Activision 2013 Annual Report Download - page 37

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Interest and other investment income (expense), net, was ($53) million in 2013, as compared to $7 million in 2012,
due to interest expense incurred from the Notes and the Term Loan, which were entered into in October 2013. Interest expense
for 2013 reflects the interest from the period in which the Notes and the Term Loan were issued and drawn, respectively, to the
end of the year. In 2014, our interest expense is expected to be higher as the Notes and the Term Loan will be outstanding for the
entire year as compared to a shorter period in 2013.
Interest and other investment income (expense), net, increased in 2012, as compared to 2011. The increase was
primarily due to the net realized gain on our foreign exchange contracts of $2 million in 2012 as compared to a ($7) million loss
in 2011. However, during 2012, we experienced lower yields on our investments, which partially offset the increase.
Income Tax Expense (Benefit) (amounts in millions)
Year Ended
December 31,
2013
% of
Pretax
income
Year Ended
December 31,
2012
% of
Pretax
income
Year Ended
December 31,
2011
% of
Pretax
income
Increase
(Decrease)
2013 v 2012
Increase
(Decrease)
2012 v 2011
Income tax expense ................................. $ 309 23.4% $ 309 21.2% $ 246 18.5% $ — $ 63
For 2013, the Company’s income before income tax expense was $1.32 billion. Our income tax expense of $309
million resulted in an effective tax rate of 23.4%. The difference between our effective tax rate and the U.S. statutory tax rate of
35% is due to earnings taxed at relatively lower rates in foreign jurisdictions, recognition of federal and California research and
development (“R&D”) credits, recognition of the retroactive reinstatement of the federal R&D tax credit described below, and
the federal domestic production deduction.
On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law by the President of the United
States. Under the provisions of the American Taxpayer Relief Act of 2012, the R&D tax credit that had expired December 31,
2011, was reinstated retroactively to January 1, 2012, and expired on December 31, 2013. The Company recorded the impact of
the extension of the R&D tax credit related to the tax year ended December 31, 2012, as a discrete item the first quarter of 2013.
The impact of the extension of the R&D tax credit resulted in a net tax benefit of approximately $12 million related to the tax
year ended December 31, 2012.
For 2012, the Company’s income before income tax expense was $1.46 billion. Our income tax expense of
$309 million resulted in an effective tax rate of 21.2%. The difference between our effective tax rate and the U.S. statutory tax
rate of 35% is due to earnings taxed at relatively lower rates in foreign jurisdictions, recognition of California R&D credits, the
federal domestic production deduction, and a tax benefit resulting from a federal income tax audit settlement allocated to us by a
subsidiary of Vivendi, as further discussed below.
In 2013 and 2012, our U.S. income before income tax expense was $626 million and $668 million, respectively, and
comprised 47% and 46%, respectively, of our consolidated income before income tax expense. In 2013 and 2012, the foreign
income before income tax expense was $693 million and $790 million, respectively, and comprised 53% and 54%, respectively,
of our consolidated income before income tax expense. In 2013 and 2012, earnings taxed at lower rates in foreign jurisdictions,
as compared to domestic earnings taxed at the U.S. federal statutory tax rate, lowered our effective tax rate by 13% and 17%,
respectively.
In connection with the Purchase Transaction, we assumed certain tax attributes of New VH, which generally consist
of New VH’s net operating loss (“NOL”) carryforwards of approximately $676 million, which represent a potential future tax
benefit of approximately $237 million. The utilization of such NOL carryforwards will be subject to certain annual limitations
and will begin to expire in 2021. The Company also obtained indemnification from Vivendi against losses attributable to the
disallowance of claimed utilization of such NOL carryforwards of up to $200 million in unrealized tax benefits in the aggregate,
limited to taxable years ending on or prior to December 31, 2016. No benefit for these tax attributes or indemnification was
recorded upon the close of the Purchase Transaction, as the benefit from these tax attributes did not meet the
“more-likely-than-not” standard. As of December 31, 2013, we utilized $45 million of the NOL, which resulted in a benefit of
$16 million, and a corresponding reserve was established as the position did not meet the “more-likely-than-not” standard. An
indemnification asset of $16 million has been recorded in “Other Assets”, and correspondingly, the same amount has been
recorded as a reduction to the consideration paid for the shares repurchased in “Treasury Stock”.
As previously disclosed, on July 9, 2008, the Business Combination occurred among Vivendi, the Company and
certain of their respective subsidiaries pursuant to which Vivendi Games, then a member of the consolidated U.S. tax group of
Vivendi’s subsidiary, Vivendi Holdings I Corp. (“VHI”), became a subsidiary of the Company. As a result of the business
combination, the favorable tax attributes of Vivendi Games carried forward to the Company. In late August 2012, VHI settled a
federal income tax audit with the Internal Revenue Service (“IRS”) for the tax years ended December 31, 2002, 2003, and 2004.
In connection with the settlement agreement, VHI’s consolidated federal net operating loss carryovers were adjusted and