Varian Semiconductor Equipment Associates (VSEA)

VSEA » Topics » Note 14. Income Taxes

This excerpt taken from the VSEA 10-Q filed May 13, 2009.

Note 17. Income Taxes

Our effective tax rate is based on our current profitability outlook and our expectation of earnings from operations in the U.S. and other tax jurisdictions throughout the world.

 

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In fiscal year 2007, we implemented a plan to realign the legal entities within our worldwide affiliated group to make our legal structure more consistent with the geographic mix of our customers and suppliers. The realignment of our entities has caused the tax rate to become more sensitive to the geographic distribution of profits.

We recorded an income tax benefit of $3.9 million for the six months ended April 3, 2009. Exclusive of discrete items, the projected effective tax benefit for the year is approximately 13%, comprised of an expected tax benefit at the U.S. statutory rate of 35%, offset by losses incurred in low tax jurisdictions, charges relating to the realignment and other items aggregating approximately 22%. This benefit was offset in the period by discrete charges primarily relating to interest accrued on uncertain tax positions and other discrete items of $0.8 million. For the six month period ended March 28, 2008, our income tax expense of $48.0 million included a discrete net benefit of $1.2 million related to a Swiss net operating loss and other discrete items. Our effective income tax rate was 38.2% for the first six months of fiscal year 2008. The discrete income tax benefit received in the first six months of fiscal year 2008 reduced the effective tax rate by approximately 1 percentage point.

We adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”) on September 29, 2007. The net increase in the reserve for unrecognized tax benefits during the first and second quarters of fiscal year 2009 was $1.1 million and $1.0 million, respectively, for positions taken in the current year. The total amount of unrecognized tax benefits was $53.5 million as of January 2, 2009 and $54.5 million as of April 3, 2009. Of these amounts, the amounts that would impact the effective tax rate, if recognized, were $49.1 million and $50.0 million, respectively. The difference between the total amount of unrecognized tax benefits and the amount that would impact the effective rate consists of items that are offset by deferred tax assets of which $3.0 million as of January 2, 2009 and April 3, 2009 relate to state tax credits which are fully offset by a valuation allowance. As of April 3, 2009, the total amount of accrued interest and penalties was $3.8 million. We will reexamine the tax provision and the effect of estimated unrecognized tax benefits on our financial position at the end of each reporting period.

Except for the matters currently in the Appeals Office of the Internal Revenue Service (“IRS”), as discussed below, we do not anticipate that the total unrecognized tax benefits will significantly change due to increases in reserves, the settlements of audits or the expiration of statute of limitations in the next twelve months.

In the normal course of business, Varian Semiconductor and its subsidiaries are examined by various federal, state and foreign tax authorities, including the IRS. We are subject to audit by the IRS and various state and foreign authorities for the fiscal years 2003 through 2007. The IRS recently concluded an examination of certain refund claims, primarily related to the extraterritorial income exclusion, filed by us for the fiscal years 2000 through 2004. The IRS issued a notice of disallowance relating to a portion of these claims and we filed a formal protest with the Appeals Office of the IRS. An Appeals hearing date has not been set. It is unknown whether agreement on these claims will be reached within the next twelve months. The favorable resolution of these claims could result in a benefit to the tax provision in the range of $0 to $5.8 million. Final agreement could reduce the amount of unrecognized tax benefits by approximately $5.8 million. The IRS is currently conducting an examination of fiscal year 2007. Audit field work began in late January 2009.

We include interest and penalties related to unrecognized tax benefits within our provision for income taxes.

This excerpt taken from the VSEA 10-Q filed Feb 10, 2009.

Note 17. Income Taxes

Our effective tax rate is based on our current profitability outlook and our expectation of earnings from operations in the U.S. and other tax jurisdictions throughout the world.

In fiscal year 2007, we implemented a plan to realign the legal entities within our worldwide affiliated group to make our legal structure more consistent with the geographic mix of our customers and suppliers. The realignment of our entities has caused the tax rate to become more sensitive to the geographic distribution of profits.

