Income Taxes

The provisions for income taxes were calculated based on the following components of earnings (loss) before income taxes:



Year ended December 31, (dollars in thousands)	2011			2010		2009
United States	$	(6,662	)	$	46,720	$	(25,385	)
Non-U.S.	31,946			34,948		(653		)
Total earnings (loss) before tax	$	25,284		$	81,668	$	(26,038	)

The current and deferred provisions (benefit) for income taxes were:



Year ended December 31, (dollars in thousands)	2011			2010			2009
Current:
U.S. federal	$	484		$	(423	)	$	11,436
Non-U.S.	5,732			13,459			10,782
U.S. state and local	100			212			170
Total current income tax provision	6,316			13,248			22,388

Deferred:
U.S. federal	(400		)	94			(16,053		)
Non-U.S.	(4,294		)	(1,854		)	(3,570		)
U.S. state and local	21			94			(15		)
Total deferred income tax (benefit) provision	(4,673		)	(1,666		)	(19,638		)

Total:
U.S. federal	84			(329		)	(4,617		)
Non-U.S.	1,438			11,605			7,212
U.S. state and local	121			306			155
Total income tax provision	$	1,643		$	11,582		$	2,750

The significant components of our deferred income tax assets and liabilities are as follows:



December 31, (dollars in thousands)	2011			2010
Deferred income tax assets:
Pension	$	35,813		$	33,007
Non-pension postretirement benefits	26,085			25,853
Other accrued liabilities	24,200			20,426
Receivables	1,279			1,496
Net operating loss and charitable contribution carry forwards	23,746			15,212
Tax credits	9,026			10,056
Total deferred income tax assets	120,149			106,050

Deferred income tax liabilities:
Property, plant and equipment	27,321			22,432
Inventories	4,932			7,138
Intangibles and other assets	11,062			12,246
Total deferred income tax liabilities	43,315			41,816
Net deferred income tax asset before valuation allowance	76,834			64,234
Valuation allowance	(79,607		)	(72,327		)
Net deferred income tax liability	$	(2,773	)	$	(8,093	)

The net deferred income tax assets and liabilities at December 31 of the respective year-ends were included in the Consolidated Balance Sheets as follows:



December 31, dollars in thousands)	2011			2010
Current deferred income tax (liability) asset	$	(3,340	)	$	283
Noncurrent deferred income tax asset (liability)	567			(8,376		)
Net deferred income tax liability	$	(2,773	)	$	(8,093	)

The 2011 deferred income tax asset for net operating loss carry forwards of $22.6 million relates to pre-tax losses incurred in the Netherlands of $14.3 million, in Portugal of $11.0 million, in China of $6.7 million, in the U.S. of $38.6 million for federal and $73.2 million for state and local jurisdictions. Our foreign net operating loss carry forwards of $32.0 million will expire between 2012 and 2018. Our U.S. federal net operating loss carry forward of $38.6 million will expire between 2028 and 2031. The U.S. state and local net operating loss carry forward of $73.2 million will expire between 2016 and 2031. The 2010 deferred income tax asset for net operating loss carry forwards of $15.2 million relates to pre-tax losses incurred in the Netherlands of $12.9 million, in Portugal of $12.5 million, in China of $14.4 million, and in the U.S. of $11.6 million for federal and $77.9 million for state and local jurisdictions.

One of our legal entities in China has a tax holiday which will expire in 2013. We recognized no benefit from the tax holiday in 2011, 2010 or 2009.

The 2011 deferred tax credits of $9.0 million consist of $1.8 million U.S. federal tax credits and $7.2 million non-U.S. credits. The U.S. federal tax credits consist of foreign tax credits, general business research and development credits, and alternative minimum tax credits. The non-U.S. credit of $7.2 million, which is related to withholding tax on inter-company debt in the Netherlands, can be carried forward indefinitely. The 2010 deferred tax credits of $10.1 million consist of $3.1 million U.S. federal tax credits and $7.0 million non-U.S. credits.

In assessing the need for a valuation allowance, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will be realized on a quarterly basis or whenever events indicate that a review is required. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income (including reversals of deferred income tax liabilities) during the periods in which those temporary differences reverse. As a result, we consider the historical and projected financial results of the legal entity or consolidated group recording the net deferred income tax asset as well as all other positive and negative evidence. Examples of the evidence we consider are cumulative losses in recent years, losses expected in early future years, a history of potential tax benefits expiring unused, whether there was an unusual, infrequent, or extraordinary item to be considered. We currently have valuation allowances in place on our deferred income tax assets in the U.S., China, Portugal, and the Netherlands. We intend to maintain these allowances until it is more likely than not that those deferred income tax assets will be realized.

Based upon management's assessment, a release of the valuation allowance in China could possibly occur during the next twelve months. The required accounting for the potential release would have a significant deferred tax consequence and would impact earnings in the quarter in which the allowance is released.

