NOTE 11 INCOME TAXES

United States and foreign income (loss) before income taxes were as follows:


	Year Ended
(In thousands)	December 31, 2011		January 1, 2011		January 2, 2010
United States	$	43,091	$	38,363	$	(15,103	)
Foreign		7,417		5,878		(4,270	)

	$	50,508	$	44,241	$	(19,373	)

The income tax provision (benefit) based on income (loss) were as follows:


	Year Ended
(In thousands)	December 31, 2011			January 1, 2011			January 2, 2010
Current:
Federal	$	(3,252	)	$	565		$	(538	)
State		1,204			687			158
Foreign		2,523			1,340			(1,180	)

		475			2,592			(1,560	)
Deferred:
Federal		(23,425	)		440			431
State		(6,760	)		(218	)		(14	)
Foreign		556			314			(824	)

		(29,629	)		536			(407	)

	$	(29,154	)	$	3,128		$	(1,967	)

The income tax provision (benefit) that was based on income (loss) differs from the amount obtained by applying the statutory tax rate as follows:


	Year Ended
(In thousands)	December 31, 2011			January 1, 2011			January 2, 2010
Income tax (benefit) provision at statutory rate	$	17,678		$	15,484		$	(6,781	)
Increase (decrease) in taxes resulting from:
Impairment or reduction of goodwill		1			213			—
Non-deductible expenses		1,700			188			204
State tax, net of federal benefit		1,043			1,549			(284	)
Dividend from foreign subsidiary		—			2,962			—
Foreign rate variance		(1,683	)		1,328			1,084
Income tax credits		(1,590	)		(880	)		(509	)
Valuation allowance		(41,715	)		(19,566	)		1,068
Tax contingency		(1,808	)		691			2,152
Other, including deferred tax adjustment, net		(2,780	)		1,159			1,099

	$	(29,154	)	$	3,128		$	(1,967	)

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:


(In thousands)	December 31, 2011			January 1, 2011
Deferred tax assets:
Net operating loss carryforwards	$	6,202		$	8,258
Accruals and reserves not currently deductible		22,882			24,045
Tax credit carryforwards		10,715			17,790
Other basis differences		7,688			5,591

Total gross deferred tax assets		47,487			55,684
Valuation allowance		(3,043	)		(42,355	)

		44,444			13,329

Deferred tax liabilities:
Intangible assets		28,428			6,784
Property and equipment		5,198			3,812
Convertible debt		1			1,735
Other basis differences		613			44

Total deferred tax liabilities		34,240			12,375

Net deferred tax assets	$	10,204		$	954

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.

The Company had previously established a valuation allowance against substantially all domestic and certain foreign deferred tax assets due to the uncertainty as to the timing and ultimate realization of those assets. In the fourth quarter of 2009, after evaluating all positive and negative evidence, it was determined that it was more likely than not that the Company would realize the net deferred tax assets applicable to the Company's German entity. Therefore, the Company recorded a release of the valuation allowance associated with this entity of $2.5 million. During 2010, the Company released a total of $16.9 million of valuation allowance related to the realization of domestic deferred tax assets as a result of the income generated in 2010. The Company also recorded a reduction to foreign deferred tax assets and a corresponding reduction to the valuation allowance of $1.3 million related to deferred tax assets that were lost due to reorganizations, sales, and liquidations of certain foreign entities. During the fourth quarter of 2011, the Company achieved a cumulative three-year income position in the United States. Management considered this position along with other available evidence, both positive and negative, and determined, as of December 31, 2011, that it was more likely than not that the net deferred tax assets (exclusive of deferred tax liabilities related to indefinite lived intangibles) would be realized, with the exception of domestic capital losses, domestic unrealized losses, foreign net operating loss carryforwards and other miscellaneous foreign deferred tax assets. Accordingly, the Company recorded a reduction in the valuation allowance of $41.7 million.

As of December 31, 2011, the Company could not determine that it is more likely than not that deferred tax assets related to domestic capital losses, domestic unrealized losses, foreign net operating loss carryforwards and other miscellaneous foreign deferred tax assets would be realized. Therefore, the Company has maintained a valuation allowance of $3.0 million against its domestic and certain foreign subsidiaries' deferred tax assets.

At December 31, 2011, the Company had gross federal, state, and foreign net operating loss carryforwards totaling approximately $35.3 million, $46.2 million, and $17.5 million, respectively. Of the $35.3 million and $46.2 million federal and state net operating loss, respectively, $19.1 million relates to tax deductions associated with certain stock compensation, the tax benefit of which will be credited to additional paid in capital when recognized. Federal net operating loss carryforwards begin to expire in 2023 and state net operating loss carryforwards begin to expire in 2017. The majority of the Company's foreign net operating loss carryforwards may be carried forward indefinitely.

At December 31, 2011, the Company had federal and state income tax credit carryforwards of $21.8 million and $11.2 million, respectively. If not previously utilized, the federal carryforwards will begin to expire in 2012. The state carryforwards do not expire.

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 $17.7 million and $22.8 million at December 31, 2011 and January 1, 2011, 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 1, 2011, the Company had $10.0 million of gross unrecognized tax benefits and a total of $9.1 million of net unrecognized tax benefits, which, if recognized, would affect the effective tax rate. Interest and penalties related to unrecognized tax benefits were $0.8 million as of January 1, 2011.

As of December 31, 2011, the Company had $17.7 million of gross unrecognized tax benefits and a total of $14.5 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 December 31, 2011. The Company does not anticipate that the balance of unrecognized tax benefits will change significantly over the next twelve months.

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


	Year Ended
(In thousands)	December 31, 2011			January 1, 2011			January 2, 2010
Unrecognized tax benefits at beginning of year	$	9,953		$	9,500		$	8,608
Gross increases for tax positions of prior years		8,325			—			2,385
Gross decreases for tax positions of prior years					—			(691	)
Gross increases for tax positions of current year		1,437			638			815
Current year acquisitions		903			—			—
Settlements		(2,370	)		(26	)		(907	)
Lapse of statute of limitations		(513	)		(159	)		(710	)

Unrecognized tax benefits at end of year	$	17,735		$	9,953		$	9,500

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


		U.S. Federal		2008 through current periods
		California		2007 through current periods
		France		2010 through current periods
		Germany		2010 through current periods
		Japan		2005 through current periods

However, the use of domestic net operating losses 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 2002 tax year.