Income Taxes

The following table presents income tax expense and the effective tax rate:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(Dollars in thousands)
Income tax expense	$	16,305		$	26,104		$	73,047		$	88,025
Effective tax rate	15		%	24		%	20		%	26		%

The effective tax rate for the three and nine months ended September 30, 2014 and 2013 is lower than the statutory federal rate of 35% primarily due to tax benefits from foreign income taxed at lower rates, partially offset by state income taxes and non-deductible stock-based compensation. The effective tax rate for the three and nine months ended September 30, 2014 was also reduced by discrete income tax benefits recognized as a result of changes in estimated income tax expenses relating to the repatriation of funds held by foreign subsidiaries.

During the nine months ended September 30, 2014, the Company completed the previously disclosed repatriation of $740.9 million of cash held by foreign subsidiaries, net of $28.1 million of foreign withholding taxes which were accrued during 2013. The Company utilized the majority of the remaining deferred tax asset for net operating loss carryforwards generated from the 2013 worthless stock deduction to offset the income tax resulting from current year income and the repatriation. The repatriation generated foreign source income in the U.S. which allows the Company to claim eligible foreign taxes amounting to $191.4 million paid in the current year and prior years as foreign tax credits instead of as deductions. The benefit from these foreign tax credits was included in the computation of the deferred tax liability on unremitted foreign earnings as of December 31, 2013. The majority of these foreign tax credits will expire in 2024. The Company believes it is more likely than not that it will realize the benefit from these foreign tax credits before they expire, and accordingly has recognized a deferred tax asset as of September 30, 2014. The Company recognized a discrete tax benefit of $5.2 million in the second quarter of 2014 and an additional $11.4 million during the third quarter of 2014, as a result of changes in estimated income tax expenses related to the repatriation.

In 2014, the Company adopted Accounting Standards Update (ASU) 2013-11, “Income Taxes - Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, Or a Tax Credit Carryforward Exists.” This ASU generally requires that unrecognized tax benefits be presented as a reduction to a deferred tax asset for a net operating loss, similar tax loss or a tax credit carryforward that is available to settle additional income taxes that would result from the disallowance of a tax position, presuming disallowance at the reporting date. As noted previously, the Company utilized a substantial portion of the remaining deferred tax asset for net operating loss carryforwards to offset the income tax resulting from current year income and the repatriation, and also recognized a deferred tax asset for foreign tax credits. As a result of the adoption of this ASU, and the utilization of the deferred tax asset for net operating loss carryforwards, partially offset by recognized deferred tax asset for foreign tax credits, approximately $22.2 million of unrecognized tax benefits, which had previously been offset against deferred tax assets, have been reclassified to Other long-term tax liabilities as of September 30, 2014.

Long-term deferred tax assets as of September 30, 2014 reflects the recognition of deferred tax asset for foreign tax and alternative minimum tax credits, the effect of the re-allocation of valuation allowances between current and long-term deferred tax assets and the reclassification of unrecognized tax benefits. Current deferred tax liabilities as of September 30, 2014 reflects the release of the deferred tax liability related to unremitted foreign earnings, as actual tax liability was determined upon the completion of the repatriation, the use of deferred tax asset for net operating loss carryforwards, the recognition of deferred tax asset for foreign tax credits, the reclassification of unrecognized tax benefits, the effect of the re-allocation of valuation allowances between current and long-term deferred tax assets, and an increase in the deferred tax liability related to the Subordinated Convertible Debentures.