INCOME TAXES

The domestic and foreign components of income before income taxes is as follows:



	Years Ended December 31,
In thousands	2013			2012		2011
Domestic	$	(27,201	)	$	34,227	$	42,021
Foreign	12,285			22,742		2,139
Income (loss) before income taxes	$	(14,916	)	$	56,969	$	44,160

The components of the provision (benefit) for income taxes were as follows:



	Years Ended December 31,
In thousands	2013			2012		2011
Federal:
Current	$	(1,616	)	$	8,899	$	4,152
Deferred	—			—		—
	(1,616		)	8,899		4,152
State:
Current	58			459		427
Deferred	—			—		—
	58			459		427
Foreign:
Current	289			372		485
Deferred	122			52		(134		)
	411			424		351
Total income tax provision (benefit)	$	(1,147	)	$	9,782	$	4,930

The difference between the provision (benefit) for income taxes and the amount computed by applying the U.S. federal statutory rate of 35 percent to income (loss) before income taxes is explained below:



	Years Ended December 31,
In thousands	2013			2012			2011
Tax computed at statutory rate	$	(5,220	)	$	19,939		$	15,456
Foreign taxes	(3,890		)	(7,536		)	(398		)
Credits	(525		)	(4,654		)	(587		)
Change in valuation allowance	8,488			2,033			(9,541		)
Income tax provision	$	(1,147	)	$	9,782		$	4,930

To better align with the international nature of our business, we transitioned certain manufacturing processes to Singapore, thereby bringing these activities closer to our Asia-based customers. We have qualified for tax incentives that provide that certain income earned in Singapore would be subject to a tax holiday and/or reduced tax rates for a limited period of time under the laws of Singapore. To realize these benefits, we must meet certain requirements relating to employment and investment activities. This exemption is expected to expire within 7 years. In 2013, the tax benefit attributable to tax holidays was approximately $0.5 million with a $0.02 impact on earnings per share. In 2012, the tax benefit attributable to tax holidays was approximately $5.0 million with a $0.18 impact on diluted earnings per share. In 2011, the tax benefit attributable to tax holidays was approximately $0.3 million with a $0.01 impact on diluted earnings per share. Our ability to realize benefits from these initiatives could be materially adversely affected if, among other things, applicable requirements are not met, the incentives are substantially modified, or if we incur losses for which we cannot take a deduction.

Significant components of deferred income tax assets and liabilities are as follows:



In thousands	2013			2012			2011
Deferred tax assets:
Net operating loss carry-forwards	$	18,061		$	11,564		$	11,826
Inventory valuation	4,744			3,201			3,092
Bad debt reserve	185			180			181
Basis difference in assets	276			2,023			2,653
Tax credit carry-forwards	15,394			14,413			19,188
Warranty reserves	302			547			735
Deferred product and services income	312			—			—
Other non-deductible accruals and reserves	5,382			4,405			3,586
Stock compensation	5,290			4,091			3,640
Total deferred tax assets	49,946			40,424			44,901
Valuation allowance	(47,877		)	(37,006		)	(42,736		)
Net deferred tax assets	$	2,069		$	3,418		$	2,165
Deferred tax liabilities:
Unremitted earnings of foreign subsidiaries	$	—		$	—		$	—
Other	(1,695		)	(2,923		)	(1,617		)
Total deferred tax liabilities	(1,695		)	(2,923		)	(1,617		)
Net deferred tax assets	$	374		$	495		$	548

We have not provided for U.S. income taxes and foreign withholding taxes on the undistributed earnings of foreign subsidiaries as of December 31, 2013 because we intend to permanently reinvest such earnings outside the United States given that we have moved certain manufacturing processes to Singapore and that our future U.S. cash flows are expected to meet our future U.S. cash needs. As of December 31, 2013, the cumulative amount of earnings for which U.S. income taxes have not been provided is approximately $45.1 million. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable.

