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QUALCOMM INC/DE - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
In addition to historical information, the following discussion contains
forward-looking statements that are subject to risks and uncertainties. Actual
results may differ substantially from those referred to herein due to a number
of factors, including but not limited to risks described in the section entitled
Risk Factors and elsewhere in this Annual Report.
Overview
Recent Developments
Revenues for fiscal 2012 were $19.1 billion, with net income of $6.1 billion,
which were impacted by the following key items:
• We shipped approximately 590 million Mobile Station Modem (MSM) integrated
circuits for CDMA- and OFDMA-based wireless devices, an increase of 22%,
compared to approximately 483 million MSM integrated circuits in fiscal
2011. (1)
• Total reported device sales were approximately $187.3 billion, an increase
of approximately 25%, compared to approximately $149.5 billion in fiscal
2011. (2)
• On December 27, 2011, we completed the sale of substantially all of our
700 MHz spectrum for $1.9 billion, and as a result, we recognized a gain
in discontinued operations of $1.2 billion during the second quarter of
fiscal 2012.
Against this backdrop, the following recent developments occurred during fiscal
2012 with respect to key elements of our business or our industry:
• Worldwide wireless connections grew by approximately 9% to reach
approximately 6.4 billion. (3)
• Worldwide 3G connections (all CDMA-based) grew by approximately 24% to
approximately 1.8 billion, which was approximately 29% of total wireless
subscriptions, including approximately 552 million CDMA2000 1X/1xEV-DO
subscriptions and approximately 1.3 billion WCDMA/HSPA/TD-SCDMA
subscriptions. (3)
(1) Some customers built devices that incorporated two MSM integrated circuits.
In such cases, which represent approximately 1% of our gross volume, we count
only one MSM integrated circuit in reporting the MSM integrated circuit
shipments.
(2) Total reported device sales is the sum of all reported sales in U.S. dollars
(as reported to us by our licensees) of all licensed CDMA-based, OFDMA-based
and multimode CDMA/OFDMA subscriber devices (including handsets, modules,
modem cards and other subscriber devices) by our licensees during a
particular period (collectively, 3G/4G devices). Not all licensees report
sales the same way (e.g., some licensees report sales net of permitted
deductions, such as transportation, insurance and packing costs, while other
licensees report sales and then identify the amount of permitted deductions
in their reports), and the way in which licensees report such information may
change from time to time. Total reported device sales for a particular period
may include prior period activity that was not reported by the licensee until
such particular period.
(3) According to Wireless Intelligence estimates as of November 5, 2012, for the
quarter ending September 30, 2012. Wireless Intelligence estimates for
CDMA2000 1X/1xEV-DO connections do not include Wireless Local Loop.
Our Business and Operating Segments
We design, manufacture, have manufactured on our behalf and market digital
communications products and services based on CDMA, OFDMA and other
technologies. We derive revenues principally from sales of integrated circuit
products, fixed license fees (payable in one or more installments) and ongoing
royalties for use of our intellectual property, and fees for messaging and other
services and related hardware sales, software development and licensing, and
related services and software hosting services. Operating expenses primarily
consist of cost of equipment and services revenues and research and development
and selling, general and administrative expenses.
We conduct business primarily through four reportable segments: QCT, QTL, QWI
and QSI.
QCT is a leading developer and supplier of integrated circuits and system
software based on CDMA, OFDMA and other technologies for use in voice and data
communications, networking, application processing, multimedia and global
positioning system products. QCT's integrated circuit products and system
software are sold to or licensed to manufacturers that use our products in
wireless devices, particularly mobile phones, tablets, laptops, data modules,
handheld wireless computers and gaming devices, access points and routers, data
cards and infrastructure equipment, and in wired devices, particularly broadband
gateway equipment, desktop computers, televisions and Blu-ray players. The MSM
integrated circuits, which include the Mobile Data Modem, Qualcomm Single Chip
and Qualcomm Snapdragon processor-based devices, perform the core baseband modem
functionality in wireless devices providing voice and data communications, as
well as multimedia applications and global positioning functions. In addition,
our Snapdragon processors provide advanced application and
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graphics processing capabilities. QCT's system software enables the other device
components to interface with the integrated circuit products and is the
foundation software enabling manufacturers to develop devices utilizing the
functionality within the integrated circuits. QCT revenues comprised 63%, 59%
and 61% of total consolidated revenues in fiscal 2012, 2011 and 2010,
respectively.
QCT utilizes a fabless production business model, which means that we do not own
or operate foundries for the production of silicon wafers from which our
integrated circuits are made. Integrated circuits are die cut from silicon
wafers that have been assembled into packages or modules and have completed the
final test manufacturing processes. We rely on independent third-party suppliers
to perform the manufacturing and assembly, and most of the testing, of our
integrated circuits based primarily on our proprietary designs and test
programs. Our suppliers are also responsible for the procurement of most of the
raw materials used in the production of our integrated circuits. We employ both
turnkey and two-stage manufacturing models to purchase our integrated circuits.
Turnkey is when our foundry suppliers are responsible for delivering fully
assembled and tested integrated circuits. Under the two-stage manufacturing
model, we purchase wafers and die from semiconductor manufacturing foundries and
contract with separate third-party manufacturers for probe, assembly and final
test services.
QTL grants licenses or otherwise provides rights to use portions of our
intellectual property portfolio, which, among other rights, includes certain
patent rights essential to and/or useful in the manufacture and sale of certain
wireless products, including, without limitation, products implementing
CDMA2000, WCDMA, CDMA TDD (including TD-SCDMA), GSM/GPRS/EDGE and/or OFDMA
standards and their derivatives. QTL licensing revenues are comprised of license
fees as well as royalties based on sales by licensees of products incorporating
or using our intellectual property. License fees are fixed amounts paid in one
or more installments. Royalties are generally based upon a percentage of the
wholesale (i.e., licensee's) selling price of licensed products, net of certain
permissible deductions (e.g., certain shipping costs, packing costs, VAT, etc.).
QTL revenues comprised 33%, 36% and 33% of total consolidated revenues in fiscal
2012, 2011 and 2010, respectively. The vast majority of such revenues were
generated through our licensees' sales of CDMA2000 and WCDMA subscriber
equipment products.
QWI, which includes our QES, QIS, QGOV and Firethorn divisions, generates
revenues primarily through sales of products, services (including software
development) and software aimed at the support and delivery of wireless
applications. QES sells integrated wireless systems and services to
transportation and logistics companies to manage their assets and workforce. QIS
provides content enablement services for the wireless industry, including its
Brew, Plaza and other products and services. QIS also provides QChat
push-to-talk and other software products and services for wireless operators.
QGOV provides development and other services and related products involving
wireless communications technologies to government agencies and their
contractors. Firethorn builds and manages software applications that enable
mobile commerce services. QWI revenues comprised 3%, 4% and 6% of total
consolidated revenues in fiscal 2012, 2011 and 2010, respectively.
QSI makes strategic investments that we believe will open new opportunities for
our technologies, support the design and introduction of new products and
services for voice and data communications or possess unique capabilities or
technology. Many of these strategic investments are in early-stage companies.