 

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We recorded an income tax provision of $5 thousand for the three months ended January 2, 2009. Exclusive of discrete items, the projected effective tax benefit for the year is approximately 4%, comprised of an expected tax benefit at the U.S. statutory rate of 35%, offset by losses incurred in low tax jurisdictions and charges relating to the realignment aggregating approximately 31%. This benefit was offset in the quarter by discrete charges primarily relating to interest accrued on uncertain tax positions and other discrete items of approximately 4 percentage points. For the three month period ended December 28, 2007, our income tax expense of $20.0 million included a discrete net benefit of $1.2 million related to a Swiss net operating loss and other discrete items. Our effective income tax rate was 31% for the first quarter of fiscal year 2008. The discrete income tax benefit received in the first quarter of fiscal year 2008 reduced the effective tax rate by approximately 2 percentage points.

We adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”) on September 29, 2007. The net increase in the reserve for unrecognized tax benefits during the first quarter of fiscal year 2009 was $1.1 million. As of January 2, 2009, the total amount of unrecognized tax benefits was $53.5 million, of which $49.1 million would impact the effective tax rate, if recognized. The difference between the total amount of unrecognized tax benefits and the amount that would impact the effective rate consists of items that are offset by deferred tax assets, $3.0 million of which relate to state tax credits which are fully offset by a valuation allowance. As of January 2, 2009, the total amount of accrued interest and penalties was $3.4 million. We will reexamine the tax provision and the effect of estimated unrecognized tax benefits on our financial position at the end of each reporting period.

Except for the matters currently in the Appeals Office of the Internal Revenue Service (“IRS”), as discussed below, we do not anticipate that the total unrecognized tax benefits will significantly change due to increases in reserves, the settlements of audits or the expiration of statute of limitations in the next twelve months.

In the normal course of business, Varian Semiconductor and its subsidiaries are examined by various federal, state and foreign tax authorities, including the IRS. We are subject to audit by the IRS and various state and foreign authorities for the fiscal years 2003 through 2007. The IRS recently concluded an examination of certain refund claims, primarily related to the extraterritorial income exclusion, filed by us for the fiscal years 2000 through 2004. The IRS issued a notice of disallowance relating to a portion of these claims and we filed a formal protest with the Appeals Office of the IRS. An Appeals hearing date has not been set. It is unknown whether agreement on these claims will be reached within the next twelve months. The favorable resolution of these claims could result in a benefit to the tax provision in the range of $0 to $5.8 million. Final agreement could reduce the amount of unrecognized tax benefits by approximately $5.8 million. We have been notified by the IRS that it is planning to conduct an examination of fiscal year 2007. Audit field work began in late January 2009.

We include interest and penalties related to unrecognized tax benefits within our provision for income taxes.

These excerpts taken from the VSEA 10-K filed Nov 26, 2008.

Income Taxes

Varian Semiconductor uses the asset and liability method of accounting for deferred income taxes. The provision for income taxes includes income taxes currently payable and those deferred as a result of temporary differences between the financial statement and tax bases of assets and liabilities. A valuation allowance is provided to reduce deferred tax assets to the amount of future tax benefit when it is more likely than not that some portion of the deferred tax assets will not be realized. Projected future taxable income and ongoing tax planning strategies are considered and evaluated when assessing the need for a valuation allowance. Any increase or decrease in a valuation allowance could have a material adverse or beneficial impact on Varian Semiconductor’s income tax provision and net income in the period in which the determination is made.

The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), on September 29, 2007. FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.” The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon audit, including resolutions of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. The Company reevaluates these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity. Any change in these factors could result in the recognition of a tax benefit or an additional charge to the tax provision. FIN 48 also provides guidance on classification, interest and penalties, accounting in interim periods, disclosure and transition.

Income Taxes

STYLE="margin-top:6px;margin-bottom:0px">Varian Semiconductor uses the asset and liability method of accounting for deferred income taxes. The provision for income taxes includes income taxes currently payable
and those deferred as a result of temporary differences between the financial statement and tax bases of assets and liabilities. A valuation allowance is provided to reduce deferred tax assets to the amount of future tax benefit when it is more
likely than not that some portion of the deferred tax assets will not be realized. Projected future taxable income and ongoing tax planning strategies are considered and evaluated when assessing the need for a valuation allowance. Any increase or
decrease in a valuation allowance could have a material adverse or beneficial impact on Varian Semiconductor’s income tax provision and net income in the period in which the determination is made.

