R. INCOME TAXES

The components of income (loss) from continuing operations before income taxes and the provision (benefit) for income taxes from continuing operations as shown in the consolidated statements of operations were as follows:


	2012			2011			2010
	(in thousands)
Income from continuing operations before income taxes:
U.S.	$	112,008		$	68,943		$	120,330
Non-U.S.		153,968			145,478			276,017

	$	265,976		$	214,421		$	396,347

Provision (benefit) for income taxes from continuing operations:
Current:
U.S. Federal	$	22,695		$	3,668		$	(1,555	)
Non-U.S.		18,261			23,994			16,547
State		(12	)		760			553

		40,944			28,422			15,545

Deferred:
U.S. Federal		8,158			(139,929	)		—
Non-U.S.		5,997			(10,549	)		1,110
State		(6,172	)		(7,480	)		—

		7,983			(157,958	)		1,110

Total provision (benefit) for income taxes from continuing operations:	$	48,927		$	(129,536	)	$	16,655

For the tax year ended December 31, 2012, the income tax expense from continuing operations for 2012 totaled $48.9 million, primarily attributable to a U.S. federal tax provision and tax provisions for foreign taxes. As of December 31, 2012, Teradyne evaluated the likelihood that it would realize the deferred income taxes to offset future taxable income and concluded that it is more likely than not that a substantial majority of its deferred tax assets will be realized through consideration of both the positive and negative evidence. Teradyne maintains a valuation allowance for certain deferred tax assets of $55.4 million, primarily related to excess stock compensation deductions associated with pre-2006 activity, state net operating losses and state tax credit carryforwards, due to the uncertainty regarding their realization. Adjustments could be required in the future if Teradyne estimates that the amount of deferred tax assets to be realized is more or less than the net amount recorded.

For the year ended December 31, 2011, income tax benefit from continuing operations totaled $129.5 million, primarily attributable to the reduction of Teradyne’s deferred income tax valuation allowance. As of December 31, 2011, Teradyne evaluated the likelihood that it would realize the deferred income taxes to offset future taxable income and concluded that it is more likely than not that a substantial majority of its deferred tax assets will be realized through consideration of both the positive and negative evidence. The evidence consisted primarily of its three year U.S. historical cumulative profitability, projected future taxable income, forecasted utilization of the deferred tax assets and the fourth quarter of 2011 acquisition of LitePoint, offset by the volatility of the industries Teradyne operates in, primarily the semiconductor industry. As such, Teradyne reduced the valuation allowance by $190.2 million, which was recorded as a tax benefit in the year ended December 31, 2011. At December 31, 2011, Teradyne maintained a valuation allowance for certain deferred tax assets of $51.1 million, primarily related to excess stock compensation deductions associated with pre-2006 activity, state net operating losses and state tax credit carryforwards, due to the uncertainty regarding their realization. Adjustments could be required in the future if Teradyne estimates that the amount of deferred tax assets to be realized is more or less than the net amount recorded.

For the year ended December 31, 2010, income tax expense from continuing operations totaled $16.7 million, primarily related to tax provisions for foreign taxes.

The total income tax provision (benefit) for the years ended December 31, 2012, 2011 and 2010 was as follows:


	2012		2011			2010
	(in thousands)
Continuing operations	$	48,927	$	(129,536	)	$	16,655
Discontinued operations		—		4,311			278

Total income tax provision (benefit)	$	48,927	$	(125,225	)	$	16,933

Significant components of Teradyne’s deferred tax assets (liabilities) as of December 31, 2012 and 2011 were as follows:


	2012			2011
	(in thousands)
Deferred tax assets:
Net operating loss carryforwards	$	36,674		$	37,899
Tax credits		64,123			76,248
Inventory valuations		50,886			42,760
Pension liability		28,674			21,119
Research and development		284			10,028
Accruals		14,246			13,817
Equity compensation		9,355			8,729
Vacation accrual		6,452			6,267
Other		282			398
Deferred revenue		15,118			35,869

Gross deferred tax assets		226,094			253,134

Less: valuation allowance		(55,446	)		(51,066	)

Total deferred tax assets		170,648			202,068

Deferred tax liabilities:
Marketable securities		(996	)		(827	)
Intangible assets		(114,730	)		(144,925	)
Excess of tax over book depreciation		(22,446	)		(18,417	)

Total deferred tax liabilities		(138,172	)		(164,169	)

Net deferred assets	$	32,476		$	37,899

At December 31, 2012, Teradyne had operating loss carryforwards that expire in the following years:


	U.S. Federal Operating Loss Carryforwards		State Net Operating Loss Carryforwards		Foreign Net Operating Loss Carryforwards
	(in thousands)
2013	$	—	$	2,708	$	—
2014		—		2		—
2015		—		2		—
2016		—		58		—
2017		—		847		—
2018-2023		22,354		3,592		—
2024-2026		—		269		9
Beyond 2026		—		3,667		622
Non-expiring		—		—		8,038

