INCOME TAXES

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



(amounts in thousands)	December 28, 2014		December 29, 2013			December 30, 2012
Domestic	$	14,200	$	(11,014	)	$	(54,066	)
Foreign	19,974		12,914			(78,949		)
Total	$	34,174	$	1,900		$	(133,015	)

Provision for income taxes:



(amounts in thousands)	December 28, 2014			December 29, 2013			December 30, 2012
Currently payable
Federal	$	(41	)	$	(2,218	)	$	2,544
State	63			73			88
Puerto Rico	77			(275		)	354
Foreign	5,746			9,519			5,949
Total currently payable	5,845			7,099			8,935

Deferred
Federal	2,145			3,701			(792		)
State	14			35			227
Puerto Rico	—			314			763
Foreign	15,217			(7,478		)	(3,128		)
Total deferred	17,376			(3,428		)	(2,930		)
Total provision	$	23,221		$	3,671		$	6,005

Deferred tax assets/liabilities at December 28, 2014 and December 29, 2013 consist of:



(amounts in thousands)	December 28, 2014			December 29, 2013
Inventory	$	3,821		$	4,472
Accounts receivable	1,093			2,279
Capitalized research and development costs	23,938			22,986
Financing liability	7,276			9,168
Net operating loss and foreign tax credit carryforwards	88,442			101,396
Interest carryforward	4,661			6,691
Deferred revenue	1,455			988
Pension	17,967			13,221
Uncertain tax positions	11,628			11,190
Deferred compensation	3,278			2,871
Stock based compensation	8,861			8,756
Depreciation	1,623			1,851
Other	4,557			4,847
Valuation allowance	(148,838		)	(145,508		)
Deferred tax assets	29,762			45,208
Intangibles	10,831			10,756
Unremitted earnings	6,177			2,983
Deferred tax liabilities	17,008			13,739
Net deferred tax assets	$	12,754		$	31,469

At December 28, 2014, we had $25.5 million of net operating loss carryforwards (tax effected) in certain non-U.S. jurisdictions. Of these, $18.2 million have no expiration, and the remaining $7.3 million will expire in future years through 2034. In the U.S., there were approximately $4.8 million of federal net operating loss carryforwards certain of which are subject to IRC § 382 limitations and $5.8 million of state net operating loss carryforwards, which will expire in future years through 2034.

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 2014 or 2012. We have adopted a “with and without” approach with regards to the utilization of windfall benefits.

At December 28, 2014, we had U.S. foreign tax credit carryforwards of $51.5 million with expiration dates ranging from 2015 to 2024.

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. The impact of the tax holidays is a benefit of $0.02 and $0.01 per share for the years ended December 28, 2014 and December 29, 2013.

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 28, 2014 and December 29, 2013, we had net deferred tax assets of $12.8 million and $31.5 million, respectively.

At December 28, 2014, the U.S. had a valuation allowance of $108.3 million recorded against its net deferred tax assets of $96.1 million. 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. The valuation allowance is reviewed quarterly and will be maintained until there is sufficient positive evidence to support a release. At each reporting date, we consider new evidence, both positive and negative, that could impact the future realization of deferred tax assets. We will consider a release of the valuation allowance once there is sufficient positive evidence that it is more likely than not that the deferred tax assets will be realized. Due to improvements in the U.S. operating results over the past three years, management believes a reasonable possibility exists that, in the near future, sufficient positive evidence may become available to reach a conclusion that all or some portion of the U.S. valuation allowance will no longer be needed. Any release of the valuation allowance will be recorded as a tax benefit increasing net income or other comprehensive income.

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.

During 2014, we determined that income related to certain warehousing operations which were historically operated out of Germany would be moved to the Netherlands beginning in fiscal 2015. The impacts of this change will result in a significant decrease in forecasted future pre-taxable income in Germany. As a result, we determined that it was no longer more likely than not that the deferred tax assets in Germany would be recoverable. Accordingly, we recorded a valuation allowance in Germany of $14.0 million as of the end of the third quarter of 2014 which also resulted in a corresponding increase to tax expense. As the change also results in an increase in future taxable income in the Netherlands, we evaluated the impact of the change on the valuation allowance in the Netherlands of $2.4 million and concluded that the impact of the increased taxable income provides sufficient evidence to reverse the full amount of Netherlands valuation allowance. We also recorded a valuation allowance reversal of $0.3 million in Canada during the third quarter of 2014.

Undistributed earnings of certain foreign subsidiaries for which taxes have not been provided approximate $4.0 million as of December 28, 2014. Such undistributed earnings are considered to be indefinitely reinvested in foreign operations. A liability of approximately $0.4 million 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.

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 2014.

As of December 28, 2014, we provided a deferred tax liability of approximately $6.2 million consisting of $3.2 million of withholding taxes associated with future repatriation of earnings for certain subsidiaries and $3.0 million of taxes related to unremitted earnings. We have not provided deferred tax liabilities for temporary differences related to basis differences in investments in subsidiaries, as the investments are essentially permanent in nature, 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 28, 2014			December 29, 2013			December 30, 2012
Tax provision at the statutory federal income tax rate	$	11,961		$	665		$	(46,555	)
Unremitted earnings	4,281			60			690
Non-deductible permanent items	1,220			1,677			1,566
Non-deductible goodwill impairment	—			—			32,503
State and local income taxes, net of federal benefit	55			82			(467		)
Current year income or losses with no tax benefit or expense recognized due to valuation allowance	(8,551		)	(165		)	38,606
Effect of foreign operations	3,143			1,041			(19,198		)
Potential tax contingencies	(634		)	160			(1,052		)
Change in valuation allowance	11,297			(125		)	283
Stock based compensation	316			315			994
Other	133			(39		)	(1,365		)
Tax provision at the effective tax rate	$	23,221		$	3,671		$	6,005

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 2014, 2013 and 2012.

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



(amounts in thousands)	December 28, 2014			December 29, 2013			December 30, 2012
Gross unrecognized tax benefits at beginning of year	$	26,592		$	24,436		$	22,543
Increases in tax positions for prior years	585			910			225
Decreases in tax positions for prior years	—			(1,083		)	(1,068		)
Increases in tax positions for current year	1,164			4,003			5,209
Settlements	—			—			(683		)
Acquisition reserves	—			—			1,166
Lapse in statute of limitations	(2,442		)	(1,674		)	(2,956		)
Gross unrecognized tax benefits at end of year	$	25,899		$	26,592		$	24,436

As of December 28, 2014 and December 29, 2013, $16.1 million and $19.6 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 $16.4 million and $18.1 million at December 28, 2014 and December 29, 2013, respectively. Penalties and tax-related interest expense are reported as a component of income tax expense. During fiscal years ended December 28, 2014, December 29, 2013 and December 30, 2012, we recognized interest and penalties of $(0.1) million, $0.1 million, and $(0.8) million, respectively, in the statement of operations. At December 28, 2014 and December 29, 2013, we have accrued interest and penalties related to unrecognized tax benefits of $4.3 million and $4.4 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 $3.7 million to $11.3 million.

We are currently under audit in the following major jurisdictions: Germany - 2006 to 2009, Finland - 2005 to 2009, India - 2010 to 2013, and Canada - 2011 to 2014. The following major jurisdictions have tax years that remain subject to examination: Germany - 2006 to 2014, United States - 2011 to 2014, China - 2011 to 2014 and Hong Kong - 2008 to 2014. Our tax returns for open years in all jurisdictions are subject to changes upon examination.