Income Taxes

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

Effective Tax Rates

The Company’s effective tax rates are as follows:



	2016	2015
Three months ended September 30,	33.0%	32.2%
Nine months ended September 30,	29.4%	32.1%

The Company’s effective tax rates for the three and nine months ended September 30, 2016 vary from the prior year’s comparable periods primarily due to:


•	a valuation allowance recorded in 2016 against certain deferred tax assets,


•	unfavorable return-to-provision adjustments recorded in the current period,


•	the 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,


•	the amount of income earned in jurisdictions with lower statutory rates, and


•	a greater U.S. federal tax benefit on domestic manufacturing activities.

In addition, the Company’s effective tax rate for the nine months ended September 30, 2016 includes a benefit for the resolution of a tax examination during 2016 plus the impact changes in Japanese tax law had on the Company’s deferred tax balances in 2016 (favorable) and tax carryforwards in 2015 (unfavorable).

The Company’s effective tax rates for both the three and nine months ended September 30, 2016 are lower than the statutory U.S. federal tax rate of 35% primarily due to the favorable impact 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, the U.S. federal research credit and the resolution of a tax examination. 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 September 30, 2016, the Company’s gross unrecognized tax benefits increased by $0.4 million primarily due to tax positions taken during the current year, partially offset by tax positions taken during prior periods. During the nine months ended September 30, 2016, the Company’s gross unrecognized tax benefits decreased by $1.5 million, primarily due to settlements with taxing authorities and tax positions taken during prior periods, partially offset by tax positions taken in the current period.

During the three and nine months ended September 30, 2016, the total amount of unrecognized tax benefits that, if recognized, would affect the Company’s effective tax rate increased by $0.6 million and decreased by $1.3 million, respectively.

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of its income tax expense. During the three and nine months ended September 30, 2016, the Company recognized $0.4 million and $0.7 million, respectively, of interest and penalty expense related to unrecognized tax benefits in its Condensed Consolidated Statement of Operations. At September 30, 2016 and December 31, 2015, the total amount of accrued interest and penalty expense related to unrecognized tax benefits recorded in the Company’s Condensed Consolidated Balance Sheets was $6.5 million and $5.8 million, respectively.

During the next twelve months, it is reasonably possible that the Company’s unrecognized tax benefits may decrease by $4.9 million due to the 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 IRS has completed its examination of the Company’s consolidated federal income tax returns through 2012. The Company’s consolidated federal income tax returns for 2013 through 2015 remain subject to examination.

The IRS is currently examining an acquired subsidiary’s consolidated federal income tax return for 2013. In addition, 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 (2012 and 2013). During the third quarter, a California audit (2010 and 2011) was completed, resulting in a minimal assessment for which an accrual was previously established.