INCOME TAXES

Income tax expense for Fiscal Years 2016, 2017, and 2018 consisted of the following:



	Fiscal Year Ended March 31,
(in thousands)	2016			2017			2018
Current:
Federal	$	15,702		$	10,591		$	82,523
State	1,934			457			4,274
Foreign	4,644			7,731			6,860
Total current provision for income taxes	22,280			18,779			93,657
Deferred:
Federal	(7,767		)	1,022			9,002
State	(1,103		)	(117		)	(1,585		)
Foreign	374			(618		)	22
Total deferred income tax expense (benefit)	(8,496		)	287			7,439
Income tax expense	$	13,784		$	19,066		$	101,096

The components of income before income taxes for Fiscal Years 2016, 2017, and 2018 are as follows:



	Fiscal Year Ended March 31,
(in thousands)	2016		2017		2018
United States	$	42,184	$	43,377	$	17,654
Foreign	39,992		58,288		82,573
Income before income taxes	$	82,176	$	101,665	$	100,227

The following is a reconciliation between statutory federal income taxes and the income tax expense for Fiscal Years 2016, 2017, and 2018:



	Fiscal Year Ended March 31,
(in thousands)	2016			2017			2018
Tax expense at statutory rate	$	28,762		$	35,583		$	31,631
Foreign operations taxed at different rates	(9,478		)	(13,183		)	(17,970		)
State taxes, net of federal benefit	831			340			2,689
Research and development credit	(3,133		)	(3,119		)	(2,023		)
Unwind of stock based compensation cost sharing	(2,855		)	—			—
Impact of Tax Act	—			—			87,790
Stock based compensation	(487		)	(365		)	(1,771		)
Other, net	144			(190		)	750
Income tax expense	$	13,784		$	19,066		$	101,096

Deferred tax assets and liabilities represent the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes.

Significant components of the Company's deferred tax assets and liabilities as of March 31, 2017 and 2018 are as follows:



	March 31,
(in thousands)	2017			2018
Accruals and other reserves	$	8,526		$	4,809
Deferred Compensation	4,859			3,467
Net operating loss carry forward	2,221			1,540
Stock compensation	12,821			8,384
Tax credits	4,530			6,504
Other deferred tax assets	1,711			1,070
Valuation allowance	(2,209		)	(2,514		)
Total deferred tax assets	32,459			23,260
Deferred gains on sales of properties	(1,771		)	(1,160		)
Unremitted earnings of certain subsidiaries	—			(1,976		)
Fixed asset depreciation	(7,351		)	(4,150		)
Total deferred tax liabilities	(9,122		)	(7,286		)
Net deferred tax assets⁽¹⁾	$	23,337		$	15,974

⁽¹⁾ The Company's deferred tax assets for the fiscal year ending March 31, 2017 and March 31, 2018, are included as a component of other assets on the consolidated balance sheets.

The Company has California research and development credit carryforwards for income tax purposes of $10.4 million that can be carried forward indefinitely. The Company has Chinese net operating losses of $4.3 million that expire in different periods through Fiscal Year 2024.

The Company evaluates its deferred tax assets, including a determination of whether a valuation allowance is necessary, based upon its ability to utilize the assets using a more likely than not analysis. Deferred tax assets are only recorded to the extent that they are realizable based upon past and future income. The Company has a long-established earnings history with taxable income in its carryback years and forecasted future earnings. The Company has concluded that no valuation allowance is required, except for the specific items discussed below.

The valuation allowance of $2.5 million as of March 31, 2018 was related to the net operating losses of a foreign subsidiary with an insufficient recent history of earnings to support the realization of their deferred tax assets, as well as to excess California research credit carryforwards. The valuation allowance of $2.2 million as of March 31, 2017 was related to the net operating losses of foreign subsidiaries with an insufficient history of recent earnings to support the realization of their deferred tax assets, as well as to excess California research credit carryforwards. During the year ending March 31, 2018, the valuation allowance increased by $0.3 million, which was mostly related to California research credit carryforwards that were generated during the year ending March 31, 2018 and for which it is more likely than not these deferred tax assets will not be realized.

The impact of an uncertain income tax position on income tax expense must be recognized at the largest amount that is more likely than not to be sustained. An uncertain income tax position will not be recognized unless it has a greater than 50% likelihood of being sustained. As of March 31, 2016, 2017, and 2018, the Company had $12.7 million, $12.9 million, and $12.6 million, respectively, of unrecognized tax benefits. The unrecognized tax benefits as of March 31, 2018 would favorably impact the effective tax rate in future periods if recognized.

