INCOME TAXES

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



(amounts in thousands)	December 29, 2013			December 30, 2012			December 25, 2011
				(As Restated)			(As Restated)
Domestic	$	(11,014	)	$	(54,066	)	$	(41,647	)
Foreign	12,914			(78,949		)	12,604
Total	$	1,900		$	(133,015	)	$	(29,043	)

Provision for income taxes:



(amounts in thousands)	December 29, 2013			December 30, 2012			December 25, 2011
				(As Restated)			(As Restated)
Currently payable
Federal	$	(2,218	)	$	2,544		$	365
State	73			88			99
Puerto Rico	(275		)	354			23
Foreign	9,519			5,949			11,978
Total currently payable	7,099			8,935			12,465

Deferred
Federal	3,701			(792		)	49,394
State	35			227			527
Puerto Rico	314			763			(377		)
Foreign	(7,478		)	(3,128		)	(8,656		)
Total deferred	(3,428		)	(2,930		)	40,888
Total provision	$	3,671		$	6,005		$	53,353

Deferred tax assets/liabilities at December 29, 2013 and December 30, 2012 consist of:



(amounts in thousands)	December 29, 2013			December 30, 2012
				(As Restated)
Inventory	$	4,472		$	5,390
Accounts receivable	2,279			2,732
Capitalized research and development costs	22,986			21,173
Financing liability	9,168			7,627
Net operating loss and foreign tax credit carryforwards	101,396			99,207
Interest carryforward	6,691			6,017
Deferred revenue	988			1,321
Pension	13,221			13,558
Uncertain tax positions	11,190			8,876
Deferred compensation	2,871			3,630
Stock based compensation	8,756			7,506
Depreciation	1,851			1,753
Other	4,847			7,102
Valuation allowance	(145,508		)	(141,474		)
Deferred tax assets	45,208			44,418
Intangibles	10,756			8,327
Unremitted earnings	2,983			3,081
Deferred tax liabilities	13,739			11,408
Net deferred tax assets	$	31,469		$	33,010

We have corrected the disclosure presentation of our net operating loss and foreign tax credit carryforwards and the valuation allowance by $37.0 million to properly reflect their gross positions as of December 30, 2012. This revision of our 2012 presentation is necessary from a disclosure perspective only and has no impact on our previously reported 2012 Consolidated Balance Sheet or Statement of Operations. Other adjustments have been made to 2012 figures in the table above to be more consistent with the current year.

A net correction of $5.2 million was recorded in our Consolidated Balance Sheet as of December 30, 2012. The correction reclassified competent authority assets of $7.6 million from other long-term liabilities to deferred tax assets. Additionally, we corrected the classification of $2.4 million of unrecognized tax benefits from other long-term liabilities to deferred tax assets.

Our early adoption of ASU 2013-11 on a prospective basis as of December 29, 2013 resulted in a decrease to deferred tax assets and a decrease to other long-term liabilities.

At December 29, 2013, we had $29.2 million of net operating loss carryforwards (tax effected) in certain non-U.S. jurisdictions. Of these, $22.3 million have no expiration, and the remaining $6.9 million will expire in future years through 2023. In the U.S., there were approximately $13.5 million of federal and $6.9 million of state net operating loss carryforwards, which will expire in future years through 2033. Of the $13.5 million of federal net operating loss carryforwards, $5.3 million is subject to IRC § 382 limitations.

In the U.S., a $1.5 million, $1.1 million and $3.5 million windfall benefit on stock compensation occurred in 2013, 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 29, 2013, we had U.S. foreign tax credit carryforwards of $50.9 million with expiration dates ranging from 2015 to 2023.

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 29, 2013 and December 30, 2012, we had net deferred tax assets of $31.5 million and $33.0 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 was executed in the fourth quarter of 2011 and has provided evidence during 2012 and 2013 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 established a preliminary opening net deferred tax liability of $3.0 million. In addition, we 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.

