NOTE 10INCOME TAXES

United States and foreign income before income taxes were as follows:

	Year Ended
	January 2,		January 3,		December 28,
(In thousands)	2016		2015		2013
United States	$	16,332	$	17,208	$	2,377
Foreign	26,734		30,472		19,059

	$	43,066	$	47,680	$	21,436

The income tax provisions based on income were as follows:

	Year Ended
	January 2,			January 3,			December 28,
(In thousands)	2016			2015			2013
Current:
Federal	$	4,699		$	6,017		$	4,973
State	169			1,205			546
Foreign	6,862			5,865			4,662

	11,730			13,087			10,181
Deferred:
Federal	(705		)	(478		)	(5,249		)
State	2,097			(105		)	283
Foreign	(1,177		)	6			483

	215			(577		)	(4,483		)

	$	11,945		$	12,510		$	5,698

The income tax provisions that were based on income differs from the amount obtained by applying the statutory tax rate as follows:

	Year Ended
	January 2,			January 3,			December 28,
(In thousands)	2016			2015			2013
Income tax provision at statutory rate	$	15,073		$	16,688		$	7,503
Increase (decrease) in taxes resulting from:
Non-deductible expenses	71			156			490
State tax, net of federal benefit	523			1,084			429
Foreign rate variance	(4,186		)	(3,881		)	(1,135		)
Income tax credits	(725		)	(783		)	(1,636		)
Valuation allowance	102			229			(873		)
Tax contingency	356			(695		)	(114		)
Other, including deferred tax adjustment, net	731			(288		)	1,034

	$	11,945		$	12,510		$	5,698

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. Significant components of the deferred taxes were as follows:

	January 2,			January 3,
(In thousands)	2016			2015
Deferred tax assets:
Net operating loss carryforwards	$	3,485		$	2,053
Accruals and reserves not currently deductible	20,135			18,529
Tax credit carryforwards	1,740			1,817
Other basis differences	10,037			9,929

Total gross deferred tax assets	35,397			32,328
Valuation allowance	(3,239		)	(2,480		)

Total deferred tax assets	32,158			29,848


Deferred tax liabilities:
Intangible assets	15,626			14,642
Property and equipment	4,806			3,169
Other basis differences	439			583

Total deferred tax liabilities	20,871			18,394

Net deferred tax assets	$	11,287		$	11,454

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers taxable income in carryback years, the scheduled reversal of deferred tax liabilities (exclusive of deferred tax liabilities related to indefinite lived intangibles), tax planning strategies and projected future taxable income in making this assessment.

As of January 2, 2016, the Company could not determine that it is more likely than not that deferred tax assets related to domestic unrealized losses, certain domestic and foreign net operating loss carryforwards and other miscellaneous foreign deferred tax assets would be realized. Therefore, the Company has maintained a valuation allowance of $3.2 million against its domestic and certain foreign subsidiaries’ deferred tax assets.

At January 2, 2016, the Company had gross state and foreign net operating loss carryforwards totaling approximately $18.3 million and $18.2 million, respectively. State net operating loss carryforwards begin to expire in 2016, net operating losses of the Company’s subsidiary in Romania begin to expire in 2019, and a majority of the remaining foreign net operating loss carryforwards may be carried forward indefinitely.

At January 2, 2016, the Company had federal and state income tax credit carryforwards of $13.4 million and $13.1 million, respectively. Certain unused federal carryforwards will begin to expire in 2020 and will continue to expire in future years if not fully utilized. The state carryforwards do not expire.

The Company recognizes excess tax benefits associated with share-based compensation to stockholders’ equity only when realized. When assessing whether excess tax benefits relating to share-based compensation have been realized, the Company follows the with-and-without approach excluding any indirect effects of the excess tax deductions. Under this approach, excess tax benefits related to share-based compensation are not deemed to be realized until after the utilization of all other tax benefits available to the Company. During the years ended January 2, 2016 and January 3, 2015, the Company realized $3.1 million and $6.4 million, respectively, of such excess tax benefits and, accordingly, recorded a corresponding increase in capital in excess of par value. As of January 2, 2016, the Company had $10.8 million of unrealized excess tax benefits associated with share-based compensation. These tax benefits, if and when realized, will be accounted for as an increase in capital in excess of par value rather than as a reduction in the provision for income taxes.

If the Company has an “ownership change” as defined under the Internal Revenue Code, utilization of its net operating loss and tax credit carryforwards may be subject to an annual limitation against taxable income in future periods.

Undistributed earnings of the Company’s historic and acquired foreign subsidiaries for which no federal or state liability has been recorded totaled $59.6 million and $46.7 million at January 2, 2016 and January 3, 2015, respectively. These undistributed earnings are considered to be indefinitely reinvested. Accordingly, no provision for federal and state income taxes or foreign withholding taxes has been provided on such undistributed earnings. Determination of the potential amount of unrecognized deferred federal and state income tax liability and foreign withholding taxes is not practicable because of the complexities associated with this hypothetical calculation; however, unrecognized foreign tax credits would be available to reduce some portion of the federal liability.

As of January 2, 2016, the Company had $18.4 million of gross unrecognized tax benefits and a total of $14.6 million of net unrecognized tax benefits, which, if recognized, would affect the effective tax rate. Interest and penalties related to unrecognized tax benefits were not significant as of January 2, 2016. The Company believes that gross unrecognized tax benefits may decrease by $1.5 million over the next twelve months.

As of January 3, 2015, the Company had $17.6 million of gross unrecognized tax benefits and a total of $14.3 million of net unrecognized tax benefits, which, if recognized, would affect the effective tax rate. Interest and penalties related to unrecognized tax benefits were not significant as of January 3, 2015.

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

	Year Ended
	January 2,			January 3,			December 28,
(In thousands)	2016			2015			2013
Unrecognized tax benefits at beginning of year	$	17,612		$	17,429		$	15,173
Gross increases for tax positions of prior years	542			236			832
Gross decrease for tax positions of prior years	—			(942		)	—
Gross increases for tax positions of current year	1,156			1,558			2,509
Settlements	(571		)	(492		)	—
Lapse of statute of limitations	(343		)	(177		)	(1,085		)

Unrecognized tax benefits at end of year	$	18,396		$	17,612		$	17,429

The Company and its subsidiaries file income tax returns in the United States and various state, local and foreign jurisdictions. The tax years that remain subject to examination by significant jurisdiction are as follows:

U.S. Federal		2012 through current periods
California		2011 through current periods
France		2013 through current periods
Germany		2010 through current periods
Japan		2009 through current periods
Israel		2012 through current periods

The use of net operating losses in the United States in future periods could trigger a review of attributes and other tax matters in years that are not otherwise subject to examination, beginning with the 2003 tax year.