Note 11. Income Taxes

The components of the Company’s income tax benefit (provision) for the years ended March 31, 2015, 2014 and 2013 are as follows:


	2015			2014			2013
	(in $000’s)
Income before income taxes:
United States	$	22,243		$	4,267		$	10,202
Foreign		6,522			4,263			6,660

Income before income taxes	$	28,765		$	8,530		$	16,862

Current tax expense (benefit):
Federal	$	464		$	(100	)	$	97
State		424			(106	)		—
Foreign		1,283			525			996

		2,171			319			1,093

Deferred tax (benefit) expense:
Federal		(66,140	)		825			825
State		(13,430	)		35			(70	)
Foreign		(7,524	)		—			—

		(87,094	)		860			755

Total income tax (benefit) provision	$	(84,923	)	$	1,179		$	1,848

The components of the Company’s net deferred taxes were as follows:


	March 31,
	2015			2014
	(in $000’s)
Deferred tax assets
NOL carryforwards and tax credit carryforwards	$	60,081		$	72,430
Stock-based compensation		10,568			10,519
Nondeductible reserves and accruals		7,573			6,775
Amortizable intangibles other than goodwill		2,993			3,470
Capitalized research and development		1,597			3,208
Foreign NOL carryforwards		19,617			2,705
Deferred revenue		2,669			1,767
Depreciation		276			561
Other, net		1,298			658

		106,672			102,093

Deferred tax liabilities
Indefinite lived intangibles		(7,530	)		(6,415	)
In-process research and development		(4,443	)		—
Domestic deferred tax liability on foreign NOL carryforwards		(12,276	)		—

		(24,249	)		(6,415	)

Net deferred tax assets		82,423			95,678
Valuation allowance		(2,912	)		(102,093	)

Net deferred tax assets	$	79,511		$	(6,415	)

Reported as:
Current deferred tax assets, net	$	35,100		$	—
Long-term deferred tax assets, net		45,206			—
Long-term deferred tax liabilities		(795	)		(6,415	)

Net deferred tax assets	$	79,511		$	(6,415	)

A reconciliation of the federal statutory income tax rate to the Company’s effective income tax rate is as follows for the years ended March 31, 2015, 2014, and 2013:


	2015			2014			2013
Statutory income tax rate		35.0	%		34.0	%		34.0	%
(Decrease) increase resulting from:
Change in valuation allowance		(342.8	)		(53.7	)		(11.5	)
Credits		(1.9	)		(20.1	)		(17.0	)
Foreign taxes		4.5			—			—
State taxes, net		4.0			12.9			(6.9	)
Permanent differences		3.9			0.4			—
Stock based compensation		0.3			0.9			0.4
Rate differential on foreign operations		0.2			31.1			9.7
Expiry of state NOL carryforwards		—			—			2.1
Other		1.6			8.4			0.2

Effective tax rate		(295.2	)%		13.9	%		11.0	%

The Company classifies its deferred tax assets and liabilities as current or non-current based on the classification of the related asset or liability for financial reporting giving rise to the temporary difference. A deferred tax asset that is not related to an asset or liability for financial reporting, including deferred tax assets related to net operating loss (“NOL”) carryforwards, is classified in current or long-term according to the expected reversal date.

The Company regularly assesses its ability to realize its deferred tax assets. Assessing the realization of deferred tax assets requires significant management judgment. In determining whether its deferred tax assets are more likely than not realizable, the Company evaluated all available positive and negative evidence, and weighted the evidence based on its objectivity. Prior to March 31, 2015, the Company had determined that the objectively verifiable negative evidence outweighed the positive evidence due to its history of net operating losses incurred for most of its existence, the then-pending status of the Company’s Pre-Market Approval (“PMA”) application with the U.S. Food and Drug Administration (“FDA”) for its Impella 2.5 product in the U.S., among other factors, and as a result it recorded a full valuation allowance against its deferred tax assets.

During the quarter ended March 31, 2015, the Company determined based on its consideration of the weight of positive and negative evidence that there was sufficient positive evidence that most of its federal, state and certain foreign deferred tax assets are more likely than not recoverable as of March 31, 2015. The Company’s conclusion was primarily driven by the Company’s receipt of PMA approval for its Impella 2.5 product in March 2015, the $28.8 million of income before taxes in fiscal 2015, its history of profits in recent years and its expectation for sustainable future profitability now that it has obtained PMA approval for Impella 2.5. Accordingly, the Company recorded a $101.5 million reversal of the valuation allowance in the quarter ended March 31, 2015, primarily related to the Company expecting to be able to use NOL carryforwards in the future in the U.S. and Germany.

As of March 31, 2015, the remaining $2.9 million valuation allowance represents deferred tax assets related to NOL carryforwards in certain foreign jurisdictions in which the Company has had limited history of profitability. Based on the review of all available evidence, the Company recorded a valuation allowance to reduce these deferred tax assets to the amount that is more likely than not to be realizable as of March 31, 2015.

Changes in the valuation allowance for deferred tax assets during the years ended March 31, 2015 and 2014 were as follows:


	2015			2014
	(in $000’s)
Valuation allowance as of beginning of year	$	102,093		$	106,670
Decreases recorded as benefit to income tax provision		(101,468	)		(4,577	)
Increases due to foreign net operating loss in certain foreign jurisdictions		2,287			—

Valuation allowance as of end of year	$	2,912		$	102,093

At March 31, 2015, the Company had federal and state net operating loss carryforwards, or NOLs, of approximately $175.6 million which expire in varying years from fiscal 2016 through fiscal 2034. During the year ended March 31, 2015, state NOLs of approximately $1.5 million expired. At March 31, 2015, the Company had German NOLs of approximately $32.2 million, which do not expire. In addition, at March 31, 2015, the Company had federal and state research and development credit carryforwards of approximately $11.8 million and $5.2 million, respectively, which expire in varying years from fiscal 2016 through fiscal 2034.

Of the total amount of available U.S. federal NOLs, $63.0 million relates to stock-based compensation tax deductions in excess of stock-based compensation expense for financial reporting purposes (“excess tax benefits”). Excess tax benefits are realized when they reduce income taxes payable, as determined using a “with and without” method, and are credited to additional paid-in capital rather than as a reduction of the income tax provision. During the year ended March 31, 2015, the Company realized excess tax benefits from state tax deductions of $0.6 million which were credited to additional paid-in capital.

The Company and its subsidiaries are subject to U.S. federal income tax, as well as income tax of multiple state and foreign jurisdictions. Fiscal years 2012 through 2015 remain open to examination in Germany. All tax years remain subject to examination by the Internal Revenue Service and state tax authorities, because the Company has net operating loss and tax credit carryforwards which may be utilized in future years to offset taxable income, those years may also be subject to review by relevant taxing authorities if the carryforwards are utilized.