Income Taxes

The Company’s quarterly provision for income taxes is measured using an annual effective tax rate, adjusted for discrete items within the periods presented.

Effective Tax Rates

The Company’s effective tax rates are as follows:



	2016	2015
Three months ended March 31,	27.9%	32.7%

The Company’s effective tax rate for the three months ended March 31, 2016 is lower than the prior year’s comparable period primarily due to:


•	The favorable impact the 2016 Japanese tax reform had on the valuation of the Company’s Japanese deferred tax balances,


•	Inclusion of the U.S. federal research credit, which had expired on December 31, 2014 and was not renewed with retroactive effect until December 2015,


•	A greater U.S. federal tax benefit on domestic manufacturing activities, and


•	The unfavorable impact the 2015 Japanese tax reform had on certain of the Company’s Japanese tax carryforwards.

The Company's effective tax rate for the three months ended March 31, 2016 is lower than the statutory U.S. federal tax rate of 35% primarily due to the favorable impacts of income earned in jurisdictions with tax rates lower than the U.S. statutory rate, the U.S. federal tax benefit for domestic manufacturing activities and the U.S. federal research credit. These items are partially offset by the unfavorable impacts of U.S. state taxes and certain expenses that are statutorily non-deductible for income tax purposes.

Unrecognized Tax Benefits

During the three months ended March 31, 2016, the Company's gross unrecognized tax benefits, excluding interest and penalties, increased by $0.8 million primarily as a result of tax positions taken in both the current and prior periods. During the three months ended March 31, 2016, the total amount of unrecognized tax benefits that, if recognized, would affect the Company's effective tax rate increased by $0.9 million.

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of its income tax expense. During the three months ended March 31, 2016, the Company recognized $0.4 million of interest and penalty expense related to unrecognized tax benefits in its Condensed Consolidated Statement of Operations. At March 31, 2016 and December 31, 2015, the Company had accrued $6.2 million and $5.8 million, respectively, of interest and penalties related to unrecognized tax benefits in its Condensed Consolidated Balance Sheets.

During the next twelve months, it is reasonably possible that the Company's unrecognized tax benefits may decrease by $7.1 million due to expiration of statutes of limitations and settlements with tax authorities. However, if the ultimate resolution of income tax examinations results in amounts that differ from this estimate, the Company will record additional income tax expense or benefit in the period in which such matters are effectively settled.

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 Company’s federal income tax returns for the years 2010 through 2012 are currently under examination by the U.S. Internal Revenue Service (IRS), and its federal income tax returns for 2013 and 2014 remain subject to examination.

The IRS recently began an examination of an acquired subsidiary’s consolidated federal income tax return for 2013. In addition, acquired subsidiaries’ federal returns (2011 and 2012) and federal tax carry forwards (2006 through 2012) remain subject to IRS 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 2010. Currently the Company and its subsidiaries are under examination in various jurisdictions, including Germany (2008 through 2012), Canada (2013 and 2014) and California (2010 and 2011).