Note 12. INCOME TAXES

The domestic and foreign components of earnings from continuing operations before income taxes are:

(amounts in thousands)	December 25, 2011	December 26, 2010	December 27, 2009
		(As Revised)	(As Revised)
Domestic	$ (35,107)	$ (21,015)	$ (19,005)
Foreign	35,535	58,760	54,664
Total	$ 428	$ 37,745	$ 35,659

Provision for income taxes:

(amounts in thousands)	December 25, 2011	December 26, 2010	December 27, 2009
		(As Revised)	(As Revised)
Currently payable
Federal	$ 365	$ 234	$ (2,565)
State	99	42	(41)
Puerto Rico	23	(3,950)	45
Foreign	11,441	15,891	20,555
Total currently payable	11,928	12,217	17,994

Deferred
Federal	49,395	(5,127)	(9,833)
State	526	4,320	1,002
Puerto Rico	(377)	(707)	540
Foreign	(1,932)	(1,345)	1,380
Total deferred	47,612	(2,859)	(6,911)
Total provision	$ 59,540	$ 9,358	$ 11,083

Adjustments have been made to prior year figures in the table above to be more presentable with the current year.

Deferred tax assets/liabilities at December 25, 2011 and December 26, 2010 consist of:

(amounts in thousands)	December 25, 2011	December 26, 2010
		(As Revised)
Inventory	$ 4,930	$ 4,817
Accounts receivable	2,513	1,296
Capitalized research and development costs	18,476	13,582
Net operating loss and foreign tax credit carryforwards	62,685	58,728
Restructuring	2,537	1,633
Deferred revenue	(1,316)	(105)
Pension	7,890	6,724
Warranty	1,507	1,469
Deferred compensation	4,980	2,306
Stock based compensation	8,148	6,740
Depreciation	1,052	2,501
Other	12,349	11,927
Valuation allowance	(102,148)	(37,808)
Deferred tax assets	23,603	73,810
Intangibles	9,542	10,447
Withholding tax liabilities	2,365	945
Deferred tax liabilities	11,907	11,392
Net deferred tax assets	$ 11,696	$ 62,418

At December 25, 2011, we had $35.4 million of net operating loss carryforwards (tax effected) in certain non-U.S. jurisdictions. Of these, $27.1 million have no expiration, and the remaining $8.3 million will expire in future years through 2031. In the U.S., there were approximately $6.6 million of federal and $6.8 million of state net operating loss carryforwards, which will expire in future years through 2031. Of the $6.6 million of federal net operating loss carryforwards, $6.3 million is subject to IRC § 382 limitations. In 2011, in connection with the acquisition of the Shore to Shore business, we acquired J&F International, a U.S. company, with $7.3 million of net operating loss carryforwards, of which $7.3 million are subject to IRC § 382 limitations. We concluded, based on results of operations in the U.S., the acquired § 382 limited net operating loss carryforwards are likely to expire unutilized, therefore, no gross asset has been recognized. In the U.S., a $1.1 million and $3.5 million (gross) windfall benefit on stock compensation occurred in 2011 and 2010, respectively. We have not recorded these amounts to additional capital or increased its related net operating loss carryforward due to the fact that the windfall benefits have not reduced income taxes payable. We have adopted a "with and without" approach with regards to utilization of windfall benefits. At December 25, 2011, we had U.S. foreign tax credit carryforwards of $12.7 million with expiration dates ranging from 2014 to 2021.

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, our experience with loss carryforwards not expiring and tax planning alternatives. We operate and derive 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 December 25, 2011 and December 26, 2010, we had net deferred tax assets of $11.7 million and $62.4 million, respectively.

During 2010 negative evidence arose in the form of cumulative losses in the U.S. 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, we 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. We are 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 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 in recent years, as well as the reduction of our global earnings experienced during the first nine months of 2011. We have not recorded a valuation allowance on the net German deferred tax asset and continue to rely on a tax planning action that has been executed in the fourth quarter of 2011. The German tax planning action does not significantly rely on our global earnings to utilize German deferred tax assets.

In May 2011, we acquired a retail apparel and footwear product identification business which designs, manufactures and sells tags and labels, brand protection, and EAS solutions/labels (collectively, the "Shore to Shore businesses") through the acquisition of equity and/or assets. As of December 25, 2011, we have established a preliminary opening net deferred tax liability of $3.0. In addition, we have established $3.1 million of income tax liabilities related to uncertain tax positions in pre-acquisition tax years. The income tax adjustments related to purchase accounting for the Shore to Shore businesses is expected to be finalized in 2012.

