Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.2.0.727
Income Taxes
 12 Months Ended
Jun. 30, 2015
Income Tax Disclosure [Abstract]  
Income Taxes
INCOME TAXES
The components of income before income taxes are as follows: 
 
Year ended June 30,
(In thousands)
2015
 
2014
 
2013
Domestic income before income taxes
$
157,251

 
$
434,336

 
$
420,862

Foreign income before income taxes
276,880

 
300,125

 
269,759

Total income before income taxes
$
434,131

 
$
734,461

 
$
690,621


The provision for income taxes is comprised of the following: 
(In thousands)
Year ended June 30,
2015
 
2014
 
2013
Current:
 
 
 
 
 
Federal
$
63,123

 
$
98,937

 
$
118,888

State
3,655

 
8,580

 
4,404

Foreign
25,438

 
27,867

 
25,112

 
92,216

 
135,384

 
148,404

Deferred:
 
 
 
 
 
Federal
(22,390
)
 
22,904

 
(2,552
)
State
409

 
(334
)
 
(1,036
)
Foreign
(2,262
)
 
(6,248
)
 
2,656

 
(24,243
)
 
16,322

 
(932
)
Provision for income taxes
$
67,973

 
$
151,706

 
$
147,472


 For the fiscal year ended June 30, 2015, actual current tax liabilities were lower than reflected in the table above by $16.7 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, 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.
The significant components of deferred income tax assets and liabilities are as follows:
(In thousands)
As of June 30,
2015
 
2014
Deferred tax assets:
 
 
 
Tax credits and net operating losses
$
108,615

 
$
95,492

Employee benefits accrual
99,472

 
97,308

Stock-based compensation
18,722

 
17,676

Capitalized R&D expenses
47

 
12,051

Inventory reserves
92,649

 
83,783

Non-deductible reserves
47,176

 
41,469

Depreciation and amortization
13,267

 
2,572

Unearned revenue
16,150

 
13,937

Other
28,784

 
29,483

Gross deferred tax assets
424,882

 
393,771

Valuation allowance
(91,350
)
 
(76,328
)
Net deferred tax assets
$
333,532

 
$
317,443

Deferred tax liabilities:
 
 
 
Unremitted earnings of foreign subsidiaries not permanently reinvested
$
(12,775
)
 
$
(17,334
)
Deferred profit
(7,372
)
 
(16,358
)
Unrealized gain on investments
(2,673
)
 
(1,168
)
Total deferred tax liabilities
(22,820
)
 
(34,860
)
Total net deferred tax assets
$
310,712

 
$
282,583


As of June 30, 2015, the Company had U.S. federal, state and foreign net operating loss (“NOL”) carry-forwards of approximately $25.7 million, $90.8 million and $50.2 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 significantly impair the realization of these NOLs. The state NOLs will begin to expire in 2017. State credits of $123.7 million will be carried over indefinitely. The foreign NOL carry-forwards will begin to expire in 2016.
The net deferred tax asset valuation allowance was $91.4 million and $76.3 million as of June 30, 2015 and June 30, 2014, 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, 2015. 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, 2015, $76.9 million relates to state credit carry-forwards. The remainder of the valuation allowance relates primarily to foreign NOL carry-forwards.
 As of June 30, 2015, U.S. income taxes were not provided for on a cumulative total of approximately $1.7 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 $573.9 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. One tax holiday expired this year and the remaining tax holidays will expire beginning in 2019 through 2021. The impact on the tax holiday that expired this year was approximately $3.1 million in tax savings for the fiscal year ended June 30, 2015. The Company was in compliance with all the terms and conditions of the tax holidays as of June 30, 2015. The net impact of these tax holidays was to decrease the Company’s tax expense by approximately $20.4 million, $25.8 million and $25.8 million in the fiscal years ended June 30, 2015, 2014 and 2013, respectively. The benefits of the tax holidays on diluted net income per share were $0.13, $0.15 and $0.15 for the fiscal years ended June 30, 2015, 2014 and 2013, 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,
 
2015
 
2014
 
2013
Federal statutory rate
35.0
 %
 
35.0
 %
 
35.0
 %
State income taxes, net of federal benefit
0.7
 %
 
0.7
 %
 
0.3
 %
Effect of foreign operations taxed at various rates
(15.3
)%
 
(11.5
)%
 
(9.6
)%
Research and development tax credit
(3.7
)%
 
(1.5
)%
 
(3.1
)%
Net change in tax reserves
1.5
 %
 
0.3
 %
 
1.7
 %
Domestic manufacturing benefit
(2.1
)%
 
(1.4
)%
 
(1.6
)%
Effect of stock-based compensation
0.8
 %
 
0.4
 %
 
(0.3
)%
Other
(1.2
)%
 
(1.3
)%
 
(1.0
)%
Effective income tax rate
15.7
 %
 
20.7
 %
 
21.4
 %

A reconciliation of gross unrecognized tax benefits is as follows: 
 
Year ended June 30,
(In thousands)
2015
 
2014
 
2013
Unrecognized tax benefits at the beginning of the year
$
59,575

 
$
59,494

 
$
50,839

Increases for tax positions taken in prior years
1,245

 
551

 
2,701

Decreases for tax positions taken in prior years
(7
)
 
(764
)
 
(905
)
Increases for tax positions taken in current year
11,634

 
11,585

 
12,709

Decreases for settlements with taxing authorities
—

 
(3,601
)
 
(3,907
)
Decreases for lapsing of statutes of limitations
(3,429
)
 
(7,690
)
 
(1,943
)
Unrecognized tax benefits at the end of the year
$
69,018

 
$
59,575

 
$
59,494


 
The amount of unrecognized tax benefits that would impact the effective tax rate was $69.0 million, $59.6 million and $59.5 million as of June 30, 2015, 2014 and 2013 respectively. The amount of interest and penalties recognized during the years ended June 30, 2015, 2014, and 2013 was $1.2 million, $0.7 million, and $1.4 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, 2015 and 2014 was approximately $7.9 million and $6.7 million, respectively.
The Company is subject to federal income tax examinations for all years beginning from the fiscal year ended June 30, 2011 and is under United States federal income tax examination for the fiscal year ended June 30, 2013. The Company is subject to state income tax examinations for all years beginning from the fiscal year ended June 30, 2011. 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, 2011. 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 $27.3 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.