Edgar Filing: QUALCOMM INC/DE

QCOM 3.25.12 10Q

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 March 25, 2012



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 April 16, 2012, was as follows:



Class		Number of Shares
Common Stock, $0.0001 per share par value		1,714,274,812

INDEX



		Page
PART I. FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41
Item 4.	Controls and Procedures	42

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3.	Defaults Upon Senior Securities	43
Item 4.	Mine Safety Disclosures	43
Item 5.	Other Information	43
Item 6.	Exhibits	43

SIGNATURES		45

PART I. FINANCIAL INFORMATION


ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

QUALCOMM Incorporated

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except per share data)

(Unaudited)



	March 25, 2012			September 25, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	5,998		$	5,462
Marketable securities	9,081			6,190
Accounts receivable, net	1,189			993
Inventories	781			765
Deferred tax assets	485			537
Other current assets	327			346
Total current assets	17,861			14,293
Marketable securities	11,489			9,261
Deferred tax assets	1,318			1,703
Assets held for sale	—			746
Property, plant and equipment, net	2,760			2,414
Goodwill	3,607			3,432
Other intangible assets, net	3,002			3,099
Other assets	1,494			1,474
Total assets	$	41,531		$	36,422
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	1,250		$	969
Payroll and other benefits related liabilities	572			644
Unearned revenues	558			610
Loans payable	1,039			994
Income taxes payable	179			18
Other current liabilities	1,580			2,054
Total current liabilities	5,178			5,289
Unearned revenues	3,894			3,541
Other liabilities	589			620
Total liabilities	9,661			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; 1,711 and 1,681 shares issued
and outstanding, respectively	—			—
Paid-in capital	11,983			10,394
Retained earnings	19,090			16,204
Accumulated other comprehensive income	809			353
Total Qualcomm stockholders’ equity	31,882			26,951
Noncontrolling interests	(12		)	21
Total stockholders’ equity	31,870			26,972
Total liabilities and stockholders’ equity	$	41,531		$	36,422

See Accompanying Notes to Condensed Consolidated Financial Statements.

QUALCOMM Incorporated

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share data)

(Unaudited)



	Three Months Ended						Six Months Ended
	March 25, 2012			March 27, 2011*			March 25, 2012			March 27, 2011*
Revenues:
Equipment and services	$	3,137		$	2,039		$	6,305		$	4,252
Licensing	1,806			1,831			3,320			2,965
Total revenues	4,943			3,870			9,625			7,217

Operating expenses:
Cost of equipment and services revenues	1,783			1,059			3,537			2,103
Research and development	954			738			1,827			1,386
Selling, general and administrative	595			529			1,098			938
Other	97			114			97			114
Total operating expenses	3,429			2,440			6,559			4,541

Operating income	1,514			1,430			3,066			2,676

Investment income, net (Note 3)	220			189			389			412
Income from continuing operations before income taxes	1,734			1,619			3,455			3,088
Income tax expense	(296		)	(355		)	(617		)	(573		)
Income from continuing operations	1,438			1,264			2,838			2,515
Discontinued operations, net of income taxes (Note 8)	761			(269		)	756			(351		)
Net income	2,199			995			3,594			2,164
Net loss attributable to noncontrolling interests	31			4			37			4
Net income attributable to Qualcomm	$	2,230		$	999		$	3,631		$	2,168

Basic earnings (loss) per share attributable to Qualcomm:
Continuing operations	$	0.86		$	0.76		$	1.70		$	1.53
Discontinued operations	0.45			(0.16		)	0.45			(0.21		)
Net income	$	1.31		$	0.60		$	2.15		$	1.32
Diluted earnings (loss) per share attributable to Qualcomm:
Continuing operations	$	0.84		$	0.75		$	1.66		$	1.51
Discontinued operations	0.44			(0.16		)	0.44			(0.21		)
Net income	$	1.28		$	0.59		$	2.10		$	1.30
Shares used in per share calculations:
Basic	1,698			1,654			1,691			1,639
Diluted	1,743			1,689			1,732			1,669

Dividends per share announced	$	0.215		$	0.190		$	0.430		$	0.380

*As adjusted for discontinued operations (Note 8)

See Accompanying Notes to Condensed Consolidated Financial Statements.

QUALCOMM Incorporated

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)



	Six Months Ended
	March 25, 2012			March 27, 2011
Operating Activities:
Net income	$	3,594		$	2,164
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	419			635
Gain on sale of spectrum	(1,179		)	—
Goodwill impairment	16			114
Revenues related to non-monetary exchanges	(61		)	(62		)
Income tax provision in excess of (less than) income tax payments	500			(1,334		)
Non-cash portion of share-based compensation expense	488			375
Incremental tax benefit from stock options exercised	(98		)	(132		)
Net realized gains on marketable securities and other investments	(144		)	(231		)
Gains on derivative instruments	(74		)	—
Other items, net	46			35
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable, net	(195		)	23
Inventories	(21		)	(81		)
Other assets	(10		)	(19		)
Trade accounts payable	287			(145		)
Payroll, benefits and other liabilities	(261		)	269
Unearned revenues	360			205
Net cash provided by operating activities	3,667			1,816
Investing Activities:
Capital expenditures	(635		)	(181		)
Purchases of available-for-sale securities	(7,036		)	(5,845		)
Proceeds from sale of available-for-sale securities	3,543			5,467
Purchases of trading securities	(1,639		)	—
Proceeds from sale of trading securities	651			—
Proceeds from sale of spectrum	1,925			—
Acquisitions and other investments, net of cash acquired	(329		)	(89		)
Other items, net	(53		)	23
Net cash used by investing activities	(3,573		)	(625		)
Financing Activities:
Borrowing under loans payable	232			1,260
Repayment of loans payable	(151		)	(1,260		)
Proceeds from issuance of common stock	1,135			2,024
Incremental tax benefit from stock options exercised	98			132
Repurchase and retirement of common stock	(99		)	—
Dividends paid	(729		)	(625		)
Other items, net	(39		)	88
Net cash provided by financing activities	447			1,619
Effect of exchange rate changes on cash	(5		)	10
Net increase in cash and cash equivalents	536			2,820
Cash and cash equivalents at beginning of period	5,462			3,547
Cash and cash equivalents at end of period	$	5,998		$	6,367

