Note 20 Income Taxes

The components of the Company’s income before income taxes are as follows:


(in thousands)	2013		2012		2011
Income before income taxes:
Domestic	$	55,826	$	34,105	$	25,057
Foreign		8,180		9,174		7,389
Total	$	64,006	$	43,279	$	32,446

The components of income tax provision for the years ended December 31, 2013, 2012 and 2011 are as follows:


(in thousands)	2013		2012		2011
Current:
U.S. federal	$	24,688	$	441	$	—
State		1,926		1,031		367
Foreign		3,165		3,527		1,799
Total		29,779		4,999		2,166

Deferred:
U.S. federal		(7,760)		869		(4,727)
State		(450)		(798)		(189)
Foreign		(1,682)		(732)		(224)
Total		(9,892)		(661)		(5,140)
Total income tax provision	$	19,887	$	4,338	$	(2,974)

The overall effective tax rate differs from the statutory federal tax rate for the years ended December 31, 2013, 2012 and 2011 as follows


	% of Pretax Income
	2013			2012			2011
Tax provision based on the federal statutory rate		35.0	%		35.0	%		35.0	%
Release of valuation allowances		—			(12.4)			(19.2)
Use of non-operating losses against U.S. taxable income, taxes		—			(14.6)			(24.8)
Deemed income related to foreign operations		0.2			0.1			0.7
Income not subject to tax		—			—			(2.0)
State taxes, net of federal benefit, before valuation allowance		2.4			2.3			1.3
Research credits		(0.6)			—			—
Foreign income tax rate differential		(0.3)			(0.7)			(0.6)
Domestic production activities deduction		(3.6)			—			—
Return to provision adjustments, foreign current and deferred balances		(0.4)			0.5			(0.7)
Other		(1.6)			(0.2)			1.1
Effective tax rate		31.1	%		10.0	%		(9.2)	%

The difference between the Company’s effective tax rate for 2013 and the federal statutory rate was 3.9 percentage points. The Company is reporting positive U.S. taxable income, and is therefore entitled to use the domestic production activities deduction provided to producers in the United States, effectively lowering the U.S. tax rate applicable to production activities.

The difference between the Company’s effective tax rate for 2012 and the federal statutory rate resulted primarily from changes in valuation allowances. These comprised:

The release of valuation allowances against certain U.S. deferred tax assets. This release was based upon the Company’s results of operations. The Company concluded during the 2012 that it is more likely than not that a portion of its current U.S. deferred tax assets will be realized. As a result, in accordance with ASC 740, the Company released the remainder of its valuation allowances related to $12,388 of reserves, accruals and tax credits and to $7,602 of net operating loss carryforwards for state income tax purposes, resulting in no valuation allowance as of December 31, 2012. This resulted in a non-cash income tax benefit of $5,372.

Other changes in valuation allowances were a result of utilizing U.S. loss carryforwards, which had had a full valuation allowance against them, to eliminate all federal and most state income tax expense otherwise arising.

The difference between the Company’s effective tax rate for 2011 and the federal statutory rate resulted primarily from changes in valuation allowances. These comprised:

The release of valuation allowances against certain U.S. deferred tax assets. This release was based upon the Company’s results of operations and its expected profitability in future years. The Company concluded, during 2011 that it is more likely than not that a portion of its net U.S. deferred tax assets will be realized. As a result, in accordance with ASC 740, $17,000 of the valuation allowance applied to such net deferred tax assets was reversed. This reversal resulted in a non-cash income tax benefit of $6,221.

In 2013, the Company had no valuation allowance against net deferred income tax assets.

In 2012, the Company’s valuation allowance against net deferred income tax assets decreased by $8,781. This decrease consisted of an $8,781 decrease against the U.S. deferred income tax assets. The decrease in the valuation allowance against the net U.S. deferred income tax assets resulted primarily from the increase in the Company’s domestic net operating income, an increase in the amount of deferred income tax liabilities and from the release of valuation allowances against U.S. net deferred tax assets.

In 2011, the Company’s valuation allowance against net deferred income tax assets decreased by $25,892. This decrease consisted of a $25,892 decrease against the U.S. deferred income tax assets. The decrease in the valuation allowance against the net U.S. deferred income tax assets resulted primarily from the increase in the Company’s domestic net operating income and an increase in the amount of net operating loss carryforwards for state income tax purposes.

