UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended May 6, 2018
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-38449
Broadcom Inc. | ||||
(Exact name of registrant as specified in its charter) | ||||
Delaware | 35-2617337 | |||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||
1320 Ridder Park Drive San Jose, CA 95131-2313 (408) 433-8000 | ||||
(Address, including zip code, of principal executive offices and registrant’s telephone number, including area code) | ||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | þ | Accelerated filer | o | Non-accelerated filer | o | Smaller reporting company | o | Emerging growth company | o |
(Do not check if a smaller reporting company) | |||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ
As of June 1, 2018, there were 431,680,880 shares of our common stock, $0.001 par value per share, outstanding.
BROADCOM INC.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended May 6, 2018
TABLE OF CONTENTS
Page | |
PART I — FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements — Unaudited
BROADCOM INC.
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
Page | |
1
BROADCOM INC.
CONDENSED CONSOLIDATED BALANCE SHEETS — UNAUDITED
May 6, 2018 | October 29, 2017 | |||||||
(In millions, except par value) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 8,187 | $ | 11,204 | ||||
Trade accounts receivable, net | 2,749 | 2,448 | ||||||
Inventory | 1,235 | 1,447 | ||||||
Other current assets | 303 | 724 | ||||||
Total current assets | 12,474 | 15,823 | ||||||
Long-term assets: | ||||||||
Property, plant and equipment, net | 2,720 | 2,599 | ||||||
Goodwill | 26,908 | 24,706 | ||||||
Intangible assets, net | 12,346 | 10,832 | ||||||
Other long-term assets | 488 | 458 | ||||||
Total assets | $ | 54,936 | $ | 54,418 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 836 | $ | 1,105 | ||||
Employee compensation and benefits | 417 | 626 | ||||||
Current portion of long-term debt | 117 | 117 | ||||||
Other current liabilities | 754 | 681 | ||||||
Total current liabilities | 2,124 | 2,529 | ||||||
Long-term liabilities: | ||||||||
Long-term debt | 17,481 | 17,431 | ||||||
Other long-term liabilities | 3,264 | 11,272 | ||||||
Total liabilities | 22,869 | 31,232 | ||||||
Commitments and contingencies (Note 11) | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, $0.001 par value; 100 shares authorized; none and 22 shares issued and outstanding as of May 6, 2018 and October 29, 2017, respectively | — | — | ||||||
Common stock and additional paid-in capital, $0.001 par value; 2,900 shares authorized; 436 and 409 shares issued and outstanding as of May 6, 2018 and October 29, 2017, respectively | 24,305 | 20,505 | ||||||
Retained earnings (accumulated deficit) | 7,868 | (129 | ) | |||||
Accumulated other comprehensive loss | (106 | ) | (91 | ) | ||||
Total Broadcom Inc. stockholders’ equity | 32,067 | 20,285 | ||||||
Noncontrolling interest | — | 2,901 | ||||||
Total stockholders’ equity | 32,067 | 23,186 | ||||||
Total liabilities and stockholders’ equity | $ | 54,936 | $ | 54,418 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
BROADCOM INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS — UNAUDITED
Fiscal Quarter Ended | Two Fiscal Quarters Ended | |||||||||||||||
May 6, 2018 | April 30, 2017 | May 6, 2018 | April 30, 2017 | |||||||||||||
(In millions, except per share data) | ||||||||||||||||
Net revenue | $ | 5,014 | $ | 4,190 | $ | 10,341 | $ | 8,329 | ||||||||
Cost of products sold: | ||||||||||||||||
Cost of products sold | 1,696 | 1,564 | 3,595 | 3,137 | ||||||||||||
Purchase accounting effect on inventory | — | 1 | 70 | 1 | ||||||||||||
Amortization of acquisition-related intangible assets | 765 | 639 | 1,480 | 1,198 | ||||||||||||
Restructuring charges | 2 | 10 | 17 | 16 | ||||||||||||
Total cost of products sold | 2,463 | 2,214 | 5,162 | 4,352 | ||||||||||||
Gross margin | 2,551 | 1,976 | 5,179 | 3,977 | ||||||||||||
Research and development | 936 | 829 | 1,861 | 1,637 | ||||||||||||
Selling, general and administrative | 294 | 204 | 585 | 405 | ||||||||||||
Amortization of acquisition-related intangible assets | 67 | 442 | 406 | 882 | ||||||||||||
Restructuring, impairment and disposal charges | 53 | 27 | 183 | 73 | ||||||||||||
Total operating expenses | 1,350 | 1,502 | 3,035 | 2,997 | ||||||||||||
Operating income | 1,201 | 474 | 2,144 | 980 | ||||||||||||
Interest expense | (148 | ) | (112 | ) | (331 | ) | (223 | ) | ||||||||
Loss on extinguishment of debt | — | — | — | (159 | ) | |||||||||||
Other income, net | 46 | 3 | 81 | 34 | ||||||||||||
Income from continuing operations before income taxes | 1,099 | 365 | 1,894 | 632 | ||||||||||||
Benefit from income taxes | (2,637 | ) | (103 | ) | (8,423 | ) | (93 | ) | ||||||||
Income from continuing operations | 3,736 | 468 | 10,317 | 725 | ||||||||||||
Loss from discontinued operations, net of income taxes | (3 | ) | (4 | ) | (18 | ) | (9 | ) | ||||||||
Net income | 3,733 | 464 | 10,299 | 716 | ||||||||||||
Net income attributable to noncontrolling interest | 15 | 24 | 351 | 37 | ||||||||||||
Net income attributable to common stock | $ | 3,718 | $ | 440 | $ | 9,948 | $ | 679 | ||||||||
Basic income (loss) per share: | ||||||||||||||||
Income per share from continuing operations | $ | 8.84 | $ | 1.10 | $ | 24.01 | $ | 1.72 | ||||||||
Loss per share from discontinued operations | (0.01 | ) | (0.01 | ) | (0.04 | ) | (0.03 | ) | ||||||||
Net income per share | $ | 8.83 | $ | 1.09 | $ | 23.97 | $ | 1.69 | ||||||||
Diluted income (loss) per share: | ||||||||||||||||
Income per share from continuing operations | $ | 8.34 | $ | 1.06 | $ | 23.03 | $ | 1.65 | ||||||||
Loss per share from discontinued operations | (0.01 | ) | (0.01 | ) | (0.04 | ) | (0.02 | ) | ||||||||
Net income per share | $ | 8.33 | $ | 1.05 | $ | 22.99 | $ | 1.63 | ||||||||
Weighted-average shares: | ||||||||||||||||
Basic | 421 | 403 | 415 | 401 | ||||||||||||
Diluted | 448 | 442 | 448 | 440 | ||||||||||||
Cash dividends declared and paid per share | $ | 1.75 | $ | 1.02 | $ | 3.50 | $ | 2.04 | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
BROADCOM INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME — UNAUDITED
Fiscal Quarter Ended | Two Fiscal Quarters Ended | |||||||||||||||
May 6, 2018 | April 30, 2017 | May 6, 2018 | April 30, 2017 | |||||||||||||
(In millions) | ||||||||||||||||
Net income | $ | 3,733 | $ | 464 | $ | 10,299 | $ | 716 | ||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||
Change in unrealized gain on available-for-sale investments | (9 | ) | — | — | — | |||||||||||
Amortization of actuarial loss and prior service costs associated with defined benefit pension plans and post-retirement benefit plans | 1 | 1 | 1 | 1 | ||||||||||||