See Accompanying Notes to Condensed Consolidated Financial Statements.

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 six-month periods ended both March 25, 2012 and March 27, 2011 included 13 weeks and 26 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. Certain prior period amounts have been adjusted to reflect the presentation of the FLO TV business as discontinued operations (Note 8).

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 six months ended March 25, 2012 were 44,100,000 and 40,576,000, respectively. The incremental dilutive common share equivalents, calculated using the treasury stock method, for the three months and six months ended March 27, 2011 were 34,955,000 and 30,231,000, respectively.

Employee stock options to purchase approximately 504,000 and 2,488,000 shares of common stock during the three months and six months ended March 25, 2012, respectively, and employee stock options to purchase approximately 5,881,000 and 33,336,000 shares of common stock during the three months and six months ended March 27, 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 six months ended March 25, 2012 to purchase 11,800,000 shares of common stock, respectively, 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 (Note 5). In addition, 733,000 and 704,000 shares of other common stock equivalents outstanding during the three months and six months ended March 25, 2012, respectively, and 78,000 and 60,000 shares of other common stock equivalents outstanding during the three months and six months ended March 27, 2011, respectively, were not included in the computation of diluted earnings per common share because either the effect would be anti-dilutive or certain performance conditions were not satisfied at the end of the period.

Comprehensive Income. Total comprehensive income attributable to Qualcomm consisted of the following (in millions):

QUALCOMM Incorporated

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	Three Months Ended						Six Months Ended
	March 25, 2012			March 27, 2011			March 25, 2012			March 27, 2011
Net income	$	2,199		$	995		$	3,594		$	2,164
Other comprehensive income:
Foreign currency translation	16			8			(12		)	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	3			(6		)	4			(10		)
Net unrealized gains on other available-for-sale securities and derivative instruments, net of income taxes	320			90			495			221
Reclassification of net realized gains on available-for-sale securities and derivative instruments included in net income, net of income taxes	(40		)	(49		)	(57		)	(125		)
Reclassification of other-than-temporary losses on available-for-sale securities included in net income, net of income taxes	16			2			25			6
Total other comprehensive income	315			45			455			105
Total comprehensive income	2,514			1,040			4,049			2,269
Comprehensive loss attributable to noncontrolling interests	30			4			38			4
Comprehensive income attributable to Qualcomm	$	2,544		$	1,044		$	4,087		$	2,273

Components of accumulated other comprehensive income in Qualcomm stockholders’ equity consisted of the following (in millions):



	March 25, 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	$	29		$	27
Net unrealized gains on other available-for-sale securities, net of income taxes	866			427
Net unrealized gains (losses) on derivative instruments, net of income taxes	11			(15		)
Foreign currency translation	(97		)	(86		)
	$	809		$	353

At March 25, 2012 and September 25, 2011, accumulated other comprehensive income included $10 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):

QUALCOMM Incorporated

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	Three Months Ended						Six Months Ended
	March 25, 2012			March 27, 2011*			March 25, 2012			March 27, 2011*
Cost of equipment and services revenues	$	17		$	17		$	36		$	30
Research and development	126			97			253			182
Selling, general and administrative	97			85			198			155
Continuing operations	240			199			487			367
Related income tax benefit	(56		)	(55		)	(109		)	(109		)
Continuing operations, net of income taxes	184			144			378			258
Discontinued operations	—			3			—			6
Related income tax benefit	—			(1		)	—			(2		)
Discontinued operations, net of income taxes	—			2			—			4
	$	184		$	146		$	378		$	262

*As adjusted for discontinued operations (Note 8)

The Company recorded $82 million and $38 million in share-based compensation expense during the six months ended March 25, 2012 and March 27, 2011, respectively, related to share-based awards granted during those periods. In addition, for the six months ended March 25, 2012 and March 27, 2011, $98 million and $132 million, respectively, were reclassified to reduce net cash provided by operating activities with an offsetting increase in net cash provided by financing activities to reflect the incremental tax benefit from stock options exercised in those periods.

At March 25, 2012, total unrecognized compensation costs related to non-vested stock options and restricted stock units granted prior to that date were $441 million and $1.0 billion, respectively, which are expected to be recognized over weighted-average periods of 1.6 years and 2.1 years, respectively. Net share-based awards, after forfeitures and cancellations, granted during the six months ended March 25, 2012 and March 27, 2011 represented 0.5% and 0.3%, respectively, of outstanding shares as of the beginning of each fiscal period. Total share-based awards granted during the six months ended March 25, 2012 and March 27, 2011 represented 0.6% 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.



	March 25, 2012		September 25, 2011
	(In millions)
Trade, net of allowances for doubtful accounts of $2 and $2, respectively	$	1,153	$	951
Long-term contracts	30		32
Other	6		10
	$	1,189	$	993

Inventories.



