QCOM 18Q1 8-K

  UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 8-K

Qualcomm Announces First Quarter Fiscal 2018 Results

GAAP Revenues $6.1 billion

GAAP Loss per Share $4.03 , reflecting Tax Reform and European Commission Fine

Non-GAAP Earnings per Share $0.98

SAN DIEGO - January 31, 2018 - Qualcomm Incorporated (NASDAQ: QCOM) today announced results for its fiscal first quarter ended December 24, 2017 .

“Our fiscal first quarter results reflect continued strong performance in our semiconductor business, as well as continued strength in 3G/4G handset ASPs,” said Steve Mollenkopf, CEO of Qualcomm Incorporated.  “We recently detailed our roadmap for value creation, outlining the significant growth potential for Qualcomm as we enter the 5G world and our products and technologies expand into attractive new markets.”

First Quarter Results (GAAP)*

	Q1 Fiscal 2018		Q1 Fiscal 2017		Year-Over-Year Change		Q4 Fiscal 2017		Sequential Change
Revenues	$6.1B		$6.0B		+1%		$5.9B		+3%
Operating income	$0.0B		$0.8B		(96%)		$0.3B		(91%)
Net (loss) income 1	($6.0B)		$0.7B		N/M		$0.2B		N/M
Diluted (loss) earnings per share 1	($4.03)		$0.46		N/M		$0.11		N/M
Operating cash flow 2	$1.8B		$1.6B		+11%		$2.4B		(27%)

1 Throughout this news release, net (loss) income and diluted (loss) earnings per share are attributable to Qualcomm (i.e., after adjustments for noncontrolling interests), unless otherwise stated.

2 In the first quarter of fiscal 2018, we adopted new accounting guidance that changed the presentation of certain cash flows related to share-based awards in the statement of cash flows. As a result, prior period cash flow amounts presented in this news release have been adjusted to conform to the current year presentation as follows: net cash provided by operating activities for the first and fourth quarters of fiscal 2017 increased by $207 million and $7 million, respectively, with corresponding offsets to net cash used in financing activities.

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Qualcomm Announces First Quarter Fiscal 2018 Results                     Page 2 of 15

First Quarter Results (Non-GAAP)*

Non-GAAP results exclude the QSI (Qualcomm Strategic Initiatives) segment and certain share-based compensation, acquisition-related items, tax items and other items. Further discussion regarding the Company’s use of Non-GAAP financial measures and detailed reconciliations between GAAP and Non-GAAP results are included within this news release.

	Q1 Fiscal 2018		Q1 Fiscal 2017		Year-Over-Year Change		Q4 Fiscal 2017		Sequential Change
Revenues	$6.0B		$6.0B		+1%		$6.0B		+1%
Operating income	$1.6B		$2.1B		(21%)		$1.6B		+4%
Net income	$1.5B		$1.8B		(18%)		$1.4B		+7%
Diluted earnings per share	$0.98		$1.19		(18%)		$0.92		+7%

* The first quarter of fiscal 2018 and fourth quarter of fiscal 2017 GAAP and Non-GAAP results were negatively impacted by our continued dispute with Apple and its contract manufacturers (who are Qualcomm licensees), as well as the previously disclosed dispute with another licensee. We did not record any QTL revenues in the first quarter of fiscal 2018 or fourth quarter of fiscal 2017 for royalties due on sales of Apple’s or the other licensee’s products. The first quarter of fiscal 2017 results included approximately $740 million in QTL revenues related to the products of Apple and the other licensee in dispute. We expect the actions taken by these licensees will continue until the respective disputes are resolved.

The following also should be considered in regard to the year-over-year and sequential comparisons:

·	The first quarter of fiscal 2018 GAAP results included:

◦

$6.0 billion charge, or ($4.03) per share, relating to the enactment of the Tax Cuts and Jobs Act (the Tax Legislation) in the United States (U.S.), which was comprised of $5.3 billion related to the estimated one-time repatriation tax on deemed repatriated earnings and profits of U.S.-owned foreign subsidiaries (the Toll Charge), $562 million resulting from the estimated impact of remeasurement of U.S. deferred tax assets and liabilities that existed at the end of fiscal 2017 at a lower enacted corporate income tax rate and $86 million resulting from our decision to no longer indefinitely reinvest certain foreign earnings. We currently estimate that we will pay $3.3 billion for the Toll Charge, after application of certain tax credits, which is payable in installments over eight years beginning on January 15, 2019.

