(11) INCOME TAXES

Income before income taxes for the years ended December 31, 2012, 2011 and 2010 was derived from the following sources:


(In thousands)	2012		2011		2010
Domestic	$	49,056	$	68,839	$	50,644
Foreign		50,647		59,125		50,837

Income before income taxes	$	99,703	$	127,964	$	101,481

Income tax (benefit) expense for the years ended December 31, 2012, 2011, and 2010 is summarized as follows:


(In thousands)	2012		2011			2010
Current:
Federal	$	5,797	$	2,382		$	2,587
State		654		1,335			662
Foreign		11,183		17,784			15,292

		17,634		21,501			18,541

Deferred (net of valuation allowance):
Federal		11,165		(19,853	)		—
State		168		(647	)		—
Foreign		1,914		3,216			(3,535	)

		13,247		(17,284	)		(3,535	)

Income tax expense	$	30,881	$	4,217		$	15,006

Income tax expense differs from the expected amounts based upon the statutory federal tax rates for the years ended December 31, 2012, 2011, and 2010 as follows:


(In thousands)	2012			2011			2010
Expected federal income tax at statutory rate	$	34,896		$	44,788		$	35,519
State income taxes before valuation allowance, net of federal tax effect		440			1,013			605
Income (losses) without tax expense (benefit)		(40	)		(1,357	)		215
Effect of foreign source income		(5,314	)		1,959			(6,891	)
Valuation allowance		358			(41,038	)		(13,600	)
Other items, net		541			(1,148	)		(842	)

Income tax expense	$	30,881		$	4,217		$	15,006

As a result of commitments made by the Company related to investments in tangible property and equipment, the establishment of a research and development center in 2006 and certain employment commitments, income from certain manufacturing activities in Malaysia is exempt from tax for years up through 2015. The income tax benefits attributable to the tax status of this subsidiary are estimated to be $2.4 million (two cents per diluted share), none, and $6.5 million (5 cents per diluted share) for the years ended December 31, 2012, 2011, and 2010, respectively.

The significant components of the Company’s deferred tax assets and deferred tax liabilities at December 31, 2012 and 2011 are as follows:


(In thousands)	2012			2011
Deferred tax assets attributable to:
Accounts receivable	$	389		$	300
Inventory		2,643			2,789
Accruals not currently deductible for tax purposes		10,054			10,831
Net operating loss and credit carryforwards		2,669			11,403
Capital loss carryforward		3,105			3,105
Depreciation		2,870			4,553
Equity compensation		3,155			2,280
Asset impairments		1,021			1,021
Purchased intangibles		1,396			339
Other, net		3,604			3,090

Gross deferred tax assets		30,906			39,711
Valuation allowance		(4,990	)		(4,632	)

Total deferred tax assets		25,916			35,079

Deferred tax liabilities attributable to:
Depreciation		(1,252	)		(918	)
Purchased intangible assets		(692	)		(674	)

Total deferred tax liabilities		(1,944	)		(1,592	)

Net deferred tax assets	$	23,972		$	33,487

Deferred tax assets are generally required to be reduced by a valuation allowance if, based on the weight of available positive and negative evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

As of December 31, 2012 and 2011, the Company had a net U.S. deferred tax asset position of $18.7 million and $26.2 million, respectively, which are composed of temporary differences and various tax credit carryforwards. Management believes that it is more likely than not that the benefit from certain state net operating loss carryforwards, state credits, and a federal capital loss carryforward will not be realized. In recognition of this risk, management has provided a valuation allowance of $4.4 million and $4.3 million as of December 31, 2012 and 2011, respectively, on the related deferred tax assets. If the assumptions change and management determines the assets will be realized, the tax benefits relating to any reversal of the valuation allowance on deferred tax assets at December 31, 2012 will be recognized as a reduction of income tax expense. The increase in the amount of certain state credits in fiscal 2012 that will not be realized increased the valuation allowance resulting in tax expense of $0.1 million. Management estimates taxable income of $45.9 million will be necessary to utilize the remaining U.S. deferred tax assets as of December 31, 2012.