The valuation allowance activity for the years ended December 31 is as follows:



Year ended December 31, (dollars in thousands)	2011		2010			2009
Beginning balance	$	72,327	$	98,989		$	87,442
Charge (benefit) to provision for income taxes	842		(22,830		)	8,140
Charge (benefit) to other comprehensive income	6,438		(3,832		)	3,407
Ending balance	$	79,607	$	72,327		$	98,989

The valuation allowance increased $7.3 million in 2011 from $72.3 million at December 31, 2010 to $79.6 million at December 31, 2011. The 2011 increase of $7.3 million is attributable to the 2011 change in deferred tax assets, primarily related to the U.S. federal net operating loss carry forward. The 2011 valuation allowance of $79.6 million consists of $65.5 million related to U.S. entities and $14.1 million related to non-U.S. entities. The valuation allowance decreased $26.7 million in 2010 from $99.0 million at December 31, 2009 to $72.3 million at December 31, 2010. The 2010 decrease in valuation allowance was largely driven by a decrease in our U.S. deferred tax asset related to cancellation of indebtedness income attributed to debt restructuring activities in 2009 and the release of a partial valuation allowance for one of our Mexican entities.

Reconciliation from the statutory U.S. federal income tax rate of 35.0 percent to the consolidated effective income tax rate was as follows:



Year ended December 31, (dollars in thousands)	2011			2010			2009
Statutory U.S. federal income tax rate	35.0		%	35.0		%	35.0		%
Increase (decrease) in rate due to:
Non-U.S. income tax differential	(14.6	)		(3.2	)		12.4
U.S. state and local income taxes, net of related U.S. federal income taxes	0.3			0.3			(0.6	)
U.S. federal credits and net operating loss carryforward	(0.3	)		0.8			—
Permanent adjustments	(18.6	)		6.9			(14.8	)
Foreign withholding taxes	6.7			0.4			(2.5	)
Valuation allowance	3.7			(25.4	)		(31.3	)
Income tax impact pursuant to Libbey Mexico acquisition	—			—			(12.1	)
Other	(5.7	)		(0.6	)		3.3
Consolidated effective income tax rate	6.5		%	14.2		%	(10.6	)	%

During 2009, the Company identified an income tax adjustment related to the 2006 Libbey Mexico acquisition as reflected in the table above. After review, management believes these items did not have a material impact on the financial statements.

Significant components of our current income tax asset (liability) are as follows:



December 31, (dollars in thousands)	2011			2010
U.S. federal	$	648		$	564
Non-U.S.	2,573			(3,519		)
U.S. state and local	(114		)	(166		)
Total current income tax asset (liability)	$	3,107		$	(3,121	)

Income tax payments consisted of the following:



Year ended December 31, (dollars in thousands)	2011		2010		2009
Total income tax payments, net of refunds	$	15,124	$	11,250	$	4,160
Less: credits or offsets	4,894		2,420		1,027
Cash paid, net	$	10,230	$	8,830	$	3,133

There were no accumulated undistributed earnings from non-U.S. subsidiaries in 2011 or 2010. We intend to reinvest any future undistributed earnings indefinitely into non-U.S. operations. Determination of the net amount of unrecognized U.S. income tax and potential foreign withholdings with respect to these earnings is not practicable.

We are subject to income taxes in the U.S. and various foreign jurisdictions. Management judgment is required in evaluating our tax positions and determining our provision for income taxes. Throughout the course of business, there are numerous transactions and calculations for which the ultimate tax determination is uncertain. When management believes certain tax positions may be challenged despite our belief that the tax return positions are supportable, we establish reserves for tax uncertainties based on estimates of whether additional taxes will be due. We adjust these reserves taking into consideration changing facts and circumstances, such as an outcome of a tax audit. The income tax provision includes the impact of reserve provisions and changes to reserves that are considered appropriate. Accruals for tax contingencies are provided for in accordance with the requirements of FASB ASC 740.

During 2011, we accrued a net $0.1 million of total unrecognized tax benefits due to tax positions related to current and prior years and lapses in statutes of limitations. The total gross unrecognized tax benefit and impact on the effective tax rate if recognized is as follow:



December 31, (dollars in thousands)	2011		2010		2009
Total gross unrecognized tax benefits	$	1,266	$	1,129	$	1,029
Impact on the effective tax rate, if unrecognized tax benefits were recognized	$	1,152	$	1,015	$	906

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits, excluding interest and penalties, is as follows:



(dollars in thousands)	2011		2010			2009
Beginning balance	$	1,129	$	1,029		$	2,301
Additions based on tax positions related to the current year	—		48			1,180
Additions for tax positions of prior years	—		—			—
Reductions for tax positions of prior years	—		(34		)	(229		)
Changes due to lapse of statute of limitations	137		86			137
Reductions due to settlements with tax authorities	—		—			(2,360		)
Ending balance	$	1,266	$	1,129		$	1,029

We recognize interest and penalties related to unrecognized tax benefits in the provision for income taxes. We recognized a $0.3 million benefit in 2011, a $0.3 million benefit in 2010 and a $0.5 million benefit in 2009 in our Consolidated Statements of Operations from a reduction in interest and penalties for uncertain tax positions. In addition, we had $1.4 million, $1.7 million and $2.0 million accrued for interest and penalties, net of tax benefit, at December 31, 2011, 2010 and 2009, respectively.

Based upon the outcome of tax examinations, judicial proceedings, or expiration of statutes of limitations, it is reasonably possible that the ultimate resolution of these unrecognized tax benefits may result in a payment that is materially different from the current estimate of the tax liabilities. It is not possible at this point in time, however, to estimate whether there will be a significant change in our gross unrecognized tax benefits.

We file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. As of December 31, 2011, the tax years that remained subject to examination by major tax jurisdictions were as follows:



Jurisdiction		Open Years
Canada		2008-2011
China		2008-2011
Mexico		2006-2011
Netherlands		2010-2011
Portugal		2008-2011
United States		2008-2011