STYLE="margin-top:12px;margin-bottom:0px">The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), on
September 29, 2007. FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.” The first step is to evaluate the tax
position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon audit, including resolutions of related appeals or litigation processes, if any. The
second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. The Company reevaluates these uncertain tax positions on a quarterly basis. This evaluation is based on factors
including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity. Any change in these factors could result in the recognition of a tax benefit or an additional charge
to the tax provision. FIN 48 also provides guidance on classification, interest and penalties, accounting in interim periods, disclosure and transition.

SIZE="2">Derivative Financial Instruments

Varian Semiconductor’s foreign subsidiaries operate and sell Varian Semiconductor’s products in
various global markets. As a result, Varian Semiconductor is exposed to changes in foreign currency exchange rates. Varian Semiconductor utilizes foreign currency forward exchange contracts to hedge against currency exposures that are

 


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VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

STYLE="margin-top:6px;margin-bottom:0px" ALIGN="center">NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

SIZE="1"> 



associated with certain of its assets and liabilities denominated in various non-U.S. dollar currencies. The effect of exchange rate changes on forward
exchange contracts is expected to offset the effect of exchange rate changes on the underlying hedged items. Varian Semiconductor believes these financial instruments do not subject it to speculative risk that would otherwise result from changes in
currency exchange rates. Varian Semiconductor does not use derivative financial instruments for speculative or trading purposes.

All of Varian
Semiconductor’s derivative financial instruments are recorded at fair value based upon quoted market prices for comparable instruments. For derivative instruments designated and qualifying as cash flow hedges of anticipated foreign currency
denominated transactions, the effective portion of the gain or loss on these hedges is reported as a component of accumulated other comprehensive income in stockholders’ equity, and is reclassified into earnings when the hedged transaction
affects earnings. If the transaction being hedged fails to occur, or if a portion of any derivative is ineffective, the gain or loss on the associated financial instrument is recorded immediately in earnings. For derivative instruments used to hedge
existing foreign currency denominated assets or liabilities, the gain or loss on these hedges is recorded immediately in earnings to offset the changes in the fair value of the assets or liabilities being hedged. There were six forward foreign
exchange sell contracts designated as hedges of anticipated product sales in Japanese Yen outstanding at October 3, 2008, totaling an equivalent notional value of $21.6 million. In addition, there was one forward foreign exchange purchase
contract in the amount of an equivalent notional value of $2.8 million offsetting one of the six forward sell contracts.

This excerpt taken from the VSEA 10-Q filed Aug 5, 2008.

Note 16. Income Taxes

Varian Semiconductor’s effective tax rate is based on its current profitability outlook and its expectations of earnings from operations in the U.S. and other tax jurisdictions throughout the world.

In fiscal 2007 Varian Semiconductor implemented a plan to realign the legal entities within its worldwide affiliated group. The objective of this realignment was to make its legal structure more consistent with the geographic mix of its customers and suppliers. In effecting this realignment, Varian Semiconductor has established operations in Switzerland that will provide operational and financial services to all of its international locations.

Varian Semiconductor’s effective income tax rate was a provision of 38.3% for the first nine months of fiscal year 2008 and a provision of 48.7% for the same period in fiscal year 2007. The 2008 provision included a discrete net benefit of $2.1 million related to a Swiss net operating loss and favorable tax return adjustments, offset by FIN 48 interest accrual, various charges related to the legal realignment, and other discrete items. The discrete income tax benefit received in the first nine months of fiscal year 2008 reduced the effective tax rate by approximately 1.4 percentage points. For the same period of fiscal year 2007, Varian Semiconductor’s income tax expense included tax charges related to the realignment and a discrete net benefit of $2.2 million related primarily to the reinstatement of the research and development tax credit retroactive to January 1, 2006. The discrete income tax benefit recorded in the first nine months of fiscal year 2007 reduced the effective tax rate by approximately 1.2 percentage points. The realignment of Varian Semiconductor’s entities has caused the tax rate to become more sensitive to the geographic distribution of profits. The 2007 provision was impacted by ongoing tax charges related to Varian Semiconductor’s announcement in June 2007 that it has begun implementing a plan to improve the alignment of its legal entity structure. The effective tax rate in both fiscal year 2008 and fiscal year 2007 is higher than the U.S. federal statutory rate principally due to tax charges to implement the new structure, which are expected to decrease over time, and an increase in reserves for unrecognized tax benefits. Future tax rates may vary from the historic rates depending on the worldwide composition of earnings and the continuing availability of income tax credits as well as the potential resolution of reserves for unrecognized tax benefits.

