Adaptec 2010 Annual Report Download - page 37

(Provision for) Recovery of Income Taxes
We recorded a provision for income taxes of $30.2 million and $4.2 million for 2010 and 2009, respectively, resulting in an
increase in provision for income taxes of $26 million. Our effective tax rate was 27% and 8% for 2010 and 2009, respectively. During
2010, we began utilizing available stock option related loss carry-forwards. As a result we recognized $13.4 million of additional
income tax provision due to the benefit of stock option related loss carry-forwards being recognized in equity. This impacted our
effective tax rate by 12%. The remaining difference relates primarily to foreign exchange translation of a foreign subsidiary, and
changes in accruals related to the unrecognized tax benefit liabilities.
The difference between our effective tax rates and the 35% federal statutory rate in each of 2010, 2009 and 2008, resulted
primarily from foreign earnings taxed at rates lower than the federal statutory rate, permanent differences arising from stock-based
compensation, foreign exchange translation of a foreign subsidiary, investment tax credits earned, non-deductible intangible asset
amortization, the effect of intercompany transactions, changes in valuation allowance, and changes in accruals related to the
unrecognized tax benefit liabilities.
The 2009 provision for income taxes was $4.2 million, which consisted of $9.9 million recovery associated with the change in
deferred tax relating to unrealized foreign exchange loss arising from the foreign currency translation pertaining to a foreign
subsidiary, $4.9 million tax expense relating to the amortization of the tax effects relating to inter-company transactions relating to
sale of certain assets, as discussed below, $4.5 million tax provision relating to the liability for unrecognized tax benefits (including
associated interest), $3.8 million increase in deferred income tax related to past acquisitions and $0.9 million increase in tax expense
from operations, net of investment tax credits earned.
The consolidated financial statements for the 2010 and 2009, include the tax effects associated with the sale of certain assets
between our wholly-owned subsidiaries. GAAP requires the tax expense associated with gains on such inter-company transactions to
be recognized over the estimated life of the related assets. Accordingly prepaid tax expenses were recorded in the year ended
December 27, 2009. The balance in long-term prepaid expenses as at December 26, 2010 and December 27, 2009, to be recognized in
future years was $23 million and $26.2 million, respectively. The tax expense during 2010 and 2009 resulting from these transactions
was $3.2 million and $4.9 million, respectively.
Our provision for income taxes for the year ended December 28, 2008 was a $70.0 million recovery, resulting in an effective tax
rate of negative 120% on net income of $58.3 million. The recovery was primarily as a result of one of our foreign subsidiaries
settling several ongoing tax matters for less than had been accrued as part of its liability for unrecognized tax benefits, resulting in the
recognition of a $124.1 million tax benefit (see Item 8. Financial Statements and Supplementary Data, Notes to the Consolidated
Financial Statements, Note 16. Income Taxes). In addition, we accrued $35.2 million (including associated interest) relating to an
ongoing liability arising from the examination of our existing transfer pricing practices prior to the settlement noted above, $28.1
million of income tax from normal operations (offset by investment tax credits of $19.5 million), $5.8 million deferred tax expense
from an unrealized gain arising from foreign currency translation pertaining to a foreign subsidiary, and $4.5 million increase in tax
from various items, including deferred taxes, minimum taxes and revisions of prior estimates.
B USINESS O UTLOOK
We expect our revenues for the first quarter of 2011 to be approximately $150 million to $160 million based on typical order
patterns. As in the past, and consistent with business practice in the semiconductor industry, a portion of our revenues are likely to be
derived from orders placed and shipped during the same quarter, which we call our “turns business.” Our turns business varies from
quarter to quarter. In the fourth quarter of 2010, net orders booked and shipped within the quarter were approximately 22% of
quarterly sales, and we expect the turns percentage to be similar in the first quarter of 2011 compared with the fourth quarter of 2010.
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