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,
	2013			2012			2011
	(in thousands)
Current:
Federal	$	145		$	11,935		$	5,472
State and local	1,089			1,387			2,045
Foreign	21,860			19,448			9,898
Total current	23,094			32,770			17,415

Deferred:
Federal	(16,413		)	12,195			17,861
State and local	(2,472		)	468			(2,099		)
Foreign	(25,872		)	(32,293		)	(42,554		)
Total deferred	(44,757		)	(19,630		)	(26,792		)

Change in valuation allowance	17,999			12,855			13,807
Total provision (benefit) for income taxes	$	(3,664	)	$	25,995		$	4,430

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,
	2013			2012			2011
	(in thousands)
Income (loss) before income taxes
Domestic	$	19,016		$	167,299		$	125,010
Foreign	(167,270		)	(31,080		)	(626,776		)
Total income (loss) before income taxes	$	(148,254	)	$	136,219		$	(501,766	)

Expected federal income tax provision (benefit)	$	(51,889	)	$	47,677		$	(175,618	)
Goodwill impairment	49,730			(1,905		)	207,054
Change in valuation allowance	17,999			12,855			13,807
Luxembourg net operating loss	(5,443		)	(12,767		)	(5,289		)
Stock-based compensation	1,598			1,787			951
Foreign earnings	(10,212		)	(23,769		)	(19,222		)
Tax credits	(10,352		)	(2,174		)	(6,877		)
Uncertain tax positions, including interest and penalties	1,360			(2,740		)	(3,996		)
Change in tax rates	1,442			174			(1,522		)
State income tax provision (benefit), net of federal effect	(2,291		)	1,242			(768		)
U.S. tax provision on foreign earnings	(245		)	2,370			—
Domestic production activities deduction	(146		)	(2,612		)	(4,313		)
Local foreign taxes	3,212			3,635			3,525
Other, net	1,573			2,222			(3,302		)
Total provision for income taxes	$	(3,664	)	$	25,995		$	4,430

Our tax benefit as a percentage of loss before tax was 2.5% for 2013. Our actual tax rate differed from the 35% U.S. federal statutory tax rate due to the following items which decreased the tax benefit: (1) nondeductible portion of the goodwill impairment; (2) increase in valuation allowance related to deferred tax assets in France for which we do not anticipate future realization; and (3) disallowed deductions due to a change in foreign legislation. The following items increased our tax benefit: (1) recognition of research and experimentation credits for 2012 and 2013 due to the signing of The American Relief Act of 2012 on January 2, 2013; (2) earnings of our subsidiaries outside of the U.S. in jurisdictions where our statutory tax rate is lower than in the U.S.; (3) the benefit of certain interest expense deductions; and (4) benefits of certain acquisition related elections for tax purposes.

Our tax provisions for 2012 and 2011 reflect the 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 reserve for uncertain tax positions. No foreign tax benefit was recorded for the goodwill impairment charge in 2011.

Deferred tax assets and liabilities consist of the following:



	At December 31,
	2013			2012
	(in thousands)
Deferred tax assets
Loss carryforwards⁽¹⁾	$	174,360		$	164,254
Accrued expenses	40,593			32,998
Depreciation and amortization	16,770			9,632
Warranty reserves	16,704			16,712
Tax credits⁽²⁾	16,073			7,054
Pension plan benefits expense	13,464			14,834
Equity compensation	9,908			10,501
Inventory valuation	2,942			4,557
Other deferred tax assets, net	9,858			5,824
Total deferred tax assets	300,672			266,366
Valuation allowance	(161,026		)	(138,910		)
Total deferred tax assets, net of valuation allowance	139,646			127,456

Deferred tax liabilities
Depreciation and amortization	(50,606		)	(59,210		)
Tax effect of accumulated translation	(1,551		)	(2,012		)
Other deferred tax liabilities, net	(2,883		)	(4,826		)
Total deferred tax liabilities	(55,040		)	(66,048		)
Net deferred tax assets	$	84,606		$	61,408

⁽¹⁾

For tax return purposes at December 31, 2013, we had U.S. federal loss carryforwards of $23.1 million that expire during the years 2020 and 2021. At December 31, 2013, we have net operating loss carryforwards in Luxembourg of $408.1 million that can be carried forward indefinitely, offset by a full valuation allowance (see discussion below). The remaining portion of the loss carryforwards are composed primarily of losses in various other foreign jurisdictions. The majority of these losses can be carried forward indefinitely. At December 31, 2013, there was a valuation allowance of $161.0 million primarily associated with foreign loss carryforwards.


⁽²⁾	For tax return purposes at December 31, 2013, we had: (1) U.S. general business credits of $28.0 million, which begin to expire in 2021; (2) U.S. alternative minimum tax credits of $2.5 million that can be carried forward indefinitely; and (3) U.S. foreign tax credits of $900,000, which begin to expire in 2019.

Since 2007 one of our Luxembourg entities has incurred losses that the Company believed would not be utilized and accordingly, the associated deferred tax asset was not recorded. During the fourth quarter of 2013 the Company has included the losses of the Luxembourg entity on its financial statements as a result of new information supporting the assertion of the ability to generate income in Luxembourg in future periods.

At December 31, 2013 the Luxembourg net operating loss carryforward was $408.1 million. A full valuation allowance is recorded for this asset due to a history of losses. The Company will continue to evaluate the need for a valuation allowance against this tax asset and will adjust the valuation allowance as deemed appropriate which, when adjusted, will result in an impact to the effective tax rate.

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, 2013 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 $20.5 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 $22.5 million and $48.8 million at December 31, 2013 and 2012, 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, 2011	$	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

Gross increase to positions in prior years	2,154
Gross decrease to positions in prior years	(536		)
Gross increases to current period tax positions	1,670
Audit settlements	—
Decrease related to lapsing of statute of limitations	(817		)
Effect of change in exchange rates	(289		)
Unrecognized tax benefits at December 31, 2013	$	28,615



	At December 31,
	2013		2012		2011
	(in thousands)
The amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate	$	27,694	$	25,852	$	28,196

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,
	2013			2012			2011
	(in thousands)
Net interest and penalties expense (benefit)	$	(898	)	$	(414	)	$	(795	)



	At December 31,
	2013		2012
	(in thousands)
Accrued interest	$	2,078	$	3,095
Accrued penalties	3,075		3,030

We believe it is reasonably possible that our unrecognized tax benefits may decrease by approximately $2.1 million within the next twelve months due to the expiration of the statute of limitations. At December 31, 2013, 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 2007
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 were recognized in the first quarter of 2013.