Note 12—Income Taxes

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

	2012			2011			2010

Domestic	$	(11.6	)	$	(25.3	)	$	(12.5	)
Foreign		149.9			170.8			162.6

	$	138.3		$	145.5		$	150.1

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

	2012			2011			2010

Current income tax (benefit) expense:
Federal	$	1.4		$	(0.6	)	$	0.3
State		0.9			0.2			—
Foreign		69.5			56.7			56.6

Total current income tax expense		71.8			56.3			56.9
Deferred income tax (benefit):
Federal		1.2			(3.8	)		0.3
State		—			(0.9	)		—
Foreign		(12.9	)		(0.1	)		(3.9	)

Total deferred income tax (benefit)		(11.7	)		(4.8	)		(3.6	)

Income tax provision	$	60.1		$	51.5		$	53.3

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



Statutory tax rate	35.0	%	35.0	%	35.0	%
Foreign tax rate differential	(7.2	)	(8.0	)	(5.7	)
Permanent differences	18.7		12.8		13.7
Tax contingencies	3.0		6.1		4.4
Change in tax rates	(0.7	)	0.2		0.1
Withholding taxes	0.3		—		(1.3	)
State income taxes, net of federal benefits	0.3		(0.3	)	0.7
Purchase accounting	0.9		(3.0	)	0.2
Tax Credits	(9.5	)	(5.1	)	(4.1	)
Other	0.1		(1.5	)	(0.5	)
Change in valuation allowance for unbenefitted losses	2.6		(0.8	)	(7.0	)

Effective tax rate	43.5	%	35.4	%	35.5	%

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):

	2012			2011

Deferred tax assets:
Accounts receivable	$	1.3		$	—
Accrued expenses		0.8			6.1
Compensation		8.6			8.2
Investments		0.8			4.2
Deferred revenue		2.2			4.4
Net operating loss carryforwards		10.6			15.3
Capital loss carryforwards		—			0.3
Foreign tax and other tax credit carryforwards		15.5			14.8
Foreign statutory reserves		15.0			4.9
Unrealized currency gain/loss		4.8			—
Warranty reserve		3.1			2.9
Other		0.6			1.3

Gross deferred tax assets		63.3			62.4
Less valuation allowance		(39.9	)		(33.7	)

Total deferred tax assets		23.4			28.7

Deferred tax liabilities:
Accounts receivable		0.1			1.0
Fixed assets		2.8			4.0
Foreign statutory reserves		5.8			12.5
Investments		0.3			2.5
Inventory		0.3			0.6
Intangibles		5.8			7.6
Accrued expenses		3.9			3.8
Other		—			3.0

Total deferred tax liabilities		19.0			35.0

Net deferred tax liability	$	4.4		$	(6.3	)

The valuation allowance was determined through an assessment of both positive and negative evidence 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.

As of December 31, 2012, the Company has approximately $27.9 million of U.S. net operating loss carryforwards available to reduce future state taxable income which expire at various times through 2032 and approximately $51.9 million of German Trade Tax net operating losses that are carried forward indefinitely. The Company also has U.S. tax credits of approximately $13.0 million available to offset future tax liabilities that expire at various dates, which include research and development tax credits of $11.6 million expiring at various times through 2032 and foreign tax credits of $1.4 million expiring at various times through 2022. Utilization of the U.S. net operating loss carryforwards and credits may be subject to annual limitations due to the ownership percentage change limitations provided by the Internal Revenue Code Section 382 and similar state provisions. In the event of a deemed change in control under Internal Revenue Code Section 382, an annual limitation on the utilization of net operating losses and credits may result in the expiration of all or a portion of the net operating loss and credit carryforwards.

The Company has permanently reinvested the earnings of its subsidiaries in the cumulative amount of approximately $979.8 million as of December 31, 2012, 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 gross unrecognized tax benefits of approximately $42.1 million as of December 31, 2012, of which $23.6 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
Gross increases—tax positions in prior periods		5.9
Gross decreases—tax positions in prior periods		(2.2	)
Gross increases—current period tax positions		12.0
Settlements		(4.6	)
Lapse of statutes		(3.6	)

Gross unrecognized tax benefits at December 31, 2012	$	42.1

The Company recognizes penalties and interest related to unrecognized tax benefits in the provision for income taxes. As of December 31, 2012 and 2011, the Company had approximately $3.7 million and $5.6 million, respectively, of accrued interest and penalties related to uncertain tax positions included in other current liabilities in the consolidated balance sheets. Penalties and interest related to unrecognized tax benefits of $2.0 million and $1.3 million were recorded in the provision for income taxes during the year ended December 31, 2012 and 2011, respectively.

The Company files tax returns in the United States, which include federal, state and local jurisdictions and many foreign jurisdictions with varying statutes of limitations. The Company considers Germany, the United States and Switzerland to be its significant tax jurisdictions. The tax years 2009 to 2012 are open tax years in these significant jurisdictions. In the fourth quarter of 2012, the Company settled tax audits in Switzerland and Germany. The Company recorded an additional $4.6 million, $6.3 million and $2.8 million of tax reserves related to these audits in 2012, 2011 and 2010, respectively. In addition, the Company has been contacted by the United States Internal Revenue Service and a tax audit has commenced in 2012 for the tax year 2010. It is expected that this audit will be completed in the fourth quarter of 2013.