Income Taxes

The (benefit) provision for taxes consists of the following:



	Fiscal Year Ended
(in thousands)	January 27, 2013			January 29, 2012			January 30, 2011
Current tax provision
Federal	$	7,100		$	2,336		$	3,178
State	784			569			444
Foreign	5,745			4,615			2,822
Subtotal	13,629			7,520			6,444
Deferred tax (benefit) provision
Federal	(15,812		)	(4,417		)	(1,631		)
State	(148		)	1,232			(5		)
Foreign	(39,359		)	757			1,952
Subtotal	(55,319		)	(2,428		)	316
(Benefit) provision for taxes	$	(41,690	)	$	5,092		$	6,760

The (benefit) provision for taxes reconciles to the amount computed by applying the statutory federal rate to income before taxes as follows:



	Fiscal Year Ended
(in thousands)	January 27, 2013			January 29, 2012			January 30, 2011
Federal income tax at statutory rate	$	86		$	32,963		$	27,766
State income taxes, net of federal benefit	(2,472		)	(263		)	581
Foreign taxes at rates less than federal rates	(9,655		)	(16,269		)	(16,367		)
Tax credits generated	(5,328		)	(2,222		)	(1,234		)
Changes in valuation allowance	2,703			1,814			(879		)
Changes in uncertain tax positions	132			(3,235		)	2,755
Deemed dividends	1,101			1,250			1,056
Equity compensation	793			(1,312		)	1,639
Permanent differences	1,571			1,592			1,652
Sales exclusion - foreign jurisdiction	(10,689		)	(11,017		)	(9,429		)
Dividend and U.S. tax on foreign earnings	(23,443		)	—			—
Revaluation of deferred taxes assets and liabilities	3,510			—			—
Other	1			1,791			(780		)
(Benefit) provision for taxes	$	(41,690	)	$	5,092		$	6,760

During fiscal year 2013, the Company released $1.1 million of previously recorded reserves for uncertain tax positions as a result of statutes of limitations for the taxing authority to challenge the position expiring.

The deferred tax assets and deferred tax liabilities are classified in the consolidated balance sheets as follows:



(in thousands)	January 27, 2013			January 29, 2012
Deferred tax assets
Current	$	7,473		$	5,339
Non-current	33,563			—
Subtotal	41,036			5,339
Deferred tax liabilities
Current	(4,221		)	(4,041		)
Non-current	(2,042		)	(1,000		)
Subtotal	(6,263		)	(5,041		)
Net deferred tax assets	$	34,773		$	298

The Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 740, Accounting for Income Taxes, requires that for a particular tax-paying component of an enterprise, and within a particular tax jurisdiction, (a) all current deferred tax liabilities and assets shall be offset and presented as a single amount and (b) all noncurrent deferred tax liabilities and assets shall be offset and presented as a single amount. Deferred tax liabilities and assets attributable to different tax-paying components of the enterprise or to different tax jurisdictions should not be offset.

The components of the net deferred income tax assets at January 27, 2013 and January 29, 2012 are as follows:



(in thousands)	January 27, 2013			January 29, 2012
Current deferred tax asset:
Deferred revenue	$	1,889		$	2,346
Inventory reserve	567			347
Payroll and related accruals	2,444			1,926
Bad debt reserve	323			359
Accrued service fees	626			405
Other deferred assets	2,593			508
Valuation allowance	(969		)	(552		)
Total current deferred tax asset	7,473			5,339
Non-current deferred tax asset:
Research and development charges	2,900			3,708
Research credit carryforward	49,257			11,967
Acquired NOL carryforward	28,595			16,489
Payroll and related accruals	5,389			4,497
Stock-based compensation	8,456			10,248
Other deferred assets	3,395			772
Valuation allowance	(7,351		)	(5,065		)
Total non-current deferred tax asset	90,641			42,616
Current deferred tax liability:
Inventory reserve - foreign	(1,618		)	(2,115		)
Bad debt reserve - foreign	(773		)	(671		)
Depreciation - foreign	(1,744		)	(1,074		)
Other current deferred tax liability	(86		)	(181		)
Total current deferred tax liability	(4,221		)	(4,041		)
Non-current deferred tax liability:
Domestic tax on foreign earnings	—			(23,443		)
Purchase accounting deferred tax liability	(49,181		)	(14,159		)
Depreciation and amortization	(8,504		)	(5,760		)
Other non-current deferred tax liability	(1,435		)	(254		)
Total non-current deferred tax liability	(59,120		)	(43,616		)
Net deferred tax asset	$	34,773		$	298

The change in the net deferred tax asset differs from the deferred tax provision as a result of deferred tax assets that do not typically impact the provision. This includes the benefit related to tax deductions from the exercise of non-qualified stock options in excess of compensation cost recognized for financial reporting purposes (recorded as an increase to additional paid-in capital when realized).

As of January 27, 2013, the Company had federal and state net operating loss carryforwards of $73.7 million and $86.3 million, respectively, which, subject to certain limitations, are available to offset future taxable income through fiscal year 2032. A portion of these losses were generated by SMI prior to the Company’s purchase of SMI and therefore are subject to change of control provisions which limit the amount of acquired tax attributes that can be utilized in a given tax year. The Company does not expect these changes in control limitations to significantly impact its ability to utilize these attributes.

