Income Taxes

6 Months Ended

Jun. 26, 2011

Income Taxes

Income Taxes

Note 8. INCOME TAXES

The effective tax rate for the twenty-six weeks ended June 26, 2011 was 302.9% as compared to 26.2% for the twenty-six weeks ended June 27, 2010. The increase in the 2011 tax rate was due to the decrease in year-to-date pretax income.

In accordance with ASC 740, "Accounting for Income Taxes", we evaluate our deferred income taxes quarterly to determine if valuation allowances are required or should be adjusted. ASC 740 requires that companies assess whether valuation allowances should be established against their deferred tax assets based on all available evidence, both positive and negative, using a "more likely than not" standard. In the assessment for a valuation allowance, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, the Company's experience with loss carryforwards not expiring and tax planning alternatives. The Company operates and derives income across multiple jurisdictions. As the geographic footprint of the business changes, we may encounter losses in jurisdictions that have been historically profitable, and as a result might require additional valuation allowances to be recorded against certain deferred tax asset balances. At June 26, 2011 and December 26, 2010, the Company had net deferred tax assets of $60.9 million and $61.5 million, respectively.

During 2010 negative evidence arose in the form of cumulative losses in two material jurisdictions with net deferred tax assets of $41.8 million and $10.1 million, respectively. The Company considered all available evidence and was able to conclude on a more likely than not basis that the effects of our commitment to specific tax planning actions provided a sufficient amount of positive evidence to support the continued benefit of the jurisdictions' deferred tax assets. The Company is committed to implementing tax planning actions, when deemed appropriate, in jurisdictions that experience losses in order to realize deferred tax assets prior to their expiration.

The total amount of gross unrecognized tax benefits that, if recognized, would affect the effective tax rate was $12.2 million and $12.8 million at June 26, 2011 and December 26, 2010, respectively. Penalties and tax-related interest expense are reported as a component of income tax expense. During the six months ended June 26, 2011, we did not recognize any interest and penalties expense compared to an interest and penalties expense of $0.4 million during the six months ended June 27, 2010, in the Statement of Operations. At June 26, 2011 and December 26, 2010, the Company had accrued interest and penalties related to unrecognized tax benefits of $3.6 million and $3.6 million, respectively.

We file income tax returns in the U.S. and in various states, local and foreign jurisdictions. We are routinely examined by tax authorities in these jurisdictions. It is possible that these examinations may be resolved within twelve months. Due to the potential for resolution of federal, state and foreign examinations, and the expiration of various statutes of limitation, it is reasonably possible that the gross unrecognized tax benefits balance may decrease within the next twelve months by a range of $3.4 million to $5.3 million.

We are currently under audit in the following major jurisdictions: United States 2007 – 2008, Germany 2002 – 2005, Finland 2005 – 2009, and Sweden 2007 – 2009.