Income Taxes

12 Months Ended

Jun. 30, 2012

Income Taxes [Abstract]

Income Taxes

10. Income Taxes

Income (loss) before provision for income taxes for fiscal 2012, 2011, and 2010 consisted of the following (in thousands):

	2012		2011			2010
United States	$	3,602	$	(915	)	$	(16,077	)
Foreign		64,948		74,386			76,334
Income before provision for income taxes	$	68,550	$	73,471		$	60,257

The provision for income taxes for fiscal 2012, 2011, and 2010 consisted of the following (in thousands):

	2012			2011			2010
Current tax expense
Federal	$	5,524		$	2,573		$	4,101
State		36			152			453
Foreign		9,587			10,616			9,272
		15,147			13,341			13,826
Deferred tax expense (benefit)
Federal		(814	)		(3,579	)		(9,058	)
State		—			—			2,619
Foreign		73			(87	)		(95	)
		(741	)		(3,666	)		(6,534	)
Provision for income taxes	$	14,406		$	9,675		$	7,292

The provision for income taxes differs from the federal statutory rate for fiscal 2012, 2011, and 2010 as follows (in thousands):

	2012			2011			2010
Provision at U.S. federal statutory rate	$	23,992		$	25,715		$	21,088
State income taxes		139			390			2,650
Qualified stock options		2,280			2,129			2,474
Business credits		(1,278	)		(2,910	)		(846	)
Foreign tax differential		(10,933	)		(15,818	)		(16,994	)
Tax exempt interest		(18	)		(18	)		(106	)
Change in valuation allowance		(27	)		(21	)		155
Tax benefit from NOL carryback		—			—			(1,804	)
Other differences		251			208			675
Provision for income taxes	$	14,406		$	9,675		$	7,292

Net deferred tax assets as of the end of fiscal 2012 and 2011 consisted of the following (in thousands):

	2012		2011
Current deferred tax assets	$	1,596	$	1,143
Non-current deferred tax assets		13,725		16,514
Net deferred tax assets	$	15,321	$	17,657

Current deferred tax assets and non-current deferred tax assets are included in prepaid expenses and other current assets, and other assets, respectively, in the accompanying consolidated balance sheets.

Significant components of our deferred tax assets (liabilities) as of the end of fiscal 2012 and 2011 consisted of the following (in thousands):

	2012			2011
Deferred tax assets:
Investment writedowns	$	6,871		$	7,253
Capital loss carryforward		1,984			2,066
Inventory writedowns		259			334
Property and equipment		605			651
Accrued compensation		1,443			924
Share-based compensation		15,913			15,996
Business credit carryforward		14,372			13,958
Net operating loss carryforward		1,403			—
Other accruals		612			274
		43,462			41,456
Valuation allowance		(14,715	)		(15,058	)
		28,747			26,398
Deferred tax liabilities:
Acquisition intangibles		(4,583	)		—
Interest deduction		(8,843	)		(8,741	)
		(13,426	)		(8,741	)
Net deferred tax assets	$	15,321		$	17,657

Realization of deferred tax assets depends on our generating sufficient U.S. and certain foreign taxable income in future years to obtain benefit from the utilization of those deferred tax assets on our tax returns. Accordingly, the amount of deferred tax assets considered realizable may increase or decrease when we reevaluate the underlying basis for our estimates of future U.S. and foreign taxable income. As of the end of fiscal 2012, a valuation allowance of $14.7 million had been established to reduce deferred tax assets to levels that we believe are more than likely than not to be realized through future taxable income.

Undistributed operating earnings of our foreign subsidiaries were approximately $334.8 million as of the end of fiscal 2012 and are considered to be indefinitely reinvested overseas, and no U.S. income taxes have been provided for on these earnings. The potential deferred tax liability associated with undistributed operating earnings of our foreign subsidiaries was approximately $84.1 million.

As of the end of fiscal 2012, we had California net operating loss carryforwards of approximately $33.5 million. The California net operating loss carryforwards were attributable to share-based award deductions. The benefit of these net operating losses will be recorded directly to additional paid-in capital when realized. The California net operating loss will begin to expire in fiscal 2021, if not utilized. The federal and state capital losses will begin to expire in fiscal 2013, if not utilized. In addition, we had $4.0 million of federal and Idaho operating losses in connection with the acquisition of Pacinian Corporation, or Pacinian. See Note 12. Acquisition of Pacinian. Under current tax law, net operating loss and tax credit carryforwards available to offset future income or income taxes may be limited by statute or upon the occurrence of certain events, including significant changes in ownership.

We had $8.0 million and $8.4 million of federal and state research tax credit carryforwards, respectively. The federal research tax credit carryforward will begin to expire in 2027 and the state research tax credit can be carried forward indefinitely. We also had $1.7 million of federal alternative minimum tax credit carryforward available to offset future federal tax liabilities with no expiration.

The total liability for gross unrecognized tax benefits, included in other liabilities in our consolidated balance sheets, increased $2.9 million to $23.1 million in fiscal 2012 from $20.2 million in fiscal 2011. All of this amount would affect the effective tax rate on income from continuing operations, if recognized. A reconciliation of the beginning and ending balance of gross unrecognized tax benefits consisted of the following (in millions):

Balance as of June 2011	$	20.2
Increase in unrecognized tax benefits related to prior year tax positions		0.3
Increase in unrecognized tax benefits related to current year tax positions		2.6
Balance as of June 2012	$	23.1

Accrued interest and penalties increased by $750,000 to $2.4 million at the end of fiscal 2012 from $1.6 million at the end of fiscal 2011. Our policy is to classify interest and penalties, if any, as components of income tax expense.

In May 2011, we were notified by the Service, that our fiscal 2003 through 2006 and fiscal 2008 through 2010 would be subject to an audit. The early periods are being audited in connection with a mandatory review of tax refunds in excess of $2.0 million when we carried back our fiscal 2008 net operating loss. In April 2012, we received notices of proposed adjustments disallowing certain interest deductions resulting in a potential tax liability of approximately $1.0 million, excluding interest and penalties. We intend to contest the proposed adjustments through the administrative process. While we believe our unrecognized tax benefits associated with the years and issues under audit are adequate, we can make no assurances that an assessment, if any, will not exceed our accrued unrecognized tax benefits.

We anticipate the federal audit will conclude in fiscal 2013 and could result in a change to our unrecognized tax benefits. Any prospective adjustments to our unrecognized tax benefits will be recorded as an increase or decrease to income tax expense and cause a corresponding change to our effective tax rate. Accordingly, our effective tax rate could fluctuate materially from period to period.

Our major tax jurisdictions are the United States, California, and Hong Kong SAR and fiscal 2003 onward remain subject to examination by one or more of these jurisdictions.