7. Income Taxes

The following tables present components of income tax (benefit)/expense and (loss)/income before income taxes on continuing operations:

(in thousands)	2012		2011		2010

Income tax based on income from continuing operations, at estimated tax rates of 39%, 33%, and 30%, respectively	$19,769		$17,814		$14,381
Pension plan settlements	(39,460	)	-		-
Redemption of life insurance policies	-		-		9,382
Income tax before discrete items	(19,691	)	17,814		23,763

Discrete tax (benefit)/expense:
Provision for/resolution of tax audits and contingencies, net	(2,747	)	289		-
Adjustments to prior period tax liabilities	(1,471	)	(1,624	)	100
Enacted legislation change	(973	)	115		324
Provision for/adjustment to beginning of year valuation allowances	(2,442	)	22,798		-
Change in tax status	-		(3,344	)	(161	)
Repatriation of non-U.S. prior years' earnings	-		-		(2,262	)
Adjustment to correct a prior year error	-		(3,553	)	-
Other discrete tax adjustments, net	(199	)	87		(742	)
Total income tax (benefit)/expense	($27,523	)	$32,582		$21,022

Income tax expense in 2011 includes a favorable adjustment of $3.5 million to correct errors from periods prior to 2006. The Company does not believe that the corrected item is or was material to 2011 or any previously reported quarterly or annual financial statements. As a result, the Company has not restated its previously issued annual or quarterly financial statements.

(in thousands)	2012		2011		2010
(Loss)/income before income taxes:
U.S.	($84,624	)	($9,748	)	($1,481	)
Non-U.S.	16,258		63,596		49,926
	($68,366	)	$53,848		$48,445

Income tax provision:

Current:
Federal	($20,123	)	($9,288	)	($2,469	)
State	(1,212	)	120		75
Non-U.S.	12,413		17,879		9,306
	($8,922	)	$8,711		$6,912

Deferred:
Federal	($12,851	)	$3,519		$11,838
State	(1,538	)	113		1,893
Non-U.S.	(4,212	)	20,239		379
	($18,601	)	$23,871		$14,110

Total provision for income taxes	($27,523	)	$32,582		$21,022

The significant components of deferred income tax (benefit)/expense are as follows:

(in thousands)	2012			2011			2010
Net effect of temporary differences		$(7,557	)		$1,593			$12,035
Foreign tax credits		9,468			(5,668	)		(14,262	)
Postretirement benefits		(18,337	)		5,119			3,216
Net impact to operating loss carryforwards		1,240			3,258			26,341
Enacted changes in tax laws and rates		(973	)		115			324
Adjustments to beginning-of-the-year valuation
allowance balance for changes in circumstances		(2,442	)		22,798			-
Changes in tax status		-			(3,344	)		(161	)
Recognition of deferred gain on extinguished debt		-			-			(13,383	)
Total		$(18,601	)		$23,871			$14,110

A reconciliation of the U.S. federal statutory tax rate to the Company's effective income tax rate is as follows:

	2012			2011			2010
U.S. federal statutory tax rate		35.0	%		35.0	%		35.0	%
State taxes, net of federal benefit		3.5			0.3			3.3
Non-U.S. local income taxes		0.5			0.4			0.8
Foreign rate differential		(1.7	)		(14.3	)		(28.2	)
U.S. tax on non-U.S. earnings and foreign withholdings		(1.2	)		12.8			7.7
Provision for/resolution of beginning of year tax contingencies		4.0			0.5			0.0
Net Change in valuation allowances		(3.7	)		42.1			14.5
Change in tax status		-			(6.2	)		(0.3	)
Adjustment to correct prior year error		-			(6.4	)		-
Officers life insurance		-			-			17.4
Other		3.9			(3.7	)		(6.7	)
Effective income tax rate		40.3	%		60.5	%		43.5	%

The Company has operations which constitute a taxable presence in 16 countries outside of the United States. All of these countries except one had income tax rates that were lower than the United States federal tax rate during the periods reported. The jurisdictional location of earnings is a significant component of our effective tax rate each year. The rate impact of this component is influenced by the specific location of non-U.S. earnings and the level of our total earnings. From period to period, the jurisdictional mix of earnings can vary as a result of operating fluctuations in the normal course of business, as well as the extent and location of other income and expense items, such as pension settlement and restructuring charges. The foreign income tax rate differential that is included above in the reconciliation of the effective tax rate includes the difference between tax expense calculated at the U.S. federal statutory tax rate of 35% and the expense accrued based on lower statutory tax rates that apply in the jurisdictions where the income or loss is earned.