QSI also holds wireless spectrum, including the broadband wireless access (BWA)
spectrum held by our subsidiaries (BWA subsidiaries) that were established to
operate a wireless network in India. As part of our strategic investment
activities, we intend to pursue various exit strategies from each of our QSI
investments at some point in the future. The assets and liabilities of the BWA
subsidiaries are presented as held for sale at September 30, 2012 as a result of
our agreement with Bharti Airtel Limited (Bharti), which provides that Bharti's
ownership interest in the BWA subsidiaries will increase over time to 100% if
certain conditions are met. In addition, the results of QSI's FLO TV business
are presented as discontinued operations and are therefore not included in QSI's
segment revenues or loss before income taxes.
Nonreportable segments are comprised of display and other product and services
initiatives, including our QMT division. QMT continues to develop an
interferometric modulator (IMOD) display technology based on
micro-electro-mechanical-system (MEMS) structure combined with thin film optics.
During the third quarter of fiscal 2012, we updated the business plan and
related internal forecasts for our QMT division to reflect a focus on licensing
our next generation IMOD display technology while directly commercializing only
certain IMOD products. As a result, we tested the QMT division's goodwill and
other long-lived assets for impairment and concluded that the fair value of the
QMT reporting unit was greater than its carrying value and that the carrying
values of QMT's long-lived asset groups were recoverable. During the fourth
quarter of fiscal 2012, we revised our plans with respect to certain equipment
comprising an asset group and recorded an impairment charge of $54 million.
Discontinued Operations
On March 27, 2011, the FLO TV business and network were shut down. On
December 27, 2011, we completed the sale of substantially all of our 700 MHz
spectrum for $1.9 billion, and as a result, we recognized a gain in discontinued
operations of $1.2 billion during the second quarter of fiscal 2012. All
remaining assets have been considered disposed of since March 27, 2011, the date
on which the assets ceased to be used. Since the shut down of the FLO TV
business and network, we have been working to sell the remaining assets and exit
contracts. Accordingly, the results of operations of the FLO TV business are
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presented as discontinued operations. Income (loss) from discontinued operations
includes share-based compensation and excludes certain general corporate
expenses allocated to the FLO TV business during the periods presented.
Summarized results from discontinued operations were as follows (in millions):
Year Ended
September 30, 2012 September 25, 2011 September 26, 2010
Revenues $ - $ 5 $ 9
Income (loss) from discontinued operations 1,203 (507 ) (459 )
Income tax (expense) benefit (427 ) 194 186
Discontinued operations, net of income taxes $ 776 $ (313 ) $ (273 )
Looking Forward
The deployment of 3G networks enables increased voice capacity and higher data
rates than prior generation networks, thereby supporting more minutes of use and
a wide range of mobile broadband data applications for handsets, 3G connected
computing devices and other consumer electronics. According to the Global mobile
Suppliers Association (GSA), as of November 2012, to complement their existing
3G networks, more than 110 wireless operators have deployed and more than 300
wireless operators are planning to deploy OFDMA-based technology, often called
4G, in new wireless spectrum to gain additional capacity for data services. As a
result, we expect continued growth in the coming years in consumer demand for 3G
and 3G/4G multimode products and services around the world. In addition, we
expect an increasing number of devices, such as computers, consumer electronics
and networking equipment, to require multiple communications technologies to
support a variety of connected applications.
As we look forward to the next several months, the following items are likely to
have an impact on our business:
• The worldwide transition from 2G to 3G and 3G/4G networks is expected to
continue, including the further expansion of 3G in China, India and other
emerging regions. We expect that the emergence of lower-end smartphone
products will contribute to such expansion.
• We expect consumer demand for advanced 3G and 3G/4G multimode devices,
including smartphones and data-centric devices, such as tablets and
e-readers, to continue at a strong pace.
• We expect that CDMA-based device prices will continue to vary broadly due
to the increased penetration of smartphones combined with active
competition throughout the world at all price tiers. Additionally, varying
rates of economic growth by region and stronger growth of CDMA-based
device shipments in emerging regions, as compared to developed regions,
are expected to continue to impact the average and range of selling prices
of CDMA-based devices.
• We continue to invest significant resources toward the development of technologies and products for voice and data communications, primarily in
the wireless industry, including advancements to 3G and 4G LTE (an
OFDMA-based standard) networks, wireless baseband chips, our converged
computing/communications (Snapdragon) chips, multimedia products, software
and services, as well as our IMOD and other display technologies.• We expect industry demand for 28 nanometer integrated circuits to continue
to be strong. Accordingly, even as we continue to increase our supply of
28 nanometer integrated circuits, we may still experience supply shortages
for our 28 nanometer integrated circuit products during the early part of
fiscal 2013. Our QCT business anticipates a strong first quarter in fiscal
2013 as the supply of 28 nanometer integrated circuits increases and as
new 3G and 3G/4G devices are launched for the holiday season.
In addition to the foregoing business and market-based matters, we continue to
devote resources to working with and educating participants in the wireless
value chain as to the benefits of our business model in promoting a highly
competitive and innovative wireless industry. However, we expect that certain
companies may continue to be dissatisfied with the need to pay reasonable
royalties for the use of our technology and not welcome the success of our
business model in enabling new, highly cost-effective competitors to their
products. We expect that such companies will continue to challenge our business
model in various forums throughout the world.
Further discussion of risks related to our business is presented in the Risk
Factors included in this Annual Report.
Critical Accounting Estimates
Our discussion and analysis of our results of operations and liquidity and
capital resources are based on our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United
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States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and disclosure of contingent assets and liabilities. On
an ongoing basis, we evaluate our estimates and judgments, including those
related to revenue recognition, valuation of intangible assets and investments,
share-based compensation, income taxes and litigation. We base our estimates on
historical and anticipated results and trends and on various other assumptions
that we believe are reasonable under the circumstances, including assumptions as
to future events. These estimates form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from
other sources. By their nature, estimates are subject to an inherent degree of
uncertainty. Although we believe that our estimates and the assumptions
supporting our assessments are reasonable, actual results that differ from our
estimates could have a significant adverse effect on our operating results and
financial position. We believe that the following significant accounting
estimates may involve a higher degree of judgment and complexity than others.
Revenue Recognition. We derive revenue principally from sales of integrated
circuit products, licensing of our intellectual property and software, and sales
of messaging, software hosting, software development and other services and
related hardware. The timing of revenue recognition and the amount of revenue
actually recognized in each case depends upon a variety of factors, including
the specific terms of each arrangement and the nature of our deliverables and
obligations.
We license or otherwise provide rights to use portions of our intellectual
property portfolio, which includes certain patent rights essential to and/or
useful in the manufacture and sale of certain wireless products. Licensing
revenues include license fees (payable in one or more installments) and ongoing
royalties based on licensees' sales of products incorporating or using our
licensed intellectual property. License fees are recognized over the estimated
period of benefit of the license to the licensee, typically 5 to 15 years. From
time to time, licensees will not report royalties timely due to legal disputes
or other reasons, and when this occurs, the timing and comparability of royalty
revenues could be affected.
