Income Taxes

Domestic and foreign pre-tax income for 2011, 2010 and 2009 were as follows:



	Year ended December 31,
	2011		2010		2009
Domestic	$	55,537	$	113,145	$	10,686
Foreign	3,435		3,384		5,964
	$	58,972	$	116,529	$	16,650

Income tax expense (benefit) for 2011, 2010 and 2009 consisted of the following:



	Year ended December 31,
	2011			2010			2009
Current:
Federal	$	(7,138	)	$	634		$	499
State	3,082			901			217
Foreign	278			(861		)	(311		)
	(3,778		)	674			405
Deferred:
Federal	13,974			(66,408		)	—
State	219			(8,374		)	—
Foreign	407			(200		)	—
	14,600			(74,982		)	—
Net income tax expense (benefit)	$	10,822		$	(74,308	)	$	405

The actual income tax expense reported for operations is different from that which would have been computed by applying the statutory federal income tax rate to income before income tax. A reconciliation of income tax expense as computed at the U.S. federal statutory income tax rate to the provision for income tax expense (benefit) for 2011, 2010 and 2009 is as follows:



	Year ended December 31,
	2011		2010		2009
Tax expense (benefit) at United States statutory rate	35.0	%	35.0	%	35.0	%
State income tax, net of federal effect	1.0		0.7		0.9
Change in valuation allowance due to change in judgment regarding the potential to realize deferred tax assets	—		(64.4	)	—
Change in valuation allowance due to current year change in deferred tax asset balances	0.2		(32.0	)	(14.2	)
Foreign income tax	(0.5	)	0.1		(5.8	)
Costa Rican subsidiary tax holiday	(2.0	)	(0.9	)	(9.7	)
Deemed dividend from foreign subsidiary	—		—		1.5
Stock-based compensation	2.6		0.4		7.0
Business combination	—		—		(1.0	)
Reduction of uncertain tax position liability	(11.2	)	—		—
Tax credits	(14.8	)	(1.8	)	—
State apportionment adjustment	7.7		—		—
Other, net	0.4		(0.9	)	(11.3	)
Effective tax rate	18.4	%	(63.8	)%	2.4	%

Deferred income tax assets and liabilities reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts for income tax purposes. These temporary differences as of December 31, 2011 and 2010 were as follows:



	December 31, 2011			December 31, 2010
Deferred tax assets:
Capital research and development expenditures	7,334			10,717
Accrued liabilities	5,112			9,185
Impairment of investment in other companies	5,821			6,310
Inventory	6,220			7,197
Net operating loss carryforwards	50,155			29,052
Research and development, and other credits	18,404			9,786
Stock-based compensation	14,466			9,971
Other	12,008			3,685
Gross deferred tax assets	119,520			85,903
Valuation allowance	(11,522		)	(11,391		)
Total deferred tax assets	107,998			74,512
Deferred tax liabilities:
Fixed assets	(47,184		)	470
Total deferred tax liabilities	(47,184		)	470
Total deferred tax assets, net	$	60,814		$	74,982

The Company recorded tax expense of $10,822 for 2011, tax benefit of $74,308 for 2010 and tax expense of $405 for 2009. The 2011 tax expense differs from the statutory rate primarily due to the benefit of federal and state credits and the expiration of the statute of limitations on an uncertain tax position in the current year. The 2010 tax benefit is due to a change in the assessment of the potential to realize deferred tax assets which resulted in the release of valuation allowance. The provision for 2009 does not reflect a benefit for prior year losses due to a full valuation allowance against net deferred tax assets. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more-likely-than-not to be realized. In 2002, the Company determined that a valuation allowance should be recorded against all of its net deferred tax assets. Due to strong results for 2010 and increased confidence that it will continue to generate taxable income into the foreseeable future, the Company's assessment regarding the potential to realize its deferred tax assets changed. This assessment required the Company to exercise significant judgment and make estimates about its ability to generate revenue, gross profit, operating income and taxable income in future periods. The result was the release of a majority of the valuation allowance on the deferred tax assets in 2010. The increase (decrease) in total valuation allowance for the net deferred tax assets for 2011, 2010 and 2009 was $131, $11,391 and $806, respectively.

During 2011, the Company purchased $3,748 of Business Energy Tax Credits ("BETC") for $2,511, resulting in a net state tax benefit of $171. The aggregate benefit of $1,237 will be recognized in income as the credits are utilized.

