Note 12—Income Taxes

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

	2016		2015		2014
Domestic	$	18.4	$	31.6	$	(83.2	)
Foreign		159.2		96.4		184.5

	$	177.6	$	128.0	$	101.3

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

	2016			2015			2014
Current income tax (benefit) expense:
Federal	$	(2.4	)	$	5.7		$	(1.1	)
State		0.3			1.3			0.4
Foreign		59.8			50.0			50.8

Total current income tax expense		57.7			57.0			50.1
Deferred income tax (benefit) expense:
Federal		3.1			(31.1	)		0.7
State		(5.3	)		(2.4	)		(0.1	)
Foreign		(32.4	)		(0.4	)		(9.0	)

Total deferred income tax (benefit) expense		(34.6	)		(33.9	)		(8.4	)

Income tax provision	$	23.1		$	23.1		$	41.7

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:

	2016			2015			2014
Statutory tax rate		35.0	%		35.0	%		35.0	%
Foreign tax rate differential		(11.6	)		(3.6	)		(12.1	)
Permanent differences		8.2			(2.0	)		9.6
Tax contingencies		(3.0	)		2.3			(0.9	)
Change in tax rates		0.2			1.3			(1.6	)
Withholding taxes		1.3			8.1			0.6
State income taxes, net of federal benefits		(2.9	)		(0.9	)		0.2
Purchase accounting		1.6			0.8			0.7
Tax credits		(3.0	)		(1.1	)		(4.3	)
Other		4.3			(2.7	)		(1.2	)
Change in valuation allowance for unbenefitted losses		(17.1	)		(19.2	)		15.2

Effective tax rate		13.0	%		18.0	%		41.2	%

The tax effect of temporary items that give rise to significant portions of the deferred tax assets and liabilities as of December 31, 2016 and 2015 are as follows (in millions):

	2016			2015
Deferred tax assets:
Accounts receivable	$	2.9		$	2.0
Accrued expenses		4.6			4.7
Compensation		30.6			30.1
Investments		—			1.4
Deferred revenue		2.0			0.2
Net operating loss carryforwards		14.1			16.0
Fixed assets		0.8			0.8
Inventory		3.2			2.9
Foreign tax and other tax credit carryforwards		17.2			32.3
Unrealized currency gain/loss		3.0			6.1
Other		—			7.5

Gross deferred tax assets		78.4			104.0
Less valuation allowance		(0.5	)		(37.2	)

Total deferred tax assets		77.9			66.8

Deferred tax liabilities:
Accounts receivable		—			0.6
Foreign statutory reserves		1.1			5.3
Intangibles		7.2			9.4
Accrued expenses		1.2			8.0
Other		2.0			—

Total deferred tax liabilities		11.5			23.3

Net deferred tax assets	$	66.4		$	43.5

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 realizable 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, 2016, the Company removed 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 be realized. In particular, the Company removed a partial valuation allowance against its U.S. net deferred tax assets, which comprised deductible temporary differences and tax credit carryforwards. Also, the Company removed its valuation allowance against certain foreign net operating losses. 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.

Changes in the valuation allowance for deferred tax assets during the years ended December 31, 2016, 2015 and 2014 were as follows:

Balance at December 31, 2013	$	42.4
Increases recorded to income tax provision		15.0

Balance at December 31, 2014	$	57.4
Decreases recorded as a benefit to income tax provision		(20.2	)

Balance at December 31, 2015	$	37.2
Decreases recorded as a benefit to income tax provision		(36.7	)

Balance at December 31, 2016	$	0.5

Increases related primarily to the generation of net operating losses and other deferred tax assets and decreases related primarily to the adjustment to certain deferred tax assets and their related allowance.

As of December 31, 2016, the Company has approximately $40.2 million net operating loss carryforwards available to reduce state taxable income. The Company also has approximately $41.0 million of German Trade Tax net operating losses that are carried forward indefinitely. Additionally, the Company has $23.1 million of other foreign net operating losses that are expected to expire at various times beginning in 2018. The Company also has U.S. federal tax credits of approximately $15.1 million available to offset future tax liabilities that expire at various dates, which include research and development tax credits of $12.2 million expiring at various times through 2035, foreign tax credits of $2.9 million expiring at various times through 2025, and state research and development tax credits of $7.8 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 statutory reserves in its tabular reconciliation of unrecognized tax benefits. Effective for the year ended December 31, 2013 and thereafter, these unrecognized tax benefits are presented as a reduction of the associated net deferred tax assets.

The Company asserts that its foreign earnings, with the exception of its foreign earnings that have been previously taxed by the U.S., are indefinitely reinvested. The Company regularly evaluates its assertion that its foreign earnings are indefinitely reinvested. If the cash, cash equivalents and short-term investments held by the Company's foreign subsidiaries are needed to fund operations in the United States or the Company otherwise elects to repatriate the unremitted earnings of its foreign subsidiaries 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 tax credits, which could result in a higher effective tax rate in the future.

The Company has indefinitely reinvested the earnings of its non-U.S. subsidiaries in the cumulative amount of approximately $1,200 million as of December 31, 2016, 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 United States 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 $90 million.

The Company has gross unrecognized tax benefits, excluding interest, of approximately $6.2 million as of December 31, 2016, of which $5.3 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 $2.1 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, 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
Gross decreases—tax positions in prior periods		(4.8	)
Gross increases—current period tax positions		0.9
Settlements		(21.3	)
Lapse of statutes		(1.8	)

Gross unrecognized tax benefits at December 31, 2016	$	6.2

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, 2016 and 2015, the Company had approximately $0.5 million and $4.7 million, respectively, of accrued interest and penalties related to uncertain tax positions included in other long-term liabilities in the consolidated balance sheets. The Company recorded a benefit of $1.8 million for penalties and interest related to unrecognized tax benefits in the provision for income taxes during the year ended December 31, 2016 and an expense of $1.4 million during the year ended December 31, 2015.

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 2013 to 2015 are open tax years in these significant foreign jurisdictions. In the first quarter of 2014, the Company settled a tax audit in the United States for the tax year 2010. In the third quarter of 2015, the Company settled tax audits in Germany and Italy. In 2016, the Company settled tax audits in Germany and Switzerland. The settlement was immaterial to the consolidated financial statements. Tax years 2011 to 2015 remain open for examination in the United States.