Note 15. Income Taxes

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


	2014			2013		2012
	(In thousands)
United States	$	(19,056	)	$	13,084	$	35,733
International		10,096			48,773		97,693

	$	(8,960	)	$	61,857	$	133,426

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


	2014			2013			2012
	(In thousands)
Current:
Federal	$	9,206		$	(13,374	)	$	11,054
State		1,532			260			1,279
Foreign		2,205			1,520			1,904

Total current		12,943			(11,594	)		14,237

Deferred:
Federal		(18,883	)		3,445			3,360
State		15,006			(3,684	)		(4,781	)
Foreign		240			129			1,167

Total deferred		(3,637	)		(110	)		(254	)

	$	9,306		$	(11,704	)	$	13,983

Income tax expense from continuing operations for fiscal 2014 includes the impact of valuation allowances recorded against deferred tax assets related to certain state tax credits and net operating loss carryforwards. 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 and 2012 was $0.3 million and $9.4 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 operations 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 accumulated other comprehensive income.

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


	2014			2013			2012
	(In thousands)
Expected income tax expense (benefit) at the statutory rate	$	(3,136	)	$	21,650		$	46,699
State income taxes, net of federal tax benefit		(330	)		1,581			1,198
Tax rate differential on foreign earnings and other international related tax items		(324	)		(14,025	)		(30,277	)
Benefit from research and other credits		(6,764	)		(9,210	)		(5,090	)
Stock-based compensation		4,759			2,414			2,602
Resolution of prior period tax matters		(1,480	)		(14,701	)		(2,530	)
Valuation allowance		16,433			(301	)		(161	)
Other, net		148			888			1,542

	$	9,306		$	(11,704	)	$	13,983

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


	2014			2013
	(In thousands)
Deferred tax assets:
Research credits	$	24,296		$	17,103
Reserves and accruals not currently deductible		20,454			16,968
Stock-based compensation		15,583			18,036
Net operating loss carryforwards		11,048			12,408
Patent license		7,430			—
Investment securities		1,046			1,267
Other		419			657

Total gross deferred tax assets		80,276			66,439
Valuation allowance		(17,672	)		(1,239	)

Total deferred tax assets, net of valuation allowance		62,604			65,200

Deferred tax liabilities:
State income taxes		10,026			9,315
Research and development expenditures		2,220			4,198
Property and equipment		1,911			6,149
Purchased intangible assets		540			510

Total deferred tax liabilities		14,697			20,172

Net deferred tax assets	$	47,907		$	45,028

The Company’s deferred tax assets related to research credits consist primarily of state research tax credit carryforwards. These state tax credits have no expiration date and may be carried forward indefinitely. However, these credits may be utilized only to the extent that the Company realizes taxable income in the related state. Based upon the Company’s current projections of future taxable income in the respective states, the Company is no longer able to assert that it is more likely than not that it would realize the full benefit of these deferred tax assets. The current projections reflect changes in the Company’s forecasted taxable income, including the impact of acquisitions and restructuring activities which occurred during the fourth quarter of fiscal 2014. Accordingly, the Company recorded a valuation allowance against these deferred tax assets of $14.8 million during fiscal 2014.

The Company’s deferred tax assets related to net operating loss carryforwards include both federal and state net operating loss carryforwards. The state net operating loss carryforwards are specific to the states in which the net operating losses were generated and certain of these carryforwards relate to previous acquisitions, which are subject to limitations on the timing of utilization. Based upon the Company’s current projections of future taxable income in the respective states, the Company is no longer able to assert that it is more likely than not that it would realize the full benefit of these deferred tax assets. The current projections reflect changes in the Company’s forecasted taxable income, including the impact of acquisitions and restructuring activities which occurred during the fourth quarter of fiscal 2014. Accordingly, the Company recorded a valuation allowance against these deferred tax assets of $1.7 million during fiscal 2014.

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 30, 2014 and March 31, 2013.

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 30, 2014, except for the deferred tax assets discussed above. 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.

As of March 30, 2014, the Company has federal net operating loss carryforwards of $14.0 million, which will expire between fiscal 2027 and 2029, if not utilized, and state net operating loss carryforwards of $71.2 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 $54.4 million, which will expire between fiscal 2017 and 2029, if not utilized, and state research tax credit carryforwards of $23.3 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 30, 2014, the cumulative amount of undistributed earnings of the Company’s foreign subsidiaries was $355.2 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 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 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.

During fiscal 2014, 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. The Company’s federal consolidated income tax returns for fiscal years 2010, 2011 and 2012 are currently under examination by the IRS. 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. Management does not believe that the results of these examinations will have a material impact on the Company’s financial condition or results of operations.

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


	2014			2013
	(In thousands)
Balance at beginning of year	$	9,584		$	58,384
Additions based on tax positions related to the current year		1,140			1,470
Additions for tax positions of prior years		4,494			183
Reductions for tax positions of prior years		(1,641	)		(20,547	)
Decreases relating to settlements with taxing authorities		—			(29,906	)

Balance at end of year	$	13,577		$	9,584

If the unrecognized tax benefits as of March 30, 2014 were recognized, $10.8 million, net of $2.8 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 $3.5 million and $1.2 million of interest expense and penalties as of March 30, 2014 and March 31, 2013, respectively. The Company recognized interest expense, net of the related tax effect, and penalties aggregating $2.1 million, $1.0 million and $1.0 million during fiscal 2014, 2013 and 2012, respectively.

It is reasonably possible that the Company’s liability for uncertain tax positions may be reduced by as much as $1.4 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 2015.