Valuation of Intangible Assets and Investments. Our business acquisitions
typically result in the recording of goodwill and other intangible assets, and
the recorded values of those assets may become impaired in the future. We also
acquire intangible assets in other types of transactions. At September 30, 2012,
our goodwill and other intangible assets, net of accumulated amortization, were
$3.9 billion and $2.9 billion, respectively. The determination of the value of
such intangible assets requires management to make estimates and assumptions
that affect our consolidated financial statements. For intangible assets
purchased in a business combination or received in a non-monetary exchange, the
estimated fair values of the assets received (or, for non-monetary exchanges,
the estimated fair values of the assets transferred if more clearly evident) are
used to establish their recorded values, except when neither the values of the
assets received or the assets transferred in non-monetary exchanges are
determinable within reasonable limits. Valuation techniques consistent with the
market approach, income approach and/or cost approach are used to measure fair
value. An estimate of fair value can be affected by many assumptions that
require significant judgment. For example, the income approach generally
requires assumptions related to the appropriate business model to be used to
estimate cash flows, total addressable market, pricing and share forecasts,
competition, technology obsolescence, future tax rates and discount rates. Our
estimate of the fair value of certain assets may differ materially from that
determined by others who use different assumptions or utilize different business
models. New information may arise in the future that affects our fair value
estimates and could result in adjustments to our estimates in the future, which
could have an adverse impact on our results of operations.
Goodwill and other indefinite-lived intangible assets are tested annually for
impairment and in interim periods if certain events occur indicating that the
carrying amounts may be impaired. Long-lived assets, such as property and
equipment and intangible assets subject to amortization, are reviewed for
impairment when there is evidence that events or changes in circumstances
indicate that the carrying amount of an asset or asset group may not be
recoverable. Our judgments regarding the existence of impairment indicators and
future cash flows related to goodwill and other intangible assets are based on
operational performance of our businesses, market conditions and other factors.
Although there are inherent uncertainties in this assessment process, the
estimates and assumptions we use, including estimates of future cash flows,
volumes, market penetration and discount rates, are consistent with our internal
planning. If these estimates or their related assumptions change in the future,
we may be required to record an impairment charge on a portion or all of our
goodwill and other intangible assets. Furthermore, we cannot predict the
occurrence of future impairment-triggering events nor the impact such events
might have on our reported asset values. Future events could cause us to
conclude that impairment indicators exist and that goodwill or other intangible
assets associated with our acquired businesses are impaired. Any resulting
impairment loss could have an adverse impact on our financial position and
results of operations. During fiscal 2012 and 2011, we recorded $23 million and
$114 million, respectively, in goodwill impairment charges related to our
Firethorn division due to the operating performance of new product applications
falling significantly short of expectations.
We hold investments in marketable securities, including equity securities,
non-investment-grade debt securities, equity and debt mutual and exchange-traded
funds, corporate bonds and notes, auction rate securities and mortgage- and
asset-backed securities. The fair value of these investments totaled $23 billion
at September 30, 2012, with increases and decreases in fair value generally
recorded through stockholders' equity as other comprehensive income or loss. We
record impairment charges through the statement of operations when we believe an
investment has experienced a decline that is other than temporary. The
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determination that a decline is other than temporary is subjective and
influenced by many factors. In addition, the fair values of our strategic
investments may be subject to substantial quarterly and annual fluctuations and
to significant market volatility. Adverse changes in market conditions or poor
operating results of investees could result in losses or an inability to recover
the carrying value of the investments, thereby requiring impairment charges.
When assessing these investments for an other-than-temporary decline in value,
we consider such factors as, among other things, how significant the decline in
value is as a percentage of the original cost; how long the market value of the
investment has been below its original cost; the extent of the general decline
in prices or an increase in the default or recovery rates of securities in an
asset class; negative events such as a bankruptcy filing or a need to raise
capital or seek financial support from the government or others; the performance
and pricing of the investee's securities in relation to the securities of its
competitors within the industry and the market in general; and analyst
recommendations, as applicable. We also review the financial statements of the
investee to determine if the investee is experiencing financial difficulties. If
we determine that a security price decline is other than temporary, we may
record an impairment loss, which could have an adverse impact on our results of
operations. During fiscal 2012, 2011 and 2010, we recorded $71 million,
$39 million and $111 million, respectively, in net impairment losses on our
investments in marketable securities.
Share-Based Compensation. Share-based compensation expense recognized during
fiscal 2012, 2011 and 2010 was $1.0 billion, $821 million and $614 million,
respectively. Share-based compensation is measured at the grant date, or at the
acquisition date for assumed awards, based on the estimated fair value of the
award and is recognized as expense over the requisite service period. We
estimate the fair value of stock option awards granted using a lattice binomial
option-pricing model and the fair value of stock option awards assumed using the
Black-Scholes option-pricing model. Accordingly, the fair value of an option
award as determined using an option-pricing model is affected by our stock price
on the valuation date as well as assumptions regarding a number of complex and
subjective variables. These variables include, but are not limited to, our
expected stock price volatility over the term of the awards, actual and
projected employee stock option exercise behaviors, risk-free interest rates and
expected dividends. For purposes of estimating the fair value of stock options,
we used the implied volatility of market-traded options in our stock for the
expected volatility assumption input to the option-pricing model. The assumption
inputs related to employee exercise behavior include estimates of the post-vest
forfeiture rate and suboptimal exercise factors, which are based on historical
experience. Beginning in fiscal 2010, we began to issue restricted stock units
(RSUs) to employees. Since such time, the number of stock options granted to
employees has decreased, and we expect this trend to continue into the
foreseeable future. We estimate the fair value of RSUs based on the fair value
of the underlying stock on the date of grant or date the awards are assumed. If
RSUs do not have the right to participate in dividends, the fair value is
discounted by the dividend yield. Judgment is required in estimating the amount
of share-based awards that are expected to be forfeited. We estimate the
forfeiture rate based on historical experience. To the extent our actual
forfeiture rate is different from our estimate, share-based compensation expense
is adjusted accordingly.
Income Taxes. Our income tax returns are based on calculations and assumptions
that are subject to examination by the Internal Revenue Service (IRS) and other
tax authorities. In addition, the calculation of our tax liabilities involves
dealing with uncertainties in the application of complex tax regulations. We
recognize liabilities for uncertain tax positions based on a two-step process.
The first step is to evaluate the tax position for recognition by determining if
the weight of available evidence indicates that it is more likely than not that
the position will be sustained on audit, including resolution of related appeals
or litigation processes, if any. The second step is to measure the tax benefit
as the largest amount that is more than 50% likely of being realized upon
settlement. While we believe we have appropriate support for the positions taken
on our tax returns, we regularly assess the potential outcomes of these
examinations and any future examinations for the current or prior years in
determining the adequacy of our provision for income taxes. We continually
assess the likelihood and amount of potential adjustments and adjust the income
tax provision, income taxes payable and deferred taxes in the period in which
the facts that give rise to a revision become known. We are participating in the
IRS Compliance Assurance Process program whereby we endeavor to agree with the
IRS on the treatment of all issues prior to filing our federal return. A benefit
of participation in this program is that post-filing adjustments by the IRS are
less likely to occur.
