Income Taxes

The following table summarizes the provision (benefit) for U.S. federal, state, and foreign taxes on income from continuing operations:



	Year Ended December 31,
	2012			2011			2010
	(in thousands)
Current:
Federal	$	11,935		$	5,472		$	10,486
State and local	1,387			2,045			765
Foreign	19,448			9,898			22,715
Total current	32,770			17,415			33,966

Deferred:
Federal	12,195			17,861			7,216
State and local	468			(2,099		)	3,340
Foreign	(19,526		)	(37,265		)	(31,743		)
Total deferred	(6,863		)	(21,503		)	(21,187		)

Change in valuation allowance	88			8,518			3,195
Total provision for income taxes	$	25,995		$	4,430		$	15,974

A reconciliation of income taxes at the U.S. federal statutory rate of 35% to the consolidated actual tax rate is as follows:



	Year Ended December 31,
	2012			2011			2010
	(in thousands)
Income (loss) before income taxes
Domestic	$	167,299		$	125,010		$	173,032
Foreign	(31,080		)	(626,776		)	(48,587		)
Total income (loss) before income taxes	$	136,219		$	(501,766	)	$	124,445

Expected federal income tax provision (benefit)	$	47,677		$	(175,618	)	$	43,556
Goodwill impairment	(1,905		)	207,054			—
Change in valuation allowance	88			8,518			3,195
Stock-based compensation	1,787			951			1,541
Foreign earnings	(23,769		)	(19,222		)	(14,986		)
Tax credits	(2,174		)	(6,877		)	(9,746		)
Uncertain tax positions, including interest and penalties	(2,740		)	(3,996		)	(10,242		)
Change in tax rates	174			(1,522		)	(1,428		)
State income tax provision (benefit), net of federal effect	1,242			(768		)	1,968
U.S. tax provision on foreign earnings	2,370			—			279
Domestic production activities deduction	(2,612		)	(4,313		)	(886		)
Local foreign taxes	3,635			3,525			4,140
Other, net	2,222			(3,302		)	(1,417		)
Total provision for income taxes	$	25,995		$	4,430		$	15,974

Our tax provisions for 2012, 2011 and 2010 reflect benefits of lower statutory tax rates on foreign earnings as compared with our U.S. federal statutory rate, foreign interest expense deductions and the benefits of certain acquisition related elections for tax purposes. During 2012 we recognized a benefit related to the release of reserves for uncertain tax positions. No foreign tax benefit was recorded for the goodwill impairment charge in 2011. During 2010 we de-recognized a reserve for an uncertain tax position due to a change in the method of depreciation for certain foreign subsidiaries.

Deferred tax assets and liabilities consist of the following:



	At December 31,
	2012			2011
	(in thousands)
Deferred tax assets
Loss carryforwards⁽¹⁾	$	54,904		$	61,330
Accrued expenses	32,998			27,103
Warranty reserves	16,712			21,230
Pension plan benefits expense	14,834			6,677
Equity compensation	10,501			10,526
Depreciation and amortization	9,632			9,241
Tax credits⁽²⁾	7,054			17,481
Inventory valuation	4,557			4,252
Other deferred tax assets, net	5,824			2,654
Total deferred tax assets	157,016			160,494
Valuation allowance	(29,560		)	(29,953		)
Total deferred tax assets, net of valuation allowance	127,456			130,541

Deferred tax liabilities
Depreciation and amortization	(59,210		)	(71,889		)
Tax effect of accumulated translation	(2,012		)	(2,733		)
Other deferred tax liabilities, net	(4,826		)	(7,885		)
Total deferred tax liabilities	(66,048		)	(82,507		)
Net deferred tax assets	$	61,408		$	48,034

⁽¹⁾

For tax return purposes at December 31, 2012, we had U.S. federal loss carryforwards of $26.4 million that expire during the years 2021 through 2022. The remaining portion of the loss carryforwards are composed primarily of losses in various foreign jurisdictions. The majority of these losses can be carried forward indefinitely. At December 31, 2012, there was a valuation allowance of $29.6 million primarily associated with foreign loss carryforwards.