Varian Semiconductor adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”) on September 29, 2007. FIN 48

 

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clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” This interpretation prescribes the recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Upon adoption of FIN 48, Varian Semiconductor increased the liability for net unrecognized tax benefits by $1.7 million, and accounted for the increase as a cumulative effect of change in accounting principle that resulted in a reduction in retained earnings of $1.7 million at September 29, 2007. Varian Semiconductor also reclassified $4.0 million of current income taxes payable to long-term income taxes payable and $1.3 million of long-term income taxes payable to non-current deferred tax assets.

As of September 29, 2007, the total gross unrecognized tax benefits related to various federal, state and foreign income tax matters was $40.8 million. Of this amount, the amount that would impact the effective tax rate, if recognized, was $38.5 million. The difference between the total amount of unrecognized tax benefits and the amount that would impact the effective tax rate consists of items that are offset by deferred tax assets of $2.3 million, of which $0.9 million relates to state tax credits which are fully offset by a valuation allowance.

The net increase in the reserve for unrecognized tax benefits during the first nine months of fiscal 2008 was $8.2 million for positions taken in the current year. Of this amount, approximately $2.3 million represents the increase for the third quarter of fiscal year 2008. As of June 27, 2008, the total amount of unrecognized tax benefits was $49 million, of which $44.7 million would impact the effective tax rate, if recognized. The difference between the total mount of unrecognized tax benefits and the amount that would impact the effective rate consists of items that are offset by deferred tax assets, $2.9 million of which relate to state tax credits which are fully offset by a valuation allowance. Varian Semiconductor anticipates a ratable increase in unrecognized tax benefits during the remainder of the fiscal year ending October 3, 2008. Varian Semiconductor will reexamine the tax provision and the effect of estimated unrecognized tax benefits on its financial position at the end of each reporting period.

In the normal course of business, Varian Semiconductor and its subsidiaries are examined by various federal, state and foreign tax authorities, including the Internal Revenue Service (“IRS”). Varian Semiconductor is subject to audit by the IRS and various state and foreign authorities for the fiscal years 2003 through 2007. The IRS recently concluded an examination of certain refund claims, primarily related to the extraterritorial income exclusion, filed by Varian Semiconductor for fiscal years 2000 through 2004. The IRS issued a notice of disallowance relating to a portion of these claims, and Varian Semiconductor filed a formal protest with the Appeals Office of the IRS. It is unlikely that agreement on these claims will be reached within the next twelve months. The favorable resolution of these claims could result in a benefit to the tax provision in the range of $0 to $5.8 million. Final agreement could reduce the amount of unrecognized tax benefits by approximately $5.8 million.

Varian Semiconductor is awaiting a final ruling from the Swiss tax authorities. If granted, the ruling will result in a tax holiday and other tax incentives which may benefit Varian Semiconductor’s effective tax rate over the long term. Although Varian Semiconductor anticipates realizing a lower future tax rate from this incentive, receipt of the ruling will cause a discrete income tax charge of approximately $1.1 million in the period received to write down the deferred tax asset related to the initial Swiss losses. These losses were initially benefited at the statutory rate and a charge will be necessary to write them down to the incentive rate. If made, this charge will also result in a change to the projected effective tax rate for the full year. Furthermore, Varian Semiconductor is finalizing an in-depth study of its research and development credit for fiscal years 2005 and 2006, and intends to file amended refund claims for the incremental credit. A favorable discrete income tax benefit may be recorded in the period the study is complete and the benefit, if any, can be estimated.

As of September 29, 2007, Varian Semiconductor had accrued $1.7 million of interest and penalties related to unrecognized tax benefits. As of June 27, 2008, the total amount of accrued interest and penalties was $2.8 million. Varian Semiconductor includes interest and penalties related to unrecognized tax benefits within its provision for income taxes.

