1. Summary of Significant Accounting Policies

Our Company

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

Basis of Presentation

The interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP, for interim financial information and with the instructions to Securities and Exchange Commission, or SEC, Form 10-Q and Article 10 of SEC Regulation S-X. They do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Therefore, these financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2011, included in our Annual Report on Form 10-K filed with the SEC on February 1, 2012.

In February 2012, we completed our acquisition of NetLogic Microsystems, Inc., or NetLogic. The unaudited consolidated financial statements include the results of operations of NetLogic commencing as of the acquisition date and are included in our Infrastructure & Networking reportable segment. See Note 3 for a further discussion.

The interim unaudited condensed consolidated financial statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly our consolidated financial position at March 31, 2012 and December 31, 2011, and our consolidated results of operations and cash flows for the three months ended March 31, 2012 and 2011. The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results to be expected for future quarters or the full year.

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.

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.

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 assets 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. We 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 that the assets 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.

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 the other parties 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.

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. In the event of settlement discussions, this generally occurs when an agreement in principle has been reached by both parties that include substantive terms, conditions and amounts. If a settlement has more than one element, we account for the agreement as a multiple element arrangement and allocate the consideration to the identifiable elements based on relative fair value. Past multiple element settlement agreements have included the licensing of intellectual property for future use and payments related to alleged prior infringement.

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board, or 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 incomer in two separate but 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. We adopted the provisions of this guidance effective January 1, 2012, as reflected in the unaudited condensed consolidated statements of comprehensive income herein.

2. Supplemental Financial Information

Net Revenue

The following table presents details of our product revenue:

 

		Three Months Ended March 31,
		2012				2011
Product sales through direct sales force			76.7	%			76.9	%
Product sales maintained under fulfillment distributor arrangements			7.7				8.1
Product sales through distributors			15.7				15.0
			100.0	%			100.0	%

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

 

			0000000				0000000				0000000				0000000				0000000				0000000
		Three Months Ending
		June 30, 2012				September 30, 2012				December 31, 2012				March 31, 2013				June 30, 2013				Total
		(In millions)
Income from Qualcomm Agreement		$	48			$	43			$	43			$	44			$	43			$	221

 

Inventory

The following table presents details of our inventory:

 

			00000000				00000000
		March 31,				December 31,
		2012				2011
		(In millions)
Work in process		$	147			$	135
Finished goods			328				286
		$	475			$	421

Property and Equipment

The following table presents details of our property and equipment:

 

		0000000			0000000				0000000
		Useful Life		March 31, 2012				December 31, 2011
		(In years)		(In millions)
Leasehold improvements		1 to 10		$	218			$	212
Office furniture and equipment		3 to 7			39				38
Machinery and equipment		5			442				396
Computer software and equipment		2 to 8			152				128
Construction in progress		N/A			27				26
					878				800
Less accumulated depreciation and amortization					(460	)			(432	)
				$	418			$	368

Goodwill

The following tables summarize the activity related to the carrying value of our goodwill:

 

			000000				000000				000000				000000				000000
		Reportable Segments
		Broadband Communications				Mobile & Wireless				Infrastructure & Networking				Foreign Currency				Consolidated
		(In millions)
Goodwill at December 31, 2011		$	597			$	470			$	735			$	(15	)		$	1,787
Goodwill recorded in connection with acquisitions			—				—				1,810				—				1,810
Effects of foreign currency translation			—				—				—				9				9
Goodwill at March 31, 2012		$	597			$	470			$	2,545			$	(6	)		$	3,606

 

Purchased Intangible Assets

The following table presents details of our purchased intangible assets:

 

			00000000				00000000				00000000				00000000				00000000				00000000
		March 31, 2012												December 31, 2011
						Accumulated												Accumulated
		Gross				Amortization				Net				Gross				Amortization				Net
		(In millions)
Developed technology		$	1,770			$	(304	)		$	1,466			$	587			$	(282	)		$	305
In-process research and development			325				—				325				59				—				59
Customer relationships			369				(133	)			236				173				(117	)			56
Other			31				(20	)			11				23				(20	)			3
		$	2,495			$	(457	)		$	2,038			$	842			$	(419	)		$	423
Effects of foreign currency translation											(15	)											(23	)
										$	2,023											$	400

In the three months ended March 31, 2012 we reclassified $1 million of IPR&D costs related to previous acquisitions to developed technology and such costs will now be amortized to cost of product revenue.

