Income Taxes

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



	Years Ended December 31,
	2014			2013			2012
United States	$	(19,301	)	$	(5,270	)	$	(5,994	)
Foreign	17,375			13,762			15,517
Total	$	(1,926	)	$	8,492		$	9,523

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



	Years Ended December 31,
	2014			2013			2012
Federal:
Current	$	—		$	(258	)	$	(190	)
Deferred	(5,608		)	222			6,873
	(5,608		)	(36		)	6,683
State:
Current	6			6			7
Deferred	853			88			1,653
	859			94			1,660
Foreign:
Current	2,453			2,022			2,135
Deferred	1,944			311			(95		)
	4,397			2,333			2,040
(Decrease) increase in valuation allowance	4,698			(239		)	(8,034		)
Tax provision	$	4,346		$	2,152		$	2,349

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,
	2014			2013			2012
Taxes at federal statutory rate	$	(655	)	$	2,888		$	3,054
State taxes, net of federal benefit	(90		)	(29		)	(23		)
Effect of tax rate differential for foreign subsidiary	(3,570		)	(2,531		)	(2,695		)
Valuation allowance, including tax benefits of stock activity	4,698			(239		)	(8,034		)
Foreign taxes on unremitted earnings	1,590			—			—
Stock-based compensation	621			460			242
Prior year true-up Subpart F income	—			—			2,484
Return to provision adjustments	536			(920		)	3,568
Subpart F income inclusion	1,167			2,446			3,110
Other	49			77			643
Tax provision	$	4,346		$	2,152		$	2,349

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, 2014. 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 $64.2 million as of December 31, 2014 to reflect the estimated amount of deferred tax assets that may not be realized. The Company increased its valuation allowance by $4.7 million for the year ended December 31, 2014.

At December 31, 2014, the Company has federal and state net operating loss carryforwards of approximately $157.7 million and $64.6 million, respectively. The federal tax loss carryforwards will begin to expire in 2020 and the state tax loss carryforwards will begin to expire in 2015. In addition, the Company has research and development and other tax credit carryforwards for federal and state income tax purposes as of December 31, 2014 of $5.1 million and $6.6 million, respectively. The federal credits will begin to expire in 2019 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 $4.1 million and $3.4 million, for 2014 and 2013, 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 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 $665,000 and $733,000 for 2014 and 2013, respectively. The benefit of the tax holiday on net income per diluted share was $0.02 and $0.03 for 2014 and 2013, respectively.

The Company records U.S. income taxes on the undistributed earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered indefinitely reinvested outside of the U.S. As a result of changes in business circumstances, the Company changed its' estimate of amounts considered permanently reinvested. As a result, in 2014, the Company recorded a deferred tax liability of $1.6 million associated with $31.8 million of unremitted earnings of a foreign subsidiary that are no longer considered indefinitely reinvested. In the event that the Company repatriates these funds, this withholding tax would become payable. As of December 31, 2014, the cumulative amount of undistributed earnings considered indefinitely reinvested was $39.2 million. 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,
	2014			2013
Deferred tax assets:
Tax loss carryforwards	$	54,551		$	55,109
Tax credit carryforwards	19			19
Uniform capitalization, contract and inventory related reserves	1,728			1,493
Accrued vacation	669			632
Stock-based compensation	1,428			1,235
Intangible assets	1,364			1,032
Deferred revenue	149			179
Unrealized gains and losses	1,780			—
Other	2,668			1,721
Total	64,356			61,420
Deferred tax liabilities:
Inventory deduction	(206		)	(290		)
Pension assets	(1,476		)	(2,125		)
Allowance for doubtful accounts	(407		)	(405		)
Tax basis depreciation less book depreciation	(192		)	(1,989		)
Withholding tax on undistributed earnings of foreign subsidiary	(1,590		)	—
Other	(241		)	(1		)
Total	(4,112		)	(4,810		)
Net deferred tax assets before valuation allowance	60,244			56,610
Valuation allowance	(64,199		)	(59,501		)
Net deferred tax liabilities	$	(3,955	)	$	(2,891	)

As of December 31, 2014 and 2013, deferred tax assets of $460,000 and $124,000, respectively were included in other non-current assets in the consolidated balance sheet.

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, 2014, approximately $11.7 million was recorded as a reduction to deferred tax assets, which caused a corresponding reduction in the Company’s valuation allowance of $11.7 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, 2014 will change materially within the 12 month period following December 31, 2014.

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



Balance at December 31, 2013	$	12,634
Increase in current period positions	890
Decrease in prior period positions	(1,585		)
Balance at December 31, 2014	$	11,939

The Company recognizes interest and penalties as a component of income tax expense. Interest and penalties for the years ended December 31, 2014 and 2013 were $34,000, and $126,000, respectively, and for the year ended December 31, 2012 interest and penalties were insignificant.

The Company’s U.S. federal income tax returns for tax years subsequent to 2009 are subject to examination by the Internal Revenue Service and its state income tax returns subsequent to 2008 are subject to examination by state tax authorities. The Company’s foreign tax returns subsequent to 2004 are subject to examination by the foreign tax authorities.

Net operating losses from years for which the statute of limitations has expired (2008 and prior for federal and 2007 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.