This excerpt taken from the VSEA 10-Q filed May 6, 2008.

Note 15. Income Taxes

Varian Semiconductor’s effective tax rate is based on its current profitability outlook and its expectations of earnings from operations in the U.S. and other tax jurisdictions throughout the world.

In fiscal 2007 Varian Semiconductor implemented a plan to realign the legal entities within its worldwide affiliated group. The objective of this realignment was to make its legal structure more consistent with the geographic mix of its customers and suppliers. In effecting this realignment, Varian Semiconductor has established operations in Switzerland that will provide operational and financial services to all of its international locations.

Varian Semiconductor’s effective income tax rate was a provision of 38.2% for the first six months of fiscal year 2008 and a provision of 31.8% for the same period in fiscal year 2007. The 2008 provision included a discrete net benefit of $1.2 million related to a Swiss net operating loss and other discrete items. The discrete income tax benefit received in the first six months of fiscal year 2008 reduced the effective tax rate by approximately 1 percentage point. For the same period of fiscal year 2007, Varian Semiconductor’s income tax expense included a discrete net benefit of $2.1 million related to the reinstatement of the research and development tax credit retroactive to January 1, 2006. The discrete income tax benefit recorded in the first six months of fiscal year 2007 reduced the effective tax rate by approximately 2 percentage points. The realignment of Varian Semiconductor’s entities has caused the tax rate to become more sensitive to the geographic distribution of profits. The increase in the effective rate in the first six months of fiscal 2008, exclusive of the benefits received, is primarily due to changes in the geographic distribution of forecasted income, lower forecasted profitability and the expiration of the research and development tax credit effective December 31, 2007. The rate is higher than the U.S. federal statutory rate principally due to tax charges to implement the new structure, which are expected to decrease over time, and an increase in reserves for unrecognized tax benefits. Future tax rates may vary from the historic rates depending on the worldwide composition of earnings and the continuing availability of income tax credits as well as the potential resolution of reserves for unrecognized tax benefits.

In the second quarter of fiscal year 2008, Varian Semiconductor’s forecast of international earnings declined significantly. Consequently, the current proportion of earnings in the U.S. became substantially higher than expected during the first quarter of fiscal year 2008. As a result, Varian Semiconductor’s current projected effective rate required an adjustment to the rate during the second quarter of fiscal year 2008. This adjustment to the rate, from 31.4% recorded in the first quarter of fiscal year 2008 to 38.2% in the second quarter of fiscal year 2008, resulted in an actual provision of 45.1% during the second quarter of 2008.

Varian Semiconductor adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”) on September 29, 2007. FIN 48

 

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clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” This interpretation prescribes the recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Upon adoption of FIN 48, Varian Semiconductor increased the liability for net unrecognized tax benefits by $1.7 million, and accounted for the increase as a cumulative effect of change in accounting principle that resulted in a reduction in retained earnings of $1.7 million at September 29, 2007. Varian Semiconductor also reclassified $4.0 million of current income taxes payable to long-term income taxes payable and $1.3 million of long-term income taxes payable to non-current deferred tax assets.

As of September 29, 2007, the total gross unrecognized tax benefits related to various federal, state and foreign income tax matters was $40.8 million. Of this amount, the amount that would impact the effective tax rate, if recognized, was $38.5 million. The difference between the total amount of unrecognized tax benefits and the amount that would impact the effective tax rate consists of items that are offset by deferred tax assets of $2.3 million, of which $0.9 million relates to state tax credits which are fully offset by a valuation allowance.

The increase in the reserve for unrecognized tax benefits during the first and second quarters of fiscal 2008, was $2.1 and $3.8 million, respectively, for positions taken in the current year. The total amount of unrecognized tax benefits was $42.9 as of December 28, 2007 and $46.7 million as of March 28, 2008. Of these amounts, the amounts that would impact the effective tax rate, if recognized, was $40.6 and $42.8 million respectively. The difference between the total amount of unrecognized tax benefits and the amount that would impact the effective rate consists of items that are offset by deferred tax assets, of which $0.9 as of December 28, 2007 and $2.5 million as of March 28, 2008 relate to state tax credits which are fully offset by a valuation allowance. Varian Semiconductor anticipates a ratable increase in unrecognized tax benefits during the remainder of the fiscal year ending October 3, 2008. Varian Semiconductor will reexamine the tax provision and the effect of estimated unrecognized tax benefits on its financial position at the end of each reporting period.

