NOTE 11. INCOME TAXES

Earnings before income taxes were as follows (in thousands):


	For the Years Ended December 31,
		2014		2013		2012

Domestic	$	148,510	$	184,086	$	184,159
International		98,045		79,175		76,458
	$	246,555	$	263,261	$	260,617

The provision (benefit) for income taxes comprised the following (in thousands):



	For the Years Ended December 31,
		2014		2013		2012
Current
Federal	$	39,713	$	50,999	$	59,887
State		4,692		5,639		5,879
International		20,213		16,657		18,534
		64,618		73,295		84,300
Deferred
Federal		2,301		3,203		(198)
State		33		329		72
International		(2,348)		(1,360)		(1,844)
		(14)		2,172		(1,970)
	$	64,604	$	75,467	$	82,330

The provision for income taxes differs from the amounts computed by applying the statutory federal income tax rate as follows:


	For the Years Ended December 31,
		2014		2013		2012

U.S. federal statutory rate		35.0	%	35.0	%	35.0	%
State income tax, net of federal tax benefit		1.5		1.5		1.5
International income taxes		(7.0)		(4.6)		(3.8)
Domestic manufacturing exclusions		(1.2)		(1.4)		(1.5)
Research and development credit		(1.3)		(2.3)		-
Other, net		(0.8)		0.5		0.4
Effective tax rate		26.2	%	28.7	%	31.6	%

Our effective income tax rate was 26.2% for the year ended December 31, 2014 and 28.7% for the year ended December 31, 2013. The decrease in our effective income tax rate for the year ended December 31, 2014, as compared to the year ended December 31, 2013, was related to higher relative earnings subject to international tax rates that are lower than domestic tax rates, a non-recurring benefit related to the deferral of intercompany profits that were included in prior year tax provisions in error, which is not material to current or prior interim or annual periods, and the resolution of domestic and international tax audits, which resulted in a net reduction in our provision for uncertain tax positions. These favorable factors were partly offset by a reduction in the benefit from the U.S. research and development (“R&D”) tax credit. During the three months ended March 31, 2013, legislation in the U.S. retroactively allowed the R&D tax credit for all of 2012 and extended the R&D tax credit through the year ending December 31, 2013. As a result, in the year ending December 31, 2013 we recorded the benefit of two years of R&D tax credit as compared to the year ending December 31, 2014 in which we have recorded only the benefit related to that year’s activities.

Our effective income tax rate was 28.7% for the year ended December 31, 2013 and 31.6% for the year ended December 31, 2012. The decrease in our effective income tax rate for the year ended December 31, 2013, as compared to the year ended December 31, 2012, was due primarily to the R&D tax credit. For the year ended December 31, 2012, the U.S. legislation authorizing the R&D tax credit had expired and no associated tax benefit was recognized within this period. On January 2, 2013, U.S. federal legislation was enacted that retroactively allowed an R&D tax credit for all of 2012 and extended the R&D tax credit through the year ended December 31, 2013. Because the related legislation was enacted in 2013, the full benefit of the R&D tax credit related to the prior year’s activities was recognized in 2013. In addition, higher relative earnings subject to international tax rates that are lower than domestic tax rates also contributed to the decrease in our effective income tax rate.

We have business operations in Switzerland and the Netherlands and have been granted tax rulings by each jurisdiction. Our tax rulings in Switzerland and the Netherlands are set to expire on December 31, 2015 and December 31, 2022, respectively. As a result of the tax rulings, our net income was higher by $8.5 million, $6.5 million and $6.0 million for the years ended December 31, 2014, 2013 and 2012, respectively. The benefit from these tax rulings is reflected within the overall benefit received from international income taxes in the table above.

We consider the majority of the operating earnings of non-U.S. subsidiaries to be indefinitely invested outside the U.S. The cumulative earnings of these subsidiaries were $431.7 million at December 31, 2014. No provision has been made for U.S. federal and state, or international taxes that may result from future remittances of the undistributed earnings of non-U.S. subsidiaries. Should we repatriate these earnings in the future, we would have to adjust the income tax provision in the period in which the decision to repatriate earnings is made. A determination of the related tax liability that would be paid on these undistributed earnings if repatriated is not practicable. For the operating earnings not considered to be indefinitely invested outside the U.S., we have accounted for the tax impact on a current basis.

