Income Taxes

The following is a geographical breakdown of income before the provision for income taxes (in thousands):



	Years Ended December 31,
	2012		2011			2010
Domestic	$	25,794	$	16,177		$	9,551
Foreign	1,281		(88		)	406
Total income before provision for income taxes	$	27,075	$	16,089		$	9,957

The provision for income taxes consists of the following (in thousands):



	Years Ended December 31,
	2012			2011			2010
Current:
Federal	$	7,181		$	4,285		$	196
State	1,006			896			207
Foreign	154			(70		)	368
Total current	8,341			5,111			771
Deferred:
Federal	2,169			1,116			3,757
State	651			(527		)	473
Foreign	(264		)	—			64
Total deferred	2,556			589			4,294
Total provision for income taxes	$	10,897		$	5,700		$	5,065

The provision for income taxes differs from the amount computed by applying the statutory federal tax rate as follows (in thousands):



	Years Ended December 31,
	2012			2011			2010
U.S. federal tax provision at statutory rate	$	9,476		$	5,631		$	3,485
State taxes	1,077			240			543
Non-deductible expenses	530			481			350
Acquisition costs	431			—			—
Share-based compensation expense	403			443			244
Research tax credits	—			(755		)	(137		)
Repatriation of foreign earnings	—			(77		)	560
Domestic production deduction	(601		)	(271		)	—
Other	(419		)	8			20
Total	$	10,897		$	5,700		$	5,065

Significant components of our deferred tax assets (liabilities) are as follows (in thousands):



	December 31,
	2012			2011
Deferred tax assets (liabilities):
Tax credit carry forwards	$	2,990		$	3,066
Inventory related items	2,900			3,032
Deferred revenue	11,497			11,979
Stock compensation	9,331			9,187
Loss carry forwards	53			—
Other, net	69			82
Subtotal	26,840			27,346
Less: valuation allowance	(39		)	—
Total net deferred tax assets	26,801			27,346

Reserves and accruals	(573		)	(1,277		)
Depreciation and amortization	(39,840		)	(4,040		)
Total deferred tax assets (liabilities)	(40,413		)	(5,317		)

Net deferred tax assets (liabilities)	$	(13,612	)	$	22,029

Deferred income tax assets (liabilities) are provided for temporary differences that will result in future tax deductions or future taxable income, as well as the future benefit of tax credit carry forwards. In assessing our ability to realize the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized by assessing the available positive and negative evidence to estimate if sufficient future taxable income will be generated in order to realize the existing deferred tax assets. On the basis of this evaluation, as of December 31, 2012, management concluded that deferred tax assets are more likely than not to be realized, and therefore no material valuation allowances have been recorded in any jurisdiction.

In 2012, we recorded approximately $33.1 million of additional net deferred tax liabilities related to our acquisition of MTS during the second quarter. This amount was primarily comprised of increased book basis in fixed assets and intangible assets as a result of the acquisition with no corresponding increase in tax basis.

As of December 31, 2012, state net operating loss carry forwards available for income tax purposes is approximately $1.5 million. These net operating losses begin to expire in the year 2026. For income tax purposes, we have federal and California research tax credit carry forwards of approximately $3.0 million and $6.7 million, respectively. Federal research tax credit carry forwards will expire in years 2022 through 2031. California credits are available indefinitely to reduce cash taxes otherwise payable. Pursuant to the requirements of ASC 718, we do not include unrealized stock option attributes as components of our gross deferred tax assets. The tax effected amounts of gross unrealized net operating loss and business tax credit carry forwards excluded under ASC 718 for the year ended December 31, 2012 are approximately $3.2 million, which will result in increases to additional paid in capital if and when realized as a reduction in income taxes otherwise paid.

We file income tax returns in the U.S. Federal jurisdiction, various states and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities, including major jurisdictions such as the United States, California, India, and the United Kingdom. We have recently concluded audits by the Internal Revenue Service and California Franchise Tax Board for years 2008 and 2009. However, since we have tax attribute carry forwards from these years that could be subject to adjustment, if and when utilized, federal and California remain open from 1996 and 1992, respectively. The India statute of limitations remains open for years 2007 through 2011.

We have not provided U.S. income taxes and foreign withholding taxes on approximately $2.2 million of undistributed earnings of its foreign subsidiaries as of December 31, 2012 because we intend to permanently reinvest such earnings outside the U.S. If we expect to distribute those earnings in the form of dividends or otherwise, we would be subject to U.S. federal and state income taxes, which may be reduced by any foreign income taxes previously paid on these earnings, and would then be recorded as a component of income tax expense. It is not practicable for us to estimate the amount of deferred tax liability related to our investments in these foreign subsidiaries.

The aggregate changes in the balance of gross unrecognized tax benefits, which excludes interest and penalties, for the three years ended December 31, 2012 is as follows (in thousands):



Balance as of December 31, 2009	$	4,295
Increases related to tax positions taken during a prior period	795
Decreases related to tax positions taken during the prior period	(80		)
Increases related to tax positions taken during the current period	421
Balance as of December 31, 2010	5,431
Increases related to tax positions taken during a prior period	—
Decreases related to tax positions taken during the prior period	(88		)
Increases related to tax positions taken during the current period	453
Balance as of December 31, 2011	5,796
Increases related to tax positions taken during a prior period	43
Increases related to tax positions related to MTS	1,066
Decreases related to tax positions taken during the prior period	—
Increases related to tax positions taken during the current period	422
Decreases related to settlements	(33		)
Decreases related to expiration of statute of limitations	(379		)
Balance as of December 31, 2012	$	6,915

As of December 31, 2012, the total amount of gross unrecognized tax benefits, if realized, would affect our tax expense by approximately $6.1 million. We recognize interest and/or penalties related to uncertain tax positions in operating expenses, which for 2012 was immaterial. We do not believe there will be any material changes in our unrecognized tax positions over the next twelve months.