Other comprehensive income (loss) | (8 | ) | 1 | 1 | 1 | |||||||||||
Comprehensive income | 3,725 | 465 | 10,300 | 717 | ||||||||||||
Comprehensive income attributable to noncontrolling interest | 15 | 24 | 351 | 37 | ||||||||||||
Comprehensive income attributable to common stock | $ | 3,710 | $ | 441 | $ | 9,949 | $ | 680 | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
BROADCOM INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED
Two Fiscal Quarters Ended | ||||||||
May 6, 2018 | April 30, 2017 | |||||||
(In millions) | ||||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 10,299 | $ | 716 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 2,148 | 2,307 | ||||||
Stock-based compensation | 595 | 418 | ||||||
Deferred taxes and other non-cash taxes | (8,534 | ) | (111 | ) | ||||
Non-cash portion of debt extinguishment loss | — | 159 | ||||||
Non-cash restructuring, impairment and disposal charges | 10 | 40 | ||||||
Amortization of debt issuance costs and accretion of debt discount | 12 | 14 | ||||||
Other | 17 | (15 | ) | |||||
Changes in assets and liabilities, net of acquisitions and disposals: | ||||||||
Trade accounts receivable, net | (78 | ) | 108 | |||||
Inventory | 306 | 96 | ||||||
Accounts payable | (312 | ) | (251 | ) | ||||
Employee compensation and benefits | (292 | ) | (53 | ) | ||||
Contributions to defined benefit pension plans | (129 | ) | (11 | ) | ||||
Other current assets and current liabilities | 354 | (391 | ) | |||||
Other long-term assets and long-term liabilities | (398 | ) | (90 | ) | ||||
Net cash provided by operating activities | 3,998 | 2,936 | ||||||
Cash flows from investing activities: | ||||||||
Acquisitions of businesses, net of cash acquired | (4,786 | ) | (37 | ) | ||||
Proceeds from sales of businesses | 782 | 10 | ||||||
Purchases of property, plant and equipment | (409 | ) | (581 | ) | ||||
Proceeds from disposals of property, plant and equipment | 238 | — | ||||||
Purchases of investments | (249 | ) | (200 | ) | ||||
Proceeds from sale of investment | 54 | — | ||||||
Other | (12 | ) | (4 | ) | ||||
Net cash used in investing activities | (4,382 | ) | (812 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from issuance of long-term debt | — | 13,446 | ||||||
Repayment of debt | (856 | ) | (13,668 | ) | ||||
Payment of debt issuance costs | — | (23 | ) | |||||
Dividend and distribution payments | (1,521 | ) | (868 | ) | ||||
Repurchases of common stock | (347 | ) | — | |||||
Issuance of common stock, net | 112 | 150 | ||||||
Payment of capital lease obligations | (21 | ) | (4 | ) | ||||
Net cash used in financing activities | (2,633 | ) | (967 | ) | ||||
Net change in cash and cash equivalents | (3,017 | ) | 1,157 | |||||
Cash and cash equivalents at beginning of period | 11,204 | 3,097 | ||||||
Cash and cash equivalents at end of period | $ | 8,187 | $ | 4,254 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
BROADCOM INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY — UNAUDITED
Preferred Stock | Common Stock and Additional Paid-in Capital | Retained Earnings/(Accumulated Deficit) | Accumulated Other Comprehensive Loss | Noncontrolling Interest | Total Stockholders’ Equity | |||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||
Balance as of October 29, 2017 | 22 | $ | — | 409 | $ | 20,505 | $ | (129 | ) | $ | (91 | ) | $ | 2,901 | $ | 23,186 | ||||||||||||||
Net income | — | — | — | — | 6,230 | — | 336 | 6,566 | ||||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | 9 | — | 9 | ||||||||||||||||||||||
Cumulative effect of accounting change | — | — | — | — | (252 | ) | — | (14 | ) | (266 | ) | |||||||||||||||||||
Cash dividends declared and paid to common stockholders | — | — | — | — | (717 | ) | — | — | (717 | ) | ||||||||||||||||||||
Cash distribution declared and paid by Broadcom Cayman L.P. on exchangeable limited partnership units | — | — | — | — | — | — | (38 | ) | (38 | ) | ||||||||||||||||||||
Exchange of exchangeable limited partnership units for common stock | — | — | — | 5 | — | — | (5 | ) | — | |||||||||||||||||||||
Issuance of common stock in connection with equity incentive plans | — | — | 1 | 34 | — | — | — | 34 | ||||||||||||||||||||||
Stock-based compensation | — | — | — | 299 | — | — | — | 299 | ||||||||||||||||||||||
Fair value of partially vested equity awards assumed in connection with the acquisition of Brocade Communications Systems, Inc. | — | — | — | 8 | — | — | — | 8 | ||||||||||||||||||||||
Balance as of February 4, 2018 | 22 | — | 410 | 20,851 | 5,132 | (82 | ) | 3,180 | 29,081 | |||||||||||||||||||||
Net income | — | — | — | — | 3,718 | — | 15 | 3,733 | ||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | (8 | ) | — | (8 | ) | ||||||||||||||||||||
Cumulative effect of accounting change | — | — | — | — | 15 | (16 | ) | 1 | — | |||||||||||||||||||||
Cash dividends declared and paid to common stockholders | — | — | — | — | (727 | ) | — | — | (727 | ) | ||||||||||||||||||||
Cash distribution declared and paid by Broadcom Cayman L.P. on exchangeable limited partnership units | — | — | — | — | — | — | (39 | ) | (39 | ) | ||||||||||||||||||||
Exchange of exchangeable limited partnership units for common stock and redemption of preferred stock due to the Redomiciliation Transaction | (22 | ) | — | 22 | 3,157 | — | (3,157 | ) | — | |||||||||||||||||||||
Issuance of common stock in connection with equity incentive plans, net | — | — | 6 | 78 | — | — | — | 78 | ||||||||||||||||||||||
Stock-based compensation | — | — | — | 296 | — | — | — | 296 | ||||||||||||||||||||||
Repurchases of common stock | — | — | (2 | ) | (77 | ) | (270 | ) | — | — | (347 | ) | ||||||||||||||||||
Balance as of May 6, 2018 | — | $ | — | 436 | $ | 24,305 | $ | 7,868 | $ | (106 | ) | $ | — | $ | 32,067 | |||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
BROADCOM INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Overview, Basis of Presentation and Significant Accounting Policies
Overview
Broadcom Inc., a Delaware corporation, is the successor to Broadcom Limited, a company organized under the laws of the Republic of Singapore, or Broadcom-Singapore. As part of the plan to cause the publicly traded parent company of Broadcom to be a Delaware corporation, or the Redomiciliation Transaction, after the close of market trading on April 4, 2018, Broadcom Inc. and Broadcom-Singapore completed a statutory scheme of arrangement under Singapore law, or the Scheme of Arrangement. Pursuant to the Scheme of Arrangement, all Broadcom-Singapore ordinary shares outstanding immediately prior to the effective time of the Scheme of Arrangement were exchanged on a one-for-one basis for newly issued shares of Broadcom Inc. common stock and Broadcom-Singapore became an indirect wholly-owned subsidiary of Broadcom Inc.
