Qualcomm 2004 Annual Report Download - page 48

QUALCOMM 44
Management’s Discussion and Analysis continued
Net Investment Income (Expense). Net investment income was $184 million for fiscal 2004, compared to net investment expense of $8 million
for fiscal 2003. The change was primarily comprised as follows (in millions):
Years Ended September 30,
2004 2003* Change
Interest income:
QSI $ 14 $ 45 $ (31)
Corporate and other segments 161 113 48
Interest expense (2) (2) —
Net realized gains on investments:
QSI 56 63 (7)
Corporate 32 17 15
Other-than-temporary losses on marketable securities (12) (100) 88
Other-than-temporary losses on other investments — (28) 28
Gains (losses) on derivative instruments 7 (3) 10
Equity in losses of investees (72) (113) 41
$184 $ (8) $192
*As adjusted for discontinued operations.
The increase in interest income on cash and marketable securities held by corporate and other segments was a result of higher average cash
and marketable securities balances, partially offset by the impact of lower interest rates earned on these balances, and $6 million in interest
income recorded as a result of a refund from the United States Internal Revenue Service. The decrease in QSI interest income was primarily
the result of the prepayment on the Pegaso debt facility in the first quarter of fiscal 2004. The other-than-temporary losses on marketable securi-
ties during fiscal 2003 primarily related to an $81 million impairment of our investment in a wireless operator in South Korea and a $16 million
impairment of our investment in a provider of semiconductor packaging, test and distribution services. The other-than-temporarylosses on
other investments during fiscal 2003 related to the impairment of our investments in two development stage CDMA wireless operators. Equity
in losses of investees decreased primarily due to a decrease in losses incurred by Inquam, of which our share was $59 million for fiscal 2004
as compared to $99 million for fiscal 2003.
Income Tax Expense. Income tax expense from continuing operations was $588 million for fiscal 2004, compared to $536 million for fiscal
2003. The annual effective tax rate for continuing operations was approximately 25% for fiscal 2004, compared to 34% for fiscal 2003. The
annual effective tax rate for continuing operations for fiscal 2004 was lower than the 2003 effective tax rate for continuing operations primarily
due to an increase in foreign earnings taxed at less than the United States federal tax rate, an increase in tax benefits recorded arising from
the forecast of our ability to use capital loss carryforwards and the reduction of QTL earnings, which are taxed at a rate that is lower than our
effective tax rate, as a percentage of total earnings due to the change in the timing of recognizing QTL royalties. Foreign earnings taxed at less
than the United States federal rate are higher in fiscal 2004 primarily due to the adjustment of an intercompany royalty agreement and an
increase in foreign earnings. The annual effective tax rate for continuing operations for fiscal 2004 is 10% lower than the United States federal
statutory rate due primarily to a benefit of approximately 14% related to foreign earnings taxed at less than the United States federal rate, research
and development tax credits and the forecast of our increased ability to use capital loss carryforwards, partially offset by state taxes of 4%.
As of September 30, 2004, we had a valuation allowance of $139 million on previously incurred capital losses due to uncertainty as to our
ability to generate sufficient capital gains to utilize all capital losses. We will continue to assess the realizability of capital losses. The amount of
the valuation allowance on capital losses may be adjusted in the futureas our ability to utilize capital losses changes. A change in the valuation
allowance may impact the provision for income taxes in the period the change occurs. We are currently considering actions that may result in
our ability to utilize some of the capital loss currently reserved, which may result in a reduction of our valuation allowance and income tax
expense in subsequent periods.
Fiscal 2003 Compared to Fiscal 2002
Revenues. Total revenues for fiscal 2003 were $3,847 million, compared to $2,915 million for fiscal 2002. Revenues from Samsung, LG
Electronics, Motorola and Kyocera, customers of our QCT, QTL and other nonreportable segments, comprised an aggregate of 17%, 13%,
13% and 9% of total consolidated revenues, respectively,in fiscal 2003, compared to 16%, 12%, 8% and 14% of total consolidated revenues,
respectively, in fiscal 2002. The percentages for Kyocera included 1% and 4% in fiscal 2003 and 2002, respectively, related to services provided
to Kyocera by employees from our terrestrial-based CDMA wireless consumer phone business which was sold to Kyocera in February 2000.
Revenues from sales of equipment and services for fiscal 2003 were $2,862 million, compared to $2,080 million for fiscal 2002. Revenues from sales
of integrated circuits increased by $828 million, primarily due to an increase in unit shipments of MSM and accompanying RF integrated circuits.
Revenues from licensing and royalty fees for fiscal 2003 were $985 million, compared to $835 million for fiscal 2002. The increase resulted
from higher QTL segment royalties, resulting from an increase in phone sales by our licensees.