Income Taxes

12 Months Ended

May 29, 2011

Income Taxes

Income Taxes

Note 11. Income Taxes

Worldwide pretax income from operations and income taxes consist of the following:

(In Millions)	2011			2010			2009
INCOME BEFORE INCOME TAXES
U.S.	$	285.8		$	166.0		$	71.8
Non-U.S.		117.2			102.6			41.8
	$	403.0		$	268.6		$	113.6
INCOME TAX EXPENSE (BENEFIT)
Current:
U.S. federal, state and local	$	45.2		$	41.1		$	17.8
Non-U.S.		19.4			5.4			1.3
		64.6			46.5			19.1
Deferred:
U.S. federal and state		42.9			13.9			(3.0	)
Non-U.S.		(3.3	)		(1.0	)		24.2
		39.6			12.9			21.2
Income tax expense	$	104.2		$	59.4		$	40.3

               The fiscal 2011 income tax expense of $104.2 million is higher than the fiscal 2010 income tax expense of $59.4 million due to the increase in fiscal 2011 income, mainly in the U.S. Our fiscal 2011 income tax expense was also higher because we incurred certain expenses associated with the Merger Agreement with TI that are not tax-deductible. Although the fiscal 2010 income tax expense of $59.4 million is higher than the fiscal 2009 income tax expense of $40.3 million due to higher income in fiscal 2010, our effective tax rate was lower in fiscal 2010 than in fiscal 2009. Our effective tax rate was lower because our fiscal 2010 income tax expense included a tax benefit of $7.4 million primarily arising from the repatriation of previously unremitted Japanese earnings. In addition, a portion of our earnings comes from our Malaysian subsidiary and is not taxable because of a tax holiday granted by the Malaysian government that is effective for a ten-year period that began in our fiscal 2010. The fiscal 2009 income tax expense included incremental tax expense of $16.7 million related to the write down of foreign deferred tax assets that would no longer be realized in the foreseeable future due to the tax holiday granted by the Malaysian government. The effect of the fiscal 2009 write down of foreign deferred tax assets was partially offset by $15.0 million of tax benefits associated with R&D tax credits, net of the portion of the tax benefit that did not meet the more-likely-than-not recognition threshold.

               The following table provides a summary of the changes in the amount of unrecognized tax benefits that are included in long-term income taxes payable on the consolidated balance sheet at May 29, 2011:

		(In Millions)
Balance at May 31, 2009		$	146.2
	Settlements and effective settlements with tax authorities		(4.0	)
	Lapse of applicable statute of limitations		(3.6	)
	Increases for tax positions in the current year		13.8
	Other changes in unrecognized tax benefits		4.2
Balance at May 30, 2010			156.6
	Settlements and effective settlements with tax authorities		(0.7	)
	Lapse of applicable statute of limitations		(1.9	)
	Increases for tax positions in the current year		16.1
	Other changes in unrecognized tax benefits		4.0
Balance at May 29, 2011		$	174.1

               All of the unrecognized tax benefit at May 29, 2011 would affect our effective tax rate if it were to be recognized in a future period. Interest and penalties related to unrecognized tax benefits are included within income tax expense. The amount of interest and penalties accrued was $21.7 million at May 29, 2011 and $18.7 million at May 30, 2010.

               We are required to file income tax returns in the U.S. federal jurisdiction, various state and local jurisdictions, and many foreign jurisdictions. A number of years may elapse before an uncertain tax position is audited and ultimately resolved. While it is often difficult to predict the final outcome or the exact timing of resolution for any particular uncertain tax position, we believe that the amounts of unrecognized tax benefits we have accrued reflect our best estimate. We adjust these amounts, as well as the related interest and penalties, as actual facts and circumstances change. Upon resolution of an uncertain tax position, we record an adjustment to income taxes in the same period.

               We believe that it is reasonably possible that the unrecognized tax benefits mainly related to transfer pricing matters for tax years where the statutes of limitation expire during fiscal 2012 could decrease by as much as $2.9 million within the next year.

