12 Income Taxes

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


(In thousands)	2012		2011			2010
U.S.	$	3,458	$	(19,997	)	$	45,962
International		190		(836	)		—

Earnings (loss) from continuing operations before income taxes	$	3,648	$	(20,833	)	$	45,962

The components of income tax (benefit) expense for continuing operations for each of the last three fiscal years are as follows:


(In thousands)	2012			2011			2010
Current:
Federal	$	2,208		$	(7,760	)	$	12,580
State and local		554			183			987
International		615			(172	)		—

Total current for continuing operations	$	3,377		$	(7,749	)	$	13,567

Deferred:
Federal	$	(600	)	$	790		$	736
State and local		(401	)		(1,015	)		27
International		(114	)		18			—

Total deferred for continuing operations	$	(1,115	)	$	(207	)	$	763

Total non-current tax expense	$	(3,311	)	$	1,280		$	415

Total income tax (benefit) expense	$	(1,049	)	$	(6,676	)	$	14,745

Income tax refunds, net of payments were $7.5 million in fiscal 2012 and income tax payments, net of refunds, were $1.7 million and $10.0 million in fiscal 2011 and 2010, respectively.

The differences between the statutory federal income tax rates and consolidated effective tax rates are as follows:


	2012			2011			2010
Federal income tax expense (benefit) at statutory rates		35.0	%		(35.0	)%		35.0	%
State and local income taxes, net of federal tax benefit		(5.2	)		(2.7	)		2.2
Tax credits – research & development		(19.2	)		(4.0	)		(1.6	)
Tax credits – other		(3.0	)		(0.3	)		(0.3	)
Manufacturing deduction		(10.7	)		1.7			(1.9	)
Meals and entertainment		5.0			0.6			0.3
Permanent tax adjustment for officers compensation		3.0			0.5			—
Nondeductible acquisition costs		—			1.0			—
Tax-exempt interest		(3.0	)		(0.9	)		(0.4	)
Tax reserve adjustments – statute expirations and benefits recognized		(42.2	)		5.6			1.0
Deferred tax adjustment		—			—			(2.1	)
Change in valuation allowance		10.4			0.5			(0.7	)
Other, net		1.1			1.0			0.6

Income tax (benefit) expense, continuing operations		(28.8	)%		(32.0	)%		32.1	%

In fiscal 2012, 2011 and 2010, there were tax deficiencies of $0.3 million, $0.2 million and $0.1 million, respectively, associated with the stock-based incentive plans. These deficiencies were subtracted directly from additional paid-in capital and were not reflected in the determination of income tax expense or benefit.

Deferred tax assets and deferred tax liabilities for continuing operations at March 3, 2012 and February 26, 2011 are as follows:


	2012						2011
(In thousands)	Current			Noncurrent			Current			Noncurrent
Accounts receivable	$	994		$	—		$	823		$	—
Accrued insurance		114			787			483			711
Other accruals		2,346			1,133			2,286			1,693
Deferred compensation		242			9,601			22			9,221
Restructuring reserve		290			189			1,460			233
Goodwill and other intangibles⁽¹⁾		53			(3,523	)		—			(3,940	)
Inventory		1,023			—			1,002			—
Depreciation		—			(16,441	)		—			(20,248	)
Liability for unrecognized tax benefits		—			3,774			—			5,308
Prepaid expenses		(442	)		516			(543	)		252
Net operating losses		—			3,019			—			2,573
Valuation allowance on net operating losses		(404	)		(1,365	)		(329	)		(1,053	)
Other		78			63			(24	)		387

Deferred tax assets (liabilities)	$	4,294		$	(2,247	)	$	5,180		$	(4,863	)

(1)	Fiscal 2011 includes a retrospective adjustment of $4.2 million as described above in Note 6.

The Company has state net operating loss carryforwards with a tax effect of $3.0 million. A valuation allowance of $1.8 million has been established for these net operating loss carryforwards due to the uncertainty of the use of the tax benefits in future periods.

The Company files income tax returns in the U.S. federal jurisdiction, Brazil and various U.S. state jurisdictions. The Company is no longer subject to U.S. federal tax examinations for years prior to fiscal 2009 or state and local income tax examinations for years prior to fiscal 2005. During the first quarter of fiscal 2012, the Company entered into an administrative appeals agreement with the IRS to conclude the federal audit for fiscal years 2004 through 2007. The federal statute of limitations has expired for fiscal year 2008. The Company is not currently under U.S. federal examination for years subsequent to fiscal year 2008, and there is very limited audit activity of the Company's income tax returns in U.S. state jurisdictions or Brazil.

The total liability for unrecognized tax benefits for fiscal 2012, 2011 and 2010, respectively, is $8.9 million, $13.8 million and $16.1 million. Included in this total liability at fiscal 2012, 2011 and 2010, respectively, are $5.1 million, $7.6 million and $6.5 million of tax benefits that, if recognized, would decrease the effective tax rate for continuing operations. Also included in the balance of unrecognized tax benefits for fiscal 2012 are $2.0 million of tax benefits, and for each of fiscal 2011 and 2010 are $3.1 million of tax benefits that, if recognized, would result in adjustments to deferred taxes. The total liability for unrecognized tax benefits at fiscal 2010 included $4.9 million related to discontinued operations, which included $1.8 million for interest and penalties. In the second quarter of fiscal 2011, this reserve was decreased primarily due to the favorable resolution of an outstanding tax exposure related to a foreign operation discontinued in 1998. The resolution of this item eliminated the total liability for unrecognized tax benefits of $4.9 million related to discontinued operations.

Penalties and interest related to unrecognized tax benefits are recorded in income tax expense, which is consistent with past practices. Related to the unrecognized tax benefits noted above, the Company reduced the accrual for penalties and interest by $1.4 million during fiscal 2012, resulting in a reserve for interest and penalties at the end of fiscal 2012 of $1.8 million. During fiscal 2011, the Company reduced the accrual for penalties and interest by $0.2 million, resulting in a reserve for interest and penalties at the end of fiscal 2011 of $3.2 million. During fiscal 2010, the Company reduced the accrual for penalties and interest by $0.6 million, resulting in a reserve for interest and penalties at the end of fiscal 2010 of $3.4 million.

A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:


(In thousands)	2012			2011			2010
Gross unrecognized tax benefits at beginning of year	$	10,676		$	12,666		$	11,559
Gross increases in tax positions for prior years		136			1,084			270
Gross decreases in tax positions for prior years		(462	)		(3,197	)		(235	)
Gross increases based on tax positions related to the current year		623			663			1,091
Gross decreases based on tax positions related to the current year		(78	)		(92	)		(19	)
Settlements		(1,200	)		(1,382	)		—
Statute of limitations expiration		(2,570	)		(127	)		—
Unrecognized tax benefits acquired in connection with Glassec		—			1,061			—

Gross unrecognized tax benefits at end of year	$	7,125		$	10,676		$	12,666

The total liability for unrecognized tax benefits is expected to decrease by approximately $1.8 million during fiscal 2013 due to audit settlements and lapsing of statutes.