Note 2 – Income Taxes

Provision for Income Taxes

The Company's income (loss) before taxes is as follows:


(in thousands) For year ended December 31,	2011			2010		2009
U.S. operations	$	(115,718	)	$	104,694	$	69,050
Non-U.S. operations		136,172			106,235		115,876
Total	$	20,454		$	210,929	$	184,926

The Company's provision (benefit) for income taxes consists of:


(in thousands) For year ended December 31,	2011			2010			2009
Current:
U.S. federal tax	$	2,869		$	(2,530	)	$	(4,187	)
U.S. state and local tax		2,176			1,256			5
Non-U.S. tax		32,816			26,560			28,744
Total current		37,861			25,286			24,562
Deferred:
U.S. federal tax		(45,576	)		26,326			19,879
U.S. state and local tax		524			238			2,720
Non-U.S. tax		1,129			4,889			3,685
Total deferred		(43,923	)		31,453			26,284
Total provision (benefit) for income taxes	$	(6,062	)	$	56,739		$	50,846

A reconciliation of the statutory U.S. federal tax rate to the Company's effective tax rate is as follows:


(in thousands) For year ended December 31,	2011		2010		2009
Statutory U.S. federal tax rate		35.0%		35.0%		35.0%
Increase (reduction) from:
Non-U.S. taxes		-70.8%		-3.1%		-5.0%
Repatriation of non-U.S. earnings, net of credits		6.3%		1.2%		4.5%
Deferred taxes on earnings of non-U.S. subsidiaries		0.0%		-2.4%		-1.8%
State and local taxes, net of federal benefit		14.1%		0.7%		1.0%
U.S. research and development tax credit		-11.0%		-3.0%		-2.3%
U.S. domestic manufacturing deduction		-9.9%		-0.9%		-0.6%
Tax benefit from sale of subsidiary		0.0%		0.0%		-3.0%
Other		6.4%		-0.6%		-0.3%
Effective tax rate		-29.9%		26.9%		27.5%

The Company has not provided taxes on the undistributed earnings of its non-U.S. subsidiaries as of December 31, 2011 because it intends to permanently reinvest these earnings outside the U.S. As of December 31, 2011, the cumulative amount of non-U.S. earnings upon which taxes have not been provided is approximately $320 million. If these earnings were distributed in the form of dividends or otherwise, the Company would be subject to income and withholding taxes. However, it is not practical to estimate the amount of tax payable upon the remittance of these earnings because such tax depends upon circumstances existing when the remittance occurs.

In 2011 and 2010, income tax benefits attributable to equity-based compensation transactions exceeded amounts recorded at grant date fair market value and, accordingly, were credited to equity in the amounts of $6.1 million and $3.3 million, respectively. In 2009, income tax benefits attributable to equity-based compensation transactions were less than the amounts recorded based on grant date fair value. As a result, a shortfall of $0.4 million was charged to equity.

In 2011, 2010 and 2009, tax provision (benefit) of $(44.1) million, $6.6 million, and $0.7 million, respectively, primarily related to changes in pension and post-retirement plan assets and benefit obligations was recorded to accumulated other comprehensive income.

Deferred Taxes and Valuation Allowances

The components of deferred tax assets and liabilities included on the Company's Consolidated Balance Sheets are as follows:


(in thousands) December 31,	2011			2010
Deferred tax assets:
Asbestos-related liabilities	$	260,969		$	199,009
Tax loss and credit carryforwards		93,337			78,289
Environmental reserves		20,042			11,333
Inventories		15,858			14,737
Accrued bonus and stock-based compensation		12,488			15,105
Pension and post-retirement benefits		50,623			13,074
Other		35,362			19,879
Total		488,679			351,426
Less: valuation allowance		107,511			62,830
Total deferred tax assets, net of valuation allowance		381,168			288,596
Deferred tax liabilities:
Basis difference in fixed assets		(35,341	)		(36,479	)
Basis difference in intangible assets		(75,127	)		(74,132	)
Total deferred tax liabilities		(110,468	)		(110,611	)
Net deferred tax asset	$	270,700		$	177,985
Balance sheet classification:
Current deferred tax assets		46,664		$	44,956
Long-term deferred tax assets		265,849			182,832
Accrued liabilities		(145	)		(951	)
Long-term deferred tax liability		(41,668	)		(48,852	)
Net deferred tax asset	$	270,700		$	177,985

