Western Digital 2008 Annual Report Download - page 75

based compensation resulted in a $70 million tax benefit during the year ended June 27, 2008. In accordance with the
provisions of SFAS 123(R), shareholders equity was increased by $89 million during 2008 for these benefits.
Beginning in the year ended June 27, 2008, deferred tax assets are presented before any reduction for liabilities
relating to unrecognized tax benefits. The increase to the deferred tax assets for the fiscal year ended June 27, 2008 relates
primarily to 1) the acquisition of Komag and its net deferred tax assets of $92 million and 2) the reclassification of
$50 million of liabilities for unrecognized tax benefits that were previously recorded net in deferred tax assets.
As of the end of fiscal 2007, the Company determined that it is more likely than not that its net deferred tax assets
will be realized. Accordingly, the Company eliminated its remaining 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. 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 27, 2008:
2008 2007 2006
U.S. Federal statutory rate ......................................... 35% 35% 35%
Tax rate differential on international income ............................ (28) (24) (25)
Tax effect of U.S. permanent differences ............................... 4 — —
State income tax, net of federal tax................................... 2 — —
Income tax credits .............................................. (2) — —
Change in valuation allowance ...................................... — (39) (16)
Other ....................................................... 1 1 3
Effective tax rate . .............................................. 12% (27)% (3)%
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 $391 million ($1.73 per diluted share), $86 million ($0.38 per diluted share) and
$81 million ($0.36 per diluted share) in 2008, 2007, and 2006, respectively.
As of June 27, 2008, the Company had federal and state NOL carryforwards of approximately $185 million and
$69 million, respectively. In addition, the Company had various federal and state tax credit carryforwards combined of
approximately $157 million. The loss carryforwards available to offset future federal and state taxable income expire at various
times from 2019 to 2026 and 2013 to 2017, respectively. Approximately $55 million of the credit carryforwards available to
offset future taxable income expire at various times from 2009 to 2027. The remaining amount is available indefinitely. NOLs
and credits relating to Komag are subject to limitations under Section 382 and 383 of the Internal Revenue Code. The
Company does not expect these limitations to result in a reduction in the total amount of NOLs and credits ultimately realized.
Adoption of FIN 48
Effective as of June 30, 2007, the Company adopted the provisions of FIN 48. FIN 48 contains a two-step approach
to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109, “Accounting for
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WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)