5. Income Taxes

The components of income from continuing operations before provision for income taxes are as follows:

(In thousands)	2012		2011		2010
Domestic	$	11,445	$	9,823	$	6,484
Foreign		24,485		28,320		17,364
	$	35,930	$	38,143	$	23,848

The components of the provision for income taxes from continuing operations are as follows:

(In thousands)	2012		2011		2010
Current Provision (Benefit) :
Federal	$	1,798	$	123	$	(630)
Foreign		7,363		5,575		3,976
State		559		473		603
		9,720		6,171		3,949

Deferred (Benefit) Provision :
Federal		(3,980)		(317)		999
Foreign		(782)		(1,309)		107
State		(106)		(260)		143
		(4,868)		(1,886)		1,249
	$	4,852	$	4,285	$	5,198

The provision (benefit) for income taxes included in the accompanying statement of income is as follows:

(In thousands)	2012		2011		2010
Continuing Operations	$	4,852	$	4,285	$	5,198
Discontinued Operation		451		(1,511)		(164)
	$	5,303	$	2,774	$	5,034

The Company receives a tax deduction upon the exercise of nonqualified stock options by employees equal to the difference between the market price and the exercise price of the Company's common stock on the date of exercise. The current provision for income taxes in the consolidated statement of income does not reflect $132,000, $371,000, and $26,000 of such excess tax benefits in 2012, 2011, and 2010, respectively, from the exercise of stock options and vesting of restricted stock units.

The provision for income taxes from continuing operations in the accompanying statement of income differs from the provision calculated by applying the statutory federal income tax rate of 35% to income from continuing operations before provision for income taxes due to the following:

(In thousands)	2012		2011		2010
Provision for Income Taxes at Statutory Rate	$	12,576	$	13,350	$	8,347
Increases (Decreases) Resulting From:
State income taxes, net of federal tax		295		(140)		485
U.S. tax cost (benefit) of foreign earnings		791		(53)		1,108
Foreign tax rate differential		(2,298)		(3,094)		(2,039)
Unrecognized tax (benefit) reserves, net		624		(1,596)		(386)
Change in valuation allowance		(7,051)		(4,183)		(2,051)
Nondeductible expenses		775		746		426
Research and development tax credits		(623)		(324)		(266)
Other		(237)		(421)		(426)
	$	4,852	$	4,285	$	5,198

Net deferred tax asset (liability) in the accompanying consolidated balance sheet consists of the following:

(In thousands)	2012		2011
Deferred Tax Liability:
Foreign and alternative minimum tax credit carryforwards	$	5,659	$	8,050
Reserves and accruals		6,493		6,651
Operating loss carryforwards		15,147		14,515
Inventory basis difference		2,468		2,443
Research and development		1,193		1,316
Employee compensation		2,229		1,847
Allowance for doubtful accounts		486		458
Other		88		176
Revenue recognition		286		328
Deferred Tax Asset, Gross		34,049		35,784
Less: Valuation Allowance		(14,315)		(21,014)
Deferred Tax Asset, Net		19,734		14,770
Goodwill and intangible assets		(15,393)		(15,244)
Fixed assets basis difference		(2,974)		(3,313)
Reserves and accruals		(342)		(398)
Other		(107)		(149)
Deferred Tax Liability		(18,816)		(19,104)
Net Deferred Tax Asset (Liability)	$	918	$	(4,334)

The deferred tax asset and liability are presented in the accompanying balance sheet within other current assets, other assets, other current liabilities and deferred income taxes based on when the tax benefits are expected to be realized and on a net basis by tax jurisdiction.

