Income Taxes

Pre-tax income was attributed to the following jurisdictions:



	Year Ended December 31,
(In thousands)	2015			2014			2013
Domestic operations	$	(6,857	)	$	(2,793	)	$	2,425
Foreign operations	42,832			43,244			26,611
Total	$	35,975		$	40,451		$	29,036

The provision for income taxes charged to operations were as follows:



	Year Ended December 31,
(In thousands)	2015			2014			2013
Current tax expense:
U.S. federal	$	2,726		$	47		$	971
State and local	189			49			254
Foreign	9,028			8,127			6,426
Total current	11,943			8,223			7,651
Deferred tax (benefit) expense:
U.S. federal	(4,588		)	(687		)	(101		)
State and local	(87		)	74			(67		)
Foreign	(466		)	307			(1,410		)
Total deferred	(5,141		)	(306		)	(1,578		)
Total provision for income taxes	$	6,802		$	7,917		$	6,073

Net deferred tax assets were comprised of the following:



	December 31,
(In thousands)	2015			2014
Deferred tax assets:
Inventory reserves	$	1,228		$	904
Capitalized research costs	52			79
Capitalized inventory costs	926			684
Net operating losses	582			1,151
Acquired intangible assets	148			143
Accrued liabilities	5,194			4,168
Income tax credits	11,251			8,568
Stock-based compensation	2,064			1,749
Total deferred tax assets	21,445			17,446
Deferred tax liabilities:
Depreciation	(2,639		)	(4,402		)
Allowance for doubtful accounts	(223		)	(180		)
Amortization of intangible assets	(1,274		)	(2,154		)
Other	(2,752		)	(2,256		)
Total deferred tax liabilities	(6,888		)	(8,992		)
Net deferred tax assets before valuation allowance	14,557			8,454
Less: Valuation allowance	(6,678		)	(5,716		)
Net deferred tax assets	$	7,879		$	2,738

The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pre-tax income from operations as a result of the following:



	Year Ended December 31,
(In thousands)	2015			2014			2013
Tax provision at statutory U.S. rate	$	12,232		$	13,753		$	9,872
Increase (decrease) in tax provision resulting from:
State and local taxes, net	(554		)	(580		)	(397		)
Foreign tax rate differential	(5,762		)	(7,150		)	(3,804		)
Nondeductible items	874			1,093			989
Federal research and development credits	(678		)	(842		)	(1,149		)
Change in deductibility of social insurance	649			688			214
Valuation allowance	621			661			520
Foreign permanent benefit	(675		)	—			—
Other	95			294			(172		)
Tax provision	$	6,802		$	7,917		$	6,073

At December 31, 2015, we had foreign tax credit carryforwards of approximately $2.1 million, and federal and state Research and Experimentation ("R&E") income tax credit carryforwards of approximately $2.3 million and $6.7 million, respectively. The foreign tax credits begin to expire in 2024. The federal R&E credits begin to expire in 2032. The state R&E income tax credits do not have an expiration date.

At December 31, 2015, we had federal, state and foreign net operating loss carryforwards of approximately $1.2 million, $2.9 million and $35 thousand, respectively. Included in the Company's U.S. net operating loss deferred tax assets above is approximately $2.2 million of unrealized gross deferred tax assets attributable to excess tax benefits associated with stock-based compensation that will impact stockholders' equity if and when such excess benefits are ultimately realized. Of the federal and state net operating loss carryforwards above, $1.2 million and $2.9 million, respectively, were acquired as part of our 2004 acquisition of SimpleDevices. The federal, state, and foreign net operating loss carryforwards begin to expire during 2024, 2018, and 2022, respectively.

Internal Revenue Code Section 382 places certain limitations on the annual amount of net operating loss carryforwards that may be utilized if certain changes to a company’s ownership occur. Our 2004 acquisition of SimpleDevices was a change in ownership pursuant to Section 382 of the Internal Revenue Code, and the federal and state net operating loss carryforwards of SimpleDevices are limited but considered realizable in future periods. The annual federal limitation is approximately $0.6 million for 2015 and thereafter.

