Income Taxes

The following were the components of (loss) income before income taxes (in thousands):



	Fiscal Years Ended
	June 28, 2015			June 29, 2014		June 30, 2013
Domestic		($40,603	)		$58,859		$31,046
Foreign	(42,299		)	88,711		76,511
Total (loss) income before income taxes		($82,902	)		$147,570		$107,557

The following were the components of income tax (benefit) expense (in thousands):



	Fiscal Years Ended
	June 28, 2015			June 29, 2014			June 30, 2013
Current:
Federal		($12,470	)		$3,423			$483
Foreign	13,327			15,371			18,127
State	1,242			1,876			1,777
Total current	2,099			20,670			20,387
Deferred:
Federal	(7,100		)	229			2,226
Foreign	(12,696		)	3,003			(177		)
State	(1,154		)	(523		)	(1,804		)
Total deferred	(20,950		)	2,709			245
Income tax (benefit) expense		($18,851	)		$23,379			$20,632

Actual income tax (benefit) expense differed from the amount computed by applying the U.S. federal tax rate of 35% to pre-tax earnings as a result of the following (in thousands, except percentages):



	Fiscal Years Ended
	June 28, 2015			% of Loss	June 29, 2014			% of Income	June 30, 2013			% of Income
Federal income tax provision at statutory rate		($29,016	)	35%		$51,645		35%		$37,645		35%
(Decrease) increase in income tax expense resulting from:
State tax provision, net of federal benefit	(797		)	1%	2,550			2%	1,146			1%
State tax credits	(585		)	1%	(1,004		)	(1)%	(1,407		)	(1)%
Tax exempt interest	(2,413		)	3%	(815		)	—%	(853		)	(1)%
48C investment tax credit	(6,826		)	8%	(11,310		)	(8)%	(5,252		)	(5)%
(Decrease) increase in tax reserve	(225		)	—%	15,411			10%	(361		)	—%
Change in tax depreciation methodology	—			—%	(18,475		)	(12)%	—			—%
Research and development credits	(2,081		)	3%	(1,574		)	(1)%	(2,426		)	(2)%
Decrease in valuation allowance	—			—%	(20		)	—%	(6		)	—%
Qualified production activities deduction	(520		)	1%	(2,362		)	(1)%	(866		)	(1)%
Stock-based compensation	2,988			(4)%	2,024			1%	1,206			1%
Statutory rate differences	18,732			(23)%	(14,285		)	(10)%	(10,184		)	(10)%
Foreign earnings taxed in U.S.	2,697			(3)%	—			—%	—			—%
Other	(805		)	1%	1,594			1%	1,990			2%
Income tax (benefit) expense		($18,851	)	23%		$23,379		16%		$20,632		19%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows (in thousands):



	June 28, 2015			June 29, 2014
Deferred tax assets:
Compensation		$1,864			$4,843
Inventories	23,172			18,672
Sales return reserve and allowance for bad debts	8,266			4,801
Warranty reserve	5,042			1,416
Federal and state net operating loss carryforwards	7,237			704
Federal credits	3,688			4,971
State credits	2,573			3,016
48C investment tax credits	14,980			22,731
Investments	953			958
Stock-based compensation	40,291			31,102
Deferred revenue	4,850			5,719
Other	2,034			876
Total gross deferred assets	114,950			99,809
Less valuation allowance	(1,485		)	(1,571		)
Deferred tax assets, net	113,465			98,238
Deferred tax liabilities:
Property and equipment	(13,337		)	(25,660		)
Intangible assets	(59,840		)	(52,462		)
Investments	(505		)	(1,792		)
Prepaid taxes and other	(1,350		)	(1,083		)
Foreign earnings recapture	(2,524		)	—
Total gross deferred liability	(77,556		)	(80,997		)
Deferred tax asset, net		$35,909			$17,241

The components giving rise to the net deferred tax assets (liabilities) have been included in the Consolidated Balance Sheets as follows (in thousands):



	Balance at June 28, 2015
	Assets					Liabilities
	Current		Noncurrent			Current		Noncurrent
U.S. federal income taxes		$23,231		$52			$—		($10,878	)
Foreign income taxes	15,959		8,841			—		(1,296		)
Total net deferred tax assets/(liabilities)		$39,190		$8,893	*		$—		($12,174	)



	Balance at June 29, 2014
	Assets				Liabilities
	Current		Noncurrent		Current		Noncurrent
U.S. federal income taxes		$17,324		$—		$—		($10,948	)
Foreign income taxes	12,090		—		—		(1,225		)
Total net deferred tax assets/(liabilities)		$29,414		$—		$—		($12,173	)

* This amount is included in Other assets in the Consolidated Balance Sheets.

The research and development credit, which had previously expired on December 31, 2013, was reinstated as part of the Tax Increase Prevention Act of 2014, enacted on December 19, 2014. This legislation retroactively reinstated and extended the credit from the previous expiration date through December 31, 2014. The benefit of this credit for fiscal 2015 as well as the period December 31, 2013 through June 29, 2014 has been included in the fiscal year 2015 tax benefit representing a $1.1 million and $1.0 million benefit, respectively.