◦	$1.2 billion charge, or ($0.76) per share, for the fine imposed by the European Commission (EC), for which we intend to provide a financial guarantee to satisfy the obligation.

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Qualcomm Announces First Quarter Fiscal 2018 Results                     Page 3 of 15

·	The first quarter of fiscal 2017 GAAP results included:

◦	$868 million charge, or ($0.49) per share, for the fine imposed by the Korea Fair Trade Commission (KFTC).

·	The fourth quarter of fiscal 2017 GAAP results included:

◦	$778 million charge, or ($0.52) per share, for the fine imposed by the Taiwan Fair Trade Commission (TFTC), which will be paid in 60 monthly installments beginning on January 30, 2018.

Segment Results

First Quarter Fiscal 2018

(in millions except percentages)	Q1 Fiscal 2018		Q1 Fiscal 2017		Year-Over-Year Change		Q4 Fiscal 2017		Sequential Change
QCT
Revenues	$4,651		$4,101		+13%		$4,650		—%
EBT 1	$955		$724		+32%		$973		(2%)
EBT as % of revenues	21%		18%		+3%		21%		—%
MSM TM chip shipments	237		217		+9%		220		+8%
QTL
Revenues	$1,299		$1,811		(28%)		$1,213		+7%
EBT	$887		$1,532		(42%)		$829		+7%
EBT as % of revenues	68%		85%		(17%)		68%		—%

1 Earnings (loss) before taxes

Cash and Marketable Securities

Our cash, cash equivalents and marketable securities totaled $39.9 billion at the end of the first quarter of fiscal 2018 , compared to $29.8 billion a year ago and $38.6 billion at the end of the fourth quarter of fiscal 2017 . In addition, funds of $2.0 billion were held to collateralize the letters of credit related to our proposed acquisition of NXP, which have been recorded as other noncurrent assets since the end of the first quarter of fiscal 2017.

Announced Agreement to Acquire NXP

On October 27, 2016 , we announced a definitive agreement to acquire NXP Semiconductors N.V. (NXP) for estimated total cash to be paid to NXP’s shareholders of $38 billion . NXP is a leader in high-performance, mixed-signal semiconductor electronics in automotive, broad-based microcontrollers, secure identification, network processing and RF power products. The transaction is subject to receipt of regulatory clearance under applicable laws and other closing conditions, including the tender of at least

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Qualcomm Announces First Quarter Fiscal 2018 Results                     Page 4 of 15

80% of the issued and outstanding common shares of NXP in the offer (provided that the minimum tender threshold may be reduced to a percentage not less than 70% with the prior written consent of NXP). The transaction is expected to close in early calendar 2018. We intend to fund the transaction with cash generated from our May 2017 debt offering, as well as cash, cash equivalents and marketable securities held by our foreign entities, which will result in the use of a substantial portion of our cash, cash equivalents and marketable securities, and the use of a Term Loan Facility, which is expected to be drawn on at close.

Return of Capital to Stockholders

During the first quarter of fiscal 2018 , we returned $1.1 billion to stockholders, including $844 million , or $0.57 per share, of cash dividends paid and $225 million through repurchases of 3.7 million shares of common stock. On January 12, 2018 , we announced a cash dividend of $0.57 per share payable on March 21, 2018 to stockholders of record as of the close of business on February 28, 2018 .

