broadcom financial analysis presentation

MBA 606 Finance Group Project Presentation

Presented By:Sherry Sebastian, Kipley Pereles, Joshua Roller, Michelle Torres, Erin

Morris, Joseph Molina, Luis Lindemann

Company Profile•Industry - Semiconductor-Integrated Circuits

•Broadcom headquarters-UC Irvine's University Research Park

•19 Years in business- Henry T. Nicholas III, Ph.D., and Henry Samueli, Ph.D. founded Broadcom in 1991

•Target market•Broadband Communications•Mobile & Wireless•Enterprise Networking

•Main product line•Cable, Satellite and IP set-top boxes•Cable, and DSL gateways•Digital TV solutions•Blu-ray Disc Players and recorders•Other Integrated Circuit solutions

Company Profile•Main suppliers

•Taiwan Semiconductor Manufacturing Corporation•Global Foundries, Inc. •Semiconductor Manufacturing International Corporation

•Leading Customers: •Cisco, Echostar, Motorola, Pace, Thomson, and Samsung.

•Main competitors-Texas Instruments, Qualcomm

•Net Revenue for 2009: $4.490 billion

•EPS - $.13 for 2009 from $.41 for 2008

•Total Assets- $5.127 billion

•Market Capitalization- $15.5 billion

•Stock market where traded- Public (NASDAQ:BRCM)

•Stock price, range (before and after crisis): Low $7.90 and High $166.24•$32.31 (December 31, 2009)

Contents

Ratio Analysis1

Capital Budgeting2

Planning Process3

Capital Structure4

5 Pricing Structure

Section 1: Ratio Analysis

Section 1

LIQUIDITY RATIOS-Current Ratio-

Measures the ability of a company to pay its bills over the short run and the margin of safety to meet everyday

cash needs.

Liquidity: Current Ratio

• Current Ratio = Current Assets / Current Liabilities (expressed as Times)• Cash balances and strong liquidity have been a hallmark of financial strength• Current Liabilities which include accrued liabilities have doubled resulting in reduced

current ratio figures. • Liquidity is strong (above 2.0), although deteriorated somewhat from the prior year and

is not as liquid as industry competitors. This could become a weakness if not corrected.

Section 1

LEVERAGE RATIOS-Debt-to-Equity Ratio-Resources provided by creditors and owners

Leverage: Debt-to-Equity Ratio

•Debt to Equity = Total Debt / Total Equity (expressed as a percentage)•Result of increased liabilities (payable and accruals) but not interest bearing debt. •32% is still a very low ratio and continues to show a very strong financial position.

Section 1

ACTIVITY RATIOS-Inventory Turnover Ratio-

Measure of a co’s cost of goods sold divided by its inventory

-Avg. Collection Period Ratio-Measures how fast the company collects on its sales

Activity: Inventory Turnover Ratio

• Inventory Turnover = Sales/ Inventory (expressed in Times)• The higher the ratio is, the more efficiently the inventory is managed• Management has stated that their channel inventory is in good shape. • Lower turnover may be result of a rapidly expanding product line and should be watched carefully. •Industry competition is doing a better job of managing inventory.

Activity: Average Collection Period Ratio

• Average Collection = Receivables / Sales per day (expressed as days)• Measures how fast the company collects on their sales • Sales were flat year over year but went down from ‘08-’09 and receivable balances have increased resulting in an increased average collection period.

Section 1PROFITABILITY RATIOS

-Gross Margin Ratio-Measured as gross margin (sales-COGS) divided by revenue

-Profit Margin Ratio-Measured as net income divided by sales

-Return on Equity Ratio-Measured as net income divided by total equity

-Earnings per Share Ratio-Measured as dividing net income by shares outstanding

-Price to Earnings Ratio-Measure of a company’s price per share divided by its earnings

per share

Profitability: Gross Margin Ratio

•Gross Margin Ratio = Gross Margin / Revenue (expressed as a percentage)•The company has a stated long term gross margin target in the 50-52% range which it is achieving.•Margins have been enhanced by licensing revenue resulting from Qualcomm’s litigation settlement (added 4%)

Profitability: Profit Margin Ratio

•Profit Margin = Net Income / Sales (expressed as a percentage)•Amount of net income per $1 sales is decreasing.• Result of increasing litigation expenses & continuing heavy R&D expenditures & a new $50M charitable contribution figure. •The co is returning to a much more satisfactory profit rate in the projections b/c of increased profits & no new negative surprises.

Profitability: Return on Equity Ratio

•Return on Equity = Net Income / Total Equity (expressed as a percentage)•Measure how the shareholders did on their investments•From ‘06-’07, change largely due to increased R&D expenditures of $200M.•From ‘08-’09, change largely due to a slippage of total revenue by $200M.•Net Income improved during the projection period b/c it assumed a modest revenue of 2% plus the new project ($85M) resulting in increased profits & no new negative expenses.

