Income Taxes

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events and basis differences that have been recognized in the Company’s financial statements and tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amount and the tax basis of assets and liabilities using the enacted tax rates in effect in the years in which the differences are expected to reverse.

Pre-tax earnings by significant geographical locations from continuing operations are as follows (in thousands):



	Year Ended December 31,
	2013		2012		2011
United States	$	118,269	$	180,022	$	192,219
Foreign	110,717		111,890		118,860
	$	228,986	$	291,912	$	311,079

The provisions for income taxes from continuing operations are as follows (in thousands):



	Year Ended December 31,
	2013			2012			2011
Current tax expense (benefit):
Federal	$	38,249		$	53,187		$	62,858
State	4,413			(3,075		)	9,262
Foreign	13,483			21,138			24,452
	56,145			71,250			96,572
Deferred tax expense (benefit):
Federal	(252		)	3,194			(5,185		)
State	(335		)	1,887			(993		)
Foreign	(3,587		)	(9,775		)	(1,967		)
	(4,174		)	(4,694		)	(8,145		)
Total provision	$	51,971		$	66,556		$	88,427


Note 14.	Income Taxes—(Continued)

Deferred tax assets (liabilities) are composed of the following components (in thousands):



	December 31,
	2013			2012 (as adjusted)
Allowance for doubtful accounts	$	1,295		$	1,123
Accrued product warranties	3,069			3,099
Inventory basis differences	11,421			9,225
Accrued liabilities	8,987			7,206
Deferred revenue	1,775			2,205
Current net operating loss	7,449			8,085
Other	(1,024		)	(1,025		)
Foreign accrued liabilities	4,504			—
Foreign other	913			1,042
Net current deferred tax assets	$	38,389		$	30,960

Net operating loss carry-forwards	$	6,143		$	11,588
Credit carry-forwards	6,391			7,034
Domestic depreciation	(5,455		)	(7,222		)
Supplemental Executive Retirement Plan	3,198			7,491
Stock-based compensation	17,239			13,745
Intangibles	(14,450		)	(15,999		)
Accrued Liabilities	7,624			6,033
Domestic other	1,416			4,018
Foreign credit carry-forwards	—			3,590
Foreign intangibles	—			(1,259		)
Foreign net operating loss carry-forwards	760			8,119
Foreign other	16			(78		)
Valuation allowance	(4,999		)	(4,837		)
Net long-term deferred tax assets	$	17,883		$	32,223

Foreign credit carry-forwards	$	2,922		$	—
Foreign depreciation	2,418			3,196
Foreign intangibles	(18,528		)	(23,597		)
Foreign net operating loss carry-forwards	8,930			5,336
Foreign other	461			504
Valuation allowance	(8,457		)	(4,510		)
Net long-term deferred tax liabilities	$	(12,254	)	$	(19,071	)

The provision for income taxes differs from the amount of tax determined by applying the applicable United States statutory federal income tax rate to pretax income as a result of the following differences:



	Year Ended December 31,
	2013		2012		2011
Statutory federal tax rate	35.0	%	35.0	%	35.0	%
Increase (decrease) in rates resulting from:
Foreign rate differential	(11.6	)	(10.4	)	(3.8	)
Foreign, federal and state income tax credits	(2.2	)	(2.7	)	(2.9	)
State taxes	1.0		0.3		2.2
Non-deductible expenses	0.5		0.7		(1.2	)
Other	—		(0.1	)	(0.9	)
Effective tax rate	22.7	%	22.8	%	28.4	%


Note 14.	Income Taxes—(Continued)

The Company's foreign tax rate differential is primarily the result of a multi-year agreement, effective August 1, 2012, with a European jurisdiction as well as the impact of lower foreign statutory rates.

At December 31, 2013, the Company had United States tax net operating loss carry-forwards totaling approximately $39.8 million which expire between 2018 and 2031. In addition, the Company has various state net operating loss carry-forwards totaling approximately $75.1 million which expire between 2018 and 2033. The federal and state net operating losses were primarily generated by ICx Technologies, prior to the acquisition by the Company in 2010. Finally, the Company has various foreign net operating loss carry-forwards totaling approximately $101.5 million which expire between 2018 and 2033.

The tax benefits described above are accounted for using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of the assets and liabilities. To the extent that management assesses the realization of such assets to not be more likely than not, a valuation allowance is required to be recorded. We believe that the net deferred tax assets of $44.0 million reflected on the December 31, 2013 Consolidated Balance Sheet are mostly realizable based on future forecasts of taxable income over a relatively short time horizon, but we have determined that a valuation allowance against our net deferred tax assets of $13.5 million is required, primarily related to certain acquired net operating losses. A valuation allowance is required when it is more-likely-than-not that all or a portion of deferred tax assets may not be realized. A review of all available positive and negative evidence is considered, including past and future performance, the market environment in which the Company operates, utilization of tax attributes in the past, length of carryback and carryforward periods, and evaluation of potential tax planning strategies when evaluating the realizability of deferred tax assets. The Company may be required to record additional valuation allowance against the deferred tax assets in future periods if its future forecasts of taxable income are not achieved.

United States income taxes have not been provided on accumulated undistributed earnings of certain subsidiaries outside the United States, as the Company intends to reinvest the earnings in operations outside the United States indefinitely. As of December 31, 2013, the cumulative amount of earnings upon which United States income taxes have not been provided is approximately $799 million. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable.

The following table summarizes the activity related to unrecognized tax benefits, including amounts accrued for potential interest and penalties (in thousands):



	Year Ended December 31,
	2013			2012			2011
Balance, beginning of year	$	35,143		$	29,200		$	30,949
Increases related to current year tax positions	979			7,220			1,225
Increases related to prior year tax positions	714			1,559			4,192
Decreases related to prior year tax positions	(2,736		)	(343		)	(4,608		)
Lapse of statute of limitations	(2,012		)	(1,887		)	(2,558		)
Settlements	(2,555		)	(606		)	—
Balance, end of year	$	29,533		$	35,143		$	29,200

The unrecognized tax benefits at December 31, 2013 relate to the United States, United Kingdom and various foreign jurisdictions. As of December 31, 2013, the Company had approximately $29.5 million of unrecognized tax benefits, $29.5 million of which would affect the Company’s effective tax rate if recognized. Over the next twelve months, the Company expects to have minimal changes to its unrecognized tax benefits.

The Company classifies interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2013, the Company had $2.6 million of accrued interest and penalties ($2.5 million net of federal and state benefits) related to uncertain tax positions that are recorded as current and non-current accrued income taxes on the Consolidated Balance Sheet.


Note 14.	Income Taxes—(Continued)

The Company files United States, state and foreign income tax returns in jurisdictions with varying statutes of limitations. The Company currently has the following tax years open to examination by major taxing jurisdictions:



	Tax Years:
United States Federal	2012
State of California	2008 – 2012
State of Massachusetts	2011 – 2012
State of Oregon	2012
Sweden	2008 – 2012
United Kingdom	2007 – 2012
Belgium	2011 - 2012