Income Taxes

The components of the pretax loss from operations for the years ended December 31, 2013, 2012 and 2011 are as follows (in thousands):



	Year Ended December 31,
	2013			2012			2011
U.S. Domestic	$	(9,264	)	$	(3,310	)	$	(14,400	)
Foreign	(69,784		)	(13,308		)	(12,288		)
Pretax loss from operations	$	(79,048	)	$	(16,618	)	$	(26,688	)

The components of the (benefit) provision for income taxes are presented in the following table (in thousands):



	Year Ended December 31,
	2013			2012			2011
Current:
Federal	$	(21	)	$	107		$	4
State	186			24			222
Foreign	2,525			2,083			(388		)
Total current provision (benefit)	2,690			2,214			(162		)
Deferred:
Federal	229			137			163
State	15			29			8
Foreign	245			(3,539		)	(4,516		)
Total deferred provision (benefit)	489			(3,373		)	(4,345		)
Total provision (benefit)	$	3,179		$	(1,159	)	$	(4,507	)

The (benefit) provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pretax income as a result of the following differences:



	December 31,
	2013		2012		2011
Federal statutory rate	(35.0	)%	(35.0	)%	(35.0	)%
Adjustments for tax effects of:
State taxes, net	(0.1	)%	(0.0	)%	(0.7	)%
Stock-based compensation	0.5	%	(0.5	)%	1.8	%
Foreign taxes	1.1	%	(0.1	)%	3.6	%
Tax credits	(0.4	)%	(0.7	)%	(1.2	)%
Deemed foreign dividend	—	%	0.2	%	10.3	%
Intercompany debt forgiveness and other permanent adjustments	9.5	%	5.0	%	0.8	%
Tax rate adjustment	0.2	%	0.7	%	(0.5	)%
Uncertain tax positions	2.7	%	14.9	%	(1.5	)%
Other	(0.4	)%	3.3	%	(3.1	)%
Valuation allowance	25.9	%	5.2	%	8.7	%
	4.0	%	(7.0	)%	(16.8	)%

The 2013 provision for income taxes primarily consists of an increase in unrecognized tax benefits associated with the European operations, tax expense related to non-income based state tax in the U.S. and current year income in Japan and Brazil, and an increase in the deferred tax liability related to tax-deductible goodwill in the U.S.

Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2013 and 2012 are as follows (in thousands):



	December 31,
	2013			2012
Deferred tax assets:
Allowances and reserves	$	816		$	1,088
Accrued expenses	3,685			648
Inventory reserves	7,549			7,839
Net operating loss carryforwards	26,497			28,786
Property and equipment	1,171			—
Stock-based compensation	2,769			1,866
Legal settlement	17,998			4,156
Income tax credit carryforwards	1,800			1,276
	62,285			45,659
Valuation allowance	(56,690		)	(36,031		)
Total deferred tax assets, net of valuation allowance	5,595			9,628
Deferred tax liabilities:
Property and equipment	—			926
Intangible assets	4,806			6,910
Goodwill	1,256			1,011
Total deferred tax liabilities	6,062			8,847
Net deferred tax assets (liabilities)	$	(467	)	$	781

The realization of deferred tax assets may be dependent on the Company’s ability to generate sufficient income in future years in the associated jurisdiction to which the deferred tax assets relate. The Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. Based on the review of all positive and negative evidence, including a three year cumulative pre-tax loss, it was concluded that a full valuation allowance of $56.7 million should be recorded against all U.S. and European deferred tax assets at December 31, 2013. During 2012, it was determined that the Company was more-likely-than-not to realize its Japanese deferred tax assets. The Company removed the valuation allowance on the Japanese deferred tax assets and recognized a tax benefit of $1.4 million in 2012. In the event that the Company were to determine that it would not be able to realize all or part of its Japanese deferred tax assets in the future, it would increase the valuation allowance and recognize a corresponding tax provision in the period in which it made such a determination. Likewise, if the Company later determines that it is more-likely-than-not to realize all or a portion of the U.S. or European deferred tax assets, it would reverse the previously provided valuation allowance.

At December 31, 2013, the Company has unrecognized tax benefits of $7.8 million of which $7.2 million will affect the effective tax rate if recognized when the Company no longer has a valuation allowance offsetting its deferred tax assets.

The following table summarizes the changes to unrecognized tax benefits for the years ended December 31, 2013, 2012 and 2011 (in thousands):




Balance at December 31, 2010	$	4,421
Additions based on tax positions related to the prior year	73
Additions based on tax positions related to the current year	399
Reductions as a result of positions taken	(59		)
Reductions as a result of lapse of applicable statute of limitations	(649		)
Additions as a result of foreign exchange rates and other	12

Balance at December 31, 2011	$	4,197
Additions based on tax positions related to the prior year	987
Additions based on tax positions related to the current year	743
Reductions as a result of lapse of applicable statute of limitations	(58		)
Additions as a result of foreign exchange rates and other	28

Balance at December 31, 2012	$	5,897
Additions based on tax positions related to the prior year	221
Additions based on tax positions related to the current year	1,664
Reductions as a result of lapse of applicable statute of limitations	(20		)
Additions as a result of foreign exchange rates and other	73

Balance at December 31, 2013	$	7,835

The Company believes it is reasonably possible it will not materially reduce its unrecognized tax benefits within the next 12 months.

The Company and its subsidiaries are subject to federal income tax as well as income tax of multiple state and foreign jurisdictions. With few exceptions, the Company is no longer subject to income tax examination by tax authorities in major jurisdictions for years prior to 2008. However, to the extent allowed by law, the taxing authorities may have the right to examine prior periods where NOLs and tax credits were generated and carried forward, and make adjustments up to the amount of the carryforwards. The Company is not currently under examination by the IRS, foreign or state and local tax authorities.

During 2013, the IRS completed its income tax examination of the 2011 tax year, which resulted in no material adjustments.

The Company recognizes interest and penalties related to uncertain tax positions as a component of the income tax provision. As of December 31, 2013, accrued interest and penalties were $1.3 million and this amount primarily relates to the uncertain tax positions of the Scient’x operations and state positions. During 2013, there was an increase of $0.9 million in the accrued interest and penalties related to the uncertain tax positions of the Scient’x operations.

At December 31, 2013, the Company had federal and state net operating loss carryforwards of $39.8 million and $52.9 million, respectively, expiring at various dates through 2033. At December 31, 2013, the Company had federal and state research and development tax credits of $2.7 million and $2.3 million, respectively. The federal research and development tax credits expire at various dates through 2033, while the state credits do not expire. The Company had foreign net operating loss carryforwards of $41.0 million beginning to expire in 2018. Utilization of the net operating loss and tax credit carryforwards may become subject to annual limitations due to ownership change limitations that could occur in the future as provided by Section 382 of the Internal Revenue Code of 1986, as amended, as well as similar state and foreign provisions. These ownership changes may limit the amount of the net operating loss and tax credit carryforwards that can be utilized annually to offset future taxable income. An ownership change occurred during June 2006 in connection with the initial public offering. The annual limitation as a result of that ownership change did not result in the loss or substantial limitation of net operating loss or tax credit carryforwards. There have been no subsequent ownership changes through December 31, 2013.

The Company does not record U.S. income taxes on the undistributed earnings of its 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 United States. The undistributed earnings of the foreign subsidiaries as of December 31, 2013 are immaterial. In the event the Company is required to repatriate funds from outside of the United States, such repatriation would be subject to local laws, customs, and tax consequences.