Income Taxes

(Loss) earnings before income taxes by geographic area are as follows (in thousands):



	Year Ended December 31,
	2012			2011			2010
United States	$	(55,754	)	$	(21,163	)	$	(1,104	)
International	(10,710		)	12,674			1,328
(Loss) earnings before income taxes	$	(66,464	)	$	(8,489	)	$	224

Income tax expense consists of the following (in thousands):



	Year Ended December 31,
	2012			2011			2010
Current:
United States	$	(3,383	)	$	3,565		$	—
State	69			700			(176		)
International	6,990			6,649			6,319
Total current	3,676			10,914			6,143
Deferred:
United States	203,511			13,070			1,509
State	7,890			(1,197		)	(291		)
International	962			(519		)	(1,812		)
Total deferred	212,363			11,354			(594		)
Income tax expense	$	216,039		$	22,268		$	5,549

With the valuation allowances recorded in 2012 and 2011, and our 2010 income near a break-even level for the year, our tax provision is presented in dollar terms rather than in percentage terms. The following is a reconciliation of income taxes at the U.S. statutory rate to the provision for income taxes (in thousands):



	2012			2011			2010
Tax at U.S. statutory rate	$	(23,262	)	$	(2,971	)	$	78
State income taxes, net of federal benefit	1,408			(729		)	(467		)
Research and experimentation tax credits	—			(901		)	(1,131		)
U.S. tax on repatriation of earnings	2,676			(131		)	31
Foreign net earnings taxed at other than U.S. statutory rate	10,817			3,613			5,883
Brazil interest on equities deduction	—			(735		)	—
Singapore enhanced research deductions	—			(344		)	—
Tax settlements	—			1,012			(811		)
Change in valuation allowance	203,805			22,527			1,200
Domestic production activities deduction	—			(472		)	(315		)
Stock compensation expense	2,603			431			692
Non-deductible acquisition costs	819			621			—
Goodwill impairment	16,733			—			—
Other items, net	440			347			389
Income tax expense	$	216,039		$	22,268		$	5,549

Deferred income taxes reflect the net tax effect of transactions which are recognized in different periods for financial and tax reporting purposes. The primary components of our deferred tax assets and liabilities are as follows (in thousands):



	2012			2011
Deferred tax assets:
Accrued expenses	$	8,339		$	9,271
Receivables and inventories	10,192			9,789
Deferred income	44,409			49,234
Net operating loss carryforwards	17,493			13,195
Capitalized R&D	35,019			54,047
Tax credit carryforwards	94,885			81,302
Postretirement obligations	46,094			45,989
Other items	5,956			13,238
Total deferred tax assets	262,387			276,065
Valuation allowance	(232,306		)	(28,993		)
Total deferred tax assets	30,081			247,072

Deferred tax liabilities:
Fixed assets	—			(1,189		)
Foreign withholding taxes	(1,451		)	—
Intangibles	(14,765		)	(20,904		)
Total deferred tax liabilities	(16,216		)	(22,093		)

Net deferred tax assets	$	13,865		$	224,979

Reported As:
Current deferred tax assets	7,225			84,541
Long-term deferred tax assets	8,514			141,064
Current deferred tax liabilities¹	(62		)	(90		)
Long-term deferred tax liabilities²	(1,812		)	(536		)
Net deferred tax assets	$	13,865		$	224,979

¹ Current deferred tax liabilities are included in accrued expenses on our consolidated balance sheets.

² Long-term deferred tax liabilities are included in other long-term liabilities on our consolidated balance sheets.

We have considered future market growth, historical and forecasted earnings, future taxable income and the mix of earnings in the jurisdictions in which we operate along with prudent, feasible and permissible tax planning strategies in determining the extent to which our deferred tax assets may be realizable. Projections inherently include a level of uncertainty that could result in lower or higher than expected future taxable income. When we determine that we will not be able to realize a portion of our net deferred tax assets in the future (using the “more likely than not” criteria), we record an adjustment to our valuation allowance and a charge to operations in the period such determination is made. Conversely, if we were to make a determination that the deferred tax assets for which there is currently a valuation allowance would be realized in the future, the related valuation allowance would be reduced and a benefit to operations would be recorded. Our deferred tax assets include substantial tax losses and tax credits that remain with us from previously discontinued operations.

In the fourth quarter of 2011, the U.S. jurisdiction moved to a cumulative loss position for the most recent three-year period ended December 31, 2011. In assessing the most objective and verifiable evidence, we used the average adjusted profitability over the previous three years to conclude that an incremental $20.9 million valuation allowance was required against a portion of our U.S. deferred tax assets. This was after considering all evidence available including future taxable temporary differences and tax planning strategies.

In the quarter ended April 1, 2012, we recorded a pre-tax loss and significantly underperformed our forecast. Accordingly, in the first quarter of 2012, in light of the current performance as well as certain changes in management, we revised our forecast downward for our U.S. operations for the remainder of 2012. We considered all the foregoing as significant, objective and verifiable negative evidence that we took into account in our assessment. We concluded that it was more likely than not that the value of such assets would not be realized and that we needed therefore to record a valuation allowance for our U.S. entities representing the full balance of these assets.

