Annual report pursuant to Section 13 and 15(d)

Note 10 - Income taxes

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Note 10 - Income taxes
 12 Months Ended
Jan. 01, 2012
Income Tax Disclosure [Text Block]
10.
Income taxes

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

   
Period ended
January 1,
2012
   
Period ended
January 2,
2011
   
Period ended
January 3,
2010
 
Current:
                 
Federal/State
  $ 484     $ 50     $ (633 )
Foreign
    99       494       135  
                         
      583       544       (498 )
Deferred:
                       
Federal
    —       (2,786 )     —  
Foreign
    222       (247 )     189  
                         
      222       (3,033 )     189  
                         
Income tax expense (recovery)
  $ 805     $ (2,489 )   $ (309 )

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
January 1,
2012
   
Period ended
January 2,
2011
   
Period ended
January 3,
2010
 
Federal income tax
  $ 684     $ 3,451     $ 717  
State income tax expense, net of federal tax benefit
    279       335       41  
Change in enacted income tax rates
    3,051       (19 )     1,911  
Loss (income) of foreign subsidiaries taxed at different rates
    1,160       (847 )     (901 )
Change in valuation allowance
    (11,822 )     (6,702 )     (1,795 )
Additional (release of) income tax exposures, net of alternative minimum taxes
    (45 )     28       (69 )
Deemed income inclusion of foreign subsidiary
    4,536       —       —  
Permanent and other differences
    2,962       1,265       (213 )
                         
Income tax expense (recovery)
  $ 805     $ (2,489 )   $ (309 )

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

   
Period ended
January 1,
2012
   
Period ended
January 2,
2011
   
Period ended
January 3,
2010
 
U.S.
  $ 9,116     $ 7,342     $ 1,065  
Non U.S.
    (7,161 )     2,519       983  
                         
    $ 1,955     $ 9,861     $ 2,048  

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:

   
January 1,
2012
   
January 2,
2011
 
Deferred income tax assets:
           
Net operating loss carryforwards
  $ 28,447     $ 37,602  
Capital loss carryforwards
    2,106       2,106  
AMT credit carryforwards
    —       548  
Property, plant and equipment and other assets
    3,678       5,348  
Reserves, allowances and accruals
    880       1,450  
                 
      35,111       47,054  
Valuation allowance
    (31,911 )     (43,731 )
                 
Net deferred income tax assets
  $ 3,200     $ 3,323  

At January 1, 2012, the Company had total net operating loss (“NOL”) carry forwards of $105, 708, of which $1,260 will expire in 2012, $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, $11,365 will expire in 2021, $16,207 will expire in 2022, $27,270 will expire in 2023, and the remainder will expire between 2025 and 2031.

At January 1, 2012 and January 2, 2011, the Company had gross unrecognized tax benefits of $274 and $330, respectively, which if recognized, would favorably impact the Company’s effective tax rate in future periods. The change during the period relates to the settlement of the prior year uncertain tax positions offset by additional uncertain tax positions related to withholding tax. The Company does not expect any of these unrecognized tax benefits to reverse in the next twelve months.

Tax years 2008 to 2011 remain open for review by the tax authorities in Canada. Tax years 2004 and 2008 to 2011 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 $48 and $225 accrued for interest and penalties as of January 1, 2012 and January 2, 2011, respectively. The decrease is due to the reversal of prior year interest on uncertain tax positions settled 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 2, 2011
  $ 330  
         
Current year additions
    274  
        Reductions related to settlements     (330 )
Balance as at January 1, 2012
  $ 274  

Deferred income taxes have not been provided on $10,794 of undistributed earnings of foreign subsidiaries. These earnings have been indefinitely reinvested and the Company currently does not plan to initiate any action that would precipitate payment of income taxes thereon. The amount of unrecognized deferred tax liabilities related to these earnings is $3,778.

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.

No incremental tax benefit has been recorded in respect of the loss from discontinued operations.

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 Accounting Standards Codification (“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, 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.