Qualcomm Incorporated
QUALCOMM INC/DE (Form: 10-Q, Received: 07/18/2012 16:11:58)
 
 
 
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_____________________
FORM 10-Q
_____________________
(Mark one)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 24, 2012
OR
o
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 0-19528
QUALCOMM Incorporated
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
 
95-3685934
(I.R.S. Employer
Identification No.)
 
 
 
5775 Morehouse Dr., San Diego, California
(Address of principal executive offices)
 
92121-1714
(Zip Code)
(858) 587-1121
(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 x  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  x  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  x
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company 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  x






Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

The number of shares outstanding of each of the issuer’s classes of common stock, as of the close of business on July 16, 2012 , was as follows:
Class
 
Number of Shares
Common Stock, $0.0001 per share par value
 
1,703,349,039
 
 
 
 
 



1



INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


PART I. FINANCIAL INFORMATION

ITEM 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

QUALCOMM Incorporated
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except per share data)
(Unaudited)
 
June 24,
2012
 
September 25,
2011
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
3,412

 
$
5,462

Marketable securities
9,983

 
6,190

Accounts receivable, net
1,250

 
993

Inventories
820

 
765

Deferred tax assets
512

 
537

Other current assets
400

 
346

Total current assets
16,377

 
14,293

Marketable securities
13,152

 
9,261

Deferred tax assets
1,677

 
1,703

Assets held for sale

 
746

Property, plant and equipment, net
2,888

 
2,414

Goodwill
3,843

 
3,432

Other intangible assets, net
3,845

 
3,099

Other assets
663

 
1,474

Total assets
$
42,445

 
$
36,422

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Trade accounts payable
$
1,116

 
$
969

Payroll and other benefits related liabilities
608

 
644

Unearned revenues
547

 
610

Loans and debentures
968

 
994

Other current liabilities
2,277

 
2,072

Total current liabilities
5,516

 
5,289

Unearned revenues
3,809

 
3,541

Other liabilities
515

 
620

Total liabilities
9,840

 
9,450

 
 
 
 
Commitments and contingencies (Note 6)

 

 
 
 
 
Stockholders’ equity:
 
 
 
Qualcomm stockholders’ equity:
 
 
 
Preferred stock, $0.0001 par value; 8 shares authorized; none outstanding

 

Common stock, $0.0001 par value; 6,000 shares authorized; 1,712 and 1,681 shares issued
 
 
 
and outstanding, respectively

 

Paid-in capital
12,096

 
10,394

Retained earnings
19,868

 
16,204

Accumulated other comprehensive income
620

 
353

Total Qualcomm stockholders’ equity
32,584

 
26,951

Noncontrolling interests
21

 
21

Total stockholders’ equity
32,605

 
26,972

Total liabilities and stockholders’ equity
$
42,445

 
$
36,422


See Accompanying Notes to Condensed Consolidated Financial Statements.


3


QUALCOMM Incorporated
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
June 24,
2012
 
June 26,
2011
 
June 24,
2012
 
June 26,
2011
Revenues:
 
 
 
 
 
 
 
Equipment and services
$
2,948

 
$
2,297

 
$
9,253

 
$
6,550

Licensing
1,678

 
1,326

 
4,998

 
4,290

Total revenues
4,626

 
3,623

 
14,251

 
10,840

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Cost of equipment and services revenues
1,719

 
1,278

 
5,255

 
3,380

Research and development
974

 
757

 
2,801

 
2,144

Selling, general and administrative
544

 
475

 
1,643

 
1,413

Other
7

 

 
104

 
114

Total operating expenses
3,244

 
2,510

 
9,803

 
7,051

 
 
 
 
 
 
 
 
Operating income
1,382

 
1,113

 
4,448

 
3,789

 
 
 
 
 
 
 
 
Investment income, net (Note 3)
199

 
161

 
589

 
574

Income from continuing operations before income taxes
1,581

 
1,274

 
5,037

 
4,363

Income tax expense
(375
)
 
(289
)
 
(993
)
 
(862
)
Income from continuing operations
1,206

 
985

 
4,044

 
3,501

Discontinued operations, net of income taxes (Note 8)
(3
)
 
44

 
753

 
(307
)
Net income
1,203

 
1,029

 
4,797

 
3,194

Net loss attributable to noncontrolling interests
4

 
6

 
41

 
10

Net income attributable to Qualcomm
$
1,207

 
$
1,035

 
$
4,838

 
$
3,204

 
 
 
 
 
 
 
 
Basic earnings (loss) per share attributable to Qualcomm:
 
 
 
 
 
 
 
Continuing operations
$
0.70

 
$
0.59

 
$
2.40

 
$
2.13

Discontinued operations

 
0.03

 
0.45

 
(0.19
)
Net income
$
0.70

 
$
0.62

 
$
2.85

 
$
1.94

Diluted earnings (loss) per share attributable to Qualcomm:
 
 
 
 
 
 
 
Continuing operations
$
0.69

 
$
0.58

 
$
2.35

 
$
2.09

Discontinued operations

 
0.03

 
0.43

 
(0.19
)
Net income
$
0.69

 
$
0.61

 
$
2.78

 
$
1.90

Shares used in per share calculations:
 
 
 
 
 
 
 
Basic
1,715

 
1,673

 
1,699

 
1,650

Diluted
1,758

 
1,709

 
1,740

 
1,682

 
 
 
 
 
 
 
 
Dividends per share announced
$
0.250

 
$
0.215

 
$
0.680

 
$
0.595




See Accompanying Notes to Condensed Consolidated Financial Statements.


4


QUALCOMM Incorporated
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Nine Months Ended
 
June 24,
2012
 
June 26,
2011
Operating Activities:
 
 
 
Net income
$
4,797

 
$
3,194

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
640

 
820

Gain on sale of wireless spectrum
(1,179
)
 

Goodwill impairment
23

 
114

Revenues related to non-monetary exchanges
(92
)
 
(93
)
Income tax provision in excess of (less than) income tax payments
239

 
(1,218
)
Non-cash portion of share-based compensation expense
752

 
568

Incremental tax benefit from stock options exercised
(127
)
 
(167
)
Net realized gains on marketable securities and other investments
(214
)
 
(304
)
Gains on derivative instruments
(87
)
 
(1
)
Other items, net
90

 
50

Changes in assets and liabilities, net of effects of acquisitions:
 
 
 
Accounts receivable, net
(249
)
 
21

Inventories
(53
)
 
(43
)
Other assets
(31
)
 
(36
)
Trade accounts payable
197

 
(191
)
Payroll, benefits and other liabilities
(412
)
 
210

Unearned revenues
295

 
156

Net cash provided by operating activities
4,589

 
3,080

Investing Activities:
 
 
 
Capital expenditures
(1,034
)
 
(400
)
Purchases of available-for-sale securities
(11,804
)
 
(8,271
)
Proceeds from sale of available-for-sale securities
5,774

 
9,355

Purchases of trading securities
(2,280
)
 

Proceeds from sale of trading securities
1,297

 

Proceeds from sale of wireless spectrum
1,925

 

Acquisitions and other investments, net of cash acquired
(677
)
 
(3,225
)
Other items, net
(76
)
 
(22
)
Net cash used by investing activities
(6,875
)
 
(2,563
)
Financing Activities:
 
 
 
Borrowing under loans and debentures
710

 
1,260

Repayment of loans
(591
)
 
(1,260
)
Proceeds from issuance of common stock
1,358

 
2,392

Proceeds from issuance of subsidiary shares to noncontrolling interest
85

 
62

Incremental tax benefit from stock options exercised
127

 
167

Repurchase and retirement of common stock
(472
)
 

Dividends paid
(1,158
)
 
(985
)
Change in obligation under securities lending
203

 
42

Other items, net
(2
)
 
(6
)
Net cash provided by financing activities
260

 
1,672

Effect of exchange rate changes on cash
(24
)
 
10

Net (decrease) increase in cash and cash equivalents
(2,050
)
 
2,199

Cash and cash equivalents at beginning of period
5,462

 
3,547

Cash and cash equivalents at end of period
$
3,412

 
$
5,746


See Accompanying Notes to Condensed Consolidated Financial Statements.