Effective Income Tax Rates

On December 22, 2017, the Tax Legislation was enacted in the U.S., which significantly revises the U.S. corporate income tax by, among other things, lowering the corporate income tax rate to 21%, implementing a modified territorial tax system (effective in fiscal 2019) and imposing the Toll Charge. Our fiscal 2018 annual effective income tax rates are estimated to be 297 percent for GAAP and 8 percent for Non-GAAP. The GAAP effective tax rate for the first quarter of fiscal 2018 and estimated annual effective tax rate for fiscal 2018 included a preliminary charge of $6.0 billion recorded discretely in the first quarter of fiscal 2018, which was comprised of $5.3 billion related to the estimated Toll Charge, $562 million resulting from the estimated impact of remeasurement of U.S. deferred tax assets and liabilities that existed at the end of fiscal 2017 at a lower enacted corporate income tax rate and $86 million resulting from our decision to no longer indefinitely reinvest certain foreign earnings. The impact of the Tax Legislation may differ from this estimate, possibly materially.

The GAAP effective tax rate for the first quarter fiscal 2018 and estimated annual effective tax rate for fiscal 2018 also included the tax impact of the  $1.2 billion  EC fine, which is not deductible for tax purposes and is attributable to a foreign jurisdiction. The estimated fiscal 2018 GAAP and Non-GAAP effective tax rates included the impact of lower income from U.S. operations, primarily related to decreased QTL revenues from Apple’s contract manufacturers and the other licensee in dispute, as well as the reduced U.S. corporate tax rate, which was effective January 1, 2018.

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Qualcomm Announces First Quarter Fiscal 2018 Results                     Page 5 of 15

Business Outlook

The following statements are forward looking, and actual results may differ materially. The “Note Regarding Forward-Looking Statements” in this news release provides a description of certain risks that we face, and our most recent annual report on file with the Securities and Exchange Commission (SEC) provides a more complete description of risks.

Our outlook does not include provisions for future asset impairments or for pending legal matters, other than future legal amounts that are probable and estimable. Further, due to their nature, certain income and expense items, such as realized investment, certain derivative and foreign currency transaction gains or losses, cannot be accurately forecast. Accordingly, we only include such items in our financial outlook to the extent they are reasonably certain; however, actual results may differ materially from the outlook.

On January 16, 2018, we announced a cost reduction plan designed to align our cost structure to our long-term margin targets. As part of this plan, we will implement a series of targeted reductions across our businesses to reduce annual costs by $1 billion, excluding incremental costs resulting from any future acquisition of a business. We expect these cost reductions to be fully captured in fiscal 2019 results. We are in the process of finalizing our plan, as well as the restructuring and restructuring-related costs we expect to incur to execute our plan. Accordingly, our second quarter of fiscal 2018 outlook does not include any restructuring and restructuring-related costs that will result from this plan. Such future restructuring and restructuring-related costs will be excluded as “Other Items” from our Non-GAAP results.

We have not included estimates related to the operating results of our proposed acquisition of NXP in our second quarter of fiscal 2018 outlook.

Our financial guidance for the second quarter of fiscal 2018 excludes QTL revenues for royalties due on the sale of Apple products by Apple’s contract manufacturers, as well as the sale of products by the other licensee in dispute as we expect the actions taken by these licensees will continue until the respective disputes are resolved.

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Qualcomm Announces First Quarter Fiscal 2018 Results                     Page 6 of 15

The following table summarizes GAAP and Non-GAAP guidance based on the current outlook. The Non-GAAP outlook presented below is consistent with the presentation of Non-GAAP results included elsewhere herein.

Qualcomm’s Business Outlook Summary and Reconciliation

		Q2 FY17 Results (1)		Current Guidance Q2 FY18 Estimates (2)
	Revenues	$5.0B		$4.8B - $5.6B
	Year-over-year change			decrease 4% - increase 12%
	GAAP diluted earnings per share (EPS)	$0.50		$0.41 - $0.51
	Year-over-year change			decrease 18% - increase 2%
	Less diluted EPS attributable to QSI	$0.00			$0.03
	Less diluted EPS attributable to share-based compensation	($0.14)			($0.14	)
	Less diluted EPS attributable to other items	($0.69)			($0.13	)
	Non-GAAP diluted EPS	$1.34		$0.65 - $0.75
	Year-over-year change			decrease 44% - 51%
	Other Information
	MSM chip shipments	179	M	170M - 190M
	Year-over-year change			decrease 5% - increase 6%
	QTL revenues	$2.2B		$1.15B - $1.35B
	Year-over-year change			decrease 40% - 49%

