INCOME TAXES

Income before income taxes included the following components (in thousands):



	Year Ended December 31,
	2011		2010		2009
U.S.	$	14,189	$	6,930	$	10,544
Foreign	108,676		45,292		17,117
Total	$	122,865	$	52,222	$	27,661

Income tax expense (benefit) consisted of the following (in thousands):



	Year Ended December 31,
	2011			2010			2009
Current:
Federal	$	7,767		$	5,303		$	—
State	395			551			483
Foreign	18,559			2,415			6,914
Total current income tax expense	26,721			8,269			7,397
U.S. deferred benefit	(6,266		)	(9,001		)	—
Foreign deferred benefit	(1,227		)	(594		)	(2,380		)
Income tax expense (benefit)	$	19,228		$	(1,326	)	$	5,017

The effective income tax rate applied to net income varied from the U.S. federal statutory rate due to the following (in thousands):



	Year Ended December 31,
	2011			2010			2009
Tax expense at U.S. federal statutory rates	$	43,003		$	18,278		$	9,681
Increase (decrease) resulting from:
State income taxes, net of federal benefit	723			551			890
Foreign tax benefit	(20,515		)	(3,859		)	(1,466		)
Research and experimentation benefit	(2,908		)	(1,065		)	(1,225		)
Foreign tax credit benefit	(4,465		)	—			—
Tax audit settlements and lapses of statutes of limitations	(509		)	1,097			(1,328		)
Stock compensation	1,683			1,565			465
Non-deductible items	1,597			2,788			1,250
Release of valuation allowance	—			(20,400		)	(3,886		)
Other	619			(281		)	636
Income tax expense (benefit)	$	19,228		$	(1,326	)	$	5,017

Our 2011 tax expense reflected taxes accrued in the U.S. and foreign jurisdictions, and included a $12.4 million benefit relating to an agreement with The Netherlands to tax profits from intellectual property at a reduced rate. This benefit was partially offset by an increase of unrecognized tax benefits for positions taken on current and prior year returns.

Our income tax benefit of approximately $1.3 million in 2010 primarily resulted from benefits related to the release of valuation allowance recorded against U.S. deferred tax assets and liabilities for unrecognized tax benefits, offset by taxes accrued in both the U.S. and foreign tax jurisdictions. As a result of a mutual agreement between the U.S. and The Netherlands taxing authorities regarding various transfer pricing issues related to our operations, during the second quarter of 2010, we released valuation allowance and tax reserves of $47.9 million, of which $12.5 million was recorded as a benefit to shareholder’s equity. The remaining $35.4 million of tax benefit was offset by tax expense of $18.1 million to recognize the impact of our new transfer pricing methodology in prior periods.

Our tax expense in 2009 primarily reflected taxes on foreign earnings, offset by the release of valuation allowance recorded against net operating loss deferred tax assets utilized to offset income earned in the U.S.

Current taxes payable were reduced for tax benefits recorded to common stock and related to stock compensation of $2.9 million, $12.1 million and zero, respectively, in 2011, 2010 and 2009.

Deferred Income Taxes

Net deferred tax assets were classified on the balance sheet as follows (in thousands):



	December 31,
	2011			2010
Deferred tax assets – current	$	18,899		$	11,505
Deferred tax assets – non-current	934			1,072
Other current liabilities	(18		)	(64		)
Deferred tax liabilities – non-current	(6,607		)	(4,106		)
Net deferred tax assets	$	13,208		$	8,407
Valuation allowance	$	2,216		$	2,123

The tax effects of temporary differences that gave rise to significant portions of deferred tax assets and deferred tax liabilities were as follows (in thousands):



	December 31,
	2011			2010
Deferred tax assets:
Accrued liabilities and reserves	$	16,254		$	11,832
Revenue recognition	4,284			4,096
Tax credit and loss carryforwards	3,295			1,971
Fixed assets and intangibles	392			499
Unrealized investment	4,618			1,471
Stock compensation	1,718			2,807
Other assets	1,635			1,584
Gross deferred tax assets	32,196			24,260
Valuation allowance	(2,216		)	(2,123		)
Net deferred tax assets	29,980			22,137
Deferred tax liabilities:
Fixed assets and intangibles	(8,245		)	(5,589		)
Revenue recognition	(4,882		)	(4,053		)
Other liabilities	(3,645		)	(4,088		)
Total deferred tax liabilities	(16,772		)	(13,730		)
Net deferred tax assets	$	13,208		$	8,407

Deferred tax (benefit) expense of ($3.0) million, $0.4 million and $0.1 million was recorded in other comprehensive income in 2011, 2010 and 2009, respectively.