The Company has established valuation allowances related to certain domestic and foreign deferred tax assets on deductible temporary differences, tax losses, and tax credit carryforwards. The valuation allowance at year-end 2012 was $14,315,000, consisting of $985,000 in the U.S. and $13,330,000 in foreign jurisdictions. The decrease in the valuation allowance in 2012 of $6,699,000 related primarily to the release of the valuation allowance in the U.S. Compliance with ASC 740 requires the Company to periodically evaluate the necessity of establishing or adjusting a valuation allowance for deferred tax assets depending on whether it is more likely than not that a related tax benefit will be realized in future periods. When assessing the need for a valuation allowance in a tax jurisdiction, the Company evaluates the weight of all available evidence to determine whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. As part of this evaluation, the Company considers its cumulative three-year history of earnings before income taxes, taxable income in prior carryback years, future reversals of existing taxable temporary differences, prudent and feasible tax planning strategies, and expected future results of operations. As of year-end 2012, in the U.S. the Company was in a three-year cumulative income position and expects income from operations and foreign source income in 2013; as a result, the Company released its tax valuation allowance against deferred tax assets associated with foreign tax credits and research and development tax credits. As of year-end 2012, the Company continued to maintain a valuation allowance in the U.S. primarily against its state operating loss carryforwards due to the uncertainty of future profitability in state jurisdictions in the U.S. As of year-end 2012, the Company maintained a full valuation allowance in certain foreign jurisdictions because of the uncertainty of future profitability.

At year-end 2012, the Company had domestic state and foreign net operating loss carryforwards of $25,360,000 and $58,213,000, respectively, U.S. foreign tax credit carryforwards of $4,499,000, U.S. research and development tax credits of $427,000, and U.S. alternative minimum tax credits of $1,154,000. The domestic state loss carryforwards will expire in the years 2013 through 2032. Their utilization is limited to future taxable income from the Company's domestic subsidiaries. Of the foreign net operating loss carryforwards, $13,804,000 will expire in the years 2014 through 2032, and the remainder do not expire. The U.S. foreign tax credits will expire in the years 2015 through 2020. The research and development tax credits will expire in the years 2021 through 2032 and the alternative minimum tax credits may be carried forward indefinitely.

The Company has not recognized a deferred tax liability for the difference between the book basis and the tax basis of its investment in the stock of its domestic subsidiaries, related primarily to unremitted earnings of subsidiaries, because it does not expect this basis difference to become subject to tax at the parent level. The Company believes it can implement certain tax strategies to recover its investment in its domestic subsidiaries tax-free. It is the Company's intention to reinvest indefinitely the earnings of its international subsidiaries in order to support the current and future capital needs of their operations in the foreign jurisdictions. Through year-end 2012, the Company has not provided for U.S. income taxes on approximately $123,533,000 of unremitted foreign earnings. The U.S. tax cost has not been determined due to the fact that it is not practicable to estimate at this time. The related foreign tax withholding, which would be required if the Company were to remit these foreign earnings to the U.S., would be approximately $1,575,000.

The Company operates within multiple tax jurisdictions and could be subject to audit in those jurisdictions. Such audits can involve complex income tax issues, which may require an extended period of time to resolve and may cover multiple years. In management's opinion, adequate provisions for income taxes have been made for all years subject to audit.

As of year-end 2012, the Company had $4,194,000 of unrecognized tax benefits which, if recognized, would reduce the effective tax rate. A tabular reconciliation of the beginning and ending amount of unrecognized tax benefits at year-end 2012 and 2011 is as follows:

(In thousands)	2012		2011
Unrecognized tax benefits, beginning of year	$	3,308	$	6,134
Gross increases—tax positions in prior periods		185		102
Gross decreases—tax positions in prior periods		(41)		(1,353)
Gross increases—current-period tax positions		1,231		1,469
Settlements		(182)		(940)
Lapses of statutes of limitation		(367)		(1,914)
Currency translation		60		(190)
Unrecognized tax benefits, end of year	$	4,194	$	3,308

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. The Company has accrued $1,196,000 and $1,194,000 for the potential payment of interest and penalties at year-end 2012 and 2011, respectively. The interest and penalties included in the consolidated statement of income was a benefit of $6,000 and $581,000 in 2012 and 2011, respectively.

The Company is currently under audit in the U.S. and certain non-U.S. taxing jurisdictions. It is reasonably possible that over the next twelve months the amount of liability for unrecognized tax benefits may be reduced by up to $409,000 due to the re-evaluation of current uncertain tax positions as a result of examinations or from the expiration of tax statute of limitations.

The Company remains subject to U.S. Federal income tax examinations for the tax years 2009 through 2012, and to non-U.S. income tax examinations for the tax years 2005 through 2012. In addition, the Company remains subject to state and local income tax examinations in the U.S. for the tax years 2002 through 2012.