Note 13. Income Taxes

Income before income taxes from continuing operations consists of the following components:


	2013		2012		2011
	(In thousands)
United States	$	13,084	$	35,733	$	55,595
International		48,773		97,693		97,303

	$	61,857	$	133,426	$	152,898

The components of income tax expense (benefit) from continuing operations are as follows:


	2013			2012			2011
	(In thousands)
Current:
Federal	$	(13,374	)	$	11,054		$	(2,726	)
State		260			1,279			4,029
Foreign		1,520			1,904			4,645

Total current		(11,594	)		14,237			5,948

Deferred:
Federal		3,445			3,360			9,208
State		(3,684	)		(4,781	)		(2,223	)
Foreign		129			1,167			(1,381	)

Total deferred		(110	)		(254	)		5,604

	$	(11,704	)	$	13,983		$	11,552

The Company’s income tax benefit from continuing operations for fiscal 2013 was primarily the result of adjustments to certain tax positions subject to an Internal Revenue Service (IRS) examination. These adjustments primarily consist of the settlement of a significant matter in the IRS examination of the Company’s income tax returns for fiscal years 2008 and 2009.

The income tax benefit related to discontinued operations for fiscal 2013, 2012 and 2011 was $0.3 million, $9.4 million and $5.9 million, respectively. The income tax benefit for fiscal 2012 includes a $5.6 million net benefit associated with the sale of the IB Business, including the tax effect of the related liquidation of two domestic subsidiaries which were engaged in the IB Business. In connection with this liquidation, the Company recognized losses for tax purposes related to its investment in these subsidiaries. The tax benefit of these losses was substantially offset by the tax related to the gain on sale of the IB Business. The $5.6 million net tax benefit is included in the gain on sale from discontinued operations, net of income taxes, in the consolidated statement of income for fiscal 2012.

The effect of deferred taxes associated with the change in unrealized gains and losses on the Company’s available-for-sale securities was immaterial for all periods presented and was recorded in other comprehensive income.

A reconciliation of the income tax expense (benefit) with the amount computed by applying the federal statutory tax rate to income from continuing operations before income taxes is as follows:


	2013			2012			2011
	(In thousands)
Expected income tax expense at the statutory rate	$	21,650		$	46,699		$	53,514
State income taxes, net of federal tax benefit		1,581			1,198			3,680
Tax rate differential on foreign earnings and other international related tax items		(14,025	)		(30,277	)		(31,231	)
Benefit from research and other credits		(9,210	)		(5,090	)		(6,728	)
Stock-based compensation		2,414			2,602			3,679
Resolution of prior period tax matters		(14,701	)		(2,530	)		(10,995	)
Other, net		587			1,381			(367	)

	$	(11,704	)	$	13,983		$	11,552

The components of the deferred tax assets and liabilities are as follows:


	2013			2012
	(In thousands)
Deferred tax assets:
Reserves and accruals not currently deductible	$	16,968		$	19,830
Stock-based compensation		18,036			17,237
Net operating loss carryforwards		12,408			14,635
Research credits		17,103			11,222
Investment securities		1,267			1,386
Other		657			2,828

Total gross deferred tax assets		66,439			67,138
Valuation allowance		(1,239	)		(1,540	)

Total deferred tax assets, net of valuation allowance		65,200			65,598

Deferred tax liabilities:
State income taxes		9,315			8,266
Property and equipment		6,149			7,044
Research and development expenditures		4,198			2,924
Purchased intangible assets		510			26

Total deferred tax liabilities		20,172			18,260

Net deferred tax assets	$	45,028		$	47,338

Based upon the Company’s current and historical pre-tax earnings, management believes it is more likely than not that the Company will realize the full benefit of the existing deferred tax assets as of March 31, 2013, except for the deferred tax assets related to certain investment securities and capital loss carryovers. Management believes the existing net deductible temporary differences will reverse during periods in which the Company generates net taxable income or that there would be sufficient tax carrybacks available; however, there can be no assurance that the Company will generate any earnings or any specific level of continuing earnings in future years.

The Company’s deferred tax assets related to investment securities and capital loss carryovers consist primarily of temporary differences related to other-than-temporary impairments on the Company’s investment securities and realized losses on dispositions of investment securities that are subject to limitations on deductibility. As a result of limitations on the deductibility of capital losses and other factors, management is currently unable to assert that it is more likely than not that the Company will realize the full benefit of these deferred tax assets. Accordingly, the Company had previously recorded a valuation allowance against these deferred tax assets. The balance of this valuation allowance was $1.2 million as of March 31, 2013 and $1.5 million as of April 1, 2012.

