Income Taxes

12 Months Ended

Dec. 31, 2011

Income Taxes [Abstract]

INCOME TAXES

NOTE 15: INCOME TAXES

Income (loss) before provision for (benefit from) income taxes consists of the following:

	Year ended December 31,
	2011			2010			2009
	(In thousands)
United States	$	(4,925	)	$	66,036		$	9,749
International		16,558			(60,597	)		(19,484	)
	$	11,633		$	5,439		$	(9,735	)

The provision for income taxes consists of the following:

	Year ended December 31,
	2011			2010			2009
	(In thousands)
Current:
Federal	$	3,184		$	7,940		$	3,768
State		755			1,820			(1,661	)
International		1,222			755			471
Deferred:
Federal		(3,618	)		2,267			4,225
State		(392	)		(1,768	)		7,036
International		1,703			(1,240	)		565
	$	2,854		$	9,774		$	14,404

Harmonic’s provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to the income (loss) before income taxes as follows:

	Year ended December 31,
	2011			2010			2009
	(In thousands)
Provision for (benefit from) income taxes at U.S. Federal statutory rate	$	4,071		$	1,904		$	(3,407	)
State taxes		1,053			(469	)		(1,661	)
Differential in rates on foreign earnings		(9,924	)		(1,842	)		(1,768	)
Losses for which no benefit is taken		9,185			6,880			8,980
Change in valuation allowance		—			(450	)		8,150
Change in liabilities for uncertain tax positions		(1,540	)		1,261			2,390
Non-deductible stock-based compensation		1,882			1,940			1,811
Research credits		(2,138	)		(1,404	)		(1,163	)
Non-deductible acquisition related expenses		—			1,289			—
Other		265			665			1,072
	$	2,854		$	9,774		$	14,404

Deferred tax assets (liabilities) comprise the following:

	December 31,
	2011			2010			2009
	(In thousands)
Deferred tax assets:
Reserves and accruals	$	31,208		$	33,741		$	19,876
Net operating loss carryovers		24,852			27,431			21,925
Depreciation and amortization		—			—			7,440
Research and development credit carryovers		13,500			12,136			14,930
Deferred stock-based compensation		6,643			6,063			4,703
Other tax credits		2,764			2,813			3,883
Other		—			—			292
Total deferred tax assets		78,967			82,184			73,049
Valuation allowance		(28,354	)		(26,557	)		(18,025	)
Net deferred tax assets		50,613			55,627			55,024
Deferred tax liabilities:
Depreciation and amortization		(5,434	)		(3,320	)		—
Intangibles		(17,668	)		(26,172	)		(7,331	)
Other		(135	)		(1,066	)		—
Net deferred tax liabilities	$	(23,237	)	$	(30,558	)	$	(7,331	)

The following table summarizes the activity related to the Company’s valuation allowance:

	Year ended December 31,
	2011		2010		2009
	(In thousands)
Balance at beginning of period	$	26,557	$	18,025	$	1,904
Additions		1,797		8,532		16,121
Deductions		—		—		—
Balance at end of period	$	28,354	$	26,557	$	18,025

Pursuant to applicable accounting guidance on accounting for income taxes, the Company is required to periodically review the Company’s deferred tax assets and determine whether, based on available evidence, a valuation allowance is necessary. The Company evaluates the need for a valuation allowance based on historical evidence, trends in profitability, expectations of future taxable income and implemented tax planning strategies. As of December 31, 2011, the Company had a valuation allowance of $28.4 million, which primarily relates to foreign net operating losses and a portion of the California tax credits. More specifically, California tax legislation enacted in February 2009 provides for the election of a single sales apportionment formula beginning in 2011. The Company elected the single sales apportionment method for 2011. The use of this apportionment method reduces the amount of expected future California state taxable income.

