INCOME TAXES

The Company reported the following operating results for the periods presented (in thousands):



	Three months ended						Six months ended
	June 27, 2014			June 28, 2013			June 27, 2014			June 28, 2013
Loss from continuing operations before income taxes	$	(8,709	)	$	(4,707	)	$	(15,842	)	$	(19,677	)
Provision for (benefit from) income taxes	28,353			(1,303		)	26,630			(6,770		)
Effective income tax rate	(325.6		)%	27.7		%	(168.1		)%	34.4		%

The Company's quarterly income taxes reflect an estimate of the corresponding fiscal year's annual effective tax rate and include, where applicable, adjustments for discrete tax items.

The Company's effective rate for the six months ended June 27, 2014 was higher than the U.S. federal statutory rate of 35% primarily due to a $24.5 million increase in the valuation allowance against both U.S. federal and state deferred tax assets. The increased valuation allowance was a result of a history of operating losses in recent years, including the lower than expected revenue and profitability in the second quarter, that has led to uncertainty with respect to the Company’s ability to realize certain of its net deferred tax assets. The Company will continue to assess the realizability of the remaining deferred tax assets, which primarily relates to California state tax and certain foreign jurisdictions going forward and adjust the valuation allowance accordingly. As such, further valuation allowance increases may be recorded in the next twelve months.

The Company's effective rate for the six months ended June 28, 2013 was slightly lower than the U.S. federal statutory rate of 35% primarily attributable to the net of various discrete items, non-deductible amortization on foreign intangibles, the differential in foreign tax rates, federal research and development tax credit, and non-deductible stock-based compensation expense. The discrete items included primarily the increase in the valuation allowance on California research and development tax credit and accrued interest on uncertain tax positions, offset partially by the benefit associated with the reinstatement of the prior year's federal research and development tax credit, and the benefit associated with the reversal of previously recorded foreign income taxes due to the expiration of the statute of limitation in the foreign jurisdictions.

The Company files federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitations during which such tax returns may be audited and adjusted by the relevant tax authorities. The U.S. Internal Revenue Service has concluded its audit for the 2008 and 2009 tax years. In addition, the statute of limitations on the Company's 2008 and 2009 U.S. corporate income tax return expired in September 2013 and, as a result, in the third quarter of 2013, the Company released the related tax reserves, including accrued interest and penalties, for those tax years. The 2010 through 2012 tax years generally remain subject to examination by U.S. federal and most state tax authorities. The statute of limitation for the 2010 tax year will be expiring in September 2014 and the tax reserve for the 2010 tax year is approximately $5.5 million. In significant foreign jurisdictions, the 2006 through 2012 tax years generally remain subject to examination by their respective tax authorities.

The Company's operations in Switzerland are subject to a reduced tax rate under the Switzerland tax holiday which requires various thresholds of investment and employment in Switzerland. The Company has met these various thresholds and the Switzerland tax holiday is effective through the end of 2018.

As of June 27, 2014, the total amount of gross unrecognized tax benefits, including interest and penalties, was approximately $26.1 million, that if recognized, would affect the Company's effective tax rate. The Company recognizes interest and penalties related to unrecognized tax positions in income tax expense. The Company had $1.8 million of gross interest and penalties accrued as of June 27, 2014. The Company will continue to review its tax positions and provide for, or reverse, unrecognized tax benefits as issues arise. As of June 27, 2014, the Company anticipates that the balance of gross unrecognized tax benefits will decrease up to approximately $8.3 million due to expiration of the applicable statues of limitations over the next twelve months.