14. INCOME TAXES

Income before income tax expense consists of the following:

	2012		2011		2010

	(in thousands)
U.S. operations	$	59,478	$	67,379	$	32,123
Foreign operations		18,858		21,447		8,724

Total	$	78,336	$	88,826	$	40,847

Income tax expense is comprised of the following:

	2012		2011			2010

	(in thousands)
Current:
Federal	$	16,766	$	16,794		$	1,488
State		3,240		3,561			1,426
Foreign		3,936		7,900			2,834

Total current:		23,942		28,255			5,748
Deferred
Federal	$	2,934	$	4,087		$	7,044
State		608		695			420
Foreign		851		(2,222	)		(389	)

Total deferred		4,393		2,560			7,075

Income tax expense	$	28,335	$	30,815		$	12,823

The following table sets forth the tax effects of temporary differences that give rise to the deferred tax assets and liabilities:

	December 31, 2012			December 31, 2011

	(in thousands)
Deferred tax assets
Accounts receivable, principally due to allowance for doubtful accounts	$	1,986		$	1,514
Inventories		3,340			2,762
Net operating loss carryforwards		8,433			8,888
Accrued pension		31,544			26,924
Stock-based compensation		4,966			7,343
Compensation-related accruals		3,209			3,103
Warranty		2,781			3,459
Obligation for postretirement benefits other than pension		4,187			4,467
Accrued liabilities and other items		4,755			4,037

Gross deferred tax assets		65,201			62,497
Valuation allowance		(7,798	)		(7,385	)

Net deferred tax assets		57,403			55,112

Deferred tax liabilities:
Intangibles		84,518			82,841
Plant and equipment		11,206			11,361

Gross deferred tax liabilities		95,724			94,202

Net deferred tax liabilities	$	(38,321	)	$	(39,090	)

Income taxes paid, net of refunds received, by the Company during 2012, 2011, and 2010 totaled $26.7 million, $13.5 million, and $0.5 million respectively.

As of December 31, 2012, the Company had net operating loss carryforwards totaling approximately $31.2 million in the United Kingdom, Germany, and Italy. The net operating loss carryforwards may be carried forward for a period of 5 years in Italy and indefinitely in the United Kingdom and Germany. The Company provides a valuation allowance against certain net foreign deferred tax assets (principally the net operating loss carryforwards) due to the uncertainty that they can be realized.

During 2012, the Company increased the valuation allowance by $0.6 million in connection with the benefits associated with net operating loss carry forwards that the Company concluded would not be realized. This entire amount was reflected as a foreign deferred income tax expense for the current year.

The following table sets forth a reconciliation of the statutory federal income tax rate to the effective income tax rate:



Federal statutory tax rate	35.0	%	35.0	%	35.0	%
Increase (decrease) in the tax rate resulting from:
State taxes, net of federal effect	3.2		3.0		2.1
Effect of tax rates of other countries	(0.5	)	(2.2	)	(0.7	)
Foreign Tax Credit-Amended Returns	—		—		(6.9	)
Section 199 deduction	(1.5	)	(1.7	)	(0.4	)
Change in Contingency Reserve	(1.9	)	—		—
Other	1.9		0.6		2.3

Effective tax rate	36.2	%	34.7	%	31.4	%

During the second quarter of 2010, the Company filed amended Federal Income Tax Returns in order to claim Foreign Tax Credits for the years 2005 through 2008. The Company realized a $2.8 million benefit, during the year ended December 31, 2010 as a result of the filing of these amended returns. During the fourth quarter of 2012, the Company received the refund claimed.

The Company has not made provisions for U.S. federal and state income taxes as of December 31, 2012 on approximately $117.2 million of foreign earnings that are expected to be reinvested indefinitely. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to U.S. federal and state income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries.

As of December 31, 2012 and 2011, the Company had unrecognized tax benefits of approximately $1.2 million and $2.0 million, respectively. The entire amount of the unrecognized tax benefits would reduce the effective tax rate if recognized.

The following table summarizes the activity related to our unrecognized tax benefits during 2012, 2011, and 2010:

	2012			2011			2010

	(in thousands)
Balance, beginning of the year	$	2,044		$	1,953		$	1,821
Additions for tax position related to the current year		125			189			112
Additions for tax position related to the prior year		191			—			69
Decreases for tax position related to the prior year		(1,102	)		—			(46	)
Prior year reductions
Settlements with taxing authorities		—			—			(47	)
Lapse of statute of limitations		(106	)		(137	)		(119	)
Change in exchange rate		—			39			163

Balance, end of the year	$	1,152		$	2,044		$	1,953

As a result of the decrease in unrecognized tax benefits during the year ended December 31, 2012, the Company reduced the accrual for interest and penalties by $0.6 million, net of deferred taxes. During 2011 and 2010, the Company recognized approximately $0.1 million of interest and penalties, net of deferred taxes. The Company has accrued approximately $0.1 million for the payment of interest and penalties at December 31, 2012, and $0.7 million for the payment of interest and penalties at December 31, 2011.

As of December 31, 2012, the Company is subject to U.S. Federal Income Tax examination for the tax years 2009 through 2012, and to non-U.S. income tax examination for the tax years 2004 to 2012. In addition, the Company is subject to state and local income tax examinations for the tax years 2004 through 2012.

There are no tax positions included in unrecognized tax benefits at December 31, 2012 for which it is reasonably possible that the total amounts could significantly change during the next twelve months.