Note 8 - Income Taxes

12 Months Ended

Dec. 31, 2012

Income Tax Disclosure [Text Block]

8.  Income Taxes

The components of income before income taxes for the years ended December 31, 2012, 2011 and 2010 are as follows (in thousands):

	Year ended December 31,
	2012		2011			2010
United States	$	807	$	(2,031	)	$	2,770
International		17,083		15,757			28,650
Total	$	17,890	$	13,726		$	31,420

Management’s intent is to indefinitely reinvest any undistributed earnings from its foreign subsidiaries. Accordingly no provision for Federal and state income or foreign withholding taxes have 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 and potential foreign withholding taxes. Up to December 31, 2012 the unremitted earnings of foreign subsidiaries is $110.0 million. 

The components of the income tax provision are as follows (in thousands):

	Year ended December 31,
	2012			2011			2010
Current:
Federal	$	840		$	447		$	1,369
State		3			(593)			15
Foreign		1,302			992			534
Deferred:
Federal		1,610			742			(1,415)
State		385			994			(848	)
Foreign		(11	)		(421	)		(61	)
Valuation allowance		(1,995	)		(1,736)			2,263
Income tax provision	$	2,134		$	425		$	1,857

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

	Year ended December 31,
	2012			2011			2010
U.S. statutory federal tax rate		34.0	%		34.0	%		34.0	%
Research and development credits		(3.6	)		(0.5	)		(2.9	)
Stock compensation		0.1			5.6			(0.7)
Foreign income taxed at lower rates		(28.4	)		(31.8	)		(29.3	)
Change in valuation allowance on federal timing differences		7.0			(6.1)			4.3
Litigation reserves & other		2.8			1.9			0.5
Effective tax rate		11.9	%		3.1	%		5.9	%

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

	December 31,
	2012			2011
Deferred tax assets:
Research tax credits	$	4,930		$	5,162
Stock compensation		5,487			6,553
Other costs not currently deductible		2,424			2,767
Depreciation and amortization		317			774
Total deferred tax assets		13,158			15,256
Valuation allowance		(12,488	)		(14,596	)
Net deferred tax assets	$	670		$	660

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 2013. 

As of December 31, 2012 and 2011, the Company had a valuation allowance of $12.5million and $14.6 million, respectively, attributable to management’s determination that it is more likely than not that most of the deferred tax assets in the United States will not be realized. Should it be determined that additional amounts of the net deferred tax asset will not be realized in the future, an adjustment to increase the deferred tax asset valuation allowance will be charged to income in the period such determination is made. Likewise, in the event the Company were to determine that it is more likely than not that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the valuation allowance for the deferred tax asset would increase income in the period such determination was made.

In November 2012, California taxpayers voted in favor of mandating the use of a single sales factor for California state apportionment, effective for tax years beginning on or after January 1, 2012. As a result of this change in law, the Company’s California deferred tax assets were revalued down. As the Company has a valuation allowance against its U.S. deferred tax assets, this revaluation of the Company’s California deferred tax assets does not have any income tax expense impact to its financial statements.

During 2012, the Company also assessed the deductibility of restricted stock units granted to its executives and determined that due to Section 162m limitation, some of these grants will result in limited benefits to the Company when vested.   As a result, we have reduced our U.S. deferred tax assets and valuation allowance.

As of December 31, 2012, the federal and state net operating loss carryforwards for income tax purposes were approximately $14.2 million and $30.3 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. $14.2 million of the federal net operating loss carry forwards and $25.3 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, 2012, the Company had research tax credit carryforwards of $10.8 million for federal income tax purposes, which will begin to expire in 2022 and $10.3million for state income tax purposes, which can be carried forward indefinitely. $3.6 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.

In the event of a change in ownership, as defined under federal and state tax laws, the Company's net operating loss and tax credit carryforwards could be subject to annual limitations.  The annual limitations could result in the expiration of the net operating loss and tax credit carryforwards prior to utilization.

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, 2012, the Company had $13.1 million of unrecognized tax benefits, $4.9 million of which would affect its effective tax rate if recognized after considering the valuation allowance. 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.

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

Balance at January 1, 2010	$	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
Gross increase for tax positions of prior year		188
Gross increases for tax position of current year		689
Reductions for prior year tax positions		-
Settlement		-
Reduction due to statutes expiring		-
Balance at December 31, 2012	$	13,081

The Company recognizes interest and penalties, if any, related to uncertain tax positions in its income tax provision. At December 31, 2012, 2011, and 2010, the Company has approximately $0.8 million, $0.7 million and $0.6 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, 2005 through December 31, 2007, the statute of limitations for tax years ended December 31, 2005 through December 31, 2007 was extended to June 30, 2013.

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, 2005 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 are contesting these proposed adjustments vigorously. In February 2012, we received a revised NOPA from the IRS (Revised NOPA).  In this Revised NOPA, the IRS raised the same issues as in the NOPA issued in April 2011 but under a different methodology.  Under the Revised NOPA, the largest potential federal income tax adjustment, if the IRS were to prevail on all matters in dispute, has decreased to $10.5 million, plus interest and penalties, if any. We responded to the IRS Revised NOPA in May 2012, but have not yet received a response from the IRS.

We have reviewed and responded to the above 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, 2012, 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, results of operations and cash flows.

The French subsidiary of the Company is currently under audit for taxable years 2009 and 2010. The Company is in the process of responding to the questions raised by the tax authority. We do not believe the resolution of the audits will result in a significant impact on our consolidated financial position, results of operations and cash flows. Aside from U.S. and France, there are no other income tax audits in process in any other material jurisdiction.

On January 2, 2013, the President signed into law The American Taxpayer Relief Act of 2012. Under prior law, a taxpayer was entitled to a research tax credit for qualifying amounts paid or incurred on or before December 31, 2011. The 2012 American Taxpayer Relief Act extends the research credit for two years to December 31, 2013.  The extension of the research credit is retroactive and includes amounts paid or incurred after December 31, 2011.  As a result of the retroactive extension, we expect an increase to our federal R&D credits carryforwards of approximately $1.0 million for qualifying amounts incurred in 2012. The benefit will be recognized in the period of enactment, which is the first quarter of 2013.  However, due to our current valuation allowance position, we do not expect the federal R&D credit to provide a tax benefit.