(1)

The second quarter of fiscal 2017 GAAP results included a $974 million reduction to revenues, or ($0.48) per share, related to the BlackBerry arbitration decision. Diluted EPS attributable to other items for the second quarter of fiscal 2017 was primarily attributable to the reduction to revenues related to the BlackBerry arbitration decision and acquisition-related items. The second quarter of fiscal 2017 results included QTL revenues related to the products of Apple’s contract manufacturers and the other licensee in dispute.

(2)

Our financial guidance for the second quarter of fiscal 2018 excludes QTL revenues for royalties due on the sale of Apple’s products by Apple’s contract manufacturers, as well as the sale of products by the other licensee in dispute as we expect the actions taken by these licensees will continue until the respective disputes are resolved. Our guidance for diluted EPS attributable to other items for the second quarter of fiscal 2018 is primarily attributable to acquisition-related items.

Sums may not equal total due to rounding.

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Qualcomm Announces First Quarter Fiscal 2018 Results                     Page 7 of 15

Reconciliations of GAAP Results to Non-GAAP Results

The following tables reconcile our GAAP results to our Non-GAAP results ($ in millions, except per share data):

	GAAP Results			Less QSI		Less Share-Based Compensation				Less Other Items (a) (b)				Non-GAAP Results
Q1 FISCAL 2018
Revenues	$6,068			$30			$—				$—			$6,038
Operating income (loss)	29			9		(248)				(1,367)				1,635
EBT	(27)			11		(248)				(1,373)				1,583
EBT as % of revenues	—	%												26	%
Net (loss) income	(5,953)			8		(199)				(7,230)				1,468
Diluted EPS (c)	($4.03)			$0.01		($0.13)				($4.89)				$0.98
Diluted shares (c)	1,477			1,491		1,491				1,491				1,491
Q4 FISCAL 2017
Revenues	$5,905			$43		$0				($95)				$5,957
Operating income (loss)	333			22		(204)				(1,063)				1,578
EBT	434			28		(204)				(1,065)				1,675
EBT as % of revenues	7	%												28	%
Net income (loss)	168			25		(153)				(1,079)				1,375
Diluted EPS	$0.11			$0.02		($0.10)				($0.73)				$0.92
Diluted shares	1,488			1,488		1,488				1,488				1,488
Q1 FISCAL 2017
Revenues	$5,999			$14			$—				$—			$5,985
Operating income (loss)	778			(2)		(239)				(1,054)				2,073
EBT	870			(17)		(239)				(1,065)				2,191
EBT as % of revenues	15	%												37	%
Net income (loss)	682			(11)		(190)				(900)				1,783
Diluted EPS	$0.46			($0.01)		($0.13)				($0.60)				$1.19
Diluted shares	1,495			1,495		1,495				1,495				1,495

(a)

At fiscal year end, the quarterly tax provision (benefit) for each column equals the annual tax provision (benefit) for each column computed in accordance with GAAP. In interim quarters, the sum of these provisions (benefits) may not equal the total GAAP tax provision, and this difference is included in the tax provision (benefit) in the “Other Items” column. See the “Reconciliations of GAAP Tax Rates to Non-GAAP Tax Rates” herein for further details.

(b)	Further details of amounts included in the “Other Items” column for the current period are included in the “Supplemental Information and Reconciliations” and the “Reconciliations of GAAP Tax Rates to Non-GAAP Tax Rates.” Details of amounts included in the “Other Items” column for prior periods are included in the news releases for those periods.

(c)

As a result of the net loss in our GAAP results in the first quarter of fiscal 2018, all of the common share equivalents issuable under share-based compensation plans had an anti-dilutive effect and were therefore excluded from the computation of GAAP diluted loss per share. The diluted EPS impacts of the $6.0 billion charge resulting from the Tax Legislation and the $1.2 billion charge related to the fine imposed by the EC were calculated using the GAAP diluted shares. Amounts in all other columns included the common share equivalents issuable under share-based compensation plans in the calculation of diluted earnings per share because the Company reported Non-GAAP net income.

