Income Taxes

The domestic and foreign components of income (loss) before income taxes for fiscal 2014, 2013 and 2012 consisted of (in thousands):



	2014			2013			2012
U.S.	$	(12,473	)	$	(8,406	)	$	8,371
Foreign	105,798			93,389			82,860
	$	93,325		$	84,983		$	91,231

Income tax expense (benefit) for fiscal 2014, 2013 and 2012 consisted of (in thousands):



	2014			2013			2012
Current:
Federal	$	(2,050	)	$	408		$	—
State	(332		)	—			131
Foreign	10,147			4,089			5,253
	7,765			4,497			5,384
Deferred:
Federal	(1,506		)	(3,702		)	18,950
State	—			(42		)	4,784
Foreign	(147		)	1,971			24
	(1,653		)	(1,773		)	23,758
	$	6,112		$	2,724		$	29,142

Included in current tax expense is a net $2.4 million non-cash benefit.

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 2014, 2013 and 2012 (certain prior period amounts have been reclassified to conform to current year presentation):



	2014		2013		2012
Federal statutory income tax rate	35.0	%	35.0	%	35.0	%
Increase (decrease) resulting from:
Permanent differences	1.8		(0.1	)	(2.0	)
State income taxes, net of federal income tax	—		—		0.2
Foreign tax rate differences	(33.2	)	(34.4	)	(27.5	)
Valuation reserve for deferred tax assets	8.4		5.8		26.5
Other, net	(5.5	)	(3.1	)	(0.3	)
Effective income tax rate	6.5	%	3.2	%	31.9	%

The Company recorded income tax expense of $6.1 million, $2.7 million and $29.1 million for fiscal 2014, 2013 and 2012, respectively.

The effective tax rate for fiscal 2014 is higher than that of fiscal 2013 primarily as a result of the geographic distribution of worldwide earnings. The effective tax rate for fiscal 2013 was significantly lower than that of fiscal 2012 primarily as a result of the Company recording an additional valuation allowance against the U.S. deferred tax assets during fiscal 2012 as well as discrete tax benefits recorded in fiscal 2013.

In fiscal 2014, the Company recorded a $7.9 million addition to its valuation allowance relating to continuing losses in certain jurisdictions within the AMER and EMEA regions. At the close of fiscal 2014, using the measurement criteria found in ASC 740, the Company believes that the positive evidence does not outweigh the negative and the valuation allowance should remain in place. During fiscal 2014, the Company also recorded tax benefits of $3.8 million primarily related to the settlement of U.S. tax examinations during the year. This benefit is included in the "Other, net" line in the rate reconciliation table above and represents 4.1% of the current "Other" balance.

In fiscal 2013, the Company recorded a $7.0 million addition to its valuation allowance, of which $5.2 million related to continuing losses in certain jurisdictions within the AMER and EMEA regions. During fiscal 2013, the Company performed an analysis of all available evidence, both positive and negative, regarding the need for a valuation allowance against our U.K. deferred tax assets, consistent with the provisions of ASC 740. Accordingly, the Company established an additional $1.8 million valuation allowance against the U.K. deferred tax assets. The Company also identified and recorded several out-of-period tax errors that reduced tax expense by $3.2 million. The Company believes these out-of-period tax errors were not material to the fiscal 2013, or previously issued, financial statements.

In fiscal 2012, the Company recorded a valuation allowance of $24.1 million, of which $1.3 million related to continuing losses in certain jurisdictions within the EMEA region. 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 its U.S. deferred tax assets, consistent with the provisions of ASC 740. Accordingly, the Company established an additional $22.8 million valuation allowance against the U.S. deferred tax assets.

The components of the net deferred income tax asset as of September 27, 2014 and September 28, 2013, consisted of (in thousands):



	2014			2013
Deferred income tax assets:
Loss/credit carryforwards	$	17,356		$	12,985
Goodwill	541			1,268
Inventories	5,468			4,997
Accrued benefits	23,754			19,428
Allowance for bad debts	343			339
Other	3,165			3,304
Total gross deferred income tax assets	50,627			42,321
Less valuation allowance	(41,935		)	(34,075		)
Deferred income tax assets	8,692			8,246
Deferred income tax liabilities:
Property, plant and equipment	4,322			3,934
Other	84			13
Deferred income tax liabilities	4,406			3,947
Net deferred income tax asset	$	4,286		$	4,299

During fiscal 2014, the Company’s valuation allowance increased by $7.9 million. This increase is the result of increases to the valuation allowances against the net deferred tax assets in the AMER region of $3.9 million, in the EMEA region of $4.2 million, and a release of the valuation allowance in the APAC region of $0.2 million.

As of September 27, 2014, the Company had approximately $89.5 million of state net operating loss carryforward that expire between fiscal 2015 and 2035, which also has a full valuation allowance against them.

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 $4.5 million related to tax deductions in excess of compensation expense for stock options. This deduction will remain unrecognized until such time as the related deductions actually reduce income taxes payable.

Cash paid for income taxes in fiscal 2014, 2013 and 2012 was $9.0 million, $5.3 million and $9.0 million, respectively.

During the fiscal year ended September 27, 2014, 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 a tax holiday for a foreign subsidiary operating in the APAC region. This tax holiday will expire in fiscal 2024 and is subject to certain conditions with which the Company expects to comply. The Company benefited from a second tax holiday within the APAC region, which under the terms of the Company's agreement with the local taxing authority expired on December 31, 2013. In fiscal 2014, 2013 and 2012, these tax holidays resulted in tax reductions of approximately $24.1 million ($0.71 per basic share), $22.7 million ($0.66 per basic share) and $17.5 million ($0.50 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 $687.6 million as of September 27, 2014. 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 $2.4 million of uncertain tax benefits as of September 27, 2014. 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; certain prior period amounts have been reclassified to conform to current year presentation):



Balance at September 29, 2012	$	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	—
Lapse of applicable statute of limitations	356
Settlements	—
Balance at September 28, 2013	$	7,436
Gross increases for tax positions of prior years	324
Gross increases for tax positions of the current year	—
Gross decreases for tax positions of prior years	1,582
Lapse of applicable statute of limitations	3,810
Settlements	—
Balance at September 27, 2014	$	2,368

Approximately $1.1 million and $5.3 million of the balance as of September 27, 2014 and September 28, 2013, 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 $0.2 million, $1.1 million, and $0.9 million as of September 27, 2014, September 28, 2013 and September 29, 2012, respectively. The Company recognized $0.1 million of expense for accrued penalties and net accrued interest in the Consolidated Statements of Comprehensive Income for the fiscal year ended September 27, 2014.

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 not currently under examination by taxing authorities in the U.S. 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		2009-2014
Germany		2009-2014
Mexico		2009-2014
Romania		2009-2014
United Kingdom		2010-2014
United States
Federal		2011-2014
State		2001-2014