Note 8—Income Taxes

Income tax expense (benefit) based on income before income taxes consists of:


	Year Ended December 31,
(in thousands)	2012			2011			2010
Current:
U.S. Federal	$	776		$	75		$	300
State and local		640			86			948
Foreign		8,352			7,003			5,730
		9,768			7,164			6,978
Deferred:
U.S. Federal		9,914			(16,963	)		(407	)
State and local		1,560			442			(52	)
Foreign		(2,410	)		(1,470	)		739
		9,064			(17,991	)		280
	$	18,832		$	(10,827	)	$	7,258

Worldwide income before income taxes consisted of the following:


	Year Ended December 31,
(in thousands)	2012		2011		2010
United States	$	27,538	$	5,405	$	27,650
Foreign		47,901		35,727		59,366
	$	75,439	$	41,132	$	87,016

Income tax expense (benefit) differed from the amounts computed by applying the U.S. Federal statutory income tax rate to income before income taxes as a result of the following:


	Year Ended December 31,
(in thousands)	2012			2011			2010
Tax at statutory rate	$	26,404		$	14,396		$	30,456
State taxes, net of federal tax effect		2,012			343			582
Effect of foreign operations and tax incentives		(11,710	)		(12,442	)		(13,021	)
Valuation allowance		(44	)		(23,674	)		(10,657	)
Thailand reserve for uncertain tax benefits		-			7,056			-
Settlement of foreign tax audits		-			(2,710	)		-
Intercompany transactions		-			2,801			(1,321	)
Losses in foreign jurisdictions for which no benefit has been provided		927			3,068			63
Other		1,243			335			1,156
Total income tax expense (benefit)	$	18,832		$	(10,827	)	$	7,258

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:


	December 31,
(in thousands)	2012			2011
Deferred tax assets:
Carrying value of inventories	$	2,786		$	2,240
Accrued liabilities and allowances deductible for tax purposes on a cash basis		8,956			5,367
Goodwill		10,526			14,397
Stock-based compensation		8,251			7,398
Net operating loss carryforwards		39,670			49,561
Tax credit carryforwards		5,848			5,400
Other		7,564			9,850
		83,601			94,213
Less: valuation allowance		(41,858	)		(42,524	)
Net deferred tax assets		41,743			51,689

Deferred tax liabilities:
Plant and equipment, due to differences in depreciation		(3,887	)		(4,586	)
Other		(1,188	)		(1,508	)
Gross deferred tax liability		(5,075	)		(6,094	)
Net deferred tax asset	$	36,668		$	45,595

Recorded as:
Current deferred tax assets	$	8,889		$	8,175
Non-current deferred tax assets		29,535			37,420
Non-current deferred tax liabilities		(1,756	)		-
Net deferred tax asset	$	36,668		$	45,595

The net change in the total valuation allowance for the years ended December 31, 2012, 2011 and 2010 was a decrease of $0.7 million, $19.3 million and $11.1 million, respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowances as of December 31, 2012. During 2011, the Company evaluated the recoverability of its deferred tax assets using the criteria described above and concluded that the Company's projected future taxable income in the U.S. is sufficient to utilize additional net operating loss carryforwards and other deferred tax assets. As a result, the Company reduced its valuation allowance by $19.1 million in the U.S. During 2010, the valuation allowance on U.S. net deferred tax assets was reduced by $10.5 million as a result of utilizing U.S. net operating losses and other deferred tax assets during the year.

As of December 31, 2012, the Company had $76.0 million in U.S. Federal operating loss carryforwards which will expire from 2022 to 2031, state operating loss carryforwards of approximately $90.4 million which will expire from 2017 to 2031, foreign operating loss carryforwards of approximately $37.1 million with indefinite carryforward periods, and foreign operating loss carryforwards of approximately $6.7 million which will expire at varying dates through 2021. The utilization of these net operating loss carryforwards is limited to the future operations of the Company in the tax jurisdictions in which such carryforwards arose. The Company has U.S. federal tax credit carryforwards of $4.2 million which will expire at varying dates through 2031. The Company has state tax credit carryforwards of $1.7 million which will expire at varying dates through 2027.