	March 25, 2012		September 25, 2011
	(In millions)
Raw materials	$	19	$	15
Work-in-process	365		384
Finished goods	397		366
	$	781	$	765

QUALCOMM Incorporated

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Other Current Liabilities.



	March 25, 2012		September 25, 2011
	(In millions)
Customer incentives and other customer-related liabilities	$	1,111	$	1,180
Current portion of payable to Broadcom (Note 6)	170		170
Payable for unsettled securities trades	39		298
Other	260		406
	$	1,580	$	2,054

Note 3 — Investment Income, Net



	Three Months Ended						Six Months Ended
	March 25, 2012			March 27, 2011*			March 25, 2012			March 27, 2011*
	(In millions)
Interest and dividend income	$	146		$	126		$	275		$	256
Interest expense	(29		)	(30		)	(57		)	(54		)
Net realized gains on marketable securities	90			102			127			230
Net realized gains on other investments	11			—			17			1
Impairment losses on marketable securities	(23		)	(4		)	(37		)	(11		)
Impairment losses on other investments	(1		)	(1		)	(6		)	(5		)
Gains on derivative instruments	28			—			74			—
Equity in losses of investees	(2		)	(4		)	(4		)	(5		)
	$	220		$	189		$	389		$	412

*As adjusted for discontinued operations (Note 8)

Note 4 — Income Taxes

The Company estimates its annual effective income tax rate for continuing operations to be approximately 18% for fiscal 2012, compared to the 20% effective income tax rate for fiscal 2011. The United States federal research and development tax credit expired on December 31, 2011. Therefore, the annual effective rate for fiscal 2012 only reflects the federal research and development credit generated through December 31, 2011. The annual effective rate for fiscal 2012 also reflects a lower state tax rate as a result of California tax legislation previously enacted.

The estimated annual effective tax rate for continuing operations for fiscal 2012 of 18% is less than the United States federal statutory rate primarily due to benefits of approximately 17% 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.

During 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 this period, 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 in fiscal 2012 would be higher by approximately $265 million.

Note 5 — Stockholders’ Equity

Changes in stockholders’ equity for the six months ended March 25, 2012 were as follows (in millions):

QUALCOMM Incorporated

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	Qualcomm Stockholders’ Equity			Noncontrolling Interests			Total Stockholders’ Equity
Balance at September 25, 2011	$	26,951		$	21		$	26,972
Net income (loss) ⁽¹⁾	3,631			(37		)	3,594
Other comprehensive income (loss)	456			(1		)	455
Common stock issued under employee benefit plans and the related tax benefits, net of shares withheld for tax	1,189			—			1,189
Share-based compensation	499			—			499
Dividends	(745		)	—			(745		)
Stock repurchases	(99		)	—			(99		)
Other	—			5			5
Balance at March 25, 2012	$	31,882		$	(12	)	$	31,870

⁽¹⁾ Discontinued operations, net of income taxes, (Note 8) was attributable to Qualcomm.

Stock Repurchase Program. During the six months ended March 25, 2012, the Company repurchased and retired 2,046,000 shares of the Company’s common stock for $99 million, before commissions. The Company did not repurchase any shares during the six months ended March 27, 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 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 March 25, 2012, approximately $3.5 billion remained available for repurchase under the Company’s stock repurchase program, net of put options outstanding.

In connection with the Company’s stock repurchase program, the Company had three outstanding put options at March 25, 2012, which gave holders the right to sell 11,800,000 shares of the Company’s common stock to the Company for approximately $511 million (net of the $75 million in put option premiums received). The fair values of the put options of $3 million at March 25, 2012 were recorded in other current liabilities. During the three months and six months ended March 25, 2012, the Company recognized gains of $32 million and $77 million, respectively, in net investment income due to a decrease in the fair value of the put options. No put options were outstanding during the three months and six months ended March 27, 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 April 3, 2012, the Company announced a cash dividend of $0.25 per share on the Company’s common stock, payable on June 20, 2012 to stockholders of record as of June 1, 2012. During the six months ended March 25, 2012 and March 27, 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
	$	0.430	$	745	$	0.380	$	633

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

QUALCOMM Incorporated

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 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. A claim construction hearing was held on October 4, 2011, and trial was scheduled for April 2, 2012. On March 24, 2012, Qualcomm Atheros and CSIRO entered into a binding Memorandum of Understanding (MOU) pursuant to which Qualcomm Atheros and CSIRO will dismiss without prejudice all claims against each other, and Qualcomm Atheros and CSIRO will enter into a license agreement for the ’069 Patent and corresponding patents. The MOU also provides that Qualcomm Atheros pay an amount to CSIRO that was not material to the Company’s financial statements. Upon the execution of the license agreement, the parties will dismiss with prejudice all claims against each other.

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. Trial is scheduled for August 4, 2014.

