INCOME TAXES

Income before income taxes consisted of the following:



	Years Ended December 31,
	2012		2011		2010
	(In thousand)
United States operations	$	25,293	$	1,507	$	37,026
Foreign operations	26,736		26,987		45,088
Total	$	52,029	$	28,494	$	82,114

A reconciliation of the U.S. Federal statutory rate to the Company’s effective tax rate is as follows:



	Years Ended December 31,
	2012		2011		2010
Federal statutory rate	35.0	%	35.0	%	35.0	%
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal tax benefit	2.8	%	6.0	%	2.6	%
Foreign operations	(14.9	)%	(18.1	)%	(10.3	)%
Incentive stock option expense	—	%	—	%	(0.3	)%
Changes in valuation allowances	(0.4	)%	(14.0	)%	1.7	%
Uncertain tax positions	(2.5	)%	(5.8	)%	(4.6	)%
Other	0.8	%	(1.3	)%	(4.1	)%
Effective tax rate	20.8	%	1.8	%	20.0	%

The effective tax rate increased by 19 percentage points in 2012 compared with 2011 primarily due to a change in the mix of earnings related to higher U.S. income offset by tax benefits for foreign tax credits, foreign earnings taxed at lower statutory rates and increased benefit from the favorable settlement of tax audits.

During 2012, the Company recorded an income tax benefit of $2.1 million for the release of a tax contingency reserve, an income tax benefit of $0.2 million for a change in state tax law, and an income tax expense of $0.2 million for the settlement of an IRS audit of years 2008, 2009, and 2010.

During 2012, the Company's foreign operations resulted in a $7.8 million income tax benefit as a result of, among other factors, the geographic and business mix of taxable earnings and losses. The Company's operations in Ireland contribute to the majority of this income tax benefit, as income earned in Ireland is taxed at a corporate income tax rate that is significantly lower than the US corporate rate. The 2012 foreign effective tax rate is 7.8%, an increase of approximately 9.5 percentage points over the rate in 2011, which included a tax benefit of $1.6 million relating to the correction of various deferred tax items for periods prior to 2011. The Company's foreign tax rate is based upon statutory tax rates and is not related to a tax holiday or negotiated tax rate.

During the second and fourth quarters of 2011, the Company recorded additional tax expense of $1.7 million for a correction to a state deferred tax asset relating to 2009 and an income tax benefit of $2.2 million for the correction of various other deferred tax items relating to periods prior to 2011 that largely impacted foreign operations, respectively. Since neither one of these changes are material to the December 31, 2011 or previous years' financial results, they have been recorded in the second and fourth quarters of 2011 as discrete events, respectively.

In the fourth quarter of 2010, the Company recorded the full year income tax benefit related to the passing of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.

Income taxes are not provided on certain undistributed earnings of non-U.S. subsidiaries, because such earnings are expected to be indefinitely reinvested and it would not be practicable to determine the amount of the related unrecognized deferred income tax liability. Undistributed earnings of such foreign subsidiaries totaled $165.3 million $168.8 million and $142.2 million at December 31, 2012, 2011 and 2010, respectively.

The American Taxpayer Relief Act of 2012 was signed into law by the President of the United States on January 2, 2013. In part, the bill approved a retroactive extension of certain business tax provisions that expired at the end of 2011 and 2012. These extensions, which included the research and development credit, are taken into account for financial reporting purposes in the quarter in which the legislation is enacted by Congress and signed into law by the President. Accordingly, there was no income tax benefit associated with the 2012 research and development tax credit in the 2012 financial statements.

The provision for income taxes consisted of the following:



	Years Ended December 31,
	2012			2011			2010
	(In thousands)
Current:
Federal	$	3,614		$	(934	)	$	2,686
State	1,373			(1,530		)	1,136
Foreign	4,301			1,813			8,495
Total current	$	9,288		$	(651	)	$	12,317
Deferred:
Federal	4,053			1,078			2,522
State	497			2,236			835
Foreign	(3,013		)	(2,158		)	771
Total deferred	$	1,537		$	1,156		$	4,128
Provision for income taxes	$	10,825		$	505		$	16,445

The income tax effects of significant temporary differences that give rise to deferred tax assets and liabilities, shown before jurisdictional netting, are presented below:



	December 31,
	2012			2011
	(In thousands)
Current assets:
Doubtful accounts	$	1,829		$	1,822
Inventory write-downs	26,549			24,695
Tax credits	3,275			2,865
Accrued vacation	2,335			2,163
Accrued bonus	4,111			2,330
Other	4,095			3,132
Total current deferred tax assets	42,194			37,007
Less valuation allowance	(2,922		)	(702		)
Current deferred tax assets after valuation allowance	$	39,272		$	36,305
Current liabilities:
Other	(314		)	(179		)
Total current deferred tax liabilities	$	(314	)	$	(179	)
Net current deferred tax assets	$	38,958		$	36,126



