12. Income Taxes

Components of (loss) earnings before income taxes are as follows:


	2011			2010		2009
Domestic source	$	(264.3	)	$	134.9	$	4.1
Foreign source		69.3			56.6		109.1

(Loss) earnings before income tax	$	(195.0	)	$	191.5	$	113.2

The provision for income tax benefit (expense) consists of the following:


	2011			2010			2009
Current
Federal	$	12.9		$	(3.4	)	$	10.5
State		(0.1	)		(2.9	)		(1.8	)
Foreign		(20.9	)		(13.1	)		(17.0	)

Subtotal		(8.1	)		(19.4	)		(8.3	)

Deferred
Federal and state		19.5			(10.2	)		24.9
Foreign		(4.8	)		(6.3	)		(16.2	)

Subtotal		14.7			(16.5	)		8.7

Total income tax benefit (expense)	$	6.6		$	(35.9	)	$	0.4

Deferred tax assets (liabilities) for 2011 and 2010 consist of the following:


	12/30/11			12/31/10
Deferred tax assets
Net operating loss and tax credit carryforwards	$	179.5		$	128.2
Deferred employee benefit expenses		22.8			36.5
Amortizable intangibles		34.8			32.4
Inventory reserves		30.6			24.6
Accrued liabilities		14.7			22.4
Deferred compensation plan		13.7			12.9
Restructuring accruals		5.7			3.5
Deferred revenue and advance payments		4.8			2.2
Fixed assets and depreciation		—			1.2
Other		11.3			12.8

Deferred tax assets	$	317.9		$	276.7

Deferred tax liabilities
Unrealized gain on marketable securities	$	(196.0	)	$	(195.3	)
Fixed assets and depreciation		(0.5	)		—
Other		(5.1	)		(8.1	)

Deferred tax liabilities		(201.6	)		(203.4	)
Valuation allowance		(113.8	)		(71.7	)

Net deferred tax assets	$	2.5		$	1.6

The net deferred income tax asset increased from $1.6 million at December 31, 2010, to $2.5 million at December 30, 2011. The $0.9 million change is attributable to an increase in the carryforward of net operating losses and credits for the year, partially offset by an increase in domestic valuation allowance and a net decrease in the remaining deferred tax assets and liabilities. The deferred tax liability includes $195.2 million representing taxes that will be due on certain hedge contract gains upon termination of our Loan related to other marketable securities.

A reconciliation of the reported effective income tax rates to the domestic federal income tax rate is as follows:


In percentages	2011			2010			2009
Statutory Federal income tax rate		35.0	%		35.0	%		35.0	%
Valuation allowance on net domestic deferred tax assets		(20.4	)		(11.6	)		(31.8	)
State income tax, net of federal benefits¹		3.0			(4.9	)		0.5
Foreign earnings taxed at different rates		(2.2	)		1.8			0.5
Research and development credits		4.2			(1.4	)		(4.8	)
Nondeductible equity-based compensation expense		(0.4	)		0.3			1.2
Interest related to prior year tax matters		(0.2	)		0.3			0.5
Tax exempt interest		—			(0.1	)		(0.3	)
Goodwill impairment		(14.8	)		—			—
Other, net		(0.8	)		(0.6	)		(1.1	)

Effective income tax rate		3.4	%		18.8	%		(0.3	)%

¹	In 2010, state income tax, net of federal benefits, reflects a benefit of $9.4 million, including interest, related to the reversal of reserves no longer required due to a lapse in the statute of limitations.

Deferred Tax Valuation Allowance

A valuation allowance is established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. The loss incurred in 2011, and the net cumulative loss for the current and prior two years, represents sufficient negative evidence for the Company to determine that a full valuation allowance be established against its domestic deferred tax assets. This valuation allowance will offset assets associated with future tax deductions as carryforward items. We continue to maintain a valuation allowance against deferred tax assets related to tax benefits from certain non-U.S. net operating losses and tax credit carryforwards. Until an appropriate level of profitability is attained, we expect to maintain a valuation allowance on our net U.S. and certain non-U.S. deferred tax assets.

During 2011, our valuation allowance increased by $42.1 million. Our domestic valuation allowance reflects an increase in deferred tax assets of $39.8 million as a result of our cumulative loss position. The valuation allowance against our foreign deferred tax assets increased by $2.3 million as the result of an increase in deferred tax assets related to net operating losses and other carryforward items in jurisdictions where we are unable to establish deferred tax assets due to losses incurred in current and prior periods.

Summary of Carryforwards

We had the following tax net operating loss (tax effected) and credit carryforwards as of December 30, 2011:


			Years of expiration
	12/30/11		Beginning		Ending
U.S. net operating loss and credit carryforwards	$	121.2		2016		2031
U.S. capital loss carryforwards		9.7		2012		2016
State net operating loss and credit carryforwards		18.7		2012		2031
State credit carryforwards		12.6		no expiration
Foreign net operating loss and credit carryforwards		13.9		2012		2030
Foreign net operating loss carryforwards		3.4		no expiration

Total	$	179.5

Accounting for Uncertainty in Income Taxes

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:


	12/30/11			12/31/10
Balance—beginning of year	$	17.2		$	26.4
Additions based on tax positions related to the current year		2.8			2.4
Reductions for tax positions of prior years		—			(0.4	)
Reductions for tax positions of prior years as a result of a lapse in the statute of limitations		(4.1	)		(10.9	)
Reductions for tax positions of prior years relating to settlements with taxing authorities		(4.5	)		(0.3	)

Balance—end of year	$	11.4		$	17.2

The ending balance at December 30, 2011, includes an accrual of $7.7 million of unrecognized tax benefits that, if recognized, would affect the effective tax rate. We continue to recognize interest and penalties related to income tax matters as part of income tax expense. Our tax provision included $0.4 million of interest and penalties for 2011, $0.6 million for 2010, and $1.8 million for 2009. The balance of interest and penalties accrued was $0.7 million as of December 30, 2011, and $3.0 million as of December 31, 2010. At December 30, 2011, the noncurrent accrual for taxes and interest was $12.1 million.

It is reasonably possible that unrecognized benefits related to domestic income taxes will decrease by up to approximately $1.0 million as a result of the settlement of audits or the expiration of the statute of limitations within the next 12 months.

It is reasonably possible that unrecognized benefits related to foreign income taxes will decrease by approximately $1.0 million to $2.0 million as a result of the settlement of audits or the expiration of the statute of limitations within the next 12 months.

Investment in Foreign Operations

We do not provide deferred U.S. income taxes and foreign withholding taxes on the undistributed cumulative earnings of foreign subsidiaries because we consider such earnings to be permanently reinvested in those operations. The undistributed cumulative earnings of foreign subsidiaries that are considered permanently reinvested outside the United States were $629.1 million at December 30, 2011. Upon repatriation of these earnings, we would be subject to U.S. income tax, net of available foreign tax credits. At December 30, 2011, the estimated amount of this unrecognized deferred tax liability on permanently reinvested foreign earnings, based on current exchange rates and assuming we are able to use foreign tax credits, was $86.1 million.

Audits

We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. We are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities in our major jurisdictions for years before 2006. Our major jurisdictions currently include the United States, California, Illinois, Finland, Denmark and Mexico. Except with respect to an audit by the Internal Revenue

Service of the 2009 pre-acquisition period of WiChorus, we are not under audit in any of our other major jurisdictions for the 2006 through 2011 tax periods. Although we have recorded tax reserves for potential adjustments to tax liabilities for prior years, we cannot provide assurance that a material adjustment to our financial statements, either positive or negative, will not result when the audits are concluded.