NOTE 8: INCOME TAXES

The following table reflects income (loss) from continuing operations by location, the provision (benefit) for income taxes and the effective tax rate for fiscal 2011, 2010 and 2009:

	Fiscal
(dollar amounts in thousands)	2011			2010			2009
United States operations	$	33,531		$	(7,061	)	$	(35,380	)
Foreign operations		128,897			147,166			(41,261	)
Income (loss) from continuing operations before tax	$	162,428		$	140,105		$	(76,641	)
Provision (benefit) for income taxes		34,818			(2,037	)		(13,029	)

Income (loss) from continuing operations	$	127,610		$	142,142		$	(63,612	)

Effective tax rate		21.4	%		-1.5	%		17.0	%

The following table reflects the provision (benefit) for income taxes from continuing operations for fiscal 2011, 2010 and 2009:

	Fiscal
(in thousands)	2011			2010			2009
Current:
Federal	$	(90	)	$	710		$	(263	)
State		1,099			594			150
Foreign		14,764			1,394			(6,110	)

Deferred:
Federal		17,463			247			354
State		8			548			41
Foreign		1,574			(5,530	)		(7,201	)

Provision (benefit) for income taxes	$	34,818		$	(2,037	)	$	(13,029	)

The following table reflects the difference between the provision (benefit) for income taxes and the amount computed by applying the statutory federal income tax rate for fiscal 2011, 2010 and 2009:

	Fiscal
(in thousands)	2011			2010			2009
Computed income tax (benefit) expense based on U.S. statutory rate	$	56,850		$	49,037		$	(26,821	)
Effect of earnings of foreign subsidiaries subject to different tax rates		(17,300	)		(15,564	)		2,945
Benefits from foreign approved enterprise zones		(21,079	)		(33,790	)		11,839
Effect of permanent items		669			1,125			731
Benefits of net operating loss and tax credit carryforwards and changes in valuation allowance		(962	)		(9,381	)		13,887
Foreign operations		6,917			6,862			(2,657	)
Settlement of tax audit		-			-			(12,510	)
Reserve for uncertain tax positions		7,406			269			143
State income tax expense		1,230			(1,554	)		777
Other, net		1,087			959			(1,363	)
Provision (benefit) for income taxes	$	34,818		$	(2,037	)	$	(13,029	)

Undistributed earnings of certain foreign subsidiaries for which taxes have not been provided were approximately $282.6 million as of October 1, 2011. Such undistributed earnings are considered to be indefinitely reinvested in foreign operations.

Undistributed earnings of approximately $85.3 million are not considered to be indefinitely reinvested in foreign operations. As of October 1, 2011, the Company had provided a deferred tax liability of approximately $16.5 million for withholding taxes associated with future repatriation of earnings for certain subsidiaries.

The following table reflects the net deferred tax balance, composed of the tax effects of cumulative temporary differences for fiscal 2011 and 2010:

	Fiscal
(in thousands)	2011			2010
Inventory reserves	$	374		$	1,551
Other accruals and reserves		5,601			6,136
Deferred revenue		77			90
Valuation allowance		(2,358	)		(2,334	)

Total short-term deferred tax asset	$	3,694		$	5,443

Non-cash interest on debt		1,936			-
Other		107			-

Total short-term deferred tax liability	$	2,043		$	-

Net short-term deferred tax asset	$	1,651		$	5,443

Domestic tax credit carryforwards	$	4,626		$	3,866
Net operating loss carryforwards		26,922			44,183
Stock options		1,478			2,970
Other		2,988			7,386

	$	36,014		$	58,405
Valuation allowance		(21,419	)		(25,522	)

Total long-term deferred tax asset (1)	$	14,595		$	32,883

Repatriation of foreign earnings, including foreign withholding taxes	$	40,529		$	39,396
Non-cash interest on debt		-			4,752
Depreciable assets		443			1,424
Prepaid expenses and other		195			-
Total long-term deferred tax liability	$	41,167		$	45,572

Net long-term deferred tax liability	$	26,572		$	12,689

Total net deferred tax liability	$	24,921		$	7,246

(1)	Included in other assets on the Consolidated Balance Sheets are deferred tax assets of $5.5 million and $7.7 million as of October 1, 2011 and October 2, 2010, respectively.

