Income Taxes

12 Months Ended

Dec. 31, 2011

Income Taxes

Income Taxes

Note 12—Income Taxes

        The domestic and foreign components of income before taxes are as follows for the years ended December 31, (in millions):

	2011			2010			2009
Domestic	$	(25.3	)	$	(12.5	)	$	(11.5	)
Foreign		170.8			162.6			140.6
	$	145.5		$	150.1		$	129.1

        The components of the income tax provision are as follows for the years ended December 31, (in millions):

	2011			2010			2009
Current income tax (benefit) expense:
Federal	$	(0.6	)	$	0.3		$	1.6
State		0.2			—			0.8
Foreign		56.7			56.6			47.8
Total current income tax expense, net		56.3			56.9			50.2
Deferred income tax (benefit):
Federal		(3.8	)		0.3			(0.4	)
State		(0.9	)		—			—
Foreign		(0.1	)		(3.9	)		(1.7	)
Total deferred income tax (benefit)		(4.8	)		(3.6	)		(2.1	)
Income tax provision	$	51.5		$	53.3		$	48.1

        A reconciliation of the United States federal statutory rate to the effective income tax rate is as follows for the years ended December 31:

	2011			2010			2009
Statutory tax rate		35.0	%		35.0	%		35.0	%
Foreign tax rate differential		(8.0	)		(5.7	)		(9.9	)
Permanent differences		0.3			1.8			3.0
Tax contingencies		6.1			4.4			2.4
Change in tax rates		0.2			0.1			0.1
Withholding taxes		—			(1.3	)		0.2
State income taxes, net of federal benefits		(0.3	)		—			0.5
Purchase accounting		(3.0	)		0.2			—
Other		(1.5	)		(0.5	)		3.2
Effective tax rate before valuation allowance		28.8	%		34.0	%		34.5	%
Change in valuation allowance for unbenefitted losses		6.6	%		1.5	%		2.8	%
Effective tax rate		35.4	%		35.5	%		37.3	%

        The tax effect of temporary items that give rise to significant portions of the deferred tax assets and liabilities are as follows as of December 31, (in millions):

	2011			2010
Deferred tax assets:
Accounts receivable	$	—		$	0.8
Accrued expenses		6.1			5.1
Compensation		8.2			4.3
Investments		4.2			2.5
Inventory		—			2.6
Deferred revenue		4.4			4.3
Net operating loss carryforwards		15.3			15.5
Capital loss carryforwards		0.3			4.3
Foreign tax and other tax credit carryforwards		14.8			8.0
Foreign statutory reserves		4.9			3.6
Warranty reserve		2.9			5.3
Other		1.3			2.0
Gross deferred tax assets		62.4			58.3
Less valuation allowance		(33.7	)		(37.2	)
Total deferred tax assets		28.7			21.1
Deferred tax liabilities:
Accounts receivable		1.0			0.5
Fixed assets		4.0			4.0
Foreign statutory reserves		12.5			18.2
Investments		2.5			—
Inventory		0.6			1.3
Intangibles		7.6			—
Accrued expenses		3.8			0.8
Other		3.0			3.2
Total deferred tax liabilities		35.0			28.0
Net deferred tax liability	$	(6.3	)	$	(6.9	)

        The valuation allowance was determined through an assessment of both positive and negative evidence as to whether it is more likely than not that deferred tax assets are recoverable. The Company's assessment was made on a jurisdiction-by-jurisdiction basis. The Company fully reserved all U.S. net deferred tax assets, which are predominantly net operating losses and tax credit carryforwards. The Company's inability to project future profitability in the U.S. beyond fiscal year 2012 represents sufficient negative evidence to record a valuation allowance against certain deferred tax assets.

        As of December 31, 2011, the Company has approximately $0.2 million of U.S. net operating loss carryforwards available to reduce future taxable income which expire at various times through 2021 and approximately $44.3 million of German Trade Tax net operating losses that are carried forward indefinitely. The Company also has U.S. tax credits of approximately $14.1 million available to offset future tax liabilities that expire at various dates, which include research and development tax credits of $9.6 million expiring at various times through 2031 and foreign tax credits of $4.5 million expiring at various times through 2021. The U.S. operating loss and tax credit carryforwards may be subject to limitations under provisions of the Internal Revenue Code. The Company was able to release a portion of the valuation allowance on its deferred tax assets in the U.S. because of deferred tax liabilities arising from the identified intangible assets acquired in connection with the tribology and HPLC businesses. Because the Company maintains a full valuation allowance on its deferred tax assets in the U.S., the deferred tax liabilities recorded in connection with these acquisitions represents a source of future taxable income that allows us to utilize a portion of the deferred tax assets.

        The Company has permanently reinvested the earnings of its subsidiaries in the cumulative amount of approximately $920.7 million as of December 31, 2011, and therefore has not provided for U.S. income taxes that could result from the distribution of such earnings to the U.S. parent. If these earnings were ultimately distributed to the U.S. in the form of dividends or otherwise, or if the shares of the subsidiaries were sold or transferred, the Company would likely be subject to additional U.S. income taxes, net of the impact of any available foreign tax credits. It is not practical to estimate the amount of unrecognized deferred U.S. income taxes on these undistributed earnings.

        The Company has unrecognized tax benefits of approximately $34.6 million as of December 31, 2011, of which $27.7 million, if recognized, would result in a reduction of the Company's effective tax rate. A tabular reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):

Gross unrecognized tax benefits at December 31, 2009	$	23.2
Gross increases—tax positions in prior periods		3.1
Gross decreases—tax positions in prior periods		(1.4	)
Gross increases—current period tax positions		2.1
Gross unrecognized tax benefits at December 31, 2010		27.0
Gross increases—tax positions in prior periods		5.5
Gross decreases—tax positions in prior periods		(0.6	)
Gross increases—current period tax positions		3.1
Gross decreases—current period tax positions		(0.4	)
Gross unrecognized tax benefits at December 31, 2011	$	34.6

        The Company recognizes penalties and interest related to unrecognized tax benefits in the provision for income taxes. As of December 31, 2011, the Company had approximately $5.6 million of accrued penalties and interest related to uncertain tax positions included in other current liabilities in the consolidated balance sheet, of which $1.3 million was recorded during the year ended December 31, 2011.

        The Company files returns in many foreign and state jurisdictions with varying statutes of limitations and considers Germany, the United States and Switzerland to be its significant tax jurisdictions. The tax years 2003 to 2011 are open tax years in these major taxing jurisdictions. One of the Company's Swiss entities is currently being audited for the tax years 2003-2006 and the audit is expected to be completed in the first half of 2012. In addition, all of the Company's significant German subsidiaries are under tax audit for the years 2003-2008 and these audits are expected to be completed in the second half of 2012. The Company recorded an additional $6.3 million and $2.8 million of reserves related to these audits in 2011 and 2010, respectively.