INCOME TAXES

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



	Year Ended December 31,
	2012		2011		2010
U.S.	$	26,640	$	14,189	$	6,930
Foreign	113,908		108,676		45,292
Total	$	140,548	$	122,865	$	52,222

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



	Year Ended December 31,
	2012			2011			2010
Current:
Federal	$	8,173		$	7,767		$	5,303
State	475			395			551
Foreign	13,870			18,559			2,415
Total current income tax expense	22,518			26,721			8,269
U.S. deferred expense (benefit)	4,285			(6,266		)	(9,001		)
Foreign deferred benefit	(1,175		)	(1,227		)	(594		)
Income tax expense (benefit)	$	25,628		$	19,228		$	(1,326	)

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,
	2012			2011			2010
Tax expense at U.S. federal statutory rates	$	49,192		$	43,003		$	18,278
Increase (decrease) resulting from:
State income taxes, net of federal benefit	1,126			723			551
Foreign tax benefit	(26,181		)	(20,515		)	(3,859		)
Research and experimentation benefit	(758		)	(2,908		)	(1,065		)
Foreign tax credit benefit	(2,738		)	(4,465		)	—
Tax audit settlements and lapses of statutes of limitations	(439		)	(509		)	1,097
Stock compensation	2,134			1,683			1,565
Non-deductible items	3,100			1,597			2,788
Release of valuation allowance	—			—			(20,400		)
Other	192			619			(281		)
Income tax expense (benefit)	$	25,628		$	19,228		$	(1,326	)

Our 2012 tax expense reflected lower tax rates in foreign jurisdictions where we earn a majority of our profits. The benefit of lower tax rates was partially offset by an increase in unrecognized tax benefits for positions taken on current and prior year returns.

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.

Current taxes payable were reduced for excess tax benefits recorded to common stock and related to stock compensation of $3.1 million, $2.9 million and $12.1 million, respectively, in 2012, 2011 and 2010.

Deferred Income Taxes

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



	December 31,
	2012			2011
Deferred tax assets – current	$	12,245		$	18,899
Deferred tax assets – non-current	5,092			934
Deferred tax liabilities – current	(93		)	(18		)
Deferred tax liabilities – non-current	(17,588		)	(6,607		)
Net deferred tax (liabilities) assets	$	(344	)	$	13,208
Valuation allowance	$	2,081		$	2,216

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,
	2012			2011
Deferred tax assets:
Accrued liabilities and reserves	$	13,239		$	16,254
Revenue recognition	3,707			4,284
Tax credit and loss carryforwards	8,497			3,295
Fixed assets and intangibles	765			392
Unrealized investment	2,538			4,618
Stock compensation	1,815			1,718
Other assets	665			1,635
Gross deferred tax assets	31,226			32,196
Valuation allowance	(2,081		)	(2,216		)
Net deferred tax assets	29,145			29,980
Deferred tax liabilities:
Fixed assets and intangibles	(20,697		)	(8,245		)
Revenue recognition	(4,991		)	(4,882		)
Other liabilities	(3,801		)	(3,645		)
Total deferred tax liabilities	(29,489		)	(16,772		)
Net deferred tax (liabilities) assets	$	(344	)	$	13,208

Deferred tax (benefit) expense of ($3.0) million, ($3.0) million and $0.4 million was recorded in other comprehensive income in 2012, 2011 and 2010, respectively.

As of December 31, 2012 and 2011, our valuation allowance on deferred tax assets totaled $2.1 million and $2.2 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.

Foreign net operating loss carryforwards as of December 31, 2012 were $11.1 million and do not expire.

Research and development tax credit carryforwards as of December 31, 2012 were $4.2 million and expire between 2013 and 2031. Alternative minimum tax credit carryforwards as of December 31, 2012 were $0.7 million and do not expire.

As of December 31, 2012, U.S. income taxes have not been provided for approximately $284.6 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,
	2012			2011			2010
Unrecognized tax benefits, beginning of period	$	16,041		$	7,156		$	20,150
Increases for tax positions taken in current period	—			542			4,461
Increases for tax positions taken in prior periods	9,965			10,502			663
Decreases for tax positions taken in prior periods	(620		)	(1,723		)	—
Decreases for lapses in statutes of limitations	(251		)	(436		)	(1,548		)
Decreases for settlements with taxing authorities	—			—			(16,570		)
Unrecognized tax benefits, end of period	$	25,135		$	16,041		$	7,156

The increases in unrecognized tax benefits in 2012 and 2011 were primarily due to uncertainty surrounding various tax credits.

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



	December 31,
	2012		2011
Other current liabilities	$	—	$	258
Other liabilities	15,693		8,335
Unrecognized tax benefits recorded in liabilities	$	15,693	$	8,593

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 $6.3 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 $2.0 million and $1.4 million as of December 31, 2012 and 2011, respectively.

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



	Year Ended December 31,
	2012			2011			2010
Benefit for lapses of statutes of limitations and settlement with taxing authorities	$	(88	)	$	(124	)	$	(1,583	)
Accruals for current and prior periods	652			293			626
Total interest and penalties	$	564		$	169		$	(957	)

For our major tax jurisdictions, the following years were open for examination by the tax authorities as of December 31, 2012:



Jurisdiction		Open Tax Years
U.S.		2007 and forward
The Netherlands		2011 and forward
Czech Republic		2010 and forward

The IRS is currently examining our 2007-2009 U.S. tax returns.