Income Taxes

12 Months Ended

Dec. 31, 2012

Income Taxes

Note 18 Income Taxes

The geographical sources of income before income taxes were as follows (in thousands):

	Year Ended December 31,
	2012		2011		2010
United States	$	60,388	$	78,593	$	72,298
Outside United States		103,786		101,126		77,309
Total	$	164,174	$	179,719	$	149,607

Zebra earns a significant amount of our operating income outside the U.S., which is deemed to be permanently reinvested in foreign jurisdictions. Zebra does not currently foresee a need to repatriate funds, however, should Zebra require more capital in the U.S. than is generated by our operations locally, Zebra could elect to repatriate funds held in foreign jurisdictions or raise capital in the U.S. through debt or equity issuances. These alternatives could result in higher effective tax rates or increased interest expense.

Deferred income taxes are not provided on undistributed earnings of foreign subsidiaries, aggregating approximately $256,000,000 at December 31, 2012 and $175,000,000 at December 31, 2011.

The provision for income taxes consists of the following (in thousands):

	Year Ended December 31,
	2012			2011			2010
Current:
Federal	$	17,744		$	7,250		$	25,795
State		1,324			1,191			3,108
Foreign		14,258			28,175			17,157
Total current		33,326			36,616			46,060
Deferred:
Federal		8,656			12,477			(3,591)
State		375			405			2,524
Foreign		(80	)		(122	)		0
Total deferred		8,951			12,760			(1,067)
Total	$	42,277		$	49,376		$	44,993

The provision for income taxes differs from the amount computed by applying the U.S. statutory Federal income tax rate of 35% to income before income taxes. The reconciliation of statutory and effective income taxes is presented below (in thousands):

	Year Ended December 31,
	2012		2011		2010
Provision computed at statutory rate	$	57,461	$	62,905	$	51,714
State income tax, net of Federal tax benefit		1,353		1,432		1,884
Asset impairment charge		3,190		0		0
Tax-exempt interest income		(8,118)		(334)		(554)
Acquisition related items		322		0		(315)
Domestic manufacturing deduction		(105)		(212)		(70)
Research and experimental credit		0		(508)		(713)
Foreign rate differential		(13,710)		(13,899)		(8,134)
Other		1,884		(8)		1,181
Provision for income taxes	$	42,277	$	49,376	$	44,993

In conjunction with the opening of Zebra’s Singapore distribution center and the establishment of Singapore as a regional headquarter location in 2009, Zebra negotiated a 10% income tax rate with the Singapore Economic Development Board. The negotiated rate is a reduction from the then current statutory rate of 17%. The 10% rate expires at the end of 2014 unless Zebra meets agreed commitments for employees and business expenditures in Singapore. If these requirements are met, the 10% rate extends through 2018. This agreement reduced Zebra’s consolidated income taxes by $2,002,000 in 2012, $2,030,000 in 2011, and $1,247,000 in 2010.

Deferred income taxes reflect the impact of temporary differences between the amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. Based on management’s assessment, it is more likely than not that the deferred tax assets will be realized through future taxable earnings.

Tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows (in thousands):

	As of December 31,
	2012			2011
Deferred tax assets:
Deferred rent	$	508		$	623
Accrued vacation		2,480			1,926
Accrued bonus		2,747			4,342
Deferred compensation		1,497			1,451
Inventory items		6,967			7,072
Allowance for doubtful accounts and other receivables		211			355
Other accruals		6,531			7,355
Equity based compensation expense		16,620			16,124
Unrealized gain on securities		438			288
Unrealized loss on other investments		419			0
Net operating loss carry-forwards		2,462			4,511
Valuation allowance		(267	)		(267)
Total deferred tax assets		40,613			43,780
Deferred tax liabilities:
Unrealized loss on other investments		0			(931)
Depreciation and amortization		(24,527	)		(17,052)
Total deferred tax liabilities		(24,527	)		(17,983)
Net deferred tax assets	$	16,086		$	25,797

On January 1, 2007, Zebra adopted ASC 740 (formerly FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109). According to ASC 740, Zebra identified, evaluated, and measured the amount of income tax benefits to be recognized for all of its income tax positions. During 2008, Zebra recognized an increase of approximately $4,000,000 in the liability for unrecognized tax benefits related to an acquisition. During 2012 Zebra recognized an increase of $680,000 in one of its UK subsidiaries.

Included in deferred tax assets are amounts related to federal and state net operating losses that resulted from our acquisition of WhereNet Corp. As of December 31, 2012, Zebra had approximately $2,518,000 of federal net operating loss carryforwards available to offset future taxable income which expire in 2022 through 2027. As of December 31, 2011, Zebra also had approximately $27,391,000 of state net operating loss carryforwards which expire in 2013 through 2021. Zebra’s intention is to utilize these net operating loss carryforwards to offset future income tax expense. Under the United States Tax Reform Act of 1986, the amounts of benefits from net operating loss carryforwards may be impaired or limited in certain circumstances, including significant changes in ownership interests.

Deferred tax asset valuation allowances included in the temporary differences above are as follows (in thousands):

	Year Ended December 31,
Valuation allowance	2012		2011		2010
Balance at the beginning of the year	$	267	$	267	$	0
Additions		0		0		267
Subtractions		0		0		0
Balance at the end of the period	$	267	$	267	$	267

Zebra’s deferred tax valuation allowance is the result of uncertainties regarding the future realization of recorded tax benefits on state income tax loss carry-forwards. The addition in 2010 is primarily related to state income tax law changes in 2011 for that year and tax years going forward.

An audit of U.S. federal tax returns for years 2008 through 2010 was completed in 2012. The tax years 2008 through 2010 remain open to examination by multiple state taxing jurisdictions. Tax authorities in the United Kingdom have completed income tax audits for tax years through 2009.

Zebra’s continuing practice is to recognize interest and/or penalties related to income tax matters as part of income tax expense. For the years ended December 31, 2012, 2011 and 2010, Zebra did not accrue any interest or penalties into income tax expense.