INCOME TAXES

Income tax expense for fiscal years 2016, 2015, and 2014 consisted of the following:



	Fiscal Year Ended March 31,
(in thousands)	2014			2015			2016
Current:
Federal	$	28,859		$	26,938		$	15,702
State	1,263			2,685			1,934
Foreign	4,384			4,253			4,644
Total current provision for income taxes	34,506			33,876			22,280
Deferred:
Federal	(4,675		)	(1,148		)	(7,767		)
State	(629		)	(1,353		)	(1,103		)
Foreign	(480		)	1,575			374
Total deferred benefit for income taxes	(5,784		)	(926		)	(8,496		)
Income tax expense	$	28,722		$	32,950		$	13,784

The components of income before income taxes for fiscal years 2016, 2015, and 2014 are as follows:



	Fiscal Year Ended March 31,
(in thousands)	2014		2015		2016
United States	$	85,231	$	83,583	$	42,184
Foreign	55,908		61,668		39,992
Income before income taxes	$	141,139	$	145,251	$	82,176

The following is a reconciliation between statutory federal income taxes and the income tax expense for fiscal years 2016, 2015, and 2014:



	Fiscal Year Ended March 31,
(in thousands)	2014			2015			2016
Tax expense at statutory rate	$	49,399		$	50,838		$	28,762
Foreign operations taxed at different rates	(16,175		)	(15,839		)	(9,478		)
State taxes, net of federal benefit	634			1,331			831
Research and development credit	(1,805		)	(2,460		)	(3,133		)
Unwind of stock based compensation cost sharing	—			—			(2,855		)
Other, net	(3,331		)	(920		)	(343		)
Income tax expense	$	28,722		$	32,950		$	13,784

The effective tax rate for fiscal years 2016, 2015, and 2014 was 16.8%, 22.7%, and 20.4% respectively. The effective tax rate for fiscal year 2016 is lower than that in the previous year due primarily to domestic interest expense on new debt and tax benefits associated with the unwind of prior intercompany cost-sharing of stock based compensation. A retroactive and permanent reinstatement of the federal research credit was signed into law on December 18, 2015. As such, the Company's effective tax rate for fiscal year 2016 includes the benefit of one quarter of credits for fiscal year 2015 plus the tax benefit for the fiscal year 2016 tax credit.

In comparison to fiscal year 2014, the effective tax rate for fiscal year 2015 was higher than the previous year due primarily to the absence of several one-time, discrete items that benefited the tax rate in the previous year, such as 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. This factor was offset by a higher proportion of income earned in foreign jurisdictions that is taxed at lower rates and by an increase in the benefit from the U.S. federal research tax credit. The U.S. federal research tax credit expired December 31, 2014, and fiscal year 2015 included four quarters of benefit because of the impact of the credit earned in our fourth quarter of fiscal year 2014 due to the retroactive reinstatement of the credit in January 2015. However, in fiscal year 2014, this credit was only available for three quarters since the tax credit expired December 31, 2013 prior to it being retroactively reinstated in January 2015.

The effective tax rate for fiscal years 2016, 2015, and 2014 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. Indefinitely reinvested foreign earnings were approximately $657.3 million at March 31, 2016. 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.

On July 27, 2015, the United States Tax Court, in an opinion in Altera Corp. v. Commissioner, invalidated the portion of the Treasury regulations issued under IRC Section 482 requiring related-party participants in a cost sharing arrangement to share stock-based compensation costs. The U.S. Tax Court issued the final decision on December 28, 2015. The government filed a notice of appeal within the required 90 day period following the final decision. At this time, the U.S. Treasury has not withdrawn the requirement to include stock-based compensation from its regulations. The Company has considered the issue and has recorded a tax benefit of $2.9 million resulting from the reimbursement of prior cost sharing of stock based compensation, offset by the U.S. tax cost of repatriation of the associated foreign earnings for which it has recorded a deferred tax liability in the current period. The Company will continue to monitor developments related to the case and the potential impact on its consolidated financial statements.

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. Effective for the fourth quarter of fiscal year 2016, the Company early adopted the update to balance sheet classification of deferred taxes (Accounting Standards Update 2015-17), which simplifies the presentation of deferred income taxes by requiring deferred tax assets and liabilities be classified as non-current on the balance sheets. The Company early adopted this standard on a prospective basis and included the current portion of deferred tax assets within the non-current portion of deferred tax assets within the consolidated balance sheet as of March 31, 2016. There was no impact on the Company's results of operations as a result of the adoption of this standard.

Significant components of the Company's deferred tax assets and liabilities as of March 31, 2016 and 2015 are as follows:



	March 31,
(in thousands)	2015			2016
Accruals and other reserves	$	5,100		$	5,896
Deferred Compensation	2,066			3,750
Net operating loss carry forward	3,043			2,955
Stock compensation	9,865			12,561
Prepaid cost sharing	—			6,199
Tax credits	3,406			3,642
Other deferred tax assets	2,903			1,684
Valuation allowance	(1,940		)	(1,962		)
Total deferred tax assets	24,443			34,725
Deferred gains on sales of properties	(1,756		)	(1,761		)
Unremitted earnings of certain subsidiaries	(3,064		)	(4,481		)
Fixed asset depreciation	(4,650		)	(4,846		)
Total deferred tax liabilities	(9,470		)	(11,088		)
Net deferred tax assets⁽¹⁾	$	14,973		$	23,637

⁽¹⁾ The Company's deferred tax assets for the fiscal year ending March 31, 2016 and the long-term portion of the Company's deferred tax assets for the fiscal year ending March 31, 2015, are included as a component of other assets on 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 $2.0 million as of March 31, 2016 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, 2016, 2015, and 2014, the Company had $12.7 million, $12.8 million, and $12.6 million, respectively, of unrecognized tax benefits. The unrecognized tax benefits as of March 31, 2016 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			2015			2016
Balance at beginning of period	$	11,072		$	12,571		$	12,821
Increase (decrease) of unrecognized tax benefits related to prior years	641			(244		)	(598		)
Increase of unrecognized tax benefits related to the current year	2,427			1,908			2,252
Reductions to unrecognized tax benefits related to settlements with taxing authorities	—			—			(149		)
Reductions to unrecognized tax benefits related to lapse of applicable statute of limitations	(1,569		)	(1,414		)	(1,634		)
Balance at end of period	$	12,571		$	12,821		$	12,692

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 $1.6 million and $1.8 million as of March 31, 2016 and 2015, 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. All federal tax matters have been concluded for tax years prior to fiscal year 2013. The California Franchise Tax Board completed its examination of our 2007 and 2008 tax years. The Company 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 2011, except for the United Kingdom, which has been concluded for tax years prior to fiscal year 2015.

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.