Sums may not equal totals due to rounding.

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Qualcomm Announces First Quarter Fiscal 2018 Results                     Page 8 of 15

Supplemental Information and Reconciliations

(Unaudited)

	Q1 FISCAL 2018
	($ in millions)	GAAP Results			Less QSI				Less Share-Based Compensation				Less Other Items (a)			Non-GAAP Results
	Cost of revenues		$2,663			$18				$10				$106			$2,529
	Research and development (R&D) expenses		1,420			—				156				2			1,262
	Selling, general and administrative (SG&A) expenses		773			3				82				76			612
	Other expenses		1,183			—				—				1,183			—
	Interest expense		170			—				—				3			167
	Investment and other income, net		114			2				—				(3)			115		(b)

(a)	Other items excluded from Non-GAAP results included a $1.2 billion charge related to the fine imposed by the EC, $187 million of acquisition-related charges and $3 million of net foreign currency transaction losses related to the TFTC fine.

(b)	Included $121 million in interest and dividend income and $10 million in net realized gains on investments, partially offset by $12 million in equity in net losses of investees and $4 million in other net investment losses.

Reconciliations of GAAP Tax Rates to Non-GAAP Tax Rates

(Unaudited)

		GAAP Results					Less QSI						Less Share-Based Compensation							Less Other Items (c)(d)								Non-GAAP Results
Q1 FISCAL 2018 ($ in millions)
Income (loss) before income taxes		$	(27	)			$	11						$	(248			)			$	(1,373			)			$	1,583
Income tax (expense) benefit		(5,926		)			(3				)			49							(5,857				)			(115		)
Net (loss) income (a)		$	(5,953	)			$	8						$	(199			)			$	(7,230			)			$	1,468
Tax rate		(21,948		%)			0		%	(b)				(2		%)	(b)				(21,953		%)	(b)				7		%
FISCAL 2018 ($ in millions)
Estimated annual tax rate		297		%			0		%	(b)				(1		%)	(b)				290		%	(b)				8		%

(a)	Before adjustments for noncontrolling interests.

(b)	The incremental effect of our adjustments to the Non-GAAP tax rate is calculated by allocating the difference between (i) the tax expense (benefit) calculated based on the GAAP tax rate and (ii) the actual or estimated tax expense (benefit) for each column.

(c)

In the first quarter of fiscal 2018, tax expense in the “Other Items” column included a $6.0 billion charge resulting from the enactment of the Tax Legislation, partially offset by a $45 million tax benefit to reconcile the tax provision for each column to the total GAAP tax provision for the quarter, a $30 million tax benefit for the tax effect of acquisition-related items in EBT and a $21 million tax benefit for the combined effect of other items in EBT.

(d)	In fiscal 2018, the estimated annual effective tax rate for the “Other Items” column included a $6.0 billion charge resulting from the enactment of the Tax Legislation, partially offset by a $119 million tax benefit for the tax effect of acquisition-related items in EBT and a $24 million tax benefit for the combined effect of other items in EBT.

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Qualcomm Announces First Quarter Fiscal 2018 Results                     Page 13 of 15

Qualcomm Incorporated

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except per share data)

(Unaudited)

	December 24, 2017				September 24, 2017
ASSETS
Current assets:
Cash and cash equivalents	$	33,362			$	35,029
Marketable securities	2,041				2,279
Accounts receivable, net	3,053				3,632
Inventories	1,872				2,035
Other current assets	638				618
Total current assets	40,966				43,593
Marketable securities	4,447				1,270
Deferred tax assets	1,241				2,900
Property, plant and equipment, net	3,224				3,216
Goodwill	6,638				6,623
Other intangible assets, net	3,548				3,737
Other assets	4,287				4,147
Total assets	$	64,351			$	65,486
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	1,685			$	1,971
Payroll and other benefits related liabilities	1,041				1,183
Unearned revenues	487				502
Short-term debt	3,465				2,495
Other current liabilities	5,349				4,756
Total current liabilities	12,027				10,907
Unearned revenues	1,906				2,003
Income taxes payable	3,867				—
Long-term debt	19,381				19,398
Other liabilities	3,246				2,432
Total liabilities	40,427				34,740
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; 1,480 and 1,474 shares issued and outstanding, respectively	265				274
Retained earnings	23,273				30,088
Accumulated other comprehensive income	386				384
Total stockholders’ equity	23,924				30,746
Total liabilities and stockholders’ equity	$	64,351			$	65,486

