Income Taxes

The domestic and foreign components of income (loss) before income taxes for fiscal 2013, 2012 and 2011 consisted of (in thousands):



	2013			2012		2011
U.S.	$	(8,406	)	$	8,371	$	(9,449	)
Foreign	93,389			82,860		101,552
	$	84,983		$	91,231	$	92,103

Income tax expense (benefit) for fiscal 2013, 2012 and 2011 consisted of (in thousands):



	2013			2012		2011
Current:
Federal	$	408		$	—	$	—
State	—			131		3
Foreign	4,089			5,253		5,872
	4,497			5,384		5,875
Deferred:
Federal	(3,702		)	18,950		(1,649		)
State	(42		)	4,784		(484		)
Foreign	1,971			24		(895		)
	(1,773		)	23,758		(3,028		)
	$	2,724		$	29,142	$	2,847

The following is a reconciliation of the federal statutory income tax rate to the effective income tax rates reflected in the Consolidated Statements of Comprehensive Income for fiscal 2013, 2012 and 2011:



	2013		2012		2011
Federal statutory income tax rate	35.0	%	35.0	%	35.0	%
Increase (decrease) resulting from:
Permanent differences	—		—		—
State income taxes, net of federal income tax	—		0.2		(0.3	)
Foreign tax rate differences	(34.4	)	(27.5	)	(34.5	)
Valuation reserve for deferred tax assets	5.8		26.5		1.4
Other, net	(3.2	)	(2.3	)	1.5
Effective income tax rate	3.2	%	31.9	%	3.1	%

The Company recorded income tax expense of $2.7 million, $29.1 million and $2.8 million for fiscal 2013, 2012 and 2011, respectively.

The effective tax rate for fiscal 2013 was significantly lower than that of fiscal 2012 but comparable to the fiscal 2011 rate. The increase to the income tax expense recorded in fiscal 2012 as compared to the other periods presented was the result of the Company recording an additional valuation allowance against the U.S. deferred tax assets in fiscal 2012. During the preparation of the fiscal 2012 consolidated financial statements, the Company performed an analysis of all available evidence, both positive and negative, regarding the need for a valuation allowance against our U.S. deferred tax assets, consistent with the provisions of ASC Topic 740, “Income Taxes.” Accordingly, the Company, based on the weight of the available positive and negative evidence, established an additional valuation allowance against the U.S. deferred tax assets, impacting the tax provision by $22.8 million. The total valuation allowance impacting the tax provision for fiscal 2012 was $24.1 million, comprised of the $22.8 million valuation allowance for the U.S. and an additional $1.3 million for operating losses in Germany and Romania.

During the fourth quarter of fiscal 2013, the Company identified and recorded a discrete tax adjustment and placed a full valuation allowance on the net deferred tax assets of the Company's U.K. operations, increasing tax expense by $1.8 million ($0.05 per diluted share). The Company's analysis found that in the fourth quarter, its U.K. operations experienced an unanticipated material decline in sales resulting in a loss in fiscal 2013, which is forecasted to continue into fiscal 2014. While the Company's U.K. operations are expected to regain profitability, the current, forecasted and cumulative losses are substantial negative evidence. Having examined the evidence, both positive and negative, it was determined that it is more likely than not that these deferred tax assets will not be utilized and should have a valuation allowance placed against them.

In the fourth quarter of fiscal 2013 the Company identified and recorded several out-of-period tax errors related to prior fiscal periods that reduced tax expense by $3.2 million ($0.09 per diluted share). These out-of-period adjustments are reflected in the Other, net line of the effective income tax rate schedule above. The Company believes these out-of-period tax errors were not material to the fiscal 2013, or previously issued, financial statements.

The components of the net deferred income tax asset as of September 28, 2013 and September 29, 2012, consisted of (in thousands):



	2013			2012
Deferred income tax assets:
Loss/credit carryforwards	$	12,985		$	12,175
Goodwill	1,268			2,024
Inventories	4,997			4,870
Accrued benefits	19,428			17,768
Allowance for bad debts	339			322
Interest rate swaps	—			664
Other	3,304			4,735
Total gross deferred income tax assets	42,321			42,558
Less valuation allowance	(34,075		)	(27,087		)
Deferred income tax assets	8,246			15,471
Deferred income tax liabilities:
Property, plant and equipment	3,934			7,404
Other	13			1,500
Deferred income tax liabilities	3,947			8,904
Net deferred income tax asset	$	4,299		$	6,567

During fiscal 2013, the Company’s valuation allowance increased by $7.0 million as a result of increases to the valuation allowance against the net deferred tax assets in the U.S. of $2.4 million, the net deferred tax assets in the U.K. of $2.4 million, the net deferred tax assets in Romania of $0.9 million, the net deferred tax assets in Germany of $1.0 million and the net deferred tax assets in China of $0.3 million.

