Edgar Filing: QUALCOMM INC/DE

QCOM 06.29.14 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

_____________________

FORM 10-Q

_____________________

(Mark one)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 29, 2014



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File Number 0-19528

QUALCOMM Incorporated

(Exact name of registrant as specified in its charter)



Delaware (State or Other Jurisdiction of Incorporation or Organization)		95-3685934 (I.R.S. Employer Identification No.)

5775 Morehouse Dr., San Diego, California (Address of Principal Executive Offices)		92121-1714 (Zip Code)

(858) 587-1121

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer x	Accelerated filer o	Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

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

The number of shares outstanding of each of the issuer’s classes of common stock, as of the close of business on July 21, 2014, was as follows:



Class		Number of Shares
Common Stock, $0.0001 per share par value		1,676,023,571

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 Comprehensive Income	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42
Item 4.	Controls and Procedures	42

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
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	44

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)



	June 29, 2014			September 29, 2013
ASSETS
Current assets:
Cash and cash equivalents	$	7,944		$	6,142
Marketable securities	10,209			8,824
Accounts receivable, net	2,084			2,142
Inventories	1,185			1,302
Deferred tax assets	451			573
Other current assets	535			572
Total current assets	22,408			19,555
Marketable securities	14,563			14,440
Deferred tax assets	1,195			1,059
Property, plant and equipment, net	2,555			2,995
Goodwill	4,183			3,976
Other intangible assets, net	2,608			2,553
Other assets	843			938
Total assets	$	48,355		$	45,516

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	1,900		$	1,554
Payroll and other benefits related liabilities	740			839
Unearned revenues	705			501
Other current liabilities	2,676			2,319
Total current liabilities	6,021			5,213
Unearned revenues	3,168			3,666
Other liabilities	379			550
Total liabilities	9,568			9,429

Commitments and contingencies (Note 6)

Stockholders’ equity:
Qualcomm stockholders’ equity:
Preferred stock, $0.0001 par value; 8 shares authorized; none outstanding	—			—
Common stock and paid-in capital, $0.0001 par value; 6,000 shares authorized; 1,678 and 1,685 shares issued and outstanding, respectively	8,346			9,874
Retained earnings	29,618			25,461
Accumulated other comprehensive income	825			753
Total Qualcomm stockholders’ equity	38,789			36,088
Noncontrolling interests	(2		)	(1		)
Total stockholders’ equity	38,787			36,087
Total liabilities and stockholders’ equity	$	48,355		$	45,516

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						Nine Months Ended
	June 29, 2014			June 30, 2013			June 29, 2014			June 30, 2013
Revenues:
Equipment and services	$	4,922		$	4,286		$	13,803		$	12,474
Licensing	1,884			1,957			5,992			5,911
Total revenues	6,806			6,243			19,795			18,385
Costs and expenses:
Cost of equipment and services revenues	2,740			2,497			7,929			7,106
Research and development	1,429			1,298			4,113			3,618
Selling, general and administrative	582			613			1,745			1,861
Other	(20		)	158			450			158
Total costs and expenses	4,731			4,566			14,237			12,743
Operating income	2,075			1,677			5,558			5,642
Investment income, net (Note 3)	422			233			968			730
Income from continuing operations before income taxes	2,497			1,910			6,526			6,372
Income tax expense	(260		)	(332		)	(886		)	(1,028		)
Income from continuing operations	2,237			1,578			5,640			5,344
Discontinued operations, net of income taxes (Note 8)	—			—			430			—
Net income	2,237			1,578			6,070			5,344
Net loss attributable to noncontrolling interests	1			2			3			8
Net income attributable to Qualcomm	$	2,238		$	1,580		$	6,073		$	5,352

Basic earnings per share attributable to Qualcomm:
Continuing operations	$	1.33		$	0.91		$	3.35		$	3.11
Discontinued operations	—			—			0.25			—
Net income	$	1.33		$	0.91		$	3.60		$	3.11
Diluted earnings per share attributable to Qualcomm:
Continuing operations	$	1.31		$	0.90		$	3.28		$	3.04
Discontinued operations	—			—			0.25			—
Net income	$	1.31		$	0.90		$	3.53		$	3.04
Shares used in per share calculations:
Basic	1,683			1,727			1,686			1,720
Diluted	1,714			1,765			1,718			1,760

Dividends per share announced	$	0.42		$	0.35		$	1.12		$	0.85

See Accompanying Notes to Condensed Consolidated Financial Statements.

QUALCOMM Incorporated

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)



	Three Months Ended						Nine Months Ended
	June 29, 2014			June 30, 2013			June 29, 2014			June 30, 2013
Net income	$	2,237		$	1,578		$	6,070		$	5,344
Other comprehensive income (loss), net of income taxes:
Foreign currency translation	8			(16		)	14			(23		)
Reclassification of foreign currency translation losses included in net income	—			11			1			11
Noncredit other-than-temporary impairment losses and subsequent changes in fair value related to certain available-for-sale debt securities	1			—			1			(1		)
Reclassification of other-than-temporary losses on available-for-sale securities included in net income	5			14			96			24
Net unrealized gains (losses) on other available-for-sale securities and derivative instruments	176			(298		)	364			(51		)
Reclassification of net realized gains on available-for-sale securities and derivative instruments included in net income	(175		)	(35		)	(404		)	(129		)
Total other comprehensive income (loss)	15			(324		)	72			(169		)
Total comprehensive income	2,252			1,254			6,142			5,175
Comprehensive loss attributable to noncontrolling interests	1			3			3			9
Comprehensive income attributable to Qualcomm	$	2,253		$	1,257		$	6,145		$	5,184

See Accompanying Notes to Condensed Consolidated Financial Statements.

QUALCOMM Incorporated

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)



	Nine Months Ended
	June 29, 2014			June 30, 2013
Operating Activities:
Net income	$	6,070		$	5,344
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense	853			744
Gain on sale of discontinued operations	(665		)	—
Revenues related to non-monetary exchanges	(93		)	(93		)
Long-lived asset and goodwill impairment charges	642			191
Income tax provision in excess of income tax payments	244			220
Non-cash portion of share-based compensation expense	806			831
Incremental tax benefits from share-based compensation	(239		)	(178		)
Net realized gains on marketable securities and other investments	(685		)	(239		)
Impairment losses on marketable securities and other investments	170			49
Other items, net	88			34
Changes in assets and liabilities:
Accounts receivable, net	43			(445		)
Inventories	116			(699		)
Other assets	136			(111		)
Trade accounts payable	321			598
Payroll, benefits and other liabilities	(337		)	52
Unearned revenues	(202		)	(30		)
Net cash provided by operating activities	7,268			6,268
Investing Activities:
Capital expenditures	(955		)	(808		)
Purchases of available-for-sale securities	(10,315		)	(12,112		)
Proceeds from sales and maturities of available-for-sale securities	9,744			7,337
Purchases of trading securities	(2,868		)	(2,658		)
Proceeds from sales and maturities of trading securities	2,619			2,365
Purchases of other marketable securities	(220		)	—
Proceeds from sale of discontinued operations, net of cash sold	788			—
Acquisitions and other investments, net of cash acquired	(447		)	(179		)
Other items, net	102			68
Net cash used by investing activities	(1,552		)	(5,987		)
Financing Activities:
Borrowing under loans and debentures	—			534
Repayment of loans and debentures	—			(492		)
Proceeds from issuance of common stock	1,147			964
Incremental tax benefits from share-based compensation	239			178
Repurchases and retirements of common stock	(3,354		)	(1,289		)
Dividends paid	(1,884		)	(1,463		)
Other items, net	(65		)	35
Net cash used by financing activities	(3,917		)	(1,533		)
Changes in cash and cash equivalents held for sale	—			(15		)
Effect of exchange rate changes on cash and cash equivalents	3			(7		)
Net increase (decrease) in cash and cash equivalents	1,802			(1,274		)
Cash and cash equivalents at beginning of period	6,142			3,807
Cash and cash equivalents at end of period	$	7,944		$	2,533

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 notes 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 29, 2013. 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. Each of the three-month and nine-month periods ended June 29, 2014 and June 30, 2013 included 13 weeks and 39 weeks, respectively.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in the Company’s condensed consolidated financial statements and the accompanying notes. Actual results could differ from those estimates. Certain prior year amounts have been reclassified to conform to the current year presentation.