5



QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 1 - Basis of Presentation
Financial Statement Preparation. These condensed consolidated financial statements have been prepared by QUALCOMM Incorporated (collectively with its subsidiaries, the Company or Qualcomm) in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the interim data includes all normal recurring adjustments necessary for a fair statement of the results for the interim periods. These condensed consolidated financial statements are unaudited and should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended September 25, 2011 . Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year. The Company operates and reports using a 52-53 week fiscal year ending on the last Sunday in September. The three-month and nine-month periods ended both June 24, 2012 and June 26, 2011 included 13 weeks and 39 weeks , respectively.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in the Company’s condensed consolidated financial statements and the accompanying notes. Actual results could differ from those estimates.
Earnings Per Common Share. Basic earnings per common share is computed by dividing net income attributable to Qualcomm by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per common share is computed by dividing net income attributable to Qualcomm by the combination of dilutive common share equivalents, comprised of shares issuable under the Company’s share-based compensation plans and shares subject to written put options, and the weighted-average number of common shares outstanding during the reporting period. Dilutive common share equivalents include the dilutive effect of in-the-money share equivalents, which are calculated based on the average share price for each period using the treasury stock method. Under the treasury stock method, the exercise price of an award, if any, the amount of compensation cost, if any, for future service that the Company has not yet recognized, and the estimated tax benefits that would be recorded in paid-in capital, if any, when an award is settled are assumed to be used to repurchase shares in the current period. The incremental dilutive common share equivalents, calculated using the treasury stock method, for the three months and nine months ended June 24, 2012 were 42,531,000 and 41,228,000 , respectively. The incremental dilutive common share equivalents, calculated using the treasury stock method, for the three months and nine months ended June 26, 2011 were 35,820,000 and 32,094,000 , respectively.
Employee stock options to purchase approximately 597,000 and 1,858,000 shares of common stock during the three months and nine months ended June 24, 2012 , respectively, and employee stock options to purchase approximately 4,492,000 and 23,721,000 shares of common stock during the three months and nine months ended June 26, 2011 , respectively, were outstanding but not included in the calculation of diluted earnings per common share because the effect would be anti-dilutive. Put options outstanding during the three months and nine months ended June 24, 2012 to purchase shares of common stock were not included in the earnings per common share computation because the put options’ exercise prices were less than the average market price of the common stock while they were outstanding, and therefore, the effect on diluted earnings per common share would be anti-dilutive. At June 24, 2012 , one put option remained outstanding, which gives the holder the right to sell 4,000,000 shares of common stock to the Company (Note 5). In addition, 5,892,000 and 2,433,000 shares of other common stock equivalents outstanding during the three months and nine months ended June 24, 2012 , respectively, and 2,891,000 and 1,146,000 shares of other common stock equivalents outstanding during the three months and nine months ended June 26, 2011 , respectively, were not included in the computation of diluted earnings per common share as the effect would be anti-dilutive.
Comprehensive Income. Total comprehensive income attributable to Qualcomm consisted of the following (in millions):


6



QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
June 24,
2012
 
June 26,
2011
 
June 24,
2012
 
June 26,
2011
Net income
$
1,203

 
$
1,029

 
$
4,797

 
$
3,194

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation
(22
)
 

 
(33
)
 
13

Noncredit other-than-temporary impairment losses and subsequent changes in fair value related to certain available-for-sale debt securities, net of income taxes
(2
)
 
(2
)
 
2

 
(12
)
Net unrealized (losses) gains on other available-for-sale securities and derivative instruments, net of income taxes
(139
)
 
(7
)
 
355

 
215

Reclassification of net realized gains on available-for-sale securities and derivative instruments included in net income, net of income taxes
(44
)
 
(45
)
 
(101
)
 
(179
)
Reclassification of other-than-temporary losses on available-for-sale securities included in net income, net of income taxes
14

 
3

 
39

 
10

Total other comprehensive (loss) income
(193
)
 
(51
)
 
262

 
47

Total comprehensive income
1,010

 
978

 
5,059

 
3,241

Comprehensive loss attributable to noncontrolling interests
6

 
6

 
44

 
10

Comprehensive income attributable to Qualcomm
$
1,016

 
$
984

 
$
5,103

 
$
3,251

Components of accumulated other comprehensive income in Qualcomm stockholders’ equity consisted of the following (in millions):
 
June 24,
2012
 
September 25,
2011
Noncredit other-than-temporary impairment losses and subsequent changes in fair value related to certain available-for-sale debt securities, net of income taxes
$
28

 
$
27

Net unrealized gains on other available-for-sale securities, net of income taxes
707

 
427

Net unrealized losses on derivative instruments, net of income taxes
(1
)
 
(15
)
Foreign currency translation
(114
)
 
(86
)
 
$
620

 
$
353

At June 24, 2012 and September 25, 2011 , accumulated other comprehensive income included $9 million and $13 million , respectively, of other-than-temporary losses on certain available-for-sale debt securities related to factors other than credit, net of income taxes.
Share-Based Compensation. Total estimated share-based compensation expense, related to all of the Company’s share-based awards, was comprised as follows (in millions):


7



QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
June 24,
2012
 
June 26,
2011
 
June 24,
2012
 
June 26,
2011
Cost of equipment and services revenues
$
19

 
$
14

 
$
55

 
$
44

Research and development
141

 
95

 
394

 
277

Selling, general and administrative
104

 
84

 
302

 
240

Continuing operations
264

 
193

 
751

 
561

Related income tax benefit
(54
)
 
(46
)
 
(163
)
 
(155
)
Continuing operations, net of income taxes
210

 
147

 
588

 
406

Discontinued operations

 
1

 
1

 
7

Related income tax benefit

 
(1
)
 

 
(3
)
Discontinued operations, net of income taxes

 

 
1

 
4

 
$
210

 
$
147

 
$
589

 
$
410

The Company recorded $169 million and $95 million in share-based compensation expense during the nine months ended June 24, 2012 and June 26, 2011 , respectively, related to share-based awards granted during those periods.
At June 24, 2012 , total unrecognized compensation costs related to non-vested stock options and restricted stock units granted prior to that date were $357 million and $1.3 billion , respectively, which are expected to be recognized over weighted-average periods of 1.4 years and 2.1 years, respectively. During the nine months ended June 24, 2012 and June 26, 2011 , net share-based awards granted, after forfeitures and cancellations, represented 0.9% and 0.7% , respectively, of outstanding shares as of the beginning of each fiscal period, and total share-based awards granted represented 1.0% and 0.5% , respectively, of outstanding shares as of the end of each fiscal period.

Note 2 — Composition of Certain Financial Statement Items
Accounts Receivable, Net.
 
June 24,
2012
 
September 25,
2011
 
(In millions)
Trade, net of allowances for doubtful accounts of $1 and $2, respectively
$
1,212

 
$
951

Long-term contracts
30

 
32

Other
8

 
10

 
$
1,250

 
$
993

Inventories.
 