India BWA Spectrum: In connection with the BWA spectrum won in India in June 2010, the Company recorded a payment in noncurrent other assets, which was $959 million and $994 million at March 25, 2012 and September 25, 2011, respectively. In addition, the Company created four wholly-owned subsidiaries in India. On August 9, 2010, each subsidiary filed an application to obtain a license to operate a wireless network on this spectrum in its respective region. Thereafter, two Indian companies each acquired 13% of each subsidiary. On September 21, 2011, the Company received a letter from the Government of India’s Department of Telecommunications (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 rather than four. 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 October 10, 2011, the DoT offered to issue a license that includes the four regions for which the Company won spectrum to one of the Company’s subsidiaries. On October 18, 2011, the Company agreed to the DoT’s offer and stated that, upon issuance of the license, the Company’s three other subsidiaries would merge into the subsidiary that had been granted the license. However, at a December 2, 2011 hearing before the TDSAT, the DoT stated that it had served a provisional assessment on one of the subsidiaries’ Indian shareholders, Tulip Telecom Ltd. (Tulip), for unpaid dues, including interest and penalties, and that the DoT could not issue a license to the Company’s subsidiary until the claimed dues were paid. On January 22, 2012, the Company filed an application requesting that the TDSAT order the DoT to issue the license. In the application, the Company argued that the provisional assessment was not a legal basis for the DoT to delay issuing the license. On February 10, 2012, the DoT filed its reply to the Company’s application reiterating that the DoT could not issue a license to the Company’s subsidiary until all outstanding dues were paid, together with an additional provisional assessment for

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prior years, increasing the DoT’s total claim for dues owed by Tulip to approximately $81 million. On February 22, 2012, the Company offered to have the Company’s subsidiary pay the dues allegedly owed by Tulip, without prejudice to the right of Tulip to contest the claim, and provided that any amount ultimately found not to be due would be refunded by the DoT. On February 24, 2012, the TDSAT ordered that (i) the Company’s subsidiary pay the dues allegedly owed by 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 spectrum; and (iv) the DoT consider and dispose of the spectrum application as expeditiously as possible. Accordingly, on March 7, 2012, the Company’s subsidiary paid $81 million to the DoT, and on March 15, 2012, the DoT issued a license to the subsidiary. On March 21, 2012, the Company’s subsidiary filed an application for assignment of the spectrum, which application remains pending before the DoT. 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.

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.

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 12 different dates, with an additional hearing day scheduled on May 11, 2012 and additional hearing days 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. 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 has begun a preliminary investigation regarding the Company’s compliance with the Foreign Corrupt Practices Act (FCPA), a topic about which the SEC is also inquiring. The Company believes that it is in compliance with the requirements of the FCPA and will continue to cooperate with both agencies.

Other: The Company has been named, along with many other manufacturers of wireless phones, wireless operators

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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 believes the claims made by other parties in the foregoing matters are without merit and will vigorously defend the actions. Other than the amount payable to CSIRO, the Company has not recorded any accrual at March 25, 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 $675 million was paid through March 25, 2012, and the remainder will be paid ratably through April 2013. At March 25, 2012, the carrying value of the liability was $212 million, which also approximated the fair value of the contractual liability net of imputed interest.

Loans Payable Related to India BWA Spectrum. In connection with the India BWA spectrum won in India in June 2010, certain of the Company’s subsidiaries in India entered into loan agreements with multiple lenders that are denominated in Indian rupees. In connection with the payment of the additional $81 million to the DoT described above, the Company’s subsidiary entered into an additional loan agreement denominated in Indian rupees. The loans bear interest at an annual rate based on the highest rate among the bank lenders, which is reset quarterly, plus 0.25% (10.75% at March 25, 2012) with interest payments due monthly. The loans can be prepaid without penalty on certain dates and are guaranteed by QUALCOMM Incorporated and one of its subsidiaries. In December 2011, the lender that could demand prepayment of its portion of the loans exercised its right requiring the Company to prepay the amount outstanding on February 28, 2012, which was $151 million. The Company refinanced this amount with new loans. 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. As a result of the DoT’s actions against the Company, the bank lenders agreed (by waivers effective until at least June 1, 2012) that any default would be deemed cured if, among other things, the relevant subsidiaries continue to pursue a merger into the subsidiary that was granted the license. At March 25, 2012, the aggregate carrying value of the loans was $1.0 billion, 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 March 25, 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

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Company has not recorded any accrual for contingent liabilities at March 25, 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 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 March 25, 2012 for the remainder of fiscal 2012 and for each of the subsequent four years from fiscal 2013 through 2016 were approximately $2.0 billion, $77 million, $39 million, $36 million and $25 million, respectively, and $8 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 $5 million, respectively.

Leases. The future minimum lease payments for all capital leases and operating leases at March 25, 2012 were as follows (in millions):



	Capital Leases		Operating Leases		Total
Remainder of fiscal 2012	$	5	$	81	$	86
2013	10		105		115
2014	10		85		95
2015	11		35		46
2016	11		22		33
Thereafter	270		144		414
Total minimum lease payments	$	317	$	472	$	789
Deduct: Amounts representing interest	179
Present value of minimum lease payments	138
Deduct: Current portion of capital lease obligations	1
Long-term portion of capital lease obligations	$	137

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 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 March 25, 2012, the Company had $119 million of site capital lease assets (which are included in buildings and improvements in property, plant and equipment) and $137 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 cdmaOne, CDMA2000, WCDMA, CDMA TDD (including TD-SCDMA), GSM/GPRS/EDGE and/or OFDMA standards, and collects fixed license fees and royalties in partial consideration for such licenses;

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•	Qualcomm Wireless & Internet (QWI) — comprised of:


•	Qualcomm Internet Services (QIS) — provides content enablement services for the wireless industry and push-to-talk and other products and services for wireless network operators;


•	Qualcomm Government Technologies (QGOV) — provides development, hardware, analytical expertise and services to United States government agencies involving wireless communications technologies;


