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Note 13 - Taxes on Income

12 Months Ended

Dec. 28, 2014

TAXES ON INCOME

Provisions for federal, foreign and state income taxes in the consolidated statements of operations consisted of the following components:

	FISCAL YEAR
	2014		2013		2012
	(in thousands)
Current expense/(benefit):
Federal	$	224	$	473	$	(134	)
Foreign		5,555		2,605		5,319
State		712		627		602

		6,491		3,705		5,787
Deferred expense/(benefit):
Federal		3,856		3,246		1,928
Foreign		493		8,692		17
State		94		5,106		(1,692	)

		4,443		17,044		253

	$	10,934	$	20,749	$	6,040

Income tax expense (benefit) is included in the accompanying consolidated statements of operations as follows:

	FISCAL YEAR
	2014		2013		2012
	(in thousands)
Continuing operations	$	10,934	$	20,749	$	15,204
Income (loss) from discontinued operations		0		0		(9,164	)

	$	10,934	$	20,749	$	6,040

Income from continuing operations before taxes on income consisted of the following:

	FISCAL YEAR
	2014		2013		2012
	(in thousands)
U.S. operations	$	10,345	$	21,292	$	27,332
Foreign operations		25,397		47,712		10,771

	$	35,742	$	69,004	$	38,103

Deferred income taxes for the years ended December 28, 2014, and December 29, 2013, 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 28, 2014, the Company had approximately $129 million in federal net operating loss carryforwards with expiration dates through 2032, of which $28.9 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 $4.0 million in net operating losses, the majority of which is 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 $209 million in state net operating loss carryforwards relating to continuing operations with expiration dates through 2034. The Company had provided a valuation allowance against $163.7 million of such losses, which the Company does not expect to utilize. In addition, the Company has approximately $166.0 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:

	2014					2013
	ASSETS			LIABILITIES		ASSETS			LIABILITIES
	(in thousands)
Basis differences of property and equipment	$			$	15,958	$			$	17,282
Basis difference of intangible assets					384					346
Foreign currency					3,848					2,755
Net operating loss carryforwards		28,463					31,944
Valuation allowances on net operating loss carryforwards		(10,298	)				(9,577	)
Federal tax credits		2,751					2,490
Deferred compensation		21,190					20,743
Basis difference of prepaids, accruals and reserves		7,816					7,265
Pensions		3,152								774
Tax effects of undistributed earnings from foreign subsidiaries not deemed to be indefinitely reinvested					948					1,704
Basis difference of other assets and liabilities					68					659

	$	53,074		$	21,206	$	52,865		$	23,520

Deferred tax assets and liabilities are included in the accompanying balance sheets as follows:

	FISCAL YEAR
	2014			2013
	(in thousands)
Deferred income taxes (current asset)	$	9,732		$	10,232
Deferred tax asset (non-current asset)		33,138			34,162
Deferred income taxes (non-current liabilities)		(11,002	)		(15,049	)
	$	31,868		$	29,345

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 28, 2014.

As of December 28, 2014 and December 29, 2013, non-current deferred tax assets were reduced by approximately $21.8 million of unrecognized tax benefits. For further discussion, see “Recent Accounting Pronouncements” in item 8 of this Report.

The Company’s effective tax rate from continuing operations was 30.6%, 30.1% and 39.9% for fiscal years 2014, 2013 and 2012, 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
	2014			2013			2012
	(in thousands)
Income taxes at U.S federal statutory rate	$	12,510		$	24,151		$	13,336
Increase (decrease) in taxes resulting from:
State income taxes, net of federal tax effect		57			496			1,116
Non-deductible business expenses		570			601			1,009
Non-deductible employee compensation		491			409			469
Tax effects of Company owned life insurance		(395	)		(1,117	)		(448	)
Tax effects of undistributed earnings from foreign subsidiaries not deemed to be indefinitely reinvested		362			562			321
Foreign and U.S. tax effects attributable to foreign operations		(3,021	)		(3,958	)		(1,174	)
Valuation allowance effect – State NOL		468			3,232			(187	)
Non-deductible reserve against capital asset		0			(218	)		1,188
Advance pricing agreements with tax authorities		0			(2,492	)		0
Federal tax credits		0			(595	)		(891	)
Other		(108	)		(322	)		465
Income tax expense	$	10,934		$	20,749		$	15,204

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. At December 28, 2014, approximately $261 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 $5.6 million would be payable upon remittance.

At December 28, 2014, the Company has provided for approximately $0.8 million in U.S. federal income taxes and approximately $0.1 million in foreign withholding taxes on approximately $2.4 million of undistributed earnings from foreign subsidiaries that are not deemed to be indefinitely reinvested outside of the U.S.

As of December 28, 2014 and December 29, 2013, the Company had $27.3 million and $27.4 million, respectively, of unrecognized tax benefits. If the $27.3 million of unrecognized tax benefits as of December 28, 2014 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, $5.5 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 28, 2014, 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 2009 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 2004 to the present.

During 2013, the Company executed advance pricing agreements (“APA”) with the Canadian tax authorities (“CRA”) and the Internal Revenue Service (“IRS”), for tax years 2006 through 2011, with respect to certain intercompany transactions (“Covered Transactions”) between Interface, Inc. (including its U.S. subsidiaries) and its Canadian subsidiary, InterfaceFLOR Canada, Inc. The Covered Transactions include intercompany buy-sale distribution, contract manufacturing, provision of management services, and licensing intangibles.

The APAs encompass the final resolution resulting from the bilateral negotiations between the CRA and the IRS under the Canada-U.S. bilateral advance pricing agreement program (“BAPA”), which the Company was accepted into during 2008, with respect to the Covered Transactions for tax years 2006 through 2011.

During 2013, the Company recognized tax benefits of $1.9 million relating to the final resolution of the BAPA and a reduction of $0.6 million in federal income taxes and foreign withholding taxes previously provided on undistributed earnings, from its Canadian subsidiary, that were not deemed to be indefinitely reinvested outside the U.S.

Management believes changes to our unrecognized tax benefits that are reasonably possible in the next 12 months 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 gross unrecognized tax benefits is as follows:

	FISCAL YEAR
	2014			2013			2012
	(in thousands)
Balance at beginning of year	$	27,361		$	25,186		$	7,736
Increases related to tax positions taken during the current year		875			911			18,118
Increases related to tax positions taken during the prior years		1,157			3,938			150
Decreases related to tax positions taken during the prior years		(697	)		(9	)		(519	)
Decreases related to settlements with taxing authorities		0			(1,928	)		0
Decreases related to lapse of applicable statute of limitations		(919	)		(397	)		(300	)
Changes due to foreign currency translation		(476	)		(340	)		1
Balance at end of year	$	27,301		$	27,361		$	25,186

- 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.

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