In July 2009, we purchased the stock of Brilliant Label Manufacturing Ltd., a China-based manufacturer of paper, fabric and woven tags and labels. As of December 27, 2009, we had established a preliminary opening net deferred tax liability of $3.7 million. In addition, we had established $2.6 million of income tax related to uncertain tax positions for Brilliant in pre-acquisition tax years. During the second quarter of 2010 we finalized our purchase accounting related to income taxes for the Brilliant acquisition and as a result, we recorded a decrease to our deferred tax liability and an increase to our accrual for uncertain tax positions (tax contingencies) of $1.3 million and $0.2 million, respectively. As of the second quarter of 2010, the financial statements reflected the final allocations of the purchase price based on the estimated fair values at the date of acquisition.

Undistributed earnings of certain foreign subsidiaries for which taxes have not been provided approximate $2.6 million as of December 25, 2011. Such undistributed earnings are considered to be indefinitely reinvested in foreign operations. A liability could arise if our intention to permanently reinvest such earnings were to change and amounts are distributed by such subsidiaries or if such subsidiaries are ultimately disposed. It is not practicable to estimate the additional income taxes related to permanently reinvested earnings or the basis differences related to investments in subsidiaries.

In the fourth quarter of 2011, we changed our assertion on unremitted earnings for certain foreign subsidiaries, primarily due to pressure on our leverage ratio for debt covenants. This resulted in the repatriation of foreign earnings in order to reduce worldwide debt to the levels stipulated by our covenants. Also impacting the change in assertion was the projected future cash impact of the 2011 Global Restructuring Plan.

As of December 25, 2011, we provided a deferred tax liability of approximately $2.4 million for withholding taxes associated with future repatriation of earnings for certain subsidiaries. We have not provided deferred tax liabilities for temporary differences related to basis differences in investments in subsidiaries, as such earnings are expected to be permanently reinvested, the investments are essentially permanent in duration, or we have concluded that no additional tax liability will arise as a result of the distribution of such earnings.

A reconciliation of the tax provision at the statutory U.S. Federal income tax rate with the tax provision at the effective income tax rate follows:

(amounts in thousands)	December 25, 2011	December 26, 2010	December 27, 2009
		(As Revised)	(As Revised)
Tax provision at the statutory federal income tax rate	$ 150	$ 13,211	$ 12,481
Unremitted earnings	1,430	—	—
Non-deductible permanent items	1,790	1,543	1,297
State and local income taxes, net of federal benefit	625	4,363	961
Losses for which no tax benefit recognized	11,929	1,408	2,077
Foreign rate differentials	(3,660)	(7,905)	(8,445)
Tax settlements	—	(47)	(20)
Potential tax contingencies	(1,086)	(3,488)	(72)
Change in valuation allowance	47,684	—	3,515
Stock based compensation	366	441	349
Other	312	(168)	(1,060)
Tax provision at the effective tax rate	$ 59,540	$ 9,358	$ 11,083

Adjustments have been made to prior year figures in the table above to be more presentable with the current year.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

( amounts in thousands)	December 25, 2011	December 26, 2010	December 27, 2009
		(As Revised)	(As Revised)
Gross unrecognized tax benefits at beginning of year	$ 12,846	$ 14,884	$ 12,520
Increases in tax positions for prior years	997	1,161	2,502
Decreases in tax positions for prior years	(44)	—	(1,684)
Increases in tax positions for current year	808	1,229	1,442
Settlements	(443)	(928)	—
Acquisition reserves	2,029	240	2,631
Lapse in statute of limitations	(2,954)	(3,740)	(2,527)
Gross unrecognized tax benefits at end of year	$ 13,239	$ 12,846	$ 14,884

The total amount of gross unrecognized tax benefits that, if recognized, would affect the effective tax rate was $13.2 million and $12.8 million at December 25, 2011 and December 26, 2010, respectively. Penalties and tax-related interest expense are reported as a component of income tax expense. During fiscal years ended December 25, 2011, December 26, 2010 and December 27, 2009, we recognized interest and penalties of $1.0 million, ($2.8) million, and $0.4 million, respectively in the statement of operations. At December 25, 2011 and December 26, 2010, we have accrued interest and penalties related to unrecognized tax benefits of $4.6 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 the next 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 change within the next twelve months by a range of $8.3 million to $2.6 million.

We are currently under audit in the following major jurisdictions: United States 2007 – 2008, Germany 2002 – 2009, Finland 2008 – 2009, Sweden 2007 – 2009, and France 2008 – 2010.