In March 2012 we recorded impairment charges for developed technology of $28 million, primarily related to our acquisitions of Dune Networks, Inc. and Percello Ltd. included in our Infrastructure & Networking and Broadband Communications reportable segments, respectively. The primary factor contributing to these impairment charges was the reduction in the revenue outlook for certain products and the resulting decrease to the estimated cash flows identified with the impaired assets.

In determining the amount of these impairment charges we calculated fair values as of the impairment date for acquired developed technology. The fair value was determined using the multiple period excess earnings method, described in Note 3. The fair values were determined using significant unobservable inputs categorized as Level 3 inputs. The key unobservable inputs utilized in the model include discount rates ranging from 15% to 25%, a tax rate of 15%, and a probability adjusted level of future cash flows based on current product and market data.

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

 

			000000000				000000000
		Three Months Ended
		March 31,
		2012				2011
		(In millions)
Cost of product revenue		$	37			$	15
Other operating expenses			17				7
		$	54			$	22

 

The following table presents details of the estimated future amortization of existing purchased intangible assets, including IPR&D.

 

			00000000				00000000				00000000				00000000				00000000				00000000				00000000
		Purchased Intangible Asset Amortization by Year
		2012				2013				2014				2015				2016				Thereafter				Total
		(In millions)
Cost of product revenue		$	157			$	180			$	231			$	222			$	200			$	789			$	1,779
Other operating expenses			78				56				62				31				9				8				244
		$	235			$	236			$	293			$	253			$	209			$	797			$	2,023

Accrued Liabilities

The following table presents details of our accrued liabilities:

 

			000000000				000000000
		March 31,				December 31,
		2012				2011
		(In millions)
Accrued rebates		$	302			$	317
Accrued royalities			26				18
Accrued settlement charges			69				28
Accrued legal costs			17				16
Accrued taxes			15				16
Warranty reserve			12				14
Restructuring liabilities			5				6
Other			65				46
		$	511			$	461

Other Long-Term Liabilities

The following table presents details of our other long-term liabilities:

 

			0000000000				0000000000
		March 31,				December 31,
		2012				2011
		(In millions)
Deferred rent		$	50			$	48
Accrued taxes			60				24
Deferred tax liabilities			79				80
Accrued settlement charges			94				48
Restructuring liabilities			1				2
Other long-term liabilities			24				22
		$	308			$	224

 

Accrued Rebate Activity

The following table summarizes the activity related to accrued rebates:

 

			$000,000,00				$000,000,00
		Three Months Ended
		March 31,
		2012				2011
		(In millions)
Beginning balance		$	317			$	270
Charged as a reduction of revenue			147				152
Reversal of unclaimed rebates			(3	)			(2	)
Payments			(159	)			(139	)
Ending balance		$	302			$	281

Warranty Reserve Activity

The following table summarizes activity related to the warranty reserve:

 

			$000,000,00				$000,000,00
		Three Months Ended
		March 31,
		2012				2011
		(In millions)
Beginning balance		$	14			$	13
Charged to costs and expenses			1				2
Payments			(3	)			(4	)
Ending balance		$	12			$	11

Restructuring Activity

The following table summarizes activity related to our current and long-term restructuring liabilities during the three months ended March 31, 2012:

 

		Three Months Ended
		March 31, 2012
		(In millions)
Beginning balance		$	8
Charged to expense			3
Cash Payments			(5	)
Ending balance		$	6

Settlement Costs (Gains)

In the three months ended March 31, 2012 we recorded settlement costs of $86 million related to patent infringement claims. We recorded settlement gains of $5 million in the three months ended March 31, 2011. See Note 9.

