Income Taxes

12 Months Ended

Jul. 01, 2011

Income Taxes [Abstract]

Income Taxes

Note 9.  Income Taxes

Pre-tax Income

The domestic and foreign components of income before income taxes were as follows for the three years ended July 1, 2011 (in millions):

	2011		2010		2009
Foreign	$	660	$	1,418	$	459
Domestic		120		102		42
Income before income taxes	$	780	$	1,520	$	501

Income Tax Provision

The components of the provision for income taxes were as follows for the three years ended July 1, 2011 (in millions):

	2011			2010			2009
Current:
Foreign	$	12		$	9		$	13
Domestic-federal		21			101			(7	)
Domestic-state		1			1			1
Deferred:
Domestic-federal		30			37			24
Domestic-state		(10	)		(10	)		—
Income tax provision	$	54		$	138		$	31

Remaining net undistributed earnings from foreign subsidiaries at July 1, 2011 on which no U.S. tax has been provided amounted to $4.7 billion. The net undistributed earnings are intended to finance local operating requirements and capital investments. Accordingly, an additional U.S. tax provision has not been made on these earnings. The tax liability for these earnings would be $1.6 billion if the Company repatriated the $4.7 billion in undistributed earnings from the foreign subsidiaries.

Deferred Taxes

Temporary differences and carryforwards, which give rise to a significant portion of deferred tax assets and liabilities as of July 1, 2011 and July 2, 2010 were as follows (in millions):

	2011			2010
Deferred tax assets:
Sales related reserves and accrued expenses not currently deductible	$	51		$	50
Accrued compensation and benefits not currently deductible		69			44
Domestic net operating loss (“NOL”) carryforward		49			52
Business credit carryforward		145			137
Other		53			47
Total deferred tax assets		367			330
Deferred tax liabilities:
Depreciation		(116	)		(58	)
Other		(10	)		(11	)
Total deferred tax liabilities		(126	)		(69	)
Deferred tax assets, net	$	241		$	261

	2011			2010
Deferred tax assets:
Current portion (included in other current assets)	$	108		$	81
Non-current portion (included in other non-current assets)		259			249
Total deferred tax assets		367			330
Deferred tax liabilities:
Current portion (included in other current assets)		(2	)		(2	)
Non-current portion (included in other non-current assets)		(124	)		(67	)
Total deferred tax liabilities		(126	)		(69	)
Deferred tax assets, net	$	241		$	261

In addition to the deferred tax assets presented above, the Company had additional NOL benefits related to stock-based compensation deductions of $110 million and $93 million at July 1, 2011 and July 2, 2010, respectively. The increase in NOL benefits relates to the current year stock based compensation deductions which will result in a future benefit of $17 million. This $17 million will be recorded as a credit to shareholders’ equity when an incremental benefit is recognized after considering all other tax attributes available to the Company.

Effective Tax Rate

Reconciliation of the U.S. Federal statutory rate to the Company’s effective tax rate is as follows for the three years ended July 1, 2011:

	2011			2010			2009
U.S. Federal statutory rate		35	%		35	%		35	%
Tax rate differential on international income		(26	)		(26	)		(30	)
Tax effect of U.S. permanent differences		3			1			6
State income tax, net of federal tax		(1	)		—			1
Income tax credits		(4	)		(1	)		(8	)
Other		—			—			2
Effective tax rate		7	%		9	%		6	%

Tax Holidays and Carryforwards

A substantial portion of the Company’s manufacturing operations in Malaysia, Singapore and Thailand operate under various tax holidays and tax incentive programs which will expire in whole or in part at various dates through 2023. Certain of the holidays may be extended if specific conditions are met. The net impact of these tax holidays and tax incentives was to increase the Company’s net earnings by $362 million ($1.54 per diluted share), $560 million ($2.40 per diluted share), and $241 million ($1.07 per diluted share) in 2011, 2010, and 2009, respectively.

As of July 1, 2011, the Company had federal and state NOL carryforwards of $185 million and $52 million, respectively. In addition, as of July 1, 2011, the Company had various federal and state tax credit carryforwards of $251 million combined. The NOL carryforwards available to offset future federal and state taxable income expire at various dates from 2021 to 2030 and 2015 to 2020, respectively. Approximately $140 million of the credit carryforwards available to offset future taxable income expire at various dates from 2012 to 2030. The remaining amount is available indefinitely. NOLs and credits relating to Komag, Incorporated (“Komag”), which was acquired by the Company on September 5, 2007, are subject to limitations under Section 382 and 383 of the Internal Revenue Code. The Company does not expect these limitations to result in a reduction in the total amount of NOLs and credits ultimately realized.

Uncertain Tax Positions

The Company recognizes liabilities for uncertain tax positions based on a two-step process. First, the tax position is evaluated for recognition by determining if it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit to be recognized in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. With the exception of certain unrecognized tax benefits that are directly associated with the tax position taken, unrecognized tax benefits are presented gross in the Company’s balance sheet. Interest and penalties related to unrecognized tax benefits are recognized on liabilities recorded for uncertain tax positions and are recorded in the provision for income taxes. As of July 1, 2011, such interest and penalties were not material.

As of July 1, 2011, the Company had $245 million of unrecognized tax benefits.

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits for the year ended July 1, 2011 (in millions):

Unrecognized tax benefit at July 2, 2010	$	230
Gross increases related to prior year tax positions		5
Gross decreases related to prior year tax positions		(11	)
Gross increases related to current year tax positions		24
Settlements/lapse of statute of limitations		(3	)
Unrecognized tax benefit at July 1, 2011	$	245

The entire balance of unrecognized tax benefits at July 1, 2011, if recognized, would affect the effective tax rate.

The Company files U.S. Federal, U.S. state, and foreign tax returns. For both federal and state tax returns, with few exceptions, the Company is subject to examination for fiscal years 2008 through 2011. In foreign jurisdictions, with few exceptions, the Company is subject to examination for all years subsequent to fiscal 2006. The Company is no longer subject to examination by the Internal Revenue Service (“IRS”) for periods prior to 2006, although carry forwards generated prior to those periods may still be adjusted upon examination by the IRS or state taxing authority if they either have been or will be used in a subsequent period.

The IRS is currently examining fiscal years 2006 and 2007 for the Company and calendar years 2005 and 2006 for Komag. The IRS has completed its field work and proposed certain adjustments. Certain issues have been agreed upon by the Company and the IRS and certain issues remain unresolved. The Company has received Revenue Agent Reports (“RARs”) for the agreed issues. The Company has also received RARs from the IRS for the unresolved issues which seek adjustments to income before income taxes of $970 million for the Company and $380 million for Komag. The issues in dispute relate primarily to transfer pricing and certain other intercompany transactions. The Company disagrees with the proposed adjustments. In May 2011, the Company filed a protest with the IRS Appeals Office regarding the proposed adjustments. The Company is continuing discussions with the IRS to resolve the Komag issues.

The Company 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. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. As of July 1, 2011, it is not possible to estimate the amount of change, if any, in the unrecognized tax benefits that is reasonably possible within the next twelve months. Any significant change in the amount of the Company’s unrecognized tax benefits would most likely result from additional information or settlements relating to the examination of the Company’s uncertain tax positions.