June 24,
2012
 
September 25,
2011
 
(In millions)
Raw materials
$
17

 
$
15

Work-in-process
318

 
384

Finished goods
485

 
366

 
$
820

 
$
765

 
Intangible Assets. Other intangible assets, net, increased to $3.8 billion at June 24, 2012 from $3.1 billion at September 25, 2011 . The increase was primarily the result of the reclassification of an advance payment ( $860 million at June 24, 2012 ), which was previously included in other noncurrent assets. The advance payment was reclassified to other intangible assets upon assignment of the 20 MHz slot of Broadband Wireless Access (BWA) spectrum by the Government of India’s Department of Telecommunications (DoT) to one of the Company’s Indian subsidiaries in the


8



QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

third quarter of fiscal 2012 (Note 6). The Company will amortize the BWA spectrum over the remaining license period (initially 18.5 years ) commencing upon the commercial launch of wireless services in India, which is expected to occur within 3.5 years of the assignment date.
Valuation of Goodwill and Other Long-Lived Assets. During the three months ended June 24, 2012 , the Company updated the business plan and related internal forecasts for its QMT division to reflect a focus on licensing its next generation IMOD display technology while directly commercializing only certain IMOD products. As a result, the Company performed a goodwill impairment test of the QMT division, which was determined to be a reporting unit for purposes of the goodwill impairment test. The Company concluded that the fair value of the QMT reporting unit was greater than its carrying value. The Company also assessed the recoverability of QMT’s other long-lived assets and concluded that the carrying values of the asset groups were recoverable. Accordingly, the Company did not record any impairment charge related to QMT in the third quarter of fiscal 2012. At June 24, 2012 , the carrying values of the QMT division’s goodwill and long-lived asset groups were $136 million and $950 million , respectively. The estimation of fair values and cash flows used in applying these tests required the use of significant unobservable inputs. During the nine months ended June 24, 2012 and June 26, 2011 , the Company recorded impairment charges of $23 million and $114 million , respectively, to write down goodwill related to its Firethorn division (Note 10).
Other Current Liabilities.
 
June 24,
2012
 
September 25,
2011
 
(In millions)
Customer incentives and other customer-related liabilities
$
1,023

 
$
1,180

Current portion of payable to Broadcom (Note 6)
170

 
170

Payable for unsettled securities trades
303

 
298

Payable for securities lending
249

 
46

Other
532

 
378

 
$
2,277

 
$
2,072


Note 3 — Investment Income, Net
 
Three Months Ended
 
Nine Months Ended
 
June 24,
2012
 
June 26,
2011
 
June 24,
2012
 
June 26,
2011
 
(In millions)
Interest and dividend income
$
156

 
$
127

 
$
431

 
$
384

Interest expense
(18
)
 
(29
)
 
(74
)
 
(84
)
Net realized gains on marketable securities
68

 
72

 
195

 
302

Net realized gains on other investments
2

 
1

 
19

 
2

Impairment losses on marketable securities
(21
)
 
(5
)
 
(58
)
 
(16
)
Impairment losses on other investments

 
(5
)
 
(6
)
 
(10
)
Gains on derivative instruments
13

 

 
87

 
1

Equity in losses of investees
(1
)
 

 
(5
)
 
(5
)
 
$
199

 
$
161

 
$
589

 
$
574


Note 4 — Income Taxes
The Company estimates its annual effective income tax rate for continuing operations to be approximately 20% for fiscal 2012 , consistent with the 20% effective income tax rate for fiscal 2011 . The annual effective tax rate for fiscal 2012 reflects a reduced tax benefit as a result of lower foreign earnings taxed at rates that are less than the United States federal tax rate as compared to fiscal 2011, offset by a lower state tax rate as compared to fiscal 2011 due to a reduction in the state tax rate as a result of California tax legislation previously enacted. The annual effective tax rate for fiscal 2012 only reflects the United States federal research and development credit generated through December 31, 2011, the


9



QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

date on which the credit expired.
The estimated annual effective tax rate for continuing operations for fiscal 2012 of 20% is less than the United States federal statutory rate primarily due to benefits of approximately 15% related to foreign earnings taxed at less than the United States federal rate. The prior fiscal year rate was lower than the United States federal statutory rate primarily due to benefits related to foreign earnings taxed at less than the United States federal rate, partially offset by state taxes and tax expense related to the valuation of deferred tax assets to reflect changes in California law.
D uring the third quarter of fiscal 2012, the Company established Qualcomm CDMA Technologies’ (QCT) non-United States headquarters in Singapore. The Company has obtained tax incentives in Singapore that result in a tax exemption for the first five years provided that the Company meets specified employment and investment 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 the tax that would be owed under the previous structure of QCT’s non-United States operations. The Company’s Singapore tax rate will increase in fiscal 2017 and again in fiscal 2027 as a result of expiration of these incentives. Had the Company located QCT’s non-United States headquarters in Singapore without the tax incentive, the Company’s expected Singapore tax for the full fiscal 2012 would be higher by approximately $200 million .

Note 5 — Stockholders’ Equity
Changes in stockholders’ equity for the nine months ended June 24, 2012 were as follows (in millions):
 
Qualcomm Stockholders’ Equity
 
Noncontrolling Interests
 
Total Stockholders’ Equity
Balance at September 25, 2011
$
26,951

 
$
21

 
$
26,972

Issuance of subsidiary shares to noncontrolling interest (1)
44

 
41

 
85

Net income (loss) (2)
4,838

 
(41
)
 
4,797

Other comprehensive income (loss)
265

 
(3
)
 
262

Common stock issued under employee benefit plans and the related tax benefits, net of shares withheld for tax
1,367

 

 
1,367

Share-based compensation
765

 

 
765

Dividends
(1,174
)
 

 
(1,174
)
Stock repurchases
(472
)
 

 
(472
)
Other

 
3

 
3

Balance at June 24, 2012
$
32,584

 
$
21

 
$
32,605

(1) Amounts include the reallocation of $2 million in accumulated other comprehensive loss resulting from the change in Qualcomm s ownership percentage.
(2) Discontinued operations, net of income taxes, (Note 8) was attributable to Qualcomm.
Noncontrolling Interests. During the third quarter of fiscal 2012, the Company’s subsidiaries in India that were established to operate a wireless network on the BWA spectrum (the BWA subsidiaries) (Note 6) issued noncontrolling interests to Bharti Airtel Limited (Bharti), an Indian wireless network operator, for $85 million . As a result, the Company’s ownership interest in each of those subsidiaries was reduced from 74% to 51% . In addition, Bharti purchased the outstanding shares of those subsidiaries that were held by two third-party Indian investors. This change in the Company’s ownership interest did not result in a change in control, and as a result, the Company’s consolidated financial statements continue to include the assets, liabilities and operating results of those subsidiaries. The Company’s agreement with Bharti provides that Bharti’s ownership interest will increase over time to 100% if certain conditions are met.
Stock Repurchase Program. During the nine months ended June 24, 2012 , the Company repurchased and retired 8,606,000 shares of the Company’s common stock for $471 million , before commissions. The Company did not repurchase any shares during the nine months ended June 26, 2011 . On March 6, 2012, the Company announced that it had been authorized to repurchase up to $4.0 billion of the Company’s common stock. The stock repurchase program has


10



QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

no expiration date. The $4.0 billion stock repurchase program replaced a $3.0 billion stock repurchase program, of which $948 million remained authorized for repurchase, net of put options outstanding. At June 24, 2012 , approximately $3.5 billion remained available for repurchase under the Company’s stock repurchase program, net of the put option outstanding. Since June 24, 2012 , the Company repurchased and retired 11,251,000 shares of the Company’s common stock for $617 million .
In connection with the Company’s stock repurchase program, the Company sold three put options during fiscal 2011. One put option remained outstanding at June 24, 2012 , which gives the holder the right to sell 4,000,000 shares of the Company’s common stock to the Company for approximately $176 million (net of the $27 million in put option premium received). The other two put options expired unexercised during the first nine months of fiscal 2012. The fair values of the put options of $4 million and $80 million at June 24, 2012 and September 25, 2011 , respectively, were recorded in other current liabilities. During the three months and nine months ended June 24, 2012 , the Company recognized losses of $1 million and gains of $75 million , respectively, in net investment income due to changes in the fair values of the put options. No put options were outstanding during the three months and nine months ended June 26, 2011 .
Dividends. On March 6, 2012, the Company announced an increase in its quarterly cash dividend per share of common stock from $0.215 to $0.25 , which is effective for dividends payable after March 23, 2012. On July 6, 2012 , the Company announced a cash dividend of $0.25 per share on the Company’s common stock, payable on September 26, 2012 to stockholders of record as of September 7, 2012 . During the nine months ended June 24, 2012 and June 26, 2011 , dividends charged to retained earnings were as follows (in millions, except per share data):
 
