Income Taxes

Income before provision for income taxes consisted of the following:



	2013		2012			2011
	(in thousands)
United States	$	4,542	$	9,723		$	12,931
International	25,479		(5,816		)	15,854
Total pre-tax income	$	30,021	$	3,907		$	28,785

The provision (benefit) for income taxes consisted of the following for the years ended September 30:



	2013		2012			2011
	(in thousands)
Current:
Federal	$	2	$	235		$	—
State	86		141			4
Foreign	2,902		1,120			1,020
Total current	$	2,990	$	1,496		$	1,024
Deferred:
Federal	7,596		5,470			(19,340		)
State	12		95			(4,561		)
Foreign	1,679		(549		)	(4,461		)
Total deferred	9,287		5,016			(28,362		)
Total provision (benefit)	$	12,277	$	6,512		$	(27,338	)

The Company’s provision (benefit) for income taxes differs from the amount computed by applying the U.S. federal statutory rate (35%) to income before taxes and minority interest as follows for the years ended September 30:



	2013			2012			2011
	(in thousands)
Income taxes computed at the U.S. federal statutory rate	$	10,507		$	1,367		$	10,075
State income taxes	98			69			3
Research credits	(89		)	757			—
Foreign losses not benefited (benefited)	—			1,377			(5,549		)
Foreign Income Inclusion, net of credit	6,469			—			—
Non-deductible stock compensation	991			672			527
Non-deductible impairment charges	—			3,321			—
U.S. operating loss not benefited (benefited)	—			—			(5,123		)
Valuation allowance changes	(1,334		)	1,384			(28,136		)
Foreign taxes	(4,334		)	(2,523		)	1,020
Other	(31		)	88			(155		)
Total provision (benefit)	$	12,277		$	6,512		$	(27,338	)

As of September 30, 2013, the Company had net operating loss carryforwards for federal, state and foreign income tax purposes of approximately $36.5 million, $78.4 million and $17.9 million, respectively. The federal, state and foreign net operating loss carryforwards will expire at various dates beginning in 2015, if not utilized. The Company has federal research and development tax credits and foreign tax and minimum tax credit carryforwards of approximately $1.6 million, $0.9 million and $0.6 million, respectively. The Company also has California state research and development tax credit carryforwards of approximately $2.6 million. The Company has foreign research and development tax credit carryforwards of approximately $2.0 million. The federal tax credits will expire in 2019 through 2031, if not utilized. The California state research and development tax credit can be carried forward indefinitely. The foreign research and development tax credit carryforwards will expire by 2014, if not utilized.

Utilization of the federal net operating loss carryforwards and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation, should the Company undergo an ownership change, may result in the expiration of federal or state net operating losses and credits before utilization.

The Company’s China operation was under a tax holiday program which began on January 1, 2007 and expired on December 31, 2011. The tax benefit resulting from the holiday was $57,000 for fiscal 2011.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred taxes consisted of the following at September 30:



	2013			2012
	(in thousands)
Deferred tax assets:
Depreciation	$	217		$	215
Inventory and other valuation reserves	532			1,136
Accrued expenses	5,312			6,255
Federal, state and foreign credit carryforwards	4,310			7,695
Federal, state and foreign net operating loss carryforwards	20,388			27,041
Non-deductible stock options	3,064			2,714
Other, net	38			2,444
Subtotal	33,861			47,500
Valuation allowance	(24,928		)	(24,887		)
Total deferred tax assets	$	8,933		$	22,613

Deferred tax liabilities:
Purchased intangibles	(1,144		)	(1,500		)
Net deferred tax assets	$	7,789		$	21,113

Reported as:
Current deferred tax assets	$	2,326		$	8,940
Non-current deferred tax assets	9,942			13,588
Non-current deferred tax liabilities	(4,479		)	(1,415		)
Net deferred tax assets	$	7,789		$	21,113

Non-current deferred tax liabilities are included within other long-term liabilities in the consolidated balance sheets.

Management has established a valuation allowance for a portion of the gross deferred tax assets based on management’s expectations of future taxable income and the actual taxable income during the three years ended September 30, 2013. The valuation allowance for deferred tax assets increased by $41,000 in fiscal 2013, increased by $2.7 million in fiscal 2012 and decreased by $40.5 million in fiscal 2011. Approximately $13.6 million of the valuation allowance is attributable to tax benefits of stock option deductions which will be credited to paid-in capital when recognized.

A reconciliation of the beginning and ending amount of the consolidated liability for unrecognized income tax benefits during the tax year ended September 30 is as follows:



	2013		2012			2011
	(in thousands)
Balance at the beginning of the year	$	2,906	$	4,533		$	3,460
Increases (decreases) related to current year positions	108		68			112
Increases (decreases) related to prior year positions	38		(1,695		)	961
Balance at the end of the year	$	3,052	$	2,906		$	4,533

The remaining amount of the unrecognized tax benefit as of September 30, 2013 is offset by a full valuation allowance. The Company does not anticipate a significant change in unrecognized tax benefits within the next twelve months except for any adjustments related to the expiration of the statute of limitations.

The Company anticipates the unrecognized tax benefits may increase during the year for items that arise in the ordinary course of business. These increases will be considered in the determination of the Company’s annual effective tax rate. The amount of the unrecognized tax benefit classified as a long term tax payable, if recognized, would reduce the annual income tax provision.

The Company’s policy to include interest and penalties related to unrecognized tax benefits within the Company’s provision for (benefit from) income taxes did not change. As of September 30, 2013, the Company has not accrued any potential penalties and interest related to these unrecognized tax benefits.

The Company files U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitations during which such tax returns may be audited and adjusted by the relevant tax authorities. The 2006 through 2013 tax years generally remain subject to examination by federal and most state tax authorities, and tax years 2006 through 2013 generally remain subject to examination by foreign tax authorities. In addition, U.S. tax returns are open from the 2000 tax year through the 2003 tax year to the extent that net operating losses generated during these periods are being utilized in open tax periods. Also, U.S. tax returns are open for the tax years from 1996 through 2003 and from 2007 through 2011 to the extent research and development credits were generated during these periods and are being utilized in open years.