	December 31,
	2012			2011
	(In thousands)
Non-current assets:
Benefit and compensation	$	(500	)	$	8,991
Stock compensation	12,730			28,659
Deferred revenue	162			148
Net operating loss carryforwards	36,037			48,251
Financing costs	—			1,472
Federal & state tax credits	19,851			1,333
Other	—			—
Total non-current deferred tax assets	68,280			88,854
Less valuation allowance	(11,321		)	(31,602		)
Non-current deferred tax assets after valuation allowance	$	56,959		$	57,252
Non-current liabilities:
Intangible & fixed assets	(46,650		)	(43,152		)
Deferred gain	—			(548		)
Non-cash interest amortization	—			(1,847		)
Other	359			(191		)
Total non-current deferred tax liabilities	$	(46,291	)	$	(45,738	)
Net non-current deferred tax assets	$	10,668		$	11,514
Total net deferred tax assets	$	49,626		$	47,640

At December 31, 2012, the Company had net operating loss carryforwards of $58.4 million for federal income tax purposes, $57.1 million for foreign income tax purposes and $56.9 million for state income tax purposes to offset future taxable income. The federal net operating loss carryforwards expire through 2030, $42.8 million of the foreign net operating loss carryforwards expire through 2021 with the remaining $14.3 million having an indefinite carry forward period. The state net operating loss carryforwards expire through 2031.

Deferred tax assets relating to tax benefits of employee stock option grants have been reduced to reflect exercises in 2012. Some exercises have resulted in tax deductions in excess of previously recorded benefits based on the option value at the time of grant (“windfalls”). Although these additional tax benefits are reflected in net operating tax loss carryforwards the additional tax benefit associated with the windfall is not recognized until the deduction reduces taxes payable. Accordingly, since the tax benefit does not reduce our current taxes payable in 2012 due to net operating loss carryforwards, these “windfall” tax benefits are not reflected in our net operating losses in deferred tax assets for 2012. Windfalls included in net operating loss carryforwards but not reflected in deferred tax assets for 2012 are $0.1 million.

A valuation allowance of $14.2 million, $32.3 million and $36.6 million is recorded against the Company’s gross deferred tax assets of $110.5 million, $125.9 million and $112.9 million recorded at December 31, 2012, 2011 and 2010, respectively.

The valuation allowance relates to deferred tax assets for certain items that will be deductible for income tax purposes under very limited circumstances and for which the Company believes it is not more likely than not that it will realize the associated tax benefit. The Company does not anticipate additional income tax benefits through future reductions in the valuation allowance. However, in the event that the Company determines that it would be able to realize more or less than the recorded amount of net deferred tax assets, an adjustment to the deferred tax asset valuation allowance would be recorded in the period such a determination is made.

The Company’s valuation allowance decreased by $18.1 million and $4.3 million in 2012 and 2011, respectively. The 2012 overall decrease in the valuation allowance was primarily due to expiring net operating losses in Switzerland which is offset by a reduction in the related deferred tax asset. Further, the Company recorded $0.3 million decrease to the valuation allowance in Switzerland related to an increase in the expected future realizability of remaining net operating losses.

A reconciliation of the beginning and ending amount of uncertain tax benefits is as follows:



	Years Ended December 31,
	2012			2011			2010
	(In thousands)
Balance, beginning of year	$	3,927		$	5,530		$	10,909
Additions for tax positions of prior years	7,796			1,001			1,685
Settlements	(3,523		)	(962		)	(5,264		)
Lapse of statute	(2,064		)	(1,642		)	(1,800		)
Balance, end of year	$	6,136		$	3,927		$	5,530

Approximately $5.1 million of the balance at December 31, 2012 relates to uncertain tax positions that, if recognized, would affect the annual effective tax rate. Included in the balance of uncertain tax positions at December 31, 2012 is $3.3 million related to tax positions for which it is reasonably possible that the total amounts could be reduced during the twelve months following December 31, 2012, as a result of expiring statutes of limitations.

The Company recognizes interest and penalties relating to uncertain tax positions in income tax expense. The Company recognized a $0.1 million expense, a $0.5 million benefit, and a $0.9 million benefit for interest and penalties in the income statement during the years ended December 31, 2012, 2011 and 2010, respectively. The Company had approximately $1.4 million, $1.3 million, and $2.1 million of interest and penalties accrued at December 31, 2012, 2011 and 2010, respectively.

During 2012, the Company settled the review of years 2008 through 2010 with the IRS, which resulted in $2.1 million being recorded in the consolidated statement of operations as an income tax benefit, partially offset by an additional Federal income tax expense of $0.2 million in 2012, as a result of receiving the agreed upon settlement. In addition, the Company reclassified $4.2 million from deferred taxes to long-term liabilities, which had no effect on the current year tax provision. These amounts include interest and penalties related to the settlement.

During 2010, the Company settled the review for the years 2005 through 2007 with the IRS which resulted in $4.0 million in taxes being reclassified from long-term liabilities to current taxes payable and deferred taxes, and $4.5 million being recorded in the consolidated statement of operations as an income tax benefit. This settlement was approved by the IRS Joint Committee on Taxation in December 2011, formally closing the 2005 through 2007 audit. The Company recorded an additional federal income tax benefit of $0.1 million in 2011 as a result of receiving the agreed upon settlement. These amounts include interest and penalties related to the settlement and tax benefit.

The Company files Federal income tax returns, as well as multiple state, local and foreign jurisdiction tax returns. The Company is no longer subject to examinations of its Federal income tax returns by the IRS through fiscal year 2007. All significant state and local matters have been concluded through fiscal 2004. All significant foreign matters have been settled through fiscal 2005.