Note 11 - Income Taxes

12 Months Ended

Dec. 31, 2015

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

11.  INCOME TAXES

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

	Year Ended December 31,
	2015			2014		2013
United States	$	(247	)	$	3,173	$	(2,309	)
International		42,738			33,219		26,316
Total income before income taxes	$	42,491		$	36,392	$	24,007

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 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 U.S. income taxes and potential foreign withholding taxes. As of December 31, 2015 and 2014, the unremitted earnings of foreign subsidiaries were $214.3 million and $172.7 million, respectively. 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,
	2015		2014			2013
Current:
Federal	$	6,042	$	18		$	77
State		2		(28	)		67
Foreign		1,213		943			1,053
Deferred:
Foreign		62		(36	)		(88	)
Total income tax provision	$	7,319	$	897		$	1,109

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

	Year Ended December 31,
	2015			2014			2013
U.S. statutory federal tax rate		34.0	%		34.0	%		34.0	%
Settlement with tax authorities		6.2			-			-
Foreign income at lower rates		(43.1	)		(27.7	)		(33.8	)
Changes in valuation allowance		17.6			5.9			16.8
Stock-based compensation		-			(9.3	)		(13.7	)
Reserves and other		2.5			(0.4	)		1.3
Effective tax rate		17.2	%		2.5	%		4.6	%

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

	December 31,
	2015			2014
Deferred tax assets:
Research tax credits	$	8,869		$	10,393
Deferred compensation		5,038			2,326
Other expenses not currently deductible		3,519			2,535
Stock-based compensation		1,912			4,068
Net operating losses		-			298
Depreciation and amortization		(52	)		181
Total deferred tax assets		19,286			19,801
Valuation allowance		(18,614	)		(19,051	)
Net deferred tax assets	$	672		$	750

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 in future periods. 

As of December 31, 2015 and 2014, the Company had a valuation allowance of $18.6 million and $19.1 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, 2015, the federal and state net operating loss carryforwards for income tax purposes were approximately $0.7 million and $22.8 million, respectively. The federal net operating loss carryforwards will begin to expire in 2034 and the state net operating loss carry forwards will expire beginning in 2017. $0.7 million of the federal net operating loss carry forwards and $22.8 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. 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, 2015, the Company had research tax credit carryforwards of $16.3 million for federal income tax purposes, which will begin to expire in 2026, and $15.6 million for state income tax purposes, which can be carried forward indefinitely. $7.4 million of the federal research tax credit and $1.6 million of the state research tax credit 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.

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.

The R&D credit extension, part of the Protecting Americans from Tax Hikes (“PATH”) Act of 2015, was signed into law by the President on December 18, 2015.  Under prior law, R&D credit was extended as of December 31 2014. The PATH Act of 2015 permanently extends the R&D credit retroactively as of January 1, 2015. As a result of the retroactive extension, the Company had an increase to its federal R&D credits of approximately $1.9 million for qualifying amounts incurred in 2015. However, due to the Company’s current valuation allowance position, the credit did not result in a tax benefit.

On July 27, 2015, in Altera Corp. v. Commissioner, the U.S. Tax Court issued an opinion related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. A final decision was issued in December 2015, and the IRS appealed the decision in February 2016. At this time, the U.S. Department of the Treasury has not withdrawn the requirement from its regulations to include stock-based compensation. Due to the uncertainty surrounding the status of the current regulations, questions related to the scope of potential benefits, and the risk of the Tax Court’s decision being overturned upon appeal, the Company has not recorded any adjustments as of December 31, 2015. The Company will continue to monitor developments related to this opinion and the potential impact on its financial statements.

At December 31, 2015, the Company had $12.1 million of unrecognized tax benefits, $2.7 million of which would affect its effective tax rate if recognized after considering the valuation allowance. At December 31, 2014, the Company had $16.4 million of unrecognized tax benefits, $4.8 million of which would affect its effective tax rate if recognized after considering the valuation allowance. 

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

Balance as at January 1, 2013	$	13,081
Increases for tax position of prior year		646
Increases for tax position of current year		1,528
Decreases due to lapse of statue of limitations		(333	)
Balance as of December 31, 2013		14,922
Increases for tax position of prior year		584
Increases for tax position of current year		1,760
Decreases due to lapse of statue of limitations		(860	)
Balance as of December 31, 2014		16,406
Increases for tax position of current year		1,964
Decreases related to settlement with tax authorities		(4,162	)
Decreases due to lapse of statue of limitations		(669	)
Decreases for tax position of prior year		(1,446	)
Balance as of December 31, 2015	$	12,093

The Company recognizes interest and penalties, if any, related to uncertain tax positions in its income tax provision. As of December 31, 2015 and 2014, the Company has approximately $0.2 million and $0.5 million, respectively, 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. It is reasonably possible that over the next twelve-month period, the Company may experience increases or decreases in its unrecognized tax benefits. However, it is not possible to determine either the magnitude or the range of increases or decreases at this time.

In Switzerland where the Company designs and sells certain of its products, the Company’s earnings are currently subject to a tax holiday through 2018. The benefit resulting from the tax holiday had an insignificant impact on earnings per share for the periods presented.

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 effective for tax years beginning on or after January 1, 2014. Given its full valuation allowance, the regulations did not have a material impact on the Company’s 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 were 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 payment, if the IRS were to prevail on all matters in dispute, was $10.5 million, plus interest and penalties, if any. The Company responded to the Revised NOPA in May 2012. In June 2013, the IRS responded and continued to disagree with the Company’s rebuttal. The Company met with the IRS Office of Appeals in 2014 and both parties engaged in continuous discussions for a resolution of the matter in the first quarter of 2015. Meanwhile, the Company granted the IRS an extension of the statute of limitations for taxable years 2005 through 2007 to September 30, 2015. 

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 years 2005 through 2007 and the carryforwards, which would then reduce the value of such credits carried forward to subsequent tax years.

In April 2015, the Company reached a final resolution with the IRS in connection with the income tax audits for the years 2005 through 2007. Under the agreement, the Company made a one-time buy-in payment of $1.2 million for taxes related primarily to the revaluation of a license for certain intellectual property rights of the Company to one of its international subsidiaries.  This buy-in payment is final and no additional payment will be required with respect to the intellectual property license for the years under examination or for a previous or subsequent tax year. In addition, the Company made an interest payment of $1.0 million as well as a tax payment of $0.1 million for the tax years 2008 to 2013 in 2015.  There were no penalties assessed on the Company as a result of the audits.

For the second quarter of 2015, the Company's income tax provision included a one-time net charge of approximately $2.7 million reflecting the taxes and interest, partially offset by the reversal of previously accrued tax liabilities and valuation allowances. Of the $2.7 million charge, approximately $1.6 million was related to taxes and $1.1 million was related to interest.