14. Income Taxes

Income (loss) before income taxes consists of:

The provision for income taxes consists of:

Income tax expense recorded for the fiscal 2013 differs from the income tax expense that would be derived by applying a U.S. statutory tax rate of 35% to the income before income taxes due to the Company’s inability to benefit from U.S. operating losses, and income that was earned and tax effected in foreign jurisdictions with different tax rates. The income tax expense includes foreign taxes as well as $4.1 million related to withholding tax on Samsung licensing revenue. These were offset by the release of reserves for uncertain tax positions of $4.6 million in foreign locations and the impact from the acquisition of the MCA business of $3.7 million.

Deferred income taxes reflect the net tax effects of tax carryovers and temporary differences between the carrying amounts of assets and liabilities for financial reporting and the balances for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities as of December 29, 2013 and December 30, 2012 are as follows:

          For the period ended December 29, 2013, the net valuation allowance increased by $31.5 million over the period ended December 30, 2012 primarily due to unbenefited net operating losses and tax credits generated in the U.S.

As of December 29, 2013, the Company had U.S. federal and state net operating loss carry forwards of approximately $1,024 million and $219.8 million, respectively. Approximately $489.7 million of the federal net operating loss carry forwards are subject to an annual limitation of $27.2 million. These net operating losses, if not utilized, expire from 2016 to 2033. The Company also has U.S. federal credit carryovers of $3.3 million, which expire from 2020 to 2033. The Company also has state tax credits of $18.2 million, which includes California state tax credits of $17.5 million, which can be carried forward indefinitely.

If the Company were to undergo an “ownership change” for purposes of Section 382 of the Internal Revenue Code of 1986, as amended, such as an offering of its common stock, its ability to utilize its federal and state net operating loss carry forwards may be limited under certain provisions of the Internal Revenue Code. As a result, the Company may incur greater tax liabilities than it would in the absence of such a limitation.

The table below displays the reconciliation between statutory federal income taxes and the total provision for income taxes.

The Company has made no provision for U.S. income taxes on approximately $118.4 million of cumulative undistributed earnings of certain foreign subsidiaries at December 29, 2013 because it is the Company’s intention to reinvest such earnings indefinitely. The determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable.

The Company enjoys tax holidays in Malaysia and Thailand.  The Tax holidays provide for lower or zero rates of taxation and require various thresholds of investment and business activities in those jurisdictions.  These tax holidays are in effect currently and scheduled to expire starting 2021 if not extended.  The net impact of these tax holidays was to decrease the Company’s tax expense by approximately $3.8M, $3.7M and $0 in the fiscal years 2013, 2012 and 2011, respectively. The estimated range of tax benefits from the above tax holidays on diluted earnings per share for fiscal years 2013, 2012 and 2011 were approximately $0.06 to $0.07, $0.06 to $0.07, $0, respectively.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

All of the Company’s unrecognized tax benefits, if recognized, would affect the effective tax rate. However, $67.2 million of the unrecognized tax benefits are currently offset against net operating loss carry forwards and tax credit carry forwards subject to a full valuation allowance.

The Company recognized adjustments to interest and penalties related to unrecognized tax benefits in income tax expense.  During the years ended December 29, 2013, December 30, 2012 and December 25, 2011, the Company recognized tax benefits of $1.1 million and $0.3 million respectively in interest and penalties. During the year ended December 25, 2011, the Company recognized approximately $5.3 million in interest and penalties.

The Company is subject to taxation in the United States and various states, such as California and Texas, and foreign jurisdictions such as Israel, Japan, Malaysia, and Thailand. The Company’s tax years beginning in 2007 are subject to examination by the tax authorities. With few exceptions, the Company is not subject to U.S. federal, state, local or foreign examinations by tax authorities for years before 2007.

The Company does not believe that it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next twelve months.