2012
 
2011
 
Per Share
 
Total
 
Per Share
 
Total
First Quarter
$
0.215

 
$
368

 
$
0.190

 
$
314

Second Quarter
0.215

 
377

 
0.190

 
319

Third Quarter
0.250

 
429

 
0.215

 
360

 
$
0.680

 
$
1,174

 
$
0.595

 
$
993


Note 6 — Commitments and Contingencies
Legal Proceedings. Tessera, Inc. v. QUALCOMM Incorporated: On April 17, 2007, Tessera filed a patent infringement lawsuit in the United States District Court for the Eastern District of Texas and a complaint with the United States International Trade Commission (ITC) pursuant to Section 337 of the Tariff Act of 1930 against the Company and other companies, alleging infringement of two patents. The district court action was stayed pending resolution of the ITC proceeding, including all appeals. On May 20, 2009, the ITC issued a limited exclusion order and a cease and desist order, both of which were terminated when the patents expired on September 24, 2010 . During the period of the exclusion order, the Company shifted supply of accused chips for customers who manufacture products that may be imported to the United States to a licensed supplier of Tessera, and the Company continued to supply those customers without interruption. The appeals court affirmed the ITC’s orders, and on November 28, 2011, the U.S. Supreme Court denied the Company’s petition for review. On January 18, 2012, pursuant to the parties’ stipulation, the district court in the Eastern District of Texas lifted the stay and ordered that the case be moved to the United States District Court for the Northern District of California. On March 1, 2012, that court consolidated the case with an earlier-filed lawsuit filed by Tessera against multiple parties, including some of the Company’s semiconductor chip package suppliers. Trial is scheduled for April 7, 2014. Tessera may continue to seek alleged past damages in the district court, but it cannot obtain injunctive relief due to the expiration of the patents.
MicroUnity Systems Engineering, Inc. v. QUALCOMM Incorporated, et al. : MicroUnity filed a total of three patent infringement complaints, on March 16, 2010, June 3, 2010 and January 27, 2011, against the Company and a number of other technology companies, including Texas Instruments, Samsung, Apple, Nokia, Google and HTC, in the United States District Court for the Eastern District of Texas. MicroUnity currently asserts infringement of a total of 13 patents against the Company’s Snapdragon products, and it seeks unspecified damages and other relief. The court consolidated the actions in May 2011. Trial is scheduled for June 3, 2013.
Broadcom Corporation et al. v. Commonwealth Scientific and Industrial Research Organisation (CSIRO) : On


11



QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

November 10, 2009, Broadcom and Atheros Communications, Inc. (Atheros), which was acquired by the Company in May 2011 and renamed Qualcomm Atheros, Inc. (Qualcomm Atheros), filed a complaint for declaratory judgment against CSIRO in the United States District Court for the Eastern District of Texas, requesting the court to declare, among other things, that United States patent number 5,487,069 (the ’069 Patent) assigned to CSIRO is invalid and unenforceable and that Atheros does not infringe any valid claims of the ’069 Patent. On October 14, 2010, CSIRO filed a complaint against Atheros and Broadcom (amended and consolidated with complaints against other third parties on April 6, 2011) alleging infringement of the ’069 Patent by Atheros’ 802.11/a/g/n products. On May 4, 2012, Qualcomm Atheros and CSIRO entered into a license agreement for the ’069 Patent and related patents, which provided that Qualcomm Atheros pay an amount to CSIRO that was not material to the Company’s financial statements. On May 10, 2012, CSIRO dismissed with prejudice its claims against Qualcomm Atheros.
MOSAID Technologies Incorporated v. Dell, Inc. et al. : On March 16, 2011, MOSAID filed a complaint against Atheros and 32 other entities in the United States District Court for the Eastern District of Texas alleging that certain of Atheros’ WiFi products infringe United States patent numbers 5,131,006, 5,151,920, 5,422,887, 5,706,428, 6,563,786 and 6,992,972. MOSAID seeks unspecified damages and other relief. The case is early in the discovery phase. On March 28, 2012, Qualcomm Atheros and the other defendants filed a motion to transfer the case to the Northern District of California. A decision on that motion is pending. A claim construction hearing is scheduled for April 16, 2013, and trial is scheduled for January 8, 2014.
India BWA Spectrum : On August 9, 2010, each of our BWA subsidiaries filed an application to obtain a license to operate a wireless network on the BWA spectrum in its respective region. On September 21, 2011, the Company received a letter from the DoT notifying the Company that its applications had been rejected based on the DoT’s conclusion that the applications were filed after the deadline and that the Company was restricted to filing one application. On September 27, 2011, the Company filed a petition with the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) seeking to overturn the DoT’s rejection. Thereafter, various actions related to the petition ensued before the TDSAT. On February 24, 2012, the TDSAT ordered that (i) one of the BWA subsidiaries pay certain dues (including interest and penalties) allegedly owed by one of the subsidiaries’ Indian noncontrolling shareholders, Tulip Telecom Ltd. (Tulip), to the DoT without prejudice to the right of Tulip to contest the claim and provided that any sum ultimately found not to be due would be refunded by the DoT, without interest, within four weeks of the date of completion of the assessment; (ii) the DoT issue a license to the subsidiary within one week after payment was made; (iii) thereafter, the subsidiary file its application for assignment of the BWA spectrum; and (iv) the DoT consider and dispose of the BWA spectrum application as expeditiously as possible. Accordingly, on March 7, 2012, the Company’s subsidiary paid the amount allegedly owed, $81 million , to the DoT, and on March 15, 2012, the DoT issued a license to the subsidiary. Tulip has agreed to repay the subsidiary for any amounts paid by the subsidiary that are ultimately found or agreed by Tulip to be due to the DoT. The $81 million payment was recorded as a charge to other operating expenses in the second quarter of fiscal 2012. On March 21, 2012, the Company’s subsidiary filed an application for assignment of the spectrum. On May 8, 2012, when the DoT assigned the BWA spectrum to the Company’s subsidiary, (i) the license period was shortened by 18 months, and (ii) the time within which the subsidiary must comply with the roll out obligation was shortened by 19 months. As a result, on May 30, 2012, the Company filed a petition with TDSAT seeking to overturn the DoT’s shortening of the license term and roll out obligation compliance period. A hearing on the petition is scheduled for August 3, 2012. The Company believes that any reasonably likely outcomes of the pending petition will not have a material adverse impact on the Company’s operating results, liquidity or financial position.
Icera Complaint to the European Commission : On June 7, 2010, the European Commission (the Commission) notified and provided the Company with a redacted copy of a complaint filed with the Commission by Icera, Inc. alleging that the Company has engaged in anticompetitive activity. The Company has been asked by the Commission to submit a preliminary response to the portions of the complaint disclosed to it, and the Company submitted its response in July 2010. On October 19, 2011, the Commission notified the Company that it should provide to the Commission additional documents and information. On January 16, 2012, the Company provided additional documents and information in response to that request. The Company continues to cooperate fully with the Commission’s preliminary investigation.
Korea Fair Trade Commission (KFTC) Complaint: On January 4, 2010, the KFTC issued a written decision, finding that the Company had violated South Korean law by offering certain discounts and rebates for purchases of its CDMA chips and for including in certain agreements language requiring the continued payment of royalties after all licensed patents have expired. The KFTC levied a fine, which the Company paid in the second quarter of fiscal 2010. The Company is appealing that decision in the Korean courts.


