Note 8 - Income Taxes

12 Months Ended

Dec. 31, 2011

Income Tax Disclosure [Text Block]

8.  Income Taxes

The components of income before income taxes for the years ended December 31, 2011, 2010 and 2009 are (in thousands):

	2011			2010		2009
United States	$	(2,031	)	$	2,770	$	6,303
International		15,757			28,650		13,845
Consolidated	$	13,726		$	31,420	$	20,148

Management’s intent is to indefinitely reinvest any undistributed earnings from its foreign subsidiaries. Accordingly no provision for Federal and state income taxes has been provided thereon, nor is it practical to determine the amount of this liability. Upon distribution of those earnings in the form of dividends or otherwise, the Company will be subject to United States income taxes. Up to December 31, 2011 the unremitted earnings of foreign subsidiaries is $93.5 million.

The income tax provision consists of the following (in thousands):

	Year ended December 31,
	2011			2010			2009
Current:
Federal	$	447		$	1,369		$	344
State		(593	)		15			70
Foreign		992			534			147
Deferred:
Federal		742			(1,415	)		315
State		994			(848	)		(688	)
Foreign		(421	)		(61	)		(85	)
Valuation allowance		(1,736	)		2,263			371
Income tax provision	$	425		$	1,857		$	474

The effective tax rate differs from the applicable U.S. statutory federal income tax rate as follows:

	December 31,
	2011			2010			2009
U.S. statutory federal tax rate		34.0	%		34.0	%		34.0	%
Research and development credits		(0.5	)		(2.9	)		(0.9	)
Stock compensation		5.6			(0.7	)		8.6
Foreign income taxed at lower rates		(31.8	)		(29.3	)		(33.3	)
Change in valuation allowance on federal timing differences		(6.1	)		4.3			(6.0	)
Litigation reserves & other		1.9			0.5			(0.0	)
Effective tax rate		3.1	%		5.9	%		2.4	%

The components of deferred tax assets and liabilities consist of the following (in thousands):

	December 31,
	2011			2010
Deferred tax assets:
Research tax credits	$	5,162		$	6,772
Stock compensation		6,553			7,223
Other costs not currently deductible		2,767			2,290
Depreciation and amortization		774			769
Total deferred tax assets		15,256			17,054
Valuation allowance		(14,596	)		(16,815	)
Net deferred tax assets	$	660		$	239

As a result of the cost sharing arrangements  with the company’s international subsidiaries (cost share arrangements), relatively small changes in costs that are not subject to sharing under the cost share arrangements can significantly impact the overall profitability of the US entity. Because of the US entity’s inconsistent earnings history and uncertainty of future earnings, the Company has determined that it is more likely than not that the U.S. deferred tax benefits would not be realized. The Company will continue to evaluate if its facts and circumstances warrant a reversal of the valuation allowance against the US deferred tax benefits during fiscal year 2012.

As of December 31, 2011, the federal and state net operating loss carryforwards for income tax purposes were approximately $6.1 million and $28.4 million, respectively. The federal net operating loss carryforwards will begin to expire in 2027 and the State net operating loss carry forwards will expire beginning in 2018. $6.1 million of the federal net operating loss carry forwards and $24.8 million of the state operating loss carry forwards 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.

As of December 31, 2011, the Company had research tax credit carryforwards of $10.8 million for federal income tax purposes, which will begin to expire in 2022 and $9.0 million for state income tax purposes, which can be carried forward indefinitely. $3.0 million of the federal research tax credit and $1.4 million of the state research tax credit carryovers 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.

ASC 740-10 Income Taxes - Overall sets forth the accounting for uncertainty in income taxes recognized in an entity’s financial statements and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under ASC 740-10, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, ASC 740-10 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

At December 31, 2011, the Company had $12.2 million of unrecognized tax benefits, $4.5 million of which would affect its effective tax rate if recognized after considering the valuation allowance. At December 31, 2010, the Company had $9.1 million of unrecognized tax benefits, $5.0 million of which would affect its effective tax rate if recognized after considering the valuation allowance.

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

Balance at December 31, 2008	$	8,553
Gross increase for tax positions of prior year		-
Gross increases for tax position of current year		1,080
Reductions for prior year tax positions		(615	)
Reduction due to statutes expiring		(12	)
Balance at December 31, 2009		9,006
Gross increase for tax positions of prior year		-
Gross increases for tax position of current year		983
Reductions for prior year tax positions		-
Settlement		(883	)
Reduction due to statutes expiring		-
Balance at December 31, 2010		9,106
Gross increase for tax positions of prior year		1,710
Gross increases for tax position of current year		1,388
Reductions for prior year tax positions		-
Settlement		-
Reduction due to statutes expiring		-
Balance at December 31, 2011	$	12,204

The Company recognizes interest and penalties, if any, related to uncertain tax positions in its income tax provision. At December 31, 2009, 2010 and 2011, the Company has approximately $0.5 million, $0.6 million and $0.7 million respectively, of accrued interest related to uncertain tax positions.

Uncertain tax positions relate to the allocation of income and deductions among the Company’s global entities and to the determination of the research and development tax credit. The Company estimates that there will be no material changes in its uncertain tax positions in the next 12 months.

The Company files income tax returns in the U.S. federal jurisdiction, and various U.S. states and foreign jurisdictions. Generally, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years prior to 2005 because of the statute of limitations. However, because the Company is currently under an IRS audit for tax years ended December 31, 2006 and December 31, 2007, the statute of limitations for tax years ended December 31, 2005 through December 31, 2007 was extended to September 16, 2012.

We are subject to examination of our income tax returns by the IRS and other tax authorities.  Our U.S. Federal income tax returns for the years ended December 31, 2000 through December 31, 2007 are under examination by the IRS. In April 2011, we received from the IRS a Notice of Proposed Adjustment, or “NOPA”, relating to a cost-sharing agreement entered into by the Company and its international subsidiaries on January 1, 2004. In the NOPA, the IRS objected to the Company’s allocation of certain litigation expenses between the Company and our international subsidiaries and the amount of “buy-in payments” made by our international subsidiaries to the Company in connection with the cost-sharing agreement, and proposed to increase our U.S. taxable income according to a few alternative methodologies. The methodology resulting in the largest potential adjustment, if the IRS were to prevail on all matters in dispute, would result in  potential federal and state income tax liabilities of up to $37.0 million, plus interest and penalties, if any. We believe that the IRS's position in the NOPA is incorrect and that our tax returns for those years were correct as filed. We expect to contest these proposed adjustments vigorously. In February 2012, we received a revised NOPA from the IRS (Revised NOPA).  In this Revised NOPA, the IRS is raising the same issues as in the NOPA issued in April 2011 but under a different methodology.  Under the Revised NOPA, the largest potential adjustment, if the IRS were to prevail on all matters in dispute, has decreased to $10.5 million, plus interest and penalties, if any. This is considered to be a subsequent event to our balance sheet date and we are currently reviewing the Revised NOPA.  The IRS also audited the research and development credits generated in the years 2000 through 2007, and the carryforward of these credits to subsequent years. We received a NOPA from the IRS in February 2011, proposing to reduce the research and development credits generated in years 2000 through 2007, which would also reduce the value of such credits carried forward to subsequent tax years.

We are currently reviewing these proposed adjustments. We regularly assess the likelihood of an adverse outcome resulting from such examinations to determine the adequacy of our provision for income taxes. As of December 31, 2011, based on the technical merits of our tax return filing positions, we believe that it is more-likely-than-not that the benefit of such positions will be sustained upon the resolution of our audits resulting in no significant impact on our consolidated financial position and the results of operations and cash flows.