We regularly review our deferred tax assets for recoverability and establish a
valuation allowance based on historical taxable income, projected future taxable
income, the expected timing of the reversals of existing temporary differences
and the implementation of tax-planning strategies. At September 30, 2012, net
deferred tax assets were $1.7 billion, which included a valuation allowance of
$142 million. If we are unable to generate sufficient future taxable income in
certain tax jurisdictions, or if there is a material change in the time period
within which the underlying temporary differences become taxable or deductible,
we could be required to increase the valuation allowance against our deferred
tax assets which could result in an increase in our effective tax rate and an
adverse impact on operating results.
We can only use net operating losses to offset taxable income of certain legal
entities in certain tax jurisdictions. At September 30, 2012, we had unused
federal, state and foreign net operating losses of $154 million, $591 million
and $41 million, respectively. Based upon our assessments of projected future
taxable income and losses and historical losses incurred by these entities, we
expect that the future taxable income of the entities in these tax jurisdictions
will not be sufficient to utilize the net operating losses we have incurred
through fiscal 2012. Therefore, we have provided a $27 million valuation
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allowance for these net operating losses. Significant judgment is required to
forecast the timing and amount of future taxable income in certain
jurisdictions. Adjustments to our valuation allowance based on changes to our
forecast of taxable income are reflected in the period the change is made.
During fiscal 2012, we established our QCT segment's non-United States
headquarters in Singapore. We obtained tax incentives in Singapore, including a
tax exemption for the first five years provided that we meet specified
employment and incentive criteria in Singapore. The location of QCT's
headquarters in Singapore will not result in any change in foreign tax during
the first five years, as compared to tax that would be owed under the previous
structure of QCT's non-United States operations. Our Singapore tax rate is
expected to increase in fiscal 2017 and again in fiscal 2027 as a result of
expiration of these incentives.
We consider the operating earnings of certain non-United States subsidiaries to
be indefinitely invested outside the United States based on estimates that
future domestic cash generation will be sufficient to meet future domestic cash
needs. We have not recorded a deferred tax liability of approximately
$5.8 billion related to the United States federal and state income taxes and
foreign withholding taxes on approximately $16.4 billion of undistributed
earnings of foreign subsidiaries indefinitely invested outside the United
States. Should we decide to repatriate the foreign earnings, we would have to
adjust the income tax provision in the period we determined that the earnings
will no longer be indefinitely invested outside the United States.
Litigation. We are currently involved in certain legal proceedings, and we
intend to continue to vigorously defend ourselves. However, the unfavorable
resolution of one or more of these proceedings could have a material adverse
effect on our business, results of operations, financial condition or cash
flows. We estimate the range of liability related to pending litigation where
the amount and range of loss can be estimated. We record our best estimate of a
loss when the loss is considered probable. Where a liability is probable and
there is a range of estimated loss with no best estimate in the range, we record
the minimum estimated liability related to the claim. As additional information
becomes available, we assess the potential liability related to our pending
litigation and revise our estimates. Revisions in our estimates of the potential
liability could materially impact our results of operations.
Results of Operations
Revenues (in millions) Year Ended
2012 vs. 2011 2011 vs. 2010
September 30, 2012 September 25, 2011 September 26, 2010 Change Change
Equipment and services $ 12,465 $ 9,223 $ 6,971 $ 3,242 $ 2,252
Licensing 6,656 5,734 4,011 922 1,723
$ 19,121 $ 14,957 $ 10,982 $ 4,164 $ 3,975
The increases in equipment and services revenues in fiscal 2012 and 2011 were
primarily due to increases in QCT revenues of $3.25 billion and $2.18 billion,
respectively. The increases in licensing revenues in fiscal 2012 and 2011 were
primarily due to increases in QTL revenues of $905 million and $1.76 billion,
respectively.
QCT and QTL segment revenues related to the products of two companies comprised
38% of total consolidated revenues in fiscal 2012; QCT and QTL segment revenues
from two customers/licensees comprised 26% and 25% in fiscal 2011 and 2010,
respectively.
Revenues from customers in China, South Korea and Taiwan comprised 42%, 22% and
14%, respectively, of total consolidated revenues for fiscal 2012, as compared
to 32%, 19%, and 17%, respectively, for fiscal 2011, and 29%, 27% and 12%, for
fiscal 2010. We distinguish revenues from external customers by geographic areas
based on the location to which our products, software or services are delivered
or, for QTL's licensing and royalty revenues, the invoiced addresses of our
licensees.
Operating Expenses (in
millions) Year Ended
2012 vs. 2011 2011 vs. 2010
September 30, 2012 September 25, 2011 September 26, 2010 Change Change
Cost of equipment and
services (E&S) revenues $ 7,096 $ 4,877 $ 3,301 $ 2,219 $ 1,576
Cost as % of E&S revenues 57 % 53 % 47 %
The decreases in margin percentage in fiscal 2012 and 2011 were primarily
attributable to decreases in QCT gross margin percentage, and in fiscal 2011,
the gross margin percentage was also adversely affected by $137 million in
charges from the recognition of the step-up of inventories to fair value and
amortization of intangible assets related to the acquisition of Atheros in
fiscal 2011. Our margin percentage may fluctuate in future periods depending on
the mix of products sold and services provided, competitive pricing, new product
introduction costs and other factors.
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Year Ended
2011 vs. 2010
September 30, 2012 September 25, 2011 September 26, 2010 2012 vs. 2011 Change Change
Research and development $ 3,915 $ 2,995 $ 2,451 $ 920 $ 544
% of revenues 20 % 20 % 22 %
Selling, general, and
administrative 2,324 1,945 1,503 379 442
% of revenues 12 % 13 % 14 %
Other 104 114 - (10 ) 114
The dollar increases in research and development expenses in fiscal 2012 and
2011 were primarily attributable to increases of $741 million and $403 million,
respectively, in costs related to the development of CDMA-based 3G, OFDMA-based
4G LTE and other technologies for integrated circuit and related software
products and to expand our intellectual property portfolio and increases of
$149 million and $104 million, respectively, in share-based compensation.
Remaining dollar increases were related to development of our display
technologies, other new product initiatives and our services businesses.
The dollar increase in selling, general and administrative expenses in fiscal
2012 was primarily attributable to a $96 million increase in employee-related
expenses, a $77 million increase in costs related to litigation and other legal
matters, a $65 million increase in share-based compensation, a $54 million
long-lived asset impairment charge related to our QMT division, a $45 million
increase in selling and marketing expenses and a $28 million increase in
patent-related expenses, partially offset by a $55 million decrease in
charitable contributions (primarily related to the establishment and initial
funding of the Qualcomm Charitable Foundation in fiscal 2011). The dollar
increase in selling, general and administrative expenses in fiscal 2011 was
primarily attributable to a $142 million increase in employee-related expenses,
an $86 million increase in share-based compensation, a $66 million increase in
depreciation and amortization expense (primarily attributable to the acquisition
of Atheros), the effect of a $62 million gain on the sale of our Australia
spectrum license recorded in fiscal 2010 and a $44 million increase in
charitable contributions (primarily related to the establishment and initial
funding of the Qualcomm Charitable Foundation in fiscal 2011).
