Income Taxes

The components of income (loss) before income taxes and the income tax expense (benefit) were as follows:



	Fiscal Year Ended
(in thousands)	April 3, 2016			March 29, 2015			March 30, 2014
Income before income taxes from continuing operations:
United States	$	5,431		$	6,113		$	8,634
Foreign	128,433			109,825			103,660
Income before income taxes	$	133,864		$	115,938		$	112,294
Income tax expense (benefit) from continuing operations:
Current:
United States	$	5,694		$	—		$	(118	)
State	154			47			35
Foreign	38			1,312			867
	5,886			1,359			784
Deferred:
United States	(59,944		)	79			240
State	26			2			14
Foreign	(7,403		)	(83		)	(57		)
	(67,321		)	(2		)	197
Income tax expense (benefit) from continuing operations	$	(61,435	)	$	1,357		$	981

For fiscal years 2016 the income tax benefit associated with stock-based compensation that decreased income taxes payable and was recorded in additional paid-in capital was $4.5 million. For fiscal years 2015 and 2014, there was no income tax benefit associated with stock-based compensation that decreased income taxes payable and was recorded in additional paid-in capital.

Reconciliation between the statutory U.S. income tax rate of 35% and the effective rate is as follows:



	Fiscal Year Ended
(in thousands)	April 3, 2016			March 29, 2015			March 30, 2014
Provision from continuing operations at 35% U.S. statutory rate	$	46,852		$	40,579		$	39,303
State tax, net of federal benefit	198			160			32
Effect of foreign operations	(55,331		)	(35,740		)	(33,217		)
Repatriation of foreign earnings	32,957			—			5,623
Valuation allowance	(81,553		)	3,372			(4,622		)
Research tax credits	(6,150		)	(4,439		)	(6,363		)
Stock-based compensation	1,028			(2,740		)	(689		)
Other	564			165			914
Income tax expense (benefit) from continuing operations	$	(61,435	)	$	1,357		$	981

As a result of the Company's international manufacturing operations, a significant portion of the Company's worldwide profits are in jurisdictions outside the United States, primarily Malaysia, which has granted the Company significant reductions in tax rates. These lower tax rates allow the Company to record a relatively low tax expense on a worldwide basis. The Company was granted a tax incentive in Malaysia during fiscal 2009. The tax incentive was contingent upon the Company continuing to meet specified investment criteria in fixed assets, and to operate an APAC regional headquarters center. In the fourth quarter of fiscal 2012, the Company agreed with the Malaysia Industrial Development Board to cancel the previously granted tax incentive and enter into a new tax incentive agreement which provides a full tax exemption on statutory income for a period of 10 years commencing April 4, 2011. The Company is required to meet several conditions as to financial targets, investment, headcount and activities in Malaysia to retain this status. The impact of these tax incentives decreased foreign taxes by $25.0 million, $9.7 million and $2.0 million for fiscal 2016, 2015 and 2014, respectively. The benefit of the tax incentives on net income per share (diluted) was approximately $0.17, $0.06, and $0.01 for fiscal 2016, 2015 and 2014, respectively.

After examination of the Company’s projected offshore cash flows, and global cash requirements, the Company has determined that beginning in fiscal year 2016, the Company would change its capital allocation strategy, such that it no longer requires 100% of its foreign-generated cash to support its foreign operations. The Company plans to repatriate a portion of its offshore earnings generated after fiscal year 2015 to the U.S. for domestic operations, and the Company has accrued for the related tax impacts accordingly.

In the fourth quarter of fiscal 2016, the Company repatriated $85 million of its offshore earnings to the U.S. for domestic operations, bringing the total repatriation in fiscal 2016 to $101 million, which includes a distribution above and beyond the anticipated annual amount. This repatriation, during the fourth quarter of fiscal 2016, reflected the Company’s objectives of increasing its available U.S. cash and providing liquidity to meet its cash needs in the U.S., including, among other things, servicing debt, potentially funding strategic investments, and potentially funding opportunistic share repurchases on an accelerated basis, while evaluating the future cash needs in the Company’s foreign jurisdictions after our recent foreign acquisition.