⁽²⁾	For tax return purposes at December 31, 2012, we had: (1) federal and state research and development tax credits of $18.1 million, which begin to expire in 2020; (2) alternative minimum tax credits of $2.5 million that are carried forward indefinitely; and (3) general business tax credits of $5.2 million, which begin to expire in 2029.

We record valuation allowances to reduce deferred tax assets to the extent we believe it is more likely than not that a portion of such assets will not be realized. In making such determinations, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and our ability to carry back losses to prior years. We are required to make assumptions and judgments about potential outcomes that lie outside management’s control. Our most sensitive and critical factors are the projection, source, and character of future taxable income. Although realization is not assured, management believes it is more likely than not that deferred tax assets, net of valuation allowance, will be realized. The amount of deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward periods are reduced or current tax planning strategies are not implemented.

Our deferred tax assets at December 31, 2012 do not include the tax effect on $55.2 million of excess tax benefits from employee stock plan exercises. Common stock will be increased by $21.0 million when such excess tax benefits reduce cash taxes payable.

We do not provide U.S. deferred taxes on temporary differences related to our foreign investments that are considered permanent in duration. These temporary differences consist primarily of undistributed foreign earnings of $48.8 million and $42.1 million at December 31, 2012 and 2011, respectively. Foreign taxes have been provided on these undistributed foreign earnings. We have not computed the unrecognized deferred income tax liability on these temporary differences. There are many assumptions that must be considered to calculate the liability, thereby making it impractical to compute at this time.

We are subject to income tax in the United States and numerous foreign jurisdictions. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when we believe that certain positions might be challenged despite our belief that our tax return positions are fully supportable. We adjust these reserves in light of changing facts and circumstances, such as the outcome of tax audits. The provision for income taxes includes the impact of reserve positions and changes to reserves that are considered appropriate.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):



Unrecognized tax benefits at January 1, 2010	$	46,206
Gross increase to positions in prior years	2,037
Gross decrease to positions in prior years	(11,700		)
Gross increases to current period tax positions	13,743
Audit settlements	(175		)
Decrease related to lapsing of statute of limitations	(4,002		)
Effect of change in exchange rates	(2,060		)
Unrecognized tax benefits at December 31, 2010	$	44,049

Gross increase to positions in prior years	2,132
Gross decrease to positions in prior years	(16,603		)
Gross increases to current period tax positions	1,866
Audit settlements	—
Decrease related to lapsing of statute of limitations	(2,888		)
Effect of change in exchange rates	(74		)
Unrecognized tax benefits at December 31, 2011	$	28,482

Gross increase to positions in prior years	299
Gross decrease to positions in prior years	(51		)
Gross increases to current period tax positions	3,347
Audit settlements	(27		)
Decrease related to lapsing of statute of limitations	(5,769		)
Effect of change in exchange rates	152
Unrecognized tax benefits at December 31, 2012	$	26,433



	At December 31,
	2012		2011		2010
	(in thousands)
The amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate	$	25,852	$	28,196	$	32,706

We classify interest expense and penalties related to unrecognized tax benefits and interest income on tax overpayments as components of income tax expense. The net interest and penalties expense (benefit) recognized is as follows:



	Year Ended December 31,
	2012			2011			2010
	(in thousands)
Net interest and penalties expense (benefit)	$	(414	)	$	(795	)	$	498



	At December 31,
	2012		2011
	(in thousands)
Accrued interest	$	3,095	$	3,781
Accrued penalties	3,030		2,766

We believe it is reasonably possible that our unrecognized tax benefits may decrease by approximately $3.6 million within the next twelve months due to the expiration of the statute of limitations. At December 31, 2012, we are not able to reasonably estimate the timing of future cash flows relating to our uncertain tax positions.

We file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. We are subject to income tax examination by tax authorities in our major tax jurisdictions as follows:



Tax Jurisdiction		Years Subject to Audit
U.S. federal		Subsequent to 1998
France		Subsequent to 2009
Germany		Subsequent to 2007
Brazil		Subsequent to 2006
United Kingdom		Subsequent to 2006

The American Taxpayer Relief Act of 2012 (the "Act") was signed into law on January 2, 2013 and extended several business tax provisions including: (1) the active financing income and controlled foreign corporation look-through exceptions to certain foreign income; and (2) the research and experimentation credit. The tax effects of the Act will be recognized in the first quarter of 2013.