Note 16 - Income taxes

12 Months Ended

Jan. 28, 2012

16. Income taxes

Income (loss) before income taxes consists the following (in thousands):

	Years Ended
	January 28, 2012			January 29, 2011			January 30, 2010
United States	$	(12,366	)	$	(4,220	)	$	(3,682	)
International		(160,645	)		14,117			8,789
Total	$	(173,011	)	$	9,897		$	5,107

The federal, state and foreign income tax provision is summarized as follows (in thousands):

	Years Ended
	January 28, 2012			January 29, 2011			January 30, 2010
Current
Federal	$	2,003		$	3,052		$	1,967
State		(27	)		15			274
Foreign		3,397			2,562			82
Total current	$	5,373		$	5,629		$	2,323

Deferred
Federal		(3,434	)		(3,791	)		(3,372	)
State		—			—			3,781
Foreign		(6,905	)		(1,088	)		(80	)
Total deferred		(10,339	)		(4,879	)		329
Total provision	$	(4,966	)	$	750		$	2,652

The tax effects of significant items comprising our deferred tax assets and liabilities are as follows (in thousands):

	January 28, 2012			January 29, 2011
Deferred tax assets:
Net operating loss	$	8,015		$	7,997
Investment impairment		1,823			1,825
Allowance, reserve and other		5,272			3,888
Depreciation		3,421			2,159
Tax credits		10,022			7,367
Stock-based compensation		11,072			9,558
Total gross deferred tax assets		39,625			32,794
Valuation allowance		(17,109	)		(14,019	)
Total net deferred tax assets		22,516			18,775
Deferred tax liabilities:
Acquired intangibles and other		(2,151	)		(8,613	)
Total net deferred tax assets	$	20,365		$	10,162

The tax benefits of net operating losses, temporary differences and credit carry-forwards are recorded as an asset to the extent that we assess that realization is “more likely than not.” Deferred income taxes result principally from differences in the recognition of certain assets and liabilities for tax and financial reporting purposes and the tax effect of tax loss carry-forwards. As of January 28, 2012, net operating loss carry-forwards amounted to approximately $37.9 million and $21.1 million for federal and California tax purposes, respectively, which will begin to expire in fiscal 2013 through 2032. We also had federal and state research credit carry-overs of $13.9 million and $13.6 million, respectively. Federal credits of $0.1 million were not utilized and began expiring during fiscal 2012. The state research credit has no expiration. Of the total net operating loss carry-over, the tax effect of $29.4 million federal and $3.4 million state losses will be recorded to additional paid-in capital when utilized in the future. We also have $29.0 million of foreign operating loss carry-forwards through the acquisition of a foreign operation. As of January 28, 2012, we maintained a partial valuation allowance against foreign net operating losses and a full valuation allowance against California deferred tax assets. The valuation allowance, in aggregate, increased by $3.1 million in fiscal 2012.

Net operating losses and tax credit carry-forwards as of January 28, 2012 are as follows (in thousands):

	Amount		Expiration Years
Net operating losses, federal	$	37,879	Through 2031
Net operating losses, state		21,133	Through 2032
Net operating losses, foreign		29,004	Indefinite
Tax credits, federal		13,875	Through 2032
Tax credits, state		13,581	Indefinite

Current federal and California tax laws include substantial restrictions on the utilization of net operating losses and tax credits in the event of an “ownership change” of a corporation. Accordingly, our ability to utilize net operating loss and tax credit carry-forwards may be limited as a result of such ownership changes. Such a limitation could result in the expiration of carry-forwards before they are utilized.

The effective tax rate of our provision for income taxes differs from the federal statutory rate as follows (in thousands):

	Years Ended
	January 28, 2012			January 29, 2011			January 30, 2010
Computed at federal statutory rate of 35%	$	(60,554	)	$	3,464		$	1,787
State taxes provision (benefit), net of federal benefit		(33	)		10			178
Uncertain tax positions		441			853			1,430
Difference between statutory rate and foreign effective tax rate		49,839			(3,466	)		(3,045	)
Stock-based compensation expense		746			878			561
Change in valuation allowance		—			—			3,781
Tax credits		(1,326	)		(1,201	)		(1,735	)
Impairment of goodwill and intangible assets		5,646			—			—
Other		275			212			(305	)
Total	$	(4,966	)	$	750		$	2,652

The $5.0 million tax benefit recorded for fiscal 2012 included a $5.6 million tax benefit resulting from the charge for impairment of intangible assets that was recorded during the third quarter of fiscal 2012.

Included in the balance of unrecognized tax benefits as of January 28, 2012 are $19.2 million of tax benefits that, if recognized, would reduce our effective tax rate. The remaining amount would be offset by the reversal of related deferred tax assets on which a valuation allowance is placed. During fiscal 2012, we added $2.1 million of unrecognized tax benefits. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

	Years Ended
	January 28, 2012			January 29, 2011			January 30, 2010
Beginning balance	$	20,337		$	18,841		$	10,949
Additions based on tax positions related to the current year		1,965			1,436			8,035
Additions for tax positions of prior years		404			388			109
Reductions for tax positions of prior year		(317	)		(328	)		(252	)
Ending balance	$	22,389		$	20,337		$	18,841

We have adopted the accounting policy that interest and penalties are classified as part of our income taxes. In fiscal 2012, we reduced our accrual of such interest and penalties expense by $0.1 million, and as of January 28, 2012, the balance of such accrued interest and penalties was $0.7 million.

Our operations are subject to income and transaction taxes in the United States and in multiple foreign jurisdictions. Significant estimates and judgments are required in determining our worldwide provision for income taxes. Some of these estimates are based on interpretations of existing tax laws or regulations. The ultimate amount of tax liability may be uncertain as a result.

Our tax filings for the fiscal years from 1991 to 2012 remain open in various taxing jurisdictions. We do not anticipate that our unrecognized tax benefit would change significantly in the coming 12 month period.

As of January 28, 2012, undistributed earnings of our foreign operations totaling $5.8 million were considered to be permanently reinvested. No deferred tax liability has been recognized for the remittance of such earnings to the U.S. since it is our intention to utilize those earnings in foreign operations. Generally, such earnings become subject to U.S. tax upon the remittance of dividends and under certain other circumstances. It is not practicable to estimate the amount of deferred tax liability on such undistributed earnings.

We benefit from tax incentives granted by local tax authorities in certain foreign jurisdictions. The Economic Development Board of Singapore granted development and expansion incentives to our wholly-owned subsidiary in Singapore in 2008 for a period of four years ending March 1, 2012 contingent on meeting specified requirements. The Singapore subsidiary can qualify for six additional years of development and expansion incentives if additional requirements are met. The impact of this tax holiday was to increase net income by approximately $2.0 million, or $0.06 per diluted share, in fiscal 2012, $6.7 million, or $0.21 per diluted share, in fiscal 2011, and $7.0 million, or $0.25 per diluted share, in fiscal 2010.

Our acquired Israeli subsidiary Sigma Designs Israel S.D.I. (formerly known as CopperGate Communications Ltd.) was granted Approved Enterprise and Beneficiary Enterprise status under the Law for the Encouragement of Capital Investments in 2004 and 2009. Sigma Designs Israel’s income is tax-exempt for a period of two years commencing with the year it first earns taxable income, and is subject to corporate taxes at the reduced rate for an additional period of eight years. The impact of this tax holiday was to increase net income by approximately $2.0 million, or $0.06 per diluted share, in fiscal 2012, $6.2 million, or $0.20 per diluted share, in fiscal 2011, and $1.1 million, or $0.04 per diluted share, in fiscal 2010.