Income Taxes

9 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

Note 11 — Income Taxes

Ordinarily, under GAAP, the Company calculates its provision for income taxes at the end of each interim reporting period on the basis of an estimated annual effective tax rate adjusted for tax items that are discrete to each period.

In evaluating the Company's ability to realize the deferred tax asset for California Research and Development (R&D) tax credits, the Company considered all available positive and negative evidence, including operating results and forecasted ranges of future taxable income, and determined it is more likely than not that a majority of its California R&D tax credits will not be realized due to reduced taxable income apportioned to California in connection with the Link-16 TDL Sale. As a result, during the second quarter of fiscal year 2023, the Company recorded a valuation allowance of $69.0 million. The Company will continue to monitor its business strategies, weighing positive and negative evidence in assessing its realization of this asset in the future. In the event there is a need to release the valuation allowance, a tax benefit will be recorded.

For the three and nine months ended December 31, 2022, the Company recorded an income tax provision of $5.2 million and $59.0 million, respectively, resulting in effective tax rates of negative 13% and negative 63%, respectively. The effective tax rates for such periods differed from the U.S. statutory rate primarily due to the expense for tax deficiencies upon settlement of stock-based compensation during the periods and, in the nine months ended December 31, 2022, due to the establishment of a valuation allowance on the deferred tax asset for California R&D tax credits that was partially offset by the benefit of federal R&D tax credits.

For the three and nine months ended December 31, 2021, the Company recorded an income tax benefit of $3.3 million and $22.0 million, respectively, resulting in effective tax rates of 10% and 28%, respectively. The effective tax rates for such periods differed from the U.S. statutory rate primarily due to the benefit of federal R&D tax credits, partially offset by the expense for tax deficiencies upon settlement of stock-based compensation during the periods, and in the nine months ended December 31, 2021, due to the reversal of a deferred tax liability recorded for EBI's outside basis difference upon assertion made during the first quarter of fiscal year 2022 to indefinitely reinvest future earnings.

Future realization of existing deferred tax assets ultimately depends on future profitability and the existence of sufficient taxable income of appropriate character (for example, ordinary income versus capital gains) within the carryforward period available under tax law. In the event that the Company’s estimate of taxable income is less than that required to utilize the full amount of any deferred tax asset, a valuation allowance is established, which would cause a decrease to income in the period such determination is made.

For the three and nine months ended December 31, 2022, the Company’s gross unrecognized tax benefits increased by $1.0 million and $9.7

million, respectively, including interest and penalties of an insignificant amount, which were included as a component of the provision for income taxes. In the next 12 months it is reasonably possible that the amount of unrecognized tax benefits will not change significantly.