Note 7 Income Taxes

Pretax income (loss) was generated from the following sources for each of the three fiscal years in the period ended September 27, 2015 (amounts in millions):



	2015			2014			2013
Domestic	$	(14.9	)	$	(62.7	)	$	(38.7	)
Foreign	111.8			86.6			94.8
Total	$	96.9		$	23.9		$	56.1

The provision for income taxes consisted of the following components for each of the three fiscal years in the period ended September 27, 2015 (amounts in millions):



	2015		2014			2013
Current:
Federal	$	—	$	—		$	0.8
State	0.2		0.3			0.8
Foreign	4.2		3.9			3.1
Deferred:
Federal	4.6		(6.5		)	2.3
State	—		(0.2		)	1.4
Foreign	3.3		3.3			4.0
	$	12.3	$	0.8		$	12.4

We recorded a provision for income taxes of $12.3 million on pretax income of $96.9 million in 2015 compared to a provision for income taxes of $0.8 million on pre-tax income of $23.9 million in 2014, and a provision for income taxes of $12.4 million on pretax income of $56.1 million in 2013. For each of these years, the provisions for income taxes were primarily due to the tax provision on profitable entities in foreign jurisdictions, U.S. tax provision relating to amortization of indefinite lived assets for tax purposes, with an offset in 2014 by the release of valuation allowance due to additional deferred tax liabilities acquired through purchase accounting. We had cumulative operating losses for the three years ended in 2015 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 it is more likely than not the tax benefits will not be realized in the future.

During 2015 and 2014, we increased the valuation allowance by $31.6 million and $8.9 million, respectively. During 2015, this increase was primarily related to continued losses in various jurisdictions and an increase due to deferred tax assets of Vitesse that were not more likely that not realizable as of the acquisition date. During 2014, this increase was primarily related to continued losses in various jurisdictions, which is partially offset by a reduction in Microsemi valuation allowance as a result of net deferred tax liabilities of companies acquired during 2014.

We have federal and state net operating losses ("NOLs") of $366.4 million and $253.1 million, respectively, that begin expiring in 2018 and 2016, respectively. Of the total NOL carryforward, $51.6 million related to the excess tax benefit from employee stock compensation and stockholders' equity will increase by $51.6 million if and when such excess tax benefits are ultimately realized. We have foreign NOLs of $283.7 million that begin expiring in 2016. We have federal and state research and experimentation credits of $52.3 million and $91.9 million, respectively, that begin expiring in 2017 and 2016, respectively. We have foreign research and experimentation credits of $81.9 million that begin expiring in 2017 and incentive deductions of $16.2 million that carry forward indefinitely. We have federal foreign tax credits of $4.7 million that begin expiring in 2021. We have federal and state enterprise zone credits, federal and state investment tax credits, and alternative minimum tax credits totaling $8.9 million that began expiring in 2015. 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 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 2015 and 2014, these undistributed earnings aggregated $471.2 million and $430.4 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 27, 2015 (amounts in millions):



	2015			2014			2013
Tax computed at federal statutory rate	$	33.9		$	8.4		$	19.6
State taxes, net of federal impact	(2.1		)	(1.1		)	(1.6		)
Foreign income taxed at different rates	(33.1		)	(24.7		)	(20.5		)
Tax credits and incentives	(5.1		)	(2.8		)	(5.4		)
Stock award compensation	1.3			1.2			0.2
Unrecognized tax benefits	3.7			1.4			(0.4		)
U.S. tax on foreign income	1.3			4.1			1.4
Income tax return to provision	—			(0.2		)	(0.9		)
Non-deductible permanent items	0.9			0.9			0.2
Pre-acquisition loss carry forwards	—			(11.4		)	—
Expiration of tax attributes	—			2.9			—
Foreign declared dividend	(0.5		)	3.6			—
Withholding taxes	(0.3		)	0.3			0.7
Other differences, net	(1.0		)	0.6			0.3
Valuation allowance	13.3			17.6			18.8
	$	12.3		$	0.8		$	12.4

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



	September 27, 2015			September 28, 2014
Accounts receivable, net	$	1.9		$	1.2
Inventories	17.5			14.5
Accrued employee benefit expenses	8.4			8.8
Net operating losses	164.6			149.6
Tax credits and incentives	153.5			144.2
Accrued other expenses	9.7			11.4
Deferred equity compensation	18.9			16.7
Property and equipment, net	13.8			3.1
Other assets	11.4			11.8
Total deferred tax assets	399.7			361.3
Intangible assets	(137.1		)	(127.2		)
Foreign declared dividend	—			(3.6		)
Total deferred tax liabilities	(137.1		)	(130.8		)
Less valuation allowance	(250.6		)	(218.9		)
	$	12.0		$	11.6

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



	September 27, 2015			September 28, 2014			September 29, 2013
Beginning gross unrecognized tax benefits	$	97.7		$	69.6		$	58.0
Additions based on tax positions related to the current year	3.5			2.4			3.2
Additions based on current year acquisitions	16.2			28.9			—
Additions based on tax positions of prior years	4.8			0.4			12.9
Reductions based on tax positions of prior years	—			—			(2.8		)
Reductions for lapses and settlements	(0.4		)	(3.6		)	(1.7		)
Ending gross unrecognized tax benefit	$	121.8		$	97.7		$	69.6

We recognize interest and penalties accrued related to unrecognized tax benefits in tax expense. During the years ended September 27, 2015, September 28, 2014, and September 29, 2013, we recognized $0.7 million, $0.7 million and $0.1 million, respectively. The cumulative interest and penalties at September 27, 2015 and September 28, 2014 were $7.4 million and $6.6 million, respectively.

Unrecognized tax benefits of $62.5 million (including interest) at September 27, 2015 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 $28.3 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 2014 generally remain subject to examination by federal and most state tax authorities. In significant foreign jurisdictions, the 2011 to 2014 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 27, 2015, the IRS has raised questions primarily related to transfer pricing. Management believes the Company's position is appropriate and 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.