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 2, 2017			April 3, 2016			March 29, 2015
Income before income taxes from continuing operations:
United States	$	(16,736	)	$	5,431		$	6,113
Foreign	116,021			128,433			109,825
Income before income taxes	$	99,285		$	133,864		$	115,938
Income tax expense (benefit) from continuing operations:
Current:
United States	$	(146	)	$	5,694		$	—
State	103			154			47
Foreign	1,611			38			1,312
	1,568			5,886			1,359
Deferred:
United States	(6,363		)	(59,944		)	79
State	7			26			2
Foreign	(5,111		)	(7,403		)	(83		)
	(11,467		)	(67,321		)	(2		)
Income tax expense (benefit) from continuing operations	$	(9,899	)	$	(61,435	)	$	1,357

For fiscal year 2017 stock-based compensation excess tax benefits of $2.5 million were reflected in the income tax benefit as a result of the early adoption of ASU 2016-09. For fiscal year 2016 the excess tax benefits of $4.5 million, associated with stock-based compensation that decreased income taxes payable, were recorded in additional paid-in capital. For fiscal year 2015, 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 2, 2017			April 3, 2016			March 29, 2015
Provision from continuing operations at 35% U.S. statutory rate	$	34,750		$	46,852		$	40,579
State tax, net of federal benefit	(389		)	198			160
Effect of foreign operations	(48,018		)	(55,331		)	(35,740		)
Repatriation of foreign earnings	10,121			32,957			—
Valuation allowance	1,424			(81,553		)	3,372
Research tax credits	(7,801		)	(6,150		)	(4,439		)
Stock-based compensation	(1,785		)	1,028			(2,740		)
Other	1,799			564			165
Income tax expense (benefit) from continuing operations	$	(9,899	)	$	(61,435	)	$	1,357

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 $31.6 million, $25.0 million, and $9.7 million for fiscal 2017, 2016, and 2015, respectively. The benefit of the tax incentives on net income per share (diluted) was approximately $0.24, $0.17, and $0.06, for fiscal 2017, 2016, and 2015, respectively.

In fiscal 2016, after examination of the Company’s projected offshore cash flows, and global cash requirements, the Company determined that beginning in fiscal year 2016, the Company would no longer require 100% of its foreign-generated cash to support its foreign operations. The Company plans to continue to repatriate a portion of its offshore earnings generated after March 29, 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 included 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 $933.7 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.

On January 16, 2017, the Malaysia Finance Act of 2017 (the “Act”) was enacted. The Act contains a number of provisions including, most notably, the reimposition of withholding taxes on offshore services provided to Malaysian entities and is effective prospectively from the date of enactment. The Company has determined that it will not affect its intercompany activities and will not have a material adverse effect on the Company’s results of operations and cash flows.

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 2, 2017			April 3, 2016
Deferred tax assets:
Deferred income on shipments to distributors	$	307		$	2,016
Non-deductible accruals and reserves	17,291			19,432
Net operating losses and credit carryforwards	148,941			112,380
Depreciation and amortization	14,005			14,473
Stock options	4,087			3,262
Other	2,046			1,747
Total deferred tax assets	186,677			153,310
Deferred tax liabilities:
Purchased intangibles	(31,421		)	(38,318		)
Other	(9,997		)	(10,975		)
Total deferred tax liabilities	(41,418		)	(49,293		)
Valuation allowance	(73,263		)	(62,800		)
Net deferred tax assets	$	71,996		$	41,217

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. 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 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 were 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 2, 2017, 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 increase by $10.5 million and decreased by $86.2 million in fiscal 2017 and 2016, respectively.

As of April 2, 2017, the Company had federal, state and foreign net operating loss (NOL) carryforwards of approximately $6.6 million and $69.5 million and $96.9 million, respectively. 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 2037, if not utilized. The state NOL carryforwards will expire in various years from fiscal 2018 through 2037, 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 2, 2017, the Company had approximately $66.8 million of federal research and development tax credit carryforwards, and $12.0 million of foreign tax credit carryforwards. The federal research and development tax credit carryforwards will expire in fiscal years 2019 through 2037, if not utilized, and the foreign tax credit carryforwards will expire in fiscal years 2018 to 2027, if not utilized. The Company also had, as of April 2, 2017, approximately $91.7 million of state income tax credit carryforwards, of which $10.6 million will expire in fiscal years 2019 through 2037, if not utilized. The Company also had, as of April 2, 2017, approximately $9.4 million of tax credit carryforwards in foreign jurisdictions, which will expire in fiscal years 2019 through 2037.

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 18, “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 2, 2017			April 3, 2016			March 29, 2015
Beginning balance	$	33,075		$	33,190		$	32,237
Increases related to prior year tax positions	1,374			1,474			549
Decreases related to prior year tax positions	(87		)	(719		)	(296		)
Increases related to current year tax positions	2,864			938			803
Decrease related to settlement	—			(1,758		)	—
Decreases related to the lapsing of statute of limitations	(233		)	(50		)	(103		)
Ending balance	$	36,993		$	33,075		$	33,190

The amount of unrecognized tax benefits that would favorably impact the effective tax rate were approximately $19.1 million and $16.0 million as of April 2, 2017 and April 3, 2016, respectively. As of April 2, 2017, approximately $12.8 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 2017 and 2016, 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.

During the quarter ended October 2, 2016, the Company closed out all positions as part of the examination of the Company's Singapore income tax returns for the fiscal years 2009 through 2012. The outcome did not have a material effect on the Company’s financial position, cash flows or results of operations.

During the quarter ended April 2, 2017, the Company closed out all positions as part of the examination of the Company's German income tax returns for the fiscal years 2012 through 2014. The outcome did not have a material effect on the Company’s financial position, cash flows or results of operations.

As of April 2, 2017, the Company is under examination in Malaysia for fiscal years 2012 through 2015, in India for fiscal year 2015, and in the State of New York for fiscal years 2013 through 2016. 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 2, 2017. 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 $0.2 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 2014 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 2010 and later.