Annual report pursuant to Section 13 and 15(d)

Note 10 - Income taxes

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Note 10 - Income taxes
 12 Months Ended
Dec. 30, 2012
Income Tax Disclosure [Text Block]
10.
Income taxes

The Company recorded the following income tax expense (recovery) for the periods noted:

   
Period ended
December 30, 2012
   
Period ended
January 1, 2012
   
Period ended
January 2, 2011
 
Current:
                 
Federal/State
  $ (41 )   $ 484     $ 50  
Foreign
    662       99       494  
                         
      621       583       544  
Deferred:
                       
Federal
    (2,100 )       —       (2,786 )
Foreign
    (335 )     222       (247 )
                         
      (2,435 )     222       (3,033 )
                         
Income tax expense (recovery)
  $ (1,814 )   $ 805     $ (2,489 )

The overall income tax expense (recovery) as recorded in the consolidated statements of operations varied from the tax expense (recovery) calculated using U.S. federal and state income tax rates as follows for the periods noted:

   
Period ended
December 30, 2012
   
Period ended
January 1, 2012
   
Period ended
January 2, 2011
 
Federal income tax
  $ 2,005     $ 684     $ 3,451  
State income tax expense, net of federal tax benefit
    96       279       335  
Change in enacted income tax rates
    (589 )     3,051       (19 )
Loss (income) of foreign subsidiaries taxed at different rates
    (211 )     1,160       (847 )
Change in valuation allowance
    (1,155 )     (11,822 )     (6,702 )
Additional (release of) income tax exposures and alternative minimum taxes
    (130 )     (45 )     28  
Deemed income inclusion of foreign subsidiary
    1,038       4,536       —  
Permanent and other differences
    (2,868 )     2,962       1,265  
                         
Income tax expense (recovery)
  $ (1,814 )   $ 805     $ (2,489 )

Earnings (loss) before income taxes consisted of the following for the periods noted:

   
Period ended
December 30, 2012
   
Period ended
January 1, 2012
   
Period ended
January 2, 2011
 
U.S.
  $ 9,552     $ 9,116     $ 7,342  
Non U.S.
    (3,824 )     (7,161 )     2,519  
    $ 5,728     $ 1,955     $ 9,861  

Deferred income taxes 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. The Company’s deferred income tax liabilities and assets are comprised of the following at:

   
December 30, 2012
   
January 1, 2012
 
Deferred income tax assets:
           
Net operating loss carryforwards
  $ 25,802     $ 28,447  
Capital loss carryforwards
    2,232       2,106  
Tax credit carryforwards
    1,408       —  
Property, plant and equipment and other assets
    3,868       3,678  
Reserves, allowances and accruals
    3,081       880  
                 
      36,391       35,111  
Valuation allowance
    (30,756 )     (31,911 )
                 
Net deferred income tax assets
  $ 5,635     $ 3,200  

At December 30, 2012, the Company had total net operating loss (“NOL”) carry forwards of $79,925, of which $2,840 will expire in 2013, $10,278 will expire in 2014, $4,154 will expire in 2015, $1,078 will expire in 2018, $60 will expire in 2019, $30 will expire in 2020, $18,338 will expire in 2023, and the remainder will expire between 2026 and 2031.

At December 30, 2012 and January 1, 2012, the Company had gross unrecognized tax benefits of $274 and $274, respectively, which if recognized, would favorably impact the Company’s effective tax rate in future periods. The Company does not expect any of these unrecognized tax benefits to reverse in the next twelve months.

Tax years 2008 to 2012 remain open for review by the tax authorities in Canada. Tax years 2004 and 2008 to 2012 remain open in the United States.

The Company accounts for interest and penalties related to unrecognized tax benefits in income tax expense based on the likelihood of the event and its ability to reasonably estimate such amounts. The Company has approximately $64 and $48 accrued for interest and penalties as of December 30, 2012 and January 1, 2012, respectively. The increase is due to additional interest accrued on uncertain tax positions during the period.

The following is a tabular reconciliation of the Company’s beginning and ending amount of unrecognized tax benefits:

Balance as at January 1, 2012
  $ 274  
         
Current year changes
    —  
         
Balance as at December 30, 2012
  $ 274  

Whether or not the recapitalization transactions undertaken in 2004 result in an ownership change for purposes of Section 382 of the Internal Revenue Code (“Section 382”), which imposes a limitation on a corporation’s use of NOL carry forwards following an “ownership change,” depends upon whether the exchangeable shares of SMTC Canada are treated as shares of the Company under U.S. tax principles. The Company has concluded that the recapitalization transactions did not result in an ownership change and as such the use of the NOL carry forwards has not been limited.

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of its deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. Management considers the scheduled reversal of deferred tax liabilities, change of control limitations, projected future taxable income and tax planning strategies in making this assessment. Guidance under  ASC 740, Income Taxes, (“ASC 740”) states that forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence, such as cumulative losses in recent years in the jurisdictions to which the deferred tax assets relate. At the end of the second quarter of 2003, the Company concluded that given the weakness and uncertainty in the economic environment at that time, it was appropriate to establish a full valuation allowance for the deferred tax assets. Commencing in 2004, it was determined by management that it was more likely than not that the deferred tax assets associated with the Mexican jurisdiction would be realized and no valuation allowance has been recorded against these deferred tax assets since 2004.  In 2010 and in 2012, it was determined by management that it was more likely than not that certain deferred tax assets associated with the U.S. jurisdiction would be realized and no valuation allowance has been recorded against these deferred tax assets. The Canadian jurisdiction continues to have a full valuation allowance recorded against the deferred tax assets.