Income Taxes

The United States and foreign components of income (loss) before income taxes and equity income from affiliates are as follows:



	2012			2011		2010
	(In thousands)
Income before income taxes, equity in earnings in affiliates, and discontinued operations
United States	$	91,048		$	96,670	$	71,890
Foreign	9,370			14,583		12,627
	100,418			111,253		84,517
Discontinued operations:
Income (loss) from operation of discontinued business	(18,465		)	12,572		13,587
Total	$	81,953		$	123,825	$	98,104

The provision (benefit) for income taxes consists of the following components:



	2012			2011			2010
	(In thousands)
Continuing Operations:
Federal income taxes:
Current	$	36,631		$	(4,198	)	$	8,902
Deferred	(78,275		)	36,716			16,308
	(41,644		)	32,518			25,210
State income taxes:
Current	5,020			2,099			1,907
Deferred	(8,770		)	4,732			3,234
	(3,750		)	6,831			5,141
Foreign income taxes:
Current	5,497			4,211			5,196
Deferred	(665		)	(388		)	(1,183		)
	4,832			3,823			4,013
Total U.S. and foreign	(40,562		)	43,172			34,364
Discontinued operations:
Tax (benefit) provision allocated to discontinued operations	(7,805		)	4,753			5,168
Total	$	(48,367	)	$	47,925		$	39,532

A reconciliation of the statutory U.S. federal tax rate 35.00% and the effective income tax rate is as follows:



	2012			2011			2010
	(In thousands)
Continuing operations:
Provisions using statutory federal income tax rate	$	35,147		$	38,939		$	29,581
State income taxes, net of federal tax benefit	4,291			4,480			3,211
Impact of REIT election	(79,033		)	—			—
Change in contingent tax liabilities	—			(337		)	(2,366		)
Impact of nondeductible transaction costs	—			65			3,230
Other, net	(967		)	25			708
Total continuing operations	(40,562		)	43,172			34,364
Discontinued operations:
Tax benefit from operations of discontinued business	(7,805		)	4,753			5,168
Provision for income taxes	$	(48,367	)	$	47,925		$	39,532

The components of the net current deferred income tax asset as of December 31, 2012 and January 1, 2012 are as follows:



	2012			2011
	(In thousands)
Accrued liabilities	$	13,060		$	21,192
Accrued compensation	6,433			5,884
Other, net	(1,203		)	1,504
Total asset	$	18,290		$	28,580

The components of the net non-current deferred income tax asset as of December 31, 2012 and January 1, 2012 are as follows:



	2012		2011
	(In thousands)
Depreciation	$	2,532	$	1,437
Total asset	$	2,532	$	1,437

The components of the net non-current deferred income tax liability as of December 31, 2012 and January 1, 2012 are as follows:



	2012			2011
	(In thousands)
Deferred compensation	$	7,666		$	9,247
Net operating losses	23,062			16,542
Tax credits	8,380			6,017
Deferred loan costs	—			2,073
Equity awards	1,816			2,881
Other, net	9,263			1,585
Bond discount	—			(657		)
Residual U.S. tax liability on unrepatriated foreign earnings	—			(3,668		)
Valuation allowance	(13,506		)	(8,025		)
Deferred rent	4,864			(6,220		)
Intangible assets	(45,955		)	(70,860		)
Depreciation	(11,293		)	(74,431		)
Total liability	$	(15,703	)	$	(125,516	)

Deferred income taxes should be reduced by a valuation allowance if it is not more likely than not that some portion or all of the deferred tax assets will be realized. On a periodic basis, management evaluates and determines the amount of the valuation allowance required and adjusts such valuation allowance accordingly. At fiscal year end 2012 and 2011, the Company has a valuation allowance of $13.5 million and $8.0 million, respectively related to deferred tax assets for foreign net operating losses, state net operating losses and state tax credits. The valuation allowance increased by $5.5 million during the fiscal year ended December 31, 2012.

The Company provides income taxes on the undistributed earnings of non-U.S. subsidiaries except to the extent that such earnings are indefinitely invested outside the United States. At December 31, 2012, $23.7 million of accumulated undistributed earnings of non-U.S. subsidiaries were indefinitely invested. At the existing U.S. federal income and applicable foreign withholding tax rates., additional taxes (net of foreign tax credits) of $0.5 million would have to be provided if such earnings were remitted currently.

