Income Taxes

Domestic and foreign pre-tax (loss) income for 2012, 2011 and 2010 were as follows:



	Year ended December 31,
	2012			2011		2010
Domestic	$	(29,483	)	$	55,537	$	113,145
Foreign	(2,391		)	3,435		3,384
	$	(31,874	)	$	58,972	$	116,529

Income tax (benefit) expense for 2012, 2011 and 2010 consisted of the following:



	Year ended December 31,
	2012			2011			2010
Current:
Federal	$	1,050		$	(7,138	)	$	634
State	280			3,082			901
Foreign	1,652			278			(861		)
	2,982			(3,778		)	674
Deferred:
Federal	(12,625		)	13,974			(66,408		)
State	4,158			219			(8,374		)
Foreign	(220		)	407			(200		)
	(8,687		)	14,600			(74,982		)
Net income tax (benefit) expense	$	(5,705	)	$	10,822		$	(74,308	)

The actual income tax (benefit) expense is different from that which would have been computed by applying the statutory federal income tax rate to (loss) income before income tax. A reconciliation of income tax (benefit) expense as computed at the U.S. federal statutory income tax rate to the provision for income tax (benefit) expense for 2012, 2011 and 2010 is as follows:



	Year ended December 31,
	2012		2011		2010
Tax (benefit) expense at U.S. statutory rate	(35.0	)%	35.0	%	35.0	%
State income tax, net of federal effect	—		1.0		0.7
Change in valuation allowance	9.4		0.2		(96.4	)
Foreign income tax	0.2		(0.5	)	0.1
Foreign subsidiary tax holiday	2.4		(2.0	)	(0.9	)
Stock-based compensation	6.1		2.6		0.4
Increase (reduction) of uncertain tax position liability	1.7		(11.2	)	—
Tax credits	(1.4	)	(14.8	)	(1.8	)
State apportionment adjustment	(0.5	)	7.7		—
Other, net	(0.8	)	0.4		(0.9	)
Effective tax rate	(17.9	)%	18.4	%	(63.8	)%

Deferred income tax assets and liabilities reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts for income tax purposes. These temporary differences as of December 31, 2012 and 2011 were as follows:



	December 31, 2012			December 31, 2011
Deferred tax assets:
Capital research and development expenditures	$	4,790		$	7,334
Accrued liabilities	6,794			5,112
Impairment of investment in other companies	3,890			5,821
Inventory	7,443			6,220
Net operating loss carryforwards	33,029			50,155
Research and development, and other credits	19,411			18,404
Stock-based compensation	21,236			14,466
Other	12,544			12,008
Gross deferred tax assets	109,137			119,520
Valuation allowance	(14,518		)	(11,522		)
Total deferred tax assets	94,619			107,998
Deferred tax liabilities:
Fixed assets	(24,904		)	(47,184		)
Total deferred tax liabilities	(24,904		)	(47,184		)
Total deferred tax assets, net	$	69,715		$	60,814

The Company recorded an income tax benefit of $5,705 for 2012, income tax expense of $10,822 for 2011 and an income tax benefit of $74,308 for 2010. The 2012 tax benefit differs from the statutory rate primarily due to an increase in the valuation allowance placed upon certain state attributes and the impact of book to tax differences related to stock based compensation expense. The 2011 tax expense differs from the statutory rate primarily due to the benefit of federal and state credits and the expiration of the statute of limitations on an uncertain tax position in the current year. The 2010 tax benefit is due to a change in the assessment of the potential to realize deferred tax assets which resulted in the release of valuation allowance. In 2002, the Company determined that a valuation allowance should be recorded against all of its net deferred tax assets. Due to strong results for 2010 and increased confidence that it will continue to generate taxable income into the foreseeable future, the Company's assessment regarding the potential to realize its deferred tax assets changed. This assessment required the Company to exercise significant judgment and make estimates about its ability to generate revenue, gross profit, operating income and taxable income in future periods. The result was the release of a majority of the valuation allowance on the deferred tax assets in 2010. The increase to the valuation allowance during 2012 is primarily the result of the Company revising its estimate of its ability to utilize certain state tax attributes in future years. The increase (decrease) in the valuation allowance for the net deferred tax assets for 2012, 2011 and 2010 was $2,996, $131 and $(112,886), respectively.

