Income Taxes

We compute an estimated annual effective tax rate on a quarterly basis, considering ordinary income and related income tax expense. Ordinary income refers to income (loss) before income tax expense excluding significant, unusual, or infrequently occurring items. The tax effect of an unusual or infrequently occurring item is recorded in the interim period in which it occurs. These items may include the cumulative effect of changes in tax laws or rates, impairment charges, adjustments to prior period uncertain tax positions, or adjustments to our valuation allowance due to changes in judgment of the realizability of deferred tax assets

The following table summarizes the provision for income taxes for the three and nine months ended September 30, 2011 and 2012:



	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2011			2012			2011			2012
	(Dollars in thousands)						(Dollars in thousands)
Tax expense/(benefit)	$	7,200		$	6,478		$	20,026		$	10,966
Pretax income	$	47,497		$	36,104		$	116,155		$	99,968
Effective tax rates	15.2		%	17.9		%	17.2		%	11.0		%

For the three months ended September 30, 2012, we earned tax credits in support of our research and development efforts of high-tech Engineered Solutions products. The tax credits positively impacted the tax rate for the quarter. The current year effective tax rate also differs from the U.S statutory rate of 35% due to jurisdictional mix of income.

In addition, for the nine months ended September 30, 2012, our net unrecognized tax benefits decreased by $9.2 million, primarily related to the resolution of uncertain tax positions from prior years, which had a favorable impact on our effective tax rate for the nine months ended September 30, 2012.

As of September 30, 2012, we had unrecognized tax benefits of $7.6 million, $5.5 million of which, if recognized, would have a favorable impact on our effective tax rate. It is uncertain whether or not any reduction of unrecognized tax benefits may occur within the next 12 months.

We file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. All U.S. tax years prior to 2010 are generally closed by statute or have been audited and settled with the domestic tax authorities. We have one issue outstanding from the 2008 federal audit, which is under appeals. We are also under audit in Switzerland for federal, cantonal, and communal taxes for the tax years ended 2006 – 2009. All other non-U.S. jurisdictions are still open to examination beginning after 2006.

We continue to assess the need for valuation allowances against certain deferred tax assets based on determinations of whether it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Appropriate consideration is given to all available evidence, both positive and negative, in assessing the need for a valuation allowance. Examples of positive evidence would include a strong earnings history, an event or events that would increase our taxable income through a continued reduction of expenses, and tax planning strategies that would indicate an ability to realize deferred tax assets. The balance of significant positive evidence does not yet outweigh the negative evidence in regards to whether or not a valuation allowance is required on these deferred tax assets.