherwise used or, if that pattern cannot be reliably determined, using a straight-line amortization method. We capitalize IPR&D projects acquired as part of a business combination. On completion of each project, IPR&D assets are reclassified to developed technology and amortized over their estimated useful lives.

Impairment of Goodwill and Other Long-Lived 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 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, 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.

Warranty

Our products typically carry a one to three year warranty. We establish reserves for estimated product warranty costs at the time revenue is recognized based upon our historical warranty experience, and additionally for any known product warranty issues. If actual costs differ from our initial estimates, we record the difference in the period they are identified. Actual claims are charged against the warranty reserve. See Note 2 for a summary of our warranty activity.

Guarantees and Indemnifications

In some agreements to which we are a party, we have agreed to indemnify the other party for certain matters, including, but not limited to product liability. We include intellectual property indemnification provisions in our standard terms and conditions of sale for our products and have also included such provisions in certain agreements with third parties. We have and will continue to evaluate and provide reasonable assistance for these other parties.

 

This may include certain levels of financial support to minimize the impact of the litigation in which they are involved. To date, there have been no known events or circumstances that have resulted in any material costs related to these indemnification provisions and no liabilities therefor have been recorded in the accompanying consolidated financial statements. However, the maximum potential amount of the future payments we could be required to make under these indemnification obligations could be significant.

We have obligations to indemnify certain of our present and former directors, officers and employees to the maximum extent not prohibited by law. Under these obligations, Broadcom is required (subject to certain exceptions) to indemnify each such director, officer and employee against expenses, including attorneys’ fees, judgments, fines and settlements, paid by such individual. The potential amount of the future payments we could be required to make under these indemnification obligations could be significant. We maintain directors’ and officers’ insurance policies that may generally limit our exposure and enable us to recover a portion of the amounts paid with respect to such obligations.

Income Taxes

We utilize the asset and liability method of accounting for income taxes, under which deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized.

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. We recognize potential accrued interest and penalties related to unrecognized tax benefits within the consolidated statements of income as income tax expense.

Research and Development Expense

Research and development expenditures are expensed in the period incurred.

Stock-Based Compensation

Broadcom has in effect stock incentive plans under which incentive stock options have been granted to employees and restricted stock units and non-qualified stock options have been granted to employees and non-employee members of the Board of Directors. We also have an employee stock purchase plan for all eligible employees. We are required to estimate the fair value of share-based awards on the date of grant. The value of the award is principally recognized as an expense ratably over the requisite service periods. 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 have estimated the fair value of stock options and stock purchase rights as of the date of grant or assumption using the Black-Scholes option pricing 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 award, the expected volatility of our stock price and the expected dividend yield. We evaluate the assumptions used to value stock options and stock purchase rights on a quarterly basis. The fair values generated by the Black-Scholes model may not be indicative of the actual fair values of our equity awards, as it does not consider other factors important to those awards to employees, such as continued employment, periodic vesting requirements and limited transferability.

Litigation and Settlement Costs

Legal costs are expensed as incurred. We are involved in disputes, litigation and other legal actions in the ordinary course of business. We continually evaluate uncertainties associated with litigation and record a charge equal to at least the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) the loss or range of loss can be reasonably estimated. This generally occurs when an agreement in principle has been reached by both parties that include substantive terms, conditions and amounts. 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.

Self-Insurance

We are self-insured for certain healthcare benefits provided to our U.S. employees. The liability for the self-insured benefits is limited by the purchase of stop-loss insurance. The stop-loss coverage provides payment for aggregate claims exceeding $0.3 million per covered person for any given year.

Accruals for losses are made based on our claim experience and actuarial estimates based on historical data. Actual losses may differ from accrued amounts. Should actual losses exceed the amounts expected and if the recorded liabilities are insufficient, an additional expense will be recorded.

Accumulated Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) includes foreign currency translation adjustments and unrealized gains or losses on investments. This information is provided in our statements of shareholders’ equity. Accumulated other comprehensive income (loss) on the consolidated balance sheets at December 31, 2011 and 2010 represents accumulated translation adjustments and unrecognized gains and losses on investments classified as available for sale.

