Income Taxes

Income Tax Assets and Liabilities – The Company accounts for income taxes whereby that deferred tax assets and liabilities are recognized using enacted tax rates for the effect of temporary differences between the book and tax accounting for assets and liabilities. Also, deferred tax assets are reduced by a valuation allowance to the extent that management cannot conclude that it is more likely than not that a portion of the deferred tax asset will be realized in the future. The Company evaluates the deferred tax assets on a continuous basis throughout the year to determine whether or not a valuation allowance is appropriate. Factors used in this determination include future expected income and the underlying asset or liability which generated the temporary tax difference. The income tax provision is primarily impacted by federal statutory rates, state and foreign income taxes and changes in the valuation allowance.

Income (loss) before provision (benefit) for income taxes consists of the following (in thousands):



	Years Ended
	December 31, 2011		January 1, 2011		January 2, 2010
Domestic	$	41,773	$	37,640	$	(14,111	)
Foreign	2,811		3,049		(2,780		)
Income (loss) before income taxes	$	44,584	$	40,689	$	(16,891	)

The provision (benefit) for income taxes consists of the following (in thousands):



	Years Ended
	December 31, 2011			January 1, 2011			January 2, 2010
Current:
Federal	$	11,059		$	2,031		$	(75	)
State	1,048			659			6
Foreign	354			55			(111		)
	12,461			2,745			(180		)
Deferred:
Federal	2,366			(14,266		)	—
State	(158		)	(459		)	—
Foreign	1,230			(3,279		)	(406		)
	3,438			(18,004		)	(406		)
Provision (benefit) for income taxes	$	15,899		$	(15,259	)	$	(586	)

The fiscal year 2011 income tax provision reflects a benefit of $0.5 million recorded in the fourth quarter of fiscal year 2011 resulting from certain return-to-provision and other adjustments that related to prior periods. The correction of these out of period errors in the current quarter are immaterial to both the consolidated quarterly and annual financial statements.

Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):



	At
	December 31, 2011			January 1, 2011
Deferred tax assets:
Reserves and accruals	$	12,441		$	9,625
Deferred revenue	1,308			338
Goodwill	396			825
Shared based compensation	2,242			2,411
Tax credit carry-forwards	999			2,819
Net operating losses	10,133			7,220
Depreciation & amortization	2,957			3,190
Other	571			415
Total deferred tax assets	31,047			26,843
Less: Valuation allowance	(8,142		)	(7,002		)
Total deferred tax assets net of valuation allowance	22,905			19,841
Deferred tax liabilities:
Depreciation & amortization	(6,229		)	(664		)
Other	(1,406		)	(277		)
Total deferred tax liabilities	(7,635		)	(941		)
Net deferred tax assets	$	15,270		$	18,900

As of December 31, 2011, the Company had net operating loss carryforwards of $27.4 million in California and $33.3 million in foreign countries, which begin to expire in 2016 and 2013 respectively. A total of $1.6 million of the California net operating loss carryforward and $1.3 million of the foreign net operating loss carryforwards are related to excess tax benefits as a result of stock option exercises and therefore will be recorded in additional paid-in capital in the period that they become realized. During the year ended December 31, 2011, the Company realized excess benefits as a result of stock option exercises in the amount of $3.9 million, which was appropriately recorded to additional paid-in-capital.

As of December 31, 2011, the Company had available for carryforward state research and experimental tax credits and other credits of $2.6 million. State research and experimental tax credits carryforward indefinitely. A total of $0.3 million of the state research and experimental tax credits are related to excess tax benefits as a result of stock option exercises and therefore will be recorded to additional paid-in-capital in the period that they become realized.

During the years ended December 31, 2011 and January 1, 2011 the valuation allowance increased by $1.1 million and decreased by $32.1 million, respectively. The valuation allowance increase in 2011 is primarily related to foreign losses without benefit.

Changes in tax laws and tax rates could affect our recorded deferred tax assets and liabilities in the future. Our tax liabilities involve dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations. Management will account for any such changes or factors in the period in which such law changes are enacted.

Differences between income taxes computed by applying the statutory federal income tax rate to income before income taxes and the provision (benefit) for income taxes consist of the following (in thousands):



	Years Ended
	December 31, 2011			January 1, 2011			January 2, 2010
Income taxes computed at U.S. statutory rate	$	15,604		$	14,241		$	(5,912	)
State income taxes	636			1,766			6
Foreign tax rate differential	907			(3,512		)	(229		)
Change in valuation allowance	17			(28,825		)	4,237
Domestic production activities deduction	(1,033		)	(404		)	—
Tax credits	(601		)	(869		)	927
Liabilities for uncertain tax positions	153			1,793			(207		)
Other, net	216			551			592
Provision (benefit) for income taxes	$	15,899		$	(15,259	)	$	(586	)

As of December 31, 2011, approximately $0.8 million of undistributed earnings from non-U.S. operations held by our foreign subsidiaries are designated as permanently reinvested outside the U.S. Accordingly, no additional U.S. income taxes or additional foreign withholding taxes have been provided thereon. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable.

We recognize tax liabilities for uncertain tax positions and adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which they are determined. The Company does not expect a material change in its unrecognized tax benefits within the next 12 months.

The accounting for uncertainty in income taxes recognized in an enterprise’s financial statements prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken on a tax return, and the derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure, and transition.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):



	Rollforward Table (at Gross): As of
	December 31, 2011			January 1, 2011			January 2, 2010
Unrecognized tax benefits – beginning of the period	$	3,370		$	1,032		$	1,374
Foreign currency movements	—			(15		)	—
Gross increases – tax positions in prior period	154			1,971			15
Gross decreases – tax positions in prior period	—			—			(345		)
Gross increases – current-period tax positions	622			530			81
Settlements	—			—			—
Lapse of statute of limitations	(547		)	(148		)	(93		)
Unrecognized tax benefits – end of the period	$	3,599		$	3,370		$	1,032

The unrecognized tax benefits at December 31, 2011 were $3.6 million, of which $2.9 million would impact the effective tax rate if the Company determined the tax benefit to be more likely than not realizable. The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. The total amount of penalties and interest are not material as of December 31, 2011, January 1, 2011, and January 2, 2010. The Company expects that approximately $0.2 million of its unrecognized tax benefits may be recognized within the next 12 months as a result of the lapse of the statute of limitations.

The Company is subject to taxation in the U.S. and various states including California, and foreign jurisdictions including Korea, Japan and United Kingdom. Due to tax attribute carry-forwards, the Company is subject to examination for tax years 2003 forward for U.S. tax purposes. The Company was also subject to examination in various states for tax years 2002 forward. The Company is subject to examination for tax years 2006 forward for various foreign jurisdictions.