               The Internal Revenue Service is currently examining our federal tax returns for fiscal 2007 through 2009, as well as our amended federal tax returns for fiscal 2005 and 2006. Several state taxing jurisdictions are examining our state tax returns for fiscal 2001 through 2005. During fiscal 2010, the state of California closed its audits of fiscal years up through fiscal 2000, which resulted in an immaterial adjustment. With a few exceptions, state tax returns for fiscal 2000 and after remain subject to future examination or adjustment by state tax authorities. Internationally, tax authorities from several foreign jurisdictions are also examining our tax returns. In general, our international tax returns for fiscal 2003 and after remain subject to examination.

               The tax effects of temporary differences that constitute significant portions of the deferred tax assets are presented below:

(In Millions)	2011			2010
DEFERRED TAX ASSETS
Inventories	$	0.3		$	3.2
Equity investments		1.8			1.0
Property, plant and equipment and intangible assets		6.0			3.8
Accrued liabilities		38.8			51.4
Research and development expenditures		52.9			73.7
Deferred compensation		15.1			18.3
Share-based compensation		58.9			72.7
Non-U.S. loss carryovers and other allowances		107.0			103.4
Federal and state credit carryovers		92.8			86.2
Other		0.4			0.8
Gross deferred tax assets		374.0			414.5
Valuation allowance		(100.8	)		(98.7	)
Total deferred tax assets, net	$	273.2		$	315.8

               The decrease in net deferred tax assets for fiscal 2011 of $42.6 million is from continuing operations and from the tax effect on other comprehensive income items.

               We record a valuation allowance to reflect the estimated amount of deferred tax assets that may not be realized. The valuation allowance has been established primarily against the reinvestment and investment tax allowances related to our operation in Malaysia, as we have concluded that the deferred tax assets will not be realized in the foreseeable future due to a tax holiday granted by the Malaysian government that is effective for a ten-year period that began in our fiscal 2010 and the uncertainty of sufficient taxable income in Malaysia beyond fiscal 2019. We have a deferred tax asset related to the California R&D credits which can be carried forward indefinitely and we have concluded that a valuation allowance is not required against it since our estimate of future taxable income for California purposes in the long term (greater than 15 years) is considered more than sufficient to realize the deferred tax asset during the same time period. The valuation allowance for deferred tax assets increased by $2.1 million in fiscal 2011 compared to an increase of $1.9 million in fiscal 2010.

               The ultimate realization of deferred tax assets depends upon the generation of future taxable income during the periods in which those temporary differences become deductible. As of May 29, 2011, based on historical taxable income and projections for future taxable income over the periods that the deferred tax assets are deductible, we believe it is more likely than not that we will realize the benefits of these deductible differences, net of the valuation allowance.

               The reconciliation between the income tax rate computed by applying the U.S. federal statutory rate and the reported worldwide tax rate follows:

	2011			2010			2009
U.S. federal statutory tax rate		35.0	%		35.0	%		35.0	%
Non-U.S. income taxed at different rates		(8.7	)		(13.8	)		0.6
U.S. state and local taxes net of federal benefits		1.5			1.6			(0.7	)
Changes in beginning of year valuation allowances		(0.5	)		(0.5	)		5.8
Domestic manufacturing benefit		(2.5	)		(1.2	)		(2.8	)
Tax credits		(1.8	)		(2.2	)		(5.7	)
Acquisition costs		1.1			-			-
Other		1.8			3.2			3.3
Effective tax rate		25.9	%		22.1	%		35.5	%

               No U.S. income taxes have been provided on the cumulative unremitted earnings of approximately $429.9 million from non-U.S. subsidiaries as of May 29, 2011. It is not practicable to determine the U.S. income tax liability that would be payable if such earnings was not reinvested indefinitely. We intend to continue reinvesting certain foreign earnings from non-U.S. subsidiaries indefinitely.

               At May 29, 2011, we had $11.6 million of state net operating loss carryovers, which expire between fiscal 2017 and 2023. We also had $135.2 million of state credit carryovers, consisting primarily of California R&D credits which can be carried forward indefinitely. In addition, we had net operating losses and other tax allowance carryovers of $432.4 million from certain non-U.S. jurisdictions, most of which do not expire.