Earnings Per Common Share. Basic earnings per common share are 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 are 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, if any, 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 for future service that the Company has not yet recognized, if any, and the estimated tax benefits that would be recorded in paid-in capital when an award is settled, if any, are assumed to be used to repurchase shares in the current period. The dilutive common share equivalents, calculated using the treasury stock method, for the three and nine months ended June 29, 2014 were 30,642,000 and 31,985,000, respectively. The dilutive common share equivalents, calculated using the treasury stock method, for the three and nine months ended June 30, 2013 were 37,927,000 and 40,132,000, respectively.

Shares of common stock equivalents outstanding that were not included in the computation of diluted earnings per common share because the effect would be anti-dilutive or certain performance conditions were not satisfied at the end of the period were 7,000 and 278,000 during the three and nine months ended June 29, 2014, respectively, and 720,000 and 589,000 during the three and nine months ended June 30, 2013, respectively.

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):



	Three Months Ended						Nine Months Ended
	June 29, 2014			June 30, 2013			June 29, 2014			June 30, 2013
Cost of equipment and services revenues	$	12		$	18		$	37		$	55
Research and development	174			166			510			479
Selling, general and administrative	88			96			259			297
Share-based compensation expense before income taxes	274			280			806			831
Related income tax benefit	(42		)	(58		)	(151		)	(169		)
	$	232		$	222		$	655		$	662

The Company recorded $177 million and $152 million in share-based compensation expense during the nine months ended June 29, 2014 and June 30, 2013, respectively, related to share-based awards granted during those periods.

QUALCOMM Incorporated

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

At June 29, 2014, total unrecognized compensation costs related to non-vested restricted stock units granted prior to that date were $1.5 billion, which are expected to be recognized over a weighted-average period of 2.0 years. During the nine months ended June 29, 2014 and June 30, 2013, net share-based awards granted, after forfeitures and cancelations, represented 0.8% and 0.7%, respectively, of outstanding shares as of the beginning of each fiscal period, and total share-based awards granted represented 0.9% and 0.8%, respectively, of outstanding shares as of the end of each fiscal period.

Recent Accounting Pronouncements. In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 outlines a comprehensive revenue recognition model and supersedes most current revenue recognition guidance. ASU 2014-09 will be effective for the Company starting in the first quarter of fiscal 2018. ASU 2014-09 allows for two methods of adoption: (a) “full retrospective” adoption, meaning the standard is applied to all periods presented, or (b) “modified retrospective” adoption, meaning the cumulative effect of applying ASU 2014-09 is recognized as an adjustment to the fiscal 2018 opening retained earnings balance. The Company is in the process of determining the adoption method as well as the effects the adoption of ASU 2014-09 will have on its consolidated financial statements.

Note 2 — Composition of Certain Financial Statement Items



Inventories (in millions)
	June 29, 2014		September 29, 2013
Raw materials	$	2	$	2
Work-in-process	480		631
Finished goods	703		669
	$	1,185	$	1,302



Property, Plant and Equipment (in millions)
	June 29, 2014			September 29, 2013
Land	$	220		$	212
Buildings and improvements	1,587			1,733
Computer equipment and software	1,534			1,425
Machinery and equipment	2,200			2,013
Furniture and office equipment	88			87
Leasehold improvements	245			218
Construction in progress	196			480
	6,070			6,168
Less accumulated depreciation and amortization	(3,515		)	(3,173		)
	$	2,555		$	2,995

During the first quarter of fiscal 2014, as a result of discussions with potential buyers and consideration of alternative uses for the separate asset groups that comprise one of the QMT division’s manufacturing facilities in Taiwan, the Company decreased its estimates of expected cash flows from those assets and recorded an impairment charge of $444 million in other expenses. The Company concluded that a triggering event had not occurred in the first quarter of fiscal 2014 that would have required impairment testing for its remaining QMT assets, including goodwill, as QMT’s licensing business plan did not utilize this manufacturing facility. During the third quarter of fiscal 2014, the Company updated QMT’s licensing business plan and related internal forecasts to reflect a decrease in expected cash flows. The updated business plan reflects an acceleration of the Company’s plans to transition from QMT’s current generation technology to the licensing of its next generation IMOD display technology and to focus on wearable devices. QMT will continue to make and sell current generation products for a period of time in support of certain existing customer requirements. As a result of this triggering event, the Company assessed the recoverability of the QMT division’s long-lived assets, performed a goodwill impairment test of the QMT reporting unit and recorded impairment charges of $64 million on long-lived assets and $100 million on goodwill in other expenses in the third quarter of fiscal 2014. At

QUALCOMM Incorporated

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 29, 2014, the carrying values of the QMT division’s goodwill and property, plant and equipment were $35 million and $162 million, respectively, including $44 million in property, plant and equipment that was classified as held for sale and included in other assets.



Other Current Liabilities (in millions)
	June 29, 2014		September 29, 2013
Customer incentives and other customer-related liabilities	$	2,111	$	1,706
Other	565		613
	$	2,676	$	2,319

Note 3 — Investment Income, Net (in millions)



	Three Months Ended						Nine Months Ended
	June 29, 2014			June 30, 2013			June 29, 2014			June 30, 2013
Interest and dividend income	$	139		$	182		$	460		$	529
Interest expense	—			(7		)	(4		)	(22		)
Net realized gains on marketable securities	290			21			660			189
Net realized gains on other investments	8			39			25			50
Impairment losses on marketable securities	(8		)	(22		)	(149		)	(37		)
Impairment losses on other investments	(3		)	(5		)	(21		)	(12		)
Net (losses) gains on derivative instruments	(6		)	5			(1		)	17
Equity in net losses of investees	(2		)	(1		)	(7		)	(5		)
Net gains on deconsolidation of subsidiaries	4			21			5			21
	$	422		$	233		$	968		$	730

Note 4 — Income Taxes

The Company estimates its annual effective income tax rate for continuing operations to be approximately 14% for fiscal 2014, which is less than the 16% effective income tax rate for fiscal 2013. Tax benefits from foreign income taxed at rates lower than rates in the United States are expected to be approximately 20% in fiscal 2014, compared to 17% in fiscal 2013. The estimated annual effective tax rate for fiscal 2014 reflects the United States federal research and development tax credit generated through December 31, 2013, the date on which the credit expired. The annual effective tax rate for fiscal 2013 included a tax benefit of $64 million related to fiscal 2012 due to the retroactive extension of the United States federal research and development tax credit in fiscal 2013.