Net Income Per Share

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

2.    Supplemental Financial Information

Net Revenue

The following table presents details of our product 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	%

Inventory

The following table presents details of our inventory:

 

		December 31,
		2011				2010
		(In millions)
Work in process		$	135			$	279
Finished goods			286				319
		$	421			$	598

 

Property and Equipment

The following table presents details of our property and equipment:

 

		Useful Life				December 31,
						2011				2010
		(In years)				(In millions)
Leasehold improvements			1 to 10			$	212			$	173
Office furniture and equipment			3 to 7				38				29
Machinery and equipment			5				396				313
Computer software and equipment			2 to 5				128				142
Construction in progress			N/A				26				14
							800				671
Less accumulated depreciation and amortization							(432	)			(405	)
						$	368			$	266

Goodwill

The following table summarizes the activity related to the carrying value of our goodwill:

 

		Reportable Segments												Foreign Currency				Consolidated
		Broadband Communications				Mobile & Wireless				Infrastructure & Networking
		(In millions)
Goodwill		$	483			$	802			$	1,874			$	—			$	3,159
Accumulated impairment losses			—				(543	)			(1,286	)			—				(1,829	)
Goodwill at December 31, 2009		$	483			$	259			$	588			$	—			$	1,330
Goodwill recorded in connection with acquisitions			111				188				36				—				335
Contingent consideration			1				—				—				—				1
Effects of foreign currency translation			—				—				—				11				11
Goodwill at December 31, 2010		$	595			$	447			$	624			$	11			$	1,677
Goodwill recorded in connection with acquisitions			—				23				111				—				134
Escrow related and other			2				—				—				—				2
Effects of foreign currency translation			—				—				—				(26	)			(26	)
Goodwill at December 31, 2011		$	597			$	470			$	735			$	(15	)		$	1,787

For a detailed discussion of our annual impairment assessment of goodwill, see Note 10.

 

Purchased Intangible Assets

The following table presents details of our purchased intangible assets:

 

		December 31, 2011												December 31, 2010
		Gross				Accumulated Amortization &     Impairments				Net				Gross				Accumulated Amortization &     Impairments				Net
		(In millions)
Developed technology		$	587			$	(282	)		$	305			$	481			$	(236	)		$	245
In-process research and development			59				—				59				56				—				56
Customer relationships			173				(117	)			56				154				(102	)			52
Customer backlog			10				(10	)			—				10				(8	)			2
Other			13				(10	)			3				11				(9	)			2
		$	842			$	(419	)		$	423			$	712			$	(355	)		$	357
Effects of foreign currency translation											(23	)											9
										$	400											$	366

For a detailed discussion of our various impairments of purchased intangible assets, see Note 10.

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,
		2011				2010				2009
		(In millions)
Cost of product revenue		$	54			$	31			$	16
Other operating expenses			30				28				15
		$	84			$	59			$	31

The following table presents details of the estimated future amortization of existing purchased intangible assets, including IPR&D. If we acquire additional purchased intangible assets in the future, our cost of product revenue or operating expenses will be increased by the amortization of those assets.

 

		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

 

Accrued Liabilities

The following table presents details of our accrued liabilities:

 

		December 31,
		2011				2010
		(In millions)
Accrued rebates		$	317			$	270
Accrued royalties			18				19
Accrued settlement charges			28				17
Accrued legal costs			16				28
Accrued taxes			16				14
Warranty reserve			14				13
Restructuring liabilities			6				—
Other			46				43
		$	461			$	404

Other Long-Term Liabilities

The following table presents details of our other long-term liabilities, which excludes long-term debt:

 

		December 31,
		2011				2010
		(In millions)
Deferred rent		$	48			$	39
Accrued taxes			24				29
Deferred tax liabilities			80				35
Restructuring liabilities			2				—
Accrued settlement charges			48				38
Other long-term liabilities			22				9
		$	224			$	150

Accrued Rebate Activity

The following table summarizes the activity related to accrued rebates:

 

		Year Ended December 31,
		2011				2010
		(In millions)
Beginning balance		$	270			$	162
Charged as a reduction to revenue			643				526
Reversal of unclaimed rebates			(13	)			(4	)
Payments			(583	)			(414	)
Ending balance		$	317			$	270

 

Warranty Reserve Activity

The following table summarizes the activity related to warranty reserve:

 

		Year Ended December 31,
		2011				2010
		(In millions)
Beginning balance		$	13			$	10
Charged to costs and expenses			11				8
Payments			(10	)			(5	)
Ending balance		$	14			$	13

Restructuring Activity

As part of our regular portfolio management review process and in light of our decision to significantly reduce our investment in our digital television and Blu-ray Disc lines of business 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 $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 currently expect to complete this plan and record additional costs of approximately $1 million in the three months ended March 31, 2012.