A sustained period of profitability in our U.S. operations is required before we would change our judgment regarding the need for a full valuation allowance against our U.S. deferred tax assets. In the event that we determine in the future that we expect to benefit from our deferred income tax assets in excess of the net balance at that time, we will make an adjustment to the deferred tax asset valuation allowance. This will reduce the provision for income taxes in that period. Until such time, we will offset U.S. profits against our deferred tax assets and will reduce the overall level of deferred tax assets subject to valuation allowance as a result.

At December 31, 2012, our valuation allowance of $232.3 million consisted of $222.5 million for a full valuation allowance against all of our U.S. deferred tax assets, $7.7 million for foreign net operating losses and $2.1 million for state net operating losses. During 2012, our valuation allowance increased $201.7 million related to our U.S. deferred tax assets; and $1.7 million and $0.4 million for net operating losses generated by our Singapore and Japanese subsidiaries, respectively.

As part of our supply chain restructuring in 2009, we licensed non-U.S. intellectual property exploitation rights from our domestic corporations to a wholly-owned non-U.S. subsidiary in Singapore. In 2012, 2011 and 2010, we recorded a non-cash tax expense of approximately $4.1 million annually in connection with the establishment of a Singapore headquarters for our supply chain operations and foreign sales activities. This non-cash tax expense is a recurring item regardless of the amount of income from operations, and will be reflected in tax expense annually through 2017.

Our Singapore subsidiary is an export-oriented company, which, pursuant to an agreement with the Singapore government's Economic Development Board (“EDB”), is entitled to claim a tax holiday through the year 2019. Accordingly, beginning in 2010, most of our operations in Singapore are entitled to a partial exemption from Singapore income tax subject to satisfaction of specific performance requirements defined by the EDB. Although we did not realize a tax benefit as a result of the tax holiday, in subsequent years, we expect the lower tax rate in Singapore will largely offset the annual non-cash tax charge related to the transfer of our supply chain and foreign sales activities to Asia.

We had available at December 31, 2012, $35.6 million of general business credit carry-forwards and $59.5 million of foreign tax credit carry-forwards. The general business credit carry-forwards have expiration dates ranging from 2018 through 2031. The foreign tax credit carry-forwards have expiration dates ranging from 2016 to 2021. Use of these credits may be limited due to ownership changes and other limitations provided by the Internal Revenue Code. If such a limitation applies, the credits may expire before full utilization. Based on projected income growth and tax planning strategies available to us, and subject to any valuation allowances discussed below, we believe it is more likely than not that not all of these credits will be used prior to their respective expiration dates.

At December 31, 2012, we recognized deferred tax assets for U.S. net operating loss (“NOL”) carry-forwards of $3.3 million for federal purposes and $4.2 million for state purposes. Deferred tax assets for foreign NOLs include loss carry-forwards in Singapore of $5.3 million; in Japan of $4.2 million; in Canada of $0.5 million; and in Malaysia of $0.1 million. The foreign net operating losses can generally carry forward indefinitely but may be subject to change of ownership limitations and other limitations provided by local law.

We have not made a provision for deferred U.S. income taxes on undistributed earnings of certain foreign subsidiaries that we intend to reinvest permanently outside of the U.S. The total amount of such earnings at December 31, 2012 was $17.1 million. If we distribute earnings of foreign subsidiaries in the form of dividends or otherwise, we may be subject to U.S. income taxes. Due to complexities in tax laws and various assumptions that would have to be made, it is not practicable to estimate the amount of unrecognized deferred U.S. taxes on these earnings. During 2012, we changed our permanent investment assertion with regard to Australia and France. As a result, we recognized tax expense of $3.1 million for U.S. federal and state income taxes for the year ended December 31, 2012, including $1.7 million for current-year deemed repatriation of earnings and $1.4 million for future repatriation of earnings.

The following table sets forth the reconciliation of the beginning and ending amount of unrecognized tax benefits (in thousands):



	2012		2011			2010
Balance at January 1,	$	24,291	$	24,208		$	27,605
Additions related to positions taken this year	—		164			61
Additions for tax positions of prior years	7		—			—
Reductions for tax positions of prior years	—		(48		)	(3,381		)
Reductions for tax positions of prior years lapse of statute	—		(33		)	(77		)
Balance at December 31,	$	24,298	$	24,291		$	24,208

Interest and penalties related to the underpayment of income taxes are classified as a component of tax expense in the consolidated statements of operations. We recognized no significant interest or penalties for the years ended December 31, 2012, 2011 and 2010. We had approximately $0.1 million for the payment of interest and penalties accrued for each year ending December 31, 2012, 2011 and 2010.

We file our tax returns as prescribed by the tax laws of the jurisdictions in which we operate. In the U.S., our tax years 1997 to 2012 remain effectively open to examination by the Internal Revenue Service, as well as various state jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as Australia, Brazil, Canada, China, Czech Republic, Denmark, France, Germany, Italy, Malaysia, Mexico, the Netherlands, Norway, Saudi Arabia, Spain, Singapore, Sweden, Thailand and the United Kingdom. In many cases, our uncertain tax positions are related to tax years that remain subject to examination by the relevant taxing authorities.

We believe that it is not reasonably possible that the unrecognized tax benefits for tax positions taken in previously filed tax returns will materially change within the next twelve months from those recorded as liabilities for uncertain tax positions in our consolidated financial statements at December 31, 2012. This is based on the current status of relevant examinations for specific jurisdictions.