At December 31, 2011, the Company had approximately $185,221 of U.S. net operating loss carryforwards available to offset future U.S. taxable income, expiring from 2023 through 2031 if unused; and $190,940 of net operating loss carryforwards for state tax purposes, expiring from 2012 through 2031 if unused. Included in these amounts are WJ and TA net operating losses which are subject to Internal Revenue Code section 382 annual utilization limitations following an ownership change. Of the total U.S. and state net operating losses, $64,122 and $600, respectively, were generated from stock option deductions and are not reflected in the Company's deferred tax assets. When utilized, the benefit will be credited to additional paid-in capital. The Company also had U.S. federal income tax credits of $24,706, of which $4,487 of unrealized tax benefits have not been recorded as a deferred tax asset as it did not meet the more likely than not criteria, and state tax credits of $12,224, of which $4,495 has not been recorded as a deferred tax asset. These federal and state tax credits expire at various dates between 2012 and 2031. Of the total U.S. and state credits, $3,666 and $611, respectively, were generated from stock option deductions and are not reflected in the Company's deferred tax assets. In 2011 and 2010, the federal capital loss carryforward decreased by $1,131 and $727 due to the sale of a capital asset and the expiration of the carryforward period, respectively. The remaining $1,711 of federal capital loss carryforward will offset future capital gains subject to the carryforward period expirations in 2012. The Company continues to maintain a valuation allowance against the tax effect of all capital loss carryforwards and certain net operating loss and credit carryforwards, since management does not believe it is more likely than not that these benefits will be realized in future periods. Specifically, sources of capital gain taxable income were not identified to utilize capital loss carryforwards, and the carryforward period may expire before certain state net operating loss and credit carryforwards are utilized.

U.S. income tax legislation passed at the end of 2010 affected the Company's deferred tax asset balances. The 2010 Tax Relief Act reinstated the R&E credit for two years, through 2011. This resulted in the recognition of an additional $5,519 and $2,009 in deferred tax assets related to federal R&E credits for 2011 and 2010, respectively.

The major jurisdictions in which the Company files include the U.S. and Costa Rica. Tax years beginning in 2006 are subject to examination by taxing authorities, although net operating loss and credit carryforwards from all years are subject to examinations and adjustments for at least three years following the year in which the attributes are used. Due to agreements with the Costa Rican and Singaporean governments, the Company was granted income tax holidays of varying rates through March 2017 and December 2019, respectively. Incentives from these countries are subject to the Company meeting certain employment and investment requirements. The decrease in income tax expense for 2011 and 2010 as a result of the tax holidays were approximately $1,309 and $269, respectively.

No provision has been made for the U.S., state or additional foreign income taxes related to approximately $121,477 of undistributed earnings of foreign subsidiaries which have been, or are, intended to be permanently reinvested outside the U.S. except for existing earnings that have been previously taxed. It is not practicable to determine the U.S. federal income tax liability, if any, which would be payable if such earnings were not permanently reinvested outside the U.S. In the event the foreign subsidiaries repatriate these earnings, the earnings may be subject to U.S. federal and state income taxes and foreign withholding taxes.

The Company's current cash, cash equivalent and short-term investment balances, (consisting of $76,444 in domestic balances and $85,867 in foreign balances) together with cash anticipated to be generated from operations and the balance available on its $200,000 syndicated credit facility, constitute the Company's principal sources of liquidity. The Company believes these sources of liquidity will satisfy its projected working capital, capital expenditure and possible investment needs domestically through the next twelve months. The Company intends to permanently reinvest all foreign earnings except existing earnings that have been previously taxed. The Company is not presently aware of any restrictions on the repatriation of these funds. If these funds were needed to fund the Company's operations in the U.S., they could be repatriated. Repatriation of the Company's foreign funds would require board approval and could result in additional U.S. income taxes and foreign withholding taxes which could be partially offset by net operating losses and/or foreign tax credits. Determining the amount of possible future taxes is not practicable.

The Company's net unrecognized tax benefits totaled $735 and $7,350 as of December 31, 2011 and December 31, 2010, respectively. Net unrecognized tax benefits included no accumulated interest and penalties as of December 31, 2011, and $3,275 as of December 31, 2010. No changes to the unrecognized tax benefits existing as of December 31, 2011 are anticipated within the next twelve months.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for 2011 and 2010, which includes amounts recorded in income taxes payable as well as amounts not recorded in the Company's deferred tax assets and excludes interest and penalties, is as follows:



Balance December 31, 2009	$	7,790
Reductions for tax positions	(6		)
Additions for tax positions	440
Expiration of statute of limitations	(1,953		)
Balance December 31, 2010	$	6,271
Additions for tax positions	11,442
Expiration of statute of limitations	(7,332		)
Balance December 31, 2011	$	10,381