6. INCOME TAXES

The components of income (loss) before income taxes and the provision (benefit) from income taxes consist of the following:


	Fiscal Year Ended July 31,
	2014			2013			2012
	(in thousands)
Income (loss) before income taxes
U.S.	$	(5,973	)	$	(15,388	)	$	(22,857	)
Foreign		7,573			2,986			2,050

Income (loss) before income taxes	$	1,600		$	(12,402	)	$	(20,807	)

Provision for (benefit from) income taxes:
Current:
Federal	$	—		$	—		$	—
State		(16	)		—			—
Foreign		2,019			(275	)		(938	)

Total Current	$	2,003		$	(275	)	$	(938	)

Deferred
Federal	$	(414	)	$	—		$	—
State		(12	)		—			—
Foreign		(810	)		—			—

Total Deferred		(1,236	)		—			—

Total provision for (benefit from) income taxes	$	767		$	(275	)	$	(938	)

Reconciliation of the U.S. federal statutory rate to the Company’s effective tax rate is as follows:


	Fiscal Year Ended July 31,
	2014			2013			2012
U.S. federal statutory rate		35.00	%		35.00	%		35.00	%
Change in valuation allowance		457.84			(41.24	)		(37.08	)
Foreign rate differential		(84.74	)		3.49			2.98
Permanent differences		(358.12	)		(2.19	)		(1.12	)
Change in uncertain tax positions		(5.30	)		7.16			4.99
Other		3.30			—			(0.26	)

Effective tax rate		47.98	%		2.22	%		4.51	%

The temporary differences and carryforwards that created the deferred tax assets and liabilities as of July 31, 2014, and 2013 are as follows:


	As of July 31,
	2014			2013
	(in thousands)
Deferred tax assets:
Net operating loss carryforwards	$	148,155		$	144,399
Capital loss carryforwards		418			393
Tax credits		29,033			26,965
Inventory valuation reserves		20,635			20,694
Deferred revenue		1,615			648
Fixed assets and spares		—			14
Other		13,223			13,018

Total deferred tax assets		213,079			206,131
Valuation allowance		(211,925	)		(204,484	)

Net deferred tax assets	$	1,154		$	1,647

Deferred tax liabilities:
Intangibles	$	(1,078	)	$	—
Fixed assets and spares		(509	)		(1,212	)
Prepaid expenses		(32	)		(22	)
Other		(58	)		(413	)

Total deferred tax liabilities		(1,677	)		(1,647	)

Net deferred tax assets (liabilities)	$	(523	)	$	—

Cumulative unremitted foreign earnings that are considered to be indefinitely reinvested outside of the U.S. and on which no U.S. taxes have been provided are approximately $8.3 million and $0.1 million as of July 31, 2014 and 2013. The increase compared to the prior year was associated with earnings of foreign subsidiaries acquired in connection with the Dover Acquisition. Due to net operating loss and credit carryforwards, the residual U.S. tax liability, if such amounts were remitted, would be minimal.

Compliance with section 10-30 of FASB ASC Topic 740, Income Taxes, requires the Company to periodically evaluate the necessity of establishing or increasing a valuation allowance for deferred tax assets depending on whether it is more likely than not that a related benefit will be realized in future periods. Because of the cumulative net loss position of the Company and the uncertainty of the timing of profitability in future periods, the Company determined that a valuation allowance against its US net deferred tax assets is appropriate as the Company determined it would be more likely than not unable to realize its US deferred tax assets. There is however, no valuation allowance in certain foreign jurisdictions, as the foreign entities have cumulative income and expected future income. The valuation allowance totaled $211.9 million and $204.5 million as of July 31, 2014 and 2013, respectively. The increase in the Company’s valuation allowance compared to the prior year was primarily due to an increase in US deferred tax assets associated with the current year taxable loss generated and other book-tax basis differences partially offset by a release of valuation allowance in connection with the Dover Acquisition, where a deferred tax liability was recorded for the book-tax basis difference related to purchased intangibles and depreciable assets. The deferred tax liability provided an additional source of income to support the realizability of the Company’s pre-existing deferred tax assets and as a result, the Company released a portion of its valuation allowance and recorded a tax benefit of $0.5 million.

As of July 31, 2014, the Company had federal net operating loss carryforwards of $367.1 million, which expire from 2019 to 2034, federal tax credit carryforwards, including research and development and foreign tax credits, of $8.0 million which expire from 2018 to 2034, state net operating loss carryforwards of $255.4 million, which expire from 2015 to 2034, and state tax credits and carryforwards of $34.8 million, of which the majority have an indefinite credit carryforward period. The remaining state tax credit carryforwards begin expiring in 2015 to 2029. The Company also has foreign net operating loss carryforwards of approximately $16.1 million in various foreign jurisdictions.

As of July 31, 2013, the Company had federal net operating loss carryforwards of $356.4 million, which expire from 2017 to 2033, federal tax credit carryforwards, including research and development and foreign tax credits, of $6.9 million which expire from 2018 to 2033, state net operating loss carryforwards of $247.2 million, which expire from 2014 to 2033, and state tax credits and carryforwards of $33.4 million, of which the majority have an indefinite credit carryforward period. The remaining state tax credit carryforwards begin expiring in 2014 to 2028. The Company also has foreign net operating loss carryforwards of approximately $16.1 million in various foreign jurisdictions.

As a result of the merger with Credence Systems Corporation on August 29, 2008, a greater than 50% cumulative ownership change in both entities triggered a significant limitation in net operating loss carryforward utilization. The Company’s ability to use the acquired U.S. net operating loss and credit carryforwards is subject to annual limitations as defined in sections 382 and 383 of the Internal Revenue Code. The Company currently estimates that the annual limitation on its use of net operating losses generated through August 29, 2008 will be approximately $10.1 million, which, based on the currently enacted federal carryforward period, limits the amount of net operating losses that are available for utilization to approximately $202.0 million. The Company will continue to assess the realizability of these carryforwards in subsequent periods.

A summary of the Company’s adjustments to its uncertain tax positions in the fiscal years ended July 31, 2014, 2013 and 2012 is as follows:


	July 31, 2014			July 31, 2013			July 31, 2012
	(in thousands)
Balance at beginning of year	$	6,788		$	8,009		$	9,094
Increase (decrease) for uncertain tax positions related to the current year		12			(242	)		(195	)
Decrease for uncertain tax positions related to prior years		—			(54	)		(385	)
Decreases for lapses of statutes of limitations		(210	)		(925	)		(505	)

Balance at end of year	$	6,590		$	6,788		$	8,009

As of July 31, 2014 and 2013, the Company’s unrecognized tax benefits were $6.6 million and $6.8 million, respectively, of which $3.0 million and $3.2 million, respectively, if recognized, would impact the effective income tax rate. The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense. The Company has accrued a total of $1.0 million and $0.9 million, respectively, for the potential payment of interest and penalties at July 31, 2014 and July 31, 2013. The Company does not anticipate the amount of the reserve for uncertain tax positions that will be reduced over the next 12 month period will be material as the Company settles disputed items with the appropriate taxing authorities.

The Company files income tax returns with the U.S. federal government and various state and international jurisdictions, which are subject to potential examination by tax authorities. With few exceptions, the Company’s 1998 and subsequent federal and state tax years remain open by statute, principally relating to net operating loss carryforwards.

Net cash paid for income taxes during the fiscal years ended July 31, 2014, July 31, 2013 and July 31, 2012 was approximately $1.1 million, $0.2 million, and $0.1 million, respectively.