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Non
-Operating Income and Expenses
Interest and Other Income.
Our interest and other income is generated primarily from interest earned on cash, cash equivalents and
short- and long-
term investments, gain on sale of investments and gains from foreign currency transactions. Interest and other income amounted
to $6.8 million, $3.1 million and $4.8 million for the years ended December 31, 2010, 2009 and 2008, respectively. The increase in interest and
other income from 2009 to 2010 was primarily due to gain on the sale of investments in the amount of approximately $4.4 million. The decrease
in interest and other income from 2008 to 2009 was primarily due to falling interest rates offset by the gain on sale of an auction rate security in
the amount of $1.8 million.
Interest and Other Expense
. Our interest and other expense amounted to $0.1 million, $0.4 million and $0.6 million for the years
ended December 31, 2010, 2009 and 2008, respectively. Interest and other expense was primarily related to interest expense on certain sales-
related tax and realized losses from foreign currency transactions.
Other-than-temporary impairment losses. An other-than-
temporary impairment occurred in connection with our securities for the year
ended December 31, 2009. During the second quarter of 2009, we recorded an impairment of $9.2 million within the consolidated statement of
operations. During the fourth quarter of 2009, we determined that one auction rate security was other-than-
temporarily impaired and recorded an
impairment loss of $0.2 million to the consolidated statement of operations. No other-than-
temporary impairments were recorded for fiscal years
2010 and 2008.
Income Taxes . Our effective income tax rate is based on pre-
tax income, statutory tax rates, tax regulations (including those related to
transfer pricing) and different tax rates in the various jurisdictions in which we operate. The tax bases of our assets and liabilities reflect our best
estimate of the tax benefits and costs we expect to realize. When necessary, we establish valuation allowances to reduce our deferred tax assets
to an amount that will more likely than not be realized.
As of December 31, 2010, we had utilizable federal and state (California) net operating loss carryforwards (“NOLs”)
of $8.1 million
and $6.4 million, respectively, after considering substantial restrictions on the utilization of these NOLs due to “ownership changes”,
as defined
in the Internal Revenue Code of 1986, as amended. We currently estimate that all of the above-
mentioned federal and state NOLs will be
available for use before their expiration. These NOLs expire through the year 2028 for the federal and 2016 for the state. In addition, as of
December 31, 2010 and 2009, we had available unrecognized state research and development tax credits of $0.8 million, which last indefinitely.
In 2008, the Governor of California signed into law new tax legislation that suspended the use of NOLs for tax years beginning on or
after January 1, 2008 and 2009. In 2010, the 2008 suspension was extended an additional two years through the end of 2011. Despite the
Company having taxable income in 2008 through 2010, the Company will not be permitted to utilize its California NOLs generated in prior
years to offset this taxable income for purposes of determining the applicable California income tax due. Current law reinstates use of NOLs in
tax years beginning on or after January 1, 2012.
Income tax expense amounted to $27.6 million, $31.0 million and $29.6 million for the years ended December 31, 2010, 2009 and
2008, respectively. Our effective tax rates for 2010, 2009 and 2008 were 25%, 32% and 29%, respectively. The decrease in our annual effective
income tax rate from 2009 to 2010 was primarily attributable to the following:
The increase in our annual effective income tax rate from 2008 to 2009 was primarily attributable to the capital loss for book but not tax
purposes due to the impairment of certain auction rate securities and related valuation allowance.
Significant judgment is required in determining our provision for income taxes and in evaluating our tax positions on a worldwide basis.
We believe our tax positions, including intercompany transfer pricing policies, are consistent with the tax laws in the jurisdictions in which we
conduct our business. It is possible that these positions may be challenged, which may have a significant impact on our effective tax rate.
The amount of income tax we pay is subject to audit by federal, state and foreign tax authorities. Our estimate of the potential outcome
of any uncertain tax issue is subject to management’s assessment of relevant risks, facts and circumstances existing at that
1.
an increase during 2010 in the portion of our income being taxed in foreign jurisdictions and subject to lower tax rates than in the
U.S.;
2.
an impairment of certain auction rate securities in 2009, which caused an increase in the effective tax rate for the year due to the
recognition of a valuation allowance;
3.
a 2010 book but not tax gain on the sale of the above
-
referenced impaired auction rate security, resulting in a significant portion of
the valuation allowance being reversed; and
4.
a reversal in 2010 of certain income tax contingencies allowed to be recognized as a result of
effectively settling the transfer pricing
portion of the Internal Revenue Service
’
s audit of our income tax returns for 2004 through 2008
.
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