Income Taxes

For financial reporting purposes, net income (loss) before income taxes includes the following components (in thousands):



	Years Ended December 31,
				2011
	2012			(Restated)			2010
United States	$	(5,994	)	$	(9,348	)	$	(12,903	)
Foreign	15,517			9,766			8,478
Total	$	9,523		$	418		$	(4,425	)

The provision (benefit) for income taxes based on income (loss) before income taxes is as follows (in thousands):



	Years Ended December 31,
				2011
	2012			(Restated)			2010
Federal:
Current	$	(190	)	$	—		$	13
Deferred	6,873			(2,430		)	(4,183		)
	6,683			(2,430		)	(4,170		)
State:
Current	7			6			5
Deferred	1,653			206			60
	1,660			212			65
Foreign:
Current	2,135			3,089			1,006
Deferred	(95		)	(1,216		)	607
	2,040			1,873			1,613
Valuation allowance	(8,034		)	2,201			4,123
Tax provision	$	2,349		$	1,856		$	1,631

The provision for income taxes in the accompanying consolidated statements of operations differs from the amount calculated by applying the statutory income tax rate to income (loss) from continuing operations before income taxes. The primary components of such difference are as follows (in thousands):



	Years Ended December 31,
				2011
	2012			(Restated)			2010
Taxes at federal statutory rate	$	3,054		$	143		$	(1,504	)
State taxes, net of federal benefit	(23		)	(323		)	(284		)
Effect of tax rate differential for foreign subsidiary	(2,695		)	(1,576		)	(1,356		)
Valuation allowance, including tax benefits of stock activity	(8,034		)	2,201			4,123
Nondeductible interest	—			462			(313		)
Foreign tax credit	—			—			(183		)
Stock-based compensation	242			73			155
FCPA settlement	—			—			1,156
Return to provision adjustments	3,568			576			(1,512		)
Subpart F income inclusion	5,594			—			948
Other	643			300			401
Tax provision	$	2,349		$	1,856		$	1,631

The Company has established a valuation allowance against its U.S. federal and state deferred tax assets due to the uncertainty surrounding the realization of such assets as evidenced by the cumulative losses from operations through December 31, 2012. Management periodically evaluates the recoverability of the deferred tax assets. At such time as it is determined that it is more likely than not that deferred assets are realizable, the valuation allowance will be reduced accordingly and recorded as a tax benefit, with the exception of $15.5 million which will impact additional paid in capital as discussed below. The Company has recorded a valuation allowance of $59.7 million as of December 31, 2012 to reflect the estimated amount of deferred tax assets that may not be realized. The Company decreased its valuation allowance by $8.0 million for the year ended December 31, 2012.

At December 31, 2012, the Company has federal and state net operating loss carryforwards of approximately $157.1 million and $82.0 million, respectively. The federal tax loss carryforwards will begin to expire in 2020 and the state tax loss carryforwards will begin to expire in 2013. In addition, the Company has research and development and other tax credit carryforwards for federal and state income tax purposes as of December 31, 2012 of $4.7 million and $5.4 million, respectively. The federal credits will begin to expire in 2018 unless utilized and the state credits have an indefinite life. Pursuant to Internal Revenue Code Sections 382 and 383, use of the Company’s federal net operating loss and credit carryforwards may be limited due to a cumulative change in ownership of more than 50% within a three-year period.

Excess tax benefits associated with stock option exercises, restricted stock grants, and disqualifying dispositions of both incentive stock options and stock issued from the Company’s Employee Stock Purchase Plan in the amount of $3.5 million and $3.3 million, for 2012 and 2011, respectively, did not reduce current income taxes payable and, accordingly, are not included in the deferred tax asset relating to net operating loss carryforwards, but are included with the federal and state net operating loss carryforwards disclosed in this footnote. The tax benefits associated with stock option deductions from 1998 to 2005 in the amount of $15.5 million were not recorded in additional paid-in capital because their realization was not more likely than not to occur and, consequently, a valuation allowance was recorded against the entire benefit.

The Company has been granted a tax holiday in Switzerland, which is effective as of January 1, 2012 and is for 10 years. The tax holiday is conditional upon the Company meeting certain employment and investment thresholds. The impact of this tax holiday decreased foreign taxes by $634,000 for 2012. The benefit of the tax holiday on net income per diluted share was $0.02 for 2012.

U.S. and foreign withholding taxes have not been recognized on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that are essentially permanent in duration. This amount becomes taxable upon a repatriation of assets from the subsidiary or a sale or liquidation of the subsidiary. The amount of unremitted earnings from foreign subsidiaries totaled $5.0 million as of December 31, 2012. Withholding taxes of approximately $2.0 million would be payable upon remittance of all previously unremitted earnings at December 31, 2012. Determination of the amount of any unrecognized deferred income tax liability on the excess of the financial reporting basis over the tax basis of investments in foreign subsidiaries is not practicable because of the complexities of the hypothetical calculation.

Items that give rise to significant portions of the deferred tax accounts are as follows (in thousands):



	December 31,
				2011
	2012			(Restated)
Deferred tax assets:
Tax loss carryforwards	$	55,288		$	59,457
Tax credit carryforwards	19			18
Uniform capitalization, contract and inventory related reserves	895			1,319
Accrued vacation	642			631
Stock-based compensation	813			763
Tax basis depreciation less book depreciation	—			984
Intangible assets	1,104			1,232
Deferred revenue	152			265
FCPA settlement	—			1,187
Other	1,185			1,849
Total	60,098			67,705
Deferred tax liabilities:
Inventory deduction	(209		)	(185		)
Pension assets	(1,385		)	(933		)
Allowance for doubtful accounts	(433		)	(245		)
Tax basis depreciation less book depreciation	(224		)	—
Other	—			(1		)
Total	(2,251		)	(1,364		)
Net deferred tax assets before valuation allowance	57,847			66,341
Valuation allowance	(59,740		)	(67,773		)
Net deferred tax liabilities	$	(1,893	)	$	(1,432	)

The Company adopted the provisions of section 740-10 of the Accounting for Uncertainty in Income Taxes Topic of the FASB ASC on January 1, 2007. Of the total unrecognized tax benefits at December 31, 2012, approximately $10.0 million was recorded as a reduction to deferred tax assets, which caused a corresponding reduction in the Company’s valuation allowance of $10.0 million. To the extent unrecognized tax benefits are recognized at a time when a valuation allowance does not exist, the recognition of the tax benefit would reduce the effective tax rate. The Company does not anticipate that the amount of unrecognized tax benefits as of December 31, 2012 will significantly increase or decrease within the 12 month period following December 31, 2012.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):



Balance at December 31, 2011	$	10,433
Increase in prior period positions	510
Decrease in current period positions	(666		)
Balance at December 31, 2012	$	10,277

The Company recognizes interest and penalties as a component of income tax expense. Interest and penalties for the years ended December 31, 2012, 2011 and 2010 were immaterial.

The Company’s U.S. federal income tax returns for tax years subsequent to 2007 are subject to examination by the Internal Revenue Service and its state income tax returns subsequent to 2006 are subject to examination by state tax authorities. The Company’s foreign tax returns subsequent to 2002 are subject to examination by the foreign tax authorities.

Net operating losses from years for which the statute of limitations has expired (2007 and prior for federal and 2006 and prior for state) could be adjusted in the event that the taxing jurisdictions challenge the amounts of net operating loss carryforwards from such years.