•	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


•	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:
March 25, 2012
Revenues	$	3,059	$	1,723	$	159		$	—		$	2		$	4,943
EBT	599		1,540		(10		)	(99		)	(296		)	1,734
March 27, 2011
Revenues	$	1,962	$	1,746	$	157		$	—		$	5		$	3,870
EBT	417		1,575		(135		)	(45		)	(193		)	1,619

For the six months ended:
March 25, 2012
Revenues	$	6,143	$	3,162	$	311		$	—		$	9		$	9,625
EBT	1,338		2,808		(9		)	(133		)	(549		)	3,455
March 27, 2011
Revenues	$	4,078	$	2,803	$	329		$	—		$	7		$	7,217
EBT	1,057		2,467		(135		)	(67		)	(234		)	3,088

*As adjusted for discontinued operations (Note 8)

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



	Three Months Ended						Six Months Ended
	March 25, 2012			March 27, 2011*			March 25, 2012			March 27, 2011*
Revenues
Other nonreportable segments	$	3		$	5		$	11		$	9
Elimination of intersegment revenues	(1		)	—			(2		)	(2		)
	$	2		$	5		$	9		$	7
EBT
Unallocated cost of equipment and services revenues	$	(68	)	$	(17	)	$	(138	)	$	(30	)
Unallocated research and development expenses	(176		)	(155		)	(339		)	(272		)
Unallocated selling, general and administrative expenses	(168		)	(161		)	(283		)	(246		)
Unallocated investment income, net	228			216			418			461
Other nonreportable segments	(112		)	(78		)	(207		)	(147		)
Intersegment eliminations	—			2			—			—
	$	(296	)	$	(193	)	$	(549	)	$	(234	)

*As adjusted for discontinued operations (Note 8)

QCT revenues for the three months and six months ended both March 25, 2012 and March 27, 2011 included $1 million and $2 million of intersegment revenues, respectively. All other revenues for all periods presented were from external customers.

Reconciling items for the three months and six months ended March 25, 2012 included $51 million and $102 million, respectively, of unallocated cost of equipment and services revenues and $6 million and $15 million of unallocated selling, general and administrative expenses, respectively, related to the amortization of intangible assets resulting from acquisitions. Other nonreportable segments’ losses before taxes during the three months and six months ended March 25, 2012 and March 27, 2011 were primarily attributable to the Company’s QMT division, a nonreportable segment developing display technology for mobile devices and other applications.

Segment assets are comprised of accounts receivable and inventories for all reportable segments other than QSI. QSI segment assets include certain marketable securities, notes receivable, spectrum licenses, other investments and all assets of QSI’s consolidated subsidiaries. QSI segment assets related to the discontinued FLO TV business totaled $135 million and $913 million at March 25, 2012 and September 25, 2011, respectively (Note 8). Reconciling items for total assets included $1.4 billion and $806 million at March 25, 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 continued 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):



	March 25, 2012		September 25, 2011
QCT	$	1,784	$	1,569
QTL	40		36
QWI	131		136
QSI	1,619		2,386
Reconciling items	37,957		32,295
Total consolidated assets	$	41,531	$	36,422

Note 8 — Discontinued Operations

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(Unaudited)

On December 27, 2011, the Company 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 three months ended March 25, 2012. Since the shut down of the FLO TV business and network on March 27, 2011, the Company has been working to sell the remaining assets and exit contracts. All remaining assets have been considered disposed of since March 27, 2011. 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						Six Months Ended
	March 25, 2012			March 27, 2011			March 25, 2012			March 27, 2011
Revenues	$	—		$	4		$	—		$	4
Income (loss) from discontinued operations	$	1,175		$	(361	)	$	1,167		$	(502	)
Income tax (expense) benefit	(414		)	92			(411		)	151
Discontinued operations, net of income taxes	$	761		$	(269	)	$	756		$	(351	)

At March 25, 2012, total assets and liabilities of the discontinued operations in the condensed consolidated balance sheet were $135 million and $209 million, respectively, consisting primarily of capital lease assets and liabilities of $119 million and $137 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).

Restructuring activities under the Company’s plan related to discontinued operations are expected to be substantially complete by the end of fiscal 2012 as the Company continues to negotiate the exit of certain contracts and removes certain of its equipment from the network sites. The restructuring liability, which is reported as a component of other liabilities, consisted of contract termination costs of $37 million and other costs of $2 million at March 25, 2012. During the six months ended March 25, 2012, the Company made payments on amounts previously accrued of $4 million.

Note 9 — Acquisitions

During the six months ended March 25, 2012, the Company acquired six businesses for total cash consideration of $302 million. Technology-based intangible assets recognized in the amount of $35 million are being amortized on a straight-line basis over a weighted-average useful life of six years. The Company recorded $46 million related to two in-process research and development (IPR&D) projects, which are expected to be completed within the next two years. 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 be 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: $48 million to QCT, $22 million to QTL and $130 million to a non-reportable 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

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1 that are observable for the instrument.


