Electronic Arts 2004 Annual Report Download - page 49

2004 primarily reÖects the resolution of certain tax-related matters with the Internal Revenue Service in the
fourth quarter of Ñscal 2004, which lowered our income tax expense by $19.7 million and resulted in a
2.5 percent rate reduction and a change in the geographic mix of taxable income subject to lower tax rates.
We intend to indeÑnitely reinvest our international earnings outside the U.S. and, accordingly, have not
provided U.S. taxes that would be incurred if such earnings were repatriated back to the U.S. Undistributed
earnings of our foreign subsidiaries amounted to approximately $738.3 million at March 31, 2004.
We are currently projecting an eÅective income tax rate of approximately 29 percent for Ñscal 2005. An
eÅective income tax rate projection, which is inherently uncertain, is based on current tax law and current
projections of the mix of income in various taxing jurisdictions and assumes no material changes in our
business or the applicable tax or accounting rules.
Our actual eÅective income tax rates for Ñscal 2005 and future periods can diÅer from the projected eÅective
income tax rates due to a variety of factors, including changes in our business that were not taken into account
in connection with our projection, a variation between the projected and actual mix of income between
international and domestic operations, changes or interpretations to applicable tax laws and regulations,
changes in the applicable accounting rules or our ability to realize deferred tax assets, or developments in tax
audit matters with various tax authorities. For example, in the fourth quarter of Ñscal 2004, we resolved
certain tax-related matters with the Internal Revenue Service, which lowered our income tax expense by
$19.7 million and resulted in a 2.5 percent rate reduction.
Finally, our projected eÅective income tax rate for Ñscal 2005 does not take into account a new election that is
available under the U.S. income tax rules regarding the allocation between U.S. and foreign jurisdictions tax
deductions attributable to employee stock option compensation. If we take advantage of this election, it
could detrimentally aÅect our eÅective income tax rate. We have not yet determined the impact that the
election would have on our reported results.
Net Income
Net income for Ñscal years 2004 and 2003 (in thousands):
March 31, % of Net March 31, % of Net
2004 Revenue 2003 Revenue $ Change % Change
$577,292 19.5% $317,097 12.8% $260,195 82.1%
Reported net income increased in Ñscal 2004 compared to Ñscal 2003 primarily due to the reasons discussed
above. Although the dollar amount of our expenses increased in Ñscal 2004 as compared to Ñscal 2003, net
income as a percentage of net revenue increased to 19.5 percent as compared to 12.8 percent in Ñscal 2003
because expenses, including our cost of goods sold, grew at a slower rate than did our net revenue.
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