In the normal course of business, Varian Semiconductor and its subsidiaries are examined by various federal, state and foreign tax authorities, including the Internal Revenue Service. Varian Semiconductor is subject to audit by the Internal Revenue Service and various state and foreign authorities for the fiscal years 2003 through 2007. The Internal Revenue Service is currently examining certain refund claims, primarily related to the extraterritorial income exclusion, filed by Varian Semiconductor for fiscal years 2000 through 2004. The favorable resolution of these claims could result in a benefit to the tax provision in the range of $0 to $5.8 million. It is reasonably possible that agreement on these claims may be reached within the next twelve months. Final agreement could reduce the amount of unrecognized tax benefits by approximately $5.8 million.

As of September 29, 2007, Varian Semiconductor had accrued $1.7 million of interest and penalties related to unrecognized tax benefits. As of December 28, 2007 and March 28, 2008, the total amount of accrued interest and penalties was $1.9 and $2.5 million respectively. Varian Semiconductor includes interest and penalties related to unrecognized tax benefits within its provision for income taxes.

This excerpt taken from the VSEA 10-Q filed Feb 1, 2008.

Note 15. Income Taxes

Varian Semiconductor’s effective tax rate is based on its current profitability outlook and its expectations of earnings from operations in the U.S. and other tax jurisdictions throughout the world.

In fiscal 2007 Varian Semiconductor implemented a plan to realign the legal entities within its worldwide affiliated group. The objective of this realignment was to make its legal structure more consistent with the geographic mix of its customers and suppliers. In effecting this realignment, Varian Semiconductor has established operations in Switzerland that will provide operational and financial services to all of its international locations.

For the quarter ended December 28, 2007, Varian Semiconductor’s income tax expense of $20.0 million included a discrete net benefit of $1.2 million related to a Swiss net operating loss and other discrete items. Varian Semiconductor’s effective income tax rate was 31% for the first quarter of fiscal year 2008. The discrete income tax benefit received in the first quarter of fiscal year 2008 reduced the effective tax rate by approximately 2 percentage points. For the quarter ended December 29, 2006, Varian Semiconductor’s income tax expense included a discrete net benefit of $2.1 million related to the reinstatement of the research and development tax credit retroactive to January 1, 2006. Varian Semiconductor’s effective income tax rate was 29% for the first quarter of fiscal year 2007. The discrete income tax benefit recorded in the first quarter of fiscal year 2007 reduced the effective tax rate by approximately 4 percentage points.

Varian Semiconductor adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”) on September 29, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” This interpretation prescribes the recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Upon adoption of FIN 48, Varian Semiconductor increased the liability for net unrecognized tax benefits by $1.7 million, and accounted for the increase as a cumulative effect of change in accounting principle that resulted in a reduction in retained earnings of $1.7 million at September 29, 2007. Varian Semiconductor also reclassified $4.0 million of current income taxes payable to long term income taxes payable and $1.3 million of long-term income taxes payable to non-current deferred tax assets.

As of September 29, 2007, the total gross unrecognized tax benefits related to various federal, state and foreign income tax matters was $40.8 million. Of this amount, the amount that would impact the effective tax rate, if recognized, was $38.5 million. The difference between the total amount of unrecognized tax benefits and the amount that would impact the effective tax rate consists of items that are offset by deferred tax assets of $2.3 million, of which $0.9 million relates to state tax credits which are fully offset by a valuation allowance. The increase in the reserve for the quarter ended December 28, 2007 was $2.2 million. Varian Semiconductor anticipates a ratable increase in unrecognized tax benefits during the remainder of the fiscal year ending October 3, 2008. Varian Semiconductor will reexamine the tax provision and the effect of estimated unrecognized tax benefits on its financial position at the end of each reporting period.

