INCOME TAXES

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



(amounts in thousands)	December 30, 2012			December 25, 2011			December 26, 2010
Domestic	$	(54,230	)	$	(41,664	)	$	(32,985	)
Foreign	(76,852		)	35,776			56,102
Total	$	(131,082	)	$	(5,888	)	$	23,117

Provision for income taxes:



(amounts in thousands)	December 30, 2012			December 25, 2011			December 26, 2010
Currently payable
Federal	$	2,544		$	365		$	(4,004	)
State	88			99			(404		)
Puerto Rico	354			23			(3,950		)
Foreign	6,453			11,474			15,045
Total currently payable	9,439			11,961			6,687

Deferred
Federal	(792		)	49,395			(5,128		)
State	226			526			4,321
Puerto Rico	765			(377		)	(707		)
Foreign	(2,274		)	(1,932		)	(1,345		)
Total deferred	(2,075		)	47,612			(2,859		)
Total provision	$	7,364		$	59,573		$	3,828

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 30, 2012 and December 25, 2011 consist of:



(amounts in thousands)	December 30, 2012			December 25, 2011
Inventory	$	5,390		$	4,930
Accounts receivable	2,733			2,513
Capitalized research and development costs	21,173			18,476
Net operating loss and foreign tax credit carryforwards	65,951			62,685
Restructuring	491			2,537
Pension	12,874			7,890
Warranty	1,138			1,507
Deferred compensation	3,630			4,980
Stock based compensation	7,506			8,148
Depreciation	1,753			1,052
Other	11,759			12,349
Valuation allowance	(104,514		)	(102,148		)
Deferred tax assets	29,884			24,919
Deferred revenue	546			1,316
Intangibles	8,327			9,542
Unremitted earnings	3,081			2,365
Deferred tax liabilities	11,954			13,223
Net deferred tax assets	$	17,930		$	11,696

At December 30, 2012, we had $35.9 million of net operating loss carryforwards (tax effected) in certain non-U.S. jurisdictions. Of these, $25.4 million have no expiration, and the remaining $10.5 million will expire in future years through 2022. In the U.S., there were approximately $5.7 million of federal and $6.7 million of state net operating loss carryforwards, which will expire in future years through 2032. Of the $5.7 million of federal net operating loss carryforwards, $5.3 million is subject to IRC § 382 limitations.

In the U.S., a $1.1 million and $3.5 million 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. There was no windfall benefit on stock compensation in 2012. We have adopted a “with and without” approach with regards to utilization of windfall benefits.

At December 30, 2012, we had U.S. foreign tax credit carryforwards of $16.6 million with expiration dates ranging from 2016 to 2022.

We operate under tax holidays in other countries, which are effective through dates ranging from 2015 through 2017, and may be extended if certain additional requirements are satisfied. The tax holidays are conditional upon our meeting certain employment and investment thresholds.

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 from multiple lines of business across multiple jurisdictions. As each of the respective lines of business experiences changes in operating results across their geographic footprint, 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. 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. At December 30, 2012 and December 25, 2011, we had net deferred tax assets of $17.9 million and $11.7 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 were 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.

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 was 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 and have provided evidence during 2012 to support the realization of the German deferred tax assets. 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 million. 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 were finalized in 2012. Our preliminary opening net deferred tax liability increased to $3.1 million and the income tax liabilities related to uncertain tax positions in pre-acquisition years was increased to $7.1 million.

During 2012, negative evidence arose in the form of cumulative losses in the Netherlands, with net deferred assets of $0.3 million. During the quarter ending June 24, 2012, a valuation allowance was established related to certain components of the Netherlands deferred tax asset based on the determination after the above considerations that it was more likely than not that the net deferred tax assets would not be fully utilized.

Undistributed earnings of certain foreign subsidiaries for which taxes have not been provided approximate $4.0 million as of December 30, 2012. 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 and the projected future cash impact of our refined business strategy. Our assertion on unremitted earnings remains unchanged in 2012.

As of December 30, 2012, we provided a deferred tax liability of approximately $3.1 million primarily 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 30, 2012			December 25, 2011			December 26, 2010
Tax provision at the statutory federal income tax rate	$	(45,879	)	$	(2,061	)	$	8,091
Unremitted earnings	690			1,430			—
Non-deductible permanent items	1,566			1,748			1,467
Non-deductible goodwill impairment	32,503			—			—
State and local income taxes, net of federal benefit	314			625			3,917
Losses for which no tax benefit recognized and release of allowance on current year income	1,135			14,224			1,408
Effect of foreign operations	17,671			(3,668		)	(7,794		)
Tax settlements	—			—			(47		)
Potential tax contingencies	(547		)	(1,086		)	(3,488		)
Change in valuation allowance	283			47,684			—
Stock based compensation	994			366			441
Other	(1,366		)	311			(167		)
Tax provision at the effective tax rate	$	7,364		$	59,573		$	3,828

Included in the effect of foreign operations is the U.S. tax impact of certain foreign income inclusions. Due to the U.S. valuation allowance, there was no related impact on overall tax expense in 2012 and 2011.

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



( amounts in thousands)	December 30, 2012			December 25, 2011			December 26, 2010
Gross unrecognized tax benefits at beginning of year	$	15,850		$	12,846		$	14,884
Increases in tax positions for prior years	225			997			1,161
Decreases in tax positions for prior years	(1,068		)	(44		)	—
Increases in tax positions for current year	3,800			808			1,229
Settlements	(683		)	(443		)	(928		)
Acquisition reserves	1,167			4,640			240
Lapse in statute of limitations	(2,956		)	(2,954		)	(3,740		)
Gross unrecognized tax benefits at end of year	$	16,335		$	15,850		$	12,846

The total amount of gross unrecognized tax benefits that, if recognized, would affect the effective tax rate was $16.3 million and $15.9 million at December 30, 2012 and December 25, 2011, respectively. Penalties and tax-related interest expense are reported as a component of income tax expense. During fiscal years ended December 30, 2012, December 25, 2011 and December 26, 2010, we recognized interest and penalties of $(0.3) million, $1.0 million, and $(2.8) million, respectively in the statement of operations. At December 30, 2012 and December 25, 2011, we have accrued interest and penalties related to unrecognized tax benefits of $4.3 million and $4.6 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 $5.0 million to $3.4 million.

We are currently under audit in the following major jurisdictions: Germany 2006 – 2009, Finland 2008 – 2009, and India 2008 - 2012.