Western Digital 2006 Annual Report Download - page 77

A substantial portion of the fully valued net operating losses (“NOL”) noted above may be reduced as a result of tax
uncertainties. In addition to the deferred tax assets presented above, the Company had additional NOL benefits related to
stock option deductions of approximately $93.8 million and $67.5 million at June 30, 2006 and July 1, 2005,
respectively. In accordance with the provisions of SFAS No. 123-R, this will be recorded as a credit to shareholders’ equity
when an incremental benefit is recognized after considering all other tax attributes available to the Company.
Accordingly, these amounts are excluded from the table above. The 2005 deferred tax assets presented above have
been reclassified to reflect the 2006 presentation.
The Company determines deferred taxes for each of its tax-paying subsidiaries within each tax jurisdiction. The
Company’s deferred tax assets, which consist primarily of NOL and tax credit carryforwards, have previously been fully
reserved in the form of a valuation allowance. At the end of fiscal 2006, the Company determined that it is more likely
than not that a portion of these assets will be realized. Accordingly, the Company reduced a portion of the valuation
allowance which resulted in the recognition of a net deferred tax asset of $22.3 million. The valuation of the deferred tax
assets is based on an assumption of the Company’s ability to generate sufficient earnings in certain jurisdictions in fiscal
years 2007 and 2008. This two-year period is used due to the difficulty in accurately projecting income for longer periods
of time given the cyclical nature of hard drive industry. This assumption may change in the future based on fluctuating
industry or company conditions. The amount of deferred tax assets may increase or decrease in subsequent quarters as the
Company updates its estimates of future taxable income or re-evaluates the two-year assumption.
Effective Tax Rate
Reconciliation of the U.S. Federal statutory rate to the Company’s effective tax rate is as follows for the three years
ended June 30, 2006:
2006 2005 2004
(as adjusted) (as adjusted)
U.S. Federal statutory rate. . ............................. 35.0% 35.0% 35.0%
Tax rate differential on international income .................. (25.3) (39.9) (43.8)
Utilization of domestic NOL carryforward ................... (16.0) (22.5) (7.8)
Tax effect of repatriation . . . ............................. 1.1 15.2 —
Increase in non-NOL deductible temporary differences not
benefited ......................................... 0.3 15.3 16.5
Other ............................................. 1.4 (1.4) 2.5
State income taxes, net ................................. 0.1 0.3 0.2
Effective tax rate ..................................... (3.4)% 2.0% 2.6%
Tax Holidays and Carryforwards
A substantial portion of the Company’s manufacturing operations in Malaysia and Thailand operate under various
tax holidays and tax incentive programs which will expire in whole or in part at various dates through 2019. Certain of
the holidays may be extended if specific conditions are met. The net impact of these tax holidays and tax incentives was to
increase the Company’s net earnings by $81.1 million ($.36 per diluted share), $66.7 million ($.31 per diluted share) and
$54.9 million ($.25 per diluted share) in 2006, 2005, and 2004 respectively.
As of June 30, 2006, the Company had federal and state NOL carryforwards of approximately $380.9 million and
$338.6 million, respectively. In addition, the Company had various federal and state tax credit carryforwards combined of
approximately $60.8 million. The loss carryforwards available to offset future federal and state taxable income expire at
various times from 2019 to 2021 and 2007 to 2025, respectively. Approximately $20.6 million of the credit
carryforwards available to offset future taxable income expire at various times from 2007 to 2025. The remaining
amount is available indefinitely.
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WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)