Income Taxes

9 Months Ended

Sep. 25, 2011

Income Taxes

Income Taxes

Note 8. INCOME TAXES

The effective tax rate for the thirty-nine weeks ended September 25, 2011 was negative 356.8% as compared to 32.7% for the thirty-nine weeks ended September 26, 2010. The change in the 2011 tax rate was primarily as a result of the recognition of a valuation allowance on domestic net deferred tax assets, discussed more below.

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 September 25, 2011 and December 26, 2010, the Company had net deferred tax assets of $12.7 million and $61.5 million, respectively.

During 2010 negative evidence arose in the form of cumulative losses in the United States and Germany, with net deferred tax assets of $41.7 million and $9.6 million, respectively. In 2010, and the first six months of 2011, 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.

During the quarter ending September 25, 2011 a valuation allowance in the amount of $48.0 million was established related to all components of the domestic net deferred tax assets based on the determination after the above considerations that it was more likely than not that the deferred tax assets would not be fully realized. The amount of valuation allowance recorded is greater than the net domestic deferred tax asset after consideration of deferred tax liabilities associated with non-amortizable assets such as goodwill and indefinite lived intangibles. This charge was primarily a result of the trend of significant domestic losses experienced by the Company in recent years, as well as the reduction of the Company's global earnings experienced during the first nine months of 2011.  The Company has not recorded a valuation allowance on the net German deferred tax asset and continues to rely on a tax planning action that will be executed in the fourth quarter of 2011.  The German tax planning action does not significantly rely on the Company's global earnings to utilize German deferred tax assets.

Included in the $62.7 million of other current assets is the Company's current income tax receivable of $17.6 million.  This amount represents estimated tax payments on account, net of refunds received in the amount of $7.9 million, and $9.7 million of tax benefit recorded on the Company's year to date pretax loss.  Included in the $28.8 million of other current liabilities is the Company's current deferred tax liability of $1.8 million.

The total amount of gross unrecognized tax benefits that, if recognized, would affect the effective tax rate was an $11.9 million and $12.8 million at September 25, 2011 and December 26, 2010, respectively. Penalties and tax-related interest expense are reported as a component of income tax expense. During the nine months ended September 25, 2011, we recognized interest and penalties expense of $0.2 million compared to an interest and penalties benefit of $2.7 million during the nine months ended September 26, 2010, in the Statement of Operations. At September 25, 2011 and December 26, 2010, the Company had accrued interest and penalties related to unrecognized tax benefits of $3.8 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 $3.3 million to $3.5 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.