 

Computation of Net Income Per Share

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

 

		Three Months Ended
		March 31,
		2012				2011
		(In millions, except per share data)
Numerator: Net income		$	88			$	228
Denominator for net income per share (basic)			548				539
Effect of dilutive securities:
Stock awards			22				36
Denominator for net income per share (diluted)			570				575
Net income per share (basic)		$	0.16			$	0.42
Net income per share (diluted)		$	0.15			$	0.40

Net income per share (diluted) does not include the effect of anti-dilutive common share equivalents resulting from outstanding equity awards. There were 27 million and 11 million anti-dilutive common share equivalents in the three months ended March 31, 2012 and 2011, respectively.

Supplemental Cash Flow Information

In the three months ended March 31, 2012 we accrued $3 million related to stock option exercises that had not settled by March 31, 2012. In the three months ended March 31, 2012, we paid $41 million for capital equipment that was accrued as of December 31, 2011 and had billings of $30 million for capital equipment that were accrued but not yet paid as of March 31, 2012.

3. Business Combinations

On February 17, 2012 we completed our acquisition of NetLogic, a publicly traded company that is a leader in high performance intelligent semiconductor solutions for next generation networks. The combination enables Broadcom to deliver best-in-class, seamlessly integrated network infrastructure platforms to its customers, reducing both time-to-market and development costs. The addition of NetLogic also extends Broadcom’s infrastructure portfolio with key technologies, including multi-core embedded processor and knowledge-based processor solutions, both critical enablers of the next generation infrastructure build-out. In connection with the acquisition we paid $3.61 billion, exclusive of cash acquired, to acquire all of the outstanding shares of capital stock and other equity rights of NetLogic. The purchase price was paid in cash, except for certain equity awards with a fair value of $349 million were assumed. Approximately $137 million of the equity consideration was recorded as goodwill and $212 million will be recognized as stock-based compensation expense primarily over the next two to three years.

The unaudited consolidated financial statements include the results of operations of NetLogic commencing as of the acquisition date and are included in our Infrastructure & Networking reportable segment. Included in the unaudited consolidated statement of income for the three months ended March 31, 2012 was net revenue of $33 million for NetLogic and an operating loss of $73 million. In connection with the acquisition, our results of operations in the three months ended March 31, 2012 included: (i) stock-based compensation of $27 million, of which $17 million related to the accelerated vesting of equity awards upon the termination of certain employees with change in control agreements, (ii) the amortization of purchased intangibles of $27 million, and (iii) the amortization of acquired inventory valuation step-up of $20 million. We also incurred certain severance and other benefit costs of $2 million in the three months ended March 31, 2012 that are classified as restructuring costs in our unaudited consolidated statement of income. Lastly, we incurred $6 million in transaction costs related to legal, accounting and other related fees, of which $1 million was recorded in the three months ended March 31, 2012 in selling, general and administrative expense and the remaining was previously expensed in 2011.

 

Our primary reason for acquiring NetLogic was to enhance our ability to deliver a complete, end-to-end network infrastructure solution for customers. In addition, it allows us to 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 the recognition of goodwill was that the purchase price for NetLogic 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 NetLogic’s technology or product on a standalone basis.

