Income Taxes

12 Months Ended

Dec. 31, 2013

Income Taxes [Abstract]

Income Taxes

Note 9 – Income taxes

The components of income before income taxes are as follows:

(In thousands)		Years Ended December 31,
		2013		2012		2011
Domestic	$	41,315	$	24,100	$	6,488
Foreign		55,853		90,737		104,646
	$	97,168	$	114,837	$	111,134

The provision for income taxes charged to operations is as follows:

(In thousands)		Years Ended December 31,
		2013		2012		2011
Current tax expense:
U.S. federal	$	27,161	$	24,538	$	19,381
State		813		1,217		1,180
Foreign		4,917		10,544		8,568
Total current	$	32,891	$	36,299	$	29,129
Deferred tax expense (benefit):
U.S. federal	$	(15,401)	$	(10,305)	$	(12,790)
State		(473)		53		(234)
Foreign		(362)		(1,347)		957
Total deferred	$	(16,236)	$	(11,599)	$	(12,067)
Change in valuation allowance		-		-		-
Total provision	$	16,655	$	24,700	$	17,062

Deferred tax liabilities (assets) at December 31, 2013 and 2012 as follows:

(In thousands)		December 31,
		2013		2012
Capitalized software	$	7,748	$	7,432
Depreciation and amortization		15,550		15,404
Intangible assets		18,843		9,920
Unrealized gain on derivative instruments		898		709
Undistributed earnings of foreign subsidiaries		8,565		8,437
Gross deferred tax liabilties		51,604		41,902
Operating loss carryforwards		(108,297)		(86,285)
Vacation and other accruals		(5,147)		(5,895)
Inventory valuation and warranty provisions		(12,813)		(11,773)
Doubtful accounts and sales provisions		(1,101)		(1,229)
Unrealized exchange loss		(2,192)		(1,664)
Deferred revenue		(7,809)		(3,987)
Accrued rent expenses		(453)		(219)
10% minority stock investment		(908)		(932)
Stock-based compensation		(6,069)		(5,471)
Research and development tax credit carryforward		(2,758)		(2,421)
Foreign tax credit carryforward		(4)		-
Other		(444)		(561)
Gross deferred tax assets		(147,995)		(120,437)
Valuation allowance		103,778		91,649
Net deferred tax liability	$	7,387	$	13,114

A reconciliation of income taxes at the U.S. federal statutory income tax rate to our effective tax rate follows:

	Years Ended December 31,
	2013		2012		2011
U.S. federal statutory rate	35	%	35	%	35	%
Foreign taxes greater (less) than federal statutory rate	2		(5)		(7)
Research and development tax credits	(7)		-		(3)
Enhanced deduction for certain research and development expenses	(13)		(15)		(16)
State income taxes, net of federal tax benefit	1		1		1
Employee share-based compensation	-		2		1
Intercompany profit	(2)		2		3
Nondeductible acquisition costs	-		2		-
Domestic production activities deduction	(1)		-		-
Other	2		-		1
Effective tax rate	17	%	22	%	15	%

As of December 31, 2013,  we had a federal net operating loss carryforward of $4.3 million which expires during the years 2030 to 2032, and federal tax credit carryforwards of $2.8 million which expire during the years 2019 to 2030. These carryforwards are subject to limitations following a change in ownership.

As of December 31, 2013, 15 of our subsidiaries had available, for income tax purposes, foreign net operating loss carryforwards of an aggregate of approximately $571 million, of which $2.7 million expires during the years 2018 to 2023 and $568 million of which may be carried forward indefinitely. Our tax valuation allowance relates primarily to our ability to realize certain of these foreign net operating loss carryforwards.

In 2003, we restructured the organization of our manufacturing operation in Hungary. The tax deductible goodwill in excess of book goodwill created by this restructuring resulted in our being required to record a gross deferred tax asset of $91 million. Because we did not expect to have sufficient taxable income in the relevant jurisdiction in future periods to realize the benefit of this deferred tax asset, a full valuation allowance was established. Following the approval of the merger of our Hungarian manufacturing operation with its Hungarian parent company in December 2007, we released $9.7 million, $8.7 million and $18.3 million in 2009, 2008 and 2007, respectively, of the valuation allowance previously established for the excess tax deductible goodwill to reflect the tax benefit we expected to realize in future periods.

Effective January 1, 2010, a new tax law in Hungary provided for an enhanced deduction for the qualified research and development expenses of NI Hungary Software and Hardware Manufacturing Kft. (“NI Hungary”). During the three months ended December 31, 2009, we obtained confirmation of the application of this new tax law for the qualified research and development expenses of NI Hungary. Based on the application of this new tax law to the qualified research and development expense of NI Hungary, we no longer expect to have sufficient future taxable income in Hungary to realize the benefits of these tax assets. As such, we recorded an income tax charge of $21.6 million during the three months ended December 31, 2009, $18.4 million of which was related to a valuation allowance on the previously recognized assets created by the restructuring and $3.2 million of which was related to tax benefits from other assets that we will no longer be able to realize as a result of this change. We do not expect to realize the tax benefit of the remaining assets created by the restructuring and therefore we had a full valuation allowance against those assets at December 31, 2013.

We have not provided for U.S. federal income and foreign withholding taxes on approximately $558 million of certain non-U.S. subsidiaries’ undistributed earnings as of December 31, 2013. These earnings would become subject to taxes of approximately $185 million, if they were actually or deemed to be remitted to the parent company as dividends or if we should sell our stock in these subsidiaries. We intend to permanently reinvest the undistributed earnings.

We account for uncertainty in income taxes recognized in our financial statements using prescribed recognition thresholds and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on our tax returns. We recognized no material adjustment to the liability for unrecognized income tax benefits. A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows:

(In thousands)		2013		2012
Balance at beginning of period	$	20,920	$	19,494
Additions based on tax positions related to the current year		3,290		3,150
Additions for tax positions of prior years		337		1,764
Reductions as a result of settlement with taxing authorities		(975)		(285)
Reductions as a result the lapse of the applicable statute of limitations		-		(2,256)
Reduction for tax positions of prior years		-		(947)
Balance at end of period	$	23,572	$	20,920

All of our unrecognized tax benefits at December 31, 2013 would affect our effective income tax rate if recognized.

We recognize interest and penalties related to income tax matters in income tax expense. During the years ended December 31, 2013 and 2012, we recognized interest expense related to uncertain tax positions of approximately $337,000 and $782,000, respectively.

The tax years 2006 through 2012 remain open to examination by the major taxing jurisdictions to which we are subject.  The Internal Revenue Service (“IRS”) commenced an examination of our U.S. income tax returns for 2010 and 2011 in the second quarter of 2013.

Earnings from our operations in Malaysia are free of tax under a tax holiday effective January 1, 2013. This tax holiday expires in 2027. If we fail to satisfy the conditions of the tax holiday, this tax benefit may be terminated early. As our Malaysia manufacturing operation is still in a start-up phase, the tax holiday did not result in any income tax benefit for the year ended December 31, 2013.