•	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 March 25, 2012 (in millions):



	Level 1		Level 2		Level 3		Total
Assets
Cash equivalents	$	1,293	$	3,531	$	—	$	4,824
Marketable securities
U.S. Treasury securities and government-related securities	660		859		—		1,519
Corporate bonds and notes	—		7,847		—		7,847
Mortgage- and asset-backed securities	—		1,301		55		1,356
Auction rate securities	—		—		120		120
Non-investment-grade debt securities	—		4,328		60		4,388
Common and preferred stock	1,471		743		—		2,214
Equity mutual and exchange-traded funds	1,296		—		—		1,296
Debt mutual funds	1,332		498		—		1,830
Total marketable securities	4,759		15,576		235		20,570
Derivative instruments	—		34		—		34
Other investments	189		—		—		189
Total assets measured at fair value	$	6,241	$	19,141	$	235	$	25,617
Liabilities
Derivative instruments	$	3	$	12	$	—	$	15
Other liabilities	189		—		5		194
Total liabilities measured at fair value	$	192	$	12	$	5	$	209

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 mutual funds is reported as 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

QUALCOMM Incorporated

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

mortgage- and asset-backed securities, principally those rated below AAA, may require the use of significant 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 are 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 six months ended March 25, 2012 or March 27, 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):



	Six Months Ended March 25, 2012									Six Months Ended March 27, 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		$	—
Total realized and unrealized gains or losses:
Included in investment income, net	—			1			(2		)	—			1			—
Included in other comprehensive income	—			2			—			2			—			—
Issuances	—			—			—			—			—			8
Purchases	—			88			—			—			—			—
Settlements	(4		)	(8		)	—			(3		)	(3		)	—
Transfers into Level 3	—			5			—			—			1			—
Ending balance of Level 3	$	120		$	115		$	5		$	125		$	17		$	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 six months ended March 25, 2012 and March 27, 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

QUALCOMM Incorporated

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 equipment and intangible assets that are written down to fair value when they are held for sale or determined to be impaired. During the six months ended March 25, 2012 and March 27, 2011, goodwill related to the Company’s Firethorn division was written down to its implied fair values of $23 million and $40 million, respectively, resulting in impairment charges of $16 million and $114 million, respectively. The impairment charges were recorded in other operating expenses. The implied fair values were based on significant unobservable inputs, and as a result, the fair value measurements were classified as Level 3. During the six months ended March 25, 2012 and March 27, 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
	March 25, 2012		September 25, 2011		March 25, 2012		September 25, 2011
Trading:
U.S. Treasury securities and government-related securities	$	233	$	—	$	229	$	—
Corporate bonds and notes	269		—		117		—
Mortgage- and asset-backed securities	—		—		65		—
Non-investment-grade debt securities	—		—		91		—
Total trading	502		—		502		—
Available-for-sale:
U.S. Treasury securities and government-related securities	1,045		516		12		6
Corporate bonds and notes	4,867		3,665		2,594		2,353
Mortgage- and asset-backed securities	1,117		587		174		91
Auction rate securities	—		—		120		124
Non-investment-grade debt securities	48		19		4,249		3,653
Common and preferred stock	170		76		2,044		1,713
Equity mutual and exchange-traded funds	—		—		1,296		845
Debt mutual funds	1,332		1,327		—		—
Total available-for-sale	8,579		6,190		10,489		8,785
Fair value option:
Debt mutual fund	—		—		498		476
Total marketable securities	$	9,081	$	6,190	$	11,489	$	9,261

The Company holds an investment in a debt mutual 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 mutual fund has no single maturity date. At March 25, 2012, the Company had an effective ownership interest in the debt mutual fund of 21%. During the three months and six months ended March 25, 2012, increases in fair value associated with this investment of $17 million and $22 million, respectively, were recognized in net investment income. During the three months and six months ended March 27, 2011, increases in fair value associated with this investment of $13 million and $18 million, respectively, were recognized in net investment income.

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 March 25, 2012 were $12 million and $10 million for the three months and six months ended March 25, 2012, respectively. The Company did not hold any securities classified as trading during the three months and six months ended March 27, 2011.

QUALCOMM Incorporated

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

At March 25, 2012, the contractual maturities of available-for-sale debt securities were as follows (in millions):



Years to Maturity
Less Than One Year		One to Five Years		Five to Ten Years		Greater Than Ten Years		No Single Maturity Date		Total
$	1,397	$	6,334	$	2,735	$	1,143	$	3,949	$	15,558

Securities with no single maturity date included debt mutual funds, non-investment-grade debt securities, 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
March 25, 2012	$	64	$	(4	)	$	60
March 27, 2011	95		(6		)	89

For the six months ended
March 25, 2012	$	100	$	(6	)	$	94
March 27, 2011	223		(11		)	212

Available-for-sale securities were comprised as follows (in millions):



	Cost		Unrealized Gains		Unrealized Losses			Fair Value
March 25, 2012
Equity securities	$	2,849	$	673	$	(12	)	$	3,510
Debt securities	15,170		432		(44		)	15,558
	$	18,019	$	1,105	$	(56	)	$	19,068
September 25, 2011
Equity securities	$	2,426	$	278	$	(70	)	$	2,634
Debt securities	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):

QUALCOMM Incorporated

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	March 25, 2012
	Less than 12 months					More than 12 months
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. Treasury securities and government-related securities	$	523	$	(1	)	$	4	$	—
Corporate bonds and notes	1,770		(9		)	21		(2		)
Mortgage- and asset-backed securities	596		(2		)	9		—
Auction rate securities	3		—			117		(2		)
Non-investment-grade debt securities	761		(20		)	92		(7		)
Common and preferred stock	208		(7		)	4		—
Equity mutual and exchange-traded funds	159		(5		)	—		—
Debt mutual funds	318		(1		)	1		—
	$	4,338	$	(45	)	$	248	$	(11	)



	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	)	$	41	$	—
Auction rate securities	3		—			121		(2		)
Non-investment-grade debt securities	1,867		(86		)	19		(3		)
Common and preferred stock	750		(70		)	4		—
	$	4,482	$	(197	)	$	185	$	(5	)

At March 25, 2012, the Company concluded that the unrealized losses on its available-for-sale securities were temporary. Further, for common and preferred stock with unrealized losses, the Company has the ability and the intent to hold such securities until they recover, which is expected to be within a reasonable period of time. For debt securities with unrealized losses, the Company does not have the intent to sell, nor is it more likely than not that the Company will be required to sell, such securities before recovery or maturity.

