Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.7.0.1
Income Taxes
 12 Months Ended
Jun. 30, 2017
Income Tax Disclosure [Abstract]  
INCOME TAXES
NOTE 12 — INCOME TAXES
The components of income before income taxes are as follows: 
 
Year ended June 30,
(In thousands)
2017
 
2016
 
2015
Domestic income before income taxes
$
615,906

 
$
417,803

 
$
157,251

Foreign income before income taxes
557,340

 
440,389

 
276,880

Total income before income taxes
$
1,173,246

 
$
858,192

 
$
434,131


The provision for income taxes is comprised of the following: 
(In thousands)
Year ended June 30,
2017
 
2016
 
2015
Current:
 
 
 
 
 
Federal
$
200,831

 
$
94,088

 
$
63,123

State
4,660

 
6,123

 
3,655

Foreign
38,208

 
37,680

 
25,438

 
243,699

 
137,891

 
92,216

Deferred:
 
 
 
 
 
Federal
444

 
15,645

 
(22,390
)
State
2,852

 
3,583

 
409

Foreign
175

 
(3,349
)
 
(2,262
)
 
3,471

 
15,879

 
(24,243
)
Provision for income taxes
$
247,170

 
$
153,770

 
$
67,973



The significant components of deferred income tax assets and liabilities are as follows:
(In thousands)
As of June 30,
2017
 
2016
Deferred tax assets:
 
 
 
Tax credits and net operating losses
$
134,052

 
$
116,277

Employee benefits accrual
106,637

 
109,524

Stock-based compensation
15,252

 
13,607

Inventory reserves
95,200

 
94,783

Non-deductible reserves
43,140

 
34,484

Depreciation and amortization
3,415

 
15,857

Unearned revenue
15,757

 
14,375

Other
26,538

 
26,877

Gross deferred tax assets
439,991

 
425,784

Valuation allowance
(120,708
)
 
(104,968
)
Net deferred tax assets
$
319,283

 
$
320,816

Deferred tax liabilities:
 
 
 
Unremitted earnings of foreign subsidiaries not indefinitely reinvested
$
(13,213
)
 
$
(11,571
)
Deferred profit
(13,657
)
 
(10,346
)
Unrealized gain on investments
(2,707
)
 
(604
)
Total deferred tax liabilities
(29,577
)
 
(22,521
)
Total net deferred tax assets
$
289,706

 
$
298,295


As of June 30, 2017, the Company had U.S. federal, state and foreign net operating loss (“NOL”) carry-forwards of approximately $29.4 million, $49.4 million and $41.9 million, respectively. The U.S. federal NOL carry-forwards will expire at various dates beginning in 2023 through 2029. The utilization of NOLs created by acquired companies is subject to annual limitations under Section 382 of the Internal Revenue Code. However, it is not expected that such annual limitation will significantly impair the realization of these NOLs. The state NOLs will begin to expire in 2018. State credits of $167.6 million will be carried over indefinitely. The foreign NOL carry-forwards will begin to expire in 2018.
The net deferred tax asset valuation allowance was $120.7 million and $105.0 million as of June 30, 2017 and June 30, 2016, respectively. The change was primarily due to an increase in the valuation allowance related to state credit carry-forwards generated in the fiscal year ended June 30, 2017. The valuation allowance is based on the Company’s assessment that it is more likely than not that certain deferred tax assets will not be realized in the foreseeable future. Of the valuation allowance as of June 30, 2017, $103.8 million relates to state credit carry-forwards. The remainder of the valuation allowance relates primarily to state and foreign NOL carry-forwards.
 As of June 30, 2017, U.S. income taxes were not provided for on a cumulative total of approximately $2.60 billion of undistributed earnings for certain non-U.S. subsidiaries. If these undistributed earnings were repatriated to the United States, they would generate foreign tax credits to reduce the federal tax liability associated with the foreign dividend. Assuming full utilization of the foreign tax credits, the potential deferred tax liability associated with undistributed earnings would be approximately $866.0 million.
KLA-Tencor benefits from tax holidays in Israel and Singapore where it manufactures certain of its products. These tax holidays are on approved investments and are scheduled to expire at varying times in the next one to four years. The Company was in compliance with all the terms and conditions of the tax holidays as of June 30, 2017. The net impact of these tax holidays was to decrease the Company’s tax expense by approximately $32.6 million, $19.5 million and $20.4 million in the fiscal years ended June 30, 2017, 2016 and 2015, respectively. The benefits of the tax holidays on diluted net income per share were $0.21, $0.12 and $0.13 for the fiscal years ended June 30, 2017, 2016 and 2015, respectively.
One of the Company’s Singapore holidays is scheduled to expire in August 2018.  The Company is unsure if the holiday will be extended.  The Company’s tax rate on income earned under this holiday would increase from 5% to 17% if the holiday is not extended.