Included in the Company’s net operating loss carryforward deferred tax asset is approximately $8.3 million of deferred tax assets attributable to excess equity deductions related to stock awards that may not be included on the Company’s consolidated balance sheet. Due to a provision within ASC 740, concerning when tax benefits related to excess stock option deductions can be credited to paid-in capital, the portion of the Company’s deferred tax asset related to such excess tax benefits must be excluded from the deferred tax asset balance, even if the facts and circumstances indicate that it is more likely than not that the deferred tax asset can be realized. The deferred tax asset and the related credit to paid-in capital will only be included as the related deferred tax asset is applied to reduce taxes payable.

As of January 27, 2013, the Company had gross federal and state research credits available of approximately $6.0 million and $12.3 million, respectively, which are available to offset taxable income. These credits will expire between fiscal years 2022 through 2033. As of January 27, 2013, the Company had federal Alternative Minimum Tax credits available of approximately $1.3 million. The Company also had Canadian research credits available of approximately $34.7 million. These credits will expire between fiscal years 2025 and 2033.

The Company has established valuation allowances against certain U.S. state and foreign deferred tax assets to reflect its concerns regarding the ability of the Company to generate sufficient taxable income to utilize these attributes. The following table summarizes the changes in these allowances during fiscal years 2013, 2012 and 2011:



	Fiscal Year Ended
(in thousands)	January 27, 2013		January 29, 2012		January 30, 2011
Beginning balance	$	5,617	$	5,053	$	6,502
Additions	2,703		564		2,767
Releases	—		—		(4,216		)
Ending balance	$	8,320	$	5,617	$	5,053

Realization of the net deferred tax assets is dependent on generating sufficient taxable income during the periods in which temporary differences will reverse. Although realization is not assured, management believes it is more likely than not that the remaining net deferred tax assets will be realized. The amount of the net deferred tax assets considered realizable, however, could be adjusted in the near term if estimates of future taxable income during the reversal periods are revised.

As of January 27, 2013, the Company had approximately $383.7 million of unremitted earnings related to the Company’s wholly owned foreign subsidiaries.

In the fourth quarter of fiscal year 2010, in connection with the SMI acquisition, the Company modified its previous assertion that all of its earnings were permanently reinvested offshore and concluded that $120.0 million of foreign earnings were not permanently reinvested offshore. Of this amount, $50.0 million was actually repatriated to the U.S., leaving $70.0 million of unrepatriated foreign subsidiary earnings.

In the first quarter of fiscal year 2013, in connection with the acquisition of Gennum, the Company reviewed its assertion regarding the amount of foreign subsidiary earnings that were considered to be permanently reinvested offshore and concluded that due to post-acquisition foreign operating cash needs, all of its foreign subsidiary earnings, including the aforementioned $70.0 million, are considered to be permanently reinvested offshore. This change in assertion resulted in the recognition of a one-time tax benefit of $23.4 million in the first quarter of fiscal year 2013.

Uncertain Tax Positions

The Company uses a two-step approach to recognize and measure uncertain tax positions (“UTP”). The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (before federal impact of state items) is as follows:



	Fiscal Year Ended
(in thousands)	January 27, 2013			January 29, 2012			January 30, 2011
Beginning balance	$	13,759		$	17,011		$	13,795
Additions based on tax positions related to the current year	695			835			449
Additions for tax positions of prior years	—			—			3,592
Reductions for tax positions of prior years	(647		)	(4,087		)	—
Reductions for settlements with tax authorities	(663		)	—			(825		)
Ending balance	$	13,144		$	13,759		$	17,011

Reductions recorded in the current year related to a release of previously recorded reserves for uncertain tax positions as a result of statutes of limitations for the taxing authority to challenge the position expiring and effective settlement of the position through examination.

Included in the balance of unrecognized tax benefits at January 27, 2013 and January 29, 2012, are $11.1 million and $11.6 million, respectively, of net tax benefits (after federal impact of state items) that, if recognized, would impact the effective tax rate.

The liability for uncertain tax positions is reflected on the consolidated balance sheets as follows:



	Fiscal Year Ended
(in thousands)	January 27, 2013		January 29, 2012
Accrued liabilities	$	188	$	437
Other long-term liabilities	10,887		11,159
Total accrued taxes	$	11,075	$	11,596

The Company’s policy is to include net interest and penalties related to unrecognized tax benefits within the provision for taxes on the consolidated statements of income. During fiscal years 2013 and 2012, a net increase of $50,000 and $50,000 of interest and penalties was recognized in the consolidated statement of income, respectively. The Company had approximately $293,000 and $243,000 of net interest and penalties accrued at January 27, 2013 and January 29, 2012, respectively.

In the second quarter of fiscal year 2013, the overall statutory tax rate in Canada increased as a result of newly enacted tax legislation. The impact of this tax law change resulted in a $3.4 million discrete charge to the Canadian tax provision and a corresponding adjustment to the Company’s deferred tax liabilities.

As of January 27, 2013, it was reasonably possible that the total amounts of unrecognized tax benefits would decrease by up to $0.2 million within twelve months as a result of statutes of limitations for the taxing authority to challenge the position expiring. If recognized, this decrease will impact the effective tax rate.

Tax years prior to 2009 (the Company’s fiscal year 2010) are generally not subject to examination by the Internal Revenue Service (“IRS”) except for items involving tax attributes that have been carried forward to tax years whose statute of limitations remains open. The Company is currently under IRS audit for fiscal year 2010 and fiscal year 2011. For state returns, the Company is generally not subject to income tax examinations for years prior to 2008 (the Company’s fiscal year 2009). The Company has a primary significant tax presence in Switzerland for which Swiss tax filings have been examined through fiscal year 2010. The Company is also subject to routine examinations by various foreign tax jurisdictions in which it operates.