Note 5 — Income Taxes

The deferred tax assets and deferred tax liabilities and related valuation allowance were comprised of the following:


	December 31,
	2012			2011
Deferred tax assets:
Derivative financial instruments	$	5,765		$	6,350
Net operating losses		2,929			7,786
Research and development credits		2,916			6,346
Depreciation		2,251			1,951
Valuation reserves and accrued liabilities		3,062			2,305
Foreign tax credit		1,775			—
Stock compensation		1,316			1,021
Inventory		723			438
Patents		654			715
Defined benefit obligation		585			410
Other credits		429			890
Capital lease obligations		370			993
Other		288			926

		23,063			30,131
Valuation allowance		(2,199	)		(3,702	)

Deferred tax liabilities:
Intangible assets		(18,948	)		(23,680	)
Unrealized foreign currency exchange gains		(2,069	)		(2,165	)
Undistributed profits of subsidiary		(359	)		(518	)
Accounts receivable		(4	)		(335	)
Property and equipment		(220	)		(202	)
Other		(725	)		(547	)

		(22,325	)		(27,447	)

Net deferred tax asset (liability)	$	(1,461	)	$	(1,018	)

Reconciliations between the statutory Federal income tax rate of 34% and the effective rate of income tax expense for each of the three years in the period ended December 31, 2012 are as follows:


	Year Ended December 31,
	2012			2011			2010
Statutory Federal income tax rate		34.0	%		34.0	%		34.0	%
Increase (Decrease) resulting from:
U.S. Taxes on foreign income, net of taxes paid credit		4.5	%		—			—
NOL’s recognized upon change in tax law		(2.9	%)		—			—
Domestic and foreign state and local tax, net of federal benefit		3.7	%		7.2	%		2.7	%
Nondeductible expenses		1.6	%		2.8	%		0.7	%
Nondeductible acquisition transaction expenses		—			5.0	%		—
Withholding taxes		—			1.7	%		—
Nondeductible stock option compensation		—			0.5	%		2.5	%
Research and development credits		(5.3	%)		(6.9	%)		(3.6	%)
Effect of different tax rates of foreign jurisdictions		(10.5	%)		(3.2	%)		—
Nontaxable derivative gains		—			(5.2	%)		—
Other tax exempt income		(0.5	%)		(8.5	%)		—
Reverse valuation allowance on Federal NOLs		—			—			(13.5	%)
Other		1.0	%		2.0	%		—

Effective rate		25.6	%		29.4	%		22.8	%

The Company has Net Operating Loss (“NOL”) carryforwards as follows:


Jurisdiction	Amount as of December 31, 2012		Years of Expiration
U.S. Federal income tax	$	10,165		2012 - 2023
State income taxes	$	4,002		2014 - 2016

All of the U.S. Federal NOLs were incurred prior to the June 8, 1999 Preferred Financing, which qualified as a change in ownership under Section 382 of the Internal Revenue Code (“IRC”). Due to this change in ownership, the NOL accumulated prior to the change in control can only be utilized against current earnings up to a maximum annual limitation of approximately $591. As a result of the annual limitation, approximately, $6,025 remaining of these carryforwards are expected to expire before ultimately becoming available to reduce future tax liabilities in addition to $13,324 in NOL’s generated prior to the change in control which have already expired without being utilized. Consequently, the related valuation allowance decreased by $1,503 during 2012. During 2010, we completed a study related to the 1999 change in control limitation amount and determined that an additional $4,044 NOL’s subject to the limitation were utilizable during 2010. We reversed the portion of the valuation allowance related to this adjustment totaling $1,375. A second change in control took place on September 22, 2006 when an accumulation of trades of the Company’s Common Stock by certain of the Company’s large shareholders exceeded a three year cumulative amount of 50% of the Company’s total Common Stock outstanding. The resulting annual change in control limitation of approximately $8,135 did not have an impact on the utilization of the amounts of the NOLs subject to this limitation.

Since our NOLs offset our current federal tax liability, we do not recognize for book purposes deductions allowed for stock option exercises in excess of that recorded for book purposes. As such, our deferred tax asset for book purposes related to NOLs is less than the actual NOL available. During 2011, our taxable income exceeded the remaining amount of NOLs recorded for book purposes representing a benefit attributable to deductions taken for tax purposes on stock option exercises. We recorded this benefit which totaled $171 and $3,275 for 2012 and 2011, respectively, directly to paid-in capital.

The earning before for income taxes and our tax provision are comprised of the following:


	Year Ended December 31,
	2012		2011		2010
Income before income taxes:
Domestic	$	3,735	$	12,223	$	10,823
Foreign		28,937		3,646		585

Total income before income taxes	$	32,672	$	15,869	$	11,408


	Year Ended December 31,
	2012			2011			2010
Current income tax expense:
Federal	$	511		$	213		$	298
State and local		(311	)		(242	)		638
Foreign		7,362			5,294			110

Total current income tax expense	$	7,562		$	5,265		$	1,046

Deferred income tax expense (benefit):
Federal	$	1,834		$	2,378		$	1,847
State and local		348			182			(284	)
Foreign		(1,393	)		(3,159	)		—

Total deferred income tax expense	$	789		$	(599	)	$	1,563

Total tax expense	$	8,351		$	4,666		$	2,609

The Company’s earnings outside the US are permanently reinvested. With respect to the German operations all amounts are permanently reinvested other than the earnings of certain jurisdictions for which deferred income taxes have been provided. Quantification of the deferred tax liability, if any, associated with indefinitely reinvested basis differences is not practicable.

The American Taxpayer Relief Act of 2012 (“the Act”) was signed into law on January 2, 2013. The Act retroactively restored the research and development credit and certain exemptions under the foreign income tax rules. Because a change in tax law is accounted for in the period of enactment, the retroactive effect of the Act on the Company’s U.S. federal taxes for 2012, a benefit of approximately $1.3 million will be recognized in 2013.

The Company is subject to U.S. federal income tax as well as income tax in multiple foreign and state jurisdictions. During 2010, the Internal Revenue Service (“IRS”) completed a review of our 2007 and 2008 Federal Income Tax Returns. Our 2010 and 2011 Federal tax returns are currently under audit. No state tax returns are currently under examination.

The reconciliation of the beginning and ending amount of unrecognized tax benefits that would favorably affect the effective income tax rate in the future periods is as follows:


	Year Ended December 31,
	2012		2011
Balance at beginning of year	$	1,678	$	500
Additions based on tax position related to current year		67		63
Additions based on tax positions related to prior year		413		—
Amount acquired with W.E.T Acquisition		—		1,216
Effect of foreign currency translation		33		(101	)

Balance at end of year	$	2,191	$	1,678