In conjunction with the Redomiciliation Transaction and pursuant to an amendment to the Amended and Restated Limited Partnership Agreement of Broadcom Cayman L.P., or the Partnership, all outstanding exchangeable limited partnership units, or LP Units, were mandatorily exchanged, or the Mandatory Exchange, on a one-for-one basis for newly issued shares of Broadcom Inc. common stock immediately prior to the effective time of the Scheme of Arrangement. As a result, all limited partners of the Partnership became common stockholders of Broadcom Inc. In addition, all related outstanding special preference shares of Broadcom-Singapore were automatically redeemed pursuant to Broadcom-Singapore’s governing documents upon the Mandatory Exchange of the LP Units. Consequently, the limited partners no longer hold a noncontrolling interest in the Partnership and we subsequently deregistered the Partnership.
The Scheme of Arrangement was accounted for as an exchange of equity interests among entities under common control. All assets and liabilities of Broadcom-Singapore were assumed by Broadcom Inc., resulting in the retention of the historical basis of accounting as if they had always been combined for accounting and financial reporting purposes.
The financial statements for periods prior to April 4, 2018, the effective date of the Redomiciliation Transaction, relate to Broadcom-Singapore and relate to Broadcom Inc. for the period after April 4, 2018. Unless stated otherwise or the context otherwise requires, references to “Broadcom,” “we,” “our” and “us” mean Broadcom Inc. and its consolidated subsidiaries from and after the effective time of the Redomiciliation Transaction and, prior to that time, to our predecessor, Broadcom-Singapore.
We are a leading designer, developer and global supplier of a broad range of semiconductor devices with a focus on complex digital and mixed signal complementary metal oxide semiconductor based devices and analog III-V based products. We have a history of innovation and offer thousands of products that are used in end products such as enterprise and data center networking, home connectivity, set-top boxes, broadband access, telecommunication equipment, smartphones and base stations, data center servers and storage systems, factory automation, power generation and alternative energy systems, and electronic displays. We have four reportable segments: wired infrastructure, wireless communications, enterprise storage and industrial & other, which align with our principal target markets.
Basis of Presentation
We operate on a 52- or 53-week fiscal year ending on the Sunday closest to October 31 in a 52-week year and the first Sunday in November in a 53-week year. Our fiscal year ending November 4, 2018, or fiscal year 2018, is a 53-week fiscal year, with our first fiscal quarter containing 14 weeks. The first quarter of our fiscal year 2018 ended on February 4, 2018, the second quarter ended on May 6, 2018 and the third quarter ends on August 5, 2018. Our fiscal year ended October 29, 2017, or fiscal year 2017, was a 52-week fiscal year.
On November 17, 2017, we acquired Brocade Communications Systems, Inc., or Brocade. The unaudited condensed consolidated financial statements include the results of operations of Brocade commencing as of the acquisition date. See Note 2. “Acquisition of Brocade” for additional information.
7
The accompanying condensed consolidated financial statements include the accounts of Broadcom and our subsidiaries, and have been prepared by us in accordance with generally accepted accounting principles in the United States, or GAAP, for interim financial information. The financial information included herein is unaudited, and reflects all adjustments which are, in the opinion of our management, of a normal recurring nature and necessary for a fair statement of the results for the periods presented. The October 29, 2017 condensed consolidated balance sheet data were derived from Broadcom-Singapore’s audited consolidated financial statements included in its Annual Report on Form 10-K for fiscal year 2017 as filed with the Securities and Exchange Commission, or SEC, but do not include all disclosures required by GAAP. All intercompany transactions and balances have been eliminated in consolidation. The operating results for the fiscal quarter and two fiscal quarters ended May 6, 2018 are not necessarily indicative of the results that may be expected for fiscal year 2018, or for any other future period.
Significant Accounting Policies
Use of estimates. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and such differences could affect the results of operations reported in future periods.
Reclassifications. Certain reclassifications have been made to the prior period condensed consolidated statement of cash flows. These reclassifications had no impact on the previously reported net cash activities.
Recently Adopted Accounting Guidance
In the first quarter of fiscal year 2018, we early adopted guidance issued by the Financial Accounting Standards Board, or FASB, in October 2016 related to the recognition of income tax consequences of an intra-entity transfer of an asset other than inventory. The standard requires a modified-retrospective transition method by means of a cumulative-effect adjustment as of the beginning of the period in which the guidance is adopted. The adoption of this guidance resulted in a decrease in current and long-term prepaid tax expense of $67 million and $199 million, respectively, an increase of $252 million to our accumulated deficit and a decrease of $14 million to our noncontrolling interest.
In the second quarter of fiscal year 2018, we early adopted guidance issued by the FASB in February 2018 that allows companies to reclassify stranded income tax effects resulting from the U.S. Tax Cuts and Jobs Act, or the 2017 Tax Reform Act, from accumulated other comprehensive loss to retained earnings. The stranded income tax effects resulted from the change in the federal tax rate for deferred taxes recorded in accumulated other comprehensive loss. The adoption of this guidance resulted in a cumulative-effect adjustment as of the beginning of the second quarter of fiscal year 2018, which consisted of an increase to our accumulated other comprehensive loss of $16 million, an increase to retained earnings of $15 million and a $1 million increase to noncontrolling interest.
Recent Accounting Guidance Not Yet Adopted
In August 2016, the FASB issued guidance related to the classification of certain transactions on the statement of cash flows. This guidance will be effective for the first quarter of our fiscal year 2019 on a retrospective basis; and early adoption is permitted. We do not intend to adopt this guidance early and will present our statements of cash flows in accordance with this guidance upon adoption.
