9. Income Taxes

The reconciliation of our income tax expense and effective income tax rates for the nine months ended June 30, 2013 and July 1, 2012 is as follows:

	Nine Months Ended
	June 30, 2013			July 1, 2012
	($ in thousands)

Tax at federal statutory rate	$	(9,009)	35.0%	$	39,800	35.0%
State taxes, net of federal benefit	210		(0.8)	3,848		3.4
R&E credits	(2,243)		8.7	(253)		(0.2)
Domestic production deduction	(889)		3.5	(543)		(0.5)
Tax differential on foreign earnings	(1,790)		7.0	(3,240)		(2.8)
Valuation allowance	3,832		(14.9)	–		–
Goodwill	12,139		(47.2)	–		–
Other	(1,142)		4.4	(90)		(0.1)

Total income tax expense	$	1,108	(4.3)%	$	39,522	34.8%

The effective tax rates for the first nine months of fiscal 2013 and 2012 were (4.3%) and 34.8%, respectively. The negative effective tax rate of 4.3% resulted primarily from the approximately $35 million goodwill impairment charge taken during the third quarter of fiscal 2013 that was not deductible for tax purposes. Excluding the impact of the goodwill impairment, the effective tax rates were 33.7% and 31.2% for the third quarter and first nine months of fiscal 2013, respectively.

At June 30, 2013, undistributed earnings of our foreign subsidiaries, primarily in Canada, aggregating approximately $22.0 million, are expected to be permanently reinvested. Accordingly, no provision for U.S. income taxes or foreign withholding taxes has been made. Upon distribution of those earnings, we would be subject to U.S. income taxes and foreign withholding taxes.

We review the realizability of deferred tax assets on a quarterly basis by assessing the need for a valuation allowance. As of June 30, 2013, we performed our assessment of net deferred tax assets. Significant management judgment is required in determining the provision for income taxes and, in particular, any valuation allowance recorded against our deferred tax assets. Applying the applicable accounting guidance requires an assessment of all available evidence, positive and negative, regarding the realizability of the net deferred tax assets. Based upon recent results, we concluded that a cumulative loss in recent years exists in foreign jurisdictions. We have historically relied on the following factors in our assessment of the realizability of our net deferred tax assets:

· taxable income in prior carryback years as permitted under the tax law;

· future reversals of existing taxable temporary differences;

· consideration of available tax planning strategies and actions that could be implemented, if necessary; and

· estimates of future taxable income from our operations.

We considered these factors in our estimate of the reversal pattern of deferred tax assets, using assumptions that we believe are reasonable and consistent with operating results. However, as a result of projected cumulative pre-tax losses for the 36 months ending September 29, 2013, we concluded that our estimates of future taxable income and certain tax planning strategies did not constitute sufficient positive evidence to assert that it is more likely than not that certain deferred tax assets would be realizable before expiration. Although we project earnings in the business beyond 2013, we did not rely on these projections when assessing the realizability of our deferred tax assets.

During the second quarter of fiscal 2013, the American Taxpayer Relief Act of 2012 was signed into law. This law retroactively extended the federal research and experimentation credits (“R&E credits”) for amounts incurred from January 1, 2012 through December 31, 2013. As a result of the retroactive extension, our effective tax rate for the second quarter of fiscal 2013 included a tax benefit of $1.1 million from the R&E credits attributable to the last nine months of fiscal 2012 and the first quarter of fiscal 2013.