As of December 31, 2011, the Company had $88.6 million of state net operating loss carryforwards available to reduce future taxable income that will begin to expire in 2014 for state tax purposes. As of December 31, 2011 the Company had foreign net operating loss carryforwards of $106.5 million that do not expire. As of December 31, 2011, the portion of state net operating loss carryforwards which relate to stock option deductions is approximately $8.8 million. The Company is tracking the portion of the Company’s deferred tax assets attributable to stock option benefits in a separate memo account pursuant to applicable accounting guidance. Therefore, these amounts are no longer included in the Company’s gross or net deferred tax assets. Pursuant to applicable accounting guidance, the stock option benefits will only be recorded to equity when they reduce cash taxes payable.

As of December 31, 2011, the Company had federal and state tax credit carryovers of approximately $3.5 million and $22.9 million, respectively, available to offset future taxable income. The federal credits expire beginning in 2029, while the state credits will not expire.

Utilization of the Company’s net operating loss and tax credits may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss before utilization.

The following table summarizes the activity related to the Company’s gross unrecognized tax benefits:

	Year ended December 31,
	2011			2010			2009
	(In millions)
Balance at beginning of period	$	48.4		$	47.0		$	46.5
Increases related to tax positions		6.6			7.8			1.7
Expiration of the statute of limitations for the assessment of taxes and release of other tax contingencies		(2.5	)		(6.4	)		(1.2	)
Balance at end of period	$	52.5		$	48.4		$	47.0

The total amount of unrecognized tax benefits that would impact the effective tax rate is approximately $52.5 million at December 31, 2011. The Company also accrued potential interest of $2.0 million, with no potential penalties, related to these unrecognized tax benefits during 2011, and in total, as of December 31, 2011, the Company had recorded liabilities for potential penalties and interest of $0.4 million and $4.8 million, respectively. In 2011, the Company reversed $2.5 million of liability primarily due to the expiration of the statute of limitations. During the years ended December 31, 2010 and 2009, the Company accrued potential interest of $1.9 million and $1.6 million, with no potential penalties in either year, and reversed $2.3 million and $1.2 million of liabilities due to the expiration of the statute of limitations, respectively. The Company anticipates a decrease of $25.4 million in unrecognized tax benefits due to expiration of the statute of limitations within the next 12 months.

The Company files U.S., state, and foreign income tax returns in jurisdictions with varying statutes of limitations during which such tax returns may be audited and adjusted by the relevant tax authorities. The 2008 through 2011 tax years generally remain subject to examination by federal and most state tax authorities. In significant foreign jurisdictions, the 2005 through 2011 tax years generally remain subject to examination by their respective tax authorities. The Company is under audit by the US Internal Revenue Service for the 2008 and 2009 tax years. In addition, the statute of limitations on our 2007 U.S. corporate income tax return has been extended.

The Company anticipates the unrecognized tax benefits may increase during 2012 for items that arise in the ordinary course of business. Such amounts will be reflected as an increase in the amount of unrecognized tax benefits and an increase to the current period tax expense. These increases will be considered in the determination of the Company’s annual effective tax rate. The amount of the unrecognized tax benefit classified as a long-term tax payable, if recognized, would reduce the annual income provision.

U.S. income taxes were not provided on approximately $36.2 million of undistributed earnings for certain non-U.S. subsidiaries. Determination of the amount of unrecognized deferred tax liability for temporary differences related to investments in these non-U.S. subsidiaries that are essentially permanent in duration is not practicable. The Company has not provided U.S. income taxes and foreign withholding taxes on the undistributed earnings of foreign subsidiaries as of December 31, 2011, because the Company intends to permanently reinvest such earnings outside the U.S. If these foreign earnings were to be repatriated in the future, the related U.S. tax liability may be reduced by any foreign income taxes previously paid on these earnings.

The Company benefits from a tax ruling concluded in Switzerland. This ruling provides for a lower rate of taxation on certain classes of income and requires various thresholds of investment and employment in Switzerland. This ruling resulted in a tax savings of $0.7 million, $0.9 million and $0.4 million in 2011, 2010 and 2009, respectively, increasing diluted earnings per share by approximately $0.006, $0.009 and $0.005 in 2011, 2010 and 2009, respectively. Our agreement with Switzerland is in effect through the end of 2013 and, subject to the Company meeting investment and employment requirements within Switzerland, is renewable for an additional five years.