Profitability: Earnings per Share Ratio

•Earnings per Share = Net Income / Shares Outstanding (expressed in dollars)•From ‘06-’07, change largely due to increased R&D expenditures of $200M.•From ‘08-’09, change largely due to a slippage of total revenue by $200M.•The co. helped themselves by doing share repurchases starting in 2007.

Research and Development

•New product development is a key strength/differentiator of Broadcom’s according to analyst’s estimates.•Ratio based on expenses divided by revenues. •R&D expenses are expected to remain flat over the projected period in so far as dollars spent & are projected to stay well about 30% of revenue.

Financial Strengths/WeaknessesStrengths:

Liquidity is strong (current ratio of 2.5 in ‘09). Leverage ratio (debt-to-equity ratio of 32% in ‘09) is low as Broadcom

has no interest bearing debt. Gross Margin of 51% in ‘09 , achieving their long-term GM target &

margins have been recently enhanced by 4% from recent settlement with Qualcomm.

R&D expenditures (32% of revenue for ‘09), resulting in product innovation.

Weaknesses: Inventory turnover (12 times/year in ‘09) is high because of rapidly

expanding product line. Average collection period (41 days in ‘09) has deteriorated from prior

year due to receivable increasing & revenues decreasing. All profitability measures are weak and deteriorated over the last four

years due to increased R&D expenditures & litigation related expenses & most recently a decline in revenue.

New Ratio ImplicationsStrengths:

Liquidity continues to remain strong (current ratio builds to 3.06 in 2012). Leverage ratio (debt-to-equity ratio remains in the 30% range for the

projection period. Gross Margin increases to 53%, slightly above management target and

comparable to competitors. R&D expenditures remain above 30% for the projection period resulting in

continuing new product innovation. Base revenue projections are kept at a very conservative 2% growth.

Profitability measures are improving (profit margin of 1.27% in 2009 improves to 5.27% in 2012). R&D expenditures & litigation related expenses have been kept at 2009 levels over the projection period with no new unusual items expected.

Weaknesses: Inventory turnover (12 times/year) has been kept constant in the projection

period and still a weakness relative to competitors. Average collection period (41 days) has been kept constant and at a level

higher than competitors.

Stock Price Chart

Like the recession we are in today, every bubble ends in a bust. Open price=$8.92/share; At low: $7.90; at high: $166.24As of Mar 3=$31.20Day's Range: $31.15 - 32.0652wk Range: $15.55 - 32.49Yield=1.00%; Dividend=$0.08/qtr, $0.32 year

Profitability: Price-to-Earnings Ratio

•Price to Earnings Ratio = Price per share / Earnings per Share (expressed in times)•Represents investors expectations of a company’s future income. •2009 is high relative to its earnings because the market and the investors of Broadcom believe in a bright earnings future for this company. •Result: EPS declined significantly in 08-09 because of the drop off in revenue & litigation settlement costs & a high stock price.

Section 2: Capital Budgeting

Capital BudgetingState of the art Bluetooth earpieceBroaccom holds patents for Bluetooth technology as well as software utilized in devices with Bluetooth capabilities

Difficulty in generating numbers for one piece of hardware or software we bundled the two and chose to create a more advanced Bluetooth earpiece

Distinguishing Broadcom’s product from competitors

Voice to text capabilitiesReduced static and connectivity issues

Capital Budgeting – Base ModelInitial investment of $30,000,000

Salvage of 20% after 6 years - $6,000,000

Initial net working capital of $500,000 then 2% of revenue for each successive year

$85 per unit, increase 3% annually

Cost $25, increase 3% annually

1,000,000 units first year with 5% annual increaseGrowth maintained by continual passing of laws forbidding cell phone usage while operating vehicles

CoC 15%

NPV – $152,539,536 IRR – 130% Payback – 1.67 years

Capital Budgeting - Best Case

Increased demand - 15% annual increase in unit sales

Unit price $110

60% increase in NPV - $244,245,199

IRR 156%

Payback 1.38 years

Capital Budgeting – Worst Case

Lack of demand sales decrease 10% annually

Unit price decreased to $70

Cost increased to $30 per unit

NPV - $87,957,375, 42% decrease

IRR – 97.3%

Payback – 4.24 years

Capital Budgeting – Tax Rate

Potential tax rate change 34% to 38%

Decreases net income

NPV - $142,464,195, 7% decrease

IRR – 133%

Payback – 3.63 years

Capital Budgeting - CoC

Change from 15% to 10%

NPV - $183,763,020, 20.5% decrease

IRR – 130%

Payback – 3.67 years

WACC – 35.55%NPV - $75,916,331IRR – unaffectedPayback - unaffected

Section 3:Planning Process

Planning Process

•SWOT: Strength, Weaknesses, Opportunities, Threats

•SLRP: Strategic Long Range Plan: As a company….•Where are we?•Where would we like to go?•How will we get there?

