NOTE 12: Taxes

A reconciliation of the United States federal statutory corporate tax rate to the Company’s effective tax rate, or income tax provision, was as follows:


	Three-months Ended						Nine-months Ended
	Sept. 30, 2012			Oct. 2, 2011			Sept. 30, 2012			Oct. 2, 2011
Income tax at federal statutory rate		35	%		35	%		35	%		35	%
State income taxes, net of federal benefit		1			1			1			1
Foreign tax rate differential		(15	)		(13	)		(15	)		(13	)
Discrete tax events		(2	)		(2	)		(1	)		(1	)

Income tax provision		19	%		21	%		20	%		22	%

The Company’s effective tax rate for the third quarter of 2012 included a decrease in tax expense of $441,000 due to the expiration of statutes of limitations for certain reserves for income tax uncertainties. This reduction in tax expense was partially offset by the final true-up of the prior year’s tax accrual upon filing the actual tax returns, which increased tax expense by $84,000. These discrete tax events decreased the effective tax rate from a provision of 21% to a provision of 19% for the three-month period in 2012 and decreased the effective tax rate from a provision of 21% to a provision of 20% for the nine-month period in 2012. Included in the effective tax rate is the reversal of a $2,457,000 valuation allowance against foreign tax credits recorded in the prior year. Management believes that the Company will have sufficient foreign source earnings taxable in the United States to allow for full realization of these credits in 2012.

The Company’s effective tax rate for the third quarter of 2011 included a decrease in tax expense of $808,000 due to the expiration of statutes of limitations for certain reserves for income tax uncertainties, along with a decrease in tax expense of $155,000 resulting from the Company’s settlement of its Advanced Pricing Agreement between Japan and Ireland. These reductions in tax expense were partially offset by the final true-up of the prior year’s tax accrual upon filing the actual tax returns, which increased tax expense by $574,000. In addition, a deferred tax asset and a related valuation allowance of $2,457,000 were recognized for incremental foreign tax credits in the United Stated generated in 2010. These discrete tax events decreased the effective tax rate from a provision of 23% to a provision of 21% for the three-month period in 2011 and decreased the effective tax rate from a provision of 23% to a provision of 22% for the nine-month period in 2011.

During the nine-month period ended September 30, 2012, the Company recorded a $428,000 increase in liabilities, net of deferred tax benefit, for uncertain tax positions that were recorded as income tax expense, of which $206,000 was recorded in the three-month period ended September 30, 2012. Estimated interest and penalties included in these amounts totaled $95,000 for the nine-month period ended September 30, 2012, of which $32,000 was recorded in the three-month period ended September 30, 2012.

The Company’s reserve for income taxes, including gross interest and penalties, was $4,890,000 as of September 30, 2012, all of which was classified as noncurrent. The amount of gross interest and penalties included in these balances was $1,149,000. If the Company’s tax positions were sustained or the statutes of limitations related to certain positions expired, these reserves would be released and income tax expense would be reduced in a future period, less $311,000 that would be recorded as Additional Paid in Capital. As a result of the expiration of certain statutes of limitations, there is a potential that a portion of these reserves could be released, which would decrease income tax expense by approximately $1,500,000 to $1,800,000 over the next twelve months.

The Company has defined its major tax jurisdictions as the United States, Ireland, China, and Japan, and within the United States, Massachusetts and California. Within the United States, the tax years 2006 through 2011 remain open to examination by various taxing authorities due to a 2009 carryback claim, while the tax years 2007 through 2011 remain open to examination by various taxing authorities in other jurisdictions in which the Company operates.