The components of the Company’s net deferred income tax assets and net deferred income tax liabilities at December 31, 2013 and 2012 are as follows:


(in thousands)	2013		2012
Deferred income tax assets:
Tax credit carryforwards	$	2,713	$	3,390
Net operating loss carryforwards		5,725		1,949
Reserves and allowances		5,927		4,706
Stock options and restricted stock awards		3,174		3,701
Deferred lease revenue		86		280
Senior convertible notes		1,042		—
Accrued liabilities		342		—
Property, plant and equipment		629		—
Total deferred income tax assets		19,638		14,026
Deferred income tax liabilities
Senior convertible notes		—		3,933
Intangibles		32,737		27,041
Property, plant and equipment		—		90
Accrued liabilities		—		130
Total deferred income tax liabilities		32,737		31,194
Net deferred income tax liabilities	$	(13,099)	$	(17,168)

The Company’s net deferred income tax liabilities include both current and noncurrent amounts. Accrued liabilities and deferred lease revenue are classified as current. Portions of reserves and allowances, tax credit carryforwards, and net operating loss carryforwards that would be available within the next year are classified as current, with the remainder of the balance classified as noncurrent. Stock options and restricted stock awards, property, plant and equipment, the senior convertible notes and intangibles are also classified as noncurrent.

The Company accounts for income taxes in accordance with ASC 740. Under ASC 740, deferred income tax assets and liabilities are determined based on the differences between financial statement and tax bases of assets and liabilities, using enacted rates in effect for the year in which the differences are expected to reverse. The provision for income taxes is based on domestic and international statutory income tax rates in the jurisdictions in which the Company operates.

At December 31, 2013, $5,725 of the Company’s deferred income tax assets was attributable to $52,177 of net operating loss carryforwards, which consisted of $6,856 loss carryforwards for U.S. federal income tax purposes, $38,934 of loss carryforwards for U.S. state income tax purposes and $6,387 of loss carryforwards for foreign income tax purposes.

At December 31, 2012, $1,949 of the Company’s deferred income tax assets was attributable to $42,202 of net operating loss carryforwards, which consisted of no loss carryforwards for U.S. federal income tax purposes, $41,047 of loss carryforwards for U.S. state income tax purposes and $1,155 of loss carryforwards for foreign income tax purposes.

The net operating loss carryforwards for U.S. federal income tax purposes begin to expire in 2022. The net operating loss carryforwards for U.S. state income tax purposes began to expire in 2014. In addition, certain loss carryforwards for foreign income tax purposes begin to expire in 2018 and certain other loss carryforwards for foreign purposes do not expire. Ultimate utilization of these loss carryforwards depends on future taxable earnings of the Company and its subsidiaries.

At December 31, 2013, tax credit carryforwards included in the Company’s deferred income tax assets consisted of $2,040 of research and experimentation tax credit carryforwards for U.S. state income tax purposes, $58 of such tax credit carryforwards for foreign income tax purposes and $615 of other state tax credits. The state research and experimentation credits do not expire; the other state credits begin to expire in 2017.

At December 31, 2012, tax credit carryforwards included in the Company’s deferred income tax assets consisted of $735 of research and experimentation tax credit carryforwards for U.S. federal income tax purposes, $2,040 of such tax credit carryforwards for U.S. state income tax purposes and $615 of other state tax credits. The state research and experimentation credits do not expire; the other federal and state credits begin to expire in 2017.

The Company recorded $26,038 to additional paid-in capital during 2013 with respect to the exercised stock options and the vesting of restricted stock awards.

The Company has not provided for any taxes on approximately $19,752 of unremitted earnings of its foreign subsidiaries, as the Company intends to permanently reinvest all such earnings outside the U.S. We believe a calculation of the deferred tax liability associated with these undistributed earnings is impracticable.

The Company decreased its ASC 740 reserve by $852, before any offsetting tax benefit, for the year ended December 31, 2013 and decreased this reserve by $298, before any offsetting tax benefit, for the year ended December 31, 2012. The Company decreased its unrecognized benefits by $459 for the year ended December 31, 2013 and decreased these benefits by $82 for the year ended December 31, 2012. The Company does not anticipate any additional unrecognized tax benefits during the next twelve months that would result in a material change to its consolidated financial position.


	Unrecognized Tax Benefits
(in thousands)	2013		2012		2011
Balance at January 1	$	(475)	$	(393)	$	(429)
Increases related to prior year tax positions		380		300		28
Decreases related to prior year tax positions		—		(378)		(2)
Increases related to current year tax positions		—		—		—
Decreases related to current year tax positions		—		(4)		—
Decreases in unrecognized liability due to settlements with foreign tax authorities		79		—		10
Balance at December 31	$	(16)	$	(475)	$	(393)

The Company includes interest and penalties in the consolidated financial statements as a component of income tax expense.

The principal tax jurisdictions in which the Company files income tax returns are the United States, France, Germany, Japan, Korea, China, India, Italy, Switzerland, Australia, the Netherlands and the United Kingdom. Tax years 2010 through 2013 remain subject to examination by the U.S. Internal Revenue Service. The Company has utilized a portion of its U.S. loss carryforwards causing the years from 1997 through 2007 to be subject to examination. The Company’s non-U.S. subsidiaries’ tax returns are open to possible examination beginning in the year shown in parentheses in the following countries: France (2011), Germany (2011), Japan (2007), Italy (2009), Switzerland (2008), the United Kingdom (2009), the Netherlands (2007), Australia (2009), Korea (2008) and China (2013).