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2011, the Company had U.S. federal, U.S. state and non-U.S. tax loss and credit carryforwards that will expire, if unused, as follows:


(in thousands) Year of expiration	U.S. Federal Tax Credits			U.S. Federal Tax Losses		U.S. State Tax Credits			U.S. State Tax Losses			Non- U.S. Tax Losses			Total
2012-2016	$	105		$	—	$	1,624		$	136,179		$	10,470
After 2016		34,430			505		3,253			342,590			24,963
Indefinite		—			—		13,969			—			29,748
Total tax carryforwards	$	34,535		$	505	$	18,846		$	478,769		$	65,181
Deferred tax asset on tax carryforwards	$	34,535		$	177	$	12,250		$	27,880		$	18,495		$	93,337
Valuation allowance on tax carryforwards		(105	)		—		(11,587	)		(27,880	)		(18,490	)		(58,062	)
Net deferred tax asset on tax carryforwards	$	34,430		$	177	$	663		$	—		$	5		$	35,275

As of December 31, 2011, the Company has determined that it is more likely than not that $58.1 million of its deferred tax assets related to tax loss and credit carryforwards will not be realized. As a result, the Company has recorded a valuation allowance against these deferred tax assets as shown in the table above. The Company has also determined that it is more likely than not that a portion of the benefit related to U.S. state and non-U.S. deferred tax assets other than tax loss and credit carryforwards will be not realized. Accordingly, a $49.4 million valuation allowance has been established against these U.S. state and non-U.S. deferred tax assets. The Company's total valuation allowance at December 31, 2011 is $107.5 million.

Unrecognized Tax Benefits

A reconciliation of the beginning and ending amount of the Company's gross unrecognized tax benefits, excluding interest and penalties, is as follows:


(in thousands)	2011			2010
Balance of liability as of January 1	$	3,725		$	6,937
Increase as a result of tax positions taken during a prior year		3,334			155
Decrease as a result of tax positions taken during a prior year		(19	)		(2,654	)
Increase as a result of tax positions taken during the current year		2,876			1,908
Decrease as a result of settlements with taxing authorities		—			(1,334	)
Reduction as a result of a lapse of the statute of limitations		(326	)		(1,287	)
Balance of liability as of December 31	$	9,590		$	3,725

The amount of the Company's unrecognized tax benefits that, if recognized, would affect its effective tax rate was $9.3 million, $2.8 million, and $7.3 million as of December 31, 2011, 2010, and 2009, respectively. The difference between these amounts for 2011 and 2010 and those reflected in the table above relates to (1) offsetting tax effects from other tax jurisdictions, (2) interest expense, net of deferred taxes, and (3) unrecognized tax benefits whose reversal (as of December 31, 2010 only) would be recorded to goodwill.

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of its income tax expense. During the years ended December 31, 2011, 2010, and 2009, the Company recognized $0.2 million of interest and penalty expense, $0.4 million of interest income, and $0.1 million of interest and penalty expense, respectively, related to unrecognized tax benefits in its consolidated statement of operations. At December 31, 2011 and December 31, 2010, the Company recognized $0.6 million and $0.5 million, respectively, of interest and penalty expense related to unrecognized tax benefits in its consolidated balance sheet.

During the next twelve months, it is reasonably possible that $1.1 million of the Company's unrecognized tax benefits could change as a result of audit settlements, expiration of statutes of limitation or other resolution of uncertainties.

Income Tax Examinations

The Company's income tax returns are subject to examination by the U.S. federal, U.S. state and local, and non-U.S. tax authorities. The Internal Revenue Service ("IRS") has completed its examinations of the Company's consolidated U.S. federal income tax returns through 2008; however, the 2008 federal income tax return of an acquired subsidiary remains open to examination.

With few exceptions, the Company is no longer subject to U.S. state and local or non-U.S. income tax examinations for years before 2006. In August 2011, Canada Revenue Agency commenced an examination of the 2007, 2008 and 2009 income tax returns of the Company's Canadian subsidiary. In October 2011, the State of California commenced an examination of the Company's 2007 and 2008 California income tax returns. As of December 31, 2011, the Company and its subsidiaries are under examination in additional jurisdictions, including Germany (2000 through 2005) and the U.K. (2007 through 2009). The Company believes that adequate accruals have been provided for all jurisdictions' open years.