Other operating expenses in fiscal 2012 were comprised of an $81 million charge
related to a payment made to the Indian government concurrent with the issuance
of the BWA spectrum license and $23 million in goodwill impairment charges
related to our Firethorn division. Other operating expenses in fiscal 2011 were
comprised of a $114 million goodwill impairment charge related to our Firethorn
division.
Net Investment Income (in
millions) Year Ended
2011 vs. 2010
September 30, 2012 September 25, 2011 September 26, 2010 2012 vs. 2011 Change ChangeInterest and dividend
income:
Corporate and other
segments $ 590 $ 480 $ 522 $ 110 $ (42 )
QSI 19 20 8 (1 ) 12
Interest expense (90 ) (114 ) (43 ) 24 (71 )
Net realized gains on
investments:
Corporate and other
segments 327 335 379 (8 ) (44 )
QSI 42 2 26 40 (24 )
Net impairment losses on
investments:
Corporate and other
segments (49 ) (39 ) (110 ) (10 ) 71
QSI (34 ) (13 ) (15 ) (21 ) 2
Gains (losses) on
derivative instruments 84 (3 ) 3 87 (6 )
Equity in losses of
investees (9 ) (7 ) (4 ) (2 ) (3 )
$ 880 $ 661 $ 766 $ 219 $ (105 )
The increase in interest and dividend income in fiscal 2012 on cash and
marketable securities held by corporate and other segments was a result of
higher average cash and marketable securities balances and higher interest rates
earned on those investments. Interest expense in fiscal 2012 and 2011 was
primarily attributable to loans and debentures related to the BWA spectrum won
in the India auction in June 2010. The decrease in interest expense in fiscal
2012 resulted primarily from the fact that we did not capitalize interest during
fiscal 2011, compared to $29 million of interest capitalized during fiscal 2012.
The increase in gains on derivative instruments in fiscal 2012 primarily
resulted from changes in the fair value of put options sold in
36
--------------------------------------------------------------------------------connection with our stock repurchase program which have expired. The decrease in
net impairment losses on investments in fiscal 2011 was due to an overall
increase in marketable securities values compared to fiscal 2010.
Income Tax Expense (in millions) Year Ended
September 30, 2012 September 25, 2011 September 26, 2010 2012 vs. 2011 Change 2011 vs. 2010 Change
Income tax expense $ 1,279 $ 1,132 $ 973 $ 147 $ 159
Effective tax rate 19 % 20 % 22 % (1 )% (2 )%
The following table summarizes the primary factors that caused our annual
effective tax rates to be less than the United States federal statutory rate:
Year Ended
September 30, 2012 September 25, 2011 September 26, 2010
Expected income tax provision at federal statutory
tax rate
35 % 35 % 35 %
State income tax provision, net of federal benefit - % 5 % 5 %
Benefits from foreign income taxed at other than
U.S. rates (16 %) (19 %) (20 %)
Benefits related to the research and development tax
credit
(1 %) (3 %) (1 %)
Change in valuation allowance 1 % 1 % (1 %)
Tax expense related to the valuation of deferred tax
assets to reflect changes in California law
- % 1 % 4 %
Effective tax rate 19 % 20 % 22 %
The effective tax rate for fiscal 2012 as compared to fiscal 2011 reflected a
reduction in our effective state tax rate as a result of California tax
legislation previously enacted, partially offset by increased earnings taxed at
the United States tax rate. The annual effective tax rate for fiscal 2012 only
reflected the United States federal research and development credit generated
through December 31, 2011, the date on which the credit expired.
The effective tax rate for fiscal 2011 reflected tax benefits of $44 million
related to an agreement reached on a component of our fiscal 2006 through fiscal
2010 state tax returns and $32 million related to fiscal 2010 resulting from the
retroactive extension of the United States federal research and development tax
credit. The effective tax rate for fiscal 2010 reflected the United States
federal research and development credits generated through December 31, 2009,
the date on which they expired, and a tax expense of approximately $137 million
that arose because certain deferred revenue was taxable in fiscal 2010, but the
resulting deferred tax asset is reversing in subsequent years in which our
effective state tax rate is lower as a result of California tax legislation
previously enacted.
Our Segment Results (in millions)
The following should be read in conjunction with the fiscal 2012, 2011 and 2010
financial results for each reporting segment. See "Notes to Consolidated
Financial Statements, Note 8. Segment Information."
Reconciling
QCT QTL QWI QSI Items Total
2012
Revenues $ 12,141 $ 6,327 $ 633 $ - $ 20 $ 19,121
EBT (1) 2,296 5,585 (15 ) (170 ) (1,134 ) 6,562
EBT as a % of revenues 19 % 88 % (2 %)
2011
Revenues $ 8,859 $ 5,422 $ 656 $ - $ 20 $ 14,957
EBT (1) 2,056 4,753 (152 ) (132 ) (838 ) 5,687
EBT as a % of revenues 23 % 88 % (23 %)
2010
Revenues $ 6,695 $ 3,659 $ 628 $ - $ - $ 10,982
EBT (1) 1,693 3,020 12 7 (239 ) 4,493
EBT as a % of revenues 25 % 83 % 2 %
37
--------------------------------------------------------------------------------(1) Earnings (loss) before taxes.
QCT Segment. Equipment and services revenues, mostly related to sales of MSM and
accompanying RF and PM integrated circuits, were $11.91 billion, $8.65 billion
and $6.47 billion in fiscal 2012, 2011 and 2010, respectively. The increases in
equipment and services revenues in fiscal 2012 and 2011 resulted primarily from
increases of $1.71 billion and $1.23 billion, respectively, related to higher
unit shipments, increases of $803 million and $391 million, respectively,
related to sales of connectivity products (primarily resulting from the
acquisition of Atheros in the third quarter of fiscal 2011) and increases of
$651 million and $461 million, respectively, related to the net effects of
changes in product mix and lower selling prices of such products.(1)
Approximately 590 million, 483 million and 399 million MSM integrated circuits
were sold during fiscal 2012, 2011 and 2010, respectively (excluding the second
MSM for customers who built devices with two MSMs starting in fiscal 2011).
The decreases in EBT as a percentage of revenues in fiscal 2012 and 2011 were
primarily due to decreases in gross margin percentage, partially offset by the
effects of higher increases in QCT revenues relative to the increases in
research and development expenses and selling, general and administrative
expenses. QCT gross margin percentage decreased in fiscal 2012 and 2011 as a
result of the net effects of lower average selling prices, unfavorable product
mix and higher product support costs, partially offset by a decrease in average
unit costs. The higher product support costs in fiscal 2012 primarily related to
increased expenses incurred to facilitate additional supply of 28 nanometer
integrated circuits.
QCT inventories increased by 36% in fiscal 2012 from $714 million to
$973 million primarily due to an increase in work-in-process and finished goods
related to growth of the business.