12



QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Japan Fair Trade Commission (JFTC) Complaint : The JFTC received unspecified complaints alleging that the Company’s business practices are, in some way, a violation of Japanese law. On September 29, 2009, the JFTC issued a cease and desist order concluding that the Company’s Japanese licensees were forced to cross-license patents to the Company on a royalty-free basis and were forced to accept a provision under which they agreed not to assert their essential patents against the Company’s other licensees who made a similar commitment in their license agreements with the Company. The cease and desist order seeks to require the Company to modify its existing license agreements with Japanese companies to eliminate these provisions while preserving the license of the Company’s patents to those companies. The Company disagrees with the conclusions that it forced its Japanese licensees to agree to any provision in the parties’ agreements and that those provisions violate the Japanese Antimonopoly Act. The Company has invoked its right under Japanese law to an administrative hearing before the JFTC. In February 2010, the Tokyo High Court granted the Company’s motion and issued a stay of the cease and desist order pending the administrative hearing before the JFTC. The JFTC has held hearings on 14 different dates, with another hearing scheduled for October 11, 2012 and additional hearing dates yet to be scheduled.
Securities and Exchange Commission (SEC) Formal Order of Private Investigation and Department of Justice (DOJ) Investigation: On September 8, 2010, the Company was notified by the SEC’s Los Angeles Regional office of a formal order of private investigation. The Company understands that the investigation arose from a “whistleblower’s” allegations made in December 2009 to the audit committee of the Company’s Board of Directors and to the SEC. In 2010, the audit committee completed an internal review of the allegations with the assistance of independent counsel and independent forensic accountants. This internal review into the whistleblower’s allegations and related accounting practices did not identify any errors in the Company’s financial statements. On January 27, 2012, the Company learned that the U.S. Attorney’s Office for the Southern District of California/DOJ (DOJ) had begun a preliminary investigation regarding the Company’s compliance with the Foreign Corrupt Practices Act (FCPA).The Company believes that FCPA compliance has also become a focus of the SEC investigation. The audit committee has commenced an internal review into the Company’s compliance with the FCPA with the assistance of independent counsel.
The Company has discovered, and as a part of its ongoing cooperation with these investigations has informed the SEC and the DOJ of, instances in which special hiring consideration, gifts or other benefits (collectively, benefits) were provided to several individuals associated with Chinese state-owned companies or agencies. Based on the facts currently known, the Company believes the aggregate monetary value of the benefits in question to be less than $250,000, excluding employment compensation. The Company is continuing to investigate the circumstances relating to providing these benefits and is attempting to identify whether any other benefits were provided.
The Company is continuing to cooperate with the SEC and the DOJ, but is unable to predict the outcome of their investigations.
Other: The Company has been named, along with many other manufacturers of wireless phones, wireless operators and industry-related organizations, as a defendant in three lawsuits pending in Washington D.C. superior court, seeking monetary damages arising out of its sale of cellular phones.
While there can be no assurance of favorable outcomes, the Company will vigorously defend the foregoing actions. The Company has not recorded any accrual at June 24, 2012 for contingent liabilities or recognized any asset impairment charges associated with the legal proceedings described above based on the Company’s belief that liabilities, while possible, are not probable. Further, any possible range of loss cannot be reasonably estimated at this time. The Company is engaged in numerous other legal actions not described above arising in the ordinary course of its business and, while there can be no assurance, believes that the ultimate outcome of these actions will not have a material adverse effect on its operating results, liquidity or financial position.
Litigation Settlement, Patent License and Other Related Items. On April 26, 2009, the Company entered into a Settlement and Patent License and Non-Assert Agreement with Broadcom. The Company agreed to pay Broadcom $891 million , of which $718 million was paid through June 24, 2012 , and the remainder will be paid ratably through April 2013 . At June 24, 2012 , the carrying value of the liability was $170 million , which also approximated the fair value of the contractual liability net of imputed interest.
Loans and Debentures. In connection with the India BWA spectrum won in India in June 2010 and payment of $81 million to the DoT in March 2012 , the Company’s BWA subsidiaries have loan agreements with multiple lenders that are denominated in Indian rupees. The majority of the loans ( $432 million at June 24, 2012 ) bear interest at an annual rate based on the highest rate among the bank lenders, which is reset quarterly, plus 0.25% ( 10.25% at June 24, 2012 ) with


13



QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

interest payments due monthly. The remaining loan ( $72 million at June 24, 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% ( 10.75% at June 24, 2012 ) with interest payments due monthly. All of the loans can be prepaid without penalty on certain dates and are guaranteed by QUALCOMM Incorporated and one of its wholly-owned subsidiaries. All of the loans are due and payable in full on December 18, 2012 . The loan agreements contain standard covenants, which, among other things, limit actions by the subsidiaries that are party to the loan agreements, including the incurrence of loans and equity investments, disposition of assets, mergers and consolidations and other matters customarily restricted in such agreements. The loan agreements also define certain events of default, including, among other things, if certain government authorizations are revoked, terminated, withdrawn, suspended, modified or withheld. At June 24, 2012 , the aggregate carrying value of the loans was $504 million , which approximated fair value.
On May 29, 2012 , the same BWA subsidiaries issued redeemable, unlisted, unsecured, non-convertible debentures (the debentures) to multiple purchasers, the proceeds of which were used primarily to prepay a portion of the loans described in the previous paragraph. The debentures are denominated in Indian rupees and bear interest at an agreed-upon annual rate, which is compounded annually and reset semi-annually beginning on June 25, 2013 ( 10.25% at June 24, 2012 ) with interest due upon redemption. All of the debentures are due and payable in full on June 25, 2017 . The holders are indemnified by QUALCOMM Incorporated and one of its wholly-owned subsidiaries. The debentures can be redeemed by the Company without penalty on certain dates. Additionally, at June 24, 2012 , each holder had 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 a component of current liabilities. At June 24, 2012 , the aggregate carrying value of the debentures, including accrued interest, was $464 million , which approximated fair value.
Indemnifications. With the exception of the practices of its Qualcomm Atheros subsidiary, the Company generally does not indemnify its customers and licensees for losses sustained from infringement of third-party intellectual property rights. However, the Company is contingently liable under certain product sales, services, license and other agreements to indemnify certain customers against certain types of liability and/or damages arising from qualifying claims of patent infringement by products or services sold or provided by the Company. The Company’s obligations under these agreements may be limited in terms of time and/or amount, and in some instances, the Company may have recourse against third parties for certain payments made by the Company. Under Qualcomm Atheros’ indemnification agreements, software license agreements and product sale agreements, including its standard software license agreements and standard terms and conditions of semiconductor sales, Qualcomm Atheros agrees, subject to restrictions and after certain conditions are met, to indemnify and defend its licensees and customers against third-party claims asserting infringement of certain intellectual property rights, which may include patents, copyrights, trademarks or trade secrets, and to pay any judgments entered on such claims against the licensees or customers. Through June 24, 2012 , Qualcomm Atheros has received a number of claims from its direct and indirect customers and other third parties for indemnification under such agreements with respect to alleged infringement of third-party intellectual property rights by its products.
These indemnification arrangements are not initially measured and recognized at fair value because they are deemed to be similar to product warranties in that they relate to claims and/or other actions that could impair the ability of the Company’s direct or indirect customers to use the Company’s products or services. Accordingly, the Company records liabilities resulting from the arrangements when they are probable and can be reasonably estimated. Reimbursements under indemnification arrangements have not been material to the Company’s consolidated financial statements. The Company has not recorded any accrual for contingent liabilities at June 24, 2012 associated with these indemnification arrangements, other than negligible amounts for reimbursement of legal costs, based on the Company’s belief that additional liabilities, while possible, are not probable. Further, any possible range of loss cannot be reasonably estimated at this time.
Purchase Obligations. The Company has agreements with suppliers and other parties to purchase inventory, other goods and services and long-lived assets. Noncancelable obligations under these agreements at June 24, 2012 for the remainder of fiscal 2012 and for each of the subsequent four years from fiscal 2013 through 2016 were approximately $1.9 billion , $320 million , $33 million , $37 million and $26 million , respectively, and $13 million thereafter. Of these amounts, for the remainder of fiscal 2012 and for fiscal 2013, commitments to purchase integrated circuit product inventories comprised $1.6 billion and $186 million , respectively.
Leases. The future minimum lease payments for all capital leases and operating leases at June 24, 2012 were as follows (in millions):


