Note 7 Income Taxes

Pretax income (loss) was generated from the following sources for each of the three fiscal years in the period ended October 2, 2016 (amounts in millions):



	2016			2015			2014
Domestic	$	(112.5	)	$	(14.9	)	$	(62.7	)
Foreign	87.1			111.8			86.6
Total	$	(25.4	)	$	96.9		$	23.9

The provision for income taxes consisted of the following components for each of the three fiscal years in the period ended October 2, 2016 (amounts in millions):



	2016			2015		2014
Current:
State	0.2			0.2		0.3
Foreign	4.3			4.2		3.9
Deferred:
Federal	4.1			4.6		(6.5		)
State	0.2			—		(0.2		)
Foreign	(1.6		)	3.3		3.3
	$	7.2		$	12.3	$	0.8

We recorded a provision for income taxes of $7.2 million on pretax loss of $25.4 million in 2016 compared to a provision for income taxes of $12.3 million and $0.8 million on pre-tax income of $96.9 million and $23.9 million in 2015 and 2014, respectively. 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 deferred tax liabilities that will not provide future sources of income to realize deferred tax assets, and 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 2016 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 2016 and 2015, we increased the valuation allowance by $205.9 million and $31.6 million, respectively, which primarily related to increases in net deferred tax assets from current year activity that are not realizable and a net increase due to acquired deferred tax assets net of liabilities. During 2016, the increase was partially offset by a change in the expected realizability of certain deferred tax assets that previously had a full valuation allowance.

We have federal and state net operating losses ("NOLs") of $671.7 million and $713.6 million, respectively, that both begin expiring in 2017. We have foreign NOLs of approximately $213.5 million that begin expiring in 2017. We have federal and state research and experimentation credits of $125.5 million and $111.2 million, respectively. We have foreign research and experimentation credits of approximately $139.6 million that begin expiring in 2017 and incentive deductions of $26.2 million that carry forward indefinitely. We have federal foreign tax credits of approximately $38.4 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 $9.0 million that begin expiring in 2017. We have federal and state capital loss carry forwards of $0.6 million that will begin expiring in 2019. The utilization of NOLs and credits acquired through an acquisition may be subject to limitations due to change in control.

In December 2015, the U.S. government permanently reinstated the federal research and development tax credit retroactively to January 1, 2015. We are currently in a loss position for U.S. income tax purposes with a full valuation allowance; therefore, no benefit has been recognized for the period ended October 2, 2016.

We have been granted a tax holiday in our subsidiary in Malaysia that has the effect of reducing its net income tax rate to zero in that jurisdiction. The tax holiday was granted in 2009 and is effective through December 2019, subject to continued compliance with the tax holiday's requirements.

No provision has been made for future income taxes on undistributed earnings of foreign operations (except for certain 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 2016 and 2015, these undistributed earnings aggregated approximately $793.8 million and $471.2 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 October 2, 2016 (amounts in millions):



	2016			2015			2014
Tax computed at federal statutory rate	$	(8.9	)	$	33.9		$	8.4
State taxes, net of federal impact	0.5			(2.1		)	(1.1		)
Foreign income taxed at different rates	(7.0		)	(33.1		)	(24.7		)
Tax credits and incentives	(10.7		)	(5.1		)	(2.8		)
Stock award compensation	(4.6		)	1.3			1.2
Unrecognized tax benefits	30.6			3.7			1.4
Sale/transfer of assets	(45.6		)	—			—
U.S. tax on foreign income	2.0			1.3			4.1
Non-deductible permanent items	6.2			0.9			0.9
Pre-acquisition loss carry forwards	—			—			(11.4		)
Expiration of tax attributes	5.0			—			2.9
Investment in foreign subsidiaries	2.7			(0.5		)	3.6
Withholding taxes	1.1			(0.3		)	0.3
Other differences, net	0.6			(1.0		)	0.4
Valuation allowance	35.3			13.3			17.6
	$	7.2		$	12.3		$	0.8

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



	October 2, 2016			September 27, 2015
Accounts receivable, net	$	2.1		$	1.9
Inventories	18.8			17.5
Accrued employee benefit expenses	10.0			8.4
Net operating losses	216.1			164.6
Tax credits and incentives	238.0			153.5
Accrued other expenses	10.3			9.7
Deferred equity compensation	20.0			18.9
Property and equipment, net	4.4			13.8
Debt issuance costs	20.9			0.3
Other assets	12.3			11.1
Total deferred tax assets	552.9			399.7
Intangible assets	(176.8		)	(137.1		)
Investment in foreign subsidiaries	(2.5		)	—
Total deferred tax liabilities	(179.3		)	(137.1		)
Less valuation allowance	(456.4		)	(250.6		)
	$	(82.8	)	$	12.0

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



	October 2, 2016			September 27, 2015			September 28, 2014
Beginning gross unrecognized tax benefits	$	121.8		$	97.7		$	69.6
Additions based on tax positions related to the current year	33.1			3.5			2.4
Additions based on current year acquisitions	132.6			16.2			28.9
Additions based on tax positions of prior years	36.3			4.8			0.4
Reductions for lapses and settlements	(4.8		)	(0.4		)	(3.6		)
Ending gross unrecognized tax benefit	$	319.0		$	121.8		$	97.7

We recognize interest and penalties accrued related to unrecognized tax benefits in tax expense. During the years ended October 2, 2016, September 27, 2015, and September 28, 2014, we recognized $3.7 million, $0.7 million and $0.7 million, respectively in interest and penalties. The cumulative interest and penalties at October 2, 2016 and September 27, 2015 were $42.0 million and $7.4 million, respectively.

Unrecognized tax benefits of $114.9 million (including interest) at October 2, 2016 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 $17.2 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 2015 generally remain subject to examination by federal and most state tax authorities. In significant foreign jurisdictions, the 2007 to 2015 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. The Internal Revenue Service is currently examining our income tax returns for tax years 2007 through 2014 and the Canada Revenue Agency is currently examining income tax returns assumed from the PMC acquisition for tax years 2007 through 2014. Both examinations primarily relate to transfer pricing matters. Management believes that our 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 our tax audits are resolved in a manner not consistent with management's expectations, we would be required to adjust our provision for income tax in the period such resolution occurs. While we believe our reported results are appropriate, any significant adjustments could have a material adverse effect on our results of operations, cash flows and financial position if not resolved within management expectations.