Income Taxes

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



Year ended December 31, (dollars in thousands)	2012			2011			2010
United States	$	(17,030	)	$	(6,662	)	$	46,720
Non-U.S.	29,705			31,946			34,948
Total income before income taxes	$	12,675		$	25,284		$	81,668

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



Year ended December 31, (dollars in thousands)	2012			2011			2010
Current:
U.S. federal	$	(18	)	$	484		$	(423	)
Non-U.S.	9,194			5,732			13,459
U.S. state and local	(72		)	100			212
Total current income tax provision (benefit)	9,104			6,316			13,248

Deferred:
U.S. federal	1,264			(400		)	94
Non-U.S.	(4,658		)	(4,294		)	(1,854		)
U.S. state and local	(1		)	21			94
Total deferred income tax provision (benefit)	(3,395		)	(4,673		)	(1,666		)

Total:
U.S. federal	1,246			84			(329		)
Non-U.S.	4,536			1,438			11,605
U.S. state and local	(73		)	121			306
Total income tax provision (benefit)	$	5,709		$	1,643		$	11,582

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



December 31, (dollars in thousands)	2012			2011
Deferred income tax assets:
Pension	$	16,526		$	35,813
Non-pension postretirement benefits	27,198			26,085
Other accrued liabilities	20,213			21,045
Receivables	1,445			1,279
Net operating loss and charitable contribution carry forwards	45,592			23,746
Tax credits	9,770			9,026
Total deferred income tax assets	120,744			116,994

Deferred income tax liabilities:
Property, plant and equipment	23,196			27,321
Inventories	4,377			4,932
Intangibles and other assets	12,392			11,062
Total deferred income tax liabilities	39,965			43,315
Net deferred income tax asset before valuation allowance	80,779			73,679
Valuation allowance	(77,629		)	(76,452		)
Net deferred income tax asset (liability)	$	3,150		$	(2,773	)

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)	2012			2011
Current deferred income tax asset	$	4,070		$	3,074
Non-current deferred income tax asset	9,830			6,911
Current deferred income tax liability	(3,213		)	(1,369		)
Non-current deferred income tax liability	(7,537		)	(11,389		)
Net deferred income tax asset (liability)	$	3,150		$	(2,773	)

The 2012 deferred income tax asset for net operating loss carry forwards of $44.4 million relates to pre-tax losses incurred in the Netherlands of $15.9 million, in Portugal of $9.4 million, in China of $0.2 million, in the U.S. of $107.2 million for federal and $107.1 million for state and local jurisdictions. Our foreign net operating loss carry forwards of $25.5 million will expire between 2013 and 2021. Our U.S. federal net operating loss carry forward of $107.2 million will expire between 2028 and 2032. The U.S. state and local net operating loss carry forward of $107.1 million will expire between 2017 and 2032. 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, and in the U.S. of $38.6 million for federal and $73.2 million for state and local jurisdictions.

One of our legal entities in China had a tax holiday which expired effective December 31, 2012. In 2012, we recognized a benefit of $0.5 million from the tax holiday. In 2011 and 2010, we recognized no benefit due to net operating losses incurred and a full valuation allowance in place.

The 2012 deferred tax credits of $9.8 million consist of $2.0 million U.S. federal tax credits and $7.8 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 $7.8 million, which is related to withholding tax on inter-company debt in the Netherlands, can be carried forward indefinitely. 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.

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 and 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., 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. During 2012, the valuation allowances against our deferred tax assets in China were released due to positive three-year cumulative earnings and forecasted future earnings.

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



Year ended December 31, (dollars in thousands)	2012			2011			2010
Beginning balance	$	76,452		$	72,327		$	98,989
Charge (benefit) to provision for income taxes	(1,805		)	(2,313		)	(22,830		)
Charge (benefit) to other comprehensive income	2,982			6,438			(3,832		)
Ending balance	$	77,629		$	76,452		$	72,327

The valuation allowance increased $1.2 million in 2012 from $76.5 million at December 31, 2011 to $77.6 million at December 31, 2012. The 2012 increase of $1.2 million is attributable to the 2012 change in deferred tax assets, primarily related to the U.S. federal net operating loss carry forward partially offset by the release of the Chinese valuation allowance. The 2012 valuation allowance of $77.6 million consists of $68.8 million related to U.S. entities and $8.8 million related to non-U.S. entities. The valuation allowance increased $4.1 million in 2011 from $72.3 million at December 31, 2010 to $76.5 million at December 31, 2011. The 2011 decrease in valuation allowance was attributable to the 2011 change in deferred tax assets, primarily related to the U.S. federal net operating loss carry forward.

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



Year ended December 31, (dollars in thousands)	2012			2011			2010
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	(43.5	)		(14.6	)		(3.2	)
U.S. state and local income taxes, net of related U.S. federal income taxes	(0.4	)		0.3			0.3
U.S. federal credits	(0.9	)		(0.3	)		0.8
Permanent adjustments	60.6			(18.6	)		6.9
Foreign withholding taxes	12.0			6.7			0.4
Valuation allowance	(10.6	)		3.7			(25.4	)
Other	(7.2	)		(5.7	)		(0.6	)
Consolidated effective income tax rate	45.0		%	6.5		%	14.2		%

Income tax payments consisted of the following:



Year ended December 31, (dollars in thousands)	2012		2011		2010
Total income tax payments, net of refunds	$	4,399	$	15,124	$	11,250
Less: credits or offsets	997		4,894		2,420
Cash paid, net	$	3,402	$	10,230	$	8,830

There were no accumulated undistributed earnings from non-U.S. subsidiaries in 2012 or 2011. 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.

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



(dollars in thousands)	2012		2011		2010
Beginning balance	$	1,266	$	1,129	$	1,029
Additions based on tax positions related to the current year	—		—		48
Reductions for tax positions of prior years	—		—		(34		)
Changes due to lapse of statute of limitations	230		137		86
Ending balance	$	1,496	$	1,266	$	1,129

We recognize interest and penalties related to unrecognized tax benefits in the provision for income taxes. Other disclosures relating to unrecognized tax benefits are as follows:



December 31, (dollars in thousands)	2012			2011			2010
Impact on the effective tax rate, if unrecognized tax benefits were recognized	$	1,382		$	1,152
Interest and penalties, net of tax, accrued in the Consolidated Balance Sheets	$	662		$	1,415
Interest and penalties expense (benefit) recognized in the Consolidated Statements of Operations	$	(753	)	$	(288	)	$	(271	)

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, 2012, the tax years that remained subject to examination by major tax jurisdictions were as follows:



Jurisdiction	Open Years
Canada	2009	–	2012
China	2009	–	2012
Mexico	2007	–	2012
Netherlands	2011	–	2012
Portugal	2008	–	2012
United States	2009	–	2012