Note 14: Income Taxes


	Years Ended December 31,
	2012			2011			2010
	(In thousands)

Income (loss) from continuing operations before taxes:
United States operations	$	(22,533	)	$	27,324		$	11,871
Foreign operations		27,575			90,775			57,595

	$	5,042		$	118,099		$	69,466


Income tax expense (benefit):
Currently payable:
United States federal	$	(6,944	)	$	(4,741	)	$	(6,138	)
United States state and local		(2,519	)		1,303			178
Foreign		14,020			18,572			16,883

		4,557			15,134			10,923

Deferred:
United States federal		(22,661	)		(1,276	)		(4,116	)
United States state and local		(424	)		(799	)		(322	)
Foreign		(19,666	)		3,732			1,705

		(42,751	)		1,657			(2,733	)

Total income tax expense (benefit)	$	(38,194	)	$	16,791		$	8,190

In addition to the above income tax expense (benefit) associated with continuing operations, we also recorded income tax expense associated with discontinued operations of $78.7 million, $7.6 million, and $42.3 million in 2012, 2011, and 2010, respectively.

In January 2013, the United States Congress passed and the President signed the American Taxpayer Relief Act of 2012 which retroactively extended various tax provisions applicable to the Company. As a result, we expect that our income tax provision for 2013 will include a related discrete tax benefit for the impact of the change in the tax law.


	Years Ended December 31,
	2012			2011			2010

Effective income tax rate reconciliation from continuing operations:
United States federal statutory rate		35.0	%		35.0	%		35.0	%
State and local income taxes		(32.5	)%		0.8	%		0.2	%
Impact of change in deferred tax asset valuation allowance		(187.8	)%		(6.8	)%		(1.3	)%
Impact of change in tax contingencies		3.3	%		(1.1	)%		0.8	%
Foreign income tax rate differences		(278.1	)%		(6.8	)%		(18.2	)%
Cooper liability settlement		(394.7	)%		0.0	%		0.0	%
Domestic permanent differences & tax credits		97.3	%		(6.9	)%		(4.7	)%

		(757.5	)%		14.2	%		11.8	%

The individual percentages reflected in the above rate reconciliation are significant due to the dollar value of such items relative to the $5.0 million of consolidated pre-tax income in 2012. The most significant factors impacting the rate and the total income tax benefit of $38.2 million include the Cooper Industries tax agreement settlement and the reduction of the deferred tax asset valuation allowance, both of which are discussed further below.

Deferred income taxes have been established for differences in the basis of assets and liabilities for financial statement and tax reporting purposes and, for prior years, these amounts included adjustments for a tax sharing agreement with Cooper Industries (Cooper). This agreement required us to pay Cooper the majority of the tax benefits resulting from basis adjustments arising from the initial public offering of our stock on October 6, 1993. The effect of the Cooper tax agreement was to put us in the same financial position we would have been in had there been no increase in the tax basis of our intangible assets (except for a retained 10% benefit). The retained 10% benefit had no impact on our consolidated income tax expense for 2011 and 2010, and we did not pay any taxes to Cooper in accordance with the tax agreement during those years. In 2011, Cooper sued us in Texas state court for amounts allegedly owed by us under the tax sharing agreement. As a result of a final settlement reached with Cooper, the tax sharing agreement has been terminated, we will pay a final settlement amount of $30 million, and the tax benefit of the settlement of $21.0 million has been reflected in our 2012 tax provision.


	December 31,
	2012			2011
	(In thousands)
Components of deferred income tax balances:
Deferred income tax liabilities:
Plant, equipment and intangibles	$	(89,433	)	$	(62,987	)

Deferred income tax assets:
Postretirement, pensions, and stock compensation		44,814			38,711
Reserves and accruals		22,042			17,878
Net operating loss and tax credit carryforwards		84,716			60,758
Valuation allowances		(7,498	)		(23,663	)

		144,074			93,684

Net deferred income tax asset	$	54,641		$	30,697

In 2012, the increase in net deferred income tax assets stems primarily from the reduction in valuation allowance associated with our ability to realize deferred tax assets related to net operating losses and tax credits in various jurisdictions. We evaluated and assessed the expected utilization of net operating losses, future book and taxable income, available tax planning strategies, and our overall deferred tax position to determine the appropriate amount and timing of valuation allowance adjustments. As a result of changes in our business, available tax planning strategies, and future taxable income projections, we determined that the weight of evidence regarding the future realizability of the deferred tax assets had become predominately positive and realization of the deferred tax assets was more likely than not.

As of December 31, 2012, we had $211.4 million of net operating loss carryforwards and $49.0 million of tax credit carryforwards. Unless otherwise utilized, net operating loss carryforwards will expire as follows: $1.0 million in 2013, $36.3 million in 2014, $66.9 million between 2015 and 2017, and $65.4 million between 2018 and 2031. Net operating losses with an indefinite carryforward period total $41.8 million. Of the $211.4 million in net operating loss carryforwards, we have determined, based on the weight of all available evidence, both positive and negative, that we will utilize $143.2 million of these net operating loss carryforwards within their respective expiration periods.

Unless otherwise utilized, tax credit carryforwards of $30.0 million will expire between 2018 and 2020. Tax credit carryforwards with an indefinite carryforward period total $19.0 million. We have determined, based on the weight of all available evidence, both positive and negative, that we will utilize all of these tax credit carryforwards within their respective expiration periods.

In general, it is our practice and intention to reinvest the earnings of our non-U.S. subsidiaries in those operations. As a result, as of December 31, 2012, we have not made a provision for U.S. or additional foreign withholding taxes on approximately $380.2 million of the undistributed earnings of foreign subsidiaries that are essentially permanent in duration. Generally, such amounts become subject to U.S. taxation upon the remittance of dividends and under certain other circumstances. It is not practical to estimate the amount of the deferred tax liability related to investments in these foreign subsidiaries.

In 2012, we recognized a net $5.8 million decrease to reserves for uncertain tax positions. A reconciliation of the beginning and ending gross amount of unrecognized tax benefits is as follows:


	2012			2011

Balance at beginning of year	$	23,199		$	24,122
Additions based on tax positions related to the current year		1,001			240
Additions for tax positions of prior years		8,928			2,186
Reductions for tax positions of prior years—Settlement		(640	)		(2,547	)
Reductions for tax positions of prior years—Statute of limitations		(15,111	)		(802	)

Balance at end of year	$	17,377		$	23,199

Additions for tax positions of prior years includes $8.3 million related to acquisitions for 2012. The balance of $17.4 million at December 31, 2012, reflects tax positions that, if recognized, would impact our effective tax rate.

As of December 31, 2012, we believe it is reasonably possible that $1.5 million of unrecognized tax benefits, primarily attributable to the expiration of several statutes of limitations, will change within the next twelve months.

Our practice is to recognize interest and penalties related to uncertain tax positions in operating expenses. During 2012, 2011, and 2010, we recognized approximately $0.1 million, $1.0 million, and $(0.6) million, respectively, in interest expense (income) and penalties. We have approximately $1.4 million and $5.2 million accrued for the payment of interest and penalties as of December 31, 2012 and 2011, respectively.

Our federal, state, and foreign income tax returns for the tax years 2007 and later remain subject to examination by the Internal Revenue Service and by various state and foreign taxing authorities.