5. Income Taxes

The provision for income taxes included in the accompanying consolidated financial statements represents federal, state and foreign income taxes. The components of income before income taxes and the provision for income taxes consist of the following:


Years ended December 31		2013		2012		2011
Income (loss) before income taxes:
Domestic	$	(1,118)	$	3,411	$	62,510
Foreign		21,852		1,149		9,132
Total income before income taxes	$	20,734	$	4,560	$	71,642

Provision for income taxes:
Current:
Federal	$	-		-		-
State and foreign		7,307		3,545		2,167
Total current provision		7,307		3,545		2,167

Deferred:
Federal		-		98		23,443
State and foreign		(3,081)		(2,831)		495
Total deferred provision (benefit)		(3,081)		(2,733)		23,938
Total provision for income taxes	$	4,226	$	812	$	26,105

A reconciliation of the Company’s effective income tax rate to the statutory federal tax rate is as follows:


Years ended December 31	2013		2012		2011
Statutory U.S. deferal income tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal tax benefit	2.7		3.8		0.2
Tax credits	(4.7)		-		(1.4)
Foreign tax rate differential	(16.5)		(16.1)		(1.4)
Reduction (increase) of income tax accruals	(1.3)		0.5		0.1
Tax on foreign dividends, net of foreign tax credits	(3.2)		45.6		1.1
Reduction of deferred taxes	3.6		6.4		0.3
Valuation allowances	2.2		(78.3)		(1.4)
Loss of domestic flow-through entity not attributable to Stoneridge, Inc.	-		6.8		1.9
Non-deductible compensation	3.4		12.8		0.3
Other	(0.8)		1.3		1.7
Effective income tax rate	20.4	%	17.8	%	36.4	%

The Company recognized a provision for income taxes of $4,226 or 20.4%, $812 or 17.8% and $26,105 or 36.4% of income before income tax for federal, state and foreign income taxes for the years ended December 31, 2013, 2012 and 2011, respectively. The increase in tax expense for the year ended December 31, 2013 compared to the same period for 2012 was related to the improved financial performance of our Swedish and Brazilian operations. The results of our U.S. operations do not impact tax expense due to the valuation allowance. However, the income or loss of the U.S. operations does impact the effective tax rate. The effective tax rate for 2013 increased primarily due to a decline in the financial performance of the U.S. operations.

A deferred tax liability of $456 has been recorded related to earnings that are not considered indefinitely reinvested related to Brazil. The Company has not recorded deferred income taxes on the remaining undistributed earnings of its foreign subsidiaries because of management’s intent and ability to indefinitely reinvest such earnings. At December 31, 2013 the aggregate undistributed earnings of our foreign subsidiaries amounted to $27,509 The Company may be subject to U.S. income taxes and foreign withholding taxes if these earnings were distributed. It is not practical to estimate the amount of taxes, if any, that may be payable on these earnings as that estimate depends upon circumstances that would exist at the time a remittance occurs.

Significant components of the Company’s deferred tax assets and liabilities were as follows:


As of December 31		2013		2012
Deferred tax assets:
Inventories	$	2,943	$	3,200
Employee salary and benefits		3,653		3,860
Insurance		489		562
Depreciation and amortization		2,359		10,029
Net operating loss carryforwards		45,859		39,834
General business credit carryforwards		12,900		11,897
Reserves not currently deductible		8,883		9,643
Gross deferred tax assets		77,086		79,025
Less: Valuation allowance		(71,827)		(71,790)
Deferred tax assets less valuation allowance		5,259		7,235

Deferred tax liabilities:
Depreciation and amortization		(23,718)		(29,615)
Basis difference - equity investee		(31,016)		(31,016)
Other		(1,764)		(4,315)
Gross deferred tax liabilities		(56,498)		(64,946)

Net deferred tax liability	$	(51,239)	$	(57,711)

The Company has concluded based on objective evidence that at December 31, 2013 and 2012 it is more likely than not that sufficient taxable income will not be generated to utilize the remaining U.S. federal, and certain state and foreign, deferred tax assets before they expire and as such a valuation allowance has been recorded. The valuation allowance represents the amount of tax benefit related to U.S. federal, state and foreign net operating losses, credits and other deferred tax assets.

The Company has net operating loss carry forwards of $106,637, $96,260 and $22,381 for U.S. federal, state and foreign tax jurisdictions, respectively. The U.S. federal net operating losses, if unused, begin to expire in December 31, 2025, the state net operating losses expire at various times and the foreign net operating losses expire at various times or have indefinite expiration dates. The Company has general business and foreign tax credit carry forwards of $12,271, $2,005 and $1,908 for U.S. federal, state and foreign jurisdictions respectively. The U.S. federal general business credits, if unused, begin to expire in December 31, 2021, and the state and foreign tax credits expire at various times. The Company is required to provide a deferred tax liability corresponding to the difference between the financial reporting basis (which was remeasured to fair value upon the acquisition of an additional 24% of PST in 2011) and the tax basis in the previously held 50% ownership interest in PST (the “outside” basis difference). This outside basis difference will generally remain fixed until (1) dividends from the subsidiary exceed the parent’s share of earnings subsequent to the date it became a subsidiary or (2) there is a transaction that affects the Company’s ownership of PST.

During the fourth quarter of 2010 we undertook a secondary offering. As a result of the secondary offering a substantial change in our ownership occurred and we experienced an ownership change pursuant to Section 382 of the Code. There was no impact to current or deferred income taxes resulting from the ownership change.

The following is a reconciliation of the Company’s total gross unrecognized tax benefits:


		2013		2012		2011
Balance as of January 1	$	3,416	$	3,452	$	3,101

Tax positions related to the current year:
Additions		217		93		381
Tax positions related to the prior years:
Additions		216		-		28
Reductions		(71)		(58)		-
Expirations of statutes of limitation		-		(71)		(58)

Balance as of December 31	$	3,778	$	3,416	$	3,452

At December 31, 2013 the Company has classified $639 as a noncurrent liability and $3,329 as a reduction to non-current deferred income tax assets. The amount of unrecognized tax benefits is not expected to change significantly during the next 12 months. Management is currently unaware of issues under review that could result in a significant change or a material deviation in this estimate.

If the Company’s tax positions at December 31, 2013 are sustained by the taxing authorities in favor of the Company, approximately $3,547 would affect the Company’s effective tax rate.

Consistent with historical financial reporting, the Company has elected to classify interest expense and, if applicable, penalties which could be assessed related to unrecognized tax benefits as a component of income tax expense. For the years ended December 31, 2013, 2012 and 2011, the Company recognized approximately $(82), $64 and $67 of gross interest and penalties, respectively. The Company has accrued approximately $624 and $706 for the payment of interest and penalties at December 31, 2013 and 2012, respectively.

The Company conducts business globally and, as a result, files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities throughout the world. The following table summarizes the open tax years for each important jurisdiction:


Jurisdiction	Open Tax Years
U.S. Federal		2010-2013
Brazil		2008-2013
China		2010-2013
France		2009-2013
Mexico		2009-2013
Spain		2009-2013
Sweden		2008-2013
United Kingdom		2009-2013