The Company had unrecognized tax benefits of $85 million and $221 million at June 29, 2014 and September 29, 2013, respectively. The total amount of unrecognized tax benefits decreased due to an agreement reached with the Internal Revenue Service on components of the Company’s fiscal 2013 tax return. As a result, the Company recorded a tax benefit of $66 million in the third quarter of fiscal 2014. Additionally, the Company believes that several other audits will be resolved within the next 12 months, further decreasing the unrecognized tax benefits, which will reduce the effective tax rate to the extent tax benefits are sustained or in the settlement of the liability with the tax authorities to the extent not sustained.

Note 5 — Stockholders’ Equity

Changes in stockholders’ equity for the nine months ended June 29, 2014 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 29, 2013	$	36,088		$	(1	)	$	36,087
Net income (loss) ⁽¹⁾	6,073			(3		)	6,070
Other comprehensive income	72			—			72
Common stock issued under employee benefit plans and related tax benefits, net of shares withheld for taxes	987			—			987
Share-based compensation	838			—			838
Dividends	(1,916		)	—			(1,916		)
Stock repurchases	(3,354		)	—			(3,354		)
Other	1			2			3
Balance at June 29, 2014	$	38,789		$	(2	)	$	38,787


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

Accumulated Other Comprehensive Income. Changes in the components of accumulated other comprehensive income, net of income taxes, in Qualcomm stockholders’ equity during the nine months ended June 29, 2014 were as follows (in millions):



	Foreign Currency Translation Adjustment				Noncredit Other-than-Temporary Impairment Losses and Subsequent Changes in Fair Value for Certain Available-for-Sale Debt Securities				Net Unrealized Gain (Loss) on Other Available-for-Sale Securities				Net Unrealized Gain (Loss) on Derivative Instruments				Total Accumulated Other Comprehensive Income
Balance at September 29, 2013	$	(115	)		$	25			$	825			$	18			$	753
Other comprehensive income before reclassifications	14				1				356				8				379
Reclassifications from accumulated other comprehensive income	1			(a)	(1		)	(a)	(287		)	(a)	(20		)	(b)	(307		)
Other comprehensive income (loss)	15				—				69				(12		)		72
Balance at June 29, 2014	$	(100	)		$	25			$	894			$	6			$	825


(a)	Reclassifications from accumulated other comprehensive income of $163 million and $287 million for the three and nine months ended June 29, 2014, respectively, were recorded in investment income, net (Note 3).


(b)	Reclassifications from accumulated other comprehensive income of $7 million and $20 million for the three and nine months ended June 29, 2014, respectively, were recorded in revenues, cost of equipment and services revenues, research and development expenses and selling, general and administrative expenses.

Stock Repurchase Program. During the nine months ended June 29, 2014 and June 30, 2013, the Company repurchased and retired 44,609,000 and 21,009,000 shares, respectively, of the Company’s common stock for $3.4 billion and $1.3 billion, respectively, before commissions. On March 4, 2014, the Company announced that it had been authorized to repurchase up to $7.8 billion of the Company’s common stock. The stock repurchase program has no expiration date. At June 29, 2014, approximately $6.5 billion remained available for repurchase.

Dividends. On July 18, 2014, the Company announced a cash dividend of $0.42 per share on the Company’s common stock, payable on September 24, 2014 to stockholders of record as of the close of business on September 3, 2014. During the nine months ended June 29, 2014 and June 30, 2013, dividends charged to retained earnings were as follows (in millions, except per share data):

QUALCOMM Incorporated

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	2014				2013
	Per Share		Total		Per Share		Total
First quarter	$	0.35	$	599	$	0.25	$	435
Second quarter	0.35		599		0.25		439
Third quarter	0.42		718		0.35		615
	$	1.12	$	1,916	$	0.85	$	1,489

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 January 18, 2012, pursuant to the parties’ stipulation, the District Court for 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 27, 2014, Tessera and the Company reached an agreement that the lawsuit against the Company would be dismissed with prejudice, and the parties will engage in discussions to explore potential technical collaborations. The court dismissed the lawsuit on April 1, 2014 based on the parties’ stipulation.

ParkerVision, Inc. v. QUALCOMM Incorporated: On July 20, 2011, ParkerVision filed a complaint against the Company in the United States District Court for the Middle District of Florida alleging that certain of the Company’s products infringe seven of its patents alleged to cover direct down-conversion receivers. ParkerVision’s complaint sought damages and injunctive and other relief. Subsequently, ParkerVision narrowed its allegations to assert only four patents. The trial began on October 7, 2013. On October 17, 2013, the jury returned a verdict finding all asserted claims of the four at-issue patents to be infringed and finding that none of the asserted claims are invalid. On October 24, 2013, the jury returned a separate verdict assessing total past damages of approximately $173 million and finding that the Company’s infringement was not willful. The Company recorded the verdict amount in fiscal 2013 as a charge in other expenses. Post-verdict motions, including the Company’s motions for judgment as a matter of law and a new trial on invalidity and non-infringement and ParkerVision’s motions for injunctive relief and ongoing royalties, were filed by January 24, 2014. A hearing on these motions was held on May 1, 2014. On June 20, 2014, the court granted the Company’s motion to overturn the infringement verdict, denied the Company’s motion to overturn the invalidity verdict, and denied the remaining motions as moot. The court then entered judgment in the Company’s favor. On June 25, 2014, ParkerVision filed a notice of appeal with the court. As a result of the court’s judgment, the Company is not liable for any damages to ParkerVision, and therefore, the Company has reversed all recorded amounts related to the damages verdict. On May 1, 2014, ParkerVision filed another complaint, captioned ParkerVision, Inc. v. QUALCOMM Incorporated, Qualcomm Atheros, Inc., HTC Corporation and HTC America, Inc., also in the United States District Court for the Middle District of Florida, alleging that certain of the Company’s products infringe seven additional ParkerVision patents. The complaint seeks damages and injunctive and other relief. The Company has not been served with the complaint in this action.

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. (subsequently acquired by Nvidia Corporation) alleging that the Company has engaged in anticompetitive activity. The Company was 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. Subsequently, the Company has provided and continues to provide additional documents and information as requested by the Commission. 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 appealed to the Seoul High Court, and on June 19, 2013, the Seoul High Court affirmed the KFTC’s decision. On July 4, 2013, the Company filed an appeal with the Korea Supreme Court.

QUALCOMM Incorporated

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Japan Fair Trade Commission (JFTC) Complaint: The JFTC received unspecified complaints alleging that the Company’s business practices are, in some way, a violation of Japanese law. On September 29, 2009, the JFTC issued a cease and desist order concluding that the Company’s Japanese licensees were forced to cross-license patents to the Company on a royalty-free basis and were forced to accept a provision under which they agreed not to assert their essential patents against the Company’s other licensees who made a similar commitment in their license agreements with the Company. The cease and desist order seeks to require the Company to modify its existing license agreements with Japanese companies to eliminate these provisions while preserving the license of the Company’s patents to those companies. The Company disagrees with the conclusions that it forced its Japanese licensees to agree to any provision in the parties’ agreements and that those provisions violate the Japanese Antimonopoly Act. The Company has invoked its right under Japanese law to an administrative hearing before the JFTC. In February 2010, the Tokyo High Court granted the Company’s motion and issued a stay of the cease and desist order pending the administrative hearing before the JFTC. The JFTC has held hearings on 23 different dates, with additional hearing dates yet to be scheduled.