•Pro- Formas: 3 year financial projections •Used to develop an appropriate capital structure and financing strategy.

•Annual Plan: States what’s going to happen over a year period. -Comparing budgets to the annual plan

Planning Cycle

Planning Cycle- Pro Formas Income Statement

Planning Cycle- Pro Formas Balance Sheet

Planning Cycle- Annual Plan By Quarter Income Statement

Planning Cycle- Annual Plan By Quarter Balance Sheet

Section 4: Capital Structure

Capital Structure

Determine the WACC (Weighted Average Cost of Capital)

Examine existing capital structure and determine the ideal mixture of debt and equity to support the investment project.

Incorporate an indenture that details the terms of the agreement between Broadcom, Inc. and its bondholders.

Capital Structure

Determine the WACC (Weighted Average Cost of Capital)

Examine existing capital structure and determine the ideal mixture of debt and equity to support the investment project.

Incorporate an indenture that details the terms of the agreement between Broadcom, Inc. and its bondholders.

Capital Structure

WACC= R(E)*E/V +R(D) * D/V * (1-Tc) Market Value of Equity (E):

#outstanding shares/Price of stock = $16,563,559.95

Cost of Equity: Er=Rf + (Rm-Rf) x β Rf = 3.6, Rm = 23.5, Rm-Rf = 19.90, Beta

Coefficient 1.31 Er = 29.67%

Cost of Debt (D): According to the most recent 10-k (ending Dec-31-2009) Broadcom has no (0) interest bearing debt.

Capital Structure

Calculating WACC: V: market value of debt + market value of equity

= $16,563,559.95 E/V = 1.00 D/V = 0 Corporate Tax Rate= 34%

Therefore WACC= R(E)*E/V +R(D) * D/V * (1-Tc)

= 29.67%

Capital Structure

Current Capital Structure:Values Current Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5 Scenario 6

R(e): 29.67% 29.67% 29.67% 29.67% 29.67% 29.67% 29.67%

E/V: 1 0.75 0.50 0.3333 0.25 0.10 0.00

D: 0 0 0 0 0 0 0

D/V: 0 0.25 0.50 0.6667 0.75 0.90 1.00

1-Tc: 0.66 0.66 0.66 0.66 0.66 0.66 0.66

WACC: 29.67% 22.25% 14.84% 9.89% 7.42% 2.97% 0.00%

Capital Structure

We DO NOT recommend Broadcom floating an offering for the size of $30M due to its large cash reserves.

High debt can lead to bankruptcy.

If Broadcom were to issue bonds for the investment we have illustrated the WACC impact.

Due to Broadcom’s good ability to pay back any money barrowed they will receive good credit ratings allowing for a full offering.

Capital Structure

Option 2 use of debt:Values Current Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5 Scenario 6

R(e): 29.67% 29.67% 29.67% 29.67% 29.67% 29.67% 29.67%

E/V: 99.80 0.75 0.50 0.3333 0.25 0.10 0.00

D: 5.57% 5.57% 5.57% 5.57% 5.57% 5.57% 5.57%

D/V: 0.20 0.25 0.50 0.6667 0.75 0.90 1.00

1-Tc: 0.66 0.66 0.66 0.66 0.66 0.66 0.66

WACC: 2961.80% 23.17% 16.67% 12.34% 10.17% 6.28% 3.68%

Capital Structure

Financing of our Project: Option 2- Scenario #6

Cost of investment = $30,000,000

Equity: 0% Bonds:100%$0 $30,000,000

30,000 bonds issued

Capital StructureIndenture

Term Explanation# of Bonds Issued: 30,000 Bonds Issued 30,000Amount of Issue: $30,000,000 The company has issued $30,000,00 worth of bonds.Date of issue: 6/1/2010 The bonds will be sold on 6/1/2010 and will mature onMaturity: 6/1/2030 6/1/2030. Interest is payable annually on June 1 of each Face value: $1,000 year to the person in whose name the bond is registered Coupon rate: 5.57% at close of business on May 15.Annual coupon: $55.70 Each bondholder will receive $55.70 per bond per year. (5.57% of face value)Offer price: $995.43Coupon payment dates: 1-Jun Bonds not secured by specific assets.Security: NoneSinking fund: NoneCall provision: At any time/ do not have a "deferred call"Call price: The bonds have a "make-whole" call feature.Rating: S&P AA Treasury rate Plus 0.15%

Moody's A The bonds are in the top grade of investment.Negative Covenants include:* The firm cannot pledge any assets to other lenders* The firm cannot sell or lease any major assets without approval of lenderPositive Covenants include:*The company must periodically furnish audited financial statements to lender.* The firm must maintain any collateral or security in good condition.

