5. Income Taxes

U.S. and foreign components of income (loss) before income taxes were (in thousands):


	Year Ended
	December 30, 2011		December 31, 2010		January 1, 2010
U.S. operations	$	4,839	$	14,585	$	(16,636	)
Foreign operations		17,601		10,225		(230	)

Total pretax income	$	22,440	$	24,810	$	(16,866	)

The provision for taxes on income consisted of the following (in thousands):


	Year Ended
	December 30, 2011			December 31, 2010			January 1, 2010
Current:
Federal	$	1,503		$	2,241		$	(4,547	)
State		324			1,186			40
Foreign		3,157			1,766			304

Total current		4,984			5,193			(4,203	)

Deferred:
Federal		(4,257	)		—			6,054
State		(2,282	)		—			1,279
Foreign		261			(480	)		30

Total deferred		(6,278	)		(480	)		7,363

Total provision (benefit)	$	(1,294	)	$	4,713		$	3,160

Significant components of net deferred tax assets and deferred tax liabilities for federal and state income taxes were as follows (in thousands):


	Year Ended
	December 30, 2011			December 31, 2010
Net current deferred tax asset (liability):
Inventory valuation and basis difference	$	1,347		$	1,401
Other accrued expenses		742			1,133
State taxes		(77	)		(109	)

		2,012			2,425

Net non-current deferred tax asset (liability):
Deferred rent		9			3
Other accrued expenses		3,181			2,675
Depreciation		842			1,535
Net operating losses		1,853			2,276
State taxes		(699	)		(936	)

		5,187			5,553

Total deferred tax assets		7,199			7,978
Valuation allowance		(441	)		(7,498	)

Net deferred tax assets	$	6,758		$	480

The effective tax rate differs from the federal statutory tax rate as follows:


	Year Ended
	December 30, 2011			December 31, 2010			January 1, 2010
Federal income tax provision at statutory rate		34.0	%		34.0	%		(35.0	)%
State income taxes, net of federal benefit		0.8	%		3.2	%		(3.2	)%
Effect of foreign operations		(11.4	)%		(9.3	)%		0.9	%
Valuation allowance		(29.8	)%		(5.0	)%		51.6	%
Other		0.6	%		(3.9	)%		4.4	%

Effective income tax rate		(5.8	)%		19.0	%		18.7	%

Undistributed earnings of the Company's foreign subsidiaries at December 30, 2011 are considered to be indefinitely reinvested and no provision for U.S. income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to U.S. income taxes. It is not practicable to determine the income tax liability that might be incurred if these earnings were to be distributed.

The provision for the year ended December 30, 2011, includes a partial release of valuation allowance of $6.7 million (see discussion below). The provision for the year ended December 31, 2010, includes a reversal of $0.9 million of previously established tax liability related to the Company's uncertain tax positions due to the finalization of the examination of the Company's tax returns for the period 2006 through 2009 by the Internal Revenue Service, and a partial release of valuation allowance of $1.2 million (see discussion below). The provision for the year ended January 1, 2010, includes the establishment of a valuation allowance of $7.0 million in the second quarter of 2009.

The following table summarizes the activity related to the Company's unrecognized tax benefits (in thousands):


Balance as of January 2, 2009	$	428
Increases related to current year tax positions		522
Expiration of the statute of limitations for the assessment of taxes		(30	)


Balance as of January 1, 2010	$	920
Increases related to prior year tax positions		2
Expiration of the statute of limitations for the assessment of taxes		(833	)


Balance as of December 31, 2010	$	39
Increases related to prior year tax positions		108
Increases related to current year tax positions		24
Expiration of the statute of limitations for the assessment of taxes		(39	)

Balance as of December 30, 2011	$	132

The Company's gross liability for unrecognized tax benefits as of December 30, 2011, December 31, 2010 and January 1, 2010 was $132,000, $39,000 and $920,000. Increases or decreases to interest and penalties on uncertain tax positions are included in income tax provision (benefit) in the Consolidated Statement of Operations. Interest related to uncertain tax positions were $10,000 as of December 30, 2011, $7,000 as of December 31, 2010 and $262,000 as of January 1, 2010. Although it is possible some of the unrecognized tax benefits could be settled within the next twelve months, the Company cannot reasonably estimate the outcome at this time.

