INCOME TAXES

Pretax income (loss) was generated from the following sources for each of the three fiscal years in the period ended September 29, 2013 (amounts in thousands):



	2013			2012			2011
Domestic	$	(38,709	)	$	(88,964	)	$	(40,359	)
Foreign	94,772			74,239			62,408
Total	$	56,063		$	(14,725	)	$	22,049

The provision (benefit) for income taxes consisted of the following components for each of the three fiscal years in the period ended September 29, 2013 (amounts in thousands):



	2013		2012			2011
Current:
Federal	$	812	$	(16	)	$	314
State	806		228			10
Foreign	3,115		3,458			8,324
Deferred:
Federal	2,306		5,061			(25,962		)
State	1,385		2,255			(1,609		)
Foreign	3,965		3,964			(14,758		)
	$	12,389	$	14,950		$	(33,681	)

We recorded a provision for income taxes of $12.4 million on pretax income of $56.1 million in 2013 compared to a provision for income taxes of $15.0 million on pre-tax loss of $14.7 million in 2012. During 2013 and 2012, we generated tax expense of $12.4 million and $15.0 million, respectively, primarily due to the tax provision on profitable entities in foreign jurisdictions and U.S. tax provision relating to deferred tax liabilities that will not provide future sources of income to realize deferred tax assets. We had cumulative operating losses for the three years ended in 2013 for our U.S. operations and several foreign operations and accordingly, have provided a full valuation allowance on certain of our U.S. and foreign net deferred tax assets as we have determined that it is more likely than not that the tax benefits will not be realized in the future.

During 2013 we increased the valuation allowance by $13.9 million, which primarily related to deductions for intangible (non-goodwill) amortization. During 2012 we increased the valuation allowance by $194.7 million, which primarily related to the acquisition of Microsemi - CMPG during the quarter ended January 1, 2012, and the recording of the deferred tax assets related to the acquisition. During 2011 we released the remaining valuation allowance related to our Israel operation, based on evaluation of key positive and negative evidence including the history of substantial losses in past years but cumulative income for the past three year period, and the indefinite carryforward period for the Israeli net operating loss carryforwards which are the principal component of our deferred tax assets in Israel.

We have federal and state net operating losses (“NOLs”) of approximately $256.4 million and $297.8 million, respectively, that begin expiring in 2021 and 2014, respectively. Of the total NOL carryforward, $19.9 million related to the excess tax benefit from employee stock compensation and stockholders' equity will increase by $19.9 million if and when such excess tax benefits are ultimately realized. We have foreign NOLs of approximately $250.3 million that carry forward indefinitely. We have federal and state research and experimentation credits of approximately $28.2 million and $44.4 million, respectively. We have foreign research and experimentation credits of approximately $81.8 million and incentive deductions of approximately $72.7 million. We have federal foreign tax credits of approximately $2.8 million. We have federal and state enterprise zone credits, state investment tax credits, and alternative minimum tax credits totaling $2.4 million that carry forward indefinitely. The utilization of NOLs and credits acquired through an acquisition may be subject to limitations due to change in control.

No provision has been made for future income taxes on undistributed earnings of U.S. and foreign operations (except for insignificant jurisdictions) since they have been indefinitely reinvested in these operations. Determination of the amount of unrecognized deferred tax liability for temporary differences related to these undistributed earnings is not practicable, as such liability is dependent upon a number of factors, including foreign tax credit position that would exist at the time any remittance would occur. At the end of fiscal years 2013 and 2012, these undistributed earnings aggregated approximately $357.4 million and $294.7 million, respectively.