The components of the net deferred tax assets (liabilities) included in the accompanying consolidated balance sheets are as follows (in thousands):



	December 31, 2014				December 31, 2013
		Current		Long-Term		Current		Long-Term

Assets
Accrued expenses	$	20,377	$	7,824	$	19,833	$	1,622
Accounts receivable reserves		2,591		-		1,153		-
Deferred revenue		8,697		3,084		5,872		1,552
Inventory basis differences		3,154		347		2,670		-
Property-based differences		-		1,601		-		1,728
Share-based compensation		2,490		8,936		2,325		7,923
Other		171		255		13		150
Net operating loss carryforwards		65		4,368		500		4,182
Unrealized losses on foreign currency exchange contracts, interest rate swaps and investments		-		-		1,580		-
Total assets		37,545		26,415		33,946		17,157
Valuation allowance		(457)		(4,221)		(642)		(4,559)
Total assets, net of valuation allowance		37,088		22,194		33,304		12,598

Liabilities
Deferred instrument costs		-		(10,149)		-		(3,093)
Property-based differences		-		(33,978)		-		(25,823)
Intangible asset basis differences		-		(16,882)		-		(15,513)
Other		(610)		(517)		(190)		(790)
Unrealized gains on foreign currency exchange contracts, interest rate swaps and investments		(2,603)		-		(1,303)		-
Total liabilities		(3,213)		(61,526)		(1,493)		(45,219)
Net deferred tax assets (liabilities)	$	33,875	$	(39,332)	$	31,811	$	(32,621)

We record a liability for uncertain tax positions that do not meet the more likely than not standard as prescribed by the authoritative guidance for income tax accounting. We record tax benefits for only those positions that we believe will more likely than not be sustained. Unrecognized tax benefits are the differences between tax positions taken, or expected to be taken, in tax returns, and the benefits recognized for accounting purposes. We classify certain uncertain tax positions as long-term liabilities.

The total amount of unrecognized tax benefits at December 31, 2014 and December 31, 2013 was $5.9 million and $6.3 million, respectively. Of the total unrecognized tax benefits at December 31, 2014 and 2013, $5.0 million and $5.7 million, respectively, comprise unrecognized tax positions that would, if recognized, affect our effective tax rate. The ultimate deductibility of the remaining unrecognized tax positions is highly certain but there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.

During each of the years ended December 31, 2014, 2013 and 2012, we recorded interest expense and penalties of $0.3 million as income tax expense in our consolidated statement of income. At December 31, 2014 and 2013, we had $0.5 million and $0.6 million, respectively, of estimated interest expense and penalties accrued in our consolidated balance sheets.

The following table summarizes the changes in unrecognized tax benefits during the years ended December 31, 2014, 2013 and 2012 (in thousands):



	For the Years Ended December 31,
		2014		2013		2012

Total amounts of unrecognized tax benefits, beginning of period	$	6,325	$	5,906	$	5,149
Gross increases in unrecognized tax benefits as a result of tax positions taken during a prior period		432		8		290
Gross increases in unrecognized tax benefits as a result of tax positions taken in the current period		1,789		1,954		1,436
Decreases in unrecognized tax benefits relating to settlements with taxing authorities		(2,242)		(317)		-
Decreases in unrecognized tax benefits as a result of a lapse of the applicable statutes of limitations		(362)		(1,226)		(969)
Total amounts of unrecognized tax benefits, end of period	$	5,942	$	6,325	$	5,906

In 2015, it is reasonably possible that we could recognize up to $0.4 million of income tax benefits that have not been recognized at December 31, 2014. The income tax benefits are due primarily to the lapse in the statutes of limitations for various U.S. and international tax jurisdictions.

In the ordinary course of our business, our income tax filings are regularly under audit by tax authorities. While we believe we have appropriately provided for all uncertain tax positions, amounts asserted by taxing authorities could be greater or less than our accrued position. Accordingly, additional provisions on income tax matters, or reductions of previously accrued provisions, could be recorded in the future as we revise our estimates due to changing facts and circumstances or the underlying matters are settled or otherwise resolved. We are currently under tax examinations by various state and international tax authorities. We anticipate that these examinations will be concluded within the next year. We are no longer subject to U.S. federal examinations for tax years before 2013. With few exceptions, we are no longer subject to income tax examinations in any state and local, or international jurisdictions in which we conduct significant taxable activities for years before 2006.

At December 31, 2014, we had net operating loss carryforwards in certain state and international jurisdictions of approximately $41.6 million available to offset future taxable income. Most of these net operating loss carryforwards will expire at various dates through 2018 and the remainder have indefinite lives. We have recorded a valuation allowance of $4.7 million against certain deferred tax assets related to temporary differences including net operating loss carryforwards, as it is more likely than not that they will not be realized or utilized within the carryforward period.