Note 15: Income Taxes

The components of income (loss) before income taxes are as follows:

 

		Year Ended
		June 26, 2011				June 27, 2010				June 28, 2009
		(in thousands)
United States		$	159,250			$	140,309			$	26,200
Foreign			641,626				289,832				(289,293	)
		$	800,876			$	430,141			$	(263,093	)

 

Significant components of the provision (benefit) for income taxes attributable to income before income taxes are as follows:

 

		Year Ended
		June 26, 2011				June 27, 2010				June 28, 2009
		(in thousands)
Federal:
Current		$	55,119			$	38,221			$	(6,523	)
Deferred			(25,143	)			11,438				11,668
		$	29,976			$	49,659			$	5,145
State:
Current		$	3,159			$	6,126			$	(487	)
Deferred			26,589				5,009				8,047
		$	29,748			$	11,135			$	7,560
Foreign:
Current		$	22,556			$	22,813			$	15,017
Deferred			(5,152	)			(135	)			11,333
		$	17,404			$	22,678			$	26,350
Total Provision for Income Taxes		$	77,128			$	83,472			$	39,055

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes, and the amounts used for income tax purposes, as well as the tax effect of carryforwards. Significant components of the Company's net deferred tax assets are as follows:

 

		June 26, 2011				June 27, 2010
		(in thousands)
Deferred tax assets:
Tax carryforwards		$	33,152			$	50,182
Allowances and reserves			85,751				63,143
Inventory valuation differences			8,861				7,764
Equity-based compensation			8,019				6,202
Capitalized R&D expenses			2,722				5,027
Other			8,743				5,088
Gross deferred tax assets			147,248				137,406
Valuation allowance			(46,201	)			(36,957	)
Net deferred tax assets			101,047				100,449
Deferred tax liabilities:
Fixed assets depreciation and intangibles amortization			(23,145	)			(20,188	)
State cumulative temporary differences			(802	)			(10,118	)
Amortization of goodwill			(7,768	)			(6,026	)
Gross deferred tax liabilities			(31,715	)			(36,332	)
Net deferred tax assets		$	69,332			$	64,117

Realization of the Company's net deferred tax assets is based upon the weighting of available evidence, including such factors as the recent earnings history and expected future taxable income. The Company believes it is more-likely-than-not that such deferred tax assets will be realized with the exception of $46.2 million related to California and certain foreign deferred tax assets.

The provisions related to the tax accounting for stock-based compensation prohibit the recognition of a deferred tax asset for an excess benefit that has not yet been realized. As a result, the Company will only recognize an excess benefit from stock-based compensation in additional paid-in-capital if an incremental tax benefit is realized after all other tax attributes currently available to us have been utilized. In addition, the Company has elected to account for the indirect benefits of stock-based compensation such as the R&D tax credit through the consolidated statement of operations.

As of June 26, 2011, the Company had a California net operating loss carryforward of approximately $2.3 million. If not utilized, the net operating loss carryforward will begin to expire in the year 2030. In the event the tax benefits are realized, an immaterial amount would be credited to additional paid-in capital.

At June 26, 2011, the Company had federal and state tax credit carryforwards of approximately $145.4 million, of which approximately $30.2 million will expire in varying amounts between fiscal years 2030 and 2032. The remaining balance of $115.1 million of tax carryforwards may be carried forward indefinitely. The tax benefits relating to approximately $36.8 million of the tax credit carryforwards will be credited to additional paid-in-capital when recognized.

At June 26, 2011, the Company had foreign net operating loss carryforwards of approximately $41.6 million, of which approximately $25.4 million may be carried forward indefinitely and $16.2 million will begin to expire in fiscal year 2012.

A reconciliation of income tax expense provided at the federal statutory rate (35% in fiscal years 2011, 2010 and 2009) to actual income expense is as follows:

 

		Year Ended
		June 26, 2011				June 27, 2010				June 28, 2009
		(in thousands)
Income tax expense computed at federal statutory rate		$	280,306			$	150,549			$	(92,083	)
State income taxes, net of federal tax benefit			9,322				4,754				(4,550	)
Foreign income taxed at different rates			(217,982	)			(84,081	)			125,124
Tax credits			(16,503	)			(4,410	)			(9,273	)
State valuation allowance, net of federal tax benefit			10,078				4,627				12,109
Equity-based compensation			12,244				11,847				10,985
Other, net			(337	)			186				(3,257	)
		$	77,128			$	83,472			$	39,055

The Company's effective tax rate on income before tax for the year was 9.6% which was lower than the United States federal statutory rate of 35% due to geographical mix of income between higher and lower foreign tax jurisdictions, favorable recognition of the U.S. federal research tax credit, and tax benefits related to the recognition of previously unrecognized tax benefits due to the settlement of audits and statute of limitations expiration.

