INCOME TAXES

The jurisdictional components of income before taxes consist of the following:



	December 31,
(in thousands)	2012		2011		2010
Income before income taxes:
Domestic	$	29,390	$	28,109	$	15,639
Foreign	14,056		20,020		13,393
	$	43,446	$	48,129	$	29,032

The components of income tax expense (benefit) consist of the following:



	December 31,
(in thousands)	2012			2011		2010
Current:
Domestic	$	9,273		$	7,771	$	8,995
Foreign	4,919			5,682		3,851
State	756			1,139		1,453
	14,948			14,592		14,299
Deferred:
Domestic	(192		)	397		(5,308		)
Foreign	(363		)	331		(284		)
State	150			122		(792		)
	(405		)	850		(6,384		)
Total income taxes	$	14,543		$	15,442	$	7,915

The difference between income tax expense (benefit) for financial statement purposes and the amount of income tax expense computed by applying the domestic statutory income tax rate of 35% to income loss before income taxes consist of the following:



	December 31,
(in thousands)	2012			2011			2010
Domestic statutory rate at 35% (34% for 2011 and 2010)	$	15,206		$	16,364		$	9,871
Increase (reduction) from:
Jurisdictional rate differences	(1,477		)	(1,315		)	(986		)
Goodwill impairment	157			633			—
Valuation allowance	825			—			—
Stock based compensation	214			161			135
U.S. state taxes	589			740			436
Domestic Production Deduction	(948		)	(796		)	(744		)
R&E Credit	(130		)	(252		)	(1,068		)
Other, net	107			(93		)	271
Provision for income taxes	$	14,543		$	15,442		$	7,915
Effective tax rate	33		%	32		%	27		%

Deferred income taxes arise from temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. The components of the Company’s deferred income tax assets and liabilities consist of the following:



	December 31,
(in thousands)	2012			2011
Deferred income tax assets:
Inventory basis difference	$	1,475		$	1,464
Accounts receivable reserve	299			320
Stock based compensation	614			518
Pension liability	3,595			3,839
Employee benefit accrual	459			382
Environmental reserve	—			450
Product liability and warranty reserves	1,120			797
Expenses not deductible for tax purposes	487			—
Foreign net operating loss	1,608			374
State net operating loss	82			279
Other	3			—

Total deferred income tax assets	$	9,742		$	8,423
Less: Valuation allowance	(825		)	—

Net deferred income tax assets	$	8,917		$	8,423

Deferred income tax liabilities:
Inventory basis differences	$	(253	)	$	(246	)
Depreciation	(2,867		)	(3,924		)
Intangible assets	(1,011		)	(710		)
Deferred revenue	(135		)	(218		)
Expenses not deductible for tax purposes	(777		)	(397		)

Total deferred income tax liabilities	$	(5,043	)	$	(5,495	)

Net deferred income tax assets	$	3,874		$	2,928

As of December 31, 2012, the Company had foreign deferred tax assets consisting of foreign net operating losses and other tax benefits available to reduce future taxable income in a foreign jurisdiction. These foreign jurisdictions' net operating loss carryforwards are in the approximate amount of $10.6 million with an unlimited carryforward period. The Company also has U.S. state net operating loss carryforwards in the approximate amount of $3.5 million which expire from 2014 to 2028.

In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based on the expectation of future taxable income and that the deductible temporary differences will offset existing taxable temporary differences, the Company believes it is more likely than not that it will realize the benefits of these deductible differences.

Deferred income taxes have not been provided on the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and the respective tax bases of the Company’s foreign subsidiaries, based on the determination that such differences are essentially permanent in duration in that the earnings of the subsidiaries are expected to be indefinitely reinvested in foreign operations. As of December 31, 2012, the cumulative undistributed earnings of these subsidiaries approximated $125,731,000. If these earnings were not considered indefinitely reinvested, deferred income taxes would have been recorded after the consideration of foreign tax credits. At this time, it is not practicable to estimate the amount of additional income taxes that might be payable on those earnings, if distributed.

The Company adopted the provisions of FASB ASC Section 740-10-25 (formerly FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”) on January 1, 2007. During the 3rd quarter of 2010, the Company completed a research and development credit study (R&D study) related to prior year tax returns. The R&D study resulted in tax credits of approximately $1,100,000. The Company has recorded an unrecognized tax benefit in the amount of $193,000 as of December 31, 2010. In 2011, the Company recorded an additional R&D tax credit of $252,000 for federal and $164,000 for state, and recorded an additional unrecognized tax benefit of approximately $42,000 that if recognized would affect our annual effective tax rate. In 2012, an additional $22,000 was added to the reserve related to the 2011 R&D credit. We do not expect our unrecognized tax benefits to change significantly over the next 12 months.



	December 31,
	2012		2011
Balance as of beginning of year	$	235,000	$	193,000
Additions for tax positions related to the current year	—		42,000
Additions for tax positions related to prior years	22,000		—
Balance as of end of year	$	257,000	$	235,000

As of December 31, 2012 and 2011, there were $257,000 and $235,000, respectively, of unrecognized tax benefits that if recognized would affect our annual effective tax rate.

The Company adopted the policy to include interest and penalty expense related to income taxes as interest and other expense, respectively. As of December 31, 2012, no interest or penalties has been accrued. The Company’s open tax years for its federal and state income tax returns are for the tax years ended 2008 through 2012. The Company's open tax years for its foreign income tax returns are for the tax years ended 2008 through 2012.

On January 2, 2013, the American Taxpayer Relief Act of 2012 (Act) was enacted. The Act provides tax relief for businesses by reinstating certain tax benefits retroactively to January 1, 2012. There are several provisions of the Act that impact the Company, most notably the extension of the Research and Development credit. Income tax accounting rules require tax law changes to be recognized in the period of enactment; as such, the associated tax benefits of the Act will be recognized in the Company's provision for income taxes in the first quarter of 2013. The company expects that a benefit in the range of $300,000 to $400,000 will be recognized related to the enactment in the first quarter of 2013.