The following table shows the activity for the credit loss portion of other-than-temporary impairments on debt securities held by the Company (in millions):



	Three Months Ended						Six Months Ended
	March 25, 2012			March 27, 2011			March 25, 2012			March 27, 2011
Beginning balance of credit losses	$	46		$	89		$	46		$	109
Reductions in credit losses related to securities the Company intends to sell	—			(30		)	(1		)	(40		)
Additional credit losses recognized on securities previously impaired	2			—			3			—
Credit losses recognized on securities previously not impaired	2			—			2			—
Reductions in credit losses related to securities sold	(4		)	(5		)	(4		)	(12		)
Accretion of credit losses due to an increase in cash flows expected to be collected	—			(2		)	—			(5		)
Ending balance of credit losses	$	46		$	52		$	46		$	52

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This information should be read in conjunction with the condensed consolidated financial statements and the notes thereto included in Item 1 of Part I of this Quarterly Report and the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended September 25, 2011 contained in our 2011 Annual Report on Form 10-K.

This Quarterly Report (including, but not limited to, the following section regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations) contains forward-looking statements, including, but not limited to, statements regarding our business, financial condition, results of operations and prospects. Additionally, statements concerning future matters, such as the development of new products, enhancements or technologies, industry or regional trends, consumer demand, sales or price levels, challenges to our business model and other statements regarding matters that are not historical, are forward-looking statements. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Quarterly Report.

Although forward-looking statements in this Quarterly Report reflect our good faith judgment, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include without limitation those discussed under the heading “Risk Factors” below, as well as those discussed elsewhere in this Quarterly Report. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Quarterly Report. Readers are urged to carefully review and consider the various disclosures made in this Quarterly Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

Overview

Recent Developments

Revenues for the second quarter of fiscal 2012 were $4.9 billion, with net income of $2.2 billion, which were impacted by the following key items:


•	We shipped 152 million MSM integrated circuits for CDMA- and OFDMA-based wireless devices, an increase of 29% compared to 118 million MSM integrated circuits in the year ago quarter. ⁽¹⁾


•	Total reported device sales were approximately $51.7 billion, an increase of approximately 29% compared to approximately $40.0 billion in the year ago quarter. ⁽²⁾


•	On December 27, 2011, we completed the sale of substantially all of our 700 MHz spectrum for $1.9 billion, and as a result, we recognized a gain in discontinued operations of $1.2 billion during the second quarter of fiscal 2012.

Against this backdrop, the following recent developments occurred during the second quarter of fiscal 2012 with respect to key elements of our business or our industry:


•	Worldwide wireless subscriptions grew by approximately 3% to reach approximately 6.2 billion. ⁽³⁾


•	Worldwide 3G connections (all CDMA-based) grew to approximately 1.7 billion, approximately 27% of total wireless subscriptions, including approximately 555 million CDMA2000 1X/1xEV-DO subscriptions and approximately 1.1 billion WCDMA/HSPA/TD-SCDMA subscriptions.⁽³⁾


(1)	Some customers built devices that incorporated two MSM integrated circuits. In such cases, which represent approximately 1% of our gross volume, we count only one MSM integrated circuit in reporting the MSM integrated circuit shipments.

(2)

Total reported device sales is the sum of all reported sales in U.S. dollars (as reported to us by our licensees) of all licensed CDMA-based, OFDMA-based and multimode CDMA/OFDMA subscriber devices (including handsets, modules, modem cards and other subscriber devices) by our licensees during a particular period. Not all licensees report sales the same way (e.g., some licensees report sales net of permitted deductions, such as transportation, insurance and packing costs, while other licensees report sales and then identify the amount of permitted deductions in their reports), and the way in which licensees report such information may change from time to time. Total reported device sales for a particular period may include prior period activity that was not reported by the licensee until such particular period.


(3)	According to Wireless Intelligence estimates as of April 16, 2012, for the quarter ended March 31, 2012. Wireless Intelligence estimates for CDMA2000 1X/1xEV-DO subscribers do not include Wireless Local Loop.

Our Business and Operating Segments

We design, manufacture, have manufactured on our behalf and market digital communications products and services based on CDMA, OFDMA and other technologies. We derive revenues principally from sales of integrated circuit products, fixed license fees (payable in one or more installments) and ongoing royalties for use of our intellectual property, messaging and other services and related hardware sales, software development and licensing and related services and software hosting services. Operating expenses primarily consist of cost of equipment and services revenues and research and development and selling, general and administrative expenses.

We conduct business primarily through four reportable segments. These segments are: Qualcomm CDMA Technologies, or QCT; Qualcomm Technology Licensing, or QTL; Qualcomm Wireless & Internet, or QWI; and Qualcomm Strategic Initiatives, or QSI.