During 2013, negative evidence arose in the form of cumulative losses in various jurisdictions in which we established $0.9 million of valuation allowance during the year. Offsetting this amount is a $1.0 million release in valuation allowance related to Belgium, as positive evidence arose in the form of cumulative income.

Undistributed earnings of certain foreign subsidiaries for which taxes have not been provided approximate $4.0 million as of December 29, 2013. 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 2013.

As of December 29, 2013, we provided a deferred tax liability of approximately $3.0 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 29, 2013			December 30, 2012			December 25, 2011
				(As Restated)			(As Restated)
Tax provision at the statutory federal income tax rate	$	665		$	(46,555	)	$	(10,165	)
Unremitted earnings	60			690			1,430
Non-deductible permanent items	1,677			1,566			1,747
Non-deductible goodwill impairment	—			32,503			—
State and local income taxes, net of federal benefit	82			(467		)	890
Losses for which no tax benefit recognized and release of allowance on current year income	(165		)	38,606			14,160
Effect of foreign operations	1,041			(19,198		)	(2,487		)
Potential tax contingencies	160			(1,052		)	(582		)
Change in valuation allowance	(125		)	283			47,684
Stock based compensation	315			994			366
Other	(39		)	(1,365		)	310
Tax provision at the effective tax rate	$	3,671		$	6,005		$	53,353

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 2013, 2012 and 2011.

We have corrected the disclosure presentation of our effect of foreign operations and losses for which no tax benefit recognized and release of allowance of $37.0 million on current year income to properly reflect their gross impact in 2012. This revision of this historical presentation is necessary from a disclosure perspective only and has no impact on our previously reported 2012 and 2011 Consolidated Balance Sheet or Statement of Operations.

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



( amounts in thousands)	December 29, 2013			December 30, 2012			December 25, 2011
				(As Restated)			(As Restated)
Gross unrecognized tax benefits at beginning of year	$	24,436		$	22,543		$	18,841
Increases in tax positions for prior years	910			225			997
Decreases in tax positions for prior years	(1,083		)	(1,068		)	(44		)
Increases in tax positions for current year	4,003			5,209			1,506
Settlements	—			(683		)	(443		)
Acquisition reserves	—			1,166			4,640
Lapse in statute of limitations	(1,674		)	(2,956		)	(2,954		)
Gross unrecognized tax benefits at end of year	$	26,592		$	24,436		$	22,543

We have corrected the disclosure presentation of our gross unrecognized tax benefits as of December 30, 2012 and December 25, 2011 by $8.1 million and $6.7 million, respectively, to properly reflect the exclusion of competent authority assets between our various jurisdictions.

As of December 30, 2013 and December 29, 2012, $19.6 million and $21.7 million, respectively, of our unrecognized tax benefits, penalties, and interest were recorded as a component of other long term liabilities on the consolidated balance sheet.

The total amount of gross unrecognized tax benefits that, if recognized, would affect the effective tax rate was $18.1 million and $18.9 million at December 29, 2013 and December 30, 2012, respectively. Penalties and tax-related interest expense are reported as a component of income tax expense. During fiscal years ended December 29, 2013, December 30, 2012 and December 25, 2011, we recognized interest and penalties of $0.1 million, $(0.8) million, and $1.5 million, respectively, in the statement of operations. At December 29, 2013 and December 30, 2012, we have accrued interest and penalties related to unrecognized tax benefits of $4.4 million and $4.3 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 $4.9 million to $13.7 million.

We are currently under audit in the following major jurisdictions: Germany - 2006 to 2009, Finland - 2005 to 2009, India - 2010, United States - 2011. The following major jurisdictions have tax years that remain subject to examination: Germany - 2006 to 2013, United States - 2010 to 2013, China - 2010 to 2013 and Hong Kong - 2007 to 2013. Our tax returns for open years in all jurisdictions are subject to changes upon examination.