

14.		INCOME TAXES

The U.S. and international components of income (loss) before provision for income taxes were as follows (in thousands):



	Year Ended
	January 1, 2016			January 2, 2015		January 3, 2014
U.S.	$	(42,166	)	$	56,801	$	42,392
International	26,466			19,778		6,446
Total income (loss) before provision for income taxes	$	(15,700	)	$	76,579	$	48,838

The provision (benefit) for income taxes was comprised of the following (in thousands):



	Year Ended
	January 1, 2016			January 2, 2015			January 3, 2014
Current:
Federal	$	(3,753	)	$	16,293		$	39,353
State	(367		)	1,299			1,604
International	6,312			2,998			1,470
	2,192			20,590			42,427
Deferred:
Federal	(8,144		)	1,211			(28,678		)
State	(880		)	(310		)	427
International	(1,274		)	(370		)	(1,605		)
	(10,298		)	531			(29,856		)
Total provision (benefit) for income taxes	$	(8,106	)	$	21,121		$	12,571

The provision (benefit) for income taxes differs from the U.S. statutory rate due to the following:



	Year Ended
	January 1, 2016					January 2, 2015					January 3, 2014
Statutory rate	$	(5,495	)	35.0	%	$	26,803		35.0	%	$	17,093		35.0	%
Federal tax credits	(1,850		)	11.8		(1,600		)	(2.1	)	(3,651		)	(7.5	)
Foreign rate differential	(3,180		)	20.2		(3,276		)	(4.3	)	(348		)	(0.7	)
Uncertain tax positions	(531		)	3.4		412			0.6		831			1.7
State taxes, net of federal benefit	(1,490		)	9.5		507			0.7		1,148			2.3
Change in foreign tax rates	(91		)	0.6		(446		)	(0.6	)	(1,806		)	(3.7	)
Non-deductible transaction costs	4,867			(31.0	)	—			—		—			—
Valuation allowance	626			(4.0	)	(299		)	(0.4	)	186			0.4
Other	(962		)	6.1		(980		)	(1.3	)	(882		)	(1.8	)
Effective tax rate	$	(8,106	)	51.6	%	$	21,121		27.6	%	$	12,571		25.7	%

Deferred tax assets (liabilities) consist of the following (in thousands):



	At
	January 1, 2016			January 2, 2015
Tax credits	$	22,196		$	5,828
Net operating loss carryforwards	153,949			6,721
Inventories	6,543			3,335
Accrued expenses	13,138			4,338
Stock-based compensation	9,512			9,341
Other	38			1,659
Gross deferred tax assets	205,376			31,222
Less valuation allowance	(39,171		)	(10,709		)
Net deferred tax assets	166,205			20,513
Property, plant and equipment	(32,772		)	(2,646		)
Intangible assets	(347,896		)	(57,850		)
Convertible subordinated notes	(3,754		)	(5,006		)
Gross deferred tax liabilities	(384,422		)	(65,502		)
Net deferred tax liability	$	(218,217	)	$	(44,989	)
Presented as follows:
Current deferred tax asset	$	—		$	6,168
Current deferred tax liability	—			(588		)
Noncurrent deferred tax asset	3,587			2,626
Noncurrent deferred tax liability	(221,804		)	(53,195		)
Net deferred tax liability	$	(218,217	)	$	(44,989	)

In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes.” This ASU requires entities that present a classified balance sheet to classify all deferred income taxes as noncurrent assets or noncurrent liabilities. Previous accounting principles required an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified balance sheet. As permitted, during the fourth quarter of 2015, the Company elected to early adopt this ASU and has elected to prospectively apply its guidance. As a result, all deferred tax assets or liabilities shown in the Consolidated Balance Sheet as of January 1, 2016, are classified as noncurrent. Prior periods were not retrospectively adjusted for the adoption of this ASU.