(1) During fiscal 2012, we updated the method we use to quantify the dollar
impact of changes in QCT unit shipments as compared to the impact of changes
in product mix and changes in product prices. The information presented for
the fiscal 2011 increase reflects the updated method.
QTL Segment. During the second quarter of fiscal 2011, we entered into
agreements with two licensees to settle ongoing disputes, including an
arbitration proceeding with Panasonic, and recorded $401 million in revenues
related to prior quarters. The $1.31 billion and $1.36 billion increases in
revenues, excluding the $401 million effect of these settlements, in fiscal 2012
and 2011, respectively, were primarily due to increases in sales of CDMA-based
devices by licensees and higher average royalties per unit for CDMA-based
devices. The increases in QTL earnings before taxes and operating margin
percentage in fiscal 2011 compared to fiscal 2010 were attributable to the 48%
increase in licensing revenue relative to a 5% increase in operating expenses.
QWI Segment. The decrease in QWI revenues in fiscal 2012 was primarily due to a
$25 million decrease in QES revenues resulting from lower shipments of mobile
information units and lower services revenues. The increase in QWI revenues in
fiscal 2011 was primarily due to increases in QGOV and QES revenues of $27
million and $20 million, respectively, partially offset by a $23 million
decrease in QIS revenues. The increase in QGOV revenues was primarily
attributable to growth in customer funded development contracts, and the
increase in QES revenues was primarily attributable to higher shipments of our
mobile information units. The decrease in QIS revenues was primarily
attributable to a decrease in Brew revenues resulting from lower consumer
demand.
QWI operating expenses in fiscal 2012 and 2011 included $23 million and $114
million, respectively, of goodwill impairment charges related to our Firethorn
division. The $46 million increase in QWI earnings before taxes in fiscal 2012,
excluding the impairment charges, was primarily attributable to a $26 million
decrease in Firethorn operating loss (before the impairment charges) and a $25
million decrease in QIS operating loss. The $50 million decrease in QWI earnings
before taxes in fiscal 2011, excluding the impairment charge, was primarily
attributable to the operating loss of our QIS division.
QSI Segment. QSI operating expenses for fiscal 2012 included $81 million related
to a payment made to the Indian government concurrent with issuance of the BWA
spectrum license. The $43 million decrease in QSI loss before taxes from
continuing operations in fiscal 2012, excluding this charge, was primarily
attributable to a $40 million increase in net realized gains on investments and
a $20 million decrease in interest expense as a result of capitalizing interest
starting in the third quarter of fiscal 2012 related to the BWA network in
India. QSI earnings before taxes from continuing operations for fiscal 2010
included a $62 million gain on the sale of our Australia spectrum license. The
remaining $77 million increase in QSI loss before taxes from continuing
operations in fiscal 2011 was primarily due to a $72 million increase in
interest expense attributable to loans related to the BWA spectrum won in the
India auction in June 2010.
Liquidity and Capital Resources
Our principal sources of liquidity are our existing cash, cash equivalents and
marketable securities, cash generated from operations and proceeds from the
issuance of common stock under our stock option and employee stock purchase
plans. Cash, cash equivalents and marketable securities were $26.8 billion at
September 30, 2012, an increase of $5.9 billion from September 25, 2011. This
increase included $1.9 billion in proceeds from the sale of substantially all of
our 700 MHz spectrum and $1.7 billion in proceeds from the issuance of common
stock under our equity compensation plans. Our cash, cash
38
--------------------------------------------------------------------------------
equivalents and marketable securities at September 30, 2012 consisted of
$9.8 billion held domestically and $17.0 billion held by foreign subsidiaries.
Of the amount of cash, cash equivalents and marketable securities held by our
foreign subsidiaries at September 30, 2012, $16.4 billion is indefinitely
reinvested and would be subject to material tax effects if repatriated. Due to
tax and accounting considerations, we derive liquidity for operations primarily
from domestic cash flow and investments held domestically. Total cash provided
by operating activities increased to $6.0 billion during fiscal 2012, compared
to $4.9 billion during fiscal 2011.
During fiscal 2012, we repurchased and retired 23,893,000 shares of common stock
for $1.3 billion, before commissions. At September 30, 2012, approximately $2.8
billion remained available for repurchase under our stock repurchase program.
Since September 30, 2012, we repurchased and retired 4,132,000 shares of common
stock for $240 million. The stock repurchase program has no expiration date. We
continue to evaluate repurchases as a means of returning capital to
stockholders, subject to our periodic determinations that repurchases are in the
best interest of our stockholders.
We paid dividends totaling $1.6 billion, $1.3 billion and $1.2 billion, or
$0.93, $0.81 and $0.72 per common share, during fiscal 2012, 2011 and 2010,
respectively. On March 6, 2012, we announced an increase in our quarterly
dividend from $0.215 to $0.25 per share of common stock. We announced cash
dividends totaling $426 million, or $0.25 per share, during the fourth quarter
of fiscal 2012, which were paid on September 26, 2012. On October 17, 2012, we
announced a cash dividend of $0.25 per share of common stock, payable on
December 21, 2012 to stockholders of record as of December 7, 2012. We intend to
continue to use cash dividends as a means of returning capital to stockholders,
subject to capital availability and our view that cash dividends are in the best
interests of our stockholders.
Accounts receivable increased 47% during fiscal 2012. Days sales outstanding, on
a consolidated basis, were 29 days at September 30, 2012, compared to 22 days at
September 25, 2011. The increase in accounts receivable and the related days
sales outstanding were primarily due to growth of the business and the effects
of timing of shipments and customer payments for receivables related to
integrated circuits.
We believe our current cash and cash equivalents, marketable securities and our
expected cash flow generated from operations will provide us with flexibility
and satisfy our working and other capital requirements over the next fiscal year
and beyond based on our current business plans.
• Our research and development expenditures were $3.9 billion and
$3.0 billion in fiscal 2012 and 2011, respectively, and we expect to
continue to invest heavily in research and development for new
technologies, applications and services for voice and data communications,
primarily in the wireless industry.
• Cash outflows for capital expenditures were $1.3 billion and $593 million
in fiscal 2012 and 2011, respectively, including approximately $480
million and $225 million, respectively, related to the construction of a
new manufacturing facility in Taiwan for our QMT division. We expect to
continue to incur capital expenditures in the future to support our business, including research and development activities. Future capital
expenditures may be impacted by transactions that are currently not
forecasted.
• Our purchase obligations for fiscal 2013, some of which relate to research
and development activities and capital expenditures, totaled $3.1 billion
at September 30, 2012.
• The acquisition of Atheros in fiscal 2011 was more significant than others
we have made in the past. We expect to continue making strategic
investments and acquisitions, the amounts of which could vary
significantly, to open new opportunities for our technologies, obtain
development resources, grow our patent portfolio or pursue new business.
• At September 30, 2012, we have loan and debenture liabilities in the
aggregate of $1.1 billion, which were classified as held for sale, related
to the BWA spectrum won in India that are denominated in Indian rupees. At
September 30, 2012, loans in the aggregate of $545 million are due and
payable in full on December 18, 2012, and $519 million in debentures,
including accrued interest, are due and payable in full on June 25, 2017.
