Income Taxes

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



	Fiscal Years Ended
	June 30, 2013		June 24, 2012			June 26, 2011
Domestic		$31,046		($5,360	)		$112,869
Foreign	76,511		53,007			65,358
Total		$107,557		$47,647			$178,227

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



	Fiscal Years Ended
	June 30, 2013			June 24, 2012			June 26, 2011
Current:
Federal		$483			($4,031	)		$31,503
Foreign	18,127			13,125			13,796
State	1,777			566			2,736
Total Current	20,387			9,660			48,035
Deferred:
Federal	2,226			(4,786		)	(4,232		)
Foreign	(177		)	(450		)	(11,601		)
State	(1,804		)	(1,189		)	(475		)
Total Deferred	245			(6,425		)	(16,308		)
Income tax expense		$20,632			$3,235			$31,727

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 30, 2013			% of Income	June 24, 2012			% of Income	June 26, 2011			% of Income
Federal income tax provision at statutory rate		$37,645		35%		$16,676		35%		$62,378		35%
Increase (decrease) in income tax expense resulting from:
State tax provision, net of federal benefit	1,146			1%	68			0%	2,665			1%
State tax credits	(1,407		)	-1%	(1,028		)	-2%	(496		)	0%
Tax exempt interest	(853		)	-1%	(1,064		)	-2%	(1,646		)	-1%
48C investment tax credit	(5,252		)	-5%	(4,105		)	-9%	(4,023		)	-2%
Decrease in tax reserve	(361		)	0%	(2,677		)	-6%	(2,175		)	-1%
Research and development credits	(2,426		)	-2%	(694		)	-1%	(3,619		)	-2%
Increase (decrease) in valuation allowance	(6		)	0%	(13		)	0%	183			0%
Qualified production activities deduction	(866		)	-1%	(177		)	-1%	(2,714		)	-1%
Stock-based compensation	1,206			1%	336			1%	308			0%
Statutory rate differences	(10,184		)	-10%	(5,830		)	-12%	(16,117		)	-9%
Effect of tax rate change	—			0%	—			0%	(2,998		)	-2%
Other	1,990			2%	1,743			4%	(19		)	0%
Income tax expense		$20,632		19%		$3,235		7%		$31,727		18%

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 30, 2013			June 24, 2012
Deferred tax assets:
Compensation		$3,868			$2,594
Inventory	16,050			13,051
Sales return reserve and allowance for bad debts	4,483			2,710
Warranty reserve	947			2,668
Federal and state net operating loss carryforwards	617			2,353
Federal credits	3,174			290
State credits	4,215			3,982
48C investment tax credits	7,216			15,905
Investments	976			980
Stock-based compensation	27,142			27,586
Other	1,209			1,056
Total gross deferred assets	69,897			73,175
Less valuation allowance	(1,604		)	(1,611		)
Deferred tax assets, net	68,293			71,564
Deferred tax liabilities:
Property and equipment	(27,484		)	(29,307		)
Intangible assets	(37,921		)	(31,701		)
Available-for-sale securities	154			(1,570		)
Prepaid taxes and other	(997		)	(1,045		)
Total gross deferred liability	(66,248		)	(63,623		)
Deferred tax asset/(liability), net		$2,045			$7,941

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 30, 2013
	Asset					Liabilities
	Current		Noncurrent			Current		Noncurrent
U.S. federal income taxes		$15,707		$—			$—		($25,504	)
Hong Kong and other income taxes	10,418		1,424		*	—		—
		$26,125		$1,424			$—		($25,504	)



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



	Balance at June 24, 2012
	Asset					Liabilities
	Current		Noncurrent			Current		Noncurrent
U.S. federal income taxes		$13,461		$—			$—		($15,609	)
Hong Kong and other income taxes	8,283		1,931		*	—		—
		$21,744		$1,931			$—		($15,609	)



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

The research and development credit, which had previously expired on December 31, 2011, was reinstated as part of the American Taxpayer Relief Act of 2012 enacted on January 2, 2013. This legislation retroactively reinstated and extended the credit from the previous expiration date through December 31, 2013. The benefit of this credit for the full year fiscal 2013 as well as the period December 31, 2011 through June 24, 2012 has been included in the fiscal year 2013 tax expense representing a $1.7 million and $0.7 million benefit, respectively.

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. As of June 24, 2012, the Company had successfully achieved the required milestones to realize the full $39 million tax benefit. This tax benefit (net of related basis adjustments) is being 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 $14.8 million related to the credits generated to date, with $5.3 million of this amount recognized as a tax benefit for the year ended June 30, 2013.

As of June 30, 2013 the Company has approximately $12.8 million of state net operating loss carryovers for which a full valuation allowance has been recognized. Furthermore, the Company has approximately $0.8 million of alternative minimum tax credits carryforwards and $4.7 million of 48C credit carryforwards that relate to excess stock option benefits which, if and when realized, will be recognized in additional paid in capital. Additionally, the Company has $6.5 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 2013, the Company recognized a net decrease in total unrecognized tax benefits of $1.7 million. As a result, the total amount of unrecognized tax benefits as of June 30, 2013 is $2.7 million. Of the $2.7 million total unrecognized tax benefits, $2.7 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 $2.1 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 30, 2013			June 24, 2012			June 26, 2011
Beginning Balance		$4,421			$6,987			$7,602
Increases related to prior year tax positions	546			—			741
Decreases related to prior year tax positions	—			(1,966		)	—
Expiration of statute of limitations for assessment of taxes	(2,235		)	(600		)	(1,356		)
Ending Balance		$2,732			$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. Total interest and penalties accrued were as follows (in thousands):



	June 30, 2013		June 24, 2012
Accrued interest and penalties		$154		$284

Total interest and penalties recognized were as follows (in thousands):



	June 30, 2013			June 24, 2012			June 26, 2011
Recognized interest and penalties (benefit)		($130	)		($292	)		($330	)

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. For U.S. state tax returns the Company is generally no longer subject to tax examinations for fiscal years prior to 2010. For foreign purposes, the Company is no longer subject to examination for tax periods 2003 and prior. Certain carryforward tax attributes generated in prior years remain subject to examination and adjustment. The Company is currently under inquiry by the Hong Kong Inland Revenue Department for the fiscal year ended June 29, 2008 (fiscal 2008) through the fiscal year ended June 27, 2010 (fiscal 2010). The Company is also currently under audit by the German Federal Central Tax Office 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 30, 2013, U.S. income taxes were not provided for on a cumulative total of approximately $275.6 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 the fiscal year ended June 26, 2011, the Company was awarded a tax holiday in Malaysia with respect to its manufacturing and distribution operations. This arrangement allows for 0% tax for 10 years starting in the fiscal year ended June 26, 2011. For the fiscal year ended June 30, 2013, the Company did not meet the requirements for the tax holiday, and as such, no benefit has been recognized. In the fiscal years ended June 24, 2012 and June 26, 2011 the Company's net income increased by $2.1 million and $1.8 million ($0.02 per basic share and $0.02 per diluted share in each year), respectively, as a result of this arrangement.