Income Taxes

In the third quarter and first nine months of 2012, our effective tax rate was a provision of 26% on pre-tax income of $30.8 million, and 25% on pre-tax income of $64.6 million, respectively, compared to a provision of 15% on pre-tax income of $18.3 million and 16% on pre-tax income of $56.9 million in the third quarter and first nine months of 2011, respectively. In the first nine months of 2012, our effective tax rate was lower than the 35% statutory federal income tax rate due primarily to our corporate structure in which our foreign taxes are at a net effective tax rate lower than the U.S. rate. The third quarter of 2012 provision includes a discrete non-cash charge of $4.2 million. This charge was recorded due to the restructuring of our Canadian operations that resulted in a change in the tax status of the foreign legal entity. Our provision in the first nine months of 2012 also includes the expiration on December 31, 2011 of the research and development (R&D) credit in the U.S. and a discrete non-cash charge of $1.5 million related to the impact of a Japanese legislative change, enacted in the first quarter, on our Japan entity's deferred tax assets. Additionally, we expect to make a R&D cost sharing prepayment by a foreign subsidiary to the U.S. at the same level as the prior year. If such prepayment is not ultimately paid within the fiscal year, the effective tax rate would be favorably impacted by up to $7.5 million. In the first nine months of 2011, our effective tax rate was lower than the 35% statutory federal income tax rate due primarily to our corporate tax structure in which our foreign taxes are at a net effective tax rate lower than the U.S. rate and a $1.8 million tax benefit related to R&D credits in the U.S. triggered by a retroactive extension of the R&D tax credit enacted in the first quarter of 2011.

We have net deferred tax assets ($121.9 million as of September 30, 2011) primarily relating to our U.S. operations. We have concluded, based on the weight of available evidence, that our net deferred tax assets are more likely than not to be realized in the future. In arriving at this conclusion, we evaluated all available evidence, including our cumulative profitability on a pre-tax basis for the last three years (adjusted for permanent differences) which includes the results of taking certain tax planning actions. We have taken and will continue to take measures to improve core earnings in the U.S. If our U.S. results do not improve, a valuation allowance against the deferred tax assets may be required. We will continue to reassess our valuation allowance requirements each financial reporting period.

As of June 30, 2012 and September 30, 2011, we had unrecognized tax benefits of $16.4 million ($16.1 million net of state tax benefits) and $16.2 million ($15.9 million net of state tax benefits), respectively. If all of our unrecognized tax benefits as of June 30, 2012 were to become recognizable in the future, we would record a $15.2 million benefit to the income tax provision.

Our policy is to record estimated interest and penalties related to the underpayment of income taxes as a component of our income tax provision. In the first nine months of 2012 and 2011 we included $0.2 million of interest expense, and $0.1 million of tax penalty expense in our income tax provision. As of June 30, 2012 and September 30, 2011 we had accrued $2.2 million and $2.0 million, respectively, of estimated interest expense and we had $0.1 million of accrued tax penalties as of June 30, 2012. Changes in our unrecognized tax benefits in the nine months ended June 30, 2012 were as follows:



	(in millions)
Balance as of October 1, 2011	$	16.2
Tax positions related to current year	1.2
Tax positions related to prior years	0.4
Statute expirations	(1.4		)
Balance as of June 30, 2012	$	16.4

Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in favorable or unfavorable changes in our estimates. We believe it is reasonably possible that within the next 12 months the amount of unrecognized tax benefits and accrued interest related to the resolution of multi-jurisdictional tax positions could be reduced by up to $6 million as audits close and statutes expire.

In the normal course of business, PTC and its subsidiaries are examined by various taxing authorities, including the Internal Revenue Service in the United States. As of June 30, 2012, we remained subject to examination in the following major tax jurisdictions for the tax years indicated:



Major Tax Jurisdiction		Open Years
United States		2009 through 2011
Germany		2007 through 2011
France		2007 through 2011
Japan		2006 through 2011
Ireland		2006 through 2011