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TAXES ON INCOME | 12 Months Ended
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Dec. 30, 2012
TAXES ON INCOME | TAXES ON INCOME Provisions for federal, foreign and state income taxes in the consolidated statements of operations consisted of the following components:
|  | FISCAL YEAR |
|  | 2012 |  |  | 2011 |  |  | 2010 |
|  | (in thousands) |
Current expense/(benefit): |  |  |  |  |  |  |  |  |  |  |  |
Federal |  | $ | (134 | ) |  | $ | 316 |  |  | $ | (62 | )
Foreign |  |  | 5,319 |  |  |  | 11,123 |  |  |  | 12,617 |
State |  |  | 602 |  |  |  | 922 |  |  |  | 530 |
|  |  | 5,787 |  |  |  | 12,361 |  |  |  | 13,085 |
Deferred expense/(benefit): |  |  |  |  |  |  |  |  |  |  |  |
Federal |  |  | 1,928 |  |  |  | 6,204 |  |  |  | (9,510 | )
Foreign |  |  | 17 |  |  |  | 2,304 |  |  |  | 994 |
State |  |  | (1,692 | ) |  |  | 14 |  |  |  | (533 | )
|  |  | 253 |  |  |  | 8,522 |  |  |  | (9,049 | )
|  | $ | 6,040 |  |  | $ | 20,883 |  |  | $ | 4,036 |
Income tax expense (benefit) is included in the accompanying consolidated statements of operations as follows:
|  | FISCAL YEAR |
|  | 2012 |  |  | 2011 |  |  | 2010 |
|  | (in thousands) |
Continuing operations |  | $ | 15,204 |  |  | $ | 20,640 |  |  | $ | 4,616 |
Loss from discontinued operations |  |  | (9,164 | ) |  |  | 243 |  |  |  | (580 | )
|  | $ | 6,040 |  |  | $ | 20,883 |  |  | $ | 4,036 |
Income (loss) from continuing operations before taxes on income consisted of the following:
|  | FISCAL YEAR |
|  | 2012 |  |  | 2011 |  |  | 2010 |
|  | (in thousands) |
U.S. operations |  | $ | 27,332 |  |  | $ | 15,592 |  |  | $ | (31,921 | )
Foreign operations |  |  | 10,771 |  |  |  | 43,318 |  |  |  | 46,834 |
|  | $ | 38,103 |  |  | $ | 58,910 |  |  | $ | 14,913 |
Deferred income taxes for the years ended December 30, 2012, and January 1, 2012, reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. At December 30, 2012, the Company had approximately $155.1 million in federal net operating loss carryforwards with expiration dates through 2032, of which $26.9 million is from share-based payment awards. In accordance with applicable accounting standards, a financial statement benefit has not been recorded for the net operating loss related to the share-based payment awards. The Company’s foreign subsidiaries had approximately $3.5 million in net operating losses available for an unlimited carryforward period. The Company expects to utilize all of its federal and foreign carryforwards prior to their expiration. The Company had approximately $187 million in state net operating loss carryforwards relating to continuing operations with expiration dates through 2032. The Company had provided a valuation allowance against $63.9 million of such losses, which the Company does not expect to utilize. In addition, the Company has approximately $182.7 million in state net operating loss carryforwards relating to discontinued operations against which a full valuation allowance has been provided. The sources of the temporary differences and their effect on the net deferred tax asset are as follows:
|  | 2012 |  |  | 2011 |
|  | ASSETS |  |  | LIABILITIES |  |  | ASSETS |  |  | LIABILITIES |
|  | (in thousands) |
Basis differences of property and equipment |  | $ | 0 |  |  | $ | 9,985 |  |  | $ | 0 |  |  | $ | 10,397 |
Basis difference of intangible assets |  |  | 0 |  |  |  | 426 |  |  |  | 0 |  |  |  | 402 |
Foreign currency loss |  |  | 0 |  |  |  | 3,217 |  |  |  | 0 |  |  |  | 2,888 |
Net operating loss carryforwards |  |  | 55,322 |  |  |  | 0 |  |  |  | 41,429 |  |  |  | 0 |
Valuation allowances on net operating loss carryforwards |  |  | (4,603 | ) |  |  | 0 |  |  |  | (4,892 | ) |  |  | 0 |
Federal tax credits |  |  | 3,164 |  |  |  | 0 |  |  |  | 676 |  |  |  | 0 |
Deferred compensation |  |  | 18,633 |  |  |  | 0 |  |  |  | 17,853 |  |  |  | 0 |
Basis difference of prepaids, accruals and reserves |  |  | 10,894 |  |  |  | 0 |  |  |  | 8,919 |  |  |  | 0 |
Pensions |  |  | 499 |  |  |  | 0 |  |  |  | 2,592 |  |  |  | 0 |
Tax effects of undistributed earnings from foreign subsidiaries not deemed to be indefinitely reinvested |  |  | 0 |  |  |  | 4,810 |  |  |  | 0 |  |  |  | 4,585 |
Basis difference of other assets and liabilities |  |  | 317 |  |  |  | 0 |  |  |  | 293 |  |  |  | 0 |
|  | $ | 84,226 |  |  | $ | 18,438 |  |  | $ | 66,870 |  |  | $ | 18,272 |
Deferred tax assets and liabilities are included in the accompanying balance sheets as follows:
|  | FISCAL YEAR |
|  | 2012 |  |  | 2011 |
|  | (in thousands) |
Deferred income taxes (current asset) |  | $ | 10,271 |  |  | $ | 9,699 |
Deferred tax asset (non-current asset) |  |  | 62,856 |  |  |  | 47,290 |
Deferred income taxes (non-current liabilities) |  |  | (7,339 | ) |  |  | (8,391 | )
|  | $ | 65,788 |  |  | $ | 48,598 |
