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Note 8 - Income Taxes

12 Months Ended

Dec. 31, 2014

8. Income Taxes

	Year Ended December 31,
	2014		2013		2012
	(In thousands)
U.S.
Current	$	3,032	$	719	$	271
Deferred		2,882		5,432		(19,863	)
Foreign
Current		476		291		512
Withholding		3,103		3,830		948
Deferred		4		108		(197	)
Total provision (benefit)	$	9,497	$	10,380	$	(18,329	)

During the years ended December 31, 2014, 2013 and 2012, income before taxes from U.S. operations was $26.2 million, $29.6 million and $17.7 million, respectively, and income before taxes from foreign operations was $1.8 million, $1.7 million and $1.2 million, respectively.

The income tax provision (benefit) differs from the amount estimated by applying the statutory federal income tax rate (35%) for the following reasons (in thousands):

	Year Ended December 31,
	2014			2013			2012
Federal statutory tax provision	$	9,786		$	10,958		$	6,609
State tax provision (benefit)		56			581			(925	)
Stock compensation expense		540			393			644
Tax credits		(3,924	)		(5,424	)		(722	)
Foreign tax, net		3,170			3,884			906
Change in valuation allowance		—			—			(25,223	)
Other		(131	)		(12	)		382
Tax provision (benefit)	$	9,497		$	10,380		$	(18,329	)

As of December 31, 2014, the Company had California net operating loss carry-forwards (“NOLs”) of approximately $6.2 million. The California NOLs begin expiring after 2031.

The Company’s 2012 tax provision did not include the benefit of the 2012 federal R&D credit. On January 2, 2013, the President of the United States signed into law The American Taxpayer Relief Act of 2012. Under prior U.S. law, a taxpayer was entitled to a research tax credit for qualifying amounts paid or incurred on or before December 31, 2011. The 2012 Taxpayer Relief Act extended the research tax credit for two years to December 31, 2013. The extension of the research tax credit was retroactive to January 1, 2012 and included amounts paid or incurred after December 31, 2011. As of December 31, 2014, the Company had federal and state research and experimental and other tax credit (“R&D credits”) carry-forwards of approximately $9.2 million and $12.4 million, respectively. The federal credits begin to expire after 2025, while the California credits have no expiration. The extent to which the federal and state credit carry forwards can be used to offset future tax liabilities, respectively, may be limited, depending on the extent of ownership changes within any three-year period as provided in the Tax Reform Act of 1986 and the California Conformity Act of 1987.

The Company assesses its deferred tax assets for recoverability on a regular basis, and where applicable, a valuation allowance is recorded to reduce the total deferred tax asset to an amount that will, more likely than not, be realized in the future. In fiscal year 2008, management concluded that it was more likely than not that the Company’s net deferred tax assets would not be fully realizable. As a result of management’s evaluation, the Company recorded valuation allowances against substantially all of its net deferred tax assets at that time. The Company evaluates positive and negative evidence at each financial reporting period to determine whether it is more likely than not that the Company’s deferred tax assets would be realizable. In accordance with such process, at December 31, 2012, the Company again evaluated the available objective evidence, both positive and negative, and concluded that it was more likely than not at that time that a portion of its deferred tax assets would be realizable, and accordingly, the Company determined that valuation allowances aggregating to $19.9 million were no longer needed. This amount released from the valuation allowance has been reported as a component of income tax benefit in the accompanying Consolidated Statement of Operations for the year ended December 31, 2012. The remaining balance of the valuation allowance primarily relates to California R&D tax credits that have not met the “more-likely-than-not” realization threshold criteria. Under current tax law, the Company on an annual basis generates more California credits than California tax. As a result, at December 31, 2014 and 2013, the excess credits of $5.4 million and $5.1 million, respectively continued to be subject to a full valuation allowance. The Company will continue to review its deferred tax assets in accordance with the applicable accounting standards. Net deferred tax assets balance as of December 31, 2014 and 2013 was $11.3 million and $14.5 million respectively. The balance as of December 31, 2014 consists of $3.3 million net deferred tax assets-current portion and $8.0 million net deferred tax assets-long-term portion. The balance as of December 31, 2013 consists of $5.9 million net deferred tax assets-current portion and $8.6 million net deferred tax assets-long-term portion.