At December 31, 2015, we assessed the realizability of our deferred tax assets by considering whether it is "more likely than not" some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We considered taxable income in carry-back years, the scheduled reversal of deferred tax liabilities, tax planning strategies and projected future taxable income in making this assessment. Due to uncertainties surrounding the realization of some of the Company’s deferred tax assets, primarily related to state R&E income tax credits generated during prior years and the current year, the Company established a valuation allowance against its deferred tax assets. When recognized, the tax benefits relating to any reversal of this valuation allowance will be recorded as a reduction of income tax expense. The total valuation allowance increased by $1.0 million and $0.9 million as of December 31, 2015 and 2014, respectively.

During the year ended December 31, 2015 we recognized an increase to paid-in capital and a decrease to income taxes payable of $3.1 million, related to the tax benefit from the exercise of non-qualified stock options and vesting of restricted stock under our stock-based incentive plans. During the year ended December 31, 2013 we recognized an increase to paid-in capital and a decrease to income taxes payable of $0.9 million, related to the tax benefit from the exercise of non-qualified stock options and vesting of restricted stock under our stock-based incentive plans.

The undistributed earnings of our foreign subsidiaries are considered to be indefinitely reinvested. Accordingly, no provision for U.S. federal and state income taxes or foreign withholding taxes has been provided on such undistributed earnings. Determination of the potential amount of unrecognized deferred U.S. income tax liability and foreign withholding taxes is not practicable because of the complexities associated with its hypothetical calculation; however, unrecognized foreign tax credits would be available to reduce some portion of the U.S. liability.

During 2012, China's State Administration of Taxation issued Circular 15 which required us to reevaluate our foreign deferred tax assets relating to our Chinese subsidiaries. These subsidiaries have recorded a deferred tax asset for social insurance and housing funds with the intent of being able to deduct these expenses once such liabilities have been settled. Circular 15 stipulates that payments into the aforementioned funds must be made within five years of recording the initial accrual or the tax deduction for these expenses will be forfeited. At December 31, 2015, we evaluated fund payments made prior to the preceding five years and determined that $0.6 million of our foreign deferred tax assets would not provide a future tax benefit due to the change in Chinese law. In adhering to the new law, we recorded increases to income tax expense of $0.6 million, $0.7 million and $0.2 million for the years ended December 31, 2015, 2014 and 2013, respectively, relating to decreases in the deferred tax assets of our Chinese subsidiaries.

Uncertain Tax Positions

At December 31, 2015 and 2014, we had unrecognized tax benefits of approximately $3.7 million and $3.6 million, including interest and penalties, respectively. We classify interest and penalties as components of tax expense. Interest and penalties were $0.2 million, $0.2 million, and $0.1 million for the years ended December 31, 2015, 2014 and 2013, respectively. Interest and penalties are included in the unrecognized tax benefits.

Changes to our gross unrecognized tax benefits were as follows:



	Year ended December 31,
(In thousands)	2015			2014			2013
Balance at beginning of period	$	3,486		$	3,490		$	5,006
Additions as a result of tax provisions taken during the current year	463			213			357
Subtractions as a result of tax provisions taken during the prior year	(161		)	(150		)	(126		)
Foreign currency translation	(79		)	(8		)	45
Lapse in statute of limitations	(241		)	(59		)	(63		)
Settlements	—			—			(1,729		)
Other	1			$	—		$	—
Balance at end of period	$	3,469		$	3,486		$	3,490

Approximately $3.3 million, $3.2 million and $3.2 million of the total amount of gross unrecognized tax benefits at December 31, 2015, 2014 and 2013, respectively, if not for the state Research and Experimentation income tax credit valuation allowance, would affect the annual effective tax rate, if recognized. We are unaware of any positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly change within the next twelve months. We anticipate a decrease in gross unrecognized tax benefits of approximately $0.1 million within the next twelve months based on federal, state, and foreign statute expirations in various jurisdictions. We have classified uncertain tax positions as non-current income tax liabilities unless expected to be paid within one year.

We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. At December 31, 2015, the open statutes of limitations for our significant tax jurisdictions are the following: federal are 2012 through 2014, state are 2011 through 2014 and foreign are 2009 through 2014.