As of September 28, 2013, the Company had approximately $81.6 million of state net operating loss carryforward that expires between fiscal 2014 and 2032, which also has a full valuation allowance against it.

As a result of using the with-and-without method under the requirements for accounting for stock-based compensation, the Company has unrecognized net operating loss carryforward of $2.6 million related to tax deductions in excess of compensation expense for stock options until such time as the related deductions actually reduce income taxes payable.

Cash paid for income taxes in fiscal 2013 and 2012 was $5.3 million and $9.0 million, respectively. Cash refunded for income taxes in fiscal 2011 was $2.2 million.

During the fiscal year ended September 28, 2013, tax legislation was adopted in various jurisdictions. None of these changes are expected to have a material impact on the Company's consolidated financial condition, results of operations or cash flows.

The Company has been granted tax holidays for its Malaysian and Xiamen, China subsidiaries. These tax holidays expire in fiscal 2024 and 2014, respectively, and are subject to certain conditions with which the Company expects to comply. In fiscal 2013, 2012 and 2011, these subsidiaries generated income, which resulted in tax reductions of approximately $22.7 million ($0.66 per basic share), $17.5 million ($0.50 per basic share) and $21.7 million ($0.57 per basic share), respectively.

The Company does not provide for taxes that would be payable if undistributed earnings of foreign subsidiaries were remitted because the Company considers these earnings to be permanently reinvested. The aggregate undistributed earnings of the Company’s foreign subsidiaries for which a deferred income tax liability has not been recorded was approximately $567.3 million as of September 28, 2013. If such earnings were repatriated, additional tax expense may result, although the calculation of such additional taxes is not practicable at this time.

The Company has approximately $7.4 million of uncertain tax benefits as of September 28, 2013. The Company has classified these amounts in the Consolidated Balance Sheets as “Other liabilities” (noncurrent) to the extent that payment is not anticipated within one year. Presented below is a reconciliation of the beginning and ending amounts of unrecognized income tax benefits (in thousands):



Balance at beginning of fiscal 2012	$	7,360
Gross increases for tax positions of prior years	243
Gross increases for tax positions of the current year	—
Gross decreases for tax positions of prior years	—
Settlements	—
Balance at beginning of fiscal 2013	$	7,603
Gross increases for tax positions of prior years	189
Gross increases for tax positions of the current year	—
Gross decreases for tax positions of prior years	356
Settlements	—
Balance at September 28, 2013	$	7,436

Approximately $5.3 million and $6.5 million of the balance as of September 28, 2013 and September 29, 2012, respectively, would reduce the Company’s effective tax rate if recognized.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. The total accrued penalties and net accrued interest with respect to income taxes was approximately $1.1 million, $0.9 million and $0.7 million as of September 28, 2013, September 29, 2012 and October 1, 2011, respectively. The Company recognized $0.2 million of expense for accrued penalties and net accrued interest in the Consolidated Statements of Comprehensive Income for the fiscal year ended September 28, 2013.

It is reasonably possible that a number of uncertain tax positions related to federal and state tax positions may be settled within the next 12 months. Settlement of these matters is not expected to have a material effect on the Company’s consolidated results of operations, financial position and cash flows. The Company is currently under examination by taxing authorities in the U.S. for fiscal years 2008 through 2010. The U.S. examination may be resolved within the next twelve months, but at this time it is not possible to estimate the amount of the effects of any changes to the Company's previously recorded uncertain tax positions. Periodically, the Company's foreign operations are notified by local taxing authorities of an examination of current or prior period tax related filings. The Company is not aware of any material proposed adjustment that has not been reflected in the current financial statements.

The Company files income tax returns, including returns for its subsidiaries, with federal, state, local and foreign taxing jurisdictions. The following tax years remain subject to examination by the respective major tax jurisdictions:



Jurisdiction		Fiscal Years
China		2008-2013
Germany		2009-2013
Mexico		2006-2013
Romania		2009-2013
United Kingdom		2007-2013
United States
Federal		2007-2013
State		2001-2013