Management believes, based on the Company’s history of taxable income and expectations for the future, that it is more likely than not that future taxable income will be sufficient to fully utilize the deferred tax assets at December 30, 2012. The Company’s effective tax rate from continuing operations was 39.9%, 35.0% and 31.0% for fiscal years 2012, 2011 and 2010, respectively. The following summary reconciles income taxes at the U.S. federal statutory rate of 35% to the Company’s actual income tax expense:
|  | FISCAL YEAR |
|  | 2012 |  |  | 2011 |  |  | 2010 |
|  | (in thousands) |
Income taxes at U.S federal statutory rate |  | $ | 13,336 |  |  | $ | 20,619 |  |  | $ | 5,220 |
Increase (decrease) in taxes resulting from: |  |  |  |  |  |  |  |  |  |  |  |
State income taxes, net of federal tax effect |  |  | 1,116 |  |  |  | 940 |  |  |  | (1,713 | )
Non-deductible business expenses |  |  | 1,009 |  |  |  | 373 |  |  |  | 354 |
Non-deductible employee compensation |  |  | 469 |  |  |  | 587 |  |  |  | 399 |
Tax effects of Company owned life insurance |  |  | (448 | ) |  |  | 283 |  |  |  | (1,281 | )
Tax effects of undistributed earnings from foreign subsidiaries not deemed to be indefinitely reinvested |  |  | 321 |  |  |  | 774 |  |  |  | 960 |
Foreign and U.S. tax effects attributable to foreign operations |  |  | (1,174 | ) |  |  | (2,115 | ) |  |  | (491 | )
Valuation allowance effect – State NOL |  |  | (187 | ) |  |  | (333 | ) |  |  | 1,717 |
Non-deductible reserve against capital asset |  |  | 1,188 |  |  |  | 0 |  |  |  | 0 |
Income attributable to noncontrolling interest in subsidiary |  |  | 0 |  |  |  | 0 |  |  |  | (368 | )
Other |  |  | (426 | ) |  |  | (488 | ) |  |  | (181 | )
Income tax expense |  | $ | 15,204 |  |  | $ | 20,640 |  |  | $ | 4,616 |
The Company does not provide for U.S. income taxes on the undistributed earnings of its foreign subsidiaries that are considered to be indefinitely reinvested outside of the U.S. as determination of the amount of unrecognized deferred U.S. income tax liability related to the indefinitely reinvested earnings is not practicable because of the complexities associated with its hypothetical calculation. Beginning in 2008, the Company has provided for approximately $15.4 million in U.S. federal and state income taxes and approximately $1.1 million in foreign withholding taxes on approximately $44.7 million of undistributed earnings from foreign subsidiaries that were no longer deemed to be indefinitely reinvested outside of the U.S. During 2009, 2010 and 2012, the Company repatriated $20.2 million, $12.2 million and $3.1 million, respectively, of these undistributed earnings on which the Company had provided $12.1 million in U.S. federal and state income taxes and $0.9 million in foreign withholding taxes. At December 30, 2012, the Company has provided for approximately $3.3 million in U.S. federal and state income taxes and approximately $0.2 million in foreign withholding taxes on approximately $9.2 million of the remaining undistributed earnings that it anticipates repatriating in the foreseeable future. At December 30, 2012, approximately $240 million of undistributed earnings of the Company’s foreign subsidiaries are deemed to be indefinitely reinvested outside of the U.S., on which withholding taxes of approximately $3.7 million would be payable upon remittance. As of December 30, 2012 and January 1, 2012, the Company had $25.2 million and $7.7 million, respectively, of unrecognized tax benefits. The addition of unrecognized tax benefits in 2012 was attributable to an increase of approximately $18.1 million primarily related to its U.S. tax positions taken in the current year which was partially offset by a net decrease of approximately $0.6 million primarily related to its foreign tax positions taken in prior years. If the $25.2 million of unrecognized tax benefits as of December 30, 2012 are recognized, there would be a favorable impact on the Company’s effective tax rate in future periods. If the unrecognized tax benefits are not favorably settled, $7.4 million of the total amount of unrecognized tax benefits would require the use of cash in future periods. The Company recognizes accrued interest and income tax penalties related to unrecognized tax benefits as a component of income tax expense. As of December 30, 2012, the Company had accrued interest and penalties of $1.2 million, which is included in the total unrecognized tax benefit noted above. The Company’s federal income tax returns are subject to examination for the years 2003 to the present. The Company files returns in numerous state and local jurisdictions and in general it is subject to examination by the state tax authorities for the years 2007 to the present. The Company files returns in numerous foreign jurisdictions and in general it