Note 11: Income Taxes

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


	Year Ended December 31,
	2011			2010			2009
United States	$	(21,163	)	$	(1,104	)	$	(26,871	)
International		12,674			1,328			7,736

(Loss) earnings from continuing operations before income taxes	$	(8,489	)	$	224		$	(19,135	)

Income taxes from continuing operations consist of the following provision (in thousands):


	Year Ended December 31,
	2011			2010			2009
Current:
United States	$	3,565		$	-		$	(708	)
State		700			(176	)		1,993
International		6,649			6,319			3,067

Total current		10,914			6,143			4,352
Deferred:
United States		13,070			1,509			(11,001	)
State		(1,197	)		(291	)		(1,836	)
International		(519	)		(1,812	)		222

Total deferred		11,354			(594	)		(12,615	)

Income tax expense (benefit)	$	22,268		$	5,549		$	(8,263	)

With the valuation allowance recorded in 2011 and our 2010 income at a near breakeven 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 from continuing operations before income taxes at the U.S. statutory rate to the provision for income taxes (in thousands):


	2011			2010			2009
Tax at U.S. statutory rate	$	(2,971	)	$	78		$	(6,697	)
State income taxes, net of federal benefit		(729	)		(467	)		154
Research and experimentation tax credits		(901	)		(1,131	)		(942	)
U.S tax on repatriation of earnings		(131	)		31			73
Foreign net earnings taxed at other then U.S statutory rate		3,613			5,883			(741	)
Brazil interest on equities deduction		(735	)		-			-
Singapore enhanced research deductions		(344	)		-			-
Tax settlements		1,012			(811	)		(810	)
Change in valuation allowance		22,527			1,200			169
Domestic production activities deduction		(472	)		(315	)		(259	)
Stock compensation expense		431			692			778
Non deductible acquisition costs		621			-			-
Other items		347			389			12

Provision (benefit) for income taxes	$	22,268		$	5,549		$	(8,263	)

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):


	2011			2010
Deferred tax assets:
Accrued expenses	$	9,271		$	6,167
Receivables and inventories		9,789			11,506
Deferred income		49,234			39,911
Net operating loss carryforwards		13,195			6,307
Capitalized R&D		54,047			46,386
Tax credit carryforwards		81,302			87,775
Postretirement obligations		45,989			35,786
Intangibles		-			949
Other items		13,238			7,843

Total current deferred tax assets		276,065			242,630
Valuation allowance		(28,993	)		(2,682	)

Net deferred tax assets		247,072			239,948


Deferred tax liabilities:
Fixed assets		(1,189	)		(43	)
Intangibles		(20,904	)		-

Net deferred tax liabilities		(22,093	)		(43	)



Net deferred tax assets	$	224,979		$	239,905


Reported As:
Current deferred income tax assets		84,541			45,725
Long-term deferred income tax assets		141,064			194,597
Current deferred income tax liabilities		(90	)		(26	)
Long-term deferred income tax liabilities		(536	)		(391	)

Net deferred tax assets	$	224,979		$	239,905

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 asset in the future (using the "more likely than not" criteria prescribed by ASC 740), we record an adjustment to our valuation allowance and a charge to earnings 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 earnings 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. At December 31, 2011, our valuation allowance consist of $20.9 million for U.S. tax credit carry forwards, $6.0 million for foreign net operating losses and $2.0 million for state net operating losses. At December 31, 2011 our valuation allowance increased $0.8 and $0.8 million for net operating losses generated by our Singapore and Japanese subsidiaries, respectively. In 2011, we also increased our valuation allowance by approximately $5.0 million through acquisition accounting losses of newly acquired subsidiaries.

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 2010 and 2011, 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, 2011, $33.4 million of general business credit carry-forwards and $48.1 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 all of these credits will be used prior to their respective expiration dates.

At December 31, 2011, we recognized deferred tax assets for U.S. net operating loss ("NOL") carry-forwards of $1.0 million for federal purposes and $3.7 million for state purposes. Deferred tax assets for foreign NOLs include loss carry-forwards in Canada of $0.7 million; in Malaysia of $0.1 million; in the Netherlands of $0.5 million; in Japan of $3.7 million; and in Singapore of $3.5 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 had available at December 31, 2011, capital loss carry-forwards in the U.K. of approximately $23.0 million, which carry forward indefinitely; however, no deferred tax asset has been recognized for capital loss carry-forwards in the U.K.

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 as of December 31, 2011, was $61.1 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.

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


	2011			2010			2009
Balance at January 1,	$	24,208		$	27,605		$	19,938
Additions related to positions taken this year		164			61			7,760
Additions for tax positions of prior years		-			-			-
Reductions for tax positions of prior years		(48	)		(3,381	)		-
Reductions for tax positions of prior years lapse of statute		(33	)		(77	)		(93	)
Settlements		-			-			-

Balance at December 31,	$	24,291		$	24,208		$	27,605

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, 2011, 2010 and 2009. We had approximately $0.1 million for the payment of interest and penalties accrued for each year ending December 31, 2011, 2010 and 2009.

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 2011 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, 2011. This is based on the current status of relevant examinations for specific jurisdictions.