We intend to refinance the loans with long-term loans on or before
December 18, 2012. Each holder has the right to demand redemption of its
portion of the debentures outstanding on June 25, 2013 subject to
sufficient prior written notice. As a result, the debentures were
classified as current liabilities. The loans bear interest at rates that
are reset quarterly (ranging from 10.00% to 10.50% at September 30, 2012);
interest payments are due monthly. The debentures bear interest at an
agreed-upon annual rate, which is compounded annually and reset
semi-annually beginning on June 25, 2013 (10.25% at September 30, 2012)
with interest due upon redemption.
Contractual Obligations / Off-Balance Sheet Arrangements
We have no significant contractual obligations not fully recorded on our
consolidated balance sheets or fully disclosed in the notes to our consolidated
financial statements. We have no material off-balance sheet arrangements as
defined in S-K 303(a)(4)(ii).
At September 30, 2012, our outstanding contractual obligations included (in
millions):
39
--------------------------------------------------------------------------------
Contractual Obligations
Payments Due By Fiscal Period
No
Beyond Expiration
Total 2013 2014-2015 2016-2017 2017 Date
Purchase obligations (1) $ 3,616 $ 3,053 $ 521 $ 32 $ 10 $ -
Loans and debentures (2) 1,064 1,064 - - - -
Operating lease obligations 444 131 170 73 70 -
Capital lease obligations
(3) 134 5 9 10 110 -
Equity funding commitments
(4) 2 - - - - 2
Other long-term liabilities
(5)(6) 52 - 44 5 1 2
Total contractual
obligations $ 5,312 $ 4,253 $ 744 $ 120 $ 191 $ 4
(1) Total purchase obligations include $3.1 billion in commitments to purchase
integrated circuit product inventories.
(2) Amounts include principal and interest. The loans and debentures are payable
in Indian rupees. The majority of the loans ($468 million at September 30,
2012) bear interest at an annual rate based on the highest rate among the
bank lenders, which is reset quarterly, plus 0.25% (10.00% at September 30,
2012) with interest payments due monthly. The remaining loan ($77 million at
September 30, 2012) bears interest at an annual rate based on the highest
rate of the bank that is party to the loan or of the other bank lenders,
which is reset quarterly, plus 0.25% (10.50% at September 30, 2012) with
interest payments due monthly. All of the loans are due and payable in full
on December 18, 2012; we intend to refinance the loans with long-term loans
on or before that date. The debentures bear interest at an agreed-upon annual
rate, which is compounded annually and reset semi-annually beginning on
June 25, 2013 (10.25% at September 30, 2012) with interest due upon
redemption. The debentures can be redeemed by us without penalty on certain
dates. Additionally, each holder has the right to demand redemption of its
portion of the debentures outstanding on June 25, 2013 subject to sufficient
prior written notice.
(3) Amounts represent future minimum lease payments including interest payments.
Capital lease obligations are included in other liabilities in the
consolidated balance sheet at September 30, 2012.
(4) These commitments do not have fixed funding dates and are subject to certain
conditions. Commitments represent the maximum amounts to be financed or
funded under these arrangements; actual financing or funding may be in lesser
amounts or not at all.
(5) Certain long-term liabilities reflected on our balance sheet, such as
unearned revenues, are not presented in this table because they do not
require cash settlement in the future. Other long-term liabilities as
presented in this table include the related current portions.
(6) Our consolidated balance sheet at September 30, 2012 included an $82 million
noncurrent liability for uncertain tax positions, all of which may result in
cash payment. The future payments related to uncertain tax positions have not
been presented in the table above due to the uncertainty of the amounts and
timing of cash settlement with the taxing authorities.
Additional information regarding our financial commitments at September 30, 2012
is provided in the notes to our consolidated financial statements. See "Notes to
Consolidated Financial Statements, Note 7. Commitments and Contingencies."
Recent Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board revised the authoritative
guidance for comprehensive income to require an entity to present total
comprehensive income, the components of net income and the components of other
comprehensive income either in a single continuous statement of comprehensive
income or in two separate but consecutive statements and eliminated the option
to present the components of other comprehensive income as part of the statement
of stockholders' equity. The guidance will be effective for us beginning in the
first quarter of fiscal 2013 and will be applied retrospectively. The adoption
of the guidance will impact the presentation of the financial statements but
will not impact our financial position, results of operations or cash flows.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk. We invest a portion of our cash in a number of diversified
investment- and non-investment-grade fixed and floating rate securities,
consisting of cash equivalents, marketable debt securities, debt funds and
derivative instruments, including interest rate swaps. Changes in the general
level of United States interest rates can affect the principal values and yields
of fixed interest-bearing securities and the fair value of interest rate swaps
held in connection with our marketable securities portfolios classified as
trading. If interest rates in the general economy were to rise rapidly in a
short period of time, our fixed interest-bearing securities could lose value.
When the general economy weakens significantly, the credit profile, financial
strength and growth prospects of certain issuers of interest-bearing securities
held in our investment portfolios may deteriorate, and our interest-bearing
securities may lose value either temporarily or other than temporarily. We may
implement investment strategies of different types with varying duration and
risk/return trade-offs that do not perform well.
40
--------------------------------------------------------------------------------
The following table provides information about our interest-bearing cash and
cash equivalents, marketable securities and loans and debentures that are
sensitive to changes in interest rates. The table presents principal cash flows,
weighted-average yield at cost and contractual maturity dates. We have assumed
that the interest-bearing securities are similar enough within the specified
categories to aggregate the securities for presentation purposes. Additionally,
the table provides information about our derivative instruments that are
sensitive to changes in interest rates. For such securities, the table presents
the notional amount, weighted-average yield and contractual maturity.
Interest Rate Sensitivity
Principal or Notional Amount by Expected Maturity
Average Interest Rates
(Dollars in millions)
No Single
2013 2014 2015 2016 2017 Thereafter Maturity Total
Fixed interest-bearing
securities:
Cash and cash
equivalents $ 793 $ - $ - $ - $ - $ - $ - $ 793
Interest rate 0.3 %
Trading securities $ 232 $ 391 $ 43 $ 46 $ 49 $ 136 $ 568 $ 1,465
Interest rate 0.6 % 3.2 % 3.2 % 5.8 % 4.0 % 2.7 % 3.1 %
Other marketablesecurities $ 1,314 $ 1,283 $ 1,979 $ 893 $ 1,041 $ 2,611 $ 3,064 $ 12,185
Interest rate 1.2 % 2.3 % 1.8 % 3.4 % 2.9 % 6.3 % 1.5 %
Time deposits $ 47 $ - $ - $ - $ - $ - $ - $ 47
Interest rate 1.6 %Interest rate swaps
(receive) $ - $ - $ - $ - $ 20 $ 20 $ - $ 40
Interest rate 1.8 % 4.8 %
Interest rate swaps
(pay) $ - $ - $ - $ - $ - $ 17 $ - $ 17
Interest rate 2.1 %
Floating
interest-bearing
securities:
Cash and cash
equivalents $ 1,925 $ - $ - $ - $ - $ - $ - $ 1,925
Interest rate 0.2 %
Trading securities $ - $ 10 $ - $ - $ - $ 2 $ 72 $ 84
Interest rate 1.7 % 6.4 % 2.3 %
Other marketable
securities $ 626 $ 1,345 $ 200 $ 193 $ 428 $ 1,164 $ 2,127 $ 6,083
Interest rate 1.2 % 1.5 % 3.7 % 4.3 % 5.5 % 6.3 % 5.6 %
Interest rate swaps
(receive) $ - $ - $ - $ - $ - $ 17 $ - $ 17
Interest rate 0.4 %
Interest rate swaps
(pay) $ - $ - $ - $ - $ 20 $ 20 $ - $ 40
Interest rate 1.3 % 3.3 %
Loans and debentures(1) $ 1,064 $ - $ - $ - $ - $ - $ - $ 1,064
Interest rate 10.2 %
(1) Denominated in Indian rupees.