Tax attributes related to stock option windfall deductions are not recorded until they result in a reduction of cash tax payable. Federal tax credits and state net operating losses from windfall deductions were excluded from the deferred tax asset balance as of December 31, 2014. As of December 31, 2014, the benefit of the federal credits and state net operating loss deferred tax assets of $5.1 million and $66,000, respectively, will be recorded to additional paid-in capital when they reduce cash taxes payable. As of December 31, 2013, the excluded windfall deductions for federal and state purposes were $4.9 million and $78,000, respectively.

The components of the net deferred tax assets are comprised of (in thousands):

	December 31,
	2014			2013
Deferred tax Assets

Net operating loss carry forward	$	533		$	621
Research and development and other credit carry forward		5,438			6,938
Foreign tax credit carry forward		1			—
Accruals deductible in different periods		3,021			3,931
Intangible assets		5,555			6,105
Stock-based compensation		2,861			2,491
Valuation allowance		(5,433	)		(5,087	)
Subtotal	$	11,976		$	14,999

Deferred tax liabilities

Fixed assets		(632	)		(478	)
Net Deferred tax assets	$	11,344		$	14,521

In accordance with the provisions of the accounting standard relating to accounting for uncertain tax positions, the Company classifies its liabilities for income tax exposures as long-term. The Company includes interest and penalties related to unrecognized tax benefits within the Company’s income tax provision. As of December 31, 2014 and 2013, the Company had accrued interest and penalties related to unrecognized tax benefits of $467,000 and $466,000, respectively. In the years ended December 31, 2014, 2013 and 2012, the Company recognized charges (credits) for interest and penalties related to unrecognized tax benefits in the consolidated statements of operations of $1,000, $39,000 and $(16,000), respectively.

The Company’s total amount of unrecognized tax benefits, excluding interest and penalties, as of December 31, 2014 was $10.4 million, of which $6.3 million, if recognized, would affect the Company’s effective tax rate. The Company’s total amount of unrecognized tax benefits, excluding interest and penalties, as of December 31, 2013 was $10.2 million, of which $6.3 million, if recognized, would affect the Company's effective tax rate. As of December 31, 2014, the Company has recorded unrecognized tax benefits of $2.6 million, including interest and penalties, as long-term income taxes payable in its consolidated balance sheet. The remaining $8.3 million has been recorded net of our deferred tax assets, of which $4.1 million is subject to a full valuation allowance. The Company does not expect the change in unrecognized tax benefits over the next twelve months to materially impact its results of operations and financial position.

The Company conducts business globally and, as a result, files numerous consolidated and separate income tax returns in the U.S. federal, various state and foreign jurisdictions. Because the Company used some of the tax attributes carried forward from previous years to tax years that are still open, statutes of limitation remain open for all tax years to the extent of the attributes carried forward into tax year 2002 for federal and California tax purposes. The Company’s France income tax examinations for 2009 were closed during the fiscal year of 2012 with immaterial adjustments. The Company is not subject to income tax examinations in any other of its major foreign subsidiaries’ jurisdictions.

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

	Amount
Gross unrecognized tax benefits, January 1, 2012	$	9,644
Increases in tax positions for current year		616
Increase in tax positions for prior years		—
Lapse in statute of limitations		(707	)
Gross unrecognized tax benefits, December 31, 2012		9,553
Increases in tax positions for current year		1,052
Increases in tax positions for prior years		—
Lapse in statute of limitations		(389	)
Gross unrecognized tax benefits, December 31, 2013		10,216
Increases in tax positions for current year		809
Increases in tax positions for prior years		—
Lapse in statute of limitations		(597	)
Gross unrecognized tax benefits, December 31, 2014	$	10,428

Undistributed earnings of the Company’s foreign subsidiaries of $4.8 million are considered to be indefinitely reinvested and accordingly, no provision for federal and state income taxes has been provided thereon. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable at this time.

Valuation allowance for deferred tax assets is summarized:

	Balance at Beginning of Period		Charged to Costs and Expenses		Deductions/ Write-offs of Accounts			Balance at End of Period
Valuation allowance for deferred tax assets
2014	$	5,087	$	346	$	—		$	5,433
2013		4,708		379		—			5,087
2012		30,731		—		(26,023	)		4,708

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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