Apple 2005 Annual Report Download - page 42

Interest and Other Income, Net
Total interest and other income, net increased $112 million or 211% to $165 million during 2005 compared to $53 million in 2004 and $83
million in 2003. These increases are attributable primarily to increasing investment yields on the Company’s cash and short-term investments
and higher invested balances. The weighted average interest rate earned by the Company on its cash, cash equivalents, and short-term
investments increased to 2.70% in 2005 compared to the 1.38% and 1.89% rates earned during 2004 and 2003, respectively. The Company
occasionally sells short-term investments prior to their stated maturities. As a result of such sales, the Company recognized net losses of
$137,000 in 2005 and net gains of $1 million and $21 million during 2004 and 2003, respectively. Partially offsetting the increase in other
income were higher foreign currency hedging expenses.
Interest expense consisted primarily of interest on the Company’
s $300 million aggregate principal amount unsecured notes, which were repaid
upon their maturity in February 2004. The unsecured notes were sold at 99.925% of par for an effective yield to maturity of 6.51%. Total
deferred gain resulting from the closure of debt swaps of approximately $23 million was fully amortized as of the notes’ maturity in
February 2004.
Provision for Income Taxes
The Company’s effective tax rate for the year ended September 24, 2005 was approximately 26%. The Company’s effective rate differs from
the statutory federal income tax rate of 35% due primarily to certain undistributed foreign earnings for which no U.S. taxes are provided
because such earnings are intended to be indefinitely reinvested outside the U.S., research and development tax credits, and a reduction of
certain tax contingency reserves and adjustments to net deferred tax assets. The benefit from adjustments to tax contingency reserves and net
deferred tax assets was $67 million. In addition, the Company recorded a $25 million reduction of the valuation allowance associated with
deferred tax assets that, in management’s opinion, are now more likely than not to be realized in the future. $14 million of the valuation
allowance reduction was recorded as a credit to income tax expense, and the remainder was recorded as a credit to goodwill.
As of September 24, 2005, the Company had deferred tax assets arising from deductible temporary differences, tax losses, and tax credits of
$767 million before being offset against certain deferred tax liabilities and a valuation allowance for presentation on the Company’s balance
sheet. Management believes it is more likely than not that forecasted income, including income that may be generated as a result of certain tax
planning strategies, will be sufficient to fully recover the remaining net deferred tax assets. As of September 24, 2005 and September 25, 2004,
a valuation allowance of $5 million and $30 million, respectively, was recorded against the deferred tax asset for the benefits of tax loss
carryforwards that may not be realized. The remaining valuation allowance at September 24, 2005 relates principally to certain state operating
loss carryforwards. The Company will continue to evaluate the realizability of the deferred tax assets quarterly by assessing the need for and
amount of the valuation allowance.
The Internal Revenue Service (IRS) has completed its field audit of the Company’s federal income tax returns for all years prior to 2002 and
proposed certain adjustments. Certain of these adjustments are being contested through the IRS Appeals Office. Substantially all IRS audit
issues for these years have been resolved. In addition, the Company is also subject to audits by state, local, and foreign tax authorities.
Management believes that adequate provision has been made for any adjustments that may result from tax examinations. However, the
outcome of tax audits cannot be predicted with certainty. Should any issues addressed in the Company’s tax audits be resolved in a manner not
consistent with management’s expectations, the Company could be required to adjust its provision for income tax in the period such resolution
occurs.
On October 22, 2004, the American Jobs Creation Act (AJCA) was signed into law. The AJCA includes a provision for the deduction of 85%
of certain foreign earnings that are repatriated, as defined in the
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