The following table summarizes activity related to our current and long-term restructuring liabilities during the 2011 (in millions):

 

		Total
Restructuring liabilities at December 31, 2010		$	—
Charged to expense			16
Cash payments			(8	)
Restructuring liabilities at December 31, 2011		$	8

Computation of Net Income Per Share

The following table presents the computation of net income per share:

 

		Year Ended December 31,
		2011				2010				2009
		(In millions, except per share data)
Numerator: Net income		$	927			$	1,082			$	65
Denominator for net income per share (basic)			539				508				494
Effect of dilutive securities:
Stock awards			24				37				19
Denominator for net income per share (diluted)			563				545				513
Net income per share (basic)		$	1.72			$	2.13			$	0.13
Net income per share (diluted)		$	1.65			$	1.99			$	0.13

Net income per share (diluted) does not include the effect of anti-dilutive common share equivalents resulting from outstanding equity awards. There were 18 million, 20 million and 73 million anti-dilutive common share equivalents in 2011, 2010 and 2009, respectively.

 

Income from the Qualcomm Agreement

As part of the Qualcomm Agreement, each party granted certain rights under its patent portfolio to the other party including, in certain circumstances, under future patents issued within one to four years after April 26, 2009. The term of the Qualcomm Agreement commenced April 26, 2009 and will continue until the expiration of the last to expire of the covered patents. In addition, certain existing patents were assigned by Broadcom to Qualcomm with Broadcom retaining a royalty-free license under these patents. The Qualcomm Agreement also resulted in the parties dismissing with prejudice all outstanding litigation between them, and in Broadcom withdrawing its complaints with foreign competition authorities. Under the terms of the agreement, Qualcomm is expected to make payments to Broadcom totaling $891 million, of which $632 million has been paid through December 31, 2011. The remaining balance of $259 million is expected to be paid in six equal and successive quarterly payments of $43 million each, continuing in the three months ending March 31, 2012 and concluding in the three months ending June 30, 2013.

We allocated the payment due us under the Qualcomm Agreement amongst several elements. In 2009 we recorded a gain from the settlement of litigation related to intellectual property of $65 million, which was recorded as a reduction in settlement costs and approximated the value of the settlements determined by the United States District Court for the Central District of California.

The fair value associated with the transfer of intellectual property rights, as well as the settlement of other outstanding litigation, of $826 million, has been accounted for as a single unit of accounting and recognized within net revenue over the Qualcomm Agreement’s performance period of four years; recognition is limited to the lesser of the cumulative straight-line amortization over the four year performance period or the cumulative cash proceeds received. As a result, income from the Qualcomm Agreement will never be recorded ahead of cash payments received. We also recognized income from the Qualcomm Agreement of $31 million in 2009 related to previous payments made to us by Qualcomm for shipments from May 2007 through December 31, 2008, related to a court-ordered permanent injunction. We had deferred the recognition of these amounts, which were received during 2008, due to continuing litigation appeals. These appeals were resolved through the Qualcomm Agreement.

Income from the Qualcomm Agreement is expected to be recognized as follows:

 

		2012				2013				Thereafter				Total
		(In millions)
Income from Qualcomm Agreement		$	186			$	86			$	—			$	272

At December 31, 2011 we had deferred income of $13 million related to the Qualcomm Agreement related to the initial payment by Qualcomm of $200 million in April 2009.

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 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. 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 Corporation in connection with the settlement of the shareholder derivative litigation as further described in Note 12. These payments were recorded as operating expenses in consolidated statements of income in 2009 and 2011.

Supplemental Cash Flow Information

In 2011 we paid $1 million related to share repurchases that had not settled by December 31, 2010. In 2011 we received $4 million related to stock option exercises that had not settled by December 31, 2010. In 2010 we received $1 million related to stock option exercises that had not settled by December 31, 2009.

At December 31, 2011, 2010 and 2009 we had billings of $43 million, $12 million and $8 million, respectively, for capital equipment that were accrued. The amounts accrued for capital equipment purchases have been excluded from the consolidated statements of cash flows and were paid in the subsequent period.

 

3.    Business Combinations

From January 1, 2009 through December 31, 2011 we completed a number of acquisitions. The consolidated financial statements include the results of operations of these acquired companies commencing as of their respective acquisition dates.