As of October 1, 2011, the Company has foreign net operating loss carryforwards of $87.9 million, state net operating loss carryforwards of $178.4 million, and tax credit carryforwards of $4.6 million that will reduce future taxable income. These carryforwards can be utilized in the future, prior to expiration of certain carryforwards in fiscal years 2012 through 2030 with the exception of certain foreign net operating losses and U.S. credits that have no expiration date. Pennsylvania tax law limits the time during which carryforwards may be applied against future taxes and Pennsylvania tax law limits the utilization of state net operating loss carryforwards to $3.0 million annually.

Of the total net operating losses as of October 2, 2010, approximately $2.1 million were attributable to stock option exercises, and as of October 1, 2011, this entire amount attributable to stock option exercises was utilized and recorded as common stock (additional paid in capital) in shareholders’ equity of the consolidated balance sheet.

The Company continues to evaluate the realizability of all of its net deferred tax assets at each reporting date and records a benefit for deferred tax assets to the extent it has deferred tax liabilities that provide a source of income to benefit the deferred tax asset. As a result of this analysis, during the fourth quarter of fiscal 2010, the Company released $0.8 million of its valuation allowance related to federal deferred tax assets with the exception of a valuation allowance against a portion of the company’s deferred tax asset related to certain federal tax credits. The remaining valuation allowance was released in fiscal 2011 for $2.3 million, of which $1.9 million was recorded to additional paid in capital. The Company continues to maintain a valuation allowance against a majority of their state deferred tax assets as the realization of these assets is not more likely than not given uncertainty of future earnings in these jurisdictions. In fiscal 2010, the Company reduced the valuation allowance against its net deferred tax assets for a foreign subsidiary based on future projected income. The Company determined that it was more likely than not to recognize all of the net deferred tax assets, primarily net operating losses, based on positive evidence of projected future projected earnings and recorded a tax benefit of approximately $5.6 million in fiscal 2010 for future years.

The following table reflects a reconciliation of the beginning and ending unrecognized tax benefits for fiscal 2011:

	Fiscal
(in thousands)	2011
Unrecognized tax benefit as of October 2, 2010	$	6,413
Additions for tax positions of prior years		7,585
Reductions for tax positions of prior years		(296	)
Unrecognized tax benefit as of October 1, 2011	$	13,702

If recognized, the $13.7 million would impact the Company’s effective tax rate.

During 2010, the U.S. Internal Revenue Service (“IRS”) completed an audit of the Company for the period ended September 30, 2006. The Company responded to various information requests from the IRS and the audit was closed with no significant adjustments to income tax expense.

In fiscal 2011, a tax application filed with a foreign jurisdiction was rejected by that country’s tax authority and the Company has filed an appeal. As a result of the rejection of the application, the Company has reconsidered its position and has determined the benefit taken on its previously filed tax returns no longer meets the recognition standard required under ASC 740. Therefore, the Company has provided a current liability of $7.5 million related to this certain unrecognized tax position, including interest and penalties.

The Company recognizes interest and penalties accrued related to unrecognized tax benefits as a component of income tax expense. There were no additional accruals of interest expense on various uncertain tax positions during fiscal 2010 for matters involving jurisdictions where interest is not assessed.

It is reasonably possible the amount of the unrecognized tax benefit with respect to certain unrecognized tax positions will decrease by $7.5 million during the next twelve months as the Company expects to finalize discussions with the tax authorities on the matter above during that time. However, the Company does not expect that the change would have a material effect on its results of operations or its financial position.

The Company files U.S. federal income tax returns, as well as, income tax returns in various state and foreign jurisdictions. For the U.S. federal income tax returns and most state tax returns, tax years following fiscal 2000 remain subject to examination as a result of the generation of net operating loss carry-forwards. The statutes of limitations with respect to the foreign jurisdictions in which the company files vary from jurisdiction to jurisdiction and range from 4 to 6 years.

As a result of committing to certain capital investments and employment levels, income from operations in Singapore and Malaysia are subject to reduced tax rates, and in some cases are wholly exempt from taxes. In connection with certain Singapore operations, the Company finalized negotiations with a foreign tax jurisdiction which resulted in a decreased effective tax rate of five percent in that jurisdiction until February 1, 2020. In fiscal 2011, the preferential rate reduced income tax expense by approximately $8.0 million or $0.11 per share. In addition, one of the Company’s subsidiaries in Malaysia is wholly exempt from taxes through 2014. For fiscal 2011 and 2010, this Malaysia exemption reduced income tax expense by approximately $13.1 million or $0.18 per share and $33.8 million or $0.46 per share, respectively.