NOTE 11 INCOME TAXES

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

	Year Ended
	December 29,			December 31,		January 1,
(In thousands)	2012			2011		2011
United States	$	2,360		$	43,091	$	38,363
Foreign	(86,831		)	7,417		5,878
	$	(84,471	)	$	50,508	$	44,241

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

	Year Ended
	December 29,			December 31,			January 1,
(In thousands)	2012			2011			2011
Current:
Federal	$	1,275		$	(3,252	)	$	565
State	(7		)	1,204			687
Foreign	2,929			2,523			1,340
	4,197			475			2,592
Deferred:
Federal	6,980			(23,425		)	440
State	(3,085		)	(6,760		)	(218		)
Foreign	(2,613		)	556			314
	1,282			(29,629		)	536
	$	5,479		$	(29,154	)	$	3,128

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
	December 29,			December 31,			January 1,
(In thousands)	2012			2011			2011
Income tax provision (benefit) at statutory rate	$	(29,565	)	$	17,678		$	15,484
Increase (decrease) in taxes resulting from:
Impairment or reduction of goodwill	23,730			1			213
Non-deductible expenses	153			1,700			188
State tax, net of federal benefit	(442		)	1,043			1,549
Dividend from foreign subsidiary	—			—			2,962
Foreign rate variance	14,096			(1,683		)	1,328
Income tax credits	(204		)	(1,590		)	(880		)
Valuation allowance	(19		)	(41,715		)	(19,566		)
Tax contingency	292			(1,808		)	691
Other, including deferred tax adjustment, net	(2,562		)	(2,780		)	1,159
	$	5,479		$	(29,154	)	$	3,128

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:

	December 29,			December 31,
(In thousands)	2012			2011
Deferred tax assets:
Net operating loss carryforwards	$	4,711		$	6,202
Accruals and reserves not currently deductible	19,199			22,882
Tax credit carryforwards	1,633			10,715
Other basis differences	7,511			7,688
Total gross deferred tax assets	33,054			47,487
Valuation allowance	(3,135		)	(3,043		)
	29,919			44,444

Deferred tax liabilities:
Intangible assets	17,011			28,428
Property and equipment	4,446			5,198
Convertible debt	—			1
Other basis differences	368			613
Total deferred tax liabilities	21,825			34,240
Net deferred tax assets	$	8,094		$	10,204

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. 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. During the first quarter of 2012, the Company released $1.4 million of its valuation allowance related to certain domestic deferred tax assets due to the expected recovery of certain investments and capital loss carryovers. During the third quarter of 2012, the Company released $0.4 million of its valuation allowance related to certain domestic deferred tax assets due to the recovery of certain other investments. During the fourth quarter of 2012, after evaluating all positive and negative facts, the Company determined that it was not more likely than not that the Company would realize certain deferred tax assets associated with its Ophir Division. Therefore, the Company recorded a valuation allowance of $1.9 million, substantially all of which was applicable to Ophir’s Optimet business based in Israel.

As of December 29, 2012, 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 $3.1 million against its domestic and certain foreign subsidiaries’ deferred tax assets.

At December 29, 2012, the Company had gross federal, state, and foreign net operating loss carryforwards totaling approximately $6.5 million, $40.2 million, and $14.2 million, respectively. Federal net operating loss carryforwards begin to expire in 2023 and state net operating loss carryforwards begin to expire in 2013. The majority of the Company’s foreign net operating loss carryforwards may be carried forward indefinitely.

At December 29, 2012, the Company had federal and state income tax credit carryforwards of $20.5 million and $10.6 million, respectively. Certain unused federal carryforwards will begin to expire in 2015 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 year ended December 29, 2012, the Company realized approximately $0.7 million of such excess tax benefits and, accordingly, recorded a corresponding increase in capital in excess of par value. As of December 29, 2012, the Company had $20.4 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 $22.6 million and $17.7 million at December 29, 2012 and December 31, 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 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.

As of December 29, 2012, the Company had $15.2 million of gross unrecognized tax benefits and a total of $12.4 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 29, 2012. The Company believes that it is reasonably possible that gross unrecognized tax benefits may decrease by $1.1 million within the next twelve months.

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

	Year Ended
	December 29,			December 31,			January 1,
(In thousands)	2012			2011			2011
Unrecognized tax benefits at beginning of year	$	17,735		$	9,953		$	9,500
Gross increases for tax positions of prior years	—			8,325			—
Gross decreases for tax positions of prior years	(2,611		)	—			—
Gross increases for tax positions of current year	1,111			1,437			638
Current year acquisitions	—			903			—
Settlements	(1,006		)	(2,370		)	(26		)
Lapse of statute of limitations	(56		)	(513		)	(159		)
Unrecognized tax benefits at end of year	$	15,173		$	17,735		$	9,953

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		2009 through current periods
California		2008 through current periods
France		2010 through current periods
Germany		2010 through current periods
Japan		2006 through current periods
Israel		2008 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.