10. Income Taxes

Components of our income (loss) from continuing operations are as follows:


	2011			2010			2009
	(In thousands)
Income (loss) from continuing operations before income taxes:
Canadian	$	(871	)	$	1,302		$	2,609
U.S.		15,928			(6,813	)		(75,798	)
Other		17,000			15,611			1,279

Total	$	32,057		$	10,100		$	(71,910	)

Components of the Company’s income tax provision (benefit) are as follows:


	2011			2010			2009
	(In thousands)
Current
Canadian	$	—		$	629		$	81
U.S.		1,358			1,781			(2,712	)
Other		1,620			3,192			623

		2,978			5,602			(2,008	)
Deferred
Canadian		—			(40	)		3,691
U.S.		(743	)		4,946			(2,565	)
Other		821			231			109

		78			5,137			1,235

Income tax provision (benefit)	$	3,056		$	10,739		$	(773	)

The Company is incorporated in Canada and therefore uses the Canadian statutory rate. The reconciliation of the statutory Canadian income tax rate related to income from continuing operations before income taxes to the effective rate is as follows:


	2011			2010			2009
	(In thousands, except percentages)
Statutory Canadian tax rate		27.0	%		28.0	%		31.5	%
Expected income tax provision (benefit)	$	8,655		$	2,828		$	(22,652	)
Permanent differences		187			9,606			1,288
International tax rate differences		1,313			(863	)		(2,858	)
Change in valuation allowance		(9,814	)		(3,778	)		22,480
Prior year provision to return differences		1,115			832			(271	)
NOL expirations		—			877			2,653
Statutory tax rate change		516			371			(41	)
Uncertain tax positions		1,332			972			732
Tax credits		(416	)		(197	)		(193	)
State income tax, net		577			520			(1,736	)
Amended returns and prior filings		(268	)		(318	)		(762	)
Other		(141	)		(111	)		587

Reported income tax provision (benefit)	$	3,056		$	10,739		$	(773	)

Effective tax rate		9.5	%		106.3	%		(1.1	)%

Deferred income taxes result principally from temporary differences in the recognition of certain revenue and expense items and operating loss carryforwards and credit carryforwards for financial and tax reporting purposes. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2011 and 2010 are as follows:


	2011			2010
	(In thousands)
Deferred tax assets
Losses & IRC Section 163(j) carryforwards	$	17,892		$	27,546
Compensation related deductions		3,533			2,271
Tax credits		6,395			5,958
Restructuring related liabilities		581			508
Deferred revenue		263			128
Transaction costs		—			1,792
Inventory		7,088			6,172
Depreciation		208			439
Amortization		32			3,675
Warranty		761			819
Other		1,231			1,105

Total deferred tax assets		37,984			50,413
Valuation allowance for deferred tax assets		(20,357	)		(29,663	)

Net deferred income tax assets	$	17,627		$	20,750

Deferred tax liabilities
Equity investment	$	(699	)	$	—
Depreciation		(3,277	)		(3,248	)
Amortization		(15,542	)		(19,884	)
Other		(822	)		(320	)

Total deferred tax liabilities	$	(20,340	)	$	(23,452	)

Net deferred income tax asset (liability)	$	(2,713	)	$	(2,702	)

In determining its fiscal 2011, 2010, and 2009 tax provisions, the Company calculated deferred tax assets and liabilities for each separate jurisdiction. Management then considered a number of factors, including positive and negative evidence related to the realization of its deferred tax assets to determine whether a valuation allowance should be recognized with respect to its deferred assets. The Company has recorded valuation allowances on its deferred tax assets in jurisdictions where it is more likely than not that the deferred tax assets will not be realized. The Company has considered forecasted earnings, the mix of earnings in the jurisdictions in which the Company operates, and prudent and feasible tax planning strategies in determining the need for valuation allowances.