In February 2016, the FASB issued guidance related to the accounting for leases, which among other things, requires a lessee to recognize lease assets and lease liabilities on the balance sheet for operating leases. This guidance will be effective for the first quarter of our fiscal year 2020. The new guidance is required to be applied using a modified retrospective approach. We are evaluating the impact this guidance will have on our condensed consolidated financial statements.
In May 2014, the FASB issued guidance that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The new standard creates a single source of revenue guidance under GAAP, eliminating industry-specific guidance. The underlying principle of the standard is to recognize revenue when a customer obtains control of promised goods or services at an amount that reflects the consideration that is expected to be received in exchange for those goods or services. An entity should apply a five-step approach for recognizing revenue as follows: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when, or as, the entity satisfies a performance obligation. The standard also requires increased disclosures including the nature, amount, timing, and uncertainty of revenues and cash flows related to contracts with customers.
8
The standard allows two methods of adoption: (i) retrospectively to each prior period presented (“full retrospective method”), or (ii) retrospectively with the cumulative effect recognized in retained earnings as of the date of adoption ("modified retrospective method"). We plan to adopt the new standard using the modified retrospective method at the beginning of the first quarter of fiscal year 2019. We have established a cross-functional team to assess the potential impact of the new revenue standard and are on schedule in establishing new accounting policies, processes, and internal controls necessary to support the requirements of the new standard. While we are still finalizing our analysis to quantify the adoption impact of the provisions of the new standard, the exact impact of the new standard will be dependent on facts and circumstances at adoption and could vary from quarter to quarter.
2. Acquisition of Brocade
On November 17, 2017, or the Brocade Acquisition Date, we acquired Brocade, or the Brocade Merger. Brocade was a supplier of networking hardware, software and services, including Fibre Channel Storage Area Network, or FC SAN, solutions and Internet Protocol Networking, or IP Networking, solutions. We acquired Brocade to enhance our position as a provider of enterprise storage connectivity solutions, broaden our portfolio for enterprise storage, and to increase our ability to address the evolving needs of our original equipment manufacturer, or OEM, customers. We financed the Brocade Merger with a portion of the net proceeds from the issuance of the 2017 Senior Notes, as defined and discussed in further detail in Note 6. “Borrowings,” as well as cash on hand.
Purchase Consideration
(In millions) | ||||
Cash paid for outstanding Brocade common stock | $ | 5,298 | ||
Cash paid by Broadcom to retire Brocade’s term loan | 701 | |||
Cash paid for Brocade equity awards | 31 | |||
Fair value of partially vested assumed equity awards | 8 | |||
Total purchase consideration | 6,038 | |||
Less: cash acquired | 1,250 | |||
Total purchase consideration, net of cash acquired | $ | 4,788 | ||
We assumed all unvested Brocade stock options, restricted stock units, or RSUs, and performance stock units, or PSUs, held by continuing employees. The portion of the fair value of partially vested equity awards associated with prior service of Brocade employees represents a component of the total consideration as presented above. All vested in-the-money Brocade stock options, after giving effect to any acceleration, were cashed out upon the completion of the Brocade Merger. RSUs and PSUs were valued based on our share price as of the Brocade Acquisition Date.
We allocated the purchase price to tangible and identified intangible assets acquired and liabilities assumed based on their estimated fair values. The fair value of identified intangible assets acquired was based on estimates and assumptions made by management at the time of acquisition. As additional information becomes available, such as finalization of the estimated fair value of tax related items, we may further revise our preliminary purchase price allocation during the remainder of the measurement period (which will not exceed 12 months from the Brocade Acquisition Date). Any such revisions or changes may be material.
9
The following table presents our preliminary allocation of the total purchase price, net of cash acquired:
Estimated Fair Value | ||||
(In millions) | ||||
Current assets | $ | 1,294 | ||
Goodwill | 2,189 | |||
Intangible assets | 3,396 | |||
Other long-term assets | 79 | |||
Total assets acquired | 6,958 | |||
Current portion of long-term debt | (856 | ) | ||
Other current liabilities | (370 | ) | ||
Long-term debt | (38 | ) | ||
Other long-term liabilities | (906 | ) | ||
Total liabilities assumed | (2,170 | ) | ||
Fair value of net assets acquired | $ | 4,788 | ||
Goodwill was primarily attributable to the assembled workforce and anticipated synergies and economies of scale expected from the integration of the Brocade business. The synergies include certain cost savings, operating efficiencies, and other strategic benefits projected to be achieved as a result of the Brocade Merger. Goodwill is not expected to be deductible for tax purposes.
Current assets included assets held-for-sale related to Brocade’s IP Networking business, which was not aligned with our strategic objectives and was sold during our fiscal quarter ended February 4, 2018. The sale of Brocade’s IP Networking business is discussed further in Note 3. “Supplemental Financial Information.” Current assets also included assets held-for-sale for Brocade’s headquarters, which was sold for $224 million during the first quarter of fiscal year 2018, for no gain or loss. We leased back a portion of the campus at market rental rates for six months.
Revenue from the Brocade acquisition has been included primarily in our enterprise storage segment. Transaction costs of $8 million and $29 million related to the Brocade Merger were included in selling, general and administrative expense for the fiscal quarter and two fiscal quarters ended May 6, 2018, respectively.
Intangible Assets
Fair Value | Weighted-Average Amortization Periods | |||||
(In millions) | (In years) | |||||
Developed technology | $ | 2,925 | 10 | |||
Customer contracts and related relationships | 255 | 11 | ||||
Trade name and other | 61 | 6 | ||||
Total identified finite-lived intangible assets | 3,241 | |||||
In-process research and development | 155 | N/A | ||||
Total identified intangible assets | $ | 3,396 | ||||
Developed technology relates to products for FC SAN applications. We valued the developed technology using the multi-period excess earnings method under the income approach. This method reflects the present value of the projected cash flows that are expected to be generated by the developed technology less charges representing the contribution of other assets to those cash flows. The economic useful life was determined based on the technology cycle related to each developed technology, as well as the cash flows over the forecast period.
Customer contracts and related relationships represent the fair value of future projected revenue that will be derived from sales of products to existing customers of Brocade. Customer contracts and related relationships were valued using the distributor method and the with-and-without-method under the income approach. The distributor method determines the fair value by measuring the economic profits generated by an intermediary, which in our case represents OEM customers. In the with-and-without method, the fair value was measured by the difference between the present values of the cash flows with and without the existing customers in place over the period of time necessary to reacquire the customers. In both instances, the economic useful life was determined based on historical customer turnover rates.
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Trade name relates to the “Brocade” trade name. The fair value was determined by applying the relief-from-royalty method under the income approach. This valuation method is based on the application of a royalty rate to forecasted revenue under the trade name. The economic useful life was determined based on the expected life of the trade name and the cash flows anticipated over the forecasted periods.
