Income Taxes

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



	Years Ended December 31,
	2013		2012		2011
Domestic	$	34,678	$	25,794	$	16,177
Foreign	351		1,281		(88		)
Total income before provision for income taxes	$	35,029	$	27,075	$	16,089

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



	Years Ended December 31,
	2013			2012			2011
Current:
Federal	$	8,218		$	7,181		$	4,285
State	1,621			1,006			896
Foreign	447			154			(70		)
Total current	10,286			8,341			5,111
Deferred:
Federal	1,287			2,169			1,116
State	(263		)	651			(527		)
Foreign	(260		)	(264		)	—
Total deferred	764			2,556			589
Total provision for income taxes	$	11,050		$	10,897		$	5,700

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,
	2013			2012			2011
U.S. federal tax provision at statutory rate	$	12,260		$	9,476		$	5,631
State taxes	883			1,077			240
Non-deductible expenses	297			530			481
Acquisition costs	—			431			—
Share-based compensation expense	407			403			443
Research tax credits	(1,430		)	—			(755		)
Domestic production deduction	(816		)	(601		)	(271		)
Other	(551		)	(419		)	(69		)
Total	$	11,050		$	10,897		$	5,700

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



	December 31,
	2013			2012
Deferred tax assets (liabilities):
Tax credit carry forwards	$	3,160		$	2,990
Inventory related items	2,947			2,900
Deferred revenue	11,074			11,497
Stock compensation	7,447			9,331
Loss carry forwards	64			53
Other, net	5			69
Subtotal	24,697			26,840
Less: valuation allowance	(39		)	(39		)
Total net deferred tax assets	24,658			26,801

Reserves and accruals	(353		)	(573		)
Depreciation and amortization	(38,681		)	(39,840		)
Total deferred tax liabilities	(39,034		)	(40,413		)

Net deferred tax liabilities	$	(14,376	)	$	(13,612	)

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. We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. On the basis of this evaluation, as of December 31, 2013, no significant valuation allowances have been recorded in any jurisdiction.

As of December 31, 2013, we had state net operating loss carry forwards available for state income tax purposes of approximately $2.2 million. If not utilized, these carry forwards will begin to expire in 2026. In addition, as of December 31, 2013 we had federal and California research credit carry forwards of approximately $1.5 million and $7.2 million, respectively. If not utilized the federal credit carry forwards will begin to expire in 2022, while the California credits can be carried forward indefinitely. Pursuant to the requirements of ASC 718, we do not include unrealized stock option attributes as components of our 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, 2013 are approximately $2.6 million, which will result in increases to additional paid in capital if and when realized as a reduction in income taxes otherwise paid.

In general, it is our practice and intention to reinvest the earnings of our non-U.S. subsidiaries in those operations. As of December 31, 2013, we have not made a provision for U.S. federal income and state income taxes on accumulated and current earnings of $2.8 million related to our U.K. and German subsidiaries because these earnings are intended to be indefinitely reinvested in operations outside the United States. If we expect to distribute those earnings in the form of dividends or otherwise, we would be subject to U.S. and state income taxes reported as a component of income tax expense, in the amount of $1.1 million. This amount may be reduced by any foreign tax credits available at the time of repatriation.

We file income tax returns in the U.S. and various states and foreign jurisdictions. In the normal course of business, we are subject to examination by tax authorities, including in major jurisdictions in the United States, California, UK and Germany. In 2012, we concluded audits by the Internal Revenue Service and California Franchise Tax Board for tax years 2008 and 2009. However, all of the net operating loss and research credit carry forwards that may be used in future years are subject to adjustment, if and when utilized. As such our federal and California tax years remain open from 1996 and 1992, respectively.

The aggregate changes in the balance of gross unrecognized tax benefits, which excludes interest and penalties, for the three years ended December 31, 2013 is as follows (in thousands):



Balance as of December 31, 2010	$	5,431
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
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
Increases related to tax positions taken during a prior period	406
Decreases related to tax positions taken during the prior period	(79		)
Increases related to tax positions taken during the current period	764
Decreases related to expiration of statute of limitations	(32		)
Balance as of December 31, 2013	$	7,974

As of December 31, 2013, the total amount of gross unrecognized tax benefits, if realized, would affect our tax expense by approximately $7.0 million. Our policy is to recognize interest and penalties related to unrecognized tax benefits in operating expenses. The total amount of interest and penalties recorded in 2013 was not significant. We do not expect any material changes to our unrecognized tax benefits over the next twelve months.