As of March 31, 2013, the Company has a deferred tax asset, net of federal benefit, of $10.9 million related to state research tax credit carryforwards. These state tax credits have no expiration date and may be carried forward indefinitely. The determination of whether it is more likely than not that the Company will realize the full benefit of its deferred tax assets, including the deferred tax asset related to the state research tax credits, requires significant judgment and estimates. These estimates may include projections of future taxable income by tax jurisdiction and the amount of tax credits to be generated in future periods. Such estimates are subject to uncertainty due to various factors, including the economic environment, industry and market conditions, and the length of time of the projections included in the analyses. If the Company’s actual results are less favorable than current estimates, the Company revises its estimates downward in future analyses, or the Company concludes it expects to generate more state research tax credits than it can utilize for an indefinite period, a valuation allowance may be required with a corresponding adjustment to earnings in the period in which such determination is made. As of March 31, 2013, based upon the Company’s estimates, management believes it is more likely than not that the Company will realize the full benefit of the existing deferred tax asset related to these state research tax credits.

As of March 31, 2013, the Company has federal net operating loss carryforwards of $15.9 million, which will expire between fiscal 2027 and 2029, if not utilized, and state net operating loss carryforwards of $79.9 million, which will expire between fiscal 2017 and 2032, if not utilized. The net operating loss carryforwards relating to acquired companies are subject to limitations on the timing of utilization. The Company also has state capital loss carryovers of $58.7 million, which will expire between fiscal 2014 and 2017, if not utilized, and state research tax credit carryforwards of $16.8 million, which have no expiration date.

The Company has made no provision for U.S. income taxes or foreign withholding taxes on the earnings of its foreign subsidiaries, as these amounts are intended to be indefinitely reinvested in operations outside the United States. As of March 31, 2013, the cumulative amount of undistributed earnings of the Company’s foreign subsidiaries was $327.8 million. Because of the availability of U.S. foreign tax credits, it is not practicable to determine the U.S. federal income tax liability that would be payable if such earnings were not reinvested indefinitely.

During the fourth quarter of fiscal 2013, the Company effectively settled a matter with the IRS related to the examination of the Company’s income tax returns for fiscal years 2008 and 2009. This settlement was for an amount less than the Company had previously accrued for this tax position. As a result, the Company recorded an income tax benefit of $9.5 million. In connection with this settlement, the Company paid federal and state income tax payments totaling $32.8 million in fiscal 2013.

Also during the fourth quarter of fiscal 2013, the Company obtained additional information related to other matters under examination by the IRS. Based on this new information, the Company reassessed the largest amount of tax benefit that is greater than 50% likely of being realized related to these tax positions. As a result, the Company reduced the related liability for unrecognized tax benefits and recorded a corresponding income tax benefit of $4.8 million.

In April 2013, the Company settled all open matters relating to the IRS examination of the Company’s income tax returns for fiscal years 2008 and 2009 without material adjustment and is no longer subject to federal income tax examinations for years prior to fiscal 2010. With limited exceptions, the Company is no longer subject to state and foreign income tax examinations by taxing authorities for years prior to fiscal 2008.

A rollforward of the activity in the gross unrecognized tax benefits is as follows:


	2013			2012
	(In thousands)
Balance at beginning of year	$	58,384		$	57,510
Additions based on tax positions related to the current year		1,470			3,581
Additions for tax positions of prior years		183			140
Reductions for tax positions of prior years		(20,547	)		(76	)
Decreases relating to settlements with taxing authorities		(29,906	)		—
Lapses of statute of limitations		—			(2,771	)

Balance at end of year	$	9,584		$	58,384

If the unrecognized tax benefits as of March 31, 2013 were recognized, $8.4 million, net of $1.2 million of tax benefits from state income taxes, would favorably affect the Company’s effective income tax rate.

In addition to the unrecognized tax benefits noted above, the Company had accrued $1.2 million and $6.5 million of interest expense and penalties as of March 31, 2013 and April 1, 2012, respectively. The Company recognized interest expense, net of the related tax effect, and penalties aggregating $1.0 million, $1.0 million and $0.1 million during fiscal 2013, 2012 and 2011, respectively.

It is reasonably possible that the Company’s liability for uncertain tax positions may be reduced by as much as $3.3 million as a result of either the settlement of tax positions with various tax authorities or by virtue of the statute of limitations expiring through the end of fiscal 2014.