At December 31, 2012, the Company had approximately $136,191 of U.S. net operating loss carryforwards available to offset future U.S. taxable income, expiring from 2017 through 2031 if unused; and $138,206 of net operating loss carryforwards for state tax purposes, expiring from 2012 through 2031 if unused. Included in these amounts are NOLs from acquisitions made in years prior to 2010 which are subject to Internal Revenue Code section 382 annual utilization limitations following an ownership change. Of the total U.S. and state NOLs, $64,308 and $11,498, respectively, were generated from stock option deductions and are not reflected in the Company's deferred tax assets. When utilized, the benefit will be credited to additional paid-in capital in the Company's consolidated balance sheets. The Company had U.S. federal income tax credits of $24,213, of which $3,463 of unrealized tax benefits have not been recorded in deferred tax assets because it did not meet the more likely than not criteria. The Company had state tax credits of $13,882, of which $5,563 has not been recorded as a deferred tax asset. These federal and state tax credits expire at various dates between 2013 and 2031. Of the total U.S. and state credits, $3,669 and $568, respectively, were generated from stock option deductions and are not reflected in the Company's deferred tax assets. In 2012 and 2011, the federal capital loss carryforward decreased by $1,575 and $1,131, respectively, due to the sale of capital assets and by $136 in 2012 due to the expiration of the carryforward period. There are no remaining federal capital loss carryforwards. The Company continues to maintain a valuation allowance against the tax effect of certain NOL and credit carryforwards, since management does not believe it is more likely than not that these benefits will be realized in future periods. Specifically, the carryforward period may expire before certain state NOL and credit carryforwards are utilized.

As of December 31, 2012, the U.S. Congress had not extended the general business credit for Research and Experimental ("R&E"). The Company has therefore not included a current year benefit for such credit in its income tax expense. However, subsequent to the end of the current year, The American Taxpayer Relief Act of 2012 was signed into law, retroactively reinstating the R&E credit for 2012 and through 2013. The expected benefit to be realized for 2012 is $4,800. U.S. income tax legislation passed at the end of 2010 affected the Company's deferred tax asset balances for 2011 and 2010. The 2010 Tax Relief Act reinstated the R&E credit for two years, through 2011. This resulted in the recognition of an additional $5,519 and $2,009 in deferred tax assets related to federal R&E credits for 2011 and 2010, respectively.

The major jurisdictions in which the Company files are the U.S., Singapore and Costa Rica. In 2012, the Company expanded its presence into Asia by increasing operations in Singapore. Tax years beginning in 2006 are subject to examination by taxing authorities, although NOL and credit carryforwards from all years are subject to examinations and adjustments for at least three years following the year in which the attributes are used. Due to agreements with the Costa Rican and Singaporean governments, the Company was granted income tax holidays of varying rates through March 2017 and December 2019, respectively. Incentives from these countries are subject to the Company meeting certain employment and investment requirements. The increase (decrease) in income tax expense for 2012 and 2011 as a result of the tax holidays was approximately $765 and $(1,309), respectively.

No provision has been made for the U.S., state or additional foreign income taxes related to approximately $110,010 of undistributed earnings of foreign subsidiaries which have been permanently reinvested outside the U.S. except for existing earnings that have been previously taxed. It is not practicable to determine the U.S. federal income tax liability, if any, which would be payable if such earnings were not permanently reinvested outside the U.S. In the event the foreign subsidiaries repatriate these earnings, the earnings may be subject to U.S. federal and state income taxes and foreign withholding taxes.

The Company's current cash, cash equivalent and short-term investment balances, (consisting of $62,869 in domestic balances and $76,089 in foreign balances) together with cash anticipated to be generated from operations and the balance available on its $200,000 syndicated credit facility, constitute the Company's principal sources of liquidity. The Company believes these sources of liquidity will satisfy its projected working capital, capital expenditure and possible investment needs domestically through the next twelve months. The Company intends to permanently reinvest all foreign earnings except existing earnings that have been previously taxed. The Company is not presently aware of any restrictions on the repatriation of these funds. If these funds were needed to fund the Company's operations in the U.S., they could be repatriated. Repatriation of the Company's foreign funds would require board approval and could result in additional U.S. income taxes and foreign withholding taxes which could be partially offset by net operating losses and/or foreign tax credits. Determining the amount of possible future taxes is not practicable.

The Company's net unrecognized tax benefits totaled $2,809 and $735 as of December 31, 2012 and December 31, 2011, respectively. Net unrecognized tax benefits included accumulated interest and penalties of $590 as of December 31, 2012. There were no accumulated interest and penalties as of December 31, 2011. No changes to the unrecognized tax benefits existing as of December 31, 2012 are anticipated within the next twelve months.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for 2012 and 2011, which includes amounts recorded in income taxes payable as well as amounts not recorded in the Company's deferred tax assets and excludes interest and penalties, is as follows:



Balance December 31, 2010	$	6,271
Additions	11,442
Expiration of statute of limitations	(7,332		)
Balance December 31, 2011	$	10,381
Reductions	(3,285		)
Additions	2,793
Balance December 31, 2012	$	9,889