Income Taxes

12 Months Ended

Sep. 27, 2019

INCOME TAXES

Deferred income taxes reflect the net effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. The components of our deferred tax assets and liabilities are as follows (in thousands):



	September 27, 2019			September 28, 2018
Deferred tax assets (liabilities):
Federal and foreign net operating losses and credits	$	263,199		$	321,982
Intangible assets	9,887			(94,929		)
Property and equipment	(1,473		)	(6,293		)
Other non-current deferred tax assets	16,933			13,850
Deferred compensation	—			3,810
Deferred gain	—			6,575
Interest	7,170			—
Valuation allowance	(252,536		)	(243,112		)
Total deferred tax asset	$	43,180		$	1,883

As of September 27, 2019, we had $923.4 million of gross federal net operating loss ("NOL") carryforwards consisting of $479.2 million relating to the AppliedMicro Acquisition, $158.9 million relating to our acquisition of Mindspeed Technologies, Inc. in 2013, $26.2 million relating to our acquisition of BinOptics Corporation in 2014 and $259.1 million relating to losses generated by MACOM. The federal NOL carryforwards will expire at various dates through 2037 for losses generated prior to the tax period ended September 28, 2018. For losses generated during the tax period ended September 28, 2018 and future years, the NOL carryforward period is infinite. The reported net operating loss carryforward includes any limitation under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, which applies to an ownership change as defined under Section 382.

The domestic and foreign income (loss) from continuing operations before taxes were as follows (in thousands):



	Fiscal Years
	2019			2018			2017
United States	$	(458,617	)	$	(145,851	)	$	(111,432	)
Foreign	35,464			(9,384		)	61,927
(Loss) income from operations before income taxes	$	(423,153	)	$	(155,235	)	$	(49,505	)

The components of the (benefit) provision for income taxes are as follows (in thousands):



	Fiscal Years
	2019			2018			2017
Current:
Federal	$	70		$	(6,876	)	$	100
State	36			(160		)	225
Foreign	876			1,642			7,307
Current provision (benefit)	982			(5,394		)	7,632
Deferred:
Federal	(21,560		)	75,428			(42,637		)
State	12,907			(15,526		)	(4,037		)
Foreign	(41,108		)	(24,652		)	(466		)
Change in valuation allowance	9,424			(51,329		)	140,419
Deferred (benefit) provision	(40,337		)	(16,079		)	93,279
Total (benefit) provision	$	(39,355	)	$	(21,473	)	$	100,911

We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making this determination, we consider available positive and negative evidence and factors that may impact the valuation of our deferred tax asset including results of recent operations, future reversals of existing taxable temporary differences, projected future taxable income, and tax-planning strategies. A significant piece of objective negative evidence evaluated was the cumulative U.S. loss incurred over the three-year period ended September 27, 2019 which we believe limited our ability to consider other subjective evidence, such as our projections for future growth.

Certain transaction- and integration-related expenses incurred in the U.S., associated primarily with the AppliedMicro Acquisition during the three months ended March 31, 2017, resulted for the first time in significant negative objective evidence in the form of adjusted cumulative losses in the U.S. over the past three-year period. This resulted in our determination that there was not sufficient objectively verifiable positive evidence to offset this negative objective evidence and we concluded that a full valuation allowance totaling $93.5 million was required for our U.S. deferred tax assets as of September 29, 2017. In addition, a full valuation allowance was established against the U.S. deferred tax assets acquired in connection with the AppliedMicro Acquisition.

The $252.5 million of valuation allowance as of September 27, 2019 relates primarily to federal and state NOLs, tax credit carryforwards and a partial valuation allowance on tax credits in Canada of $19.0 million whose recovery is not considered more likely than not. The $243.1 million of valuation allowance as of September 28, 2018 related primarily to federal and state NOLs, tax credit carryforwards and a partial valuation allowance on tax credits in Canada of $13.6 million whose recovery is not considered more likely than not. The change during the fiscal year ended September 27, 2019 of $9.4 million primarily relates to the reduction of our NOLs due to section 382 limitations, the changes in our temporary differences, and the lower U.S federal tax rate.

