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million of gains on sales of our investments. Interest income increased from $9 million in 2011 to $12 million in
2012 due to higher average daily invested cash balances.
Income Tax Provision.
Income tax expense was $145 million in 2012 as compared to $54 million in 2011. Tax
expense as a percentage of income before taxes was 8.3% in 2012 compared to 6.9% for 2011. The differences between
the effective tax rate and the U.S. Federal statutory rate are primarily due to tax holidays in Malaysia, the Philippines,
Singapore and Thailand that expire at various dates through 2025 and the current year generation of income tax cred-
its.
As of June 29, 2012, we had a recorded liability for unrecognized tax benefits of approximately $280 million,
which includes $39 million assumed in the Acquisition. Aside from the increase in the liability for unrecognized tax
benefits related to liabilities assumed in the Acquisition, we recognized a net decrease of $4 million in our liability for
unrecognized tax benefits during 2012. Interest and penalties recognized on such amounts were not material.
The IRS has completed its field examination of the federal income tax returns for fiscal years 2006 and 2007 for
us and calendar years 2005 and 2006 for Komag, which was acquired by us on September 5, 2007. In September
2011, we received a final RAR and Closing Agreement with respect to the years under examination for Komag. This
agreement resulted in an immaterial benefit to our income tax provision. We have also received RARs from the IRS
that seek adjustments to income before income taxes of approximately $970 million in connection with unresolved
issues related primarily to transfer pricing and intercompany payable balances. We disagree with the proposed
adjustments and in May 2011, we filed a protest with the IRS Appeals Office. In January 2012, the IRS commenced
an examination of our fiscal years 2008 and 2009 and Komag's period ended September 5, 2007.
We believe that adequate provision has been made for any adjustments that may result from tax examinations.
However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in our tax audits are
resolved in a manner not consistent with management's expectations, we could be required to adjust our provision for
income taxes in the period such resolution occurs. As of June 29, 2012, it was not possible to estimate the amount of
change, if any, in the unrecognized tax benefits that is reasonably possible within the next twelve months. Any sig-
nificant change in the amount of our unrecognized tax benefits would most likely result from additional information
or settlements relating to the examination of our tax returns.
Liquidity and Capital Resources
We ended 2013 with total cash and cash equivalents of $4.3 billion, an increase of $1.1 billion from June 29,
2012. The following table summarizes our statements of cash flows for the three years ended June 28, 2013 (in
millions):
Years Ended
June 28,
2013
June 29,
2012
July 1,
2011
Net cash flow provided by (used in):
Operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,119
$ 3,067
$1,655
Investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(970)
(4,167)
(793)
Financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,048)
819
(106)
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . .
--
(1)
--
Net increase (decrease) in cash and cash equivalents . . . . . . . . . .
$ 1,101
$ (282)
$ 756
Our investment policy is to manage our investment portfolio to preserve principal and liquidity while max-
imizing return through the full investment of available funds. In connection with our Acquisition, we entered into a
five-year credit agreement (the "Credit Facility"), which provides for a $500 million revolving credit facility. In addi-
tion, we may elect to expand the Credit Facility by up to an additional $500 million if existing or new lenders provide
additional term or revolving commitments. We believe our current cash, cash equivalents and cash generated from
operations as well as our available credit facilities will be sufficient to meet our working capital, debt, dividend, stock
repurchase and capital expenditure needs for at least the next twelve months. Our ability to sustain our working capi-
tal position is subject to a number of risks that we discuss in Item 1A of this Annual Report on Form 10-K.
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