QCT is a leading developer and supplier of integrated circuits and system software based on CDMA, OFDMA and other technologies for use in voice and data communications, networking, application processing, multimedia and global positioning system products. QCT’s integrated circuit products and system software are sold to or licensed to manufacturers that use our products in wireless devices, particularly mobile phones, tablets, laptops, data modules, handheld wireless computers and gaming devices, access points and routers, data cards and infrastructure equipment, and in wired devices, particularly broadband gateway equipment, desktop computers, televisions and Blu-ray players. The MSM integrated circuits, which include the Mobile Data Modem, Qualcomm Single Chip and Qualcomm Snapdragon devices, perform the core baseband modem functionality in wireless devices providing voice and data communications, as well as multimedia applications and global positioning functions. In addition, our Snapdragon enabled integrated circuits provide advanced application and graphics processing capabilities. QCT’s system software enables the other device components to interface with the integrated circuit products and is the foundation software enabling manufacturers to develop devices utilizing the functionality within the integrated circuits. QCT revenues comprised 62% and 51% of total consolidated revenues in the second quarter of fiscal 2012 and 2011, respectively, and 64% and 56% of total consolidated revenues for the first six months of fiscal 2012 and 2011, respectively.

QCT utilizes a fabless production business model, which means that we do not own or operate foundries for the production of silicon wafers from which our integrated circuits are made. Integrated circuits are die, cut from silicon wafers, that have been assembled into packages or modules and have completed the final test manufacturing processes. We rely on independent third-party suppliers to perform the manufacturing and assembly, and most of the testing, of our integrated circuits based primarily on our proprietary designs and test programs. Our suppliers are also responsible for the procurement of most of the raw materials used in the production of our integrated circuits. We employ both turnkey and two-stage manufacturing business models to purchase our integrated circuits. Turnkey is when our foundry suppliers are responsible for delivering fully assembled and tested integrated circuits. Under the two-stage manufacturing business model, we purchase wafers and die from semiconductor manufacturing foundries and contract with separate third-party manufacturers for probe, assembly and final test services.

QTL grants licenses or otherwise provides rights to use portions of our intellectual property portfolio, which, among other rights, includes certain patent rights essential to and/or useful in the manufacture and sale of certain wireless products, including, without limitation, products implementing cdmaOne, CDMA2000, WCDMA, CDMA TDD (including TD-SCDMA), GSM/GPRS/EDGE and/or OFDMA standards and their derivatives. QTL licensing revenues are comprised of license fees as well as royalties based on sales by licensees of products incorporating or using our intellectual property. License fees are fixed amounts paid in one or more installments. Royalties are generally based upon a percentage of the wholesale (i.e., licensee’s) selling price of licensed products, net of certain permissible deductions (e.g., certain shipping costs, packing costs, VAT, etc.). QTL revenues comprised 35% and 45% of total consolidated revenues in the second quarter of fiscal 2012 and 2011, respectively, and 33% and 39% of total consolidated revenues for the first six months of fiscal 2012 and 2011, respectively. The vast majority of such revenues were generated through our licensees’ sales of cdmaOne, CDMA2000 and WCDMA subscriber equipment products.

QWI, which includes Qualcomm Enterprise Services (QES), Qualcomm Internet Services (QIS), Qualcomm Government Technologies (QGOV) and Firethorn, generates revenues primarily through mobile information products and services and software and software development aimed at support and delivery of wireless applications. QES sells integrated wireless systems and services to transportation and logistics companies to manage their assets and workforce. Through March 2012, QES has shipped approximately 1,554,000 terrestrial-based and satellite-based mobile information units. QIS provides content enablement services for the wireless industry, including Brew, the Plaza suite and other

services. QIS also provides QChat push-to-talk and other products for wireless operators. QGOV provides development, hardware, analytical expertise and services involving wireless communications technologies to United States government agencies. Firethorn builds and manages software applications that enable mobile commerce services. QWI revenues comprised 3% and 4% of total consolidated revenues in the second quarter of fiscal 2012 and 2011, respectively, and 3% and 5% of total consolidated revenues for the first six months of fiscal 2012 and 2011, respectively.

QSI makes strategic investments that we believe will open new opportunities for our technologies, support the design and introduction of new products and services for voice and data communications or possess unique capabilities or technology. Many of these strategic investments are in early-stage companies. QSI also holds wireless spectrum. As part of our strategic investment activities, we intend to pursue various exit strategies at some point in the future. The results of QSI’s FLO TV business are presented as discontinued operations and are therefore not included in QSI’s revenues or loss before income taxes. Since the shut down of the FLO TV business and network on March 27, 2011, we have been working to sell FLO TV’s assets and exit contracts. During the three months ended March 25, 2012, we completed our sale of substantially all of our 700 MHz spectrum for $1.9 billion.

Nonreportable segments include the Qualcomm MEMS Technologies division, which continues to develop an IMOD display technology based on micro-electro-mechanical-system (MEMS) structure combined with thin film optics, and other product initiatives.

Discontinued Operations

On December 27, 2011, we completed the sale of substantially all of our 700 MHz spectrum for $1.9 billion, and as a result, we recognized a gain in discontinued operations of $1.2 billion during the second quarter of fiscal 2012. Since the shut down of the FLO TV business and network on March 27, 2011, we have been working to sell the remaining assets and exit contracts. All remaining assets have been considered disposed of since March 27, 2011. 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 period presented.

Summarized results from discontinued operations were as follows (in millions):



	Three Months Ended						Six Months Ended
	March 25, 2012			March 27, 2011			March 25, 2012		March 27, 2011
Revenues	$	—		$	4		$	—	$	4
Income (loss) from discontinued operations	$	1,175		$	(361	)	$	1,167	$	(502	)
Income tax (expense) benefit	(414		)	92