During the second quarter of fiscal 2014, the Company was notified by the Internal Revenue Service that it had been allocated$30 million of federal tax credits as part of the American Recovery and Reinvestment Act of 2009 - Phase II (Internal Revenue Code Section 48C). This $30 million allocation is in addition to the $39 million previously allocated to the Company in the third quarter of fiscal 2010. As of June 28, 2015, the Company has successfully achieved the required milestones to realize the full $69 million tax benefit. The tax benefit (net of related basis adjustments) will be amortized into income over the useful life (5 years) of the underlying equipment that was placed into service to generate these credits. Since fiscal 2010, the Company has recognized an income tax benefit of $32.9 million related to the credits generated to date, with $6.8 million of this amount recognized as a tax benefit for the year ended June 28, 2015.

At June 28, 2015, the Company had approximately $24 million of foreign net operating loss carryovers which have no carry forward limitation. As of June 28, 2015, the Company had approximately $15.1 million of state net operating loss carryovers for which a full valuation allowance has been recognized. Additionally, the Company had $4.2 million of state income tax credit carryforwards. The state net operating loss carryovers and income tax credit carryforwards will begin to expire in fiscal 2016 and fiscal 2017, respectively. Furthermore, the Company had approximately $0.8 million of alternative minimum tax credit carryforwards, $6.5 million of 48C credit carryforwards, $2.3 million of research and development credit carryforwards and $1.6 million of state income tax credit carryforwards that relate to excess stock option benefits which, if and when realized, will be recognized in Additional paid-in-capital in the Consolidated Balance Sheets.

U.S. GAAP requires a two-step approach to recognizing and measuring uncertain tax positions. 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 cumulatively more than 50% likely to be realized upon ultimate settlement.

As of June 29, 2014 the Company’s liability for unrecognized tax benefits was $18.4 million. The Company recognized a $0.4 million decrease to the liability for unrecognized tax benefits due to a decrease in the effective tax rate related to an uncertainty regarding a change in tax depreciation methodology adopted in fiscal 2014. In addition there was a $0.2 million decrease to the amount of unrecognized tax benefits as a result of a statute expiration. As a result, the total liability for unrecognized tax benefits as of June 28, 2015 was $17.8 million. If any portion of this $17.8 million is recognized, the Company will then include that portion in the computation of its effective tax rate. Although the ultimate timing of the resolution and/or closure of audits is highly uncertain, the Company believes it is reasonably possible that approximately $0.2 million of gross unrecognized tax benefits will change in the next 12 months as a result of pending audit settlements or statute requirements.

The following is a tabular reconciliation of the Company’s change in uncertain tax positions (in thousands):



	Fiscal Years Ended
	June 28, 2015			June 29, 2014			June 30, 2013
Balance at beginning of period		$18,389			$2,732			$4,421
Increases related to prior year tax positions	—			18,040			546
Decreases related to prior year tax positions	(407		)	(741		)	—
Expiration of statute of limitations for assessment of taxes	(187		)	(1,642		)	(2,235		)
Balance at end of period		$17,795			$18,389			$2,732

The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the Income tax (benefit) expense line item in the Consolidated Statements of (Loss) Income. Total interest and penalties accrued were as follows (in thousands):



	June 28, 2015		June 29, 2014
Accrued interest and penalties		$10		$104

Total interest and penalties recognized were as follows (in thousands):



	Fiscal Years Ended
	June 28, 2015			June 29, 2014			June 30, 2013
Recognized interest and penalties (benefit)		($94	)		($51	)		($130	)

The Company files U.S. federal, U.S. state and foreign tax returns. For U.S. federal purposes, the Company is generally no longer subject to tax examinations for fiscal years prior to 2012. For U.S. state tax returns, the Company is generally no longer subject to tax examinations for fiscal years prior to 2011. For foreign purposes, the Company is generally no longer subject to examination for tax periods 2005 and prior. Certain carryforward tax attributes generated in prior years remain subject to examination and adjustment.

The Company provides for U.S. income taxes on the earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered indefinitely reinvested outside the United States. As of June 28, 2015, U.S. income taxes were not provided for on a cumulative total of approximately $291.5 million of undistributed earnings for certain non-U.S. subsidiaries, as the Company currently intends to reinvest these earnings in these foreign operations indefinitely. If, at a later date, these earnings were repatriated to the U.S., the Company would be required to pay taxes on these amounts. Determination of the amount of any deferred tax liability on these undistributed earnings is not practicable.

During the fiscal year ended June 26, 2011, the Company was awarded a tax holiday in Malaysia with respect to its manufacturing and distribution operations. This arrangement allows for 0% tax for 10 years starting in the fiscal year ended June 26, 2011. For the fiscal years ended June 30, 2013, June 29, 2014 and June 28, 2015, the Company did not meet the requirements for the tax holiday, and as such, no benefit has been recognized.