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Note 8 - Income Taxes

12 Months Ended

Jan. 03, 2015

(8)

Income Taxes

The components of the provision for income taxes are as follows (in thousands):

	2014			2013			2012

Current:
Federal	$	-		$	-		$	-
State		304			(68	)		165
Foreign		3,293			6			790
Deferred:
Federal		-			-			-
State		26			56			(928	)
Foreign		(1,961	)		-			839
Income tax expense (benefit)	$	1,662		$	(6	)	$	866

A reconciliation between the statutory federal income tax rate and the effective income tax rate is as follows (in thousands):

	2014			2013			2012

Income (loss) before income taxes	$	16,024		$	(2,118	)	$	(48,429	)
Statutory federal income tax rate		34	%		34	%		34	%
Income tax expense (benefit) at statutory federal rate		5,448			(720	)		(16,466	)
State income taxes, net of federal tax benefit		310			151			124
Permanent difference - Goodwill impairment		-			-			11,448
Valuation allowance		(5,415	)		386			4,739
Effect of lower foreign taxes		(372	)		497			296
Adjustment for unrecognized tax positions		397			(70	)		(23	)
Other items, net		1,294			(250	)		748
Income tax expense (benefit)	$	1,662		$	(6	)	$	866
Effective tax rate		10.4	%		0.3	%		(1.8	)%

Temporary differences that gave rise to deferred tax assets and liabilities are as follows (in thousands):

	2014			2013

Deferred tax assets:
Deferred revenue	$	4,833		$	4,516
Accrued rents		1,746			1,682
Net operating loss carryforwards		613			6,462
Intangible assets		1,489			1,639
Deferred compensation		1,019			2,040
Accrued compensation		3,058			283
Carryforward of tax credits		4,250			5,453
Receivable write-offs		1,436			624
Stock compensation		-			179
Inventories		661			414
Other		3,270			1,858
		22,375			25,150
Less: Valuation allowance		15,572			20,987
Total deferred tax assets		6,803			4,163

Deferred tax liabilities:
Depreciation		(1,021	)		(184	)
Other		(2,975	)		(3,106	)
Total deferred tax liabilities		(3,996	)		(3,290	)
Net deferred tax asset	$	2,807		$	873

As of January 3, 2015, the Company maintained a valuation allowance on its deferred tax assets of $15.6 million. In fiscal 2014, the Company generated significant U.S. income and was approximately break-even on a three-year cumulative pre-tax income (loss) basis in the U.S. The historical losses are considered a significant piece of negative evidence and while management believes these losses are not an indication of continuing operations, ASC 740 requires that objective historical evidence be given more weight than subjective evidence, such as forecasts of future income. While the current year income results are considered positive evidence, the Company does not believe this positive evidence outweighs the recent losses and as such, continues to maintain this valuation allowance. The Company released approximately $4.4 million of U.S. related valuation allowance in fiscal 2014 consistent with the level of income generated.

In addition to this release of valuation allowance in the U.S., in fiscal 2014, the Company recorded an income tax benefit of $1.1 million due to reductions in valuation allowances in foreign jurisdictions, primarily the UK and Canada. The Company reduced the valuation allowance in the UK and Canada because the weight of evidence regarding the future realizability of the deferred tax assets had become predominately positive and realization of the deferred tax assets was more likely than not. The positive evidence considered in our assessment of the realizability of the deferred tax assets included: 1) the generation of positive cumulative income in the respective UK legal entities for the three-year period ending with fiscal 2014, and 2) the implementation of tax planning strategies that would reduce certain management and royalty fees for Canada and generate increased future income in Canada. The negative evidence considered included historical losses in certain prior years; however, the positive evidence outweighed this negative evidence.

The fiscal 2013 income tax provision was impacted by the full valuation allowance position in most major jurisdictions.

Included in the deferred tax asset is $4.3 million related to tax credits for which a valuation allowance of $4.3 million has been recorded. The valuation allowance for the tax credits includes amounts for which subsequently recognized tax benefits will be applied directly to contributed capital. The valuation allowance on the U.S. deferred tax assets will continue to fluctuate as a result of temporary differences between the financial reporting and tax basis of the assets and liabilities.

Income taxes and remittance taxes have not been recorded on approximately $11.0 million of undistributed earnings of foreign operations of the Company, because the Company intends to reinvest those earnings indefinitely. It is not practicable to estimate the income tax liability that might be incurred if such earnings were remitted to the United States.

As of January 3, 2015, the Company had total unrecognized tax benefits of $1.0 million compared to $0.7 million as of December 28, 2013. The Company reviews its uncertain tax positions periodically and accrues interest and penalties accordingly. In fiscal 2014, $0.3 million of interest and penalties were included in the unrecognized tax benefits, compared to $0.1 million in fiscal 2013.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

Balance as of December 29, 2012	$	185
Lapse of statute		(139	)
Audit settlement release		(4	)
Addition to reserve		518
Balance as of December 28, 2013		560
Addition to reserve		200
Audit settlement release		(29	)
Lapse of statute		(12	)
Balance as of January 3, 2015	$	719

As of January 3, 2015, approximately $0.7 million of the unrecognized tax benefits would impact the Company’s provision for income taxes and effective tax rate if recognized. Management estimates that it is reasonably possible that the total amount of uncertain tax benefits could decrease by as much as $0.5 million within the next 12 months.

The Company’s income before income taxes from domestic and foreign operations (which include the United Kingdom, Canada, France and Ireland), are as follows (in thousands):

	2014		2013			2012
Domestic	$	12,973	$	(1,134	)	$	(11,550	)
Foreign		3,051		(984	)		(36,879	)
Total	$	16,024	$	(2,118	)	$	(48,429	)

The following tax years remain open in the Company’s major taxing jurisdictions as of January 3, 2015:

United States (Federal)	2011 through 2014
United Kingdom	2008 through 2014
Canada	2011 through 2014
Ireland	2007 through 2014

- 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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