INCOME TAXES

Income tax expense for fiscal years 2014, 2013, and 2012 consisted of the following:



(in thousands)	Fiscal Year Ended March 31,
	2014			2013			2012
Current:
Federal	$	28,859		$	25,530		$	23,844
State	1,263			2,452			2,719
Foreign	4,384			4,777			5,080
Total current provision for income taxes	34,506			32,759			31,643
Deferred:
Federal	(4,675		)	(586		)	2,324
State	(629		)	(474		)	(569		)
Foreign	(480		)	324			168
Total deferred benefit for income taxes	(5,784		)	(736		)	1,923
Income tax expense	$	28,722		$	32,023		$	33,566

The components of income before income taxes for fiscal years 2014, 2013, and 2012 are as follows:



	Fiscal Year Ended March 31,
(in thousands)	2014		2013		2012
United States	$	85,231	$	80,875	$	79,589
Foreign	55,908		57,550		63,013
Income before income taxes	$	141,139	$	138,425	$	142,602

The following is a reconciliation between statutory federal income taxes and the income tax expense for fiscal years 2014, 2013, and 2012:



(in thousands)	Fiscal Year Ended March 31,
	2014			2013			2012
Tax expense at statutory rate	$	49,399		$	48,449		$	49,911
Foreign operations taxed at different rates	(16,175		)	(15,244		)	(16,973		)
State taxes, net of federal benefit	634			1,978			2,149
Research and development credit	(1,805		)	(3,380		)	(1,392		)
Other, net	(3,331		)	220			(129		)
Income tax expense	$	28,722		$	32,023		$	33,566

The effective tax rate for fiscal years 2014, 2013, and 2012 was 20.4%, 23.1%, and 23.5% respectively. The effective tax rate for fiscal year 2014 is lower than the previous year due primarily to the generation of a foreign tax credit carryover, changes in Mexican tax law that resulted in the reversal of a valuation allowance, and a deduction for qualifying domestic production activities offset by a smaller proportion of income earned in foreign jurisdictions that is taxed at lower rates and a decrease in the benefit from the U.S. federal research tax credit. The U.S. federal research tax credit expired December 31, 2013 and was therefore only available for three quarters in fiscal year 2014, compared to fiscal year 2013, which included a full four quarters of benefit as well as the impact of the credit earned in our fourth quarter of fiscal year 2012 due to the retroactive reinstatement in January 2012.

In comparison to fiscal year 2012, the decrease in the effective tax rate for fiscal year 2013 was due primarily to a smaller proportion of income earned in foreign jurisdictions that is taxed at lower rates partially offset by the increased benefit from the U.S. federal research tax credit in fiscal year 2013. The U.S. federal research credit was reinstated in January 2013 retroactively to January 2012; therefore, the effective tax rate for fiscal year 2013 includes the benefit of the credit earned in the fourth quarter of fiscal year 2012 compared to the benefit of the credit for only three quarters in fiscal year 2012.

The effective tax rate for fiscal years 2014, 2013, and 2012 differs from the statutory rate due to the impact of foreign operations taxed at different statutory rates, income tax credits, state taxes, and other factors. The future tax rate could be impacted by a shift in the mix of domestic and foreign income, tax treaties with foreign jurisdictions, changes in tax laws in the U.S. or internationally, or a change in estimate of future taxable income which could result in a valuation allowance being required.

The Company's provision for income taxes does not include provisions for U.S. income taxes and foreign withholding taxes associated with the repatriation of undistributed earnings of certain foreign operations that it intends to reinvest indefinitely in the foreign operations. Permanently reinvested foreign earnings were approximately $594.2 million at March 31, 2014. The determination of the tax liability that would be incurred if these amounts were remitted back to the U.S. is not practical but would likely be material. If these earnings were distributed to the U.S. in the form of dividends or otherwise, the Company would be subject to additional U.S. income taxes, subject to an adjustment for foreign tax credits and foreign withholding taxes. The Company's current plans do not require repatriation of earnings from foreign operations to fund the U.S. operations because it generates sufficient domestic operating cash flow and has access to external funding under its line of credit. As a result, the Company does not expect a material impact on its business or financial flexibility with respect to undistributed earnings of its foreign operations.

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, 2014 and 2013 are as follows:



	March 31,
(in thousands)	2014				2013
Accruals and other reserves	$	8,459			$	7,983
Net operating loss carry forward	4,580				5,956
Stock compensation	8,957				8,199
Other deferred tax assets	3,937				3,643
Valuation allowance	(3,351		)		(5,984		)
Total deferred tax assets	22,582				19,797
Deferred gains on sales of properties	(1,756		)		(1,756		)
Unremitted earnings of certain subsidiaries	(3,064		)		(3,064		)
Fixed asset depreciation	(3,571		)		(4,402		)
Other deferred tax liabilities	—				(2,197		)
Total deferred tax liabilities	(8,391		)		(11,419		)
Net deferred tax assets	$	14,191		⁽¹⁾	$	8,378

⁽¹⁾ The long-term portion of the Company's deferred tax assets for the fiscal year ending March 31, 2014 is included as a component of other assets in the consolidated balance sheets.

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 $3.4 million as of March 31, 2014 was related to the net operating losses of a foreign subsidiary with an insufficient history of earnings to support the realization of the deferred tax asset.

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, 2014, 2013, and 2012, the Company had $12.6 million, $11.1 million, and $11.1 million, respectively, of unrecognized tax benefits. The unrecognized tax benefits as of March 31, 2014 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)	2014			2013			2012
Balance at beginning of period	$	11,072		$	11,141		$	10,458
Increase (decrease) of unrecognized tax benefits related to prior years	641			(117		)	116
Increase of unrecognized tax benefits related to the current year	2,427			2,430			2,074
Reductions to unrecognized tax benefits related to lapse of applicable statute of limitations	(1,569		)	(2,382		)	(1,507		)
Balance at end of period	$	12,571		$	11,072		$	11,141

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 $2.0 million as of March 31, 2014 and 2013, 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. The Company is under examination by the Internal Revenue Service for its 2010 tax year. The California Franchise Tax Board completed its examination of our 2007 and 2008 tax years. We received a Notice of Proposed Assessment and responded by filing a protest letter. The amount of the proposed assessment is not material. Foreign income tax matters for material tax jurisdictions have been concluded for tax years prior to fiscal year 2007, except for the United Kingdom, which has been concluded for tax years prior to fiscal year 2013.

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.