9.Income Taxes

The effective tax rates for the first nine months of fiscal 2014 and 2013 were 29.4% and (4.3%), respectively. The fiscal 2014 effective rate reflects $26.2 million of gains related to the updated valuation of contingent consideration liabilities that were not taxable. 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. At June 29, 2014, undistributed earnings of our foreign subsidiaries, primarily in Canada, in the amount of approximately $43.3 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. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable; however, the potential foreign tax credit associated with the deferred income would be available to partially reduce the resulting U.S. tax liabilities.

We review the realizability of deferred tax assets on a quarterly basis by assessing the need for a valuation allowance. As of June 29, 2014, we performed our assessment of net deferred tax assets. Significant management judgment is required to determine 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, both 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 certain 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 in these certain foreign jurisdictions for the 36 months ending September 28, 2014, 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 related business beyond 2014, we did not rely on these projections when assessing the realizability of our deferred tax assets. Based on our assessment, we concluded that it is more likely than not that the assets will be realized except for the assets related to loss carry-forwards in foreign jurisdictions for which a valuation allowance of $8.8 million had been provided in previous years.

In the third quarter of fiscal 2014, we received notification from the Internal Revenue Service that our appeals settlement in connection with three issues, research and experimentation tax credit (“R&E credit”), domestic production activities deduction, and meals and entertainment expenses, was approved for fiscal years 2005 through 2007. The settlement of these issues, including interest, resulted in a cash refund of $6.3 million, which was received in the third quarter of fiscal 2014. The settlement did not have a material impact on our financial statements as the amount received was consistent with the amount previously recognized in the financial statements.

During the second quarter of fiscal 2013, the American Taxpayer Relief Act of 2012 was signed into law. This law retroactively extended the federal R&E credits for amounts incurred from January 1, 2012 through December 31, 2013. Our effective tax rate for the first quarter of fiscal 2014 includes a tax benefit from R&E credits attributable to the first three months of fiscal 2014. Should the R&E credits provision be retroactively extended during fiscal 2014, additional benefits will be reflected in our effective tax rate during the quarter reporting period of enactment.