The fair value of in-process research and development, or IPR&D, was determined using the multi-period excess earnings method under the income approach. This method reflects the present value of the projected cash flows that are expected to be generated by the IPR&D, less charges representing the contribution of other assets to those cash flows.
We believe the amounts of purchased intangible assets recorded above represent the fair values of, and approximate the amounts a market participant would pay for, these intangible assets as of the Brocade Acquisition Date.
The following table summarizes the details of IPR&D by category:
Description | IPR&D | Percentage of Completion | Estimated Cost to Complete | Expected Release Date (By Fiscal Year) | |||||||||
(Dollars in millions) | |||||||||||||
Directors | $ | 64 | 72 | % | $ | 45 | 2019 | ||||||
Switches | $ | 50 | 81 | % | $ | 21 | 2018 | ||||||
Embedded | $ | 31 | 74 | % | $ | 22 | 2019 | ||||||
Networking software | $ | 10 | 73 | % | $ | 27 | 2018 | ||||||
The discount rate of 11% was applied to the projected cash flows to reflect the risk related to these IPR&D projects. The discount rate represents a premium of 1% over the weighted-average cost of capital to reflect the higher risk and uncertainty of the cash flows for IPR&D relative to the overall businesses.
Unaudited Pro Forma Information
The following unaudited pro forma financial information presents combined results of operations for each of the periods presented, as if Brocade had been acquired as of the beginning of fiscal year 2017. The unaudited pro forma information includes adjustments to amortization and depreciation for intangible assets and property, plant and equipment acquired, adjustments to stock-based compensation expense, the purchase accounting effect on inventory acquired, restructuring charges related to the acquisition and transaction costs. For fiscal year 2017, non-recurring pro forma adjustments directly attributable to the Brocade Merger included (i) the purchase accounting effect of inventory acquired of $70 million and (ii) acquisition costs of $76 million. The unaudited pro forma information presented below is for informational purposes only and is not necessarily indicative of our consolidated results of operations of the combined business had the acquisition actually occurred at the beginning of fiscal year 2017 or of the results of our future operations of the combined business.
Fiscal Quarter Ended | Two Fiscal Quarters Ended | |||||||||||||||
May 6, 2018 | April 30, 2017 | May 6, 2018 | April 30, 2017 | |||||||||||||
(In millions) | ||||||||||||||||
Pro forma net revenue | $ | 5,017 | $ | 4,662 | $ | 10,464 | $ | 9,301 | ||||||||
Pro forma net income attributable to common stock | $ | 3,744 | $ | 442 | $ | 10,077 | $ | 554 | ||||||||
3. Supplemental Financial Information
Cash Equivalents
Cash equivalents included $4,362 million and $6,002 million of time deposits as of May 6, 2018 and October 29, 2017, respectively. As of May 6, 2018 and October 29, 2017, cash equivalents also included $402 million and $401 million of money-market funds, respectively. For time deposits, carrying value approximates fair value due to the short-term nature of the instruments. The fair value of money-market funds, which was consistent with their carrying value, was determined using unadjusted prices in active, accessible markets for identical assets, and as such they were classified as Level 1 assets in the fair value hierarchy.
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Accounts Receivable Factoring
In connection with a factoring agreement with a third-party financial institution, we sell certain of our trade accounts receivable on a non-recourse basis. We account for these transactions as sales of receivables and present cash proceeds as cash provided by operating activities in the condensed consolidated statements of cash flows. Total trade accounts receivable sold under the factoring agreement were $57 million during the fiscal quarter and two fiscal quarters ended May 6, 2018. Factoring fees for the sales of receivables were recorded in other income, net and were not material.
Inventory
May 6, 2018 | October 29, 2017 | |||||||
(In millions) | ||||||||
Finished goods | $ | 510 | $ | 562 | ||||
Work-in-process | 542 | 696 | ||||||
Raw materials | 183 | 189 | ||||||
Total inventory | $ | 1,235 | $ | 1,447 | ||||
Other current assets
May 6, 2018 | October 29, 2017 | |||||||
(In millions) | ||||||||
Prepaid expenses | $ | 174 | $ | 440 | ||||
Other receivables | 87 | 155 | ||||||
Other | 42 | 129 | ||||||
Total other current assets | $ | 303 | $ | 724 | ||||
Accrued Rebate Activity
Two Fiscal Quarters Ended | ||||||||
May 6, 2018 | April 30, 2017 | |||||||
(In millions) | ||||||||
Beginning balance | $ | 124 | $ | 317 | ||||
Charged as a reduction of revenue | 64 | 120 | ||||||
Reversal of unclaimed rebates | (10 | ) | (36 | ) | ||||
Payments | (125 | ) | (222 | ) | ||||
Ending balance | $ | 53 | $ | 179 | ||||
We recorded customer rebate charges of $25 million and $56 million in the fiscal quarters ended May 6, 2018 and April 30, 2017, respectively.
Other Long-Term Liabilities
May 6, 2018 | October 29, 2017 | |||||||
(In millions) | ||||||||
Deferred tax liabilities (a) | $ | 266 | $ | 10,019 | ||||
Unrecognized tax benefits (a) (b) | 2,700 | 1,011 | ||||||
Other | 298 | 242 | ||||||
Total other long-term liabilities | $ | 3,264 | $ | 11,272 | ||||
________________________________
(a) Refer to Note 8. “Income Taxes” for additional information regarding these balances.
(b) Includes accrued interest and penalties.
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Discontinued Operations
On December 1, 2017, we sold Brocade’s IP Networking business to ARRIS International plc, or ARRIS, for cash consideration of $800 million, adjusted for closing working capital balances. In connection with this sale, we indemnified ARRIS for $116 million of potential income tax liabilities. We provided transitional services as short-term assistance to ARRIS in assuming the operations of the purchased business. We do not have any material continuing involvement with this business and have presented its results in discontinued operations.
The following table summarizes the selected financial information of discontinued operations:
Fiscal Quarter Ended | Two Fiscal Quarters Ended | |||||||||||||||
May 6, 2018 | April 30, 2017 | May 6, 2018 | April 30, 2017 | |||||||||||||
(In millions) | ||||||||||||||||
Net revenue | $ | — | $ | 3 | $ | 18 | $ | 5 | ||||||||
Loss from discontinued operations | $ | (3 | ) | $ | (4 | ) | $ | (18 | ) | $ | (9 | ) | ||||
Supplemental Cash Flow Information
Fiscal Quarter Ended | Two Fiscal Quarters Ended | |||||||||||||||
May 6, 2018 | April 30, 2017 | May 6, 2018 | April 30, 2017 | |||||||||||||
(In millions) | ||||||||||||||||
Cash paid for interest | $ | 1 | $ | 1 | $ | 233 | $ | 103 | ||||||||
Cash paid for income taxes | $ | 87 | $ | 121 | $ | 196 | $ | 218 | ||||||||
At May 6, 2018 and October 29, 2017, we had $27 million and $122 million, respectively, of unpaid purchases of property, plant and equipment included in accounts payable and other current liabilities.
