11. Income Taxes

Income before income taxes consisted of the following for the periods indicated:


	Year Ended January 31,
	2013		2012		2011
	(in thousands)
U.S. operations	$	3,264	$	2,923	$	2,758
Non-U.S. operations		16,778		8,242		12,672

Income before income taxes	$	20,042	$	11,165	$	15,430

Income tax provision consisted of the following for the periods indicated:


	Year Ended January 31,
	2013			2012			2011
	(in thousands)
Current:
U.S. federal tax	$	2,022		$	962		$	306
U.S. state taxes		5			26			—
Non-U.S. foreign taxes		701			502			708

		2,728			1,490			1,014

Deferred:
U.S. federal tax		(743	)		(73	)		473
U.S. state taxes		(109	)		(36	)		10
Non-U.S. foreign taxes		(22	)		(37	)		4

		(874	)		(146	)		487

Provision for income taxes	$	1,854		$	1,344		$	1,501

Income tax provision differed from the amounts computed by applying the U.S. federal income tax rate of 34% to pretax income as a result of the following for the periods indicated:


	Year Ended January 31,
	2013			2012			2011
	(in thousands)
U.S. federal tax at statutory rate	$	6,814		$	3,796		$	5,246
U.S. state taxes		(107	)		(13	)		9
Non-U.S. foreign tax differential		(4,513	)		(2,306	)		(3,577	)
Stock-based compensation		682			537			366
U.S. R&D credit		(890	)		(623	)		(571	)
Other		(132	)		(47	)		28

Provision for income taxes	$	1,854		$	1,344		$	1,501

Temporary differences that gave rise to significant portions of the Company’s deferred tax assets and liabilities at January 31, 2013 and 2012 were as follows:


	As of January 31,
	2013			2012
	(in thousands)
Deferred tax assets:
Deferred revenue	$	—		$	83
Federal and state credits		1,243			1,301
Expenses not currently deductible		1,345			895
Foreign deferred		60			38
Stock-based compensation		950			451

Gross deferred tax assets		3,598			2,768
Valuation allowance		(1,243	)		(1,301	)

Total deferred tax assets	$	2,355		$	1,467

Deferred tax liabilities
Property and equipment		(197	)		(180	)

Net deferred tax assets	$	2,158		$	1,287

Tax valuation allowance for the periods indicated below were as follows:


	Balance at Beginning of Period		Additional Charged to Expenses		Additions Charged to Other Account		Deductions Charged to Expenses or Other Accounts			Balance at End of Period
	(in thousands)
Tax Valuation Allowance
Year ended January 31, 2013	$	1,301	$	—	$	—	$	(58	)	$	1,243
Year ended January 31, 2012	$	1,153	$	280	$	—	$	(132	)	$	1,301
Year ended January 31, 2011	$	5,409	$	46	$	—	$	(4,302	)	$	1,153

The Company conducts its business in several countries and regions and is subject to taxation in those jurisdictions. The Company is incorporated in the Cayman Islands with foreign subsidiaries in the U.S., China, Taiwan, and other foreign countries and regions. As such, the Company’s worldwide operating income is subject to varying tax rates and its effective tax rate is highly dependent upon the geographic distribution of its earnings or losses and the tax laws and regulations in each geographical region. Consequently, the Company has experienced lower effective tax rates as a substantial amount of its operations are conducted in lower-tax jurisdictions. If the Company’s operational structure was to change in such a manner that would increase the amount of operating income subject to taxation in higher-tax jurisdictions, or if the Company was to commence operations in jurisdictions assessing relatively higher tax rates, its effective tax rate could fluctuate significantly on a quarterly basis and/or be adversely affected. Dividend distributions received from the Company’s U.S. subsidiary and certain other foreign subsidiaries may be subject to local country withholding taxes when, and if, distributed. Deferred tax liabilities have not been recorded on unremitted earnings of certain subsidiaries because management’s intent is to indefinitely reinvest any undistributed earnings in those subsidiaries. If dividend distributions from those subsidiaries were to occur, the liability as of January 31, 2013 would be $2.9 million. Cumulative undistributed earnings of foreign subsidiaries for which no deferred taxes have been provided approximated $18.4 million at January 31, 2013. The decrease in tax expense for the fiscal years ended January 31, 2013 was primarily due to a change in the mix of earnings in various geographic jurisdictions and the re-enactment of the U.S. federal research credit on December 31, 2012.

As of January 31, 2013 and 2012, the Company had deferred tax assets (net of deferred tax liabilities) before valuation allowance, of $3.4 million and $2.6 million, respectively. Realization of the deferred tax assets is dependent upon future taxable income, if any, the amount and timing of which are uncertain.

The Company has California state research and development credit carryforwards of approximately $1.8 million at January 31, 2013. The California credits can be carried forward indefinitely.

As of January 31, 2013, the Company maintained a full valuation allowance against its California credit carryforwards due to uncertainty regarding the future utilization of these deferred tax assets. The total state tax credit valuation allowance decreased by approximately $0.1 million in fiscal 2013. As of January 31, 2013, the Company has no valuation allowance other than state tax credit carryforwards as the Company has sufficient positive evidence to indicate no other valuation allowance is needed as a result of the Company’s history of profitable operations in the United States.

Utilization of the research credit carryforwards may be subject to an annual limitation due to the ownership percentage change limitations as defined by the U.S. Internal Revenue Code Section 382, as amended, and similar state provisions. The annual limitation may result in the expiration of the U.S. Federal and state research credit carryforwards before utilization. The Company does not expect any tax credit carryforwards to expire as a result of a Section 382 limitation.

The Company applies the provisions of FASB’s guidance on accounting for uncertainty in income taxes. As of January 31, 2013, the Company had approximately $3.0 million in unrecognized tax benefits, $2.1 million of which would affect the Company’s effective tax rate if recognized. The following table sets forth a reconciliation of the beginning and ending amount of unrecognized tax benefits:


	Year Ended January 31,
	2013			2012			2011
	(in thousands)
Beginning balance:	$	2,213		$	2,007		$	1,883
Additions based on tax positions related to the current year		325			311			244
Additions for tax positions of prior years		690			34			138
Reductions for tax positions of prior years		(210	)		(139	)		(258	)

Ending balance:	$	3,018		$	2,213		$	2,007

The Company classified $1.2 million and $1.1 million of income tax liabilities as other long term liabilities as of January 31, 2013 and 2012, respectively, because payment of cash or settlement is not anticipated within one year from the balance sheet date.

The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense. The Company recorded $23,000, $37,000 and $22,000 of interest expense and penalties related to uncertain tax positions for the years ended January 31, 2013, 2012 and 2011, respectively. The Company recorded noncurrent liabilities of $116,000 and $93,000 related to interest and penalties related to uncertain tax positions at January 31, 2013 and 2012, respectively.

The Company is subject to income tax in the U.S. federal jurisdiction and various state and foreign jurisdictions. The U.S. Internal Revenue Service has concluded its audit of the Company’s Federal income tax return for the fiscal year ended January 31, 2010 with no adjustments.

The Company believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income tax in the period such resolution occurs. Although timing of the resolution and/or closure of audits is highly uncertain, the Company does not believe it is reasonably possible that its unrecognized tax benefits would materially change in the next 12 months.

As of January 31, 2013, the Company’s long-term income taxes payable, including estimated interest and penalties, was approximately $1.4 million. The Company was unable to make a reasonably reliable estimate of the timing of payments in individual years due to uncertainties in the timing of tax audits, if any, or their outcomes.