Section 5: Pricing Structure

Assumptions

Assumptions Capacity to Purchase Goods Special Arrangements Operational Flow

Terms and Conditions (T’s & C’s) Payment Terms Price Protection Third Parties

Termination, Sunk Cost, Wind Down

Cost Drivers2010 %

Sales $ 36,651,500 100.00%Cost/ Goods Sold (COGS) 28,596,796 78.02%Gross Profit $ 8,054,704 21.98%

Operating ExpensesSalary (Office & Overhead) $ 2,850,000 7.78%Payroll (Taxes etc.) 570,000 1.56%Outside Services 28,750 0.08%Supplies (Office Operation) 37,000 0.10%Repairs/ Maintenance 53,000 0.14%Advertising 125,000 0.34%Vehicle, Delivery and Travel 85,010 0.23%Accounting and Legal 127,500 0.35%Building Lease 156,231 0.43%Telephone/Internet/IT Service 275,000 0.75%Utilities 79,000 0.22%Insurance 354,891 0.97%License Fees 200,000 0.55%Transaction Fees (POS) 25,000 0.07%Depreciation 158,974 0.43%Litigation 733,030 2.00%Professional Services 176,000 0.48%Equipment Lease 743,645 2.03%Armoured Car Contracts 175,356 0.48%Service Continuation (RMA) 458,612 1.25%Vehicle Lease 131,520 0.36%Consulting Services 51,000 0.14%Total Expenses $ 7,594,519 20.72%

Net Profit 460,185

Discount CalculatorBase Price Discounted Price

Sale Price $ 85.00 Initial markup 100%

List Price $ 170.00

Units Request Order 200,000 200,000

Cash Discount 25%

Savings per base unit $ 42.50

Total Price $ 127.50

Lump sum total $ 34,000,000 $ 25,500,000

Tax 8%

Shipping and handling $ 25,000 $ 25,000

Total $ 36,651,500 $ 27,494,875

Total Savings $ 9,156,625

Shipping & Handling per Units 1 $ 13.99 Minimum Order10 $ 32.99

100 $ 189.99 1000 $ 643.99

10000 $ 1,250.00 Maximum Order

If Payment In Full Within 10 Days $ 27,494,875 If Payment In Full Within 30 Days $ 36,651,500 If Payment Greater Than 60 Days $ 2,565,605

7%

Termination Cost

• Cost Items • Parts • Assets • One-Time Costs • Third Party Contracts • Wind Down Services

Samsung Termination CostSamsung-United States

Termination Costs

Cost Items: Percent From Operating ExpensesSalary (Office & Overhead) 221,614.40 0.0778Payroll (Taxes etc.) 8,864.58 0.0156Outside Services 22.55 0.0008Supplies (Office Operation) 37.35 0.0010Repairs/ Maintenance 76.64 0.0014Advertising 426.31 0.0034Vehicle, Delivery and Travel 197.17 0.0023Accounting and Legal 443.54 0.0035Building Lease 665.95 0.0043Telephone/Internet/IT Service 2,063.35 0.0075Utilities 170.28 0.0022Insurance 3,436.36 0.0097License Fees 1,091.36 0.0055Depreciation 689.54 0.0043Parts:Depreciation 689.54 0.0043Assests:Unearned Discount 4,578,312.50 0.1500Equipment Lease 15,088.27 0.0203One-time Costs:Transaction Fees (POS) 17.05 0.0007Professional Services 845.15 0.0048

Third Party Contracts:Vehicle Lease 471.95 0.0036Armoured Car Contracts 838.98 0.0048Litigation 14,660.60 0.0200Consulting Services 70.97 0.0014Wind Down Services:Service Continuation (RMA) 5,738.51 0.01Professional Services 273,801.00Consulting to New Supplier 102,549.00

Risk @ 20% $ 18,325,750

Grand Total of Cost $ 23,558,633

Risk Exposure

Pricing Structure Base PriceUnit Forecast 200,000Sales price $ 34,000,000

Unearned Discount $ 9,156,625 Cash Discount 25%

Tax $ 2,831,328

Total Units Ordered 200,000Total Unit Price per Order $ 36,651,500 Percent of Loss (Units) 0.50Total Loss $ 18,325,750 Total Gross Income $ 18,325,750 Loss on Discount $ 9,156,625 Net Income $ 9,169,125

Sources

Researched Information from: -10K/10Q Broadcom -10K/10Q Texas Instruments & Qualcomm

(Industry Averages)-Forbes-Wall Street Journal -Yahoo Finance -ValueLine /Bloomberg, Thompson Financial

www.themegallery.com