For earnings accumulated as of March 29, 2015, the Company continues to indefinitely reinvest such amounts in its foreign jurisdictions, except to the extent there is any previously taxed income which is expected to be repatriated. No U.S. income taxes have been provided for approximately $888.7 million of undistributed earnings of foreign subsidiaries. As the Company currently has no plans to repatriate those earnings, no U.S. income taxes have been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company could be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to various foreign countries. As the Company does not know the time or manner in which the Company would repatriate those funds, it is not practical to determine the impact of local taxes, withholding taxes and foreign tax credits associated with the future repatriation of such earnings and therefore the Company cannot quantify the tax liability.

The Protecting Americans from Tax Hikes Act of 2015 (the “Act”) was signed into law on December 18, 2015. The Act contains a number of provisions including, most notably, a permanent extension of the U.S. federal research tax credit. The Company’s tax provision for fiscal 2016 reflects the benefit of the U.S. federal research credit.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax assets and liabilities were as follows:



(in thousands)	April 3, 2016			March 29, 2015
Deferred tax assets:
Deferred income on shipments to distributors	$	2,016		$	3,057
Non-deductible accruals and reserves	19,432			9,337
Net operating losses and credit carryforwards	112,380			122,178
Depreciation and amortization	14,473			12,274
Stock options	3,262			1,849
Other	1,747			1,737
Total deferred tax assets	153,310			150,432
Deferred tax liabilities:
Purchased intangibles	(38,318		)	(564		)
Other	(10,975		)	(2,699		)
Total deferred tax liabilities	(49,293		)	(3,263		)
Valuation allowance	(62,800		)	(148,954		)
Net deferred tax assets (liabilities)	$	41,217		$	(1,785	)

The Company maintained a full valuation allowance against its deferred tax assets through the third quarter of fiscal 2016 as there was insufficient positive evidence to overcome the significant negative evidence and to conclude that it was more likely than not that the deferred tax assets would be realized. The Company reached this decision based on judgment, which included consideration of historical U.S. operating results, projections of future U.S. profits, and a history of expiring tax attributes. In the fourth quarter of fiscal 2016, the Company generated a substantial amount of U.S. profits, especially as a result of the repatriation of foreign earnings during the fourth quarter of fiscal 2016, utilizing its remaining U.S. federal net operating loss carryovers available as well as a significant amount of U.S. tax credit carryforwards. In addition, in the fourth quarter of fiscal 2016 the Company completed its business plan for fiscal 2017 and validated its mid-term business plan. The Company also considered forecasts of future taxable income and evaluated the utilization of its remaining tax credit carryforwards prior to their date of expiration. All of these are significant positive factors that overcame prior negative evidence and the Company concluded that it was appropriate to release the valuation allowance of $61.7 million against its deferred tax assets as of April 3, 2016, with the exception of deferred tax assets related to certain foreign and state jurisdictions.

As of April 3, 2016, the Company continued to maintain a valuation allowance against its net deferred tax assets in certain foreign and state jurisdictions, as management is not able to conclude that it is more likely than not that these deferred tax assets will be realized. The Company reached this decision based on judgment, which included consideration of historical operating results and projections of future profits. The valuation allowance for deferred tax assets decreased by $86.2 million in fiscal 2016 and increased by $5.3 million in fiscal 2015.

As of April 3, 2016, the Company had federal, state and foreign net operating loss (NOL) carryforwards of approximately $2.0 million and $53.7 million and $112.0 million, respectively, which include excess tax benefits related to stock-based compensation. The foreign net operating loss carryforwards were obtained as part of the acquisition of ZMDI in fiscal 2016 (see Note 3, “Business Combinations” for additional information on the acquisition). The federal NOL carryforwards will expire in various years from fiscal 2020 through 2024, if not utilized. The state NOL carryforwards will expire in various years from fiscal 2017 through 2036, if not utilized. The foreign NOL carryforwards do not expire. The utilization of US federal and state NOLs created by acquired companies is subject to annual limitations under Section 382 of the Internal Revenue Code. However, the Company does not expect that such annual limitation will impair the realization of these NOLs.

