PROVISION FOR INCOME TAXES:

Income Taxes

The Company accounts for income taxes under the provisions of ASC 740. Under the provisions of ASC 740, deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, utilizing the tax rates that are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

U.S. and foreign components of income before income taxes were (in thousands):



	Year Ended December 31,
	2013		2012			2011
U.S. operations	$	1,936	$	(36,178	)	$	18,884
Foreign operations	53,491		15,396			26,211
Total pretax income (loss)	$	55,427	$	(20,782	)	$	45,095

The components of the provision for (benefit from) income taxes are as follows (in thousands):



	Year Ended December 31,
	2013			2012			2011
Current provision (benefit):
Federal	$	(558	)	$	9,813		$	7,758
State	2			(2,083		)	246
Foreign	3,049			1,892			474
	2,493			9,622			8,478
Deferred provision (benefit):
Federal	(3,633		)	2,647			1,458
State	—			3,109			845
Foreign	(699		)	(1,756		)	23
	(4,332		)	4,000			2,326
Total	$	(1,839	)	$	13,622		$	10,804

The Company is entitled to a deduction for federal and state tax purposes with respect to employees' stock option activity. The net reduction in taxes otherwise payable in excess of any amount credited to income tax expense has been reflected as an adjustment to additional paid-in capital. For 2013, 2012 and 2011, the benefit arising from employee stock option activity that resulted in an adjustment to additional paid in capital was approximately $1.3 million, $1.3 million and $2.2 million, respectively.

The provision for (benefit from) income taxes differs from the amount, which would result by applying the applicable federal income-tax rate to income before provision for (benefit from) income taxes, as follows:




	2013	2012	2011
Provision computed at Federal statutory rate	35.0%	35.0%	35.0%
State tax provision, net of Federal benefit	—%	8.9%	0.5%
Business tax credits	(8.1)%	4.9%	(5.7)%
Stock-based compensation	(2.8)%	2.5%	(0.2)%
Foreign income taxed at different rate	(29.5)%	25.9%	(10.9)%
IRS audit settlement	—%	(87.2)%	—%
Valuation allowance	(0.1)%	(48.4)%	3.4%
Other	2.2%	(7.2)%	1.9%
Total	(3.3)%	(65.6)%	24.0%

The effective tax rate for the year ended December 31, 2013, was favorably impacted by the geographic distribution of the Company's world-wide earnings and earnings in lower-tax jurisdictions. Additionally, the rate was favorably impacted by federal research tax credits for 2013 and 2012.

During the third quarter of 2012, the Company recorded an impairment charge and write-off of certain assets related to SemiSouth of approximately $58.9 million, on which the Company recognized a $8.0 million tax benefit. The write-off resulted in a net loss for 2012.

During the third quarter of 2012 the Company made a one-time payment of taxes and interest totaling $42.6 million in connection with settling the U.S. Internal Revenue Service ("IRS") examination of the Company's income tax returns for the years 2003 through 2006. Related to this, the provision for income tax in the second quarter of 2012 included a one-time charge of $44.8 million, comprising $35.0 million in federal income taxes, net interest of $5.7 million, and state income taxes (including interest) of approximately $4.1 million. The impact of the charge was partially offset by the reversal of $26.9 million of related unrecognized tax benefits that had been recorded as non-current liabilities in the Company's consolidated balance sheet resulting in a net charge of $18.1 million. Additionally, there was a $2.2 million reduction of the valuation allowance on the Company's California deferred tax assets.

The components of the net deferred income tax asset /(liabilities) were as follows (in thousands):



	December 31,
	2013			2012
Deferred tax assets:
Other reserves and accruals	$	6,893		$	3,391
Tax credit carry-forwards	12,453			6,205
Stock compensation	5,964			7,804
Capital losses	10,307			9,744
Net operating loss	1,014			710
Valuation allowance	(19,271		)	(15,970		)
	17,360			11,884
Deferred tax liabilities:
Depreciation	(4,226		)	(2,758		)
Acquired intangibles	(4,303		)	(5,187		)
Unremitted earnings	(2,432		)	—
Other	(1,107		)	(1,427		)
	(12,068		)	(9,372		)
Net deferred tax asset	$	5,292		$	2,512

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income. In the event that the Company determines, based on available evidence and management judgment, that all or part of the net deferred tax assets will not be realized in the future, the Company would record a valuation allowance in the period the determination is made. In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with the Company’s expectations could have a material impact on its results of operations and financial position.

