10. Income Taxes

Income (loss) from continuing operations before taxes was as follows:



	Years Ended
	December 31, 2013		December 31, 2012			December 31, 2011
	(In thousands)

U.S.	$	3,318	$	(12,827	)	$	3,372
Foreign	876		2,643			(2,363		)
Total	$	4,194	$	(10,184	)	$	1,009

Income tax expense consists of the following:



	Years Ended
	December 31, 2013			December 31, 2012			December 31, 2011
				(In thousands)

Current:
Federal	$	223		$	72		$	1,358
State	91			(1,518		)	(152		)
Foreign	1,048			763			950
Total current income tax expense (benefit)	$	1,362		$	(683	)	$	2,156
Deferred:
Federal	$	(1,766	)	$	781		$	(652	)
State	(1,294		)	10			(116		)
Foreign	202			110			(2,144		)
Total deferred income tax expense (benefit)	$	(2,858	)	$	901		$	(2,912	)
Total income tax expense (benefit)	$	(1,496	)	$	218		$	(756	)

The following reconciles income taxes computed at the U.S. statutory federal tax rate to income tax expense (benefit):



	Years Ended
	December 31, 2013			December 31, 2012*			December 31, 2011*


Income tax at U.S. statutory rate	$	1,425		$	(3,463	)	$	343
State income taxes, net of federal benefit	172			(52		)	193
Foreign taxes, rate differential	298			163			(27		)
Transaction costs	570			3			15
Indefinite life goodwill	505			791			540
Federal and state research and developmental credits	(1,422		)	(1,764		)	(1,047		)
Equity compensation	174			413			145
Change in tax rate	418			(182		)	2
Meals, entertainment and club dues	424			282			124
Change in uncertain tax positions	31			(2,050		)	(316		)
Alternative minimum tax	139			200			358
Section 956 inclusion	515			330			—
Contingent consideration	934			366			340
Other	314			471			(125		)
Change in valuation allowance	(5,993		)	4,710			(1,301		)
Income tax expense (benefit)	$	(1,496	)	$	218		$	(756	)

* Amounts for the years ended December 31, 2012 and December 31, 2011 have been recast to conform to current year presentation.

Significant components of our deferred tax assets and liabilities are as follows:



	December 31, 2013			December 31, 2012*
	(In thousands)
Deferred tax assets:
Net operating loss carryforwards	$	34,617		$	35,227
Tax credits	10,845			6,534
Accruals and reserves	8,880			12,613
Property and equipment	3,205			5,567
Long term investments	1,109			6,519
Other deferred tax assets	313			485
Total gross deferred tax assets	$	58,969		$	66,945
Deferred tax liabilities:
Intangible assets	12,323			11,757
Indefinite lived intangible assets	5,038			4,533
Total gross deferred tax liabilities	$	17,361		$	16,290

Total net deferred tax assets	$	41,608		$	50,655
Valuation allowance for deferred tax assets	(46,319		)	(52,670		)
Net deferred taxes	$	(4,711	)	$	(2,015	)

* Amounts for the year ended December 31, 2012 have been recast to conform to current year presentation.

At December 31, 2013 and 2012, we had $5.0 million and $4.2 million, respectively, of net deferred tax liabilities in the U.S. related to indefinite-lived goodwill and intangible assets that are amortized for income tax purposes. For book purposes, the indefinite-lived goodwill and intangible assets will be charged to results of operations when they are determined to be impaired in accordance with ASC Topic 350. Because we cannot predict when these assets will be impaired and when the associated deferred tax liabilities will reverse, the deferred tax liabilities related to these assets are not considered a source of income to support the realization of our deferred tax assets.

Due to uncertainties surrounding our ability to generate future taxable income, a valuation allowance has been established against our domestic and certain foreign deferred tax assets. As of December 31, 2013 the valuation allowance was $46.3 million. For the year ended December 31, 2013, the valuation allowance decreased by $6.4 million primarily as a result of the partial release of the valuation allowance to offset the basis difference related to the Aegis Acquisition and also to absorb the final installment gain of the Intermolecular disposition. For the year ended December 31, 2012, the valuation allowance increased by $4.4 million primarily as a result of the Velquest Acquisition.