During the periods reported, income outside of the U.S. was heavily concentrated within Switzerland (8% tax rate) and Brazil (25% tax rate) and as a result, the foreign income tax rate differential was primarily attributable to these tax rate differences. Also, in 2012 the income tax rate differential was significantly reduced by the pension settlement and restructuring charges outside of the U.S. that resulted in a lower tax rate benefit, as compared to the benefit calculated using the higher U.S. tax rate.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of certain assets and liabilities for financial reporting and the amounts used for income tax expense purposes. Significant components of the Company's deferred tax assets and liabilities are as follows:

		U.S.				Non-U.S.
	2012	2011		2012		2011
(in thousands)
Current deferred tax assets:
Accounts receivable	$1,733	$1,713		$2,437		$2,279
Inventories	1,589	3,049		2,052		1,919
Tax credit carryforwards	3,000	-		-		-
Other	3,413	3,815		6,370		7,351
Total current deferred tax assets	9,735	8,577		10,859		11,549

Noncurrent deferred tax assets:
Deferred compensation	5,668	5,420		-		-
Depreciation and amortization	5,004	-		2,958		2,502
Postretirement benefits	38,632	45,547		4,480		8,984
Tax loss carryforwards	1,032	2,002		78,968		70,510
Tax credit carryforwards	24,504	36,868		1,561		3,980
Other	4,119	5,469		557		259
Noncurrent deferred tax assets
before valuation allowance	78,959	95,306		88,524		86,235

Less: valuation allowance	-	(739	)	(60,348	)	(62,674	)
Total noncurrent deferred tax assets	78,959	94,567		28,176		23,561

Total deferred tax assets	$88,694	$103,144		$39,035		$35,110

Current deferred tax liabilities:
Unrepatriated foreign earnings	$1,521	$3,672		$ -		$ -
Inventories	-	-		1,383		1,514
Other	-	-		12		215
Total current deferred tax liabilities	1,521	3,672		1,395		1,729

Noncurrent deferred tax liabilities:
Depreciation and amortization	15,296	17,139		10,106		10,953
Postretirement benefits	-	-		4,726		1,854
Branch losses subject to recapture	-	-		12,959		14,176
Other	68	471		2,473		-
Total noncurrent deferred tax liabilities	15,364	17,610		30,264		26,983

Total deferred tax liabilities	16,885	21,282		31,659		28,712

Net deferred tax asset	$71,809	$81,862		$7,376		$6,398

Deferred income tax assets, net of valuation allowances, are expected to be realized through the reversal of existing taxable temporary differences and future taxable income. In 2012, the Company recorded a net decrease in its valuation allowance of $3.1 million.

At December 31, 2012, the Company had available approximately $633.8 million of net operating loss carryforwards, for which we have a deferred tax asset of $80.0 million, with expiration dates ranging from one year to indefinite that may be applied against future taxable income. Included in the net operating loss carryforwards is approximately $31.4 million of state net operating loss carryforwards that are subject to various business apportionment factors and multiple jurisdictional requirements when utilized. In addition, the Company had available a foreign tax credit carryforward of $19.2 million that will begin to expire in 2015, research and development credit carryforwards of $7.0 million that will begin to expire in 2023, and alternative minimum tax credit carryforwards of $1.3 million with no expiration date.

The Company reported a U.S. net deferred tax asset of $71.8 million at December 31, 2012, which contained $28.5 million of tax attributes with limited lives. Although the Company is in a cumulative book income position over the evaluation period (three-year period ending December 31, 2012), management has evaluated its ability to utilize these tax attributes during the carryforward period. The Company's future profits from operations coupled with the repatriation of non-U.S. earnings will generate income of sufficient character to utilize the remaining tax attributes. Accordingly, no valuation allowance has been established for the remaining U.S. net deferred tax assets.

The Company records the residual U.S. and foreign taxes on certain amounts of current foreign earnings that have been targeted for repatriation to the U.S. As a result, such amounts are not considered to be permanently reinvested, and the Company accrued for the residual taxes on these earnings to the extent they cannot be repatriated in a tax-free manner.

At December 31, 2012 the Company reported a deferred tax liability of $1.5 million on $19.4 million of non-U.S. earnings that have been targeted for future repatriation to the U.S. Included in these amounts are $0.5 million of tax expense on approximately $12.1 million of foreign earnings that were generated in 2012.

