Note 15: Income Taxes

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

 

		Year Ended
		June 30, 2013				June 24, 2012				June 26, 2011
		(in thousands)
United States		$	(46,392	)		$	(6,950	)		$	159,250
Foreign			113,050				211,368				641,626
		$	66,658			$	204,418			$	800,876

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

 

		Year Ended
		June 30,				June 24,				June 26,
		2013				2012				2011
		(in thousands)
Federal:
Current		$	(1,096	)		$	5,038			$	55,119
Deferred			(60,172	)			(1,033	)			(25,143	)
		$	(61,268	)		$	4,005			$	29,976
State:
Current		$	3,332			$	1,297			$	3,159
Deferred			(6,351	)			336				26,589
		$	(3,019	)		$	1,633			$	29,748
Foreign:
Current		$	20,640			$	33,871			$	22,556
Deferred			(3,574	)			(3,814	)			(5,152	)
		$	17,066			$	30,057			$	17,404
Total Provision (Benefit) for Income Taxes		$	(47,221	)		$	35,695			$	77,128

 

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 30,				June 24,
		2013				2012
		(in thousands)
Deferred tax assets:
Tax carryforwards		$	169,371			$	114,974
Allowances and reserves			94,720				102,041
Equity-based compensation			19,586				24,960
Inventory valuation differences			22,833				8,233
Other			11,286				3,506
Gross deferred tax assets			317,796				253,714
Valuation allowance			(76,594	)			(55,213	)
Net deferred tax assets			241,202				198,501
Deferred tax liabilities:
Intangible Assets			(94,836	)			(117,312	)
Convertible debt			(98,482	)			(81,608	)
Temporary differences for captial assets			(41,470	)			(71,439	)
Amortization of goodwill			(9,950	)			(8,180	)
Other			(14,581	)			(7,060	)
Gross deferred tax liabilities			(259,319	)			(285,599	)
Net deferred tax assets		$	(18,117	)		$	(87,098	)

The change in the gross deferred tax assets, gross deferred tax liabilities and valuation allowance between fiscal year 2013 and 2012 is primarily attributable to reversal of deferred tax liabilities related to intangibles and fixed assets due to non-deductibility of amortization and depreciation resulting from purchase price accounting adjustments, an increase of tax credit attributes resulting from the extension of the federal research and development tax credit in fiscal year 2013, and resolution of certain tax matters. 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 $76.6 million primarily 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 continued to elect to account for the indirect benefits of stock-based compensation such as the research and development tax credit through the consolidated statement of operations.

At June 30, 2013, the Company had federal net operating loss carryforwards of approximately $158.6 million. These losses will begin to expire in the year 2018, and are subject to limitations on their utilization.

As of June 30, 2013, the Company had state net operating loss carryforward of approximately $129.3 million. If not utilized, the net operating loss carryforwards will begin to expire in the year 2015, and are subject to limitations on their utilization.

At June 30, 2013, the Company had federal tax credit carryforwards of approximately $86.1 million, of which $83.4 million will begin to expire in fiscal year 2027. The remaining balance of $2.7 million of credits may be carried forward indefinitely. The tax benefits relating to approximately $8.7 million of federal tax credit carryforwards will be credited to additional paid-in-capital when recognized.

At June 30, 2013, the Company had state tax credit carryforwards of approximately $192.0 million. Substantially all tax credits may be carried forward indefinitely. The tax benefits relating to approximately $36.7 million of the state tax credit carryforwards will be credited to additional paid-in-capital when recognized.

At June 30, 2013, the Company had foreign net operating loss carryforwards of approximately $57.2 million, of which approximately $30.0 million may be carried forward indefinitely and $27.2 million will begin to expire in fiscal year 2014.