We have preliminarily estimated the fair value of the acquired assets and liabilities for NetLogic. We allocated the purchase price 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. We expect to finalize the allocation of the NetLogic acquisition by the end of the second quarter of 2012. The purchase price for NetLogic was preliminarily allocated as follows:

 

		2012
		Acquisitions
		(In millions)
Fair Market Values
Cash and cash equivalents		$	219
Short-term marketable securities			48
Accounts receivable, net			34
Inventory			92
Prepaid and other current assets			8
Property and equipment, net			16
Other assets			23
Purchased intangible assets			1,696
Goodwill			1,810
Total assets acquired			3,946
Accounts payable			35
Accrued liabilities			20
Net deferred tax liabilities			46
Contingent consideration			53
Long-term liabilities			43
Total liabilities assumed			197
Purchase price allocation		$	3,749

 

		Useful				NetLogic
		Life				Acquisition
		(In years)				(In millions)
Purchased Intangible Assets:
Developed technology			6 - 14			$	1,226
In-process research and development			10-13				267
Customer relationships			3 - 5				196
Other			3				7
						$	1,696

 

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.

The fair value of the IPR&D from the NetLogic acquisition 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 amount recorded as IPR&D, as well as developed technology, represented the fair value and approximate the amount a market participant would pay for these projects as of the acquisition date.

The following table summarizes the significant assumptions underlying the valuation of IPR&D at the NetLogic acquisition date:

 

Weighted

Average

Average

Risk

Estimated

Estimated

Estimated

Adjusted

Percent

Time to

Cost to

Discount

Company Acquired

Development Projects

Complete

Complete

Complete

Rate

IPR&D

(In years)

(In millions)

(In millions)

NetLogic

Next generation networks

10%

4.3

$401

17%

$267

At March 31, 2012 all development projects from the NetLogic acquisition were still in process. The assumptions consist primarily of expected completion dates for the IPR&D projects, estimated costs to complete the projects, and revenue and expense projections for the products once they have entered the market. Research and development costs to bring the products of NetLogic 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.

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

 

Contingent Earn-out Consideration

In connection with our NetLogic acquisition, we assumed a liability of $53 million related to contingent consideration in connection with one of NetLogic’s prior acquisitions and subsequently paid this amount in the three months ended March 31, 2012. Additional cash consideration of up to $57 million may be paid to the former shareholders of this prior acquisition upon satisfaction of certain future performance goals. As of March 31, 2012 we do not have any liabilities recorded in connection with any remaining contingent earn-out consideration, as we believe that the achievement of the future performance goals is unlikely.

Supplemental Pro Forma Data (Unaudited)

The unaudited pro forma statement of income data below gives effect to our 2012 and 2011 acquisitions as if they had occurred at the beginning of the year prior to their respective acquisition dates. The following data includes the effects of amortization of purchased intangible assets and acquired inventory valuation step-up, stock-based compensation expense, foregone interest as a result of cash paid to acquire the companies, and other one-time transactions costs directly associated with the acquisitions such as legal, accounting and banking fees. 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.

 

			0000000000				0000000000
		Three Months Ended
		March 31,
		2012				2011
		(In millions, except per share data)
Pro forma net revenue		$	1,877			$	1,929
Pro forma net income		$	116			$	165
Pro forma net income per share (basic)		$	0.21			$	0.30
Pro forma net income per share (diluted)		$	0.20			$	0.28

BroadLight, Inc. Acquisition

In April 2012 we completed our previously announced acquisition of BroadLight, Inc., a privately held provider of highly integrated networking and fiber access passive optical network processors. We paid $203 million, exclusive of cash assumed, to acquire all of the outstanding shares of capital stock and other equity rights of BroadLight, of which $3 million will be paid in Broadcom restricted stock units for certain unvested employee stock options. Additional contingent earn-out consideration of up to $10 million in cash may be paid to the former holders of BroadLight capital stock and other rights upon satisfaction of certain future performance goals. A portion of the cash consideration payable to the stockholders will be placed into escrow to cover indemnity obligations. The results of operations of BroadLight will be included as of the acquisition date in our unaudited consolidated financial statements beginning in three months ended June 30, 2012.

