NOTE 10—INCOME TAXES

 

Consolidated income from continuing operations before income taxes consisted of the following (in thousands):

 

		Year Ended December 31,
		2011				2010				2009
U.S. operations		$	68,412			$	59,881			$	59,629
Foreign operations			69,268				45,010				30,221
Income before income tax		$	137,680			$	104,891			$	89,850

 

The components of the provision (benefit) for income taxes consisted of the following (in thousands):

 

		Year Ended December 31,
		2011				2010				2009
Current:
Federal		$	16,384			$	24,419			$	10,030
State and local			1,995				4,060				2,088
Non-U.S.			19,508				23,253				10,399
			37,887				51,732				22,517
Deferred:
Federal			407				(18,405	)			2,377
State and local			229				(1,223	)			12
Non-U.S.			(4,322	)			(4,250	)			(2,077	)
			(3,686	)			(23,878	)			312
Income tax expense		$	34,201			$	27,854			$	22,829

 

The following is a reconciliation of the statutory federal income tax rate to the effective rate reported in the financial statements:

 

		Year Ended December  31,
		2011				2010				2009
		(percent of income)
Provision for federal income taxes at the statutory rate			35.0	%			35.0	%			35.0	%
State and local income taxes, net of federal benefit			1.4				2.6				1.9
Non-U.S. income taxed at different rates			(6.5	)			(2.3	)			0.4
Foreign tax credits			(1.8	)			(3.5	)			(5.8	)
Reduction of accrued income taxes			(3.5	)			(4.0	)			(4.1	)
Tax-exempt interest			(0.1	)			(0.2	)			(0.5	)
Other			0.3				(1.0	)			(1.5	)
Actual provision for income taxes			24.8	%			26.6	%			25.4	%

 

Significant components of the Company's deferred taxes consisted of the following (in thousands):

 

		December 31,
		2011				2010
Deferred tax assets:
Non-deductible accruals and allowances		$	30,307			$	26,905
Capitalized inventory costs			25,814				21,065
Stock compensation			6,283				6,157
Net operating loss carryforwards			6,364				6,894
Depreciation and amortization			1,693				1,722
Tax credits			12,702				11,187
Other			1,121				414
Gross deferred tax assets			84,284				74,344
Valuation allowance			(6,690	)			(7,261	)
Net deferred tax assets			77,594				67,083
Deferred tax liabilities:
Deductible accruals and allowance			(801	)			(593	)
Depreciation and amortization			(12,320	)			(7,182	)
Foreign currency loss			(2,494	)			—
Other			(596	)			(1,564	)
Gross deferred tax liabilities			(16,211	)			(9,339	)
Total net deferred taxes		$	61,383			$	57,744

 

We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. The Company had net operating loss carryforwards at December 31, 2011 and 2010 in certain international tax jurisdictions of $58,272,000 and $67,800,000, respectively, which will begin to expire in 2015. The net operating losses result in a deferred tax asset of $6,364,000 and $6,894,000 at December 31, 2011 and 2010, respectively, both of which were subject to a 100% valuation allowance. To the extent that the Company reverses a portion of the valuation allowance, the adjustment would be recorded as a reduction to income tax expense.

 

Non-current deferred tax assets of $11,605,000 and $14,806,000 are included as a component of other non-current assets in the consolidated balance sheet at December 31, 2011 and 2010, respectively.

 

The Company had undistributed earnings of foreign subsidiaries of approximately $218,023,000 at December 31, 2011 for which deferred taxes have not been provided. Such earnings are considered indefinitely invested outside of the United States. If these earnings were repatriated to the United States, the earnings would be subject to U.S. taxation. The amount of the unrecognized deferred tax liability associated with the undistributed earnings was approximately $50,059,000 at December 31, 2011. The unrecognized deferred tax liability approximates the excess of the United States tax liability over the creditable foreign taxes paid that would result from a full remittance of undistributed earnings.

 

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):

 

		December 31,
		2011				2010				2009
Balance at beginning of period		$	18,694			$	20,183			$	21,839
Increases related to prior year tax positions			43				893				1,346
Decreases related to prior year tax positions			(141	)			(27	)			(634	)
Increases related to current year tax positions			1,388				1,278				1,598
Settlements			(649	)			—				(1,194	)
Expiration of statute of limitations			(5,019	)			(3,633	)			(2,772	)
Balance at end of period		$	14,316			$	18,694			$	20,183

 

Unrecognized tax benefits of $12,735,000 and $16,740,000 would affect the effective tax rate if recognized at December 31, 2011 and 2010, respectively.

 

The Company conducts business globally, and as a result, the Company or one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as Canada, China, France, Germany, Hong Kong, Italy, Japan, South Korea, Switzerland, the United Kingdom and the United States. The Company has effectively settled U.S. tax examinations of all years through 2007. Internationally, the Company has effectively settled Canadian tax examinations of all years through 2004, Swiss tax examinations of all years through 2008, French tax examinations of all years through 2008, Japanese tax examinations of all years through 2007 and Korean tax examinations of all years through 2007. The Company is currently under examination in Canada for the tax years 2005 through 2008 and in Japan for the tax years 2008 through 2010. The Company does not anticipate that adjustments relative to these ongoing tax audits will result in a material change to its consolidated financial position, results of operations or cash flows.

 

Due to the potential for resolution of income tax audits currently in progress, and the expiration of various statutes of limitation, it is reasonably possible that the unrecognized tax benefits balance may change within the twelve months following December 31, 2011 by a range of zero to $10,195,000. Open tax years, including those previously mentioned, contain matters that could be subject to differing interpretations of applicable tax laws and regulations as they relate to the amount, timing, or inclusion of revenue and expenses or the sustainability of income tax credits for a given examination cycle.

 

The Company recognizes interest expense and penalties related to income tax matters in income tax expense. The Company recognized a net reversal of accrued interest and penalties of $501,000 in 2011, net accrued interest and penalties of $780,000 in 2010 and a net reversal of accrued interest and penalties of $80,000 in 2009, all related to uncertain tax positions. The Company had $3,434,000 and $3,935,000 of accrued interest and penalties related to uncertain tax positions at December 31, 2011 and 2010, respectively.