Note 8 - Income Taxes

12 Months Ended

Dec. 31, 2013

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

8.  Income Taxes

The components of income (loss) before income taxes are as follows (in thousands):

	Year Ended December 31,
	2013			2012		2011
United States	$	(2,309	)	$	807	$	(2,031	)
International		26,316			17,083		15,757
Total income before income taxes	$	24,007		$	17,890	$	13,726

Management’s intent is to indefinitely reinvest any undistributed earnings from the Company's foreign subsidiaries. Accordingly, no provision for Federal and state income or foreign withholding 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 the U.S. income taxes and potential foreign withholding taxes. As of December 31, 2013, the unremitted earnings of foreign subsidiaries were $141.0 million. The Company has sufficient cash reserves in the U.S. and intends to use the undistributed foreign earnings to fund foreign operations and research and development needs, planned capital outlay and expansion.

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

	Year Ended December 31,
	2013			2012			2011
Current:
Federal	$	77		$	840		$	447
State		67			3			(593	)
Foreign		1,053			1,302			992
Deferred:
Foreign		(88	)		(11	)		(421	)
Total income tax provision	$	1,109		$	2,134		$	425

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

	Year Ended December 31,
	2013			2012			2011
U.S. statutory federal tax rate		34.0	%		34.0	%		34.0	%
State, net of federal benefit		0.3			-			-
Research and development credits		-			(3.6	)		(0.5	)
Stock-based compensation		(13.7	)		0.1			5.6
Foreign income at lower rates		(33.8	)		(28.4	)		(31.8	)
Changes in valuation allowance		16.8			7.0			(6.1	)
Litigation reserves and other		1.0			2.8			1.9
Effective tax rate		4.6	%		11.9	%		3.1	%

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

	As of December 31,
	2013			2012
Deferred tax assets:
Research tax credits	$	8,303		$	4,930
Other expenses not currently deductible		3,204			2,133
Stock-based compensation		2,599			5,487
Litigation settlement		2,490			-
Net operating losses		627			291
Depreciation and amortization		291			317
Total deferred tax assets		17,514			13,158
Valuation allowance		(16,739	)		(12,488	)
Net deferred tax assets	$	775		$	670

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 U.S. entity. Because of the U.S. 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 U.S. deferred tax benefits during 2014. 

As of December 31, 2013 and 2012, the Company had a valuation allowance of $16.7 million and $12.5 million, respectively, attributable to management’s determination that it is more likely than not that most of the deferred tax assets in the U.S. 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.

As of December 31, 2013, the federal and state net operating loss carryforwards for income tax purposes were approximately $15.6 million and $30.2 million, respectively. The federal net operating loss carryforwards will begin to expire in 2027 and the state net operating loss carryforwards will expire beginning in 2018. $14.6 million of the federal net operating loss carry forwards and $25.1 million of the state net operating loss carryforwards 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. The Company has elected to follow the “with and without” approach to account for excess tax benefits from stock options exercises. In addition, the Company only considers the direct effects of stock option exercises when calculating the amount of windfalls or shortfalls.

As of December 31, 2013, the Company had research tax credit carryforwards of $14.4 million for federal income tax purposes, which will begin to expire in 2022, and $12.4 million 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.

On January 2, 2013, the President signed into law The American Taxpayer Relief Act of 2012 (the "2012 Act"). 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 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, the Company had an increase to its federal R&D credits carryforwards of approximately $1.7 million for qualifying amounts incurred in 2012. However, due to the Company’s current valuation allowance position, this credit did not result in a tax benefit.

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.

At December 31, 2013, the Company had $14.9 million of unrecognized tax benefits, $5.0 million of which would affect its effective tax rate if recognized after considering the valuation allowance. 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.

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

Balance as at January 1, 2011	$	9,106
Gross increase for tax position of prior year		1,710
Gross increase for tax position of current year		1,388
Balance as at December 31, 2011		12,204
Gross increase for tax position of prior year		188
Gross increase for tax position of current year		689
Balance as of December 31, 2012		13,081
Gross increase for tax position of prior year		646
Gross increase for tax position of current year		1,528
Reduction for prior year tax position		(333	)
Balance as of December 31, 2013	$	14,922

The Company recognizes interest and penalties, if any, related to uncertain tax positions in its income tax provision. As of December 31, 2013 and 2012, the Company had approximately $0.8 million of accrued interest related to uncertain tax positions, which were recorded in long-term income tax liabilities in the Consolidated Balance Sheets.

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 believes that it is reasonably possible that approximately $1.2 million of its unrecognized tax benefits may be released in 2014 as a result of a lapse of the statute of limitation. In addition, it is reasonably possible that over the next twelve-month period the Company may experience other increases or decreases in its unrecognized tax benefits. However, it is not possible to determine either the magnitude or the range of other increases or decreases at this time.

On September 13, 2013, the U.S. Treasury Department and the IRS issued final regulations that address costs incurred in acquiring, producing, or improving tangible property (the "tangible property regulations"). The tangible property regulations are generally effective for tax years beginning on or after January 1, 2014, and may be adopted in earlier years. Given its full valuation allowance, the Company does not anticipate the impact of these changes to be material to its consolidated financial position, results of operations or cash flows.

Income Tax Audits

The Company is subject to examination of its income tax returns by the IRS and other tax authorities. The Company’s 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, the Company received from the IRS a Notice of Proposed Adjustment ("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 its international subsidiaries and the amount of "buy-in payments" made by the international subsidiaries to the Company in connection with the cost-sharing agreement, and proposed to increase the Company’s U.S. taxable income according to a few alternative methodologies. In February 2012, the Company 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, is $10.5 million, plus interest and penalties, if any. The Company responded to the IRS Revised NOPA in May 2012. As of June 2013, the IRS has responded and continues to disagree with the Company’s rebuttal. The Company took the issue to the IRS Office of Appeals and has an appointed date in March 2014. Meanwhile, the Company agreed to grant the IRS an extension of the statute of limitations for taxable years 2005 through 2007 to December 31, 2014. 

The IRS also audited the research and development credits carried forward into year 2005 and the credits generated in the years 2005 through 2007. The Company received a NOPA from the IRS in February 2011, proposing to reduce the research and development credits generated in year 2005 through 2007 and the carryforwards, which would then reduce the value of such credits carried forward to subsequent tax years.

The Company reviewed and responded to the above proposed adjustments. The Company regularly assesses the likelihood of an adverse outcome resulting from such examinations to determine the adequacy of its provision for income taxes. As of December 31, 2013, based on the technical merits of its tax return filing positions, the Company believes that it is more-likely-than-not that the benefit of such positions will be sustained upon the resolution of its audits, resulting in no significant impact on the Company’s consolidated financial position, results of operations and cash flows.