Securities and Exchange Commission (SEC) Formal Order of Private Investigation and Department of Justice Investigation: On September 8, 2010, the Company was notified by the SEC’s Los Angeles Regional office of a formal order of private investigation. The Company understands that the investigation arose from a “whistleblower’s” allegations made in December 2009 to the audit committee of the Company’s Board of Directors and to the SEC. In 2010, the audit committee completed an internal review of the allegations with the assistance of independent counsel and independent forensic accountants. This internal review into the whistleblower’s allegations and related accounting practices did not identify any errors in the Company’s financial statements. On January 27, 2012, the Company learned that the U.S. Attorney’s Office for the Southern District of California/Department of Justice (collectively, DOJ) had begun an investigation regarding the Company’s compliance with the Foreign Corrupt Practices Act (FCPA). The audit committee conducted an internal review of the Company’s compliance with the FCPA and its related policies and procedures with the assistance of independent counsel and independent forensic accountants. The audit committee has completed this comprehensive review, made findings consistent with the Company’s findings described below and suggested enhancements to the Company’s overall FCPA compliance program. In part as a result of the audit committee’s review, the Company has made and continues to make enhancements to its FCPA compliance program, including implementation of the audit committee’s recommendations.

As previously disclosed, the Company discovered, and as a part of its cooperation with these investigations informed the SEC and the DOJ of, instances in which special hiring consideration, gifts or other benefits (collectively, benefits) were provided to several individuals associated with Chinese state-owned companies or agencies. Based on the facts currently known, the Company believes the aggregate monetary value of the benefits in question to be less than $250,000, excluding employment compensation.

On March 13, 2014, the Company received a Wells Notice from the SEC’s Los Angeles Regional Office indicating that the staff has made a preliminary determination to recommend that the SEC file an enforcement action against the Company for violations of the anti-bribery, books and records and internal control provisions of the FCPA. The bribery allegations relate to benefits offered or provided to individuals associated with Chinese state-owned companies or agencies. The Wells Notice indicated that the recommendation could involve a civil injunctive action and could seek remedies that include disgorgement of profits, the retention of an independent compliance monitor to review the Company’s FCPA policies and procedures, an injunction, civil monetary penalties and prejudgment interest.

A Wells Notice is not a formal allegation or finding by the SEC of wrongdoing or violation of law. Rather, the purpose of a Wells Notice is to give the recipient an opportunity to make a “Wells submission” setting forth reasons why the proposed enforcement action should not be filed and/or bringing additional facts to the SEC’s attention before any decision is made by the SEC as to whether to commence a proceeding. On April 4, 2014 and May 29, 2014, the Company made Wells submissions to the staff of the Los Angeles Regional Office explaining why the Company believes it has not violated the FCPA and therefore enforcement action is not warranted.

The Company is continuing to cooperate with the SEC and the DOJ, but is unable to predict the outcome of their investigations or any action that the SEC may decide to file.

China National Development and Reform Commission (NDRC) Investigation: In November 2013, the NDRC notified the Company that it had commenced an investigation of the Company relating to the Chinese Anti-Monopoly Law (AML). The Company understands that the investigation concerns primarily the Company’s licensing business and certain interactions between the Company’s licensing business and its chipset business, including how royalties are calculated in the Company’s patent licenses, the value exchanged for cross-licenses to patents of the Company’s

QUALCOMM Incorporated

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(Unaudited)

licensees, whether the Company will offer license agreements limited to patents essential to certain standards, whether royalties are sought for the Company’s expired patents, the Company’s policy of selling chipsets only to the Company’s patent licensees, the alleged refusal of the Company to grant patent licenses to chipset manufacturers, and certain other terms and conditions in the Company’s patent license and chipset sale agreements. A broad range of remedies with respect to business practices deemed to violate the AML is potentially available to the NDRC, including but not limited to issuing an order to cease conduct deemed illegal, confiscating gains deemed illegally obtained, imposing a fine in the range of 1% to 10% of the prior year’s revenues and requiring modifications to business practices. Given the limited precedent of enforcement actions and penalties under the AML, it is difficult to predict the outcome of this matter or what remedies may be imposed by the NDRC. The Company continues to cooperate with the NDRC as it conducts its investigation.

The Company will continue to vigorously defend itself in the foregoing matters. However, litigation and investigations are inherently uncertain. Accordingly, the Company cannot predict the outcome of these matters. The Company has not recorded any accrual at June 29, 2014 for contingent losses associated with these matters based on its belief that, with the exception of the NDRC matter, losses, while possible, are not probable. Further, any possible range of loss cannot be reasonably estimated at this time. Regarding the NDRC matter, the Company believes that a loss is probable but that any possible range of loss cannot be reasonably estimated at this time. The unfavorable resolution of one or more of these matters could have a material adverse effect on the Company’s business, results of operations, financial condition or cash flows. 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 other legal actions will not have a material adverse effect on its business, results of operations, financial condition or cash flows.

Indemnifications. 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, copyright, trademark or trade secret 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. Through June 29, 2014, the Company has received a number of claims from its direct and indirect customers and other third parties for indemnification under such agreements with respect to alleged infringement of third-party intellectual property rights by its products.

These indemnification arrangements are not initially measured and recognized at fair value because they are deemed to be similar to product warranties in that they relate to claims and/or other actions that could impair the ability of the Company’s direct or indirect customers to use the Company’s products or services. Accordingly, the Company records liabilities resulting from the arrangements when they are probable and can be reasonably estimated. Reimbursements under indemnification arrangements have not been material to the Company’s consolidated financial statements. The Company has not recorded any accrual for contingent liabilities at June 29, 2014 associated with these indemnification arrangements, other than insignificant amounts, based on the Company’s belief that additional liabilities, while possible, are not probable. Further, any possible range of loss cannot be reasonably estimated at this time.

Purchase Obligations. The Company has agreements with suppliers and other parties to purchase inventory, other goods and services and long-lived assets. Obligations, which generally have a remaining term of less than one year, under these agreements at June 29, 2014 for the remainder of fiscal 2014 and for each of the subsequent four years from fiscal 2015 through fiscal 2018 were approximately $3.0 billion, $387 million, $64 million, $19 million and $17 million, respectively, and $40 million thereafter. Of these amounts, for the remainder of fiscal 2014 and for fiscal 2015, commitments to purchase integrated circuit product inventories comprised $2.6 billion and $228 million, respectively. Integrated circuit product inventory obligations represent purchase commitments for wafers, die and assembly and test services. Under the Company’s manufacturing relationships with its foundry suppliers and assembly and test service providers, cancelation of outstanding purchase orders is generally allowed but requires payment of costs incurred through the date of cancelation.

Leases. The future minimum lease payments for all capital leases and operating leases at June 29, 2014 by fiscal year were as follows (in millions):

QUALCOMM Incorporated

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	Capital Leases		Operating Leases		Total
Remainder of fiscal 2014	$	—	$	25	$	25
2015	1		93		94
2016	1		79		80
2017	1		58		59
2018	1		31		32
Thereafter	18		50		68
Total minimum lease payments	22		$	336	$	358
Deduct: Amounts representing interest	10
Present value of minimum lease payments	12
Deduct: Current portion of capital lease obligations	1
Long-term portion of capital lease obligations	$	11

The Company leases certain of its land, facilities and equipment under noncancelable operating leases, with terms ranging from less than one year to 25 years and with provisions in certain leases for cost-of-living increases. The Company leases certain property under capital lease agreements primarily related to site leases that have an initial term of five years with renewal options of up to five additional renewal periods. Capital lease obligations are included in other liabilities.