In the normal course of business, Varian Semiconductor and its subsidiaries are examined by various federal, state and foreign tax authorities, including the Internal Revenue Service. Varian Semiconductor is subject to audit by the Internal Revenue Service and various state and foreign authorities for the fiscal years ended 2003 through 2007. The Internal Revenue Service is currently examining certain refund claims filed by Varian Semiconductor for fiscal years ended 2000 through 2004. The favorable resolution of these claims could result in a benefit to the tax provision in the range of $0 to $5.8 million. It is reasonably possible that agreement on these claims may be reached within the next twelve months. Final agreement could reduce the amount of unrecognized tax benefits by approximately $5.8 million.

 

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As of September 29, 2007, Varian Semiconductor had accrued $1.7 million of interest and penalties related to unrecognized tax benefits. As of December 28, 2007, the total amount of accrued interest and penalties was $1.9 million. Varian Semiconductor includes interest and penalties related to unrecognized tax benefits within its provision for income taxes.

This excerpt taken from the VSEA 10-K filed Nov 21, 2007.

Income Taxes

Varian Semiconductor uses the asset and liability method of accounting for deferred income taxes. The provision for income taxes includes income taxes currently payable and those deferred as a result of temporary differences between the financial statement and tax bases of assets and liabilities. A valuation allowance is provided to reduce deferred tax assets to the amount of future tax benefit when it is more likely than not that some portion of the deferred tax assets will not be realized. Projected future taxable income and ongoing tax planning strategies are considered and evaluated when assessing the need for a valuation allowance. Any increase or decrease in a valuation allowance could have a material adverse or beneficial impact on Varian Semiconductor’s income tax provision and net income in the period in which the determination is made.

This excerpt taken from the VSEA 10-Q filed Aug 6, 2007.

Note 14. Income Taxes

Varian Semiconductor’s effective tax rate is based on its current profitability outlook and its expectations of earnings from operations in the U.S. and other tax jurisdictions throughout the world.

 

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In June, 2007, Varian Semiconductor announced that it has approved a plan to improve the alignment of its legal entity structure with the geographic mix of its customers and suppliers. To effect this realignment, Varian Semiconductor has established operations in Switzerland that will provide operational and financial services to all of its international locations.

Varian Semiconductor’s effective income tax rate was 72% for the third quarter of fiscal year 2007 and 49% for the first nine months of fiscal year 2007. Tax charges related to the realignment, offset slightly by benefits related to the reinstatement of the research and development tax credit, increased the projected annual effective rate from 32% in the second fiscal quarter to 49% in the third fiscal quarter. A key element of the new structure involves the sharing of certain expenses. In conjunction with the initial implementation of this cost-sharing arrangement, Varian Semiconductor expects to incur incremental U.S. federal and state income tax charges, and generate some foreign losses with no current tax benefit.

Varian Semiconductor’s effective income tax rate was 32% for the first nine months of fiscal year 2006. The discrete income tax benefit received in the first quarter of fiscal year 2006, and other discrete items, reduced the tax rate by approximately 12 percentage points to an actual rate of 20% for the first nine months of fiscal 2006. In the first quarter of fiscal year 2006, Varian Semiconductor recognized an income tax benefit of $9.0 million related to the favorable conclusion of a multi-year examination. Additionally, Varian Semiconductor reduced other current assets by $8.0 million upon the receipt of a refund from the Internal Revenue Service. Included in interest income for the first six months of fiscal year 2006 is $1.3 million of interest income related to the final resolution of the examination.

This excerpt taken from the VSEA 10-Q filed May 8, 2007.

Note 14. Income Taxes

Varian Semiconductor’s effective tax rate is based on its current profitability outlook and its expectations of earnings from operations in the U.S. and other tax jurisdictions throughout the world.

 

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Varian Semiconductor is currently exploring alternatives with respect to reorganizing the company to better align its processes with the geographic location of its customers and suppliers. It is expected that over the long-term, Varian Semiconductor will benefit from significant economic efficiencies, however over the next few quarters, its effective tax rate could increase materially depending on the nature, extent and timing of the realignment. Varian Semiconductor is currently evaluating the impact of various alternatives, and consequently, is not able at this time to provide an estimate of the impact, if implemented, on its consolidated financial statements.