Total	$	22,354	$	11,145	$	8,669

Of the U.S. federal operating loss carryforwards, $22.4 million relates to the acquisition of GenRad, Inc. in 2001. The GenRad losses are limited in the amount that can be used as a result of “change in ownership” rules as defined in the Internal Revenue Code of 1986. The net operating loss carryforward does not include any excess tax deduction related to stock based compensation which has not been recognized for financial statement purposes. Certain of the above tax attribute carryovers included in deferred tax assets, primarily the net operating loss carryovers, will be recorded through additional paid-in capital when realized, with the exception of the GenRad net operating losses.

Teradyne has approximately $119.0 million of tax credit carry forwards. Federal business tax credits of approximately $15.5 million expire in the years 2028 through 2031. Teradyne has foreign tax credits of approximately $42.5 million expiring in the years 2013 through 2022 and alternative minimum tax credits of approximately $6.6 million, which do not expire. In addition, there are state tax credits of $54.4 million which begin to expire in 2013.

During 2012, Teradyne’s valuation allowance increased by $4.4 million primarily due to the increase in the deferred tax assets related to state tax credits generated in 2012. During 2011, Teradyne’s beginning of the year valuation allowance decreased by $190.2 million due to a release of the valuation allowance. During 2010, Teradyne’s valuation allowance decreased by $60.0 million primarily due to the reduction in the deferred tax assets related to the decrease in net operating loss carryovers used in 2010.

A reconciliation of the effective tax rate for the years 2012, 2011 and 2010 follows:


	2012			2011			2010
U.S. statutory federal tax rate		35.0	%		35.0	%		35.0	%
State income taxes, net of federal tax benefit		(1.7	)		—			0.4
Foreign taxes		(11.5	)		(12.6	)		(13.9	)
Valuation allowance		(0.5	)		(87.7	)		(17.4	)
Other U.S. permanent items		(2.8	)		5.7			—
Other, net		(0.1	)		(0.8	)		0.1

		18.4	%		(60.4	)%		4.2	%

Teradyne qualifies for a tax holiday in Singapore by fulfilling the requirements of an agreement with the Singapore Economic Development Board under which certain headcount and spending requirements must be met. The tax savings due to the tax holiday for the years ended December 31, 2012 and 2011 were $10.9 million or $0.05 per diluted share and $0.2 million or $0.00 per diluted share, respectively. There were no tax savings from the tax holiday for the year ended December 31, 2010. The tax holiday is currently expected to expire on December 31, 2015.

Teradyne records all interest and penalties related to income taxes as a component of income tax expense. Accrued interest and penalties related to income tax items at December 31, 2012 were not material.

Teradyne’s gross unrecognized tax benefits for the years ended December 31, 2012, 2011 and 2010 were as follows:


	2012			2011			2010
	(in thousands)
Beginning balance, as of January 1	$	19,678		$	12,028		$	12,767
Additions:
Tax positions for current year		459			6,131			106
Tax positions for prior years		1,402			1,296			2,435
Acquired tax positions		—			1,388			—
Reductions:
Tax positions for prior years		(4,072	)		(1,165	)		(3,280	)
Settlements with tax authorities		—			—			—

Ending Balance as of December 31	$	17,467		$	19,678		$	12,028

Current year and prior year additions include assessment of potential transfer pricing issues worldwide, federal tax credits, state tax credits, and domestic production activities deduction. Reductions for tax positions for prior years primarily relate to statute expiration and the effective settlement of a state tax audit. Of the $17.5 million of unrecognized tax benefits as of December 31, 2012, $14.8 million would impact the consolidated income tax rate if ultimately recognized. The remaining $2.7 million would impact the valuation allowance if recognized.

As of December 31, 2012, Teradyne has open tax years beginning in 2006 for major jurisdictions including the U.S., Japan, Singapore and the United Kingdom. Teradyne estimates that it is reasonably possible that the balance of unrecognized tax benefits as of December 31, 2012 may decrease approximately $0.3 million in the next twelve months, as a result of a lapse of statutes of limitation.

As of December 31, 2012, a deferred tax liability has not been established for approximately $10.6 million of cumulative undistributed earnings of non-U.S. subsidiaries, which are expected to be reinvested indefinitely in operations outside the U.S. Determination of the unrecognized deferred tax liability on unremitted earnings is not practical.

On January 2, 2013, the American Taxpayer Relief Act of 2012 was enacted which retrospectively reinstated the research and development tax credit for 2012 and extended it through December 31, 2013. As a result, in the first quarter of 2013, Teradyne expects to record a discrete benefit related to 2012 of approximately $7.0 million.