Note 7 — Segment Information

The Company is organized on the basis of products and services. The Company aggregates two of its divisions into the QSI segment. Reportable segments are as follows:


•	QCT (Qualcomm CDMA Technologies) segment — 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.

•

QTL (Qualcomm Technology Licensing) segment — grants licenses or otherwise provides rights to use portions of the Company’s intellectual property portfolio, which, among other rights, includes certain patent rights essential to and/or useful in the manufacture and sale of certain wireless products, including, without limitation, products implementing CDMA2000, WCDMA, CDMA TDD (including TD-SCDMA), GSM/GPRS/EDGE and/or OFDMA (including LTE) standards and their derivatives, and QTL collects fixed license fees and/or royalties based on sales by licensees of products incorporating or using the Company’s intellectual property.

•

QSI (Qualcomm Strategic Initiatives) segment — comprised of the Company’s Qualcomm Ventures and Structured Finance & Strategic Investments divisions. QSI makes strategic investments that the Company believes may open new or expand 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.

During the first quarter of fiscal 2014, the Company reassessed its management reporting as a result of the sale of the North and Latin America operations of its Omnitracs division (Note 8), which comprised substantially all of the Omnitracs division, among other reasons. The Omnitracs division was previously aggregated with three other divisions into the Qualcomm Wireless & Internet (QWI) reportable segment. Starting in fiscal 2014, the QWI segment was eliminated, and revenues and operating results for the divisions that comprised the QWI reportable segment are included in nonreportable segments as components of reconciling items. Prior period segment information has been adjusted to conform to the new segment presentation.

Nonreportable segments include the Company’s QIS (Qualcomm Internet Services), QGOV (Qualcomm Government Technologies) and QMT (Qualcomm MEMS Technologies) divisions and other display, wireless technology and service initiatives. Nonreportable segments develop and offer products and services that include, but are not limited to: software products and content enablement services to wireless operators; development, other services and related products to U.S. government agencies and their contractors; low power consumption, high optical performance flat

QUALCOMM Incorporated

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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display modules; products designed for implementation of small cells; medical device connectivity and related data management; augmented reality; and device-to-device communication.

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 net investment income; certain share-based compensation; and certain research and development expenses, selling, general and administrative expenses and other expenses or income that were deemed to be not directly related to the businesses of the segments. Additionally, unallocated charges include recognition of the step-up of inventories to fair value, amortization and impairment of certain intangible assets and certain other acquisition-related charges. The table below presents revenues and EBT for reportable segments (in millions):



	QCT		QTL		QSI			Reconciling Items			Total
For the three months ended:
June 29, 2014
Revenues	$	4,957	$	1,803	$	—		$	46		$	6,806
EBT	1,116		1,550		(1		)	(168		)	2,497
June 30, 2013*
Revenues	$	4,222	$	1,867	$	—		$	154		$	6,243
EBT	738		1,633		51			(512		)	1,910

For the nine months ended:
June 29, 2014
Revenues	$	13,816	$	5,774	$	—		$	205		$	19,795
EBT	2,762		5,054		(36		)	(1,254		)	6,526
June 30, 2013*
Revenues	$	12,258	$	5,680	$	—		$	447		$	18,385
EBT	2,487		4,968		66			(1,149		)	6,372

*As adjusted

QCT revenues for both of the three and nine months ended June 29, 2014 and June 30, 2013 included $1 million and $3 million of intersegment revenues, respectively. All other revenues for reportable segments were from external customers for all periods presented.

QUALCOMM Incorporated

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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



	Three Months Ended						Nine Months Ended
	June 29, 2014			June 30, 2013*			June 29, 2014			June 30, 2013*
Revenues
Nonreportable segments	$	47		$	156		$	208		$	451
Intersegment eliminations	(1		)	(2		)	(3		)	(4		)
	$	46		$	154		$	205		$	447
EBT
Unallocated cost of equipment and services revenues	$	(74	)	$	(82	)	$	(223	)	$	(258	)
Unallocated research and development expenses	(220		)	(201		)	(653		)	(591		)
Unallocated selling, general and administrative expenses	(107		)	(112		)	(318		)	(376		)
Unallocated other income, net	184			—			173			—
Unallocated investment income, net	413			176			985			644
Nonreportable segments	(364		)	(293		)	(1,218		)	(568		)
	$	(168	)	$	(512	)	$	(1,254	)	$	(1,149	)

*As adjusted

Nonreportable segments EBT for the three and nine months ended June 29, 2014 included a total of $164 million and $607 million, respectively, in impairment charges related to the Company’s QMT division (Note 2).

Unallocated acquisition-related expenses were comprised as follows (in millions):



	Three Months Ended				Nine Months Ended
	June 29, 2014		June 30, 2013		June 29, 2014		June 30, 2013
Cost of equipment and services revenues	$	62	$	64	$	186	$	203
Research and development expenses	3		1		26		2
Selling, general and administrative expenses	6		6		19		20

Segment assets are comprised of accounts receivable and inventories for all reportable segments other than QSI. QSI segment assets include marketable securities, notes receivable, wireless spectrum, other investments and all assets of consolidated subsidiaries included in QSI. Reconciling items for total consolidated assets included $299 million and $892 million at June 29, 2014 and September 29, 2013, respectively, of goodwill and other assets related to the Company’s QMT division. The decrease in QMT assets was primarily a result of impairments of goodwill and certain property, plant and equipment recorded in the nine months ended June 29, 2014 (Note 2). Total segment assets also differ from total assets on a consolidated basis as a result of unallocated corporate assets primarily comprised of certain cash, cash equivalents, marketable securities, property, plant and equipment, deferred tax assets, goodwill, other intangible assets and assets of nonreportable segments. Segment assets and reconciling items were as follows (in millions):



	June 29, 2014		September 29, 2013*
QCT	$	3,046	$	3,305
QTL	158		28
QSI	517		511
Reconciling items	44,634		41,672
Total consolidated assets	$	48,355	$	45,516

*As adjusted

QUALCOMM Incorporated

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 8 — Discontinued Operations

On November 25, 2013, the Company completed its sale of the North and Latin America operations of its Omnitracs division to a U.S.-based private equity firm for cash consideration of $788 million (net of cash sold). As a result, the Company recorded a gain in discontinued operations of $665 million ($430 million net of income tax expense) during the nine months ended June 29, 2014. Total assets and total liabilities were reduced by $150 million and $45 million, respectively. The revenues and operating results of the North and Latin America operations of the Omnitracs division, which comprised substantially all of the Omnitracs division, were not presented as discontinued operations in any fiscal period because they were immaterial. The related assets (included in other current assets and other noncurrent assets) and liabilities (included in other current liabilities and other noncurrent liabilities) of $139 million and $43 million, respectively, were classified as held for sale at September 29, 2013.

Note 9 — Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants as of the measurement date. Applicable accounting guidance provides an established hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors that market participants would use in valuing the asset or liability. There are three levels of inputs that may be used to measure fair value:


•	Level 1 includes financial instruments for which quoted market prices for identical instruments are available in active markets.


•	Level 2 includes financial instruments for which there are inputs other than quoted prices included within Level 1 that are observable for the instrument.


•	Level 3 includes financial instruments for which fair value is derived from valuation techniques in which one or more significant inputs are unobservable, including the Company’s own assumptions.

Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.

The following table presents the Company’s fair value hierarchy for assets and liabilities measured at fair value on a recurring basis at June 29, 2014 (in millions):

QUALCOMM Incorporated

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	Level 1		Level 2		Level 3		Total
Assets
Cash equivalents	$	2,933	$	4,235	$	—	$	7,168
Marketable securities
U.S. Treasury securities and government-related securities	729		897		—		1,626
Corporate bonds and notes	—		14,815		—		14,815
Mortgage- and asset-backed securities	—		1,098		177		1,275
Auction rate securities	—		—		83		83
Common and preferred stock	1,264		742		—		2,006
Equity funds	681		—		—		681
Debt funds	817		3,469		—		4,286
Total marketable securities	3,491		21,021		260		24,772
Derivative instruments	—		14		—		14
Other investments	281		—		—		281
Total assets measured at fair value	$	6,705	$	25,270	$	260	$	32,235
Liabilities
Derivative instruments	$	1	$	4	$	—	$	5
Other liabilities	280		—		—		280
Total liabilities measured at fair value	$	281	$	4	$	—	$	285

Cash Equivalents and Marketable Securities. The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents, including 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 for interest-bearing securities includes accrued interest.

The fair value of U.S. Treasury securities and government-related securities, corporate bonds and notes and common and preferred stock is generally determined using standard observable inputs, including reported trades, quoted market prices, matrix pricing, benchmark yields, broker/dealer quotes, issuer spreads, two-sided markets and/or benchmark securities.

The fair value of debt and equity funds is reported at published net asset values. The Company assesses the daily frequency and size of transactions at published net asset values and/or the funds’ underlying holdings to determine whether fair value is based on observable or unobservable inputs.

The fair value of highly rated mortgage- and asset-backed securities is derived from the use of matrix pricing (prices for similar securities) or, in some cases, cash flow pricing models with observable inputs such as contractual terms, maturity, credit rating and/or securitization structure to determine the timing and amount of future cash flows. Certain mortgage- and asset-backed securities, principally those rated below AAA, may require the use of significant 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 most 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.

QUALCOMM Incorporated

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, interest rate and/or equity, prepayment and credit risks for portfolios of marketable securities classified as trading; and warrants to purchase common stock of other companies 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 consist of mutual funds classified as trading securities, and were included in other assets.

Activity between Levels of the Fair Value Hierarchy. There were no significant transfers between Level 1 and Level 2 during the nine months ended June 29, 2014 or June 30, 2013. When a determination is made to classify an asset or liability within Level 3, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement. The following table includes the activity for marketable securities and other liabilities classified within Level 3 of the valuation hierarchy (in millions):



	Nine Months Ended June 29, 2014					Nine Months Ended June 30, 2013
	Auction Rate Securities		Mortgage- and Asset-Backed Securities			Auction Rate Securities			Mortgage- and Asset-Backed Securities
Beginning balance of Level 3	$	83	$	239		$	118		$	203
Total realized and unrealized gains or losses:
Included in investment income, net	—		10			—			4
Included in other comprehensive income	—		(4		)	1			(2		)
Purchases	—		86			—			157
Sales	—		(124		)	—			(10		)
Settlements	—		(28		)	(36		)	(66		)
Transfers (out of) into Level 3	—		(2		)	—			18
Ending balance of Level 3	$	83	$	177		$	83		$	304

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 out of Level 3 during the nine months ended June 29, 2014 primarily consisted of debt securities with significant upgrades in credit ratings. Transfers into Level 3 during the nine months ended June 30, 2013 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 significant downgrades in credit ratings.

Nonrecurring Fair Value Measurements. The Company measures certain assets at fair value on a nonrecurring basis. These assets include cost and equity method investments when they are deemed to be other-than-temporarily impaired, assets acquired and liabilities assumed in an acquisition or in a nonmonetary exchange, and property, plant and equipment and intangible assets that are written down to fair value when they are held for sale or determined to be impaired. During the nine months ended June 29, 2014, certain long-lived assets and goodwill related to the Company’s QMT division were written down to their estimated fair values resulting in impairment charges of $507 million on long-lived assets and $100 million on goodwill (Note 2). At June 29, 2014, the carrying values of the QMT division’s property, plant and equipment and goodwill were $162 million and $35 million, respectively. The Company determined the fair values primarily using cost, income and market approaches. The estimation of fair values and cash flows used in these fair value measurements required the use of significant unobservable inputs, and as a result, the fair value measurements were classified as Level 3. During the nine months ended June 29, 2014 and June 30, 2013, 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.

QUALCOMM Incorporated

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 10 — Marketable Securities

Marketable securities were comprised as follows (in millions):



	Current				Noncurrent
	June 29, 2014		September 29, 2013		June 29, 2014		September 29, 2013
Trading:
U.S. Treasury securities and government-related securities	$	317	$	241	$	47	$	49
Corporate bonds and notes	195		269		380		256
Mortgage- and asset-backed securities	—		—		215		104
Total trading	512		510		642		409
Available-for-sale:
U.S. Treasury securities and government-related securities	872		721		390		71
Corporate bonds and notes	6,553		4,533		7,687		6,812
Mortgage- and asset-backed securities	860		745		200		328
Auction rate securities	—		—		83		83
Common and preferred stock	342		8		1,664		2,351
Equity funds	160		—		521		960
Debt funds	910		2,307		2,589		2,889
Total available-for-sale	9,697		8,314		13,134		13,494
Fair value option:
Debt fund	—		—		787		537
Total marketable securities	$	10,209	$	8,824	$	14,563	$	14,440

The Company holds an investment in a debt fund for which the Company elected the fair value option because the Company is able to redeem its shares at net asset value, which is determined daily. The investment would have otherwise been recorded using the equity method. The debt fund has no single maturity date. At June 29, 2014, the Company had an effective ownership interest in the debt fund of 27%. Changes in fair value associated with this investment are recognized in net investment income. During the three and nine months ended June 29, 2014, net increases in fair value associated with this investment were $12 million and $30 million, respectively. During the three months ended June 30, 2013, the net decrease in fair value associated with this investment was $4 million. During the nine months ended June 30, 2013, the net increase in fair value associated with this investment was $14 million.

The Company classifies certain portfolios of debt securities that utilize derivative instruments to acquire or reduce foreign exchange, interest rate and/or equity, prepayment and credit risks as trading. Net gains recognized on debt securities classified as trading held at June 29, 2014 were $7 million and $8 million for the three and nine months ended June 29, 2014, respectively. Net losses recognized on debt securities classified as trading held at June 30, 2013 were $21 million and $36 million for the three and nine months ended June 30, 2013, respectively.

At June 29, 2014, 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
$	2,993	$	10,255	$	1,594	$	660	$	4,642	$	20,144

Debt securities with no single maturity date included debt funds, mortgage- and asset-backed securities and auction rate securities.

