Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Oct. 03, 2015

INCOME TAXES

The provision for income taxes consists of the following (in thousands):



	Period ended
	October 3, 2015		September 27, 2014			September 28, 2013			June 29, 2013
Current:
Federal	$	—	$	—		$	—		$	40
State	60		79			—			35
Foreign	186		158			44			145
Total current	$	246	$	237		$	44		$	220
Deferred:
Federal	$	1,320	$	(5,807	)	$	(933	)	$	499
State	439		(923		)	(156		)	3
Total deferred	1,759		(6,730		)	(1,089		)	502
Provision for (benefit from) income taxes	$	2,005	$	(6,493	)	$	(1,045	)	$	722

For financial reporting purposes our income (loss) before provision for (benefit from) income taxes includes the following components (in thousands):



	Period ended
	October 5, 2015		September 27, 2014			September 28, 2013			June 29, 2013
United States	$	3,434	$	(16,832	)	$	(2,827	)	$	1,468
Foreign	6,664		9,379			2,350			8,438
	$	10,098	$	(7,453	)	$	(477	)	$	9,906

A reconciliation between actual provision for (benefit from) income taxes and the provision for income taxes computed using the federal statutory income tax rate of 34.0% is as follows (in thousands):



	Period ended
	October 3, 2015			September 27, 2014			September 28, 2013			June 29, 2013
Income tax expense at the statutory rate	$	3,433		$	(2,533	)	$	(162	)	$	3,371
State income tax expense, net of federal income tax effect	374			(893		)	(147		)	(11		)
Rate difference and nondeductible items in foreign jurisdictions	(30		)	(55		)	(15		)	(16		)
Impact of foreign earnings in tax-free zone	(2,168		)	(3,098		)	(756		)	(2,754		)
Valuation allowance adjustments	—			4			—			75
Nondeductible compensation	335			—			—			—
Nondeductible amortization and other permanent differences	81			76			25			100
Other	(20		)	6			10			(43		)
Provision for (benefit from) income taxes	$	2,005		$	(6,493	)	$	(1,045	)	$	722

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. We have not provided deferred taxes on the $59.6 million of undistributed earnings of our foreign subsidiaries where the earnings are considered to be permanently reinvested. The undistributed earnings would become taxable in the United States if we decided to repatriate earnings for business, tax or foreign exchange reasons. If we made that decision, U.S. income taxes would be provided for net of foreign taxes already paid. The determination of the unrecognized deferred tax liability associated with these unremitted earnings is not practical at this time.

Significant components of our deferred tax assets and liabilities are as follows (in thousands):



	October 3, 2015			September 27, 2014
Deferred tax assets:
Federal net operating loss carryforwards	$	7,842		$	7,219
State net operating loss carryforwards	2,362			2,445
Charitable donation carryforward	28			28
Derivative — interest rate contracts	268			168
Alternative minimum tax credit carryforward	99			49
Currently nondeductible accruals	6,029			6,747
Gross deferred tax assets	16,628			16,656
Less valuation allowance — state net operating loss	(202		)	(201		)
Net deferred tax assets	16,426			16,455

Deferred tax liabilities:
Depreciation	(2,941		)	(2,792		)
Goodwill and intangibles	(6,024		)	(4,793		)
Other	(167		)	(117		)
Gross deferred tax liabilities	(9,132		)	(7,702		)
Net deferred tax asset	7,294			8,753
Less non-current net deferred tax liabilities	7			3,399
Current deferred tax asset	$	7,301		$	12,152

As of October 3, 2015, and September 27, 2014, we had federal net operating loss carryforwards of approximately $23.1 million and $21.2 million, respectively. The deferred tax asset resulting from federal net operating losses for October 3, 2015, and September 27, 2014, were $7.8 million and $7.2 million, respectively. There is no carryback opportunity for these losses and the carryforwards expire at various intervals from 2033 to 2035. We determined that no valuation allowance is required, as we expect that all such carryforwards more likely than not will be realized within statutory periods of carryover and utilization.

As of October 3, 2015, and September 27, 2014, we had state net operating loss carryforwards of approximately $58.5 million and $52.7 million, respectively. These carryforwards expire at various intervals from 2019 through 2035. Our deferred tax asset related to state net operating loss carryforwards is reduced by a valuation allowance to result in deferred tax assets we consider more likely than not to be realized. There was no significant change in the total valuation allowance for the year ended October 3, 2015.

For both federal and state purposes, the ultimate realization of deferred tax assets depends upon the generation of future taxable income or tax planning strategies during the periods in which those temporary differences become deductible or when the carryforwards are available.

FASB Codification No. 740, Income Taxes (“ASC 740”) requires that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not (i.e., a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Accrued interest and penalties related to unrecognized tax benefits would also be recorded. We did not have any material unrecognized tax benefits as of October 3, 2015, or September 27, 2014.

In the December quarter of fiscal year 2013, the Internal Revenue Service commenced an examination of our U.S. income tax returns for our fiscal year 2010 (tax year 2009). Upon filing the carryback of our net operating losses from fiscal year 2012 to our fiscal years 2011 and 2010 (tax years 2010 and 2009) and receiving a cash refund of the taxes previously paid, the Internal Revenue Service expanded the examination to include our U.S. income tax returns for our 2011 and 2012 fiscal years. This examination was concluded in January 2014, and no tax deficiency was found. Based on the conclusion of the audit, these returns are no longer subject to further examination by the Internal Revenue Service. However, net operating loss carryforwards remain subject to examination to the extent they are carried forward and impact a year that is open to examination by taxing authorities. The tax years 2011 to 2013 according to statute and with few exceptions, remain open to examination by various state, local and foreign jurisdictions. Tax years 2012 to 2013 remain open for examination for federal purposes.