Income Taxes

Provision for Income Taxes

The Company’s income (loss) from continuing operations before taxes is as follows:



(in thousands) For year ended December 31,	2012		2011			2010
U.S. operations	$	175,055	$	(121,411	)	$	102,833
Non-U.S. operations	109,550		136,172			106,234
Total	$	284,605	$	14,761		$	209,067

The Company’s provision (benefit) for income taxes from continuing operations consists of:



(in thousands) For year ended December 31,	2012		2011			2010
Current:
U.S. federal tax	$	5,154	$	1,124		$	(3,099	)
U.S. state and local tax	1,948		1,928			1,173
Non-U.S. tax	26,314		32,816			26,560
Total current	33,416		35,868			24,634
Deferred:
U.S. federal tax	52,948		(45,576		)	26,326
U.S. state and local tax	1,068		524			238
Non-U.S. tax	984		1,129			4,889
Total deferred	55,000		(43,923		)	31,453
Total provision (benefit) for income taxes	$	88,416	$	(8,055	)	$	56,087

A reconciliation of the statutory U.S. federal tax rate to the Company’s effective tax rate from continuing operations is as follows:



(in thousands) For year ended December 31,	2012		2011		2010
Statutory U.S. federal tax rate	35.0	%	35.0	%	35.0	%
Increase (reduction) from:
Non-U.S. taxes	(4.0	)%	(98.4	)%	(3.1	)%
Repatriation of non-U.S. earnings, net of credits	0.1	%	8.8	%	1.2	%
Deferred taxes on earnings of non-U.S. subsidiaries	—	%	—	%	(2.4	)%
State and local taxes, net of federal benefit	1.1	%	18.4	%	0.7	%
U.S. research and development tax credit	(0.3	)%	(15.3	)%	(3.0	)%
U.S. domestic manufacturing deduction	(0.9	)%	(12.7	)%	(0.9	)%
Other	0.1	%	8.9	%	(0.7	)%
Effective tax rate	31.1	%	(55.3	)%	26.8	%

The Company has not provided taxes on the undistributed earnings of its non-U.S. subsidiaries as of December 31, 2012 because it intends to permanently reinvest these earnings outside the U.S. As of December 31, 2012, the cumulative amount of non-U.S. earnings upon which taxes have not been provided is approximately $405 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 2012, 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 $3.6 million, $6.1 million and $3.3 million, respectively.

In 2012, 2011 and 2010, tax provision (benefit) of $(13.4) million, $(44.1) million, and $6.6 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,	2012			2011
Deferred tax assets:
Asbestos-related liabilities	$	230,166		$	260,969
Tax loss and credit carryforwards	77,098			93,337
Environmental reserves	12,614			20,042
Inventories	12,827			15,858
Accrued bonus and stock-based compensation	12,470			12,488
Pension and post-retirement benefits	66,313			50,623
Other	42,348			35,362
Total	453,836			488,679
Less: valuation allowance	115,014			107,511
Total deferred tax assets, net of valuation allowance	338,822			381,168
Deferred tax liabilities:
Basis difference in fixed assets	(30,130		)	(35,341		)
Basis difference in intangible assets	(78,086		)	(75,127		)
Total deferred tax liabilities	(108,216		)	(110,468		)
Net deferred tax asset	$	230,606		$	270,700
Balance sheet classification:
Current deferred tax assets	21,618			$	46,664
Long-term deferred tax assets	245,843			265,849
Accrued liabilities	(2		)	(145		)
Long-term deferred tax liability	(36,853		)	(41,668		)
Net deferred tax asset	$	230,606		$	270,700

As of December 31, 2012, 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
2013-2017	$	105		$	—		$	2,039		$	161,854		$	6,912
After 2017	14,547			1,067			4,162			410,775			30,656
Indefinite	—			—			15,959			—			39,088
Total tax carryforwards	$	14,652		$	1,067		$	22,160		$	572,629		$	76,656
Deferred tax asset on tax carryforwards	$	14,652		$	373		$	14,404		$	26,297		$	21,372		$	77,098
Valuation allowance on tax carryforwards	(262		)	(373		)	(13,760		)	(26,297		)	(21,372		)	(62,064		)
Net deferred tax asset on tax carryforwards	$	14,390		$	—		$	644		$	—		$	—		$	15,034

As of December 31, 2012, the Company has determined that it is more likely than not that $62.1 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 $52.9 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, 2012 is $115.0 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)	2012			2011
Balance of liability as of January 1	$	9,590		$	3,725
Increase as a result of tax positions taken during a prior year	5,941			3,334
Decrease as a result of tax positions taken during a prior year	(25		)	(19		)
Increase as a result of tax positions taken during the current year	3,893			2,876
Reduction as a result of a lapse of the statute of limitations	(235		)	(326		)
Balance of liability as of December 31	$	19,164		$	9,590

The amount of the Company’s unrecognized tax benefits that, if recognized, would affect its effective tax rate was $18.9 million, $9.3 million, and $2.8 million as of December 31, 2012, 2011 and 2010, respectively. The difference between these amounts for 2012 and 2011 and those reflected in the table above relates to (1) offsetting tax effects from other tax jurisdictions, and (2) interest expense, net of deferred taxes.

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, 2012, 2011 and 2010, the Company recognized $0.4 million of interest and penalty expense, $0.2 million of interest and penalty expense and $0.4 million of interest income, respectively, related to unrecognized tax benefits in its consolidated statement of operations. At December 31, 2012 and December 31, 2011, the Company recognized $1.0 million and $0.6 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 $4.1 million of the Company's unrecognized tax benefits could change as a result of completed audits and / or settlements, the expiration of statutes of limitation or other resolutions 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 has completed its examinations of the Company's consolidated U.S. federal income tax returns through 2008. The Company's consolidated U.S. federal income tax return for the years 2009 through 2011, together with those of acquired subsidiaries, remain 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 2007. As of December 31, 2012, the Company and its subsidiaries are under examination in various jurisdictions, including Germany (2006 through 2009), Hungary (2009 and 2010), and California (2007 and 2008). During 2012, examinations were completed in Germany (2002 through 2005) and the UK (2007 through 2009), and resulted in minimal assessments. In addition, the Company is currently appealing tax assessments in Canada (2007 through 2009). Overall, the Company believes that adequate accruals have been provided for all jurisdictions' open years.