QUALCOMM Incorporated

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company recorded realized gains and losses on sales of available-for-sale securities as follows (in millions):



	Gross Realized Gains		Gross Realized Losses			Net Realized Gains
For the three months ended
June 29, 2014	$	267	$	(8	)	$	259
June 30, 2013	52		(5		)	47

For the nine months ended
June 29, 2014	$	610	$	(16	)	$	594
June 30, 2013	204		(14		)	190

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



	Cost		Unrealized Gains		Unrealized Losses			Fair Value
June 29, 2014
Equity securities	$	2,000	$	692	$	(5	)	$	2,687
Debt securities (including debt funds)	19,741		423		(20		)	20,144
	$	21,741	$	1,115	$	(25	)	$	22,831
September 29, 2013
Equity securities	$	2,570	$	793	$	(44	)	$	3,319
Debt securities (including debt funds)	18,255		396		(162		)	18,489
	$	20,825	$	1,189	$	(206	)	$	21,808

The following table shows the gross unrealized losses and fair values of the Company’s investments in individual securities that are classified as available-for-sale and have been in a continuous unrealized loss position deemed to be temporary for less than 12 months and for more than 12 months, aggregated by investment category (in millions):



	June 29, 2014
	Less than 12 months					More than 12 months
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Corporate bonds and notes	$	2,033	$	(5	)	$	96	$	(2	)
Auction rate securities	—		—			83		(1		)
Debt funds	50		(1		)	394		(11		)
Equity funds	30		—			115		(5		)
	$	2,113	$	(6	)	$	688	$	(19	)

QUALCOMM Incorporated

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	September 29, 2013
	Less than 12 months					More than 12 months
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. Treasury securities and government-related securities	$	42	$	(1	)	$	—	$	—
Corporate bonds and notes	2,084		(31		)	24		(1		)
Mortgage- and asset-backed securities	367		(5		)	24		—
Auction rate securities	—		—			83		(1		)
Common and preferred stock	291		(41		)	—		—
Debt funds	2,776		(123		)	4		—
Equity funds	82		(3		)	—		—
	$	5,642	$	(204	)	$	135	$	(2	)

At June 29, 2014, the Company concluded that the unrealized losses on its available-for-sale securities were temporary. Further, for common and preferred stock and for equity and debt funds 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						Nine Months Ended
	June 29, 2014			June 30, 2013			June 29, 2014			June 30, 2013
Beginning balance of credit losses	$	8		$	8		$	4		$	31
Reduction in credit losses related to securities the Company intends to sell	—			—			—			(6		)
Credit losses recognized on securities not previously impaired	—			—			5			1
Additional credit losses recognized on securities previously impaired	—			—			—			1
Reductions in credit losses related to securities sold	(3		)	(3		)	(4		)	(21		)
Accretion of credit losses due to an increase in cash flows expected to be collected	—			—			—			(1		)
Ending balance of credit losses	$	5		$	5		$	5		$	5

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 Part I, Item 1 of this Quarterly Report and with Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended September 29, 2013 contained in our 2013 Annual Report on Form 10-K.

This Quarterly Report (including, but not limited to, this 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 of technologies, industry or regional trends, consumer demand, sales or price levels, challenges to our business model, capital expenditures, investments in research and development, strategic investments and acquisitions 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 third quarter of fiscal 2014 were $6.8 billion, with net income attributable to Qualcomm of $2.2 billion, which primarily resulted from the following key items:


•	We shipped approximately 225 million Mobile Station Modem (MSM) integrated circuits for CDMA- and OFDMA-based wireless devices, an increase of approximately 31%, compared to approximately 172 million MSM integrated circuits in the year ago quarter.


•	Total reported device sales were approximately $58.1 billion, an increase of approximately 3%, compared to approximately $56.5 billion in the year ago quarter.⁽¹⁾

Against this backdrop, the following recent developments occurred during the third quarter of fiscal 2014 with respect to key elements of our business or our industry:


•	Worldwide cellular connections grew sequentially by approximately 2% to reach approximately 7.0 billion.⁽²⁾


•	Worldwide 3G/4G connections (CDMA-based, OFDMA-based and CDMA/OFDMA multimode) grew sequentially by approximately 5% to approximately 2.7 billion, which was approximately 39% of total cellular connections.⁽²⁾

(1)

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 CDMA/OFDMA multimode subscriber devices (including handsets, modules, modem cards and other subscriber devices) by our licensees during a particular period (collectively, 3G/4G devices). Not all licensees report sales the same way (e.g., some licensees report sales net of permitted deductions, including transportation, insurance, packing costs and other items, 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. In addition, certain licensees may not report (in the quarter in which they are contractually obligated to report) their sales of certain types of subscriber units, which (as a result of audits, legal actions or for other reasons) may be reported in a subsequent quarter. Accordingly, total reported device sales for a particular period may include prior period activity that was not reported by the licensee until such particular period.


(2)	According to GSMA Intelligence estimates as of July 21, 2014, for the quarter ended June 30, 2014 (estimates excluded 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 and licensing our intellectual property, including patents, software and other rights.

We conduct business primarily through three reportable segments: QCT, QTL and QSI. Our reportable segments are operated by QUALCOMM Incorporated and its direct and indirect subsidiaries. Following our corporate reorganization at the beginning of fiscal 2013, substantially all of our products and services businesses, including QCT, and substantially all of our engineering, research and development functions, are now operated by Qualcomm Technologies, Inc. (QTI), a wholly-owned subsidiary of QUALCOMM Incorporated, and QTI’s subsidiaries. QTL continues to be operated by QUALCOMM Incorporated, which continues to own the vast majority of our patent portfolio. Neither QTI nor any of its subsidiaries has any right, power or authority to grant any licenses or other rights under or to any patents owned by QUALCOMM Incorporated.

QCT (Qualcomm CDMA Technologies) 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 and streaming media players. The MSM integrated circuits, which include the Mobile Data Modem, Qualcomm Single Chip and Qualcomm Snapdragon processor 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 processors 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 73% and 68% of total consolidated revenues in the third quarter of fiscal 2014 and 2013, respectively, and 70% and 67% of total consolidated revenues for the first nine months of fiscal 2014 and 2013, 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 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 model, we purchase wafers and die from semiconductor manufacturing foundries and contract with separate third-party suppliers for probe, assembly and test services.

QTL (Qualcomm Technology Licensing) 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 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 complete licensed products, net of certain permissible deductions (e.g., certain shipping costs, packing costs, VAT, etc.). QTL recognizes royalty revenues based on royalties reported by licensees during the quarter and when other revenue recognition criteria are met. Licensees, however, do not report and pay royalties owed for sales in any given quarter until after the conclusion of that quarter. QTL revenues comprised 26% and 30% of total consolidated revenues in the third quarter of fiscal 2014 and 2013, respectively, and 29% and 31% of total consolidated revenues for the first nine months of fiscal 2014 and 2013, respectively. The vast majority of such revenues were generated through our licensees’ sales of CDMA2000- and WCDMA-based products, including multimode products that also implement OFDMA, such as feature phones and smartphones.

QSI (Qualcomm Strategic Initiatives) makes strategic investments that we believe may open new or expand 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 from each of our QSI investments at some point in the future.

During the first quarter of fiscal 2014, we reassessed our management reporting as a result of the sale of the North and Latin America operations of our Omnitracs division, among other reasons. The Omnitracs division was previously aggregated with three other divisions into the Qualcomm Wireless & Internet (QWI) reportable segment. Starting in fiscal 2014, the QWI segment was eliminated, and the former QWI divisions are included in nonreportable segments.

Nonreportable segments include our QIS (Qualcomm Internet Services), QGOV (Qualcomm Government Technologies) and QMT (Qualcomm MEMS Technologies) divisions and other display, wireless technology and service initiatives. Nonreportable segments develop and offer products and services that include, but are not limited to: software products and content enablement services to wireless operators; development, other services and related products to U.S. government agencies and their contractors; low power consumption, high optical performance flat display modules; products designed for implementation of small cells; medical device connectivity and related data management; augmented reality; and device-to-device communication.

