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,
	2014			2013		2012
U.S. operations	$	(5,064	)	$	1,936	$	(36,178	)
Foreign operations	61,878			53,491		15,396
Total pretax income (loss)	$	56,814		$	55,427	$	(20,782	)

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



	Year Ended December 31,
	2014			2013			2012
Current provision (benefit):
Federal	$	(1,234	)	$	(558	)	$	9,813
State	(137		)	2			(2,083		)
Foreign	3,094			3,049			1,892
	1,723			2,493			9,622
Deferred provision (benefit):
Federal	(3,279		)	(3,633		)	2,647
State	(284		)	—			3,109
Foreign	(890		)	(699		)	(1,756		)
	(4,453		)	(4,332		)	4,000
Total	$	(2,730	)	$	(1,839	)	$	13,622

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 2014, 2013 and 2012, the benefit arising from employee stock option activity that resulted in an adjustment to additional paid in capital was approximately $0.8 million, $1.3 million and $1.3 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:




	2014	2013	2012
Provision computed at Federal statutory rate	35.0%	35.0%	35.0%
State tax provision, net of Federal benefit	—	—	8.9
Business tax credits	(5.5)	(8.1)	4.9
Stock-based compensation	(2.9)	(2.8)	2.5
Foreign income taxed at different rate	(28.6)	(29.5)	25.9
IRS audit settlement	(5.8)	—	(87.2)
Valuation allowance	2.0	(0.1)	(48.4)
Other	1.0	2.2	(7.2)
Total	(4.8)%	(3.3)%	(65.6)%

The Company reached a settlement with the IRS in the quarter ended June 30, 2014, to close out the examination of its federal income-tax returns for the years 2007 through 2009. As a result, the Company adjusted its tax balances and the provision for income tax for the year ended December 31, 2014, includes a one-time benefit of $3.3 million comprising $2.8 million in federal income taxes and interest, and state income taxes of approximately $0.5 million. The one-time benefit includes the reversal of $4.1 million of related unrecognized tax benefits that had been recorded as non-current liabilities in the Company's consolidated balance sheets. The Company has now concluded all U.S. federal income-tax matters for the years through 2009. The Company engages in qualifying activities for R&D credit purposes. The Tax Increase Prevention Act of 2014 was signed into law on December 19, 2014, to extend the federal research and development credit for 2014. The related tax benefit was taken in the fourth quarter of 2014.

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 both 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,
	2014			2013
Deferred tax assets:
Other reserves and accruals	$	3,928		$	6,893
Tax credit carry-forwards	19,602			12,453
Stock compensation	5,429			5,964
Capital losses	11,401			10,307
Net operating loss	3,680			1,014
Valuation allowance	(25,828		)	(19,271		)
	18,212			17,360
Deferred tax liabilities:
Depreciation	(3,320		)	(4,226		)
Acquired intangibles	(3,502		)	(4,303		)
Unremitted earnings	(5,182		)	(2,432		)
Other	(1,072		)	(1,107		)
	(13,076		)	(12,068		)
Net deferred tax asset	$	5,136		$	5,292

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, 2014, 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. 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, 2014, the Company had federal research and development tax credit carry-forwards of approximately $10.8 million, which will begin to expire in 2030 if unutilized, California research and development tax credit carry-forwards of approximately $14.9 million (there is no expiration of research and development tax credit carry-forwards for the state of California) and California net operating losses of $31.5 million which will begin to expire in 2032. As of December 31, 2014, the Company had Canadian scientific research and experimental development tax credit carry-forwards of approximately $2.3 million and New Jersey research and experimental development tax credit carry-forwards of approximately $0.4 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. Beginning in 2013, the Company determined that a portion of its foreign subsidiaries current and future earnings may be remitted prospectively 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, 2014, the Company had undistributed earnings of foreign subsidiaries that are indefinitely invested outside of the U.S. of approximately $144.0 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, 2012	$	34,855
Gross Increases for Tax Positions of Current Year	1,110
Gross Increases 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 Increase for Tax Positions of Prior Years	—
Settlements	—
Lapse of Statute of Limitations	—
Unrecognized Tax Benefits Balance at December 31, 2013	12,694
Gross Increases for Tax Positions of Current Year	2,117
Gross Increases for Tax Positions of Prior Years	710
Settlements	(4,361		)
Lapse of Statute of Limitations	—
Unrecognized Tax Benefits Balance at December 31, 2014	$	11,160

The Company's total unrecognized tax benefits as of December 31, 2014, 2013 and 2012, was $11.2 million, $12.7 million and $10.8 million, respectively. An income-tax benefit of $4.9 million, net of valuation allowance adjustments, would be recorded if these unrecognized tax benefits are recognized. As of December 31, 2014, the Company is not under any income tax audit. The Company cannot reasonably estimate the amount of the unrecognized tax benefit that could be adjusted in the next twelve months.

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, 2014, and December 31, 2013, of $0.1 million and $0.7 million, respectively, which have been recorded in long-term income taxes payable in the accompanying Consolidated Balance Sheets. Approximately $10,000 of interest, net of the benefit, was included in the Company's benefit from income taxes for the year-ended December 31, 2014.

In July 2013, the FASB issued a new accounting standard that requires the presentation of certain unrecognized tax benefits as reductions to deferred tax assets rather than as liabilities in the Company's condensed consolidated balance sheets when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The Company adopted this new standard on a prospective basis in the first quarter of 2014. The impact of the adoption was a reduction to long-term deferred tax assets and non-current income tax payable of approximately $4.3 million.

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.

As of December 31, 2014, the Company has concluded all U.S. federal income tax matters for the years through 2009, and has finalized Swiss income tax returns for the years through 2012. There is currently no pending income tax audit.