The reconciliation of the United States federal statutory income tax rate to KLA-Tencor’s effective income tax rate is as follows: 
 
Year ended June 30,
 
2017
 
2016
 
2015
Federal statutory rate
35.0
 %
 
35.0
 %
 
35.0
 %
State income taxes, net of federal benefit
0.4
 %
 
0.9
 %
 
0.7
 %
Effect of foreign operations taxed at various rates
(12.2
)%
 
(13.0
)%
 
(15.3
)%
Research and development tax credit
(1.1
)%
 
(1.9
)%
 
(3.7
)%
Net change in tax reserves
1.3
 %
 
(2.2
)%
 
1.5
 %
Domestic manufacturing benefit
(1.5
)%
 
(1.5
)%
 
(2.1
)%
Effect of stock-based compensation
(0.2
)%
 
0.3
 %
 
0.8
 %
Other
(0.6
)%
 
0.3
 %
 
(1.2
)%
Effective income tax rate
21.1
 %
 
17.9
 %
 
15.7
 %

A reconciliation of gross unrecognized tax benefits is as follows: 
 
Year ended June 30,
(In thousands)
2017
 
2016
 
2015
Unrecognized tax benefits at the beginning of the year
$
50,365

 
$
69,018

 
$
59,575

Increases for tax positions taken in prior years
6,788

 
4,245

 
1,245

Decreases for tax positions taken in prior years
(246
)
 
(1,209
)
 
(7
)
Increases for tax positions taken in current year
14,696

 
13,636

 
11,634

Decreases for settlements with taxing authorities
—

 
(8,762
)
 
—

Decreases for lapsing of statutes of limitations
(3,164
)
 
(26,563
)
 
(3,429
)
Unrecognized tax benefits at the end of the year
$
68,439

 
$
50,365

 
$
69,018


 
The amount of unrecognized tax benefits that would impact the effective tax rate was $68.4 million, $50.4 million and $69.0 million as of June 30, 2017, 2016 and 2015 respectively. The amount of interest and penalties recognized during the years ended June 30, 2017, 2016, and 2015 was expense of $2.2 million, income of $4.3 million as a result of a release of unrecognized tax benefits, and expense of $1.2 million, respectively. KLA-Tencor’s policy is to include interest and penalties related to unrecognized tax benefits within other expense (income), net. The amount of interest and penalties accrued as of June 30, 2017 and 2016 was approximately $5.9 million and $3.7 million, respectively.
The Company is subject to federal income tax examinations for all years beginning from the fiscal year ended June 30, 2014. The Company is subject to state income tax examinations for all years beginning from the fiscal year ended June 30, 2013. The Company is also subject to examinations in other major foreign jurisdictions, including Singapore, for all years beginning from the fiscal year ended June 30, 2013. The Company is under income tax examination in Israel for the fiscal years ended June 30, 2013 through June 30, 2015. The Company believes that adequate amounts have been reserved for any adjustments that may ultimately result from any future examinations of these years.
It is possible that certain examinations may be concluded in the next twelve months. The Company believes it is possible that it may recognize up to $15.3 million of its existing unrecognized tax benefits within the next 12 months as a result of the lapse of statutes of limitations and the resolution of examinations with various tax authorities.