Annual report pursuant to Section 13 and 15(d)

Income Taxes

v2.4.0.8
Income Taxes
 12 Months Ended
Jun. 30, 2014
Income Tax Disclosure [Abstract]  
Income Taxes
INCOME TAXES
The components of income before income taxes are as follows: 
 
Year ended June 30,
(In thousands)
2014
 
2013
 
2012
Domestic income before income taxes
$
434,336

 
$
420,862

 
$
607,146

Foreign income before income taxes
300,125

 
269,759

 
366,948

Total income before income taxes
$
734,461

 
$
690,621

 
$
974,094


The provision for income taxes is comprised of the following: 
(In thousands)
Year ended June 30,
2014
 
2013
 
2012
Current:
 
 
 
 
 
Federal
$
98,937

 
$
118,888

 
$
(699
)
State
8,580

 
4,404

 
51

Foreign
27,867

 
25,112

 
24,383

 
135,384

 
148,404

 
23,735

Deferred:
 
 
 
 
 
Federal
22,904

 
(2,552
)
 
188,882

State
(334
)
 
(1,036
)
 
3,721

Foreign
(6,248
)
 
2,656

 
1,741

 
16,322

 
(932
)
 
194,344

Provision for income taxes
$
151,706

 
$
147,472

 
$
218,079


 For the fiscal year ended June 30, 2014, actual current tax liabilities were lower than reflected in the table above by $16.5 million primarily due to a benefit for a deduction related to employee stock activity, which was recorded as an increase to capital in excess of par value.
For the fiscal year ended June 30, 2013, actual current tax liabilities were lower than reflected in the table above by $6.9 million primarily due to a benefit for a deduction related to employee stock activity, which was recorded as an increase to capital in excess of par value.
For the fiscal years ended June 30, 2012, the Company did not recognize any benefit for a deduction related to employee stock activity. Therefore, the Company had not reduced actual current tax liabilities, or recorded any increases to capital in excess of par value.
The significant components of deferred income tax assets and liabilities are as follows:
(In thousands)
As of June 30,
2014
 
2013
Deferred tax assets:
 
 
 
Tax credits and net operating losses
$
95,492

 
$
77,512

Employee benefits accrual
97,308

 
83,391

Stock-based compensation
17,676

 
37,091

Capitalized R&D expenses
12,051

 
34,791

Inventory reserves
83,783

 
79,866

Non-deductible reserves
41,469

 
42,256

Depreciation and amortization
2,572

 
—

Unearned revenue
13,937

 
12,010

Other
29,483

 
25,454

Gross deferred tax assets
393,771

 
392,371

Valuation allowance
(76,328
)
 
(57,097
)
Net deferred tax assets
$
317,443

 
$
335,274

Deferred tax liabilities:
 
 
 
Unremitted earnings of foreign subsidiaries not permanently reinvested
$
(17,334
)
 
$
(20,636
)
Depreciation and amortization
—

 
(1,863
)
Deferred profit
(16,358
)
 
(10,351
)
Unrealized gain on investments
(1,168
)
 
(572
)
Total deferred tax liabilities
(34,860
)
 
(33,422
)
Total net deferred tax assets
$
282,583

 
$
301,852


As of June 30, 2014, the Company had U.S. federal, state and foreign net operating loss (“NOL”) carry-forwards of approximately $28.5 million, $93.6 million and $51.5 million, respectively. The U.S. federal NOL carry-forwards will expire at various dates beginning in 2023 through 2027. 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 impair the realization of these NOLs. The state NOLs will begin to expire in 2017. State credits of $102.6 million will be carried over indefinitely. The foreign NOL carry-forwards will begin to expire in 2015.
The net deferred tax asset valuation allowance was $76.3 million and $57.1 million as of June 30, 2014 and June 30, 2013, 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, 2014. 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, 2014, $63.2 million relates to state credit carry-forwards. The remainder of the valuation allowance relates primarily to foreign NOL carry-forwards.
 As of June 30, 2014, U.S. income taxes were not provided for on a cumulative total of approximately $1.5 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 $497.1 million.
KLA-Tencor benefits from several 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 within the next one to seven years. However, of the tax holidays whose expiration will have a material impact on the Company's tax obligations, the soonest that any such tax holiday is scheduled to expire is during the fiscal year ending June 30, 2020. The Company was in compliance with all of the terms and conditions of the tax holidays as of June 30, 2014. The net impact of these tax holidays was to decrease the Company’s tax expense by approximately $25.8 million, $25.8 million and $53.1 million in the fiscal years ended June 30, 2014, 2013 and 2012, respectively. The benefits of the tax holidays on diluted net income per share were $0.15, $0.15 and $0.31 for the fiscal years ended June 30, 2014, 2013 and 2012, respectively.
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,
 
2014
 
2013
 
2012
Federal statutory rate
35.0
 %
 
35.0
 %
 
35.0
 %
State income taxes, net of federal benefit
0.7
 %
 
0.3
 %
 
0.4
 %
Effect of foreign operations taxed at various rates
(11.5
)%
 
(9.6
)%
 
(9.9
)%
Research and development tax credit
(1.5
)%
 
(3.1
)%
 
(1.1
)%
Net change in tax reserves
0.3
 %
 
1.7
 %
 
(2.8
)%
Domestic manufacturing benefit
(1.4
)%
 
(1.6
)%
 
(0.7
)%
Effect of stock-based compensation
0.4
 %
 
(0.3
)%
 
1.3
 %
Other
(1.3
)%
 
(1.0
)%
 
0.2
 %
Effective income tax rate
20.7
 %
 
21.4
 %
 
22.4
 %

As of June 30, 2014, KLA-Tencor had cumulative windfalls in excess of shortfalls of approximately $23.4 million. Windfall tax benefits arise when a company's tax deductions for employee stock activity exceeds book compensation for the same activity. A shortfall arises when the tax deduction is less than book compensation. Windfalls are recorded as increases to capital in excess of par value. Shortfalls are recorded as decreases to capital in excess of par value to the extent that cumulative windfalls exceed cumulative shortfalls. Shortfalls in excess of cumulative windfalls are recorded as income tax expense.
A reconciliation of gross unrecognized tax benefits is as follows: 
 
Year ended June 30,
(In thousands)
2014
 
2013
 
2012
Unrecognized tax benefits at the beginning of the period
$
59,494

 
$
50,839

 
$
78,337

Increases for tax positions taken in prior years
551

 
2,701

 
4,172

Decreases for tax positions taken in prior years
(764
)
 
(905
)
 
(1,002
)
Increases for tax positions taken in current year
11,585

 
12,709

 
15,663

Decreases for settlements with taxing authorities
(3,601
)
 
(3,907
)
 
(43,464
)
Decreases for lapsing of statutes of limitations
(7,690
)
 
(1,943
)
 
(2,867
)
Unrecognized tax benefits at the end of the period
$
59,575

 
$
59,494

 
$
50,839


 
The amount of unrecognized tax benefits that would impact the effective tax rate was $59.6 million as of June 30, 2014. KLA-Tencor’s policy is to include interest and penalties related to unrecognized tax benefits within interest income and other, net. The amount of interest and penalties accrued as of June 30, 2014 and 2013 was approximately $6.7 million and $6.0 million, respectively.
The Company is subject to federal income tax examinations for all years beginning from the fiscal year ended June 30, 2011. The Company is subject to state income tax examinations for all years beginning from the fiscal year ended June 30, 2010. 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, 2010. 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 $11.6 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.