The accumulated undistributed earnings of the Company's foreign operations were approximately $375.0 million, and are intended to remain permanently invested in foreign operations. Accordingly, no taxes have been provided on these earnings at December 31, 2012. If these earnings were distributed, the Company would be subject to both foreign withholding taxes and U.S. income taxes that may not be fully offset by foreign tax credits. A reasonable estimate of the deferred tax liability on these earnings is not practicable at this time.

A reconciliation of the beginning and ending amount of unrecognized tax benefits, in accordance with applicable accounting guidance, is as follows:

(in thousands)	2012		2011		2010

Unrecognized tax benefits balance at January 1	$27,053		$23,467		$22,513

Increase in gross amounts of tax positions related to prior years	9,454		8,040		23

Decrease in gross amounts of tax positions related to prior years	-		(37	)	(690	)

Increase in gross amounts of tax positions related to current year	381		1,005		1,043

Decrease due to settlements with tax authorities	(13,099	)	(4,576	)	-

Decrease due to lapse in statute of limitations	(20	)	-		(76	)

Currency translation	617		(846	)	654

Unrecognized tax benefits balance at December 31	$24,386		$27,053		$23,467

At December 31, 2012, we had gross tax-effected unrecognized tax benefits of $24.4 million, all of which, if recognized, would impact the effective tax rate.

The Company recognizes interest and penalties related to unrecognized tax benefits within its global operations as a component of income tax expense. The Company recognized interest and penalties of ($6.4) million, $1.1 million and $.3 million in the Statements of Income and Retained Earnings in 2012, 2011 and 2010, respectively. The 2012 amount includes the reversal of $4.4M of interest and penalties related to the settlement of audits. As of December 31, 2012 and 2011, the Company had approximately $1.4 million and $7.6 million, respectively, of accrued interest and penalties related to uncertain tax positions.

We conduct business globally and, as a result, the Company or one or more of our subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business we are subject to examination by taxing authorities throughout the world, including major jurisdictions as the United States, Brazil, Canada, France, Germany, Italy, Mexico, and Switzerland. Open tax years in these jurisdictions range from 2000 to 2012. We are currently under audit in the U.S. and non-U.S. tax jurisdictions, including but not limited to Canada, Germany, and France.

It is reasonably possible that over the next twelve months the amount of unrecognized tax benefits may change within a range of a net increase of $0 million to a net decrease of $13.9 million, from the reevaluation of uncertain tax positions arising in examinations, in appeals, or in the courts, or from the closure of tax statutes. Not included in the range is $22.5 million of tax benefits in Germany related to a 1999 reorganization that have been challenged by the German tax authorities in the course of an audit of tax years 2000-2003. In 2008 the German Federal Tax Court (FTC) denied tax benefits to other taxpayers in a case involving German tax laws relevant to our reorganization. One of these cases involved a non-German party, and in the ruling in that case, the FTC acknowledged that the German law in question may be violative of European Union (EU) principles and referred the issue to the European Court of Justice (ECJ) for its determination on this issue. In September 2009, the ECJ issued an opinion in this case that is generally favorable to the other taxpayer and referred the case back to the FTC for further consideration. In May 2010 the FTC released its decision, in which it resolved certain tax issues that may be relevant to our audit and remanded the case to a lower court for further development. In 2012, the lower court decided in favor of the taxpayer and the government appealed the findings to the FTC. Although we were required to pay approximately $13.2 million to the German tax authorities in order to continue to pursue the position; when taking into consideration the ECJ decision, the latest FTC decision and the lower court decision, we believe that it is more likely than not that the relevant German law is violative of EU principles and accordingly we have not accrued tax expense on this matter. As we continue to monitor developments, it may become necessary for us to accrue tax expense and related interest.

As of December 31, 2012 and 2011, current income taxes receivable and deferred consisted of the following:

(in thousands)	2012	2011
Income taxes receivable	$ -	$9,884
Deferred income taxes	20,594	20,126
Total current income taxes receivable and deferred	$20,594	$30,010

As of December 31, 2012 and 2011, noncurrent taxes receivable and deferred consisted of the following:

(in thousands)	2012	2011
Income taxes receivable	$16,751	$16,516
Deferred income taxes	107,135	118,128
Total noncurrent deferred taxes and taxes receivable	$123,886	$134,644

As of December 31, 2012 and 2011, current taxes payable and deferred consisted of the following:

(in thousands)	2012	2011
Taxes payable	$10,636	$3,365
Deferred income taxes	2,916	5,401
Total current income taxes payable and deferred	$13,552	$8,766

Taxes paid, net of refunds, amounted to $15.1 million in 2012, $13.7 million in 2011, and $9.2 million in 2010.