Income Taxes

The following are the components of income/(loss) before income taxes (in thousands):



	Fiscal Years Ended
	June 24, 2012			June 26, 2011		June 27, 2010
Domestic	$	(10,682	)	$	110,959	$	153,848
Foreign	58,329			67,268		51,624
Total	$	47,647		$	178,227	$	205,472

The following are the components of income tax (benefit)/expense (in thousands):



	Fiscal Years Ended
	June 24, 2012			June 26, 2011			June 27, 2010
Current:
Federal	$	(4,031	)	$	31,503		$	45,005
Foreign	13,125			13,796			12,963
State	566			2,736			6,260
Total Current	$	9,660		$	48,035		$	64,228
Deferred:
Federal	(6,665		)	(5,008		)	(8,180		)
Foreign	1,429			(10,825		)	(2,837		)
State	(1,189		)	(475		)	(29		)
Total Deferred	(6,425		)	(16,308		)	(11,046		)
Income tax expense	$	3,235		$	31,727		$	53,182

Actual income tax expense differed from the amount computed by applying the U.S. federal tax rate of 35% to pre-tax earnings as a result of the following (in thousands, except percentages):



	Fiscal Years Ended
	June 24, 2012			% of Income	June 26, 2011			% of Income	June 27, 2010			% of Income
Federal income tax provision at statutory rate	$	16,676		35%	$	62,378		35%	$	71,916		35%
Increase (decrease) in income tax expense resulting from:
State tax provision, net of federal benefit	68			0%	2,169			1%	4,135			2%
Tax exempt interest	(1,064		)	-2%	(1,646		)	-1%	(1,089		)	-1%
Exam settlements	—			0%	—			0%	1,645			1%
48C investment tax credit	(4,105		)	-9%	(4,023		)	-2%	(1,401		)	-1%
Increase (decrease) in tax reserve	(2,677		)	-6%	(2,175		)	-1%	(3,462		)	-2%
Research and development credits	(694		)	-1%	(3,619		)	-2%	(1,092		)	-1%
Qualified production activities deduction	(177		)	0%	(2,714		)	-2%	(3,945		)	-2%
Statutory rate differences	(5,830		)	-12%	(16,117		)	-9%	(14,939		)	-7%
Effect of tax rate change	—			0%	(2,998		)	-2%	(707		)	0%
Other	1,038			2%	472			0%	2,121			1%
Income tax expense	$	3,235		7%	$	31,727		17%	$	53,182		25%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows (in thousands):



	June 24, 2012			June 26, 2011
Deferred tax assets:
Compensation	$	2,594		$	1,494
Inventory	13,051			10,132
Sales return reserve and allowance for bad debts	2,710			4,160
Warranty reserve	2,668			—
Federal and state net operating loss carryforwards	2,353			1,010
Federal credits	290			—
State credits	3,982			3,688
48C investment tax credits	15,905			11,176
Investments	980			970
Stock-based compensation	27,586			16,731
Other	1,056			2,071
Total gross deferred assets	73,175			51,432
Less valuation allowance	(1,611		)	(1,620		)
Deferred tax assets, net	71,564			49,812
Deferred tax liabilities:
Property and equipment	(29,307		)	(19,590		)
Intangible assets	(31,701		)	(29,952		)
Available-for-sale securities	(1,570		)	(2,629		)
Prepaid taxes and other	(1,045		)	(890		)
Total gross deferred liability	(63,623		)	(53,061		)
Deferred tax asset/(liability), net	$	7,941		$	(3,249	)

The components giving rise to the net deferred tax assets (liabilities) have been included in the accompanying Consolidated Balance Sheet as follows (in thousands):



	Balance at June 24, 2012
	Asset					Liabilities
	Current		Noncurrent			Current		Noncurrent
U.S. federal income taxes	$	13,461	$	—		$	—	$	(15,735	)
Hong Kong and other income taxes	8,283		1,931		*	—		—
	$	21,744	$	1,931		$	—	$	(15,735	)



*	This amount is included in Other Assets on the Consolidated Balance Sheets.



	Balance at June 26, 2011
	Asset					Liabilities
	Current		Noncurrent			Current		Noncurrent
U.S. federal income taxes	$	10,072	$	—		$	—	$	(21,902	)
Hong Kong and other income taxes	7,785		796		*	—		—
	$	17,857	$	796		$	—	$	(21,902	)



*	This amount is included in Other Assets on the Consolidated Balance Sheets.

