Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The estimates and assumptions we use in computing the income taxes reflected in our consolidated financial statements could differ from the actual results reflected in our income tax returns filed during the subsequent year. We record adjustments based on filed returns as such returns are finalized and resultant adjustments are identified.
The components of income before income taxes consist of the following:
|
| | | | | | | | | | | |
| Fiscal Year Ended |
| 2013 | | 2012 | | 2011 |
United States | $ | 200,663 |
| | $ | 156,134 |
| | $ | 129,412 |
|
Foreign | 235,436 |
| | 240,050 |
| | 258,459 |
|
Total | $ | 436,099 |
| | $ | 396,184 |
| | $ | 387,871 |
|
The provision for income taxes consists of the following:
|
| | | | | | | | | | | |
| Fiscal Year Ended |
| 2013 | | 2012 | | 2011 |
Current: | | | | | |
Federal | $ | 80,910 |
| | $ | 13,642 |
| | $ | 29,238 |
|
State | 8,225 |
| | 2,547 |
| | 3,951 |
|
Foreign | 69,468 |
| | 80,003 |
| | 81,617 |
|
| 158,603 |
| | 96,192 |
| | 114,806 |
|
Deferred: | | | | | |
Federal | (13,894 | ) | | (20,738 | ) | | 23,772 |
|
State | (1,776 | ) | | 1,161 |
| | 707 |
|
Foreign | (17,417 | ) | | 13,660 |
| | 4,346 |
|
| (33,087 | ) | | (5,917 | ) | | 28,825 |
|
Provision for income taxes | $ | 125,516 |
| | $ | 90,275 |
| | $ | 143,631 |
|
The reconciliation of the statutory U.S. federal income tax rate to our effective tax rate is as follows:
|
| | | | | | | | |
| Fiscal Year Ended |
| 2013 | | 2012 | | 2011 |
U.S. statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
State income taxes, net of federal income tax benefit | 1.5 |
| | 1.2 |
| | 1.5 |
|
U.S. tax on foreign earnings, net of foreign tax credits | (4.6 | ) | | 0.6 |
| | 0.2 |
|
Effect of international operations | (5.6 | ) | | (7.7 | ) | | (9.7 | ) |
Effect of change in valuation allowances | 2.9 |
| | 2.6 |
| | 8.7 |
|
Effect of worthless stock deduction | — |
| | (9.0 | ) | | — |
|
Other | (0.4 | ) | | 0.1 |
| | 1.3 |
|
Effective tax rate | 28.8 | % | | 22.8 | % | | 37.0 | % |
Deferred income taxes reflect the tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our net deferred tax assets and liabilities are as follows:
|
| | | | | | | |
| Fiscal Year End |
| 2013 | | 2012 |
Deferred tax assets: | | | |
Net operating loss carryforwards | $ | 293,514 |
| | $ | 223,790 |
|
Tax credit carryforwards | 134,573 |
| | 94,732 |
|
Employee benefits, including stock-based compensation | 51,764 |
| | 60,292 |
|
Reorganization and restructuring reserves | 3,138 |
| | 4,410 |
|
Inventory | 32,627 |
| | 31,999 |
|
Depreciation and amortization | 38,899 |
| | 69,264 |
|
Allowance on trade accounts receivable | 12,991 |
| | 13,476 |
|
Reserves and accruals not currently deductible for income tax purposes | 27,545 |
| | 26,478 |
|
Other | 33,308 |
| | 17,700 |
|
Total deferred tax assets | 628,359 |
| | 542,141 |
|
Valuation allowance | (315,312 | ) | | (241,095 | ) |
Subtotal | 313,047 |
| | 301,046 |
|
Deferred tax liabilities: | — |
| | |
Depreciation and amortization | (154,079 | ) | | (166,239 | ) |
Outside basis difference on earnings of foreign subsidiaries | (60,345 | ) | | (61,560 | ) |
Other | (15,250 | ) | | (17,272 | ) |
Total deferred tax liabilities | (229,674 | ) | | (245,071 | ) |
Net deferred tax assets | $ | 83,373 |
| | $ | 55,975 |
|
Out of the amounts shown above, net current deferred tax assets of $83,001 and $106,986 are included in other current assets at December 28, 2013 and December 29, 2012, respectively. Net non-current deferred tax assets of $372 as of December 28, 2013 are included in other non-current assets and net non-current deferred tax liabilities of $51,011 as of December 29, 2012 are included in deferred income taxes.