A reconciliation of the change in the amount of gross unrecognized income tax benefits for the periods is as follows:



	March 31,
(in thousands)	2016			2017			2018
Balance at beginning of period	$	12,821		$	12,692		$	12,854
Increase (decrease) of unrecognized tax benefits related to prior fiscal years	(598		)	(2		)	(1,310		)
Increase of unrecognized tax benefits related to the current year	2,252			2,195			3,085
Reductions to unrecognized tax benefits related to settlements with taxing authorities	(149		)	—			(115		)
Reductions to unrecognized tax benefits related to lapse of applicable statute of limitations	(1,634		)	(2,031		)	(1,902		)
Balance at end of period	$	12,692		$	12,854		$	12,612

The Company's continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. The interest related to unrecognized tax benefits was $1.7 million and $1.4 million as of March 31, 2017 and 2018, respectively. No penalties have been accrued.

The Company and its subsidiaries are subject to taxation in various foreign and state jurisdictions, including the U.S. All federal tax matters have been concluded for tax years prior to Fiscal Year 2014. Foreign and State income tax matters for material tax jurisdictions have been concluded for tax years prior to Fiscal Year 2011 and Fiscal Year 2013, respectively.

The Company believes that an adequate provision has been made for any adjustments that may result from tax examinations; however, the outcome of such examinations cannot be predicted with certainty. If any issues addressed in the tax examinations are resolved in a manner inconsistent with the Company's expectations, the Company could be required to adjust its provision for income tax in the period such resolution occurs. The timing of any resolution and/or closure of tax examinations is not certain.

On December 22, 2017, the Tax Cuts and Jobs Act (H.R. 1) (the “Act”) was signed into law in the United States. The Act includes several changes to existing tax law, including, among other things, a permanent reduction in the corporate income tax rate from 35% to 21% and applying new taxes on certain foreign source earnings.

In addition, we were subject to a one-time deemed repatriation of accumulated foreign subsidiary unremitted earnings (hereafter, the "toll charge"), which the Company will elect to pay over an eight-year period as permitted under the Act. The Company recorded a 79.7 million toll charge as part of income tax expense for the Fiscal year ended March 31, 2018, representing a provisional estimate based on a 15.5% tax applied to foreign unremitted cash and cash equivalents and an 8% tax applied to permanently reinvested foreign assets. As part of the Act, the Company also completed its re-measurement of deferred tax assets as of March 31, 2018 to the new future federal tax rate of 21%, thereby reducing the Company’s deferred tax assets by $4.6 million. The Company expects to repatriate substantially all of its unremitted foreign subsidiary earnings and has recorded income tax expenses of $5.0 million related to state income taxes and foreign withholding taxes that will become due over the repatriation period. Finally, the Company files its federal tax return on a fiscal year-end and is therefore required to pro-rate the new and old tax rates during Fiscal Year 2018. The blended, annualized tax rate applied to Fiscal Year 2018 income is 31.56%.

In accordance with SAB 118, the provisional estimate for the toll charge will be finalized when the Company completes its substantive review of unremitted foreign earnings through examination of statutory filings and tax returns of the Company's foreign subsidiaries and fiscal branches that span a 30-year period. The Company must also analyze the impact of foreign exchange rates and inflation on the historical information to support foreign tax credits available to offset the toll charge. In addition, the Company's estimate of the toll charge obligation may change due to legislative technical corrections, the IRS' promulgation of regulations to interpret the Act, and changes in accounting standards for income taxes or related interpretations in response to the Act. This review and finalization of the toll charge provisional estimate will be completed within a twelve month measurement period from the date of enactment.

The Company recorded a correction to the geographic mix of income during the three months ended June 30, 2017 related to Fiscal Year 2017, which reduced income in a high tax jurisdiction and increased income in a low tax jurisdiction. This correction resulted in a reduction of $2.8 million to the Company’s income tax expense for the year ended March 31, 2018 as compared to the prior fiscal year end. For additional details regarding this correction refer to Note 2, Significant accounting Policies.

The Company adopted new stock-based compensation accounting guidance effective the beginning of Fiscal Year 2018. Excess tax benefits associated with employee equity plans were previously recorded in additional paid-in capital and the adoption of this guidance had an immaterial impact on the Company's effective tax rate for the three months ended December 31, 2017, but resulted in a $2.7 million reduction to income tax expense for the twelve months ended March 31, 2018. The amount of excess tax benefits or deficiencies will fluctuate from period-to-period based on the price of the Company’s stock, the volume of share-based instruments settled or vested, and the value assigned to employee equity awards under U.S. GAAP.