A reconciliation of income tax expense provided at the federal statutory rate (35% in fiscal years 2013, 2012 and 2011) to actual income expense is as follows:

 

		Year Ended
		June 30, 2013				June 24, 2012				June 26, 2011
		(in thousands)
Income tax expense computed at federal statutory rate		$	23,332			$	71,546			$	280,306
State income taxes, net of federal tax benefit			(13,588	)			(4,895	)			9,322
Foreign income taxed at different rates			(40,255	)			(51,425	)			(217,982	)
Tax credits			(42,593	)			(5,791	)			(16,503	)
State valuation allowance, net of federal tax benefit			11,538				5,862				10,078
Equity-based compensation			20,318				14,123				12,244
Acquisition costs			—				5,683				—
Other permanent differences and miscellaneous items			(5,973	)			592				(337	)
		$	(47,221	)		$	35,695			$	77,128

Effective from fiscal year 2003 through June 2013, the Company had a tax holiday in Switzerland for one of its foreign subsidiaries, which was conditional upon the Company meeting certain employment and investment thresholds. The impact of the tax holiday decreased income taxes by approximately $10.8 million, $22.3 million, and $119.5 million for fiscal years 2013, 2012, and 2011, respectively. The benefit of the tax holiday on diluted earnings per share was approximately $0.06 in fiscal year 2013, $0.18 in fiscal year 2012, and $0.96 in fiscal year 2011. The Company obtained a new Swiss ruling that is effective until June 30, 2023.

Effective from January 2007 through December 2012, Novellus had a tax holiday in Singapore for one of its foreign subsidiaries. The tax holiday was terminated effective January 1, 2013. The benefit of the Singapore tax holiday for the Company’s fiscal year 2013 results is immaterial.

Unremitted earnings of the Company’s foreign subsidiaries included in consolidated retained earnings aggregated to approximately $2.1 billion at June 30, 2013. These earnings 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 $462.2 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 30, 2013, the total gross unrecognized tax benefits were $333.1 million compared to $343.8 million as of June 24, 2012, and $181.5 million as of June 26, 2011. During fiscal year 2013, gross unrecognized tax benefits decreased by approximately $10.7 million. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $257.7 million, $278.2 million, and $120.4 million as of June 30, 2013, June 24, 2012, and June 26, 2011, respectively. The aggregate changes in the balance of gross unrecognized tax benefits were as follows:

 

		(in millions)
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
Settlements and effective settlements with tax authorities			(0.2	)
Lapse of statute of limitations			(6.6	)
Increases in balances related to tax positions taken during prior periods			1.4
Decreases in balances related to tax positions taken during prior periods			(4.3	)
Increases in balances related to tax positions taken during current period			22.3
Tax positions assumed in Novellus transaction			149.7
Balance as of June 24, 2012			343.8
Settlements and effective settlements with tax authorities			(3.4	)
Lapse of statute of limitations			(51.4	)
Increases in balances related to tax positions taken during prior periods			11.3
Decreases in balances related to tax positions taken during prior periods			(11.3	)
Increases in balances related to tax positions taken during current period			35.2
Tax positions assumed in Novellus transaction			8.9
Balance as of June 30, 2013		$	333.1

The Company recognizes interest expense and penalties related to the above unrecognized tax benefits within income tax expense. The Company had accrued $25.5 million, $25.2 million, and $16.9 million, cumulatively, for gross interest and penalties as of June 30, 3013, June 24, 2012, and June 26, 2011, respectively.

The Internal Revenue Service (“IRS”) has completed its audit of the Company’s U.S. income tax return for fiscal years 2008 and 2009. As a result of the settlement of the IRS audit, the Company reduced its unrecognized tax benefits by approximately $1.8 million in fiscal year 2013. In addition, the Company is also subject to audits by state and foreign tax authorities. The Company is unable to make a reasonable estimate as to when cash settlements, if any, with the relevant taxing authorities will occur.

The Company files U.S. federal, U.S. state, and foreign income tax returns. As of June 30, 2013, tax years 2003-2012 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.