The determination of our tax provision is subject to judgments and estimates. The carrying value of our net deferred tax assets, which is made up primarily of tax deductions, assumes we will be able to generate sufficient future income to fully realize these deductions. In determining whether the realization of these deferred tax assets may be impaired, we make judgments with respect to whether we are likely to generate sufficient future taxable income to realize these assets. In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with the Company's expectations could have a material impact on its results of operations and financial position.

As of December 30, 2011, the Company maintained a full valuation allowance on the deferred tax assets of one of the Company's China subsidiaries. During the fourth quarter of fiscal 2011 the Company reversed all of the valuation allowance related to the Company's U.S. federal and state deferred tax assets. In order to reverse a valuation allowance, U.S. GAAP guidance requires the Company to review the Company's cumulative twelve-quarter income/loss as well as its ability to generate sufficient future taxable income to realize its net deferred tax assets. During fiscal 2011, the Company conducted quarterly reviews of each of its subsidiaries. The Company's U.S. subsidiaries reflected a cumulative twelve quarter profit at the end of the fourth quarter of fiscal 2011 compared to a cumulative twelve quarter loss at the end of the previous quarter, and based on financial trends of its U.S. subsidiaries at the close of fiscal 2011 the Company determined that it was more likely than not that it would generate sufficient taxable income to realize its deferred tax assets. Therefore, the Company concluded that it was appropriate to release all of the valuation allowance remaining after adjustment for true-ups and changes in deferred tax assets, or $6.7 million, related to its U.S. federal and state deferred tax assets. The Company also concluded that due to a fourth quarter 2011 net loss and financial trends of one of its Chinese subsidiaries, it was appropriate to increase the valuation allowance by $125,000 to $441,000, thereby maintaining a full reserve on the deferred tax assets of that subsidiary. During fiscal 2011 the Company also released $0.4 million of valuation allowance due to true-ups and changes in deferred tax assets for which it maintained a full valuation allowance. The total valuation allowance on the Company's consolidated deferred tax assets as of December 31, 2011, is $441,000.

The Company files income tax returns in the U.S. federal jurisdiction, various states and foreign jurisdictions. The Company's 2008 through 2011 federal income tax returns are open to audit through the statute of limitations by the Internal Revenue Service. The Company's 2007 through 2011 state income tax returns are open to audit under the statute of limitations by the California Franchise tax Board. The Company is also subject to examination in various other jurisdictions for various periods. The Company's federal returns are still open for fiscal years 2004 through 2007 due to the carryback of losses for these years.

The Company is currently experiencing a tax holiday related to its Singapore subsidiary that will expire for tax years beginning January 2015. The Company's Singapore subsidiary recorded a net profit for the year ended December 30, 2011.

Sales, Use and Value-Added Taxes — Sales, Use and value-added taxes receivable and payable are recorded on a net basis by jurisdiction. Subsequent to the issuance of the 2010 consolidated financial statements, management determined that certain of these receivables and payables had previously been recorded on a gross basis. Accordingly, the amounts previously reported as of December 31, 2010 have been corrected in the accompanying consolidated financial statements to be reported on a net basis. Accrued liabilities were reduced by $2.7 million as of December 31, 2010 from $3.2 million as previously reported to $0.5 million. Prepaid and other current assets were reduced by $2.7 million as of December 31, 2010 from $5.9 million as previously reported to $3.2 million. Additionally, the consolidated statement of cash flows for the year ended January 1, 2010 has been corrected, within cash flows from operating activities, to report a change in prepaid expenses and other current asserts of $3.5 million rather than a change of $2.8 million as previously reported, and a change in accrued liabilities of $(1.1) million rather than a change of $(0.4) million as previously reported. The consolidated statement of cash flows for the year ended December 31, 2010 has been corrected, within cash flows from operating activities, to report a change in prepaid expenses and other current assets of $2.4 million rather than a change of $0.4 million as previously reported, and a change in accrued liabilities of $(1.4) million rather than a change of $0.6 million as previously reported. These corrections had no effect on the Company's previously reported stockholders' equity, net income (loss), working capital or net cash provided by operations.