Note 12—Income Taxes

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

	2015		2014			2013
Domestic	$	31.6	$	(83.2	)	$	(42.4	)
Foreign		96.4		184.5			167.0

	$	128.0	$	101.3		$	124.6

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

	2015			2014			2013
Current income tax (benefit) expense:
Federal	$	5.7		$	(1.1	)	$	0.2
State		1.3			0.4			0.2
Foreign		50.0			50.8			35.0

Total current income tax expense		57.0			50.1			35.4
Deferred income tax (benefit) expense:
Federal		(31.1	)		0.7			(1.8	)
State		(2.4	)		(0.1	)		(0.6	)
Foreign		(0.4	)		(9.0	)		9.8

Total deferred income tax (benefit) expense		(33.9	)		(8.4	)		7.4

Income tax provision	$	23.1		$	41.7		$	42.8

The income tax 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,:

	2015			2014			2013
Statutory tax rate		35.0	%		35.0	%		35.0	%
Foreign tax rate differential		(3.6	)		(12.1	)		(10.2	)
Permanent differences		(2.0	)		9.6			12.0
Tax contingencies		2.3			(0.9	)		(1.1	)
Change in tax rates		1.3			(1.6	)		0.1
Withholding taxes		8.1			0.6			0.1
State income taxes, net of federal benefits		(0.9	)		0.2			0.1
Purchase accounting		0.8			0.7			0.8
Tax credits		(1.1	)		(4.3	)		(8.6	)
Other		(2.7	)		(1.2	)		0.6
Change in valuation allowance for unbenefited losses		(19.2	)		15.2			5.5

Effective tax rate		18.0	%		41.2	%		34.3	%

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):

	2015			2014
Deferred tax assets:
Accounts receivable	$	2.0		$	1.0
Accrued expenses		4.7			0.8
Compensation		30.1			21.0
Investments		1.4			0.6
Deferred revenue		0.2			3.9
Net operating loss carryforwards		16.0			30.3
Fixed assets		0.8			—
Inventory		2.9			—
Foreign tax and other tax credit carryforwards		32.3			21.8
Unrealized currency gain/loss		6.1			0.2
Warranty reserve		—			1.1
Other		7.5			5.7

Gross deferred tax assets		104.0			86.4
Less valuation allowance		(37.2	)		(57.4	)

Total deferred tax assets		66.8			29.0

Deferred tax liabilities:
Accounts receivable		0.6			2.9
Fixed assets		—			1.9
Foreign statutory reserves		5.3			4.5
Investments		—			0.1
Inventory		—			0.3
Intangibles		9.4			13.1
Accrued expenses		8.0			—

Total deferred tax liabilities		23.3			22.8

Net deferred tax assets	$	43.5		$	6.2

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. Judgments around realizability depend on the availability and weight of both positive and negative evidence. After considering all available evidence at December 31, 2015 the Company established valuation allowances against a portion of its deferred tax assets in the U.S. and certain other jurisdictions as it is more likely than not that these assets will not be realized. In particular, the Company recorded a partial valuation allowance against its U.S. net deferred tax assets, which was comprised of deductible temporary differences and tax credit carryforwards. In determining the realizability of these assets, the Company considered numerous factors including historical profitability, the character and amount of estimated future taxable income and prudent and feasible tax planning strategies.

The Company's valuation allowance at December 31, 2015 decreased $20.1 million as compared to December 31, 2014, including a reduction to the beginning of the year valuation allowance of $20.8 million, to account for a change in judgment with respect to the realizability of the Company's U.S. deferred tax assets. This decrease was primarily attributable to U.S. net operating loss and foreign tax credit usage as a result of the repatriation of $235.3 million of foreign earnings to the United States during 2015 prompted by adverse interest rate conditions in Europe that were unfavorably impacting cash balances. Among the evidence supporting the Company's conclusion around realizability of these deferred tax assets was the elimination of recent cumulative U.S. losses as well as expected future near term U.S. taxable income.

As of December 31, 2015, the Company had approximately $3.0 million of net operating loss carryforwards available to reduce state taxable income; approximately $42.4 million of German Trade Tax net operating losses that are carried forward indefinitely; and $42.9 million of other foreign net operating losses that are expected to expire at various times beginning in 2018. The Company also had U.S. federal tax credits of approximately $27.8 million available to offset future tax liabilities that expire at various dates, which include research and development tax credits of $14.0 million expiring at various times through 2034, foreign tax credits of $13.8 million expiring at various times through 2024, and state research and development tax credits of $7.1 million. Utilization of these credits and state net operating losses 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. These unrecognized 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 $1,456.1 million as of December 31, 2015, 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. The Company estimates the amount of unrecognized deferred U.S. income taxes on these undistributed earnings to be approximately $120 million.

The Company has gross unrecognized tax benefits, excluding interest, of approximately $26.9 million as of December 31, 2015, of which $13 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 $5.2 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, 2012	$	61.1
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		51.7
Gross decreases—tax positions in prior periods		(6.4	)
Gross decreases—current period tax positions		(0.3	)
Settlements		(0.6	)
Lapse of statutes		(4.4	)

Gross unrecognized tax benefits at December 31, 2014		40.0
Gross decreases—tax positions in prior periods		(1.5	)
Gross increases—current period tax positions		0.4
Settlements		(2.7	)
Lapse of statutes		(3.0	)

Gross unrecognized tax benefits at December 31, 2015	$	33.2

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, 2015 and 2014, the Company had approximately $4.7 million and $3.6 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 $1.4 million and $0.1 million were recorded in the provision for income taxes during the year ended December 31, 2015 and 2014, 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 2014 are open tax years in these significant foreign jurisdictions. In the first quarter of 2014, the Company settled a tax audit in the U.S. for the tax year 2010. In the third quarter of 2015, the Company settled tax audits in Germany and Italy. The settlement was immaterial to the consolidated financial statements. Tax years 2011 to 2014 remain open for examination in the U.S.