4. Goodwill and Intangible Assets
Goodwill
Wired Infrastructure | Wireless Communications | Enterprise Storage | Industrial & Other | Total | ||||||||||||||||
(In millions) | ||||||||||||||||||||
Balance as of October 29, 2017 | $ | 17,622 | $ | 5,945 | $ | 995 | $ | 144 | $ | 24,706 | ||||||||||
Brocade Merger | 70 | — | 2,119 | — | 2,189 | |||||||||||||||
Other acquisition | 13 | — | — | — | 13 | |||||||||||||||
Balance as of May 6, 2018 | $ | 17,705 | $ | 5,945 | $ | 3,114 | $ | 144 | $ | 26,908 | ||||||||||
During the two fiscal quarters ended May 6, 2018, we made one immaterial acquisition in addition to the Brocade Merger.
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Intangible Assets
Gross Carrying Amount | Accumulated Amortization | Net Book Value | ||||||||||
(In millions) | ||||||||||||
As of May 6, 2018: | ||||||||||||
Purchased technology | $ | 15,770 | $ | (5,295 | ) | $ | 10,475 | |||||
Customer contracts and related relationships | 1,792 | (770 | ) | 1,022 | ||||||||
Trade names | 578 | (143 | ) | 435 | ||||||||
Other | 151 | (37 | ) | 114 | ||||||||
Intangible assets subject to amortization | 18,291 | (6,245 | ) | 12,046 | ||||||||
IPR&D | 300 | — | 300 | |||||||||
Total | $ | 18,591 | $ | (6,245 | ) | $ | 12,346 | |||||
As of October 29, 2017: | ||||||||||||
Purchased technology | $ | 12,724 | $ | (4,265 | ) | $ | 8,459 | |||||
Customer contracts and related relationships | 4,240 | (3,100 | ) | 1,140 | ||||||||
Trade names | 528 | (117 | ) | 411 | ||||||||
Other | 135 | (25 | ) | 110 | ||||||||
Intangible assets subject to amortization | 17,627 | (7,507 | ) | 10,120 | ||||||||
IPR&D | 712 | — | 712 | |||||||||
Total | $ | 18,339 | $ | (7,507 | ) | $ | 10,832 | |||||
Based on the amount of intangible assets subject to amortization at May 6, 2018, the expected amortization expense for each of the next five years and thereafter was as follows:
Fiscal Year: | Expected Amortization Expense | |||
(In millions) | ||||
2018 (remainder) | $ | 1,669 | ||
2019 | 2,872 | |||
2020 | 2,424 | |||
2021 | 1,930 | |||
2022 | 1,425 | |||
Thereafter | 1,726 | |||
Total | $ | 12,046 | ||
The weighted-average amortization periods remaining by intangible asset category were as follows:
Amortizable intangible assets: | May 6, 2018 | |
(In years) | ||
Purchased technology | 6 | |
Customer contracts and related relationships | 6 | |
Trade names | 12 | |
Other | 9 | |
5. Net Income Per Share
Basic net income per share is computed by dividing net income attributable to common stock by the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted-average number of shares of common stock and potentially dilutive shares of common stock outstanding during the period.
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Diluted shares include the dilutive effect of in-the-money stock options, RSUs and employee stock purchase plan rights under the Broadcom Limited Second Amended and Restated Employee Share Purchase Plan, as amended, or ESPP (together referred to as equity awards). Diluted shares also included shares issuable upon exchange of the LP Units for the periods presented prior to the effective time of Mandatory Exchange (refer to Note 7. “Stockholders’ Equity” for additional information).
The dilutive effect of equity awards is calculated based on the average stock price for each fiscal period, using the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options and to purchase shares under the ESPP and the amount of compensation cost for future service that we have not yet recognized are collectively assumed to be used to repurchase shares.
The dilutive effect of the LP Units was calculated using the if-converted method. The if-converted method assumed that the LP Units were converted at the beginning of the reporting period and included net income attributable to noncontrolling interest for the period.
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The following is a reconciliation of the numerators and denominators of the basic and diluted net income per share computations for the periods presented:
Fiscal Quarter Ended | Two Fiscal Quarters Ended | |||||||||||||||
May 6, 2018 | April 30, 2017 | May 6, 2018 | April 30, 2017 | |||||||||||||
Numerator - Basic: | (In millions, except per share data) | |||||||||||||||
Income from continuing operations | $ | 3,736 | $ | 468 | $ | 10,317 | $ | 725 | ||||||||
Less: Income from continuing operations attributable to noncontrolling interest | 15 | 24 | 352 | 37 | ||||||||||||
Income from continuing operations attributable to common stock | 3,721 | 444 | 9,965 | 688 | ||||||||||||
Loss from discontinued operations, net of income taxes | (3 | ) | (4 | ) | (18 | ) | (9 | ) | ||||||||
Less: Loss from discontinued operations, net of income taxes, attributable to noncontrolling interest | — | — | (1 | ) | — | |||||||||||
Loss from discontinued operations, net of income taxes, attributable to common stock | (3 | ) | (4 | ) | (17 | ) | (9 | ) | ||||||||
Net income attributable to common stock | $ | 3,718 | $ | 440 | $ | 9,948 | $ | 679 | ||||||||
Numerator - Diluted: | ||||||||||||||||
Income from continuing operations | $ | 3,736 | $ | 468 | $ | 10,317 | $ | 725 | ||||||||
Loss from discontinued operations, net of income taxes | (3 | ) | (4 | ) | (18 | ) | (9 | ) | ||||||||
Net income | $ | 3,733 | $ | 464 | $ | 10,299 | $ | 716 | ||||||||
Denominator: | ||||||||||||||||
Weighted-average shares outstanding - basic | 421 | 403 | 415 | 401 | ||||||||||||
Dilutive effect of equity awards | 13 | 16 | 15 | 16 | ||||||||||||
Exchange of noncontrolling interest | 14 | 23 | 18 | 23 | ||||||||||||
Weighted-average shares outstanding - diluted | 448 | 442 | 448 | 440 | ||||||||||||
Basic income (loss) per share: | ||||||||||||||||
Income per share from continuing operations | $ | 8.84 | $ | 1.10 | $ | 24.01 | $ | 1.72 | ||||||||
Loss per share from discontinued operations | (0.01 | ) | (0.01 | ) | (0.04 | ) | (0.03 | ) | ||||||||
Net income per share | $ | 8.83 | $ | 1.09 | $ | 23.97 | $ | 1.69 | ||||||||
Diluted income (loss) per share: | ||||||||||||||||
Income per share from continuing operations | $ | 8.34 | $ | 1.06 | $ | 23.03 | $ | 1.65 | ||||||||