As of December 31, 2013, the Company continues to maintain a valuation allowance primarily as a result of SemiSouth capital losses for federal purposes, and on its California deferred tax assets as the Company believes that it is not more likely than not that the deferred tax assets will be fully realized. The Company also had a California net operating loss which it believes that it is not more likely than not that the deferred tax asset will be fully realized and a valuation allowance was recorded. In addition, the Company maintains a valuation allowance with respect to certain of its deferred tax assets relating to tax credits in Canada and the state of New Jersey.

As of December 31, 2013, the Company had federal research and development tax credit carry-forwards of approximately $8.4 million, which will begin to expire in 2030 if unutilized, California research and development tax credit carry-forwards of approximately $11.8 million (there is no expiration of research and development tax credit carry-forwards for the state of California) and California net operating losses of $29.0 million which will begin to expire in 2032. As of December 31, 2013, the Company had Canadian scientific research and experimental development tax credit carry-forwards of approximately $2.0 million and New Jersey research and experimental development tax credit carry-forwards of approximately $0.3 million, which will start to expire in 2026 and 2027, respectively.

The Company does not provide for U.S. taxes on its undistributed earnings of foreign subsidiaries that it intends to invest indefinitely outside the U.S., unless such taxes are otherwise required under U.S. tax law. In 2013, the Company determined that a portion of its current year earnings of foreign subsidiaries may be remitted in the future to the U.S. for domestic cash flow purposes and, accordingly, provided for the related U.S. taxes in its consolidated financial statements. If the Company changes its intent to invest its undistributed foreign earnings indefinitely or if a greater amount of undistributed earnings are needed for U.S. operations than previously anticipated and for which U.S. taxes have not been recorded, the Company would be required to accrue or pay U.S. taxes (subject to an adjustment for foreign tax credits, where applicable) and withholding taxes payable to various foreign countries on some or all of these undistributed earnings. As of December 31, 2013, the Company had undistributed earnings of foreign subsidiaries that are indefinitely invested outside of the U.S. of approximately $105.0 million. It is not practicable to determine the income tax liability that might be incurred if these earnings were to be distributed.

Unrecognized Tax Benefits

The Company applies the provisions of ASC 740-10, relating to accounting for uncertain income taxes.



Reconciliation of the Beginning and Ending Amount of Unrecognized Tax Benefits (in thousands):
Unrecognized Tax Benefits Balance at January 1, 2011	$	29,911
Gross Increases for Tax Positions of Current Year	4,944
Gross Decreases for Tax Positions of Prior Years	—
Settlements	—
Lapse of Statute of Limitations	—
Unrecognized Tax Benefits Balance at December 31, 2011	34,855
Gross Increases for Tax Positions of Current Year	1,110
Gross Increase for Tax Positions of Prior Years	9,344
Settlements	(34,496		)
Lapse of Statute of Limitations	—
Unrecognized Tax Benefits Balance at December 31, 2012	10,813
Gross Increases for Tax Positions of Current Year	1,881
Gross Decreases for Tax Positions of Prior Years	—
Settlements	—
Lapse of Statute of Limitations	—
Unrecognized Tax Benefits Balance at December 31, 2013	$	12,694

The Company's total unrecognized tax benefits as of December 31, 2013, 2012 and 2011, was $12.7 million, $10.8 million and $34.9 million, respectively. An income-tax benefit of $10.9 million, net of valuation allowance adjustments, would be recorded if these unrecognized tax benefits are recognized. Although it is possible some of the unrecognized tax benefits could be settled within the next twelve months, the Company cannot reasonably estimate the outcome at this time.

The Company's continuing practice is to recognize interest and/or penalties related to income-tax matters in income-tax expense. The Company has accrued interest and penalties at December 31, 2013, and December 31, 2012, of $0.7 million and $0.6 million, respectively, which have been recorded in long-term income taxes payable in the accompanying Consolidated Balance Sheets.

In the quarter ended June 30, 2012, the Company reached an understanding regarding the terms for settling with the U.S. Internal Revenue Service ("IRS") and closed out all positions as part of the examination of the Company's income tax returns for the years 2003 through 2006. On August 2, 2012, the IRS signed a formal closing agreement with the Company that is consistent with the intentions of the parties pursuant to their earlier understanding. Further, the agreement confirmed that the royalty arrangement between the Company and its foreign subsidiary concluded on October 31, 2012, resulting in a substantially lower effective tax rate for the Company in subsequent years.

Approximately, $0.04 million of interest and penalties, net of the benefit, were included in the Company's benefit from income taxes for the year-ended December 31, 2013.

The Company has concluded all U.S. federal income tax matters for the years through 2006. As of December 31, 2013, the fiscal years 2007 through 2009 remain under audit by the IRS, and no notice of proposed adjustments has been received.