 

Company Acquired		Date Acquired		Business		Cash Consideration Paid				Cash Assumed				Equity Consideration Paid				Assumed Debt				Contingent Consideration Maximum				Contingent Consideration Fair Value
						(In millions)
2011 Acquisitions
SC Square Ltd.		May 2011		Security software		$	40			$	—			$	—			$	—			$	—			$	—
Provigent, Inc.		Apr. 2011		Microwave backhaul systems			314				10				4				—				—				—
Other		Various					3				—				—				—				—				—
						$	357			$	10			$	4			$	—			$	—			$	—
2010 Acquisitions
Gigle Networks, Inc.		Dec. 2010		SoC solutions for home networking over power lines		$	73			$	1			$	2			$	—			$	8			$	1
Percello Ltd.		Nov. 2010		SoC solutions for femtocells			85				2				3				—				12				—
Beceem Communications, Inc.		Nov. 2010		SoC solutions for LTE and WiMAX 4G connectivity			301				12				23				—				—				—
Innovision Research & Technology PLC		Jul. 2010		Near-field communication (NFC)			50				2				—				—				—				—
Teknovus, Inc.		Mar. 2010		Ethernet passive optical network (EPON) chipsets & software			109				9				—				15				—				—
Other		Various					7				—				—				—				—				—
						$	625			$	26			$	28			$	15			$	20			$	1
2009 Acquisitions
Dune Networks, Inc.		Dec. 2009		Switch fabric solutions for data center networking equipment		$	185			$	28			$	14			$	—			$	—			$	—
Other		Various					8				—				—				—				2				1
						$	193			$	28			$	14			$	—			$	2			$	1
Total Acquisitions						$	1,175			$	64			$	46			$	15			$	22			$	2

Substantially all of the equity consideration paid will be recognized as stock-based compensation expense over three to four years. Certain of the cash consideration in the above acquisitions is currently held in escrow pursuant to the terms of the acquisition agreements and is reflected in goodwill as we believe the likelihood of the escrow fund being utilized by us is remote.

Our primary reasons for the above acquisitions were to enter into or expand our market share in the relevant wired and wireless communications markets, reduce the time 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. The principal factor that resulted in recognition of goodwill was that the purchase price for each acquisition was based on cash flow projections assuming the integration of any acquired technology and products with our products, which is of considerably greater value than utilizing each acquired company’s technology or product on a standalone basis.

 

We allocated the purchase price of these acquisitions to tangible assets, liabilities and identifiable intangible assets acquired based on their estimated fair values. The excess of the purchase price over the aggregate fair values was recorded as goodwill. The fair value assigned to identifiable intangible assets acquired was based on estimates and assumptions made by management at the time of acquisition. Based upon those calculations, the purchase prices for the acquisitions were allocated as follows:

 

		2011 Acquisitions				2010 Acquisitions				2009 Acquisitions
		(In millions)
Fair Market Values
Cash and cash equivalents		$	11			$	26			$	28
Accounts receivable, net			12				24				5
Inventory			30				27				8
Prepaid and other current assets			4				5				1
Property and equipment, net			3				6				1
Other assets			—				5				—
Goodwill			134				336				53
Purchased intangible assets			233				266				136
Total assets acquired			427				695				232
Accounts payable			(7	)			(14	)			(2	)
Wages and related benefits			(4	)			(8	)			(3	)
Debt			—				(15	)			—
Accrued liabilities			(2	)			(15	)			(29	)
Long-term liabilities			(57	)			(13	)			—
Total liabilities assumed			(70	)			(65	)			(34	)
Purchase price allocation		$	357			$	630			$	198

 

		Useful Life				2011 Acquisitions				2010 Acquisitions				2009 Acquisitions
		(In years)				(In millions)
Purchased Intangible Assets:
Developed technology			1 - 13			$	148			$	156			$	58
In-process research and development			2 - 10				45				55				51
Customer relationships			1 - 8				37				47				27
Other			1 - 10				3				8				—
						$	233			$	266			$	136

Purchased Intangible Assets

Developed technology represents patented technology and completed technology. Patented technology is the fundamental technology that survives multiple product iterations, while completed technology is specific to certain products acquired: both of these technologies have passed technological feasibility. We generally use a relief-from-royalty method to value patented technology, based on market royalties for similar fundamental technologies. The relief-from-royalty method estimates the cost savings that accrue to the owner of an intangible asset that would otherwise be payable as royalties or license fees on revenues earned through the use of the asset. The royalty rate used is based on an analysis of empirical, market-derived royalty rates for guideline intangible assets. Typically, revenue is projected over the expected remaining useful life of the patented technology. The market-derived royalty rate is then applied to estimate the royalty savings. To value completed technology, we generally use a multi-period excess earnings approach which calculates the value based on the risk-adjusted present value of the cash flows specific to the products, allowing for a reasonable return.