Loss per share from discontinued operations | (0.01 | ) | (0.01 | ) | (0.04 | ) | (0.02 | ) | ||||||||
Net income per share | $ | 8.33 | $ | 1.05 | $ | 22.99 | $ | 1.63 | ||||||||
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6. Borrowings
As of May 6, 2018: | As of October 29, 2017: | |||||||||||||
Effective Interest Rate | Aggregate Principal Amount | Effective Interest Rate | Aggregate Principal Amount | |||||||||||
(In millions, except for percentages) | ||||||||||||||
2017 Senior Notes | ||||||||||||||
Fixed rate 2.375% notes due January 2020 | 2.615 | % | $ | 2,750 | 2.615 | % | $ | 2,750 | ||||||
Fixed rate 2.200% notes due January 2021 | 2.406 | % | 750 | 2.406 | % | 750 | ||||||||
Fixed rate 3.000% notes due January 2022 | 3.214 | % | 3,500 | 3.214 | % | 3,500 | ||||||||
Fixed rate 2.650% notes due January 2023 | 2.781 | % | 1,000 | 2.781 | % | 1,000 | ||||||||
Fixed rate 3.625% notes due January 2024 | 3.744 | % | 2,500 | 3.744 | % | 2,500 | ||||||||
Fixed rate 3.125% notes due January 2025 | 3.234 | % | 1,000 | 3.234 | % | 1,000 | ||||||||
Fixed rate 3.875% notes due January 2027 | 4.018 | % | 4,800 | 4.018 | % | 4,800 | ||||||||
Fixed rate 3.500% notes due January 2028 | 3.596 | % | 1,250 | 3.596 | % | 1,250 | ||||||||
17,550 | 17,550 | |||||||||||||
Assumed BRCM Senior Notes | ||||||||||||||
Fixed rate 2.70% notes due November 2018 | 2.70 | % | 117 | 2.70 | % | 117 | ||||||||
Fixed rate 2.50% - 4.50% notes due August 2022 - August 2034 | 2.50% - 4.50% | 22 | 2.50% - 4.50% | 22 | ||||||||||
139 | 139 | |||||||||||||
Assumed Brocade Convertible Notes | ||||||||||||||
Fixed rate 1.375% convertible notes due January 2020 | 0.628 | % | 38 | — | ||||||||||
Total principal amount outstanding | 17,727 | 17,689 | ||||||||||||
Less: Unaccreted discount and unamortized debt issuance costs | (129 | ) | (141 | ) | ||||||||||
Total carrying value of debt | $ | 17,598 | $ | 17,548 | ||||||||||
Senior Notes and Assumed BRCM Senior Notes
In fiscal year 2017, Broadcom Corporation, or BRCM, and Broadcom Cayman Finance Limited, or together with BRCM referred to as the Subsidiary Issuers, completed the issuance and sale of senior unsecured notes, or the 2017 Senior Notes, in an aggregate principal amount of $17,550 million. Our 2017 Senior Notes were fully and unconditionally guaranteed, jointly and severally, on an unsecured, unsubordinated basis by Broadcom-Singapore and the Partnership, subject to certain release conditions described in the indentures governing the 2017 Senior Notes, or the 2017 Indentures. On April 9, 2018, Broadcom Inc., or Parent Guarantor, became a guarantor of the 2017 Senior Notes and entered into supplemental indentures with the Subsidiary Issuers and the trustee of the 2017 Senior Notes. At that time, Broadcom-Singapore, a guarantor at the issuance of the 2017 Senior Notes, became an indirect wholly-owned subsidiary of Broadcom Inc. and a subsidiary guarantor, or Subsidiary Guarantor. In addition, the Partnership was released from its guarantee of the 2017 Senior Notes under each of the 2017 Indentures in accordance with their terms. Each series of 2017 Senior Notes pays interest semi-annually in cash in arrears on January 15 and July 15 of each year. As of May 6, 2018 and October 29, 2017, we accrued interest payable of $194 million and $136 million, respectively.
We may redeem all or a portion of our 2017 Senior Notes at any time prior to their maturity, subject to a specified make-whole premium as set forth in the 2017 Indentures. In the event of a change of control triggering event, holders of our 2017 Senior Notes will have the right to require us to purchase for cash all or a portion of their 2017 Senior Notes at a redemption price of 101% of the aggregate principal amount of such 2017 Senior Notes plus accrued and unpaid interest. The 2017 Indentures also contain covenants that restrict, among other things, the ability of Broadcom and our subsidiaries to incur certain secured debt and consummate certain sale and leaseback transactions, and the ability of the Parent Guarantor, the Subsidiary Issuers and the Subsidiary Guarantor to merge, consolidate or sell all or substantially all of their assets.
17
In connection with the issuance of the 2017 Senior Notes, we entered into registration rights agreements, pursuant to which we were obligated to use commercially reasonable efforts to file with the SEC, and cause to be declared effective, a registration statement with respect to an offer to exchange, or the Exchange Offer, each series of 2017 Senior Notes for notes that are registered with the SEC, or the Registered Notes, with substantially identical terms. On January 9, 2018, we launched the Exchange Offer and on February 21, 2018, substantially all of the 2017 Senior Notes were tendered and exchanged for Registered Notes in the Exchange Offer.
We were in compliance with all of the covenants related to the 2017 Senior Notes and senior unsecured notes assumed in the connection with acquisition of BRCM, or the Assumed BRCM Senior Notes, as of May 6, 2018.
Assumed Brocade Debt
As a result of the Brocade Merger, we assumed $575 million in aggregate principal amount of Brocade’s 1.375% convertible senior unsecured notes due 2020, or the Assumed Brocade Convertible Notes. The Brocade Merger was a “fundamental change” as well as a “make-whole fundamental change” as defined under the terms of the indenture governing the Assumed Brocade Convertible Notes. Accordingly, the holders of the Assumed Brocade Convertible Notes received the right to require us to repurchase their notes for cash. In the first quarter of fiscal year 2018, we repurchased $537 million in aggregate principal amount for $548 million at a conversion rate of $1,018 for each $1,000 of principal surrendered for conversion. As of May 6, 2018, the outstanding principal amount of the Assumed Brocade Convertible Notes was $38 million. The remaining outstanding Assumed Brocade Convertible Notes are convertible into cash at a conversion rate of $812 for each $1,000 of principal. We were in compliance with all of the covenants related to the Assumed Brocade Convertible Notes as of May 6, 2018.
