INCOME TAXES

6 Months Ended

Jun. 29, 2012

INCOME TAXES

INCOME TAXES

9.                        INCOME TAXES

Income taxes are accounted for under the asset and liability method and are determined using an estimated annual effective tax rate. Deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the financial reporting basis and tax basis of the Company’s assets and liabilities, subject to a judgmental assessment of recoverability of deferred tax assets. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets may not be realized.

The Company recognizes the tax benefit from uncertain tax positions if it is more likely than not that the tax positions will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefit is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense.

The Company recorded an income tax benefit of $2.7 million and $3.6 million for the three and six months ended June 29, 2012, respectively, as compared to income tax expense of $0.2 million for the three and six months ended July 1, 2011. The tax benefit is attributable to the $15.2 million of goodwill impairment and operating losses of $6.6 million offset by a valuation allowance of $5.3 million which was recorded during the three months ended June 29, 2012 due to the uncertainty of realization of deferred tax assets. The effective tax rates for the three and six months ended June 29, 2012 differ from the U.S. federal statutory rate of 35% primarily due to state income tax rates, permanent items that are not deductible for U.S. tax purposes, and the establishment of the valuation allowance during the three months ended June 29, 2012.