Income Taxes

12 Months Ended

Dec. 31, 2012

Income Taxes

Note 9 – Income Taxes

A summary of the components of the provision for income taxes as of December 31, 2012, 2011 and 2010 is as follows:

(In thousands)	2012			2011		2010
Current
Federal	$	26,225		$	59,382	$	48,870
State		3,766			7,177		6,380
International		(504	)		431		274
Total Current		29,487			66,990		55,524
Deferred tax expense (benefit)		(3,785	)		575		(1,324	)
Total Provision for Income Taxes	$	25,702		$	67,565	$	54,200

The effective income tax rate differs from the federal statutory rate due to the following:

	2012			2011			2010
Tax provision computed at the federal statutory rate		35.00	%		35.00	%		35.00	%
State income tax provision, net of federal benefit		3.78			3.19			3.33
Federal research credits		—			(2.50	)		(2.90	)
Valuation allowance on losses of foreign subsidiaries		3.80			—			—
Tax-exempt income		(1.01	)		(0.27	)		(0.46	)
State tax incentives		(4.46	)		(0.90	)		(0.86	)
Stock-based compensation		2.36			0.03			0.34
Domestic production activity deduction		(3.21	)		(1.84	)		(2.37	)
Other, net		(1.03	)		0.07			0.15
Effective Tax Rate		35.23	%		32.78	%		32.23	%

Income before provision for income taxes for the years ended December 31, 2012, 2011 and 2010 is as follows:

(In thousands)	2012			2011		2010
U.S. entities	$	80,926		$	204,652	$	167,118
International entities		(7,961	)		1,490		1,071
Total	$	72,965		$	206,142	$	168,189

Income before provision for income taxes for international entities reflects income based on statutory transfer pricing agreements. This amount does not correlate to consolidated international revenues, many of which occur from our U.S. entity.

Deferred income taxes on the balance sheet result from temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes. The principal components of our current and non-current deferred taxes are as follows:

(In thousands)	2012			2011
Current deferred tax assets
Accounts receivable	$	2		$	4
Inventory		7,507			6,709
Accrued expenses		5,546			5,412
Total Current Deferred Tax Assets		13,055			12,125
Non-current deferred tax assets
Accrued expenses		116			113
Deferred compensation		4,456			3,177
Stock-based compensation		4,569			3,808
Uncertain tax positions related to state taxes and related interest		1,005			947
Pensions		605			—
Foreign and state losses and state credit carry-forwards		11,327			7,891
Federal loss and research carry-forwards		12,210			14,778
Valuation allowance		(10,939	)		(7,585	)
Total Non-current Deferred Tax Assets		23,349			23,129
Total Deferred Tax Assets	$	36,404		$	35,254
Non-current deferred tax liabilities
Accumulated depreciation	$	(6,405	)	$	(7,081	)
Intellectual property		(1,839	)		(2,594	)
Investments		(4,844	)		(5,109	)
Total Non-current Deferred Tax Liabilities	$	(13,088	)	$	(14,784	)
Net Deferred Tax Assets	$	23,316		$	20,470

At December 31, 2012 and 2011, non-current deferred tax liabilities and non-current deferred tax assets, respectively, related to investments reflect deferred taxes on unrealized gains and losses on available-for-sale investments. The net change in non-current deferred taxes associated with these investments, a deferred tax benefit of $34 thousand in 2012 and a deferred tax benefit of $7.8 million in 2011, is recorded as an adjustment to other comprehensive income, presented in the Consolidated Statements of Comprehensive Income.

We have deferred tax assets for foreign and domestic loss carry-forwards, unamortized research and development costs and state credit carry-forwards of $23.5 million which will expire between 2013 and 2030. The foreign loss carry-forwards were generated through the acquisition of a foreign entity in 2009 and through current losses at a foreign subsidiary. The unamortized research and development costs are related to our acquisition of Bluesocket in 2011. The state credit carry-forwards result from tax credits in excess of our annual tax liability to an individual state where we do not generate sufficient state income to offset the credit. We believe it is more likely than not that we will not realize the full benefits of the deferred tax asset arising from these losses and credits in various states and foreign countries, and accordingly, we have provided a valuation allowance against these deferred tax assets. We do not provide for U.S. income tax on undistributed earnings of our foreign operations, whose earnings are intended to be permanently reinvested. These earnings are not required to service debt or fund our U.S. operations.

During 2012, 2011 and 2010, we recorded an income tax benefit of $1.9 million, $10.5 million and $4.9 million, respectively, as an adjustment to equity. This deduction is calculated on the difference between the exercise price of stock option exercises and the market price of the underlying common stock upon exercise.

The change in the unrecognized income tax benefits for 2012, 2011 and 2010 is reconciled below:

(In thousands)	2012			2011			2010
Balance at beginning of period	$	2,970		$	2,593		$	2,919
Increases for tax position related to:
Prior years		965			—			197
Current year		302			840			818
Decreases for tax positions related to:
Prior years		(49	)		(92	)		(16	)
Settlements with taxing authorities		(507	)		(354	)		(630	)
Expiration of applicable statute of limitations		(755	)		(17	)		(695	)
Balance at end of period	$	2,926		$	2,970		$	2,593

As of December 31, 2012, 2011, and 2010, our total liability for unrecognized tax benefits was $2.9 million, $3.0 million, and $2.6 million, respectively, of which $2.2 million, $2.4 million, and $2.0 million, respectively, would reduce our effective tax rate if we were successful in upholding all of the uncertain positions and recognized the amounts recorded. We classify interest and penalties recognized on the liability for unrecognized tax benefits as income tax expense. As of December 31, 2012, 2011 and 2010, the balances of accrued interest and penalties were $0.8 million, $1.2 million and $1.0 million, respectively.

We do not anticipate a single tax position generating a significant increase or decrease in our liability for unrecognized tax benefits within 12 months of this reporting date. We file income tax returns in the U.S. federal and various state jurisdictions and several foreign jurisdictions. We have been audited by the Internal Revenue Service and the state of Alabama through the 2009 tax year. Generally, we are not subject to changes in income taxes by any taxing jurisdiction for the years prior to 2009.