As of January 1, 2016, the Company has the following carryforwards available:



Jurisdiction	Tax Attribute	Amount (in millions)		Begin to Expire
Federal	Net Operating Loss	$	386.2	2019
International	Net Operating Loss	42.2		2016
State	Net Operating Loss	298.7		2016
Federal	Foreign Tax Credit	17.0		2019
U.S. and State	R&D Tax Credit	2.6		2018
State	Investment Tax Credit	5.3		2016

Certain U.S. tax attributes are subject to limitations of Internal Revenue Code Section 382, which in general provides that utilization is subject to an annual limitation if an ownership change results from transactions increasing the ownership of certain shareholders or public groups in stock of a corporation by more than 50 percentage points over a three- year period. Such an ownership change occurred upon the consummation of the acquisition of Lake Region Medical. The Company does not anticipate that these limitations will affect utilization of these carryforwards prior to their expiration.

The Company’s federal net operating loss carryforward and certain other federal tax credits reported on its income tax returns included uncertain tax positions taken in prior years. Due to the application of the accounting for uncertain tax positions, the actual tax attributes are larger than the tax amounts for which a deferred tax asset is recognized for financial statement purposes.

In assessing the realizability of deferred tax assets, management considers, within each taxing jurisdiction, whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on the consideration of the weight of both positive and negative evidence, management has determined that a portion of the deferred tax assets as of January 1, 2016 and January 2, 2015 related to certain foreign tax credits, state investment tax credits, and foreign and state net operating losses will not be realized. The increase in the valuation allowance during 2015 is primarily attributable to the acquisition of Lake Region Medical.

The Company files annual income tax returns in the U.S., various state and local jurisdictions, and in various foreign jurisdictions. A number of years may elapse before an uncertain tax position, for which the Company has unrecognized tax benefits, is examined and finally settled. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, the Company believes that its unrecognized tax benefits reflect the most probable outcome. The Company adjusts these unrecognized tax benefits, as well as the related interest, in light of changing facts and circumstances. The resolution of an uncertain tax position, if recognized, would be recorded as an adjustment to the Provision (Benefit) for Income Taxes and the effective tax rate in the period of resolution.

Below is a summary of changes to the unrecognized tax benefit (in thousands):



	Year Ended
	January 1, 2016			January 2, 2015			January 3, 2014
Balance, beginning of year	$	2,411		$	1,858		$	970
Additions relating to business combinations	7,443			—			—
Additions based upon tax positions related to the current year	274			268			325
Additions related to prior period tax positions	163			510			651
Reductions relating to settlements with tax authorities	(550		)	(225		)	(88		)
Reductions as a result of a lapse of applicable statute of limitations	(470		)	—			—
Balance, end of year	$	9,271		$	2,411		$	1,858

Greatbatch and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The tax years that remain open and subject to tax audits varies depending on the tax jurisdiction. The Internal Revenue Service finalized an audit of the 2012 and 2013 U.S. Federal income tax returns of the Company in the first quarter of 2015. The impact to the income tax expense was not material. The U.S. subsidiary of the former Lake Region Medical is still subject to U.S. federal, state, and local examinations for the taxable years 2006 to 2014.

It is reasonably possible that a reduction of approximately $0.1 million of the balance of unrecognized tax benefits may occur within the next twelve months as a result of the lapse of the statute of limitations and/or audit settlements. As of January 1, 2016, approximately $8.5 million of unrecognized tax benefits would favorably impact the effective tax rate (net of federal impact on state issues), if recognized.

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of Provision (Benefit) for Income Taxes on the Consolidated Statement of Operations. During 2015, 2014, and 2013, the recorded amounts for interest and penalties, respectively, were not significant.

As of January 1, 2016, no taxes have been provided on the undistributed earnings of certain foreign subsidiaries amounting to $84 million. The Company intends to permanently reinvest these earnings. Quantification of the deferred tax liability associated with these undistributed earnings is not practicable.