As of December 31, 2012 and 2011, the Company had a net non-U.S. deferred tax asset position of $10.2 million and $11.9 million, respectively, for which management determined based upon the available evidence a valuation allowance of $0.6 million and $0.3 million as of December 31, 2012 and 2011, respectively, were required against the non-U.S. deferred tax assets. For other non-U.S. jurisdictions, management is relying upon projections of future taxable income to utilize deferred tax assets. Estimated taxable income of $34.2 million will be necessary to utilize the non-U.S. deferred tax assets, of which an estimated $17.0 million is related to Nihon Entegris KK, the Company’s Japanese subsidiary.

At December 31, 2012, there were approximately $299.6 million of accumulated undistributed earnings of subsidiaries outside the United States all of which are considered to be reinvested indefinitely. Management has considered its future cash needs and affirms its intention to indefinitely invest such earnings overseas to be utilized for working capital purposes, expansion of existing operations, possible acquisitions and other international items. No U.S. tax has been provided on such earnings. If they were remitted to the Company, applicable U.S. federal and foreign withholding taxes may be partially offset by available foreign tax credits. Management has concluded that it is impracticable to compute the full actual tax impact, but it estimates that $4.6 million of withholding taxes would be incurred if the $299.6 million were distributed.

At December 31, 2012, the Company had state operating loss carryforwards of approximately $2.0 million, which begin to expire in 2013; foreign tax credit carryforwards of approximately $5.7 million, which begin to expire in 2019; and foreign operating loss carryforwards of $5.1 million, which begin to expire in 2015.

Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax positions will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that fail to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. The provisions also provide guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties.

Reconciliations of the beginning and ending balances of the total amounts of gross unrecognized tax benefits for the years ended December 31, 2012 and 2011 are as follows:


(In thousands)	2012			2011
Gross unrecognized tax benefits at beginning of year	$	2,467		$	2,527
Increases in tax positions for prior years		—			11
Decreases in tax positions for prior years		(19	)		—
Increases in tax positions for current year		4,608			992
Settlements		(1,044	)		(291	)
Lapse in statute of limitations		(593	)		(772	)

Gross unrecognized tax benefits at end of year	$	5,419		$	2,467

The total amount of net unrecognized tax benefits that, if recognized, would affect the effective tax rate was $0.7 million at December 31, 2012.

The Company’s policy for recording interest and penalties associated with tax audits is to record such items as a component of income before taxes.

Penalties are recorded in other expense or income, and interest paid or received is recorded in interest expense or interest income, respectively, in the consolidated statements of operations. For the years ended December 31, 2012 and 2011, the Company has accrued interest and penalties related to unrecognized tax benefits of $1.0 million and $1.0 million, respectively. Interest and penalties of $(0.0) million, $(0.0) million and $(0.6) million were recognized in the consolidated statements of operations for the years ended December 31, 2012, 2011 and 2010, respectively.

The Company files income tax returns in the U.S. and in various state, local and foreign jurisdictions. The statute of limitations related to the consolidated Federal income tax return is closed for all years up to and including 2008. With respect to foreign jurisdictions, the statute of limitations varies from country to country, with the earliest open year for the Company’s major foreign subsidiaries being 2007.

Due to the potential for resolution of a foreign examination and the expiration of various statutes of limitations, it is reasonably possible that the Company’s gross unrecognized tax benefit balance may decrease within the next twelve months by approximately $1.9 million.

On January 2, 2013 President Obama signed into law H.R. 8, the American Taxpayer Relief Act of 2012. The Act reinstated the federal credit for increasing research expenditures retroactively to the beginning of 2012. Management estimates that during the first quarter of 2013, the Company will recognize a discrete tax benefit of approximately $1.1 million related to the credit. While other provisions of the Act may impact the filing of the 2012 federal income tax return, none of the other Act provisions are expected to have a material impact on the financial statements.