14



QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
Capital
Leases
 
Operating
Leases
 
Total
Remainder of fiscal 2012
$
2

 
$
32

 
$
34

2013
10

 
109

 
119

2014
10

 
85

 
95

2015
11

 
36

 
47

2016
11

 
22

 
33

Thereafter
268

 
141

 
409

Total minimum lease payments
$
312

 
$
425

 
$
737

Deduct: Amounts representing interest
175

 
 
 
 
Present value of minimum lease payments
137

 
 
 
 
Deduct: Current portion of capital lease obligations
1

 
 
 
 
Long-term portion of capital lease obligations
$
136

 
 
 
 
The Company leases certain of its land, facilities and equipment under noncancelable operating leases, with terms ranging from less than one year to 35 years and with provisions in certain leases for cost-of-living increases. The Company leases certain property under operating and capital lease agreements associated with its discontinued operations (Note 8), primarily related to site leases that have an initial term of five to seven years with renewal options of up to five additional renewal periods. In determining the capital lease classification for the site leases upon commencement of each lease, the Company included all renewal options. As a result of its restructuring plan (Note 8), the Company does not intend to renew its existing site capital leases. At June 24, 2012 , the Company had $119 million of site capital lease assets (which are included in buildings and improvements in property, plant and equipment) and $136 million of capital lease obligations (which are included in other liabilities) that pertain to lease optional renewal periods. The Company expects to write off these amounts at the end of the current contractual lease terms. Any early terminations may impact the amounts that are written off.

Note 7 — Segment Information
The Company is organized on the basis of products and services. The Company aggregates four of its divisions into the Qualcomm Wireless & Internet (QWI) segment and three of its divisions into the Qualcomm Strategic Initiatives (QSI) segment. Reportable segments are as follows:
Qualcomm CDMA Technologies (QCT) — develops and supplies 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.
Qualcomm Technology Licensing (QTL) — grants licenses or otherwise provides rights to use portions of the Company’s 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, and QTL collects license fees as well as royalties based on sales by licensees of products incorporating or using the Company’s intellectual property.
Qualcomm Wireless & Internet (QWI) — comprised of:
Qualcomm Internet Services (QIS) — provides content enablement services for the wireless industry and push-to-talk and other software products and services for wireless network operators;
Qualcomm Government Technologies (QGOV) — provides development and other services and related products involving wireless communications technologies to government agencies and their contractors;
Qualcomm Enterprise Services (QES) — provides fleet management, satellite- and terrestrial-based two-way wireless information and position reporting and other services, software and hardware to transportation and logistics companies; and


15



QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Firethorn — builds and manages software applications that enable certain mobile commerce services.
Qualcomm Strategic Initiatives (QSI) — comprised of the Company’s Qualcomm Ventures, Structured Finance & Strategic Investments and FLO TV divisions. QSI makes strategic investments that the Company believes will open new opportunities for its technologies, support the design and introduction of new products or 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. The results of QSI’s FLO TV business are presented as discontinued operations (Note 8) and are therefore not included in QSI’s revenues or loss before income taxes.
The Company evaluates the performance of its segments based on earnings (loss) before income taxes (EBT) from continuing operations. Segment EBT includes the allocation of certain corporate expenses to the segments, including depreciation and amortization expense related to unallocated corporate assets. Certain income and charges are not allocated to segments in the Company’s management reports because they are not considered in evaluating the segments’ operating performance. Unallocated income and charges include certain investment income (loss); share-based compensation (Note 1); and certain research and development expenses and other selling and marketing expenses that were deemed to be not directly related to the businesses of the segments. Additionally, starting with acquisitions in the third quarter of fiscal 2011, unallocated charges include recognition of the step-up of inventories to fair value and amortization of certain intangible assets. Such charges related to acquisitions that were completed prior to the third quarter of fiscal 2011 are allocated to the respective segments. The table below presents revenues and EBT for reportable segments (in millions):
 
QCT
 
QTL
 
QWI
 
QSI
 
Reconciling
Items
 
Total
For the three months ended:
 
 
 
 
 
 
 
 
 
 
 
June 24, 2012
 
 
 
 
 
 
 
 
 
 
 
Revenues
$
2,869

 
$
1,593

 
$
160

 
$

 
$
4

 
$
4,626

EBT
472

 
1,407

 
(6
)
 
(16
)
 
(276
)
 
1,581

June 26, 2011
 
 
 
 
 
 
 
 
 
 
 
Revenues
$
2,194

 
$
1,257

 
$
164

 
$

 
$
8

 
$
3,623

EBT
430

 
1,092

 
(13
)
 
(30
)
 
(205
)
 
1,274

 
 
 
 
 
 
 
 
 
 
 
 
For the nine months ended:
 
 
 
 
 
 
 
 
 
 
 
June 24, 2012
 
 
 
 
 
 
 
 
 
 
 
Revenues
$
9,012

 
$
4,755

 
$
471

 
$

 
$
13

 
$
14,251

EBT
1,810

 
4,215

 
(15
)
 
(149
)
 
(824
)
 
5,037

June 26, 2011
 
 
 
 
 
 
 
 
 
 
 
Revenues
$
6,272

 
$
4,061

 
$
493

 
$

 
$
14

 
$
10,840

EBT
1,487

 
3,559

 
(147
)
 
(97
)
 
(439
)
 
4,363

Reconciling items in the previous table were as follows (in millions):


16



QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
June 24,
2012
 
June 26,
2011
 
June 24,
2012
 
June 26,
2011
Revenues
 
 
 
 
 
 
 
Other nonreportable segments
$
5

 
$
9

 
$
16

 
$
17

Elimination of intersegment revenues
(1
)
 
(1
)
 
(3
)
 
(3
)
 
$
4

 
$
8

 
$
13

 
$
14

EBT
 
 
 
 
 
 
 
Unallocated cost of equipment and services revenues
$
(73
)
 
$
(73
)
 
$
(211
)
 
$
(103
)
Unallocated research and development expenses
(181
)
 
(129
)
 
(519
)
 
(400
)
Unallocated selling, general and administrative expenses
(114
)
 
(106
)
 
(397
)
 
(353
)
Unallocated investment income, net
204

 
181

 
622

 
642

Other nonreportable segments
(112
)
 
(78
)
 
(319
)
 
(225
)
 
$
(276
)
 
$
(205
)
 
$
(824
)
 
$
(439
)
For the three months and nine months ended June 24, 2012 , QCT revenues included intersegment revenues of $1 million and $3 million , respectively, as compared to $1 million and $2 million , respectively, for the corresponding periods ended June 26, 2011 . All other revenues for reportable segments were from external customers for all periods presented.
Reconciling items for the three months and nine months ended June 24, 2012 included $54 million and $156 million , respectively, of unallocated cost of equipment and services revenues and $7 million and $21 million , respectively, of unallocated selling, general and administrative expenses related to the amortization of intangible assets resulting from acquisitions. Reconciling items for both the three months and nine months ended June 26, 2011 included $59 million and $18 million of unallocated cost of equipment and services revenues and unallocated selling, general and administrative expenses, respectively, related to the step-up of inventories to fair value and amortization of intangible assets resulting from acquisitions. Other nonreportable segments’ losses before taxes during the three months and nine months ended June 24, 2012 and June 26, 2011 were primarily attributable to the Company’s QMT division, a nonreportable segment developing interferometric modulator (IMOD) display technology.
Segment assets are comprised of accounts receivable and inventories for all reportable segments other than QSI. QSI segment assets include marketable securities, notes receivable, wireless spectrum, other investments and all assets of consolidated subsidiaries included in QSI. QSI segment assets related to the discontinued FLO TV business totaled $130 million and $913 million at June 24, 2012 and September 25, 2011 , respectively (Note 8). Reconciling items for total consolidated assets included $1.3 billion and $806 million at June 24, 2012 and September 25, 2011 , respectively, of goodwill and other assets related to the Company’s QMT division. The increase in QMT’s assets primarily related to the construction of a new manufacturing facility in Taiwan. Total segment assets also differ from total assets on a consolidated basis as a result of unallocated corporate assets primarily comprised of certain cash, cash equivalents, marketable securities, property, plant and equipment, deferred tax assets, goodwill, other intangible assets and assets of nonreportable segments. Segment assets and reconciling items were as follows (in millions):
 