During the first quarter of fiscal 2014, as a result of discussions with potential buyers and consideration of alternative uses for the separate asset groups that comprise one of the QMT division’s manufacturing facilities in Taiwan, we decreased our estimates of expected cash flows from those assets and recorded an impairment charge of $444 million in other expenses. We concluded that a triggering event had not occurred in the first quarter of fiscal 2014 that would have required impairment testing for the remaining QMT assets, including goodwill, as QMT’s licensing business plan did not utilize this manufacturing facility. During the third quarter of fiscal 2014, we updated QMT’s licensing business plan and related internal forecasts to reflect a decrease in expected cash flows. The updated business plan reflects an acceleration of our plans to transition from QMT’s current generation technology to the licensing of QMT’s next generation IMOD display technology and to focus on wearable devices. QMT will continue to make and sell current generation products for a period of time in support of certain existing customer requirements. As a result, we tested the QMT division’s long-lived assets and goodwill and recorded total impairment charges of $164 million in other expenses in the third quarter of fiscal 2014.

Seasonality. Many of our products or intellectual property are incorporated into consumer wireless devices, which are subject to seasonality and other fluctuations in demand. As a result, QCT has tended historically to have stronger sales toward the end of the calendar year as manufacturers prepare for major holiday selling seasons, and QTL has tended to record higher royalty revenues in the first calendar quarter when licensees report their sales made during the fourth calendar quarter. These seasonal trends may or may not continue in the future.

Discontinued Operations. On November 25, 2013, we completed our sale of the North and Latin America operations of our Omnitracs division to a U.S.-based private equity firm for cash consideration of $788 million (net of cash sold). As a result, we recorded a gain in discontinued operations of $665 million ($430 million net of income tax expense) during the nine months ended June 29, 2014. The revenues and operating results of the North and Latin America operations of our Omnitracs division, which comprised substantially all of our Omnitracs division, were not presented as discontinued operations in any fiscal period because they were immaterial.

Looking Forward

The deployment of 3G networks has enabled increased voice capacity and higher data rates than prior generation networks, thereby supporting more minutes of use and a wide range of mobile broadband data applications for handsets, 3G connected computing devices and other consumer electronics. According to the Global mobile Suppliers Association (GSA), as of July 2014, to complement their existing 3G networks, 300 wireless operators have deployed and more than 200 additional wireless operators are planning to deploy OFDMA-based technology, often called 4G, in new wireless spectrum to gain additional capacity for data services. As a result, we expect continued growth in the coming years in consumer demand for 3G, 3G/4G multimode and 4G products and services around the world.

As we look forward to the next several months, the following items are likely to have an impact on our business:


•	The worldwide transition from 2G to 3G and 3G/4G networks is expected to continue, including the further expansion of 3G and 3G/4G in emerging regions, such as China. We expect that the growth of low-tier smartphone products will contribute to such expansion.


•	We expect consumer demand for advanced 3G and 3G/4G multimode devices, including smartphones and data-centric devices, to continue at a strong pace.


•	China continues to present significant opportunities for us, particularly with the rollout of 4G LTE. We expect the launch of 4G services in China will encourage competition and growth, bring the benefits of 4G LTE to consumers, encourage consumers to replace 2G (GSM) devices and enable new opportunities (e.g., machine-to-machine) for the industry.

•

China also presents significant challenges, as our business practices continue to be the subject of an investigation by the China National Development and Reform Commission (NDRC). We also believe that certain licensees in China currently are not fully complying with their contractual obligations to report their sales of licensed products to us (which includes certain licensees underreporting a portion of their 3G/4G device sales and a dispute with a licensee) and that unlicensed companies may seek to delay execution of new licenses while the NDRC investigation is ongoing. Litigation and/or other actions may be necessary to compel these licensees to report such sales and pay the required royalties for such sales and unlicensed companies to execute new licenses. Further, our success in China is in part dependent upon the rate of commercialization of 4G LTE products in China.

•

We expect that 3G/4G device prices will continue to vary broadly due to the increased penetration of smartphones combined with active competition throughout the world at all price tiers. Additionally, varying rates of economic growth by region and stronger growth of device shipments in emerging regions, as compared to developed regions, are expected to continue to impact the average and range of selling prices of 3G/4G devices.

•

We continue to invest significant resources toward advancements in 3G, 3G/4G and 4G LTE (an OFDMA-based standard) technologies, audio and video codecs, wireless baseband chips, our converged computing/communications (Snapdragon) chips, graphics, connectivity, multimedia products, software and services. We are also investing across a broad spectrum of opportunities that leverage our existing technical and business expertise to deploy new business models and enter into new industry segments, such as new display technologies; products designed for implementation of small cells and the 1000x data challenge; wireless charging; very high speed connectivity; automotive; mobile health; wearable technology; and products for the connected home, the digital 6th sense and the Internet of Everything.

In addition to the foregoing business and market-based matters, we continue to devote resources to working with and educating participants and governments in the wireless value chain as to the benefits of our business model and our extensive technology investments in promoting a highly competitive and innovative wireless industry. However, we expect that certain companies may continue to be dissatisfied with the need to pay reasonable royalties for the use of our technology and not welcome the success of our business model in enabling new, highly cost-effective competitors to their products. We expect that such companies and/or governments or regulators will continue to challenge our business model in various forums throughout the world.

Further discussion of risks related to our business is presented in the Risk Factors included in this Quarterly Report.

Results of Operations



Revenues (in millions)
	Three Months Ended							Nine Months Ended
	June 29, 2014		June 30, 2013		Change			June 29, 2014		June 30, 2013		Change
Equipment and services	$	4,922	$	4,286	$	636		$	13,803	$	12,474	$	1,329
Licensing	1,884		1,957		(73		)	5,992		5,911		81
	$	6,806	$	6,243	$	563		$	19,795	$	18,385	$	1,410

The increases in equipment and services revenues in the third quarter and the first nine months of fiscal 2014 were primarily due to increases in QCT revenues of $732 million and $1.55 billion, respectively, partially offset by decreases of $89 million and $218 million as a result of the sale of our Omnitracs division during fiscal 2014. The decrease in licensing revenues in the third quarter of fiscal 2014 was primarily due to a decrease in QTL revenues of $64 million. The increase in licensing revenues in the first nine months of fiscal 2014 was primarily due to an increase in QTL revenues of $94 million.



Costs and Expenses (in millions)
	Three Months Ended								Nine Months Ended
	June 29, 2014			June 30, 2013			Change		June 29, 2014			June 30, 2013			Change
Cost of equipment and services (E&S) revenues	$	2,740		$	2,497		$	243	$	7,929		$	7,106		$	823
Cost as % of E&S revenues	56		%	58		%			57		%	57		%

The increase in margin percentage in the third quarter of fiscal 2014 was primarily attributable to an increase in QCT margin percentage. Margin percentage remained flat in the first nine months of fiscal 2014. Our margin percentage may fluctuate in future periods depending on the mix of products sold and services provided, competitive pricing, new product introduction costs and other factors.



	Three Months Ended								Nine Months Ended
	June 29, 2014			June 30, 2013			Change		June 29, 2014			June 30, 2013			Change
Research and development	$	1,429		$	1,298		$	131	$	4,113		$	3,618		$	495
% of revenues	21		%	21		%			21		%	20		%
Selling, general, and administrative	$	582