In the United States, Canada, and the United Kingdom, the Company determined that it is more likely than not that it will not realize certain of its deferred tax assets. The Company has provided valuation allowances in the amount of $20.4 million and $29.7 million at December 31, 2011 and December 31, 2010, respectively. The change in valuation allowance is due to changes in the Company’s net deferred tax asset position in various jurisdictions. In conjunction with the Company’s ongoing review of its actual results and anticipated future earnings, the Company continuously reassesses the possibility of releasing the valuation allowance currently in place on its deferred tax assets. It is reasonably possible that a significant portion of the valuation allowance will be released within the next twelve months. Such a release will be reported as a reduction to income tax expense with no impact on cash flows in the quarter in which it is released.

At December 31, 2011, the Company has loss carryforwards of $17.9 million (tax effected) available to reduce future years’ income for tax purposes. Of this amount, approximately $14.6 million relates to the United States and expires through 2032; $0.4 million relates to Canada and expires starting in 2015; $2.7 million relates to the United Kingdom and can be carried forward indefinitely; and the remaining $0.2 million relates to various foreign jurisdictions.

At December 31, 2011, the Company had tax credits of approximately $6.4 million available to reduce future years’ income taxes. Of this amount, approximately $4.0 million relates to the United States and expires through 2031 and $2.4 million relates to Canada of which $1.6 million expires between 2020 and 2022 and $0.8 million can be carried forward indefinitely.

As of December 31, 2011, the amount of non-Canadian earnings that are expected to remain indefinitely reinvested in the business as defined in the provisions of ASC 740, “Income Taxes”, and for which we have not provided any tax costs of repatriation, is $13.6 million. In general, the determination of the amount of the unrecognized deferred tax liability related to the reinvested earnings is not practical because of the complexities associated with its hypothetical calculation.

As of December 31, 2010, the Company’s total amount of gross unrecognized tax benefits was $5.1 million all of which would favorably affect its effective tax rate, if recognized. As of December 31, 2011, the amount of gross unrecognized tax benefits totaled approximately $7.3 million all of which would favorably affect the Company’s effective tax rate, if recognized. The Company is currently under examination in the United States for tax years from 2000 to 2008. It is reasonably possible that the U.S. examination for the periods from 2000 to 2008 will be completed during the next 12 months, which might result in a decrease of approximately $0 to $3.6 million in the Company’s balance of unrecognized tax benefits as a result of a settlement. The Company believes that there are no other jurisdictions in which the outcome of unresolved issues or claims is likely to be material to its results of operations, financial position or cash flows. Furthermore, the Company believes that it has adequately provided for all income tax uncertainties.

The reconciliation of the total amounts of unrecognized tax benefits is as follows (in thousands):


Balance at December 31, 2008	$	4,656
Additions based on tax positions related to the current year		677

Balance at December 31, 2009		5,333
Additions based on tax positions related to the current year		241
Additions for tax positions of prior years		(36	)
Reductions for tax positions of prior years		(450	)

Balance at December 31, 2010		5,088
Additions based on tax positions related to the current year		2,318
Additions for tax positions of prior years		55
Reductions to tax positions resulting from a lapse of the applicable statute of limitations		(177	)

Balance at December 31, 2011	$	7,284

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2011 and 2010, the Company had approximately $1.2 million and $1.6 million, respectively, of accrued interest and penalties related to uncertain tax positions. During the years ended December 31, 2010 and 2009, the Company recognized approximately $0.8 million and $0.2 million, respectively, of interest and penalties related to uncertain tax positions. During the year ended December 31, 2011, the Company recognized approximately $0.2 million in interest related to uncertain tax positions and recognized a $0.5 million benefit from lower penalties related to uncertain tax positions.

The Company files income tax returns in Canada and the U.S., various states, and foreign jurisdictions. Generally, the Company is no longer subject to U.S. federal, state or local, or foreign income tax examinations by tax authorities for the years before 2000. Currently, the Company is under examination in the United States for tax years 2000 through 2008.

The Company’s income tax returns may be reviewed in the following countries for the following periods under the appropriate statute of limitations:


United States			2000 - Present
Canada			2005 - Present
United Kingdom			2008 - Present
China			2008 - Present
Japan			2007 - Present
Germany			2006 - Present