 

4. Fair Value Measurements

Instruments Measured at Fair Value on a Recurring Basis. The following tables present our cash and marketable securities’ costs, gross unrealized gains, gross unrealized losses and fair value by major security type recorded as cash and cash equivalents or short-term or long-term marketable securities:

 

		March 31, 2012
						Gross				Gross												Short-Term				Long-Term
						Unrealized				Unrealized								Cash and				Marketable				Marketable
		Cost				Gains				Losses				Fair Value				Cash Equivalents				Securities				Securities
Cash		$	151			$	—			$	—			$	151			$	151			$	—			$	—
Level 1:
Bank deposits			655				—				—				655				654				1				—
Money market funds			89				—				—				89				89				—				—
U.S. treasury and and agency obligations			404				—				—				404				140				116				148
Corporate bonds			3				—				—				3				—				3				—
Subtotal			1,151				—				—				1,151				883				120				148
Level 2:
Commercial paper			291				—				—				291				291				—
Corporate bonds			452				1				—				453								225				228
Asset-backed securities and other			17				—				—				17				—				5				12
Subtotal			760				1				—				761				291				230				240
Level 3:
None			—				—				—				—				—				—				—
Total		$	2,062			$	1			$	—			$	2,063			$	1,325			$	350			$	388

 

		December 31, 2011
						Gross				Gross												Short-Term				Long-Term
						Unrealized				Unrealized								Cash and				Marketable				Marketable
		Cost				Gains				Losses				Fair Value				Cash Equivalents				Securities				Securities
Cash		$	154			$	—			$	—			$	154			$	154			$	—			$	—
Level 1:
Bank deposits			2,717				—				—				2,717				2,716				—				1
Money market funds			914				—				—				914				914				—				—
U.S. treasury and and agency obligations			469				—				—				469				—				90				379
Corporate bonds			7				—				—				7				—				7				—
Subtotal			4,107				—				—				4,107				3,630				97				380
Level 2:
Commercial paper			381				—				—				381				311				70				—
Corporate bonds			543				1				(2	)			542				51				211				280
Asset-backed securities and other			21				—				—				21				—				5				16
Subtotal			945				1				(2	)			944				362				286				296
Level 3:
None			—				—				—				—				—				—				—
Total		$	5,206			$	1			$	(2	)		$	5,205			$	4,146			$	383			$	676

There were no transfers between Level 1, Level 2 or Level 3 securities in the three months ended March 31, 2012. All of our long-term marketable securities had maturities of between one and three years in duration at March 31, 2012. Our cash, cash equivalents and marketable securities at March 31, 2012 consisted of $1.30 billion held domestically, with the remaining balance of $762 million held by foreign subsidiaries.

 

At March 31, 2012 we had 131 investments with a fair value of $484 million that were in an unrealized loss position for less than 12 months. Our gross unrealized losses of less than $1 million for these investments at March 31, 2012 were due to changes in interest rates. We have determined that the gross unrealized losses on these investments at March 31, 2012 are temporary in nature. We evaluate securities for other-than-temporary impairment on a quarterly basis. Impairment is evaluated considering numerous factors, and their relative significance varies depending on the situation. Factors considered include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the issuer, and our intent and ability to hold the investment in order to allow for an anticipated recovery in fair value.

Instruments Not Recorded at Fair Value on a Recurring Basis. We measure the fair value of our long-term debt carried at amortized cost quarterly for disclosure purposes. The estimated fair value of long-term debt is determined by Level 2 inputs and is based primarily on quoted market prices for the same or similar issues. Based on the market prices, the fair value of our long-term debt was $1.23 billion and $1.22 billion as of March 31, 2012 and December 31, 2011 respectively. The recorded values of all our accounts receivable and accounts payable approximate their current fair values because of their nature and respective relatively short maturity dates or durations.

Assets and Liabilities Recorded at Fair Value on a Non-Recurring Basis. We measure the fair value of our cost method investments when they are deemed to be other-than-temporarily impaired, assets acquired and liabilities assumed in a business acquisition, and goodwill and other long lived assets when they are held for sale or determined to be impaired. See Notes 2 and 3 for discussion on fair value measurements of certain assets and liabilities recorded at fair value on a non-recurring basis.