 

Customer relationships represent the fair value of future projected revenue that will be derived from the sale of products to existing customers of the acquired companies.

In-Process Research and Development

The fair value of the IPR&D for our acquisitions was determined using the income approach. Under the income approach, the expected future cash flows from each project under development are estimated and discounted to their net present values at an appropriate risk-adjusted rate of return. Significant factors considered in the calculation of the rate of return are the weighted average cost of capital, the return on assets, as well as the risks inherent in the development process, including the likelihood of achieving technological success and market acceptance. Each project was analyzed to determine the unique technological innovations, the existence and reliance on patented technology, the existence of any alternative future use or current technological feasibility, and the complexity, cost and time to complete the remaining development. Future cash flows for each project were estimated based on forecasted revenue and costs, taking into account the expected product life cycles, market penetration and growth rates. We believe the amounts recorded as IPR&D, as well as developed technology, represented the fair values and approximate the amounts a market participant would pay for these projects as of the respective acquisition dates.

The following table summarizes the significant assumptions underlying the valuations of the ongoing development projects that were in process at the date of acquisition and were capitalized as IPR&D in 2011, 2010 and 2009:

 

Company Acquired		Development Projects		Weighted Average Estimated Percent Complete				Average Estimated Time to Complete				Estimated Cost to Complete				Risk Adjusted Discount Rate				IPR&D
								(In years)				(In millions)								(In millions)
2011 Acquisitions
Provigent, Inc.		Microwave			41	%			2.1			$	74				21	%		$	45
2010 Acquisitions
Gigle Networks		Powerline Communication Solutions			12	%			1.4				10				18	%			5
Percello		LTE/Femtocell solutions			10	%			3.2				10				17	%			10
Beceem Communications		LTE/WiMAX			51	%			1.1				32				22	%			29
Teknovus		Ethernet Passive Optical Network (EPON) chipsets and software			11	%			0.9				19				26	%			11
2009 Acquisitions
Dune Networks		High-density switching line card solutions			85	%			1.0				2				21	%			50

At December 31, 2011 all development projects from our Provigent, Teknovus, Percello and Gigle acquisitions were still in process. 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., and such costs will be now be amortized to cost of product revenue. Research and development costs to bring the products of the acquired companies to technological feasibility are not expected to have a material impact on our results of operations or financial condition. Actual results to date have been consistent, in all material respects, with our assumptions at the time of the acquisitions.

Contingent Earn-out Consideration

In connection with certain of our acquisitions, additional cash consideration of up to $20 million may be paid to former shareholders upon satisfaction of certain future performance goals. In connection with this contingent earn-out consideration, we originally recorded an estimated $1 million liability. In 2011 we recorded a change in contingent earn-out consideration of $1 million and reversed the associated liability. This benefit is reflected in selling, general and administrative expenses. As of December 31, 2011 we do not have any liabilities recorded in connection with any remaining contingent earn-out consideration.

 

Supplemental Pro Forma Data (Unaudited)

The unaudited pro forma statements of income data below gives effect to the 2011 and 2010 acquisitions, described above, as if they had occurred at the beginning of the year prior to their respective acquisition dates. The following data includes the amortization of purchased intangible assets, the amortization of inventory valuation step-up and stock-based compensation expense. This pro forma data is presented for informational purposes only and does not purport to be indicative of the results of future operations or of the results that would have occurred had the acquisitions taken place in the periods noted above.

 

		Year Ended December  31,
		2011				2010
		(In millions, except per share data)
Pro forma net revenue		$	7,412			$	6,971
Pro forma net income		$	911			$	988
Pro forma net income per share (basic)		$	1.69			$	1.94
Pro forma net income per share (diluted)		$	1.62			$	1.81

Pending Acquisition

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.

Under the agreement, each issued and outstanding share of NetLogic common stock (other than (i) shares held by Broadcom, NetLogic or any of their respective wholly owned subsidiaries and (ii) shares held by NetLogic stockholders who perfect their appraisal rights) will be converted into the right to receive $50 in cash. The agreement further provides for, subject to certain limited exceptions, (i) the assumption of all in-the-money options to acquire NetLogic common stock outstanding immediately prior to the effective time of the Merger held by employees, (ii) the cash-out of all in-the-money stock options held by non-employees, (iii) the conversion of all unvested restricted stock units held by NetLogic employees into Broadcom restricted stock units and (iv) the cash-out of all unvested restricted stock units held by persons other than NetLogic employees.

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 the Chinese Antimonopoly Law. There are no financing contingencies related to the acquisition. The transaction is expected to close in the first half of 2012.