June 24,
2012
 
September 25,
2011
QCT
$
1,878

 
$
1,569

QTL
36

 
36

QWI
137

 
136

QSI
1,554

 
2,386

Reconciling items
38,840

 
32,295

Total consolidated assets
$
42,445

 
$
36,422


Note 8 — Discontinued Operations
On March 27, 2011, the FLO TV business and network were shut down. On December 27, 2011 , the Company


17



QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

completed the sale of substantially all of its 700 MHz spectrum for $1.9 billion , and as a result, the Company recognized a gain in discontinued operations of $1.2 billion during the nine months ended June 24, 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, the Company has been working to sell the remaining assets and exit contracts. Accordingly, the results of operations of the FLO TV business are presented as discontinued operations. Income (loss) from discontinued operations includes share-based payments 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):
 
Three Months Ended
 
Nine Months Ended
 
June 24, 2012
 
June 26, 2011
 
June 24, 2012
 
June 26, 2011
Revenues
$


$
1


$


$
5

(Loss) income from discontinued operations
$
(5
)

$
1


$
1,163


$
(502
)
Income tax benefit (expense)
2


43


(410
)

195

Discontinued operations, net of income taxes
$
(3
)

$
44


$
753


$
(307
)
During the third quarter of fiscal 2011 , in connection with the presentation of the FLO TV business as discontinued operations and the requirement to compute the tax effect of discontinued operations on a discrete basis, the Company recorded a tax benefit of $43 million related to losses incurred in the first and second quarter of fiscal 2011 that were previously included in the calculation of the estimated annual effective tax rate.
At June 24, 2012 , total assets and liabilities of the discontinued operations in the condensed consolidated balance sheet were $130 million and $208 million , respectively, consisting primarily of capital lease assets and liabilities of $119 million and $136 million , respectively. The Company has a significant number of site leases, and the Company has corresponding capital lease assets, capital lease liabilities and asset retirement obligations (Note 6).

Note 9 — Acquisitions
During the nine months ended June 24, 2012 , the Company acquired seven businesses for total cash consideration of $635 million . Technology-based intangible assets recognized in the amount of $95 million are being amortized on a straight-line basis over a weighted-average useful life of five years . The Company recorded $62 million related to nine in-process research and development (IPR&D) projects, which are expected to be completed within two years from the acquisition date. The acquired IPR&D will not be amortized until completion, and upon completion, IPR&D projects will be amortized over their useful lives, which are expected to range between four to nine years. Goodwill recognized in these transactions, of which $71 million is expected to be deductible for tax purposes, was assigned to the Company’s reportable segments as follows: $294 million to QCT, $22 million to QTL and $130 million to a nonreportable segment.

Note 10 — Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants as of the measurement date. Applicable accounting guidance provides an established hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors that market participants would use in valuing the asset or liability. There are three levels of inputs that may be used to measure fair value:
Level 1 includes financial instruments for which quoted market prices for identical instruments are available in active markets.
Level 2 includes financial instruments for which there are inputs other than quoted prices included within Level 1 that are observable for the instrument.


18



QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Level 3 includes financial instruments for which fair value is derived from valuation techniques in which one or more significant inputs are unobservable, including the Company’s own assumptions.
Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.
The following table presents the Company’s fair value hierarchy for assets and liabilities measured at fair value on a recurring basis at June 24, 2012 (in millions):
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Cash equivalents
$
685

 
$
1,722

 
$

 
$
2,407

Marketable securities
 
 
 
 
 
 
 
U.S. Treasury securities and government-related securities
1,084

 
945

 

 
2,029

Corporate bonds and notes

 
8,619

 

 
8,619

Mortgage- and asset-backed securities

 
1,295

 
68

 
1,363

Auction rate securities

 

 
120

 
120

Non-investment-grade debt securities and funds
316

 
4,403

 
70

 
4,789

Common and preferred stock
1,346

 
798

 

 
2,144

Equity funds
991

 

 

 
991

Debt funds
2,333

 
747

 

 
3,080

Total marketable securities
6,070

 
16,807

 
258

 
23,135

Derivative instruments

 
26

 

 
26

Other investments
185

 

 

 
185

Total assets measured at fair value
$
6,940

 
$
18,555

 
$
258

 
$
25,753

Liabilities
 
 
 
 
 
 
 
Derivative instruments
$

 
$
23

 
$

 
$
23

Other liabilities
185

 

 

 
185

Total liabilities measured at fair value
$
185

 
$
23

 
$

 
$
208


Cash Equivalents and Marketable Securities. The Company considers all highly liquid investments, including repurchase agreements, with original maturities of three months or less to be cash equivalents. Cash equivalents are comprised of money market funds, certificates of deposit, commercial paper, government agencies’ securities and repurchase agreements fully collateralized by government agencies’ securities.
With the exception of auction rate securities, the Company obtains pricing information from quoted market prices, pricing vendors or quotes from brokers/dealers. The Company conducts reviews of its primary pricing vendors to determine whether the inputs used in the vendor’s pricing processes are deemed to be observable.
The fair value of U.S. Treasury securities and government-related securities, corporate bonds and notes and common and preferred stock are generally determined using standard observable inputs, including reported trades, quoted market prices, matrix pricing, benchmark yields, broker/dealer quotes, issuer spreads, two-sided markets and/or benchmark securities.
The fair value of debt and equity funds is reported at published net asset values. The Company assesses the daily frequency and size of transactions at published net asset values and/or the fund’s underlying holdings to determine whether fair value is based on observable or unobservable inputs.
The fair value of highly rated mortgage- and asset-backed securities is derived from the use of matrix pricing (prices for similar securities) or, in some cases, cash flow pricing models with observable inputs such as contractual terms, maturity, credit rating and/or securitization structure to determine the timing and amount of future cash flows. Certain mortgage- and asset-backed securities, principally those rated below AAA, may require the use of significant


19



QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

unobservable inputs to estimate fair value, such as default likelihood, recovery rates and prepayment speed.
The fair value of auction rate securities is estimated by the Company using a discounted cash flow model that incorporates transaction details such as contractual terms, maturity and timing and amount of future cash flows, as well as assumptions related to liquidity, default likelihood and recovery, the future state of the auction rate market and credit valuation adjustments of market participants. Though certain of the securities held by the Company are pools of student loans guaranteed by the U.S. government, prepayment speeds and illiquidity discounts are considered significant unobservable inputs. These additional inputs are generally unobservable, and therefore, auction rate securities are included in Level 3.
Derivative Instruments. Derivative instruments include foreign currency option and forward contracts to manage foreign exchange risk for certain foreign currency transactions and certain balances denominated in a foreign currency; option, forward and swap contracts to acquire or reduce foreign exchange risk and/or equity, prepayment and credit risks for portfolios of marketable securities classified as trading; warrants to purchase common stock of other companies at fixed prices; and written put options to repurchase shares of the Company’s common stock at fixed prices. Derivative instruments that are traded on an exchange are valued using quoted market prices and are included in Level 1. Derivative instruments that are not traded on an exchange are valued using conventional calculations/models that are primarily based on observable inputs, such as foreign currency exchange rates, the Company’s stock price, volatilities and interest rates, and therefore, such derivative instruments are included in Level 2.
Other Investments and Other Liabilities. Other investments and other liabilities included in Level 1 are comprised of the Company’s deferred compensation plan liability and related assets, which are invested in mutual funds. Other liabilities included in Level 3 are comprised of put rights held by third parties representing interests in certain of the Company’s subsidiaries. These put rights were terminated during the third quarter of fiscal 2012 and were previously valued with a conventional option pricing model using significant unobservable inputs.
Activity between Levels of the Fair Value Hierarchy. There were no significant transfers between Level 1 and Level 2 during the nine months ended June 24, 2012 or June 26, 2011 . When a determination is made to classify an asset or liability within Level 3, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement. The following table includes the activity for marketable securities and other liabilities classified within Level 3 of the valuation hierarchy (in millions):
 
