Note 12—Income Taxes

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

	2013			2012			2011

Domestic	$	(42.4	)	$	(11.6	)	$	(25.3	)
Foreign		167.0			149.9			170.8


	$	124.6		$	138.3		$	145.5

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

	2013			2012			2011

Current income tax (benefit) expense:
Federal	$	0.2		$	1.4		$	(0.6	)
State		0.2			0.9			0.2
Foreign		35.0			69.5			56.7


Total current income tax expense		35.4			71.8			56.3
Deferred income tax (benefit):
Federal		(1.8	)		1.2			(3.8	)
State		(0.6	)		—			(0.9	)
Foreign		9.8			(12.9	)		(0.1	)


Total deferred income tax (benefit)		7.4			(11.7	)		(4.8	)


Income tax provision	$	42.8		$	60.1		$	51.5

The income tax (benefit) provision differs from the tax provision computed at the U.S federal statutory rate due to the following significant components for the years ended December 31:



Statutory tax rate	35.0	%	35.0	%	35.0	%
Foreign tax rate differential	(10.2	)	(7.2	)	(8.0	)
Permanent differences	12.0		18.7		12.8
Tax contingencies	(1.1	)	3.0		6.1
Change in tax rates	0.1		(0.7	)	0.2
Withholding taxes	0.1		0.3		—
State income taxes, net of federal benefits	0.1		0.3		(0.3	)
Purchase accounting	0.8		0.9		(3.0	)
Tax credits	(8.6	)	(9.5	)	(5.1	)
Other	0.6		0.1		(1.5	)
Change in valuation allowance for unbenefitted losses	5.5		2.6		(0.8	)


Effective tax rate	34.3	%	43.5	%	35.4	%

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):

	2013			2012

Deferred tax assets:
Accounts receivable	$	2.7		$	1.3
Accrued expenses		3.1			0.8
Compensation		10.7			8.6
Investments		0.5			0.8
Deferred revenue		4.1			2.2
Net operating loss carryforwards		11.4			10.6
Capital loss carryforwards		0.8			—
Foreign tax and other tax credit carryforwards		18.8			15.5
Foreign statutory reserves		—			15.0
Unrealized currency gain/loss		4.5			4.8
Warranty reserve		2.0			3.1
Other		3.6			0.6


Gross deferred tax assets		62.2			63.3
Less valuation allowance		(42.4	)		(39.9	)


Total deferred tax assets		19.8			23.4


Deferred tax liabilities:
Accounts receivable		0.4			0.1
Fixed assets		2.1			2.8
Foreign statutory reserves		—			5.8
Investments		0.2			0.3
Inventory		0.9			0.3
Intangibles		7.4			5.8
Accrued expenses		15.5			3.9
Unrealized currency gain/loss		4.2			—


Total deferred tax liabilities		30.7			19.0


Net deferred tax liability	$	(10.9	)	$	4.4

The Company uses the liability method to account for income taxes. Under this method, deferred income taxes are recognized for the future tax consequences of differences between the tax and financial accounting bases of assets and liabilities at each reporting period. Deferred income taxes are based on enacted tax laws and statutory tax rates applicable to the period in which these differences are expected to affect taxable income. A valuation allowance is established when necessary to reduce deferred tax assets to the expected realized amounts.

The Company can only recognize a deferred tax asset to the extent this it is "more likely than not" that these assets will be realized. After considering all available positive and negative evidence, the Company established a valuation allowance against deferred tax assets in certain jurisdictions as it is more likely than not that these assets will not be realized. In determining the realizability of these assets, the Company considered numerous factors including historical profitability, the character and estimated future taxable income, prudent and feasible tax planning strategies, and the industry in which it operates. The Company fully reserved all U.S. net deferred tax assets, which are predominantly net operating losses and tax credit carryforwards. The Company's valuation allowance at December 31, 2013 increased by $2.5 million from the balance at December 31, 2012, due primarily to unbenefited losses and credits in the U.S. Also during 2013, the Company reduced its beginning-of-the-year valuation allowance by $3.3 million to account for deferred tax liabilities recorded in conjunction with the acquisition of Prairie Technologies, Inc. that caused a change in judgment with respect to the realizability of the Company's deferred tax assets in future years.

As of December 31, 2013, the Company has approximately $30.3 million of U.S. net operating loss carryforwards available to reduce future state taxable income which expire at various times through 2033 and approximately $54.3 million of German Trade Tax net operating losses that are carried forward indefinitely. Additionally, the Company has $8.6 million of other foreign net operating losses that are expected to expire at various times beginning in 2022. The Company also has U.S. tax credits of approximately $18.8 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 2033 and foreign tax credits of $7.2 million expiring at various times through 2023. 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 reflects certain foreign statutory reserves in its tabular reconciliation of unrecognized tax benefits. Effective for the year ended December 31, 2013, these tax benefits are presented as a reduction of the associated net deferred tax assets.

The Company has indefinitely reinvested the earnings of its subsidiaries in the cumulative amount of approximately $1,054.0 million as of December 31, 2013, 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 practicable to estimate the amount of unrecognized deferred U.S. income taxes on these undistributed earnings.

The Company has gross unrecognized tax benefits, excluding interest, of approximately $32.7 million as of December 31, 2013, of which $14.1 million, if recognized, would reduce the Company's effective tax rate. In the next twelve months it is reasonably possible that the Company will reduce its unrecognized tax benefits by $1-3 million due to statutes of limitations expiring and favorably settling with taxing authorities which would reduce 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, 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
Gross decreases—tax positions in prior periods		(0.5	)
Gross increases—current period tax positions		0.7
Settlements		(7.1	)
Lapse of statutes		(2.5	)


Gross unrecognized tax benefits at December 31, 2013	$	32.7

The Company's policy is to include accrued interest and penalties related to unrecognized tax benefits and income tax liabilities, when applicable, in income tax expense. As of December 31, 2013 and 2012, the Company had approximately $3.8 million and $3.7 million, respectively, of accrued interest and penalties related to uncertain tax positions included in other long-term liabilities in the consolidated balance sheets. Penalties and interest related to unrecognized tax benefits of $0.9 million and $2.0 million were recorded in the provision for income taxes during the year ended December 31, 2013 and 2012, respectively.

The Company files tax returns in the U.S., which include federal, state and local jurisdictions and many foreign jurisdictions with varying statutes of limitations. The Company considers Germany, the U.S. and Switzerland to be its significant tax jurisdictions. The tax years 2009 to 2012 are open tax years in these significant foreign jurisdictions. In the fourth quarter of 2012, the Company settled tax audits in Switzerland and Germany. In the first quarter of 2014, the Company settled a tax audit in the U.S. for the tax year 2010. The settlement was immaterial to the consolidated financial statements. Tax years 2011 to 2012 remain open for examination in the U.S.