Note 15. Income Taxes

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


	2015		2014			2013
	(In thousands)
United States	$	12,294	$	(19,056	)	$	13,084
International		42,899		10,096			48,773

	$	55,193	$	(8,960	)	$	61,857

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


	2015			2014			2013
	(In thousands)
Current:
Federal	$	1,859		$	9,206		$	(13,374	)
State		913			1,532			260
Foreign		3,285			2,205			1,520

Total current		6,057			12,943			(11,594	)

Deferred:
Federal		(1,700	)		(18,883	)		3,445
State		603			15,006			(3,684	)
Foreign		(360	)		240			129

Total deferred		(1,457	)		(3,637	)		(110	)

	$	4,600		$	9,306		$	(11,704	)

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 effect of deferred taxes associated with the change in unrealized gains and losses on the Company’s available-for-sale securities was immaterial 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:


	2015			2014			2013
	(In thousands)
Expected income tax expense (benefit) at the statutory rate	$	19,318		$	(3,136	)	$	21,650
State income taxes, net of federal tax benefit		1,773			(330	)		1,581
Tax rate differential on foreign earnings and other international related tax items		(11,195	)		(324	)		(14,025	)
Benefit from research and other credits		(7,360	)		(6,764	)		(9,210	)
Stock-based compensation		2,649			4,759			2,414
Resolution of prior period tax matters		(3,577	)		(1,480	)		(14,701	)
Valuation allowance		2,634			16,433			(301	)
Other, net		358			148			888

	$	4,600		$	9,306		$	(11,704	)

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


	2015			2014
	(In thousands)
Deferred tax assets:
Research credits	$	31,487		$	24,296
Reserves and accruals not currently deductible		18,971			20,454
Stock-based compensation		14,415			15,583
Net operating loss carryforwards		9,764			11,048
Patent license		7,098			7,430
Property and equipment		2,587			—
Investment securities		913			1,046
Other		313			419

Total gross deferred tax assets		85,548			80,276
Valuation allowance		(20,307	)		(17,672	)

Total deferred tax assets, net of valuation allowance		65,241			62,604

Deferred tax liabilities:
State income taxes		10,547			10,026
Research and development expenditures		5,814			2,220
Property and equipment		—			1,911
Other		—			540

Total deferred tax liabilities		16,361			14,697

Net deferred tax assets	$	48,880		$	47,907

The Company’s deferred tax assets related to research credits consist primarily of state research 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 unable to assert that it is more likely than not that it will realize the full benefit of these deferred tax assets. Accordingly, the Company has recorded valuation allowances against these deferred tax assets. The balance of this valuation allowance was $17.5 million and $14.8 million as of March 29, 2015 and March 30, 2014, respectively.

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 unable to assert that it is more likely than not that it will realize the full benefit of these deferred tax assets. Accordingly, the Company recorded a valuation allowance against these deferred tax assets during fiscal 2014. The balance of this valuation allowance was $1.7 million as of March 29, 2015 and March 30, 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 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 $1.1 million and $1.2 million as of March 29, 2015 and March 30, 2014, respectively.

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 29, 2015, 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 29, 2015, the Company has federal net operating loss carryforwards of $13.0 million, which will expire between fiscal 2027 and 2029, if not utilized, and state net operating loss carryforwards of $63.2 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 $54.5 million, which will expire between fiscal 2017 and 2030, if not utilized.

As of March 29, 2015, the Company has federal research tax credit carryforwards of $4.5 million, which will expire between fiscal 2034 and 2035, if not utilized. The Company also has state research tax credit carryforwards of $28.2 million and state alternative minimum tax credits of $0.5 million, both of 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 29, 2015, the cumulative amount of undistributed earnings of the Company’s foreign subsidiaries was $392.9 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.

During fiscal 2015, the Company settled all open matters relating to the IRS examination of the Company’s income tax returns for fiscal years 2010 through 2013. 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 $2.5 million. In connection with this settlement, the Company will pay federal and state income tax payments totaling $1.9 million in fiscal 2016.

The Company is no longer subject to federal income tax examinations for years prior to fiscal 2014. 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:


	2015			2014
	(In thousands)
Balance at beginning of year	$	13,577		$	9,584
Additions based on tax positions related to the current year		1,059			1,140
Additions for tax positions of prior years		2,966			4,494
Reductions for tax positions of prior years		(276	)		(1,641	)
Decreases relating to settlements with taxing authorities		(3,629	)		—
Reductions due to lapses of statutes of limitations		(793	)		—

Balance at end of year	$	12,904		$	13,577

If the unrecognized tax benefits as of March 29, 2015 were recognized, $10.0 million, net of $2.9 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 of interest expense and penalties as of March 29, 2015 and March 30, 2014. The Company recognized interest expense, net of the related tax effect, and penalties aggregating $0.1 million, $2.1 million and $1.0 million during fiscal 2015, 2014 and 2013, respectively.

It is reasonably possible that the Company’s liability for uncertain tax positions may be reduced by as much as $2.4 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 2016.