The following is a reconciliation of income tax computed at the federal statutory rate to our actual tax expense for each of the three fiscal years in the period ended September 29, 2013 (amounts in thousands):



	2013			2012			2011
Tax computed at federal statutory rate	$	19,622		$	(5,153	)	$	7,717
State taxes, net of federal impact	(1,468		)	(3,244		)	(7,023		)
Foreign income taxed at different rates	(21,705		)	(18,207		)	(9,830		)
Tax credits and incentives	(5,418		)	(1,096		)	(4,234		)
Stock award compensation	197			295			347
Unrecognized tax benefits	(392		)	1,981			1,541
Executive compensation	—			—			444
U.S. tax on foreign income	1,374			18,150			—
Income tax return to provision	(875		)	(3,153		)	55
Non-deductible permanent items	167			1,682			2,748
Pre-acquisition loss carryforwards	1,182			(4,043		)	(2,298		)
Withholding taxes	700			—			—
Other differences, net	164			9			(261		)
Valuation allowance	18,841			27,729			(22,887		)
	$	12,389		$	14,950		$	(33,681	)

The tax effected deferred tax assets (liabilities) are comprised of the following components (amounts in thousands):



	September 29, 2013			September 30, 2012
Accounts receivable, net	$	945		$	925
Inventories	9,264			12,109
Accrued employee benefit expenses	4,230			5,230
Net operating losses	140,555			127,603
Tax credits and incentives	140,069			137,628
Accrued other expenses	6,287			7,776
Deferred equity compensation	14,845			14,111
Property and equipment, net	3,242			3,152
Other assets	9,797			17,155
Total deferred tax assets	329,234			325,689
Intangible assets	(100,050		)	(101,250		)
Total deferred tax liabilities	(100,050		)	(101,250		)
Less valuation allowance	(210,073		)	(196,147		)
	$	19,111		$	28,292

Certain amounts in effective tax rate reconciliation and the deferred tax assets (liabilities) disclosures for 2012 have been reclassified. There was no effect on the total income tax expense or net deferred tax assets.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (amounts in thousands):



	September 29, 2013			September 30, 2012			October 2, 2011
Beginning gross unrecognized tax benefits	$	58,016		$	32,370		$	21,719
Additions based on tax positions related to the current year	3,238			12,786			2,665
Additions based on current year acquisitions	—			10,615			8,164
Additions based on tax positions of prior years	12,845			2,605			382
Reductions based on tax positions of prior years	(2,805		)	(169		)	—
Reductions for lapses and settlements	(1,723		)	(191		)	(560		)
Ending gross unrecognized tax benefit	$	69,571		$	58,016		$	32,370

We recognize interest and penalties accrued related to unrecognized tax benefits in tax expense. During the years ended September 29, 2013, September 30, 2012, and October 2, 2011, we recognized approximately $0.0 million, $2.0 million, and $0.7 million, respectively, in interest and penalties. The cumulative interest and penalties at September 29, 2013, September 30, 2012, and October 2, 2011 were $5.9 million, $6.0 million, and $4.2 million, respectively.

Unrecognized tax benefits of $58.9 million (including interest) at September 29, 2013 would impact the effective tax rate if recognized after the valuation allowance has been released. We anticipate a decrease in gross unrecognized tax benefits of approximately $4.2 million within the next twelve months based on federal, state, and foreign expirations in various jurisdictions.

We file U.S. federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitations. Fiscal years 2007 to 2013 generally remain subject to examination by federal and most state tax authorities. In significant foreign jurisdictions, the 2009 to 2013 tax years generally remain subject to examination by tax authorities. We establish liabilities for possible assessments by tax authorities resulting from known tax exposures including, but not limited to, international tax issues and certain tax credits. We are currently undergoing an Internal Revenue Service examination as well as certain state examinations. There have been no significant proposed adjustments to date. As of September 29, 2013, the IRS has raised questions primarily related to transfer pricing. Management believes that the Company's position is appropriate and that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company's tax audits are resolved in a manner not consistent with management's expectations, the Company would be required to adjust its provision for income tax in the period such resolution occurs. While the Company believes its reported results are accurate, any significant adjustments could have a material adverse effect on the Company's results of operations, cash flows and financial position if not resolved within expectations.