Cash and cash equivalents and marketable securities are recorded at fair value.
The loans and debentures approximate fair value. The debentures can be redeemed
by us without penalty on certain dates. Additionally, each holder has the right
to demand redemption of its portion of the debentures outstanding on June 25,
2013 subject to sufficient prior written notice.
Equity Price Risk. We hold a diversified marketable securities portfolio that
includes equity securities and fund shares that are subject to equity price
risk. We have made investments in marketable equity securities of companies of
varying size, style, industry and geography, and changes in investment
allocations may affect the price volatility of our investments. A 10% decrease
in the market price of our marketable equity securities and fund shares at
September 30, 2012 would cause a decrease in the carrying amounts of these
securities of $321 million. At September 30, 2012, gross unrealized losses of
our marketable equity securities and fund shares were $14 million. Although we
consider these unrealized losses to be temporary, there is a risk that we may
incur net other-than-temporary impairment charges or realized losses on the
values of these securities if they do
41
--------------------------------------------------------------------------------
not recover in value within a reasonable period.
Foreign Exchange Risk. We manage our exposure to foreign exchange market risks,
when deemed appropriate, through the use of derivative financial instruments,
including foreign currency forward and option contracts with financial
counterparties. We utilize such derivative financial instruments for hedging or
risk management purposes rather than for speculation purposes. Counterparties to
our derivative contracts are all major institutions. In the event of the
financial insolvency or distress of a counterparty to our derivative financial
instruments, we may be unable to settle transactions if the counterparty does
not provide us with sufficient collateral to secure its net settlement
obligations to us, which could have a negative impact on our results.
At September 30, 2012, we had a net asset of $1 million related to foreign
currency option contracts that were designated as hedges of foreign currency
risk on royalties earned from certain licensees on their sales of CDMA-based
devices. If our forecasted royalty revenues were to decline by 20% and foreign
exchange rates were to change unfavorably by 20% in our hedged foreign currency,
we would not incur a loss. See "Notes to Consolidated Financial Statements, Note
1. The Company and Its Significant Accounting Policies" for a description of our
foreign currency accounting policies.
At September 30, 2012, we had a net asset of $4 million related to foreign
currency forward contracts that were designated as hedges of foreign currency
risk on intercompany payments of operating expenditures relating to a
wholly-owned foreign subsidiary. If our forecasted operating expenditures were
to decline by 20% and foreign exchange rates were to change unfavorably by 20%
in each of our hedged foreign currencies, we would not incur a loss.
At September 30, 2012, we had a net liability that was negligible related to
foreign currency forwards, futures, options and swaps that were not designated
as hedging instruments related to our marketable securities portfolios
classified as trading. If the foreign exchange rates relevant to these contracts
were to change unfavorably by 10% and we do not have an offset foreign currency
exposure relating to debt instruments held in our marketable securities
portfolios classified as trading, we would incur a loss of $2 million.
At September 30, 2012, we had floating-rate bank loans and debentures in the
aggregate of $1.1 billion, which are payable in full in Indian rupees in
December 2012 and June 2017, respectively. The loans and debentures are payable
in the functional currency of our consolidated subsidiaries that are party to
the loans and debentures; however, we are subject to foreign currency
translation risk, which may impact our liability for principal repayment and
interest expense that we will record in the future. If the foreign currency
exchange rate were to change unfavorably by 20%, we would incur additional
principal of $262 million and interest cost of $12 million through the remainder
of the contractual terms of the loans and debentures.
Financial instruments held by consolidated subsidiaries that are not denominated
in the functional currency of those entities are subject to the effects of
currency fluctuations and may affect reported earnings. As a global concern, we
face exposure to adverse movements in foreign currency exchange rates. We may
hedge currency exposures associated with certain assets and liabilities
denominated in nonfunctional currencies and certain anticipated nonfunctional
currency transactions. As a result, we could experience unanticipated gains or
losses on anticipated foreign currency cash flows, as well as economic loss with
respect to the recoverability of investments. While we may hedge certain
transactions with non-United States customers, declines in currency values in
certain regions may, if not reversed, adversely affect future product sales
because our products may become more expensive to purchase in the countries of
the affected currencies.
Our analysis methods used to assess and mitigate the risks discussed above
should not be considered projections of future risks.
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements at September 30, 2012 and September 25,
2011 and the Report of PricewaterhouseCoopers LLP, Independent Registered Public
Accounting Firm, are included in this Annual Report on Form 10-K on pages F-1
through F-34.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such terms are defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended (the Exchange Act). Based on this evaluation, our principal executive
officer and our principal financial officer concluded that our disclosure
controls and
42
--------------------------------------------------------------------------------
procedures were effective as of the end of the period covered by this Annual
Report.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act
Rule 13a-15(f). Under the supervision and with the participation of our
management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under the framework in Internal Control -
Integrated Framework, our management concluded that our internal control over
financial reporting was effective as of September 30, 2012.
PricewaterhouseCoopers LLP, the independent registered public accounting firm
that audited the consolidated financial statements included in this Annual
Report on Form 10-K, has also audited the effectiveness of our internal control
over financial reporting as of September 30, 2012, as stated in its report which
appears on page F-1.
Inherent Limitations over Internal Controls
Our internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of consolidated financial statements for external purposes in accordance with
generally accepted accounting principles. Our internal control over financial
reporting includes those policies and procedures that:
i. pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of our
assets;
ii. provide reasonable assurance that transactions are recorded as
necessary to permit preparation of consolidated financialstatements
in accordance with generally accepted accounting principles, and that
our receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and
iii. provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of our assets that
could have a material effect on the consolidated financialstatements.
Internal control over financial reporting cannot provide absolute assurance of
achieving financial reporting objectives because of its inherent limitations,
including the possibility of human error and circumvention by collusion or
overriding of controls. Accordingly, even an effective internal control system
may not prevent or detect material misstatements on a timely basis. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions or
that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during
the fourth quarter of fiscal 2012 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
Item 9B. Other Information
None.
43--------------------------------------------------------------------------------
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