Our effective tax rates differ from the federal and statutory rate as follows:



	Fiscal Years
	2019	2018	2017
Federal statutory rate	21.0%	24.5%	35.0%
Foreign rate differential	1.6	5.1	31.9
State taxes net of federal benefit	0.9	0.8	0.2
Warrant liabilities	—	4.4	(1.8)
Change in valuation allowance	(2.4)	34.0	(270.0)
Research and development credits	1.4	9.0	12.8
Provision to return adjustments	0.3	8.3	(4.0)
Section 382 adjustment	(19.3)	—	—
Nondeductible compensation expense	(0.6)	1.4	(4.1)
Global Intangible Low Taxed Income	(2.9)	—	—
Nondeductible legal fees	—	0.9	(3.9)
2017 tax reform	—	(73.7)	—
Intra-entity license transfer	9.4	—	—
Other permanent differences	(0.1)	(0.9)	0.1
Effective income tax rate	9.3%	13.8%	(203.8)%

For fiscal years 2019, 2018 and 2017, the effective tax rates on $423.2 million, $155.2 million and $49.5 million, respectively, of pre-tax loss from continuing operations were 9.3%, 13.8% and (203.8)%, respectively. For fiscal year 2019, the effective tax rate was primarily impacted by a change in our NOL carryforward due to an adjustment in our Section 382 limitation from a prior period acquisition and the immediate recognition of the current and deferred income tax effects totaling $39.8 million from an intra-entity transfer of a license for intellectual property to a higher taxed jurisdiction that received a tax basis step-up. For fiscal year 2018, the effective tax rate was primarily impacted by the Tax Cuts and Jobs Act (the "Tax Act"). The effective income tax rates for fiscal years 2019, 2018 and 2017 were also impacted by a lower income tax rate in many foreign jurisdictions in which our foreign subsidiaries operate, changes in valuation allowance, research and development tax credits, and a fair market value adjustment of warrant liabilities.

All earnings of foreign subsidiaries, other than our M/A-COM Technology Solutions International Limited Cayman Islands subsidiary ("Cayman Islands subsidiary"), are considered indefinitely reinvested for the periods presented. During fiscal year 2019 we changed our position for our Cayman Islands subsidiary to no longer have its earnings permanently reinvested. Although a foreign subsidiary would typically have to accrue for foreign withholding tax liabilities associated with undistributed earnings, Cayman Islands has no withholding tax under domestic law, therefore, we did not accrue for foreign withholding tax. During fiscal year 2019 we finalized our calculation of the one-time deemed repatriation of gross foreign earnings and profits, totaling $156.8 million, which resulted in approximately $86.7 million in U.S. taxable income for the year ended September 28, 2018 with Grand Cayman and Ireland accounting for $59.7 million and $25.6 million, respectively. Due to the fact that we are in a full U.S. valuation allowance, this one-time deemed repatriation had no impact on our tax expense for fiscal year 2018.

Our fiscal year 2019 tax provision incorporated changes required by the Tax Act. Some of these changes include a new limitation on the deductible interest expense, inclusion of Global Intangible Low Taxed Income earned by controlled foreign corporations, computation of the new base erosion anti-abuse minimum tax, repealing the performance-based compensation exception to section 162(m) and revising the definition of a covered employee.

Activity related to unrecognized tax benefits is as follows (in thousands):



	Amount
Balance - September 29, 2017	(1,670		)
Additions based on tax positions	—
Reductions based on tax positions	1,370
Balance - September 28, 2018	$	(300	)
Additions based on tax positions	—
Reductions based on tax positions	—
Balance at September 27, 2019	$	(300	)

The balance of the unrecognized tax benefit as of September 27, 2019, is included in other long-term liabilities in the accompanying Consolidated Balance Sheets. The entire balance of unrecognized tax benefits, if recognized, will reduce income tax expense.

It is our policy to recognize any interest and penalties accrued related to unrecognized tax benefits in income tax expense. During fiscal year 2019, we did not make any payment of interest and penalties. There was nothing accrued in the Consolidated Balance Sheets

for the payment of interest and penalties at September 27, 2019, as the remaining unrecognized tax benefits would only serve to reduce our current federal and state NOL carryforwards, if ultimately recognized.

A summary of the fiscal tax years that remain subject to examination, as of September 27, 2019, for the Company’s significant tax jurisdictions are:



Jurisdiction	Tax Years Subject to Examination
United States—federal	2015 - forward
United States—various states	2015 - forward
Ireland	2016 - forward

Generally, we are no longer subject to federal income tax examinations for years before 2015, except to the extent of loss and tax credit carryforwards from those years.