INCOME TAX EXPENSE

6 Months Ended

Dec. 23, 2012

INCOME TAX EXPENSE

NOTE 10 — INCOME TAX EXPENSE

The Company recorded an income tax benefit of $(15.8) million and $(11.8) million for the three and six months ended December 23, 2012, respectively. The income tax benefit yielded an effective tax rate of 168.6% and 456.4% for the three and six months ended December 23, 2012, respectively.

The differences between the U.S. federal statutory tax rate of 35% and the Company’s effective tax rates for the three and six months ended December 23, 2012 were primarily due to the recognition of previously unrecognized tax benefits due to lapse of statute of limitations and successful resolution of certain tax matters, the geographic mix of income, and the treatment of discrete items in determining the effective tax rate, partially offset by the tax effect of non-deductible stock-based compensation. The effective tax rates recorded during the three and six months ended December 23, 2012 included the tax impact of discrete items, which were recorded during the quarter in which they occurred. During the three and six months ended December 23, 2012, tax discrete items primarily consisted of: (1) a tax benefit of $30.5 million and $30.9 million for the three months and six months, respectively, from the recognition of previously unrecognized tax benefits due to lapse of statutes of limitation and successful resolution of certain tax matters, and (2) the effective tax rate impact of integration and impairment expenses of $28.3 million and $45.3 million for the three months and six months, respectively, for which little tax benefit is derived.

The total gross unrecognized tax benefits as of each date noted below were as follows:

	December 23,		June 24,
	2012		2012
	(in millions)
Total gross unrecognized tax benefits	$	333.9	$	343.8

If the gross unrecognized tax benefits were recognized in a future period, it would result in a net tax benefit of $264.4 million and a reduction of the effective tax rate.

The Company recognizes interest expense and penalties related to the above unrecognized tax benefits within income tax expense (benefit). As of December 23, 2012, the Company had accrued approximately $24.7 million for the payment of gross interest and penalties, relating to unrecognized tax benefits, compared to $25.2 million as of June 24, 2012.

The Internal Revenue Service (“IRS”) is examining the Company’s U.S. income tax returns for fiscal years 2008 and 2009. As of December 23, 2012, no significant adjustments have been proposed by the IRS. The IRS has completed its audit of Novellus’ calendar year 2006 through calendar year 2008 tax returns. No significant adjustments were proposed by the IRS. The Company is also subject to audits by foreign tax authorities. The Company is unable to make a reasonable estimate as to when cash settlements, if any, with the relevant taxing authorities will occur.

The Company files U.S. federal, U.S. state, and foreign income tax returns. As of December 23, 2012, tax years 2003-2012 remain subject to examination in the jurisdictions where the Company operates.

The Company is in various stages of the examinations in connection with all of its tax audits worldwide, and it is difficult to determine when these examinations will be settled. It is reasonably possible that over the next twelve-month period the Company may experience a significant increase or decrease in its unrecognized tax benefits. It is not possible to determine either the magnitude or the range of any increase or decrease at this time.

Realization of the Company’s net deferred tax assets is based upon the weight of available evidence, including such factors as the recent earnings history and expected future taxable income. The Company believes it is more likely than not that such assets will be realized with the exception of $55.2 million related to certain California and foreign deferred tax assets. However, ultimate realization could be negatively impacted by market conditions and other variables not known or anticipated at this time. If the valuation allowance related to deferred tax assets were released as of December 23, 2012, approximately $55.2 million would be credited to the statement of operations.