is subject to examination by the foreign tax authorities for the years 2003 to the present. In August 2006, the Canadian tax authorities (“CRA”) proposed a reassessment of taxable income for transfer pricing related adjustments for the years 2001 and 2002. In November 2006, the Company filed a submission with the CRA to set aside the reassessment of taxable income. In September 2008, the CRA issued a final notice of reassessment of tax, including interest, of approximately $0.9 million for the years 2001 and 2002. In December 2008, the Company filed an objection to the notice of reassessment of tax with the CRA. In May 2009, the Company filed a Joint Request for Competent Authority Assistance Pursuant to the Mutual Agreement Procedure (“MAP”) under the Canada-U.S. 1980 Tax Convention. In November 2010, the Company received notice from the Canadian Competent Authority Services Division that an agreement had been reached between the U.S. and Canadian Competent Authorities to reverse in its entirety the CRA audit initiated adjustments with respect to the transfer pricing related adjustments for the years 2001 and 2002. As a result, during 2010, the Company reduced its liability for unrecognized tax benefits relating to this reassessment. In February 2008, the Company filed with the CRA and the Internal Revenue Service (“IRS”) an application for a Canada – U.S. bilateral advanced pricing agreement (“BAPA”) with respect to certain intercompany transactions (“Covered Transactions”) between Interface, Inc. (including its U.S. subsidiaries) and its Canadian subsidiary, InterfaceFLOR Canada, Inc. The BAPA covers tax years 2006 through 2011. The Covered Transactions include intercompany buy-sale distribution, contract manufacturing, provision of management services, and licensing intangibles. Some of the Covered Transactions are the same types of transactions that were the subject of dispute in the reassessment for tax years 2001 and 2002 described above. Shortly after the BAPA submission, the Company was accepted into the BAPA program by both the CRA and the IRS. However, subsequently in late December 2008, the Company made a business decision to discontinue the manufacturing operation at its facility in Canada, thus affecting the majority of the Covered Transactions, where only the intercompany buy-sale distribution transactions were continued after February 2009. During 2009, the CRA and the IRS substantially completed their due diligence and currently the Company is working with both tax authorities to reach a final resolution. The Company expects a final resolution during 2013 and estimates recognition of tax benefits of approximately $2 million resulting from the resolution of the BAPA. Management believes changes to our unrecognized tax benefits that are reasonably possible in the next 12 months, other than the Canadian BAPA discussed above, will not have a significant impact on our financial positions or results of operations. The timing of the ultimate resolution of the Company’s tax matters and the payment and receipt of related cash is dependent on a number of factors, many of which are outside the Company’s control. A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
|  | Fiscal Year |
|  | 2012 |  |  | 2011 |  |  | 2010 |
|  | (in thousands) |
Balance at beginning of year |  | $ | 7,736 |  |  | $ | 8,159 |  |  | $ | 9,551 |
Increases related to tax positions taken during the current year |  |  | 18,118 |  |  |  | 693 |  |  |  | 718 |
Increases related to tax positions taken during the prior years |  |  | 150 |  |  |  | 250 |  |  |  | 538 |
Decreases related to tax positions taken during the prior years |  |  | (519 | ) |  |  | (1,237 | ) |  |  | 0 |
Decreases related to settlements with taxing authorities |  |  | 0 |  |  |  | 0 |  |  |  | (1,778 | )
Decreases related to lapse of applicable statute of limitations |  |  | (300 | ) |  |  | 0 |  |  |  | (712 | )
Changes due to foreign currency translation |  |  | 1 |  |  |  | (129 | ) |  |  | (158 | )
Balance at end of year |  | $ | 25,186 |  |  | $ | 7,736 |  |  | $ | 8,159 |

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 109 -Paragraph 136, 172 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(h)) -URI http://asc.fasb.org/extlink&oid=6881521&loc=d3e23780-122690 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 08 -Paragraph h -Article 4 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 15 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32718-109319 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 109 -Paragraph 43, 44, 45, 46, 47, 48, 49 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32537-109319 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32639-109319 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32559-109319 + Details
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