Income Taxes

9 Months Ended

Jul. 04, 2020

INCOME TAXES

Income tax expense includes a provision for federal, state and foreign taxes based on the annual estimated effective tax rate applicable to us and our subsidiaries, adjusted for items which are considered discrete to the period.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was enacted and signed into law. U.S. GAAP rules require recognition of the tax effects of new legislation during the reporting period that includes the enactment date. The CARES Act, among other things, includes tax provision changes that benefit business entities and it makes certain technical corrections to the Tax Act. The tax relief measures for business include a five-year net operating loss (“NOL”) carryback, suspension of the annual deduction limitation for net operating losses generated in a tax year beginning after December 31, 2017, changes in the deductibility of interest, acceleration of alternative minimum tax credit refunds, payroll tax relief, and technical corrections allowing accelerated deductions for qualified improvement property. The CARES Act also provides other non-tax benefits, including employee retention credits, to assist businesses impacted by the pandemic. We are currently evaluating the income tax benefits of the CARES Act.

Our effective tax rate on loss before income taxes for the three and nine months ended July 4, 2020 reflected a provision at a 59.6% rate and a benefit at a 6.9% rate, respectively. Our effective tax rate for the three months ended July 4, 2020 was unfavorably impacted primarily due to the establishment of valuation allowances for certain deferred tax assets. Our effective tax rate for the nine months ended July 4, 2020 was unfavorably impacted primarily due to the impairment of goodwill that is not deductible for tax purposes and the establishment of valuation allowances for certain deferred tax assets. These unfavorable impacts were partially offset by the release of unrecognized tax benefits net of settlements and competent authority offsets, the geographic distribution of the impairments of certain long-lived assets that are deductible for tax purposes and the reduction in foreign earnings subject to foreign tax rates that are higher than the U.S. tax rates. Our

effective tax rate is based on forecasted annual results and these amounts may fluctuate significantly through the rest of the year as a result of the unpredictable impact of COVID-19 on our operating activities.

Our effective tax rate on income (loss) before income taxes for the three and nine months ended June 29, 2019 was a benefit at a 73.2% rate and a provision at a 6.2% rate, respectively. Our effective tax rate for the three months ended June 29, 2019 reflected the recognition of a tax benefit on a pre-tax loss. This loss was in part a result of the restructuring costs in the third quarter of fiscal 2019 in our German operations resulting from our decision to relocate the manufacturing and engineering of our High Power Fiber Lasers ("HPFL") products at our Hamburg, Germany facility to our Tampere, Finland location and exit a portion of our HPFL business. A benefit in a high tax jurisdiction increases the effective tax rate on a loss. Furthermore, revision of the estimated annual effective tax rate in the three months ended June 29, 2019 resulted in additional benefit to the period and cumulatively offset tax expense recorded through the previous quarter. Our effective tax rate for the nine months ended June 29, 2019 was lower than the U.S. federal tax rate of 21.0% primarily due to the tax benefit from German losses subject to higher tax rates than U.S. tax rates, the excess tax benefits from restricted stock unit vesting, the benefit of federal research and development tax credits and our Singapore and South Korea tax exemptions. These amounts were partially offset by an accrual for foreign withholding taxes on certain current year foreign earnings not considered permanently reinvested, stock-based compensation not deductible for tax purposes and limitations on the deductibility of compensation under IRC Section 162(m).

The following table summarizes the activity related to our gross unrecognized tax benefits for the nine months ended July 4, 2020 (amounts in thousands):


	Nine Months Ended
	July 4, 2020
Balance as of the beginning of the year	$	58,111
Increases related to acquisitions	—
Tax positions related to current year:
Additions	1,238
Reductions	—
Tax positions related to prior year:
Additions	—
Reductions	—
Settlements	—
Lapses in statutes of limitations	(681)
Decrease in unrecognized tax benefits based on tax audit results	(19,463)
Foreign currency revaluation adjustment	247
Balance as of end of period	$	39,452

The unrecognized tax benefits indicated in the table above is primarily due to the close of certain German tax audits. As of July 4, 2020, the total amount of gross interest and penalties accrued was $2.7 million and is classified as long-term taxes payable in the consolidated balance sheets.