10. Income Taxes

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


	2012			2011			2010
Domestic source	$	(209.2	)	$	(264.3	)	$	134.9
Foreign source		60.6			69.3			56.6
(Loss) earnings before income tax	$	(148.6	)	$	(195.0	)	$	191.5

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


	2012			2011			2010
Current
Federal	$	(2.9	)	$	12.9		$	(3.4	)
State		(0.7	)		(0.1	)		(2.9	)
Foreign		(13.8	)		(20.9	)		(13.1	)
Subtotal		(17.4	)		(8.1	)		(19.4	)
Deferred
Federal and state		(4.8	)		19.5			(10.2	)
Foreign		(0.9	)		(4.8	)		(6.3	)
Subtotal		(5.7	)		14.7			(16.5	)
Total income tax (expense) benefit	$	(23.1	)	$	6.6		$	(35.9	)

Deferred tax (liabilities) assets for 2012 and 2011 consist of the following:


	12/28/12			12/30/11
Deferred tax assets
Net operating loss and tax credit carryforwards	$	229.6		$	179.5
Amortizable intangibles		41.8			34.8
Inventory reserves		29.8			30.6
Deferred employee benefit expenses		17.2			22.8
Accrued liabilities		15.3			14.7
Deferred compensation plan		6.1			13.7
Restructuring accruals		5.7			5.7
Deferred revenue and advance payments		5.2			4.8
Fixed assets and depreciation		4.6			—
Other		13.1			11.3
Deferred tax assets	$	368.4		$	317.9
Deferred tax liabilities
Unrealized gain on marketable securities	$	(184.8	)	$	(196.0	)
Unremitted earnings of non-U.S. subsidiaries		(48.0	)		—
Fixed assets and depreciation		—			(0.5	)
Other		(6.7	)		(5.1	)
Deferred tax liabilities		(239.5	)		(201.6	)
Valuation allowance		(134.3	)		(113.8	)
Net deferred tax (liabilities) assets	$	(5.4	)	$	2.5

The net deferred income tax asset decreased from $2.5 million at December 30, 2011, to a net deferred income tax liability of $5.4 million at December 28, 2012. The $7.9 million change is attributable to an increase in the domestic valuation allowance and in the deferred tax liabilities offset by an increase in the carryforward of net operating losses and credits. The deferred tax liability includes $184.0 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	2012			2011			2010
Statutory Federal income tax rate		35.0	%		35.0	%		35.0	%
Valuation allowance on net domestic deferred tax assets		(46.1	)		(20.4	)		(11.6	)
State income tax, net of federal benefits¹		(0.8	)		3.0			(4.9	)
Foreign earnings taxed at different rates		2.6			(2.2	)		1.8
Research and development credits		0.1			4.2			(1.4	)
Nondeductible equity-based compensation expense		(0.4	)		(0.4	)		0.3
Interest related to prior year tax matters		(0.2	)		(0.2	)		0.3
Tax exempt interest		—			—			(0.1	)
Goodwill impairment		—			(14.8	)		—
Other, net		(5.8	)		(0.8	)		(0.6	)
Effective income tax rate		(15.6	)%		3.4	%		18.8	%

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 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 and 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 2012, our valuation allowance increased by $20.5 million. Our domestic valuation allowance reflects an increase in deferred tax assets of $23.0 million as a result of our cumulative loss position. The valuation allowance against our foreign deferred tax assets decreased by $2.5 million as the result of a decrease in deferred tax assets.

Summary of Carryforwards

We had the following tax net operating loss (tax effected) and credit carryforwards as of December 28, 2012:


			Years of expiration
	12/28/12		Beginning	Ending
U.S. net operating loss and credit carryforwards	$	179.1	2016		2032
U.S. capital loss carryforwards		0.4	2016		2016
State net operating loss and credit carryforwards		20.1	2013		2032
State credit carryforwards		13.8	no expiration
Foreign net operating loss and credit carryforwards		13.2	2013		2031
Foreign net operating loss carryforwards		3.0	no expiration
Total	$	229.6

Accounting for Uncertainty in Income Taxes

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


	12/28/12			12/30/11
Balance – beginning of year	$	11.4		$	17.2
Additions based on tax positions related to the current year		1.9			2.8
Additions for tax positions of prior years		0.6			—
Reductions for tax positions of prior years as a result of a lapse in the statute of limitations		(0.7	)		(4.1	)
Reductions for tax positions of prior years relating to settlements with taxing authorities		—			(4.5	)
Balance – end of year	$	13.2		$	11.4

The ending balance at December 28, 2012, includes an accrual of $7.2 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 $0.3 million of interest and penalties for 2012, $0.4 million for 2011, and $0.6 million for 2010. The balance of interest and penalties accrued was $0.9 million as of December 28, 2012, and $0.7 million as of December 30, 2011. At December 28, 2012, the noncurrent accrual for taxes and interest was $14.1 million.

It is reasonably possible that unrecognized benefits related to domestic income taxes will decrease 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

During 2012, we determined that a dividend of approximately $367.0 million would be remitted from our foreign subsidiaries. We recorded deferred U.S. income tax of $48.0 million and foreign withholding taxes of $1.0 million on this dividend. We have not provided deferred U.S. income taxes and foreign withholding taxes on the remaining 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 $259.3 million at December 28, 2012. Upon repatriation of these earnings, we would be subject to U.S. income tax, net of available foreign tax credits. At December 28, 2012, 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 $32.5 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 2007. Our major jurisdictions currently include the United States, California, Illinois, Finland, Mexico, the United Kingdom, Brazil, Argentina, China, India, Japan, Malaysia and the Philippines. We are currently under audit by the State of Illinois for the 2007 and 2008 tax periods, in India for the 2009 tax period and in the Philippines for the 2010 tax period. During 2013, we expect the Internal Revenue Service to begin an audit of our 2010 and 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.