

7.	Income Taxes

The Company’s income tax provision for interim periods is calculated by applying its estimated annual effective tax rate on ordinary income before taxes to year-to-date ordinary book income before taxes. The income tax effects of any extraordinary, significant unusual or infrequent items not included in ordinary book income are determined separately and recognized in the period in which the items arise.

During the three and nine months ended September 30, 2012, the Company recorded income tax provisions of $1.4 million and $2.6 million resulting in effective tax rates of 81.8% and 35.0%, respectively. During the three and nine months ended September 30, 2011, the Company recorded an income tax benefit of $1.7 million and $1.8 million resulting in effective tax rates of 30.3% and 12.9%, respectively. These effective tax rates differ from the Federal statutory rate of 35% primarily due to the effects of valuation allowances associated with foreign losses, state income taxes, foreign income taxes, nondeductible expenses such as certain stock compensation and meals and entertainment, unrecognized tax benefits and changes in statutory tax rates which took effect during the year. As of September 30, 2012, the Company’s estimated annual effective tax rate was 30.6%, compared to 80.2% as of June 30, 2012. The change in the estimated annual effective tax rate is primarily due to a significant reduction in forecasted pre-tax book income in jurisdictions where the Company is able to recognize an income tax benefit.

During the three months ended June 30, 2012, the Company recorded deferred tax expense of $2.5 million associated with the write-off of a deferred tax asset related to certain market-based stock awards that will never be realized due to the expiration of the stock awards prior to vesting. The write-off of the deferred tax asset has been included as a discrete item in the tax provision for the nine months ended September 30, 2012.

The exercise of certain stock options and the vesting of certain restricted stock awards during the three and nine months ended September 30, 2012 and 2011, generated income tax deductions equal to the excess of the fair market value over the exercise price or grant date fair value, as applicable. The Company will not recognize a deferred tax asset with respect to the excess of tax over book stock compensation deductions until the tax deductions actually reduce its current taxes payable. As such, the Company has not recorded a deferred tax asset in the accompanying consolidated financial statements related to the additional net operating losses generated from the windfall tax deductions associated with the exercise of these stock options and the vesting of restricted stock awards. If and when the Company utilizes these net operating losses to reduce income taxes payable, the tax benefit will be recorded as an increase in additional paid-in capital.

During the three and nine months ended September 30, 2012, certain stock options were exercised and certain shares related to restricted stock awards vested at times when the Company’s stock price was substantially lower than the fair value of those shares at the time of grant. As a result, the income tax deduction related to such shares is less than the expense previously recognized for book purposes. Such shortfalls reduce additional paid-in capital to the extent windfall tax benefits have been previously recognized. The Company recognized certain windfall tax benefits in 2011 and recorded an increase to additional paid-in capital. As a result, $0.0 million and $0.1 million of the shortfalls reduced additional paid-in capital for the three and nine months ended September 30, 2012, respectively, and $0.2 million and $0.5 million of the shortfalls has been included in income tax expense for the three and nine months ended September 30, 2012, respectively. There was no comparative amount for the three and nine months ended September 30, 2011.

As of September 30, 2012 and December 31, 2011, the Company had a valuation allowance related to the deferred tax assets of the foreign subsidiaries (primarily net operating loss carryforwards) that are either loss companies or are in their start-up phases and on the capital loss carryforwards for Federal tax purposes. During the nine months ended September 30, 2012, the Company recorded a valuation allowance related to certain state net operating loss carryforwards, primarily related to Indiana, where ARS is located, due to a current expectation that certain net operating loss carryforwards will not be realized. Management will continue to evaluate the Company’s deferred tax position of its U.S. and foreign companies throughout 2012 to determine the appropriate level of valuation allowance required against its deferred tax assets.

As of September 30, 2012 and December 31, 2011, the Company had unrecognized tax benefits of approximately $1.4 million. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. As of September 30, 2012 and December 31, 2011, the amount of accrued interest and penalties on unrecognized tax benefits was approximately $0.7 million and $0.6 million, respectively.

The Company or one of its subsidiaries files income tax returns in the U.S. Federal jurisdiction and various state and foreign jurisdictions. For income tax returns filed by the Company, the Company is no longer subject to U.S. Federal examinations by tax authorities for years before 2009 or state and local examinations by tax authorities for years before 2008 although tax attribute carryforwards generated prior to these years may still be adjusted upon examination by tax authorities.