As of the fiscal year ended December 31, 2012, the Company had $37.0 million of Federal net operating loss carryforwards which begin to expire in 2022 and $110.9 million of combined net operating loss carryforwards in various states which begin to expire in 2013. The Company has recorded a partial valuation allowance against the deferred tax assets related to the state operating losses.

Also as of the fiscal year ended December 31, 2012, the Company had $16.0 million of foreign operating losses which carry forward indefinitely and $6.7 million of state tax credits which begin to expire in 2013. The Company has recorded a full and partial valuation allowance against the deferred tax assets related to the foreign operating losses and state tax credits, respectively.

The Company recognizes the cost of employee services received in exchange for awards of equity instruments based upon the grant date fair value of those awards. The exercise of non-qualified stock options and vesting of restricted stock awards which have been granted under the Company’s equity award plans give rise to compensation income which is includable in the taxable income of the applicable employees and deducted by the Company for federal and state income tax purposes. Such compensation income results from increases in the fair market value of the Company’s common stock subsequent to the date of grant. At fiscal year end 2012, the deferred tax asset net of a valuation allowance related to unexercised stock options and restricted stock grants for which the Company has recorded a book expense was $2.7 million.

The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

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



	2012			2011			2010
	(In thousands)
Balance at Beginning of Period	$	6,528		$	9,062		$	5,947
Additions based on tax positions related to the current year	2,437			13			3,251
Additions for tax positions of prior years	13,356			43			—
Additions from current year acquisitions	—			3,848			2,928
Reductions for tax positions of prior years	—			(3,237		)	(2,891		)
Reductions as a result of a lapse of applicable statutes of limitations	(592		)	(845		)	—
Settlements	(3,230		)	(2,356		)	(173		)
Balance at End of Period	$	18,499		$	6,528		$	9,062

All amounts in the reconciliation are reported on a gross basis and do not reflect a federal tax benefit on state income taxes. The Company has accrued $16.9 million of accrued uncertain tax benefits as of December 31, 2012 which is inclusive of the federal tax benefit on state income taxes. The Company anticipates a decrease in the unrecognized tax benefits within 12 months of the reporting date of approximately $0.5 million. Settlements reported in the reconciliation for 2011 include amounts related to federal audit adjustments for the years 2002 through 2005, for which a settlement was finalized in 2011. The accrued uncertain tax balance at December 31, 2012 includes $16.9 million of unrecognized tax benefits which, if ultimately recognized, will reduce the Company’s annual effective tax rate.

The Company is subject to income taxes in the U.S. federal jurisdiction, and various states and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for the years before 2009. The Company has participated in the voluntary IRS real-time tax audit Compliance Assurance Process (“CAP”) since 2011. The 2009 and 2010 years are under audit as transition years as provided under the IRS CAP program.

During the fourth fiscal quarter of 2009, the IRS completed its examination of the Company’s U.S. federal income tax returns for the years 2002 through 2005. Following the examination, the IRS notified the Company that it proposed to disallow a deduction that the Company realized during the 2005 tax year. The Company appealed this proposed disallowed deduction with the IRS’s appeals division. In December 2010, the Company reached an agreement with the office of IRS Appeals on the amount of the deduction which was then reviewed at a higher level. The Company previously reported that if the disallowed deduction were to be sustained on appeal, it could result in a potential tax exposure to the Company of up to $15.4 million. In the second quarter 2011, the matter was resolved with no change.

The calculation of the Company’s provision (benefit) for income taxes requires the use of significant judgment and involves dealing with uncertainties in the application of complex tax laws and regulations. In determining the adequacy of the Company’s provision (benefit) for income taxes, potential settlement outcomes resulting from income tax examinations are regularly assessed. As such, the final outcome of tax examinations, including the total amount payable or the timing of any such payments upon resolution of these issues, cannot be estimated with certainty.

During the fiscal years ended December 31, 2012, January 1, 2012 and January 2, 2011, the Company recognized $0.0 million, $0.0 million and $(0.8) million in interest and penalties, respectively. The Company had accrued $0.4 million and $0.4 million for the payment of interest and penalties at December 31, 2012 and January 1, 2012, respectively. The Company classifies interest and penalties as interest expense and other expense, respectively.