As of April 3, 2016, the Company had approximately $61.9 million of federal research and development tax credit carryforwards, and $12.3 million of foreign tax credit carryforwards. The federal research and development tax credit carryforwards will expire in fiscal years 2019 through 2036, if not utilized, and the foreign tax credit carryforwards will expire in fiscal years 2017 to 2025, if not utilized. The Company also had, as of April 3, 2016, approximately $84.6 million of state income tax credit carryforwards, of which $7.3 million will expire in fiscal years 2019 through 2036, if not utilized. The Company also had, as of April 3, 2016, approximately $8.8 million of tax credit carryforwards in foreign jurisdictions, which will expire in fiscal years 2019 through 2026.

Of the NOLs and credits described above, approximately $26.8 million, tax effected, relate to excess stock compensation benefits and thus such carryforwards are not recorded as deferred tax assets. Instead, these excess stock compensation benefits will be credited to additional paid-in capital when recognized.

The federal, state, and foreign NOL and tax credit carryforwards in the income tax returns filed include unrecognized tax benefits. The deferred tax assets recognized for those NOLs and tax credits are presented net of these unrecognized tax benefits.

In October 2015, the Company issued Convertible Notes which led to the establishment of $0.9 million of net deferred tax liability associated with the equity component of the Convertible Notes and its related debt issuance costs (see Note 17, “Convertible Senior Notes, Warrants and Hedges” for additional information on the Convertible Notes). This deferred tax liability led to a net reduction of valuation allowance of an equal amount in the third quarter of fiscal 2016.

The following tables summarize the activities of gross unrecognized tax benefits:



	Fiscal Year Ended
(in thousands)	April 3, 2016			March 29, 2015			March 30, 2014
Beginning balance	$	33,190		$	32,237		$	31,066
Increases related to prior year tax positions	1,474			549			90
Decreases related to prior year tax positions	(719		)	(296		)	(301		)
Increases related to current year tax positions	938			803			1,498
Decrease related to settlement	(1,758		)	—			—
Decreases related to the lapsing of statute of limitations	(50		)	(103		)	(116		)
Ending balance	$	33,075		$	33,190		$	32,237

The amount of unrecognized tax benefits that would favorably impact the effective tax rate were approximately $16.0 million and $0.3 million as of April 3, 2016 and March 29, 2015, respectively. As of April 3, 2016, approximately $17.1 million of unrecognized tax benefits would be offset by a change in valuation allowance. The Company recognizes potential interest and penalties related to the income tax on the unrecognized tax benefits as a component of income tax expense and accrued approximately $0.1 million for these items in fiscal 2016 and 2015, respectively.

During the quarter ended June 28, 2015, the Company reached an understanding regarding the terms for settling with the U.S. Internal Revenue Service ("IRS") and closed out all positions as part of the examination of its income tax returns for the fiscal years 2010 through 2012. As a result, the Company remeasured its tax positions based on the facts, circumstances, and information available at the reporting date. The outcome did not have a material effect on the Company’s financial position, cash flows or results of operations due to its tax attributes.

As of April 3, 2016, the Company’s fiscal years 2009 through 2012 are under audit by the Inland Revenue Authority of Singapore. Although the final outcome is uncertain, based on currently available information, the Company believes that the ultimate outcome will not have a material adverse effect on its financial position, cash flows or results of operations.

On July 27, 2015, in Altera Corp. v. Commissioner, the U.S. Tax Court issued an opinion, in favor of Altera Corp., related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. The Internal Revenue Service filed a notice of appeal on February 19, 2016 in this case. Due to the uncertainty surrounding the status of the current regulations, questions related to the scope of potential benefits, and the risk of the Tax Court’s decision being overturned upon appeal, the Company has not recorded any benefit as of April 3, 2016. The Company will continue to monitor ongoing developments and potential impacts to its financial statements.

The Company believes that within the next 12 months, it is reasonably possible that a decrease of up to $0.3 million in unrecognized tax benefits may occur due to settlements with tax authorities or statute lapses.

The Company's open years in the U.S. federal jurisdiction are fiscal 2013 and later years. In addition, the Company is effectively subject to federal tax examination adjustments for tax years ended on or after fiscal year 1999, in that the Company has tax attribute carryforwards from these years that could be subject to adjustments, if and when utilized. The Company's open years in various state and foreign jurisdictions are fiscal years 2008 and later.