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Qualcomm Announces First Quarter Fiscal 2018 Results                     Page 14 of 15

Qualcomm Incorporated

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share data)

(Unaudited)

	Three Months Ended
	December 24, 2017				December 25, 2016
Revenues:
Equipment and services	$	4,704			$	4,139
Licensing	1,364				1,860
Total revenues	6,068				5,999
Costs and expenses:
Cost of revenues	2,663				2,443
Research and development	1,420				1,311
Selling, general and administrative	773				591
Other	1,183				876
Total costs and expenses	6,039				5,221
Operating income	29				778
Interest expense	(170		)		(90		)
Investment and other income, net	114				182
(Loss) income before income taxes	(27		)		870
Income tax expense	(5,926		)		(189		)
Net (loss) income	(5,953		)		681
Net loss attributable to noncontrolling interests	—				1
Net (loss) income attributable to Qualcomm	$	(5,953	)		$	682
Basic (loss) earnings per share attributable to Qualcomm	$	(4.03	)		$	0.46
Diluted (loss) earnings per share attributable to Qualcomm	$	(4.03	)		$	0.46
Shares used in per share calculations:
Basic	1,477				1,478
Diluted	1,477				1,495
Dividends per share announced	$	0.57			$	0.53

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Qualcomm Announces First Quarter Fiscal 2018 Results                     Page 15 of 15

Qualcomm Incorporated

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

	Three Months Ended
	December 24, 2017				December 25, 2016
Operating Activities:
Net (loss) income	$	(5,953	)		$	681
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization expense	363				329
Indefinite and long-lived asset impairment charges	—				32
Income tax provision in excess of (less than) income tax payments	5,697				(113		)
Non-cash portion of share-based compensation expense	248				239
Net realized gains on marketable securities and other investments	(23		)		(147		)
Impairment losses on marketable securities and other investments	9				143
Other items, net	57				(4		)
Changes in assets and liabilities:
Accounts receivable, net	581				131
Inventories	162				(354		)
Other assets	(56		)		(16		)
Trade accounts payable	(248		)		(208		)
Payroll, benefits and other liabilities	1,000				957
Unearned revenues	(75		)		(84		)
Net cash provided by operating activities	1,762				1,586
Investing Activities:
Capital expenditures	(226		)		(129		)
Purchases of available-for-sale marketable securities	(5,627		)		(4,117		)
Proceeds from sales and maturities of available-for-sale securities	2,704				6,891
Deposits of investments designated as collateral	—				(1,950		)
Acquisitions and other investments, net of cash acquired	(122		)		(57		)
Other items, net	10				43
Net cash (used) provided by investing activities	(3,261		)		681
Financing Activities:
Proceeds from short-term debt	2,116				2,727
Repayment of short-term debt	(1,149		)		(2,727		)
Proceeds from issuance of common stock	134				131
Repurchases and retirements of common stock	(225		)		(444		)
Dividends paid	(844		)		(784		)
Payments of tax withholdings related to vesting of share-based awards	(192		)		(172		)
Other items, net	(5		)		(42		)
Net cash used by financing activities	(165		)		(1,311		)
Effect of exchange rate changes on cash and cash equivalents	(3		)		(17		)
Net (decrease) increase in cash and cash equivalents	(1,667		)		939
Cash and cash equivalents at beginning of period	35,029				5,946
Cash and cash equivalents at end of period	$	33,362			$	6,885