Western Digital 2007 Annual Report Download - page 73

Accordingly, these amounts are excluded from the table above. The 2006 deferred tax assets presented above have been
reclassified to reflect the 2007 presentation.
Reserves and accrued expenses not currently deductible consisted of the following as of June 29, 2007 and June 30,
2006 (in millions):
2007 2006
Sales related reserves and adjustments ...................................... $54 $69
Accrued compensation and benefits . . ...................................... 25 21
Other accrued liabilities ................................................ 4 5
Inventory reserves and adjustments . . ...................................... 5 4
Total reserves and accrued expenses not currently deductible .................... 88 99
The Company determines deferred taxes for each of its tax-paying subsidiaries within each tax jurisdiction. The
Company’s deferred tax assets had previously been partially reserved in the form of a valuation allowance. As of the end of
fiscal 2007, the Company determined that it is more likely than not that these assets will be realized. Accordingly, the
Company reduced the remainder of the valuation allowance which resulted in the recognition of additional net deferred tax
assets of $125 million. The realization of the deferred tax assets is primarily dependent on the Company’s ability to generate
sufficient earnings in certain jurisdictions in future years. The Company released the remainder of the valuation allowance
for its deferred tax assets based on the weight of available evidence including the history of cumulative pretax income and
the increased likelihood of the Company’s ability to generate profits in the future. In 2006, the Company released a portion
of the valuation allowance on deferred tax assets due to the difficulty at the time in accurately projecting income for periods
of longer than two years given the cyclical nature of the industry. The amount of deferred tax assets considered realizable
may increase or decrease in subsequent periods based on fluctuating industry or company conditions.
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 29, 2007:
2007 2006 2005
U.S. Federal statutory rate ......................................... 35% 35% 35%
Tax rate differential on international income ............................ (24) (25) (40)
Utilization of domestic NOL carryforward ............................. (9) (16) (22)
Tax effect of repatriation .......................................... — 1 15
Increase in non-NOL deductible temporary differences not benefited ........... — 6 15
Release of valuation allowance ...................................... (30) (6) —
Other ....................................................... 1 2 (1)
Effective tax rate . .............................................. (27)% (3)% 2%
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 2022. 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 $86 million ($0.38 per diluted share), $81 million ($0.36 per diluted share) and
$67 million ($0.31 per diluted share) in 2007, 2006, and 2005 respectively.
As of June 29, 2007, the Company had federal and state NOL carryforwards of approximately $308 million and
$139 million, respectively. In addition, the Company had various federal and state tax credit carryforwards combined of
approximately $90 million. The loss carryforwards available to offset future federal and state taxable income expire at
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WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)