Income Taxes

The domestic and foreign components of income (loss) before income taxes for fiscal 2012, 2011 and 2010 consisted of (in thousands):



	2012		2011			2010
U.S.	$	8,371	$	(9,449	)	$	(7,742	)
Foreign	82,860		101,552			98,179
	$	91,231	$	92,103		$	90,437

Income tax expense (benefit) for fiscal 2012, 2011 and 2010 consisted of (in thousands):



	2012		2011			2010
Current:
Federal	$	—	$	—		$	—
State	131		3			74
Foreign	5,253		5,872			4,019
	5,384		5,875			4,093
Deferred:
Federal	18,950		(1,649		)	(1,029		)
State	4,784		(484		)	(459		)
Foreign	24		(895		)	(1,701		)
	23,758		(3,028		)	(3,189		)
	$	29,142	$	2,847		$	904

The following is a reconciliation of the federal statutory income tax rate to the effective income tax rates reflected in the Consolidated Statements of Operations for fiscal 2012, 2011 and 2010:



	2012		2011		2010
Federal statutory income tax rate	35.0	%	35.0	%	35.0	%
Increase (decrease) resulting from:
Permanent differences	—		—		0.6
State income taxes, net of federal income tax	0.2		(0.3	)	(0.3	)
Foreign tax rate differences	(27.5	)	(34.5	)	(36.3	)
Valuation reserve for deferred tax assets	26.5		1.4		0.9
Other, net	(2.3	)	1.5		1.1
Effective income tax rate	31.9	%	3.1	%	1.0	%

The Company recorded income tax expense of $29.1 million, $2.8 million and $0.9 million for fiscal 2012, 2011 and 2010, respectively. The increase to the income tax expense recorded in fiscal 2012 as compared to fiscal 2011 and fiscal 2010 is the result of the Company recording an additional valuation allowance against the U.S. deferred tax assets based on the significant negative evidence of the Company's U.S. cumulative loss position and the deterioration of its forecasts late in the fourth quarter of fiscal 2012 for fiscal 2013, which has impacted forecasted profitability in the near term in the AMER region. Plexus believes the cumulative losses for the previous three fiscal years are a significant factor in establishing such an allowance coupled with the lesser weight of evidence pertaining to longer range forecasts. As the weight given to the positive and negative evidence is proportionate with the extent to which the evidence may be objectively verified, it is generally difficult for positive evidence regarding projected future taxable income exclusive of reversing taxable temporary differences to outweigh objectively verifiable negative evidence of recent financial reporting losses. Accordingly, the Company, based on the weight of the available positive and negative evidence, established an additional valuation allowance of $20.6 million ($22.8 million provision, offset by $2.2 million to other comprehensive income) on the U.S deferred tax assets as of September 29, 2012.

The components of the net deferred income tax asset as of September 29, 2012 and October 1, 2011, consisted of (in thousands):



	2012			2011
Deferred income tax assets:
Loss/credit carryforwards	$	12,175		$	10,263
Goodwill	2,024			2,787
Inventories	4,870			6,961
Accrued benefits	17,768			16,001
Allowance for bad debts	322			1,149
Interest rate swaps	664			2,031
Other	4,735			4,406
Total gross deferred income tax assets	42,558			43,598
Less valuation allowance	(27,087		)	(5,116		)
Deferred income tax assets	15,471			38,482
Deferred income tax liabilities:
Property, plant and equipment	7,404			9,552
Other	1,500			710
	8,904			10,262
Net deferred income tax asset	$	6,567		$	28,220

As discussed above, during fiscal 2012 the Company established a full valuation allowance of $20.6 million ($22.8 million provision, offset by $2.2 million to other comprehensive income, for a net deferred tax asset reduction of $20.6 million) against the U.S. net deferred assets. In addition, during fiscal 2012 the Company added valuation allowances of $0.9 million and $0.4 million in Germany and Romania, respectively, to offset the increase in net deferred tax assets in those jurisdictions which, more likely than not, will not be realized. In fiscal 2011 and fiscal 2010 the Company added valuation allowances of $0.3 million and $0.2 million in the United Kingdom, respectively, and $0.9 million and $0.6 million in Romania, respectively.