Cumulative undistributed earnings of certain foreign subsidiaries amounted to approximately $534 million as of December 31, 2012. The Company considers earnings from foreign subsidiaries to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes has been made for these earnings. Upon distribution of foreign subsidiary earnings in the form of dividends or otherwise, such distributed earnings would be reportable for U.S. income tax purposes (subject to adjustment for foreign tax credits). Determination of the amount of any unrecognized deferred tax liability on these undistributed earnings is not practical.

The Company has been granted certain tax incentives, including tax holidays, for its subsidiaries in China, Malaysia and Thailand that will expire at various dates, unless extended or otherwise renegotiated, through 2012, 2015 and 2018, respectively, and are subject to certain conditions with which the Company expects to comply. The net impact of these tax incentives was to lower income tax expense for the years ended December 31, 2012, 2011, and 2010 by approximately $8.0 million (approximately $0.14 per diluted share), $10.5 million (approximately $0.18 per diluted share) and $8.7 million (approximately $0.14 per diluted share), respectively, as follows:


	Year Ended December 31,
(in thousands)	2012		2011		2010
China	$	2,449	$	1,474	$	498
Malaysia		992		-		696
Thailand		4,594		9,036		7,490
	$	8,035	$	10,510	$	8,684

The Company must determine whether it is "more-likely-than-not" that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets the more-likely-than-not recognition threshold, the position is measured to determine the amount of benefit to recognize in the financial statements. As of December 31, 2012, the total amount of the reserve for uncertain tax benefits including interest and penalties is $21.3 million. A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, is as follows:


	December 31,
(in thousands)	2012			2011			2010
Balance as of January 1	$	18,091		$	14,759		$	16,036
Additions related to prior year tax positions		141			7,056			120
Decreases related to prior year tax positions		(162	)		(3,724	)		-
Decreases as a result of a lapse of the applicable statute of limitations in current year		-			-			(1,397	)
Balance as of December 31	$	18,070		$	18,091		$	14,759

The increase in the total amount of unrecognized tax benefits reserve during 2011 is primarily the result of recording an income tax reserve against an income tax receivable that the Company had previously recorded for a subsidiary in Thailand offset by a decrease in the unrecognized tax benefits reserve for a settlement of income tax audits outside the United States. The decreases in the unrecognized tax benefits reserve during 2010 are primarily the result of the expiration of the statute of limitations for worthless stock deductions and intercompany transactions.

The reserve is classified as a current or long-term liability in the consolidated balance sheet based on the Company's expectation of when the items will be settled. The Company records interest expense and penalties accrued in relation to uncertain income tax benefits as a component of current income tax expense. The total amount of interest and penalties included in income tax expense during the year ended December 31, 2012, 2011 and 2010 was $0.0 million, $(0.2) million and $(0.3) million, respectively. The amount of accrued potential interest and penalties on unrecognized tax benefits included in the reserve as of December 31, 2012 is $1.6 million and $1.6 million, respectively. A subsidiary of the Company in Thailand has filed for a refund of $8.4 million of previously paid income taxes applicable to the years 2004 and 2005, which is included in other assets. The Thailand tax authorities have conducted an initial examination of the applicable refund filings. The Company received official notification that the tax authorities have rejected its refund claim during the fourth quarter of 2012. The Company has filed an appeal of the rejected refund claim as management believes that the conclusions of the Thailand tax authorities are incorrect. During 2011, the Company recorded a reserve for uncertain benefits of $7.1 million against this refund claim.

The Company and its subsidiaries in Brazil, China, Ireland, Luxembourg, Malaysia, Mexico, the Netherlands, Romania, Singapore, Thailand and the United States remain open to examination by the various local taxing authorities, in total or in part, for fiscal years 2004 to 2012.

The Company is subject to examination by tax authorities for varying periods in various U.S. and foreign tax jurisdictions. During the course of such examinations disputes occur as to matters of fact and/or law. Also, in most tax jurisdictions the passage of time without examination will result in the expiration of applicable statutes of limitations thereby precluding the taxing authority from conducting an examination of the tax period(s) for which such statute of limitation has expired. The Company believes that it has adequately provided for its tax liabilities.