Nine Months Ended June 24, 2012
 
Nine Months Ended June 26, 2011
 
Auction Rate
Securities
 
Other Marketable
Securities
 
Other Liabilities
 
Auction Rate
Securities
 
Other Marketable
Securities
 
Other Liabilities
Beginning balance of Level 3
$
124

 
$
27

 
$
7

 
$
126

 
$
18

 
$
8

Total realized and unrealized gains or losses:
 
 
 
 
 
 
 
 
 
 
 
Included in investment income, net

 
2

 
(7
)
 

 
1

 

Included in other comprehensive income

 
1

 

 
2

 

 

Purchases

 
110

 

 
4

 

 

Settlements
(4
)
 
(17
)
 

 
(6
)
 
(4
)
 

Transfers into Level 3

 
15

 

 

 
6

 

Ending balance of Level 3
$
120

 
$
138

 
$

 
$
126

 
$
21

 
$
8

The Company recognizes transfers into and out of levels within the fair value hierarchy at the end of the fiscal month in which the actual event or change in circumstances that caused the transfer occurs. Transfers into Level 3 during the nine months ended June 24, 2012 and June 26, 2011 primarily consisted of debt securities with significant inputs that became unobservable as a result of an increased likelihood of a shortfall in contractual cash flows or a significant downgrade in credit ratings.
Nonrecurring Fair Value Measurements. The Company measures certain assets at fair value on a nonrecurring basis. These assets include cost and equity method investments when they are deemed to be other-than-temporarily impaired, assets acquired and liabilities assumed in an acquisition or in a nonmonetary exchange, and property, plant and


20



QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

equipment and intangible assets that are written down to fair value when they are held for sale or determined to be impaired. During the nine months ended June 24, 2012 and June 26, 2011 , goodwill related to the Company’s Firethorn division was written down to implied fair value resulting in impairment charges of $23 million and $114 million , respectively. The impairment charges were recorded in other operating expenses. At June 24, 2012 , the carrying value of the Firethorn division’s goodwill was $17 million . The estimation of fair values in the testing of goodwill requires the use of significant unobservable inputs, and as a result, the fair value measurements were classified as Level 3. During the nine months ended June 24, 2012 and June 26, 2011 , the Company did not have any other significant assets or liabilities that were measured at fair value on a nonrecurring basis in periods subsequent to initial recognition.

Note 11 — Marketable Securities
Marketable securities were comprised as follows (in millions):
 
Current
 
Noncurrent
 
June 24,
2012
 
September 25,
2011
 
June 24,
2012
 
September 25,
2011
Trading:
 
 
 
 
 
 
 
U.S. Treasury securities and government-related securities
$
240

 
$

 
$
317

 
$

Corporate bonds and notes
260

 

 
127

 

Mortgage- and asset-backed securities

 

 
65

 

Non-investment-grade debt securities

 

 
94

 

Total trading
500

 

 
603

 

Available-for-sale:
 
 
 
 
 
 
 
U.S. Treasury securities and government-related securities
881

 
516

 
591

 
6

Corporate bonds and notes
5,006

 
3,665

 
3,226

 
2,353

Mortgage- and asset-backed securities
1,112

 
587

 
186

 
91

Auction rate securities

 

 
120

 
124

Non-investment-grade debt securities and funds
43

 
19

 
4,652

 
3,653

Common and preferred stock
108

 
76

 
2,036

 
1,713

Equity funds

 

 
991

 
845

Debt funds
2,333

 
1,327

 
245

 

Total available-for-sale
9,483

 
6,190

 
12,047

 
8,785

Fair value option:
 
 
 
 
 
 
 
Debt fund

 

 
502

 
476

Total marketable securities
$
9,983

 
$
6,190

 
$
13,152

 
$
9,261

The Company holds an investment in a debt fund for which the Company elected the fair value option because the Company is able to redeem its shares at net asset value, which is determined daily. The investment would have otherwise been recorded using the equity method. The debt fund has no single maturity date. At June 24, 2012 , the Company had an effective ownership interest in the debt fund of 22% . During the three months and nine months ended June 24, 2012 , increases in fair value associated with this investment of $5 million and $27 million , respectively, were recognized in net investment income. During the nine months ended June 26, 2011 , an increase in fair value associated with this investment of $18 million was recognized in net investment income; the change in fair value during the three months ended June 26, 2011 was negligible.
The Company classifies portfolios of debt securities that involve the purchase or sale of derivative instruments to acquire or reduce foreign exchange and/or equity, prepayment and credit risk as trading. Net gains recognized on debt securities classified as trading still held at June 24, 2012 were $4 million for the nine months ended June 24, 2012 . Net losses recognized on debt securities classified as trading still held at June 24, 2012 were $6 million for the three months ended June 24, 2012 . The Company did not hold any securities classified as trading during the three months and nine months ended June 26, 2011 .
At June 24, 2012 , the contractual maturities of available-for-sale debt securities were as follows (in millions):


21



QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Years to Maturity
 
 
 
 
Less Than
One Year
 
One to
Five Years
 
Five to
Ten Years
 
Greater Than
Ten Years
 
No Single
Maturity
Date
 
Total
$
1,194

 
$
7,537

 
$
2,854

 
$
1,285

 
$
5,525

 
$
18,395

Debt securities with no single maturity date included debt funds, non-investment-grade debt securities and funds, mortgage- and asset-backed securities and auction rate securities.
The Company recorded realized gains and losses on sales of available-for-sale securities as follows (in millions):
 
Gross Realized Gains
 
Gross Realized Losses
 
Net Realized Gains
For the three months ended
 
 
 
 
 
June 24, 2012
$
76

 
$
(7
)
 
$
69

June 26, 2011
74

 
(2
)
 
72

 
 
 
 
 
 
For the nine months ended
 
 
 
 
 
June 24, 2012
$
177

 
$
(14
)
 
$
163

June 26, 2011
297

 
(13
)
 
284

Available-for-sale securities were comprised as follows (in millions):
 
Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
June 24, 2012
 
 
 
 
 
 
 
Equity securities
$
2,660

 
$
517

 
$
(42
)
 
$
3,135

Debt securities (including debt funds)
18,070

 
388

 
(63
)
 
18,395

 
$
20,730

 
$
905

 
$
(105
)
 
$
21,530

September 25, 2011
 
 
 
 
 
 
 
Equity securities
$
2,426

 
$
278

 
$
(70
)
 
$
2,634

Debt securities (including debt funds)
12,179

 
294

 
(132
)
 
12,341

 
$
14,605

 
$
572

 
$
(202
)
 
$
14,975

The following table shows the gross unrealized losses and fair values of the Company’s investments in individual securities that are classified as available-for-sale and have been in a continuous unrealized loss position deemed to be temporary for less than 12 months and for more than 12 months, aggregated by investment category (in millions):
 
June 24, 2012
 
Less than 12 months
 
More than 12 months
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Corporate bonds and notes
1,981

 
(9
)
 
88

 
(4
)
Mortgage- and asset-backed securities
254

 
(1
)
 
28

 

Auction rate securities

 

 
120

 
(2
)
Non-investment-grade debt securities and funds
1,274

 
(25
)
 
205

 
(14
)
Common and preferred stock
217

 
(21
)
 
9

 
(1
)
Equity funds
269

 
(20
)
 

 

Debt funds
1,252

 
(8
)
 
1

 

 
$
5,247

 
$
(84
)
 
$
451

 
$
(21
)



22



QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
September 25, 2011
 
Less than 12 months
 
More than 12 months
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Corporate bonds and notes
$
1,862

 
$
(41
)