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 1, 2018			April 2, 2017			April 3, 2016
Income before income taxes from continuing operations:
United States	$	(37,479	)	$	(16,736	)	$	5,431
Foreign	129,651			116,021			128,433
Income before income taxes	$	92,172		$	99,285		$	133,864
Income tax expense (benefit) from continuing operations:
Current:
United States	$	24,721		$	(146	)	$	5,694
State	996			103			154
Foreign	5,999			1,611			38
	31,716			1,568			5,886
Deferred:
United States	67,895			(6,363		)	(59,944		)
State	(970		)	7			26
Foreign	5,667			(5,111		)	(7,403		)
	72,592			(11,467		)	(67,321		)
Income tax expense (benefit) from continuing operations	$	104,308		$	(9,899	)	$	(61,435	)

For fiscal years 2018 and 2017 stock-based compensation excess tax benefits of $2.1 million and $2.5 million, respectively, were reflected in the income tax benefit as a result of the 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 and the effective rate is as follows:



	Fiscal Year Ended
(in thousands)	April 1, 2018			April 2, 2017			April 3, 2016
Provision from continuing operations at U.S. statutory rate	$	29,034		$	34,750		$	46,852
State tax, net of federal benefit	431			(389		)	198
Effect of foreign operations	(38,714		)	(48,018		)	(55,331		)
Repatriation of foreign earnings	6,341			10,121			32,957
Valuation allowance	2,622			1,424			(81,553		)
Research tax credits	(8,666		)	(7,801		)	(6,150		)
Stock-based compensation	(1,005		)	(1,785		)	1,028
Transition Tax	103,907			—			—
Impact of the Tax Cuts and Jobs Act on deferred taxes	10,308			—			—
Other	50			1,799			564
Income tax expense (benefit) from continuing operations	$	104,308		$	(9,899	)	$	(61,435	)

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“TCJA”). The TCJA provides for numerous significant tax law changes and modifications including, among other things, reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; requiring companies to pay a one-time transition tax on certain unremitted earnings of foreign subsidiaries; generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; and creating a new limitation on deductible interest expense. Certain provisions of the TCJA began to impact the Company fiscal year 2018, while other provisions will impact the Company beginning in fiscal year 2019.

The corporate tax rate reduction is effective as of January 1, 2018. Since the Company has a fiscal year rather than a calendar year, it is subject to rules relating to transitional tax rates. As a result, the Company’s fiscal year 2018 federal statutory rate will be a blended rate of 31.5%. The Company’s fiscal year 2017 and 2016 statutory rate was 35%.

The SEC staff issued Staff Accounting Bulletin 118 which allows companies to record provisional amounts during a measurement period that is similar to the measurement period used when accounting for business combinations. As of April 1, 2018, the Company has made reasonable estimates of the effects on its existing deferred tax balances and the one-time repatriation tax recording provisional charges of $10.3 million and $103.9 million, respectively, as a component of income tax expense from continuing operations.

The $10.3 million charge for the effect on the Companies deferred tax balances resulted from the reduction of the corporate income tax rate to 21%. U.S. GAAP requires companies to remeasure their deferred tax assets and liabilities as of the date of enactment, with resulting tax effects accounted for in the reporting period of enactment. The Company remeasured deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future.

The $103.9 million charge for the one-time repatriation tax increased other accrued liabilities by $1.5 million, increased long-term income taxes payable by $24.1 million, and reduced deferred tax assets, for the utilization of tax attributes, by $78.3 million. The liabilities resulting from the repatriation tax are payable over a period of up to eight years. The provisional amount was based on the Company’s total post-1986 earnings and profits (“E&P”) of its foreign subsidiaries. The majority of these earnings were historically permanently reinvested outside the United States, thus no taxes had previously been provided for these earnings. In addition, the one-time repatriation tax is based in part on the amount of those earnings held in cash and other specified assets either as of the end of fiscal year 2018 or the average of the year-end balances for fiscal years 2016 and 2017.

The TCJA creates a new Global Intangible Low-Taxed Income (“GILTI”) requirement under which certain income earned by controlled foreign corporations (“CFC”s) must be included currently in the gross income of the CFCs’ U.S. shareholder. GILTI is the excess of the shareholder’s “net CFC tested income” over the net deemed tangible income return, which is currently defined as the excess of (1) 10 percent of the aggregate of the U.S. shareholder’s pro rata share of the qualified business asset investment of each CFC with respect to which it is a U.S. shareholder over (2) the amount of certain interest expense taken into account in the determination of net CFC-tested income.