We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including the nature of the deferred tax assets and related statutory limits on utilization, recent operating results, future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. In the event we were to determine that we would be able to realize our deferred income tax assets in the future in excess of or less than the net recorded amount, we would make an adjustment to the valuation allowance which would reduce or increase the provision for income taxes.
At December 28, 2013, we had deferred tax assets related to net operating loss carryforwards of $293,514, along with a valuation allowance of $235,757, with the net amount reflecting the amount more likely than not to be realized. Of the remaining $57,757 of net deferred tax assets associated with NOL carryforwards, $22,001 has no expiration date. Included in the amounts noted above at December 28, 2013 is $59,494 of deferred tax assets for local statutory losses that were generated by our Luxembourg subsidiary during 2013, along with an offsetting valuation allowance. A portion of the carryforwards may expire before being applied to reduce future income tax liabilities. We monitor all of our other deferred tax assets for realizability in a similar manner to those described above and will record or release valuation allowances as required to reflect the amount more likely than not to be realized.
At December 28, 2013, our total deferred tax assets related to foreign tax credit carryforwards in the U.S. was $134,342 and our total valuation allowance related to such credit carryforwards was $55,508, with the net amount reflecting the amount more likely than not to be realized based on our current ability to generate the character of income required to utilize these credits prior to expiry through 2021.
The valuation allowance increased by a net $74,217 during 2013, driven largely by the increase in the valuation allowance on deferred tax assets related to the net operating losses in Luxembourg and the foreign tax credit carryforwards, as noted above. The remaining increase relates primarily to book operating losses in certain subsidiaries that are currently not expected to be realized through future taxable income in these entities, partially offset by previously reserved amounts which became realizable based on taxable income generated in the current year, as well as the impacts of translation adjustments for previously established valuation allowances in currencies other than the U.S. dollar.
We have not provided deferred taxes on undistributed earnings from certain of our foreign subsidiaries that are indefinitely reinvested. These undistributed earnings may become taxable upon an actual or deemed repatriation of assets from the subsidiaries or a sale or liquidation of the subsidiaries. We estimate that our total net undistributed earnings upon which we have not provided deferred tax total approximately $2,000,000 at December 28, 2013, and $2,100,000 at December 29, 2012. A determination of the deferred tax liability on such earnings is not practicable as such liability is dependent upon our U.S. foreign tax credit position that would exist at the time any remittance would occur.
Tax benefits claimed from the exercise of employee stock options and other employee stock programs that are in excess of (less than) the amount recorded upon grant are recorded as an increase (decrease) in stockholders’ equity. In 2013, 2012 and 2011, these amounts totaled $422, $5,810 and $3,625, respectively.
The total amount of gross unrecognized tax benefits is $35,398 as of December 28, 2013, substantially all of which would impact the effective tax rate if recognized. A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:
|
| | | | | | | | | | | |
| Fiscal Year Ended |
| 2013 | | 2012 | | 2011 |
Gross unrecognized tax benefits at beginning of the year | $ | 38,790 |
| | $ | 24,888 |
| | $ | 23,641 |
|
Increases in tax positions for prior years | 4,918 |
| | 17,281 |
| | 3,953 |
|
Decreases in tax positions for prior years | (61 | ) | | (900 | ) | | (1,221 | ) |
Increases in tax positions for current year | 737 |
| | 2,716 |
| | 1,197 |
|
Decreases in tax positions for current year | — |
| | — |
| | — |
|
Settlements | (1,078 | ) | | (343 | ) | | (789 | ) |
Lapse in statute of limitations | (7,908 | ) | | (4,852 | ) | | (1,893 | ) |
Gross unrecognized tax benefits at end of the year | $ | 35,398 |
| | $ | 38,790 |
| | $ | 24,888 |
|
We recognize interest and penalties related to unrecognized tax benefits in income tax expense. As of December 28, 2013, the total accrual for interest and penalties on our unrecognized tax benefits is $7,333.
We conduct business globally and, as a result, we and/or one or more of our subsidiaries file income tax returns in the U.S. federal and various state jurisdictions and in over thirty foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities in many of the jurisdictions in which we operate. In the U.S., the IRS has concluded its examination for the years prior to 2010. In our material tax jurisdictions, the statute of limitations is open, in general, for three - five years.
It is possible that within the next twelve months, ongoing tax examinations in the U.S. states and several of our foreign jurisdictions may be resolved, that new tax exams may commence and that other issues may be effectively settled. However, we do not expect our assessment of unrecognized tax benefits to change significantly over that time.
