Blizzard 2011 Annual Report Download - page 35

fair value of a financial liability relating to a contingent earn-out liability from a previous acquisition and there was no such item
during 2011.
Investment and other income, net increased in 2010 as compared to 2009, primarily as a result of a reduction in fair
value of a financial liability relating to a contingent earn-out liability from a previous acquisition. This increase was partially
offset by lower investment income due to lower interest rates.
Income Tax Expense (Benefit) (amounts in millions)
Year
Ended
December 31,
2011
% of
Pretax
income
Year
Ended
December 31,
2010
% of
Pretax
income
Year
Ended
December 31,
2009
% of
Pretax
income
Increase
(Decrease)
2011 v
2010
Increase
(Decrease)
2010 v
2009
Income tax expense
(benefit) ........................... $246 18.5% $74 15.0% $(121) NM% $172 $195
For 2011, the company’s income before income tax expense was $1.331 billion. Our income tax expense of
$246 million resulted in an effective tax rate of 18.5%. The difference between our effective tax rate and the U.S. statutory tax
rate of 35% is due to earnings taxed at lower rates in foreign jurisdictions, recognition of federal and California research and
development credits, the federal domestic production deduction and a favourable impact from discrete items recognized in
connection with the filing of our 2010 tax returns.
In 2010, the company’s income before income tax expense was $492 million. Our income tax expense of $74 million
resulted in an effective tax rate of 15.0%. Our effective tax rate was lower than the U.S. federal statutory tax rate primarily due
to earnings taxed at lower rates in foreign jurisdictions, recognition of federal and California research and development credits
and the federal domestic production deduction.
In 2011 and 2010, our U.S. income before income tax expense was $623 million and $228 million, respectively, and
comprised 47% and 46%, respectively, of our consolidated income before income tax expense. In 2011 and 2010, the foreign
income before income tax expense was $708 million and $264 million, respectively, and comprised 53% and 54%, respectively,
of our consolidated income before income tax expense. In 2011 and 2010, the impact of earnings taxed at lower rates in foreign
jurisdictions versus our U.S. federal statutory tax rate was 15% and 22%, respectively.
In 2009, the company recognized a loss before income tax benefit of $8 million. Included in the results was an
impairment of intangible assets totaling $409 million, which was one of the primary reasons for the overall loss before income
tax benefit for the year. Furthermore, the impact of income tax benefits of $121 million recognized for the year resulted in net
income of $113 million, and consequently an effective tax rate was not meaningful. Overall, our 2009 income taxes benefited
from earnings taxed at lower rates in foreign jurisdictions, recognition of federal and California research and development
credits, the federal domestic production deduction and a benefit from reductions in our valuation allowances.
The IRS is currently examining the company’s federal tax returns for the 2009 tax year. The company also has
several state and non-U.S. audits pending. Although the final resolution of the company’s global tax disputes is uncertain, based
on current information, in the opinion of the company’s management, the ultimate resolution of these matters will not have a
material adverse effect on the company’s consolidated financial position, liquidity or results of operations. However, an
unfavorable resolution of the company’s global tax disputes could have a material adverse effect on the company’s business and
results of operations in the period in which the matters are ultimately resolved.
A more detailed analysis of the differences between the U.S. federal statutory rate and the consolidated effective tax
rate, as well as other information about our income taxes, is provided in Note 15 of the Notes to Consolidated Financial
Statements included in this Annual Report.
Foreign Exchange Impact
Changes in foreign exchange rates had a positive impact of $49 million and a negative impact of $10 million on
Activision Blizzard’s consolidated operating income in 2011 and 2010, respectively. The change is primarily due to the
strengthening of the British pound, euro and Australian dollar average rates relative to the U.S. dollar.
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