During fiscal 2010, the Company was notified by the Internal Revenue Service that it had been allocated $39 million of federal tax credits as part of the American Recovery and Reinvestment Act of 2009 (Internal Revenue Section 48C). This $39 million allocation was based upon the Company projecting that it would put into service approximately $130 million of qualified equipment into its United States manufacturing locations over the next three years. During fiscal 2010, 2011 and 2012, the Company has generated $10.8 million, $23.7 million and $4.5 million of 48C credit, respectively. The tax benefit (net of related basis adjustments) will be amortized into income over the useful life (5 years) of the underlying equipment that was placed in service to generate these credits. Since fiscal 2010, the Company has recognized an income tax benefit of $9.5 million related to the credits generated to date, with $4.1 million of this amount recognized as a tax benefit for the year ended June 24, 2012.

As of June 24, 2012 the Company has approximately $10.7 million of state net operating loss carryovers against which a full valuation allowance has been recorded. Furthermore, the Company has approximately $0.8 million of alternative minimum tax credits carryforwards and $3.5 million of 48C credit carryforwards that relate to excess stock option benefits which, if and when realized, will credit additional paid in capital. Additionally, the Company has $6.1 million of state income tax credit carryforwards. The state net operating loss carryovers will begin to expire in fiscal 2015 and the state income tax credit carryforwards will begin to expire in fiscal 2016.

U.S. GAAP requires a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is cumulatively more than 50% likely to be realized upon ultimate settlement.

During fiscal 2012, the Company recognized a net decrease in total unrecognized tax benefits of $2.6 million as a result of the settlement of prior year tax audits and statute expirations in the United States and Hong Kong. As a result, the total amount of unrecognized tax benefits as of June 24, 2012 is $4.4 million. Of the $4.4 million total unrecognized tax benefits, $4.4 million represents tax positions that, if recognized, would impact the effective tax rate. Although timing of the resolution and/or closure on audits is highly uncertain, the Company believes it is reasonably possible that approximately $2.2 million of gross unrecognized tax benefits will change in the next 12 months as a result of pending audit settlements or statute expirations.

The following is a tabular reconciliation of the Company’s change in uncertain tax positions (in thousands):



	June 24, 2012			June 26, 2011
Beginning Balance	$	6,987		$	7,602
Increases related to prior year tax positions	—			741
Decreases related to prior year tax positions	(1,966		)	—
Expiration of statute of limitations for assessment of taxes	(600		)	(1,356		)
Ending Balance	$	4,421		$	6,987

The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the income tax expense line item in the Consolidated Statements of Income. As of June 24, 2012, the Company accrued $42 thousand for the payment of interest related to unrecognized tax benefits.

The Company files U.S. federal, U.S. state and foreign tax returns. For U.S. federal purposes, the Company is generally no longer subject to examinations for fiscal years ended June 29, 2009 and prior. During the third quarter of fiscal 2012, the Company settled its federal examination with the Internal Revenue Service for fiscal 2009. For foreign purposes, the Company is no longer subject to examination for tax periods 2002 and prior. Certain carryforward tax attributes generated in prior years remain subject to examination and adjustment. For U.S. state tax returns the Company is generally no longer subject to tax examinations for fiscal years prior to 2009. The Company is also currently under inquiry by the Hong Kong Inland Revenue Department for fiscal 2008 through fiscal 2010.

The Company provides for U.S. income taxes on the earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered indefinitely reinvested outside the United States. As of June 24, 2012, U.S. income taxes were not provided for on a cumulative total of approximately $229.0 million of undistributed earnings for certain non-U.S. subsidiaries, as the Company currently intends to reinvest these earnings in these foreign operations indefinitely. Determination of the amount of any deferred tax liability on these undistributed earnings is not practicable.

During fiscal 2011, the Company was awarded a tax holiday in Malaysia with respect to its manufacturing and distribution operations. As a result of this arrangement, which allows for 0% tax for 10 years starting in fiscal 2011, the Company's net income increased by $2.1 million and $1.8 million in fiscal 2012 and fiscal 2011, respectively ($0.02 per basic share and $0.02 per diluted share in each year).