INCOME TAXES

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



(amounts in thousands)	December 27, 2015			December 28, 2014		December 29, 2013
Domestic	$	(39,924	)	$	14,200	$	(11,014	)
Foreign	21,349			19,974		12,914
Total	$	(18,575	)	$	34,174	$	1,900

Provision for income taxes:



(amounts in thousands)	December 27, 2015			December 28, 2014			December 29, 2013
Currently payable
Federal	$	(633	)	$	(41	)	$	(2,218	)
State	68			63			73
Puerto Rico	200			77			(275		)
Foreign	2,178			5,746			9,519
Total currently payable	1,813			5,845			7,099

Deferred
Federal	57			2,145			3,701
State	(312		)	14			35
Puerto Rico	—			—			314
Foreign	6,082			15,217			(7,478		)
Total deferred	5,827			17,376			(3,428		)
Total provision	$	7,640		$	23,221		$	3,671

Deferred tax assets/liabilities at December 27, 2015 and December 28, 2014 consist of:



(amounts in thousands)	December 27, 2015			December 28, 2014
Inventory	$	3,663		$	3,821
Accounts receivable	939			1,093
Capitalized research and development costs	25,252			23,938
Financing liability	7,036			7,276
Net operating loss and foreign tax credit carryforwards	91,100			88,442
Interest carryforward	5,338			4,661
Deferred revenue	1,745			1,455
Pension	13,349			17,967
Uncertain tax positions	7,030			11,628
Deferred compensation	2,677			3,278
Stock based compensation	7,963			8,861
Depreciation	1,038			1,623
Other	10,472			4,557
Valuation allowance	(150,154		)	(148,838		)
Deferred tax assets	27,448			29,762
Intangibles	11,232			10,831
Unremitted earnings	8,235			6,177
Deferred tax liabilities	19,467			17,008
Net deferred tax assets	$	7,981		$	12,754

At December 27, 2015, we had $21.2 million of net operating loss carryforwards (tax effected) in certain non-U.S. jurisdictions. Of these, $15.8 million have no expiration, and the remaining $5.4 million will expire in future years through 2034. In the U.S., there were approximately $4.7 million of federal net operating loss carryforwards certain of which are subject to IRC § 382 limitations and $5.5 million of state net operating loss carryforwards, which will expire in future years through 2035.

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 2015, 2014 or 2012. We have adopted a “with and without” approach with regards to the utilization of windfall benefits.

At December 27, 2015, we had U.S. foreign tax credit carryforwards of $58.9 million with expiration dates ranging from 2016 to 2025.

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 $0.02 per share for the years ended December 27, 2015 and December 28, 2014.

We evaluate our deferred income taxes quarterly to determine if valuation allowances are required or should be adjusted. We assess whether valuation allowances should be established against our 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 27, 2015 and December 28, 2014, we had net deferred tax assets of $8.0 million and $12.8 million, respectively.

There was a change in accounting principle related to our early adoption of ASU 2015-17 on a prospective basis as of December 27, 2015. The adoption resulted in a decrease to current assets, a decrease to current liabilities, and an increase to both noncurrent deferred tax assets and liabilities. The adoption of the ASU to classify all of our deferred tax assets and liabilities as noncurrent will reduce time, complexity and costs to prepare our tax disclosures related to deferred income taxes.

At December 27, 2015, the U.S. had a valuation allowance of $115.8 million recorded against its net deferred tax assets of $104.5 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. Any release of the valuation allowance will be recorded as a tax benefit increasing net income or other comprehensive income.

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 change resulted 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 the Netherlands valuation allowance. We also recorded a valuation allowance reversal of $0.3 million in Canada during the third quarter of 2014.

During 2015, negative evidence arose in the form of projected cumulative losses in one of the China entities, for which we established a $0.4 million valuation allowance during the year.

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 2015.

As of December 27, 2015, we provided a deferred tax liability of approximately $8.2 million consisting of $3.2 million of withholding taxes associated with future repatriation of earnings for certain subsidiaries and $5.0 million of income 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.

Undistributed earnings of certain foreign subsidiaries for which taxes have not been provided approximate $4.4 million as of December 27, 2015. Such undistributed earnings are considered to be indefinitely reinvested in foreign operations. A liability of approximately $0.5 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.

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 27, 2015			December 28, 2014			December 29, 2013
Tax provision at the statutory federal income tax rate	$	(6,501	)	$	11,961		$	665
Unremitted earnings	2,786			4,281			60
Non-deductible permanent items	1,246			1,220			1,677
State and local income taxes, net of federal benefit	(268		)	55			82
Current year income or losses with no tax benefit or expense recognized due to valuation allowance	9,886			(8,551		)	(165		)
Effect of foreign operations	35			3,143			1,041
Potential tax contingencies	(990		)	(634		)	160
Change in valuation allowance	448			11,297			(125		)
Stock based compensation	612			316			315
Other	386			133			(39		)
Tax provision at the effective tax rate	$	7,640		$	23,221		$	3,671

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 2015, 2014 and 2013.

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



(amounts in thousands)	December 27, 2015			December 28, 2014			December 29, 2013
Gross unrecognized tax benefits at beginning of year	$	25,899		$	26,592		$	24,436
Increases in tax positions for prior years	1,808			585			910
Decreases in tax positions for prior years	(5,476		)	—			(1,083		)
Increases in tax positions for current year	2,854			1,164			4,003
Settlements	(1,281		)	—			—
Lapse in statute of limitations	(2,609		)	(2,442		)	(1,674		)
Gross unrecognized tax benefits at end of year	$	21,195		$	25,899		$	26,592

As of December 27, 2015 and December 28, 2014, $10.5 million and $16.1 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 $12.0 million and $16.4 million at December 27, 2015 and December 28, 2014, respectively. Penalties and tax-related interest expense are reported as a component of income tax expense. During fiscal years ended December 27, 2015, December 28, 2014 and December 29, 2013, we recognized interest and penalties of $(0.1) million, $(0.1) million, and $0.1 million, respectively, in the statement of operations. At December 27, 2015 and December 28, 2014, we have accrued interest and penalties related to unrecognized tax benefits of $3.1 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 $3.6 million.

We are currently under audit in the following major jurisdictions: India - 2010 to 2013, France - 2012 to 2013 and Canada - 2011 to 2014. The following major jurisdictions have tax years that remain subject to examination: Germany - 2010 to 2015, United States - 2012 to 2015, China - 2012 to 2015 and Hong Kong - 2009 to 2015. Our tax returns for open years in all jurisdictions are subject to changes upon examination.