Because of the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of the TCJA and the application of ASC 740. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into a company’s measurement of its deferred taxes (the “deferred method”). The Company’s selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing the Company’s global income to determine what the impact is expected to be. The Company is not yet able to reasonably estimate the effect of this provision of the TCJA. Therefore, the Company has not made any adjustments related to potential GILTI tax in its financial statements and has not made a policy decision regarding whether to record deferred taxes on GILTI.

As of April 1, 2018, the Company had not fully completed its accounting for the tax effects of the enactment of the TCJA. The Company’s provision for fiscal year 2018 is based in part on a reasonable estimate of the effects on its transition tax and existing deferred tax balances. The Company will continue to assess the impact of the recently enacted tax law and expected further guidance from federal and state tax authorities as well as further guidance for the associated income tax accounting on its business and consolidated financial statements.

In connection with the TCJA and review of the Company’s projected offshore cash flows, and global cash requirements, the Company determined that historical foreign earnings would no longer be permanently reinvested. Accordingly, a tax expense of $5.8 million was accrued during fiscal 2018, for withholding taxes on potential distributions from the Company’s foreign subsidiaries.

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 Malaysian Industrial Development Authority 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 $33.7 million, $31.6 million, and $25.0 million for fiscal years 2018, 2017, and 2016, respectively. The benefit of the tax incentives on net income per share (diluted) was approximately $0.25, $0.24, and $0.17, for fiscal years 2018, 2017, and 2016, respectively.

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.

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 1, 2018			April 2, 2017
Deferred tax assets:
Non-deductible accruals and reserves	14,720			17,598
Net operating losses and credit carryforwards	108,868			148,941
Depreciation and amortization	1,879			14,005
Stock options	2,791			4,087
Other	1,548			2,046
Total deferred tax assets	129,806			186,677
Deferred tax liabilities:
Purchased intangibles	(26,127		)	(31,421		)
Unremitted foreign earnings	(8,163		)	(2,318		)
Other	(2,920		)	(7,679		)
Total deferred tax liabilities	(37,210		)	(41,418		)
Valuation allowance	(91,054		)	(73,263		)
Net deferred tax assets	$	1,542		$	71,996

As of April 1, 2018, 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 $17.8 million and $10.5 million in fiscal years 2018 and 2017, respectively.

As of April 1, 2018, the Company had federal, state and foreign net operating loss (NOL) carryforwards of approximately $31.6 million, $110.2 million and $83.1 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 2019 through 2035, if not utilized. The state NOL carryforwards will expire in various years from fiscal 2024 through 2038, 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 1, 2018, the Company had approximately $19.9 million of federal research and development tax credit carryforwards. The federal research and development tax credit carryforwards will expire in fiscal years 2034 through 2038, if not utilized. The Company also had, as of April 1, 2018, approximately $99.0 million of state income tax credit carryforwards, of which $12.9 million will expire in fiscal years 2019 through 2037, if not utilized. The Company also had, as of April 1, 2018, approximately $10.4 million of tax credit carryforwards in foreign jurisdictions, which will expire in fiscal years 2019 through 2038.

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.

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



	Fiscal Year Ended
(in thousands)	April 1, 2018			April 2, 2017			April 3, 2016
Beginning balance	$	36,993		$	33,075		$	33,190
Increases related to prior year tax positions	2,022			1,374			1,474
Decreases related to prior year tax positions	(279		)	(87		)	(719		)
Increases related to current year tax positions	8,095			2,864			938
Decrease related to settlement	—			—			(1,758		)
Decreases related to the lapsing of statute of limitations	(165		)	(233		)	(50		)
Ending balance	$	46,666		$	36,993		$	33,075

The amount of unrecognized tax benefits that would favorably impact the effective tax rate were approximately $27.6 million and $19.1 million as of April 1, 2018 and April 2, 2017, respectively. As of April 1, 2018, approximately $15.8 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 $0.2 million and $0.1 million for these items in fiscal years 2018 and 2017, respectively.

During the 2018 fiscal year, the Company closed out all positions as part of the examination of its India, Italy and New York state income tax returns. The outcome did not have a material effect on the Company’s financial position, cash flows or results of operations.

As of April 1, 2018, the Company is under examination in Malaysia for fiscal years 2012 through 2015 and in Canada for fiscal years 2016 and 2017. Although the final outcome of each examination 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 1, 2018. 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 2015 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 2011 and later.