8) Income Taxes

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities. Deferred tax assets are reduced, if deemed necessary, by a valuation allowance for the amount of tax benefits which are not expected to be realized. Investment tax credits are recognized on the flow through method.

ASC Topic 740-10 Overall – Uncertainty in Income Taxes (“ASC Topic 740-10”) clarifies the accounting and disclosure for uncertainty in tax positions. ASC Topic 740-10 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. The Company is subject to the provisions of ASC Topic 740-10 and has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. Should the Company need to accrue a liability for uncertain tax benefits, any interest associated with that liability will be recorded as interest expense. Penalties, if any, would be recognized as operating expenses. There were no penalties or interest liability accrued as of September 27, 2014 or December 31, 2013, nor were any penalties or interest costs included in expense for the three and nine month periods ending September 27, 2014 and September 28, 2013. The years under which we conducted our evaluation coincided with the tax years currently still subject to examination by major federal and state tax jurisdictions, those being 2012 through 2013 for federal purposes and 2011 through 2013 for state purposes.

The effective tax rates were approximately 27.2% and 33.4% for the three months and 31.0% and 28.8% for the nine months ended September 27, 2014 and September 28, 2013, respectively. The effective tax rate for the third quarter and first nine months of 2014 was lower than the federal statutory rate, due to the domestic production activity deduction, lower effective tax rates on foreign income and the recognition of $0.9 million in domestic Research and Development (“R&D”) tax credits related to prior years that was recognized in the third quarter of 2014. The effective tax rate for the nine months of 2013 was impacted primarily by the domestic production activity deduction, the recognition of approximately $1.1 million in domestic 2012 R&D tax credits and $0.6 million in domestic 2013 R&D tax credits. The effective tax rate for the three months ended September 28, 2013 was impacted primarily by the recognition of approximately $0.2 million in domestic 2013 R&D tax credits.