We also assumed $300 million in aggregate principal amount of Brocade’s 4.625% senior unsecured notes due 2023. On January 16, 2018, we called and redeemed all of these outstanding notes for a total payment of $308 million, including the redemption price.
Fair Value of Debt
As of May 6, 2018, the estimated aggregate fair value of the 2017 Senior Notes, the Assumed BRCM Senior Notes and the Assumed Brocade Convertible Notes was $17,024 million and was primarily classified as Level 2 as we used quoted prices from less active markets.
Future Principal Payments of Debt
The future scheduled principal payments for the outstanding 2017 Senior Notes, Assumed BRCM Senior Notes and Assumed Brocade Convertible Notes as of May 6, 2018 were as follows:
Fiscal Year: | Future Scheduled Principal Payments | |||
(In millions) | ||||
2018 (remainder) | $ | 117 | ||
2019 | — | |||
2020 | 2,788 | |||
2021 | 750 | |||
2022 | 3,509 | |||
Thereafter | 10,563 | |||
Total | $ | 17,727 | ||
7. Stockholders’ Equity
Completion of the Redomiciliation Transaction
For the period prior to the Redomiciliation Transaction, our stockholders’ equity reflects Broadcom-Singapore’s outstanding ordinary shares, all of which were publicly traded on the NASDAQ Global Select Market. After the close of market trading on April 4, 2018, pursuant to the Scheme of Arrangement, all Broadcom-Singapore ordinary shares outstanding immediately prior to the effective time of Scheme of Arrangement were exchanged on a one-for-one basis for newly issued shares of Broadcom Inc. common stock and Broadcom-Singapore became an indirect wholly-owned subsidiary of Broadcom Inc.
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In conjunction with the Redomiciliation Transaction and pursuant to the Mandatory Exchange, immediately prior to the effective time of the Scheme of Arrangement all outstanding LP Units held by the limited partners were mandatorily exchanged for approximately 22 million newly issued shares of Broadcom Inc. common stock on a one-for-one basis. As a result, all limited partners of the Partnership have become common stockholders of Broadcom Inc. In addition, all related outstanding special preference shares of Broadcom-Singapore were automatically redeemed pursuant to Broadcom-Singapore’s governing documents upon the Mandatory Exchange.
Noncontrolling Interest
As of October 29, 2017 and immediately prior to the effective time of the Scheme of Arrangement, the limited partners held a noncontrolling interest of approximately 5% in the Partnership through their ownership of LP Units. Accordingly, net income attributable to our common stock in our condensed consolidated statements of operations excludes the noncontrolling interest’s proportionate share of the results for the periods presented. In addition, we presented the proportionate share of equity attributable to the noncontrolling interest as a separate component of stockholders’ equity within our condensed consolidated balance sheet as of October 29, 2017 and condensed consolidated statements of stockholders’ equity for the periods immediately prior to the effective time of the Scheme of Arrangement.
Dividends and Distributions
Fiscal Quarter Ended | Two Fiscal Quarters Ended | |||||||||||||||
May 6, 2018 | April 30, 2017 | May 6, 2018 | April 30, 2017 | |||||||||||||
(In millions, except per share data) | ||||||||||||||||
Cash dividends and distributions paid per share/unit | $ | 1.75 | $ | 1.02 | $ | 3.50 | $ | 2.04 | ||||||||
Cash dividends paid to stockholders | $ | 727 | $ | 414 | $ | 1,444 | $ | 822 | ||||||||
Cash distributions paid to limited partners | $ | 39 | $ | 23 | $ | 77 | $ | 46 | ||||||||
Stock Repurchase Program
In April 2018, our Board of Directors authorized the repurchase of up to $12 billion of our common stock from time to time on or prior to November 3, 2019, the end of our fiscal year 2019. Under our stock repurchase program, we repurchased and retired approximately 1.5 million shares of our common stock at a weighted average price of $230.50 in the fiscal quarter ended May 6, 2018. As of May 6, 2018, $11,653 million of the current authorization remained available under our stock repurchase program.
Repurchases under our stock repurchase program may be effected through a variety of methods, including open market or privately negotiated purchases. The timing and number of shares of common stock repurchased will depend on a variety of factors, including price, general business and market conditions and alternative investment opportunities. We are not obligated to repurchase any specific number of shares of common stock, and we may suspend or discontinue our repurchase program at any time.
Stock-Based Compensation Expense
Fiscal Quarter Ended | Two Fiscal Quarters Ended | |||||||||||||||
May 6, 2018 | April 30, 2017 | May 6, 2018 | April 30, 2017 | |||||||||||||
(In millions) | ||||||||||||||||
Cost of products sold | $ | 21 | $ | 15 | $ | 41 | $ | 29 | ||||||||
Research and development | 205 | 150 | 408 | 291 | ||||||||||||
Selling, general and administrative | 70 | 51 | 146 | 97 | ||||||||||||
Total stock-based compensation expense | $ | 296 | $ | 216 | $ | 595 | $ | 417 | ||||||||
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Equity Incentive Award Plans
A summary of time- and market-based RSU activity is as follows:
Number of RSUs Outstanding | Weighted- Average Grant Date Fair Value Per Share | ||||||
(In millions, except per share data) | |||||||
Balance as of October 29, 2017 | 18 | $ | 163.42 | ||||
Granted | 7 | $ | 240.87 | ||||
Vested | (5 | ) | $ | 155.45 | |||
Forfeited | (1 | ) | $ | 161.95 | |||
Balance as of May 6, 2018 | 19 | $ | 194.00 | ||||
The aggregate fair value of time- and market-based RSUs that vested during the two fiscal quarters ended May 6, 2018 was $1,355 million, which represents the market value of our common stock on the date that the RSUs vested. The number of RSUs vested included shares of common stock that we withheld for settlement of employees’ withholding obligations due upon the vesting of RSUs. Total unrecognized compensation cost related to unvested RSUs as of May 6, 2018 was $3,048 million, which is expected to be recognized over the remaining weighted-average service period of 3.1 years.
A summary of time- and market-based stock option activity is as follows:
Number of Options Outstanding | Weighted- Average Exercise Price Per Share | Weighted- Average Remaining Contractual Life (In years) | Aggregate Intrinsic Value | |||||||||||
(In millions, except years and per share data) | ||||||||||||||
Balance as of October 29, 2017 | 10 | $ | 49.54 | |||||||||||
Exercised | (1 | ) | $ | 45.76 | $ | 318 | ||||||||
Cancelled | — | * | $ | 74.66 | ||||||||||
Balance as of May 6, 2018 | 9 | $ | 50.08 | 2.41 | $ | 1,593 | ||||||||
Fully vested as of May 6, 2018 | 8 | $ | 48.96 | |||||||||||