Effective from fiscal year 2003 through June 2013, the Company has a tax holiday in Switzerland for one of its foreign subsidiaries, which is conditional upon the Company meeting certain employment and investment thresholds. The impact of the tax holiday decreased income taxes by approximately $119.5 million, $45.9 million, and $0 million for fiscal years 2011, 2010, and 2009, respectively. The benefit of the tax holiday on diluted earnings per share was approximately $0.96 in fiscal year 2011, $0.36 in fiscal year 2010, and $0.00 in fiscal year 2009.

 

Unremitted earnings of the Company's foreign subsidiaries included in consolidated retained earnings aggregated to approximately $1.54 billion at June 26, 2011. These earnings, which reflect full provisions for foreign income taxes, are indefinitely reinvested in foreign operations. If these earnings were remitted to the United States, they would be subject to U.S. and foreign withholding taxes of approximately $387.3 million at current statutory rates. The Company's federal income tax provision includes U.S. income taxes on certain foreign-based income.

As of June 26, 2011, the total gross unrecognized tax benefits were $181.5 million compared to $190.5 million as of June 27, 2010, and $178.4 million as of June 28, 2009. During fiscal year 2011, gross unrecognized tax benefits decreased by approximately $9.0 million. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $120.4 million, $153.8 million, and $125.5 million as of June 26, 2011, June 27, 2010, and June 28, 2009, respectively. The aggregate changes in the balance of gross unrecognized tax benefits were as follows:

 

		(in millions)
Balance as of June 29, 2008		$	143.8
Settlements and effective settlements with tax authorities			—
Lapse of statute of limitations			(0.7	)
Increases in balances related to tax positions taken during prior periods			13.9
Decreases in balances related to tax positions taken during prior periods			(2.5	)
Increases in balances related to tax positions taken during current period			23.9
Balance as of June 28, 2009		$	178.4
Settlements and effective settlements with tax authorities			(1.3	)
Lapse of statute of limitations			(8.1	)
Increases in balances related to tax positions taken during prior periods			5.5
Decreases in balances related to tax positions taken during prior periods			(2.0	)
Increases in balances related to tax positions taken during current period			18.0
Balance as of June 27, 2010			190.5
Settlements and effective settlements with tax authorities			(24.2	)
Lapse of statute of limitations			(5.2	)
Increases in balances related to tax positions taken during prior periods			13.7
Decreases in balances related to tax positions taken during prior periods			(13.4	)
Increases in balances related to tax positions taken during current period			20.1
Balance as of June 26, 2011		$	181.5

The Company recognizes interest expense and penalties related to the above unrecognized tax benefits within income tax expense. The Company had accrued $16.9 million, $18.5 million, and $19.1 million, cumulatively, for gross interest and penalties as of June 26, 2011, June 27, 2010 and June 28, 2009, respectively.

The Company completed a number of income tax audits in the U.S. and other foreign jurisdictions in fiscal year 2011. As a result of the settlement of these audits, the Company reduced its unrecognized tax benefits by approximately $24.2 million in fiscal year 2011.

The Internal Revenue Service ("IRS") is examining the Company's U.S. income tax return for fiscal year 2008 and 2009. The Company is also under audit by the California Franchise Tax Board ("FTB") for fiscal years 2005 and 2006. As of June 26, 2011, no significant adjustments have been proposed by the IRS or FTB. The Company is unable to make a reasonable estimate as to when cash settlements, if any, with the relevant taxing authorities will occur. In addition, the Company is also subject to audits by foreign tax authorities.

The Company files U.S. federal, U.S. state, and foreign income tax returns. As of June 26, 2011, tax years 2003-2010 remain subject to examination in the jurisdictions where the Company operates.

 

The Company is in various stages of the examinations in connection with all of its tax audits worldwide and it is difficult to determine when these examinations will be settled. It is reasonably possible that over the next twelve-month period the Company may experience an increase or decrease in its unrecognized tax benefits. It is not possible to determine either the magnitude or the range of any increase or decrease at this time.