During the fiscal year ended September 29, 2012, tax legislation was adopted in various jurisdictions. None of these changes are expected to have a material impact on the Company's consolidated financial condition, results of operations or cash flows.

The Company has been granted tax holidays for its Malaysian and Xiamen, China subsidiaries. These tax holidays expire in 2024 and 2013, respectively, and are subject to certain conditions with which the Company expects to comply. In fiscal 2012, 2011 and 2010, these subsidiaries generated income, which resulted in tax reductions of approximately $17.5 million ($0.50 per basic share), $21.7 million ($0.57 per basic share) and $23.0 million ($0.58 per basic share), respectively.

The Company does not provide for taxes that would be payable if undistributed earnings of foreign subsidiaries were remitted because the Company considers these earnings to be permanently reinvested. The aggregate undistributed earnings of the Company’s foreign subsidiaries for which a deferred income tax liability has not been recorded was approximately $467.1 million as of September 29, 2012. If such earnings were repatriated, additional tax expense may result, although the calculation of such additional taxes is not practicable at this time.

As of September 29, 2012, the Company had approximately $78.9 million of state net operating loss carryforwards that expire between fiscal 2013 and 2032, which also have a full valuation allowance against them.

As a result of using the with-and-without method under the requirements for accounting for stock-based compensation, the Company recorded a valuation allowance for state taxes against the amount of net operating loss and credit carryforwards related to tax deductions in excess of compensation expense for stock options until such time as the related deductions actually reduce income taxes payable. As of the end of fiscal 2012 there was a valuation allowance of $2.3 million for federal and state taxes against the amount of net operating loss and credit carryforwards related to tax deductions in excess of compensation expense for stock options.

Cash paid for income taxes in fiscal 2012 and 2010 was $9.0 million and $3.5 million, respectively. Cash refund for income taxes in fiscal 2011 was $2.2 million.

The Company has approximately $7.6 million of uncertain tax benefits as of September 29, 2012. The Company has classified these amounts in the Consolidated Balance Sheets as “Other liabilities” (noncurrent) to the extent that payment is not anticipated within one year. Presented below is a reconciliation of the beginning and ending amounts of unrecognized income tax benefits (in thousands):



Balance at beginning of fiscal 2011	$	5,944
Gross increases for tax positions of prior years	191
Gross increases for tax positions of the current year	1,225
Gross decreases for tax positions of prior years	—
Settlements	—
Balance at beginning of fiscal 2012	$	7,360
Gross increases for tax positions of prior years	243
Gross increases for tax positions of the current year	—
Gross decreases for tax positions of prior years	—
Settlements	—
Balance at September 29, 2012	$	7,603

Approximately $6.5 million and $6.3 million, respectively of the balance as of September 29, 2012, and October 1, 2011 would reduce the Company’s effective tax rate if recognized.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. The total accrued penalties and net accrued interest with respect to income taxes was approximately $0.9 million, $0.7 million and $0.5 million as of September 29, 2012, October 1, 2011 and October 2, 2010, respectively. The Company recognized $0.2 million of expense for accrued penalties and net accrued interest in the Consolidated Statements of Operations for the fiscal year ended September 29, 2012.

It is reasonably possible that a number of uncertain tax positions related to federal and state tax positions may be settled within the next 12 months. Settlement of these matters is not expected to have a material effect on the Company’s consolidated results of operations, financial position and cash flows. The Company is currently under examination by taxing authorities in the U.S. for fiscal years 2008 through 2010 and is not undergoing any tax examinations in any of its major foreign jurisdictions. The U.S. examination may be resolved within the next twelve months, but at this time it is not possible to estimate the amount of the effects of any changes to the Company's previously recorded uncertain tax positions.

The Company files income tax returns, including returns for its subsidiaries, with federal, state, local and foreign taxing jurisdictions. The following tax years remain subject to examination by the respective major tax jurisdictions:



Jurisdiction		Fiscal Years
China		2008-2012
Germany		2009-2012
Mexico		2006-2012
Romania		2009-2012
United Kingdom		2007-2012
United States
Federal		2007-2012
State		2001-2012