Note 18. Income taxes

12 Months Ended

Feb. 02, 2013

Income Tax Disclosure [Text Block]

18.          Income taxes

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

	Fiscal Years Ended
	February 2, 2013			January 28, 2012			January 29, 2011
United States	$	(5,274	)	$	(12,366	)	$	(4,220	)
International		(75,747	)		(160,645	)		14,117
Total	$	(81,021	)	$	(173,011	)	$	9,897

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

	Fiscal Years Ended
	February 2, 2013			January 28, 2012			January 29, 2011
Current
Federal	$	(162	)	$	2,003		$	3,052
State		15			(27	)		15
Foreign		8,496			3,397			2,562
Total current		8,349			5,373			5,629
Deferred:
Federal		15,932			(3,434	)		(3,791	)
Foreign		(3,534	)		(6,905	)		(1,088	)
Total deferred		12,398			(10,339	)		(4,879	)
Total provision (benefit)	$	20,747		$	(4,966	)	$	750

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

	February 2, 2013			January 28, 2012
Deferred tax assets:
Net operating loss	$	8,426		$	8,015
Investment impairment		1,519			1,823
Allowance, reserve and other		8,126			5,272
Depreciation		2,598			3,421
Tax credits		10,936			10,022
Stock-based compensation		10,840			11,072
Total gross deferred tax assets		42,445			39,625
Valuation allowance		(33,305	)		(17,109	)
Total net deferred tax assets		9,140			22,516
Deferred tax liabilities:
Acquired intangibles and other		(1,395	)		(2,151	)
Total net deferred tax assets	$	7,745		$	20,365

The Company must regularly assess the likelihood that future taxable income levels will be sufficient to ultimately realize the tax benefits of its deferred tax assets.  During the third quarter of fiscal 2013, we concluded it was necessary to establish a valuation allowance for certain deferred tax assets (DTA) related to Federal taxes in the United States. Due to the history of losses in the United States, it was determined that it is more likely than not that certain Federal DTAs would not be recognized. Accordingly, we established a valuation allowance in the amount of $16.7 million.  We also maintained a partial valuation allowance against foreign net operating losses and a full valuation allowance against California deferred tax assets.  The valuation allowance increased by $16.2 million in fiscal 2013.

As of February 2, 2013, net operating loss carry forwards amounted to approximately $33.9 million and $25.4 million for federal and California tax purposes, respectively, which will begin to expire in fiscal 2014 through 2033.  We also had federal and state research credit carryovers of $15.7 million and $15.7 million, respectively.  Federal research credits will start expiring from fiscal 2019. The state research credit has no expiration.  Of the total net operating loss carryover, the tax effect of $25.5 million federal and $3.4 million state losses will be recorded to additional paid-in capital when utilized in the future. We also have $29.7 million of foreign operating loss carry forwards through the acquisition of a foreign operation. 

Net operating losses and tax credit carry forwards as of February 2, 2013 are as follows (in thousands):

	Amount		Range of Expiration Years
Net operating losses, federal	$	33,934	2019	-	2032
Net operating losses, state		25,407	2014	-	2033
Net operating losses, foreign		29,669	Indefinite
Tax credits, federal		15,693	2019	-	2033
Tax credits, state		15,689	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 (benefit from) income taxes differs from the federal statutory rate as follows (in thousands):

	Fiscal Years Ended
	February 2, 2013			January 28, 2012			January 29, 2011
Computed at federal statutory rate of 35%	$	(28,357	)	$	(60,554	)	$	3,464
State taxes provision (benefit), net of federal benefit		10			(33	)		10
Uncertain tax positions		219			441			853
Difference between statutory rate and foreign effective tax rate		31,469			49,839			(3,466	)
Stock-based compensation expense		2,391			746			878
Change in federal valuation allowance		16,704			-			-
Tax credits		(1,561	)		(1,326	)		(1,201	)
Goodwill and intangible assets impairment		-			5,646			-
Other		(128	)		275			212
Total	$	20,747		$	(4,966	)	$	750

Included in the balance of unrecognized tax benefits as of February 2, 2013 are $17.7 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 2013, we added $4.6 million of unrecognized tax benefits.  A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

	Fiscal Years Ended
	February 2, 2013			January 28, 2012			January 29, 2011
Beginning balance	$	22,389		$	20,337		$	18,841
Additions based on tax positions related to the current year		4,596			1,965			1,436
Additions for tax positions of prior years		283			404			388
Reductions for tax positions of prior year		(252	)		(317	)		(328	)
Ending balance	$	27,016		$	22,389		$	20,337

We have adopted the accounting policy that interest and penalties recognized are classified as part of our income taxes.  In fiscal 2013, we increased our accrual of such interest and penalties expense by $0.3 million.  In fiscal 2012, we reduced our accrual of such interest and penalties expense by $0.1 million.  As of February 2, 2013 and January 28, 2012, the balance of such accrued interest and penalties was $1.0 million and $0.7 million, respectively.

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. In February 2013, our Denmark subsidiary reached an audit agreement with the Danish Taxing Authorities to reduce our net operating losses in Denmark by DKK 75 million. The disallowed net operation losses were subject to valuation allowance in the past and the audit adjustment would not result in a financial charge.

Our tax filings for the fiscal years from 1991 to 2013 remain open in various taxing jurisdictions. We do not anticipate that our unrecognized tax benefit will change significantly in the coming fiscal year.

As of February 2, 2013, undistributed earnings of our foreign operations totaling $6.7 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, which ended March 1, 2012, contingent on meeting specified requirements.  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, $7.0 million, or $0.25 per diluted share, in fiscal 2010, and $6.5 million, or $0.23 per diluted share, in fiscal 2009.  The Company is currently in negotiation with the Economic Development Board for its operations plan in Singapore and is not benefiting from the incentives in fiscal 2013.

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 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 $3.4 million, or $0.10 per diluted share, in fiscal 2013, $2.0 million, or $0.06 per diluted share, in fiscal 2012, and $6.2 million, or $0.20 per diluted share, in fiscal 2011.