We do not record U.S. income taxes on the undistributed earnings of our foreign subsidiaries based upon the Company's intention to permanently reinvest undistributed earnings to ensure sufficient working capital and further expansion of existing operations outside the U.S. The undistributed earnings of the foreign subsidiaries as of December 31, 2013 are approximately $2.5 million. In the event we are required to repatriate funds from outside of the U. S., such repatriation would be subject to local laws, customs, and tax consequences. Due to the unbenefited loss in the U.S., the impact of any repatriation would not be material to the financial statements.

As of December 31, 2013, we had U.S. federal NOLs of approximately $82.3 million and tax credit carryforwards of approximately $4.2 million. We also had California NOLs of approximately $67.7 million and tax credit carryforwards of approximately $15.2 million. We also had approximately $4.0 million of UK NOLs and $6.6 million of Ireland NOLs. If not fully utilized, portions of our U.S. federal NOLs will expire in varying amounts from 2019 through 2030. Federal tax credit carryforwards will expire in varying amounts from 2020 through 2031. Portions of our California NOLs will expire in varying amounts from 2014 through 2030. The California tax credit carryforwards do not expire. The UK and Irish NOLs do not expire. Realization of our NOLs and credits is dependent upon our generating of sufficient taxable income prior to expiration of those attributes.

The future utilization of our NOLs to offset future taxable income may be subject to a substantial annual limitation as a result of changes in ownership by our stockholders that hold 5% or more of our common stock. An assessment of such ownership changes under Sections 382 and 383 of the Internal Revenue Code (the “Code”) was completed through December 31, 2013. As a result of this assessment, we determined that we experienced an ownership change in 2010 related to the acquisition of Symyx which will limit the future utilization of our NOLs and credit carryforwards. U.S. federal NOLs of approximately $12.8 million will expire due to limitations under Sections 382 and U.S. federal R&D credits of approximately $1.9 million will expire due to limitations under Section 383. Future ownership changes may further impact the utilization of existing NOLs and tax credit carryforwards. The Velquest Acquisition on December 30, 2011 and the ChemSW Acquisition on October 23, 2012 generated ownership changes under Sections 382 and 383 of the Code. The NOLs and tax credits expiration due to the ownership change related to the Velquest Acquisition are $14.9 million and $0.5 million, respectively. The Aegis Acquisition resulted in $17.3 million of NOL expiration due to an ownership change related to 2005.

Following is a tabular reconciliation of the Unrecognized Tax Benefits (“UTB”) activity during the year ended December 31, 2013 (excluding interest and penalties):




	(In thousands)
Balance at December 31, 2010	$	17,761
Additions based on tax positions related to the current year	189
Reductions for tax positions of prior year	—
Settlements	—
Reductions due to lapse of applicable statute of limitations	(747		)
Impact of foreign currency fluctuations	(1,559		)
Balance at December 31, 2011	$	15,644
Additions based on tax positions related to the current year	909
Additions based on tax positions of prior year	611
Settlements	—
Reductions due to lapse of applicable statute of limitations	(2,393		)
Impact of foreign currency fluctuations	95
Balance at December 31, 2012	$	14,866
Additions based on tax positions related to the current year	295
Additions for tax positions of prior year	6,818
Reductions for tax positions of prior year	(1,691		)
Settlements	—
Reductions due to lapse of applicable statute of limitations	—
Impact of foreign currency fluctuations	179
Balance at December 31, 2013	$	20,467

Included in the balance of unrecognized tax benefits as of December 31, 2013, are $9.2 million of tax benefits that, if recognized, would affect the effective tax rate. Also included in the balance of unrecognized tax benefits at December 31, 2013, are $11.3 million of tax benefits that, if recognized, would result in adjustments to other tax accounts, primarily deferred taxes.

We have elected to include interest expense and penalties accrued on unrecognized tax benefits as a component of our provision for income taxes. Interest and penalties incurred during each of the the years ended December 31, 2013, 2012 and 2011 were not material.

We believe that it is reasonably possible that approximately $1.0 million of our remaining unrecognized tax positions, each of which are individually insignificant, may be recognized by the end of 2014 as we settle current audits with the taxing authorities or statutes expire.

The United States federal audit cycle covering the consolidated income tax returns for the years ended 2010 and 2011 is ongoing as of December 31, 2013. After the United States federal examinations of the 2010 and 2011 tax years conclude, the remaining years subject to federal examination will be 2012 through 2013. The remaining years subject to state examination are 2009 through 2013. There are no other ongoing tax audits in any of foreign entities. Years subject to tax examination in the foreign jurisdictions are 2007 through 2013.