We currently have a full valuation allowance against our U.S. net deferred tax asset. Each quarter we assess the likelihood that we will be able to recover our deferred tax assets. As a result of our analysis, we concluded that it is more likely than not that, as of December 31, 2013, our net deferred tax assets will not be realized, with the exception of those in Japan and Taiwan. Therefore, we continue to provide a full valuation allowance against net deferred tax assets outside of Japan and Taiwan. Management continues to monitor the relative weight of positive and negative evidence of future profitability in relevant jurisdictions. Even after the net loss recorded in 2013, we have experienced cumulative profitability. However, as of December 31, 2013, we have determined that the following negative evidence outweighs the positive evidence such that it is not more likely than not we will generate sufficient taxable income in the relevant jurisdictions to utilize our deferred tax assets and release the associated valuation allowance:


•	Movement of certain product manufacturing to Singapore, resulting in reduced U.S. taxable income,


•	Current U.S. taxable loss,


•	Inherent earnings volatility of our industry resulting in our inability to forecast long term earnings, and


•	Usage limitations resulting in a longer period being required to realize our deferred tax assets.

The net valuation allowance increased by $10.9 million during the year ended December 31, 2013, and decreased by $5.7 million and $16.0 million during the years ended December 31, 2012 and 2011, respectively. The increase in valuation allowance in 2013 was primarily due to an increase in net operating loss carry-forwards and inventory reserves.

Approximately $13.1 million of the valuation allowance as of December 31, 2013 is attributable to pre-2006 windfall stock option deductions, the benefit of which will be credited to paid-in capital if and when realized through a reduction in income taxes payable. Beginning in 2006, we are tracking the windfall stock option deductions off balance sheet, as required by ASC 718. As of December 31, 2013, we have a previously recorded balance of $38.9 million of windfall stock option deductions that are being tracked off balance sheet. If and when realized, a tax benefit of $14.4 million associated with those deductions will be credited to additional paid-in capital. In 2013, no entry to paid-in capital for was made to reflect the benefit from windfall stock option deductions, which is the excess of federal income tax liabilities expected on the tax return without windfall stock option deductions over federal income tax liabilities expected on the tax return with windfall stock option deductions, because we are in a loss position in this year. Prior to 2013, a tax benefit of $9.9 million associated with those deductions had been credited to additional paid-in capital.

As of December 31, 2013, we had net operating loss carry-forwards for federal and state tax purposes of $45.9 million and $23.3 million, respectively. We also had federal and California research and development tax credit carry-forwards of approximately $5.3 million and $12.8 million, respectively. The federal and state net operating loss carry-forwards will expire at various dates beginning in 2020 through 2034, if not utilized. The federal tax credit carry-forwards will expire at various dates beginning in 2021 through 2034, if not utilized. The California tax credit carry-forwards have no expiration date.

Utilization of our net operating loss and tax credit carry-forwards is subject to an annual limitation due to an ownership change, as defined by the IRS code section 382 that occurred in 2007. None of the net operating loss or tax credit carry-forwards is anticipated to expire as a result of the ownership change. Any future changes of ownership could result in the expiration of net operating losses or credits before utilization.

During the year ended December 31, 2013, our reserve for uncertain tax positions increased by $0.1 million, net. Interest and penalties related to the reserve for uncertain tax positions were insignificant in 2013 and 2012. Over the next twelve months, we expect an insignificant decline in the estimated amount of liabilities associated with our uncertain tax positions which arose prior to December 31, 2013 as a result of expiring statutes of limitations in certain foreign jurisdictions.

If we are able to eventually recognize these uncertain tax positions, $6.8 million of the unrecognized benefit on January 1, 2013 and $6.9 million of the unrecognized benefit on December 31, 2013, would reduce our effective tax rate. We currently have a full valuation allowance against our U.S. net deferred tax asset which would impact the timing of the effective tax rate benefit should any of these uncertain tax positions be favorably settled in the future.

We are subject to federal and state tax examination for years 1999 forward and 1997 forward, respectively, by virtue of the tax attributes carrying forward from those years. We are also subject to audits in the foreign jurisdictions in which we operate for years 2003 and forward. There are no income tax examinations currently in progress.

A reconciliation of the change in the uncertain income tax benefits from January 1, 2012 to December 31, 2013 is as follows:



In thousands	2013			2012
Balance at January 1	$	6,792		$	5,531
Tax positions related to the current year:
Additions	1,290			1,247
Tax positions related to the prior years:
Additions	291			32
Reductions	(1,386		)	—
Lapses in statutes of limitations	(39		)	(18		)
Balance at December 31	$	6,948		$	6,792