Varian Semiconductor’s effective income tax rate was 31.8% for the first six months of fiscal year 2007. Varian Semiconductor recognized a benefit received in the first quarter of fiscal year 2007 related to the reinstatement of the research and development tax credit which reduced the effective tax rate by approximately 2 percentage points.

Varian Semiconductor’s effective income tax rate was 8.3% for the first six months of fiscal year 2006. The discrete income tax benefit received in the first quarter of fiscal year 2006, and other discrete items, reduced the tax rate by approximately 22 percentage points. In the first quarter of fiscal year 2006, Varian Semiconductor recognized an income tax benefit of $9.0 million related to the favorable conclusion of a multi-year examination. Additionally, Varian Semiconductor reduced other current assets by $8.0 million upon the receipt of a refund from the Internal Revenue Service. Included in interest income for the first six months of fiscal year 2006 is $1.3 million of interest income related to the final resolution of the examination.

In accordance with EITF 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)” (“EITF 06–3”), Varian Semiconductor records certain taxes on a net basis (i.e. the taxes are excluded from revenues and costs). Taxes within the scope of EITF 06–3 are those that are imposed on and concurrent with a specific revenue–producing transaction, such as sales tax or value–added tax. Taxes assessed on an entity’s activities over a period of time, such as gross receipts taxes, are not within the scope of the issue.

This excerpt taken from the VSEA 10-Q filed Feb 5, 2007.

Note 14. Income Taxes

Varian Semiconductor’s effective tax rate is based on its current profitability outlook and its expectations of earnings from operations in the United States and other tax jurisdictions throughout the world.

In the first quarter of fiscal year 2007, Varian Semiconductor’s income tax expense of $15.1 million included a discrete net benefit of $2.1 million related to the reinstatement of the research and development tax credit retroactive to January 1, 2006. Varian Semiconductor’s effective income tax rate was 29% for the first quarter of fiscal year 2007. The discrete income tax benefit received in the first quarter of fiscal year 2007 reduced the effective tax rate by approximately 4 percentage points.

In the first quarter of fiscal year 2006, Varian Semiconductor recognized an income tax benefit of $3.3 million which included a provision of $5.7 million and a benefit of $9.0 million related to the favorable conclusion of a multi-year examination. Additionally, Varian Semiconductor reduced other current assets by $8.0 million upon the receipt of a refund from the IRS. Included in interest income for the first quarter of fiscal year 2006 is $1.3 million of interest income related to the final resolution of the examination. Varian Semiconductor’s effective income tax rate was a benefit of 17% for the first quarter of fiscal year 2006. The discrete income tax benefit received in the first quarter of fiscal year 2006 and other discrete items reduced the tax rate by approximately 47 percentage points.

This excerpt taken from the VSEA 10-K filed Dec 7, 2006.

Income Taxes

 

Varian Semiconductor uses the asset and liability method of accounting for deferred income taxes. The provision for income taxes includes income taxes currently payable and those deferred as a result of temporary differences between the financial statement and tax bases of assets and liabilities. A valuation allowance is provided to reduce deferred tax assets to the amount of future tax benefit when it is more likely than not that some portion of the deferred tax assets will not be realized. Projected future taxable income and ongoing tax planning strategies are considered and evaluated when assessing the need for a valuation allowance. Any increase or decrease in a valuation allowance could have a material adverse or beneficial impact on Varian Semiconductor’s income tax provision and net income in the period in which the determination is made.

 

This excerpt taken from the VSEA 10-K filed Dec 13, 2005.

Income Taxes

 

Varian Semiconductor uses the asset and liability method of accounting for deferred income taxes. The provision for income taxes includes income taxes currently payable and those deferred as a result of temporary differences between the financial statement and tax bases of assets and liabilities. A valuation allowance is provided to reduce deferred tax assets to the amount of future tax benefit when it is more likely than not that some portion of the deferred tax assets will not be realized. Projected future taxable income and ongoing tax planning strategies are considered and evaluated when assessing the need for a valuation allowance. Any increase or decrease in a valuation allowance could have a material adverse or beneficial impact on Varian Semiconductor’s income tax provision and net income in the period in which the determination is made.

 

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