As of December 31, 2011 and 2010, our valuation allowance on deferred tax assets totaled $2.2 million and $2.1 million, respectively. In assessing the realizability of deferred tax assets, we utilize a more likely than not standard. If it is determined that it is “more likely than not” that deferred tax assets will not be realized, a valuation allowance must be established against the deferred tax assets. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the associated temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, historical operating performance, projected future taxable income and tax planning strategies in making this assessment.

Research and development tax credit carryforwards as of December 31, 2011 were $2.2 million and expire between 2012 and 2016. Alternative minimum tax credit carryforwards as of December 31, 2011 were $0.7 million and do not expire.

As of December 31, 2011, U.S. income taxes have not been provided for approximately $166.9 million of cumulative undistributed earnings of several non-U.S. subsidiaries, as our current intention is to reinvest these earnings indefinitely outside the U.S. Foreign tax provisions have been provided for these cumulative undistributed earnings. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries. Similarly, we have not provided deferred taxes on the cumulative translation adjustment related to those non-U.S. subsidiaries.

Unrecognized Tax Benefits and Other Tax Contingencies

A rollforward of our unrecognized tax benefits was as follows (in thousands):



	Year Ended December 31,
	2011			2010			2009
Unrecognized tax benefits, beginning of period	$	7,156		$	20,150		$	18,367
Increases for tax positions taken in current period	542			4,461			2,648
Increases for tax positions taken in prior periods	10,502			663			846
Decreases for tax positions taken in prior periods	(1,723		)	—			(383		)
Decreases for lapses in statutes of limitations	(436		)	(1,548		)	(398		)
Decreases for settlements with taxing authorities	—			(16,570		)	(930		)
Unrecognized tax benefits, end of period	$	16,041		$	7,156		$	20,150

The increase in unrecognized tax benefits in 2011 was primarily due to uncertainty surrounding various tax credits.

The decrease for settlements with taxing authorities in 2010 primarily related to receiving confirmation that the U.S. and The Netherlands taxing authorities had entered into a mutual agreement on various transfer pricing issues related to our operations.

Current and non-current liability components of unrecognized tax benefits were classified on the balance sheet as follows (in thousands):



	December 31,
	2011		2010
Other current liabilities	$	258	$	639
Other liabilities	8,335		6,517
Unrecognized tax benefits recorded in liabilities	$	8,593	$	7,156

The entire balance of unrecognized tax benefits, if recognized, would reduce our effective tax rate. We believe it is reasonably possible that our unrecognized tax benefits could decrease, in the next 12 months, between zero and $0.3 million due to lapses of statutes of limitations and as the result of settlements with taxing authorities.

We recognize interest and penalties related to unrecognized tax benefits in income tax expense. The liability for unrecognized tax benefits included accruals for interest and penalties of $1.4 million and $1.2 million as of December 31, 2011 and 2010, respectively.

Tax expense included the following relating to interest and penalties (in thousands):



	Year Ended December 31,
	2011			2010			2009
Benefit for lapses of statutes of limitations and settlement with taxing authorities	$	(124	)	$	(1,583	)	$	(433	)
Accruals for current and prior periods	293			626			944
Total interest and penalties	$	169		$	(957	)	$	511

For our major tax jurisdictions, the following years were open for examination by the tax authorities as of December 31, 2011:



Jurisdiction		Open Tax Years
U.S.		2007 and forward
The Netherlands		2006 and forward
Czech Republic		2009 and forward