Income Taxes

Income from continuing operations before income taxes included income from domestic operations of $195.1 million for 2012, $180.7 million for 2011 and $168.1 million for 2010. Income before taxes included income from foreign operations of $33.1 million for 2012, $30.9 million for 2011 and $5.5 million for 2010.

Provision (benefit) for income taxes from continuing operations was as follows (in millions):



	2012			2011			2010
Current
Federal	$	44.2		$	29.1		$	36.8
State	4.8			8.1			(1.8		)
Foreign	7.4			10.0			(1.4		)
Total current	56.4			47.2			33.6
Deferred
Federal	11.8			28.3			16.1
State	4.4			(5.1		)	3.9
Foreign	(7.2		)	(0.9		)	—
Total deferred	9.0			22.3			20.0
Provision for income taxes	$	65.4		$	69.5		$	53.6

The following is a reconciliation of the statutory federal income tax rate to the actual effective income tax rate:



	2012		2011		2010
U.S. federal statutory tax rate	35.0	%	35.0	%	35.0	%
State and local taxes, net of federal benefit	3.2		1.8		3.8
Research and development tax credits	(2.4	)	(2.6	)	(6.7	)
Qualified production activity deduction	(1.9	)	(1.4	)	(1.8	)
Foreign rate differential	(6.0	)	(2.2	)	—
Accruals for unrecognized tax benefits	0.7		2.3		—
Other	0.1		—		0.6
Effective income tax rate	28.7	%	32.9	%	30.9	%

Deferred income taxes result from temporary differences in the recognition of income and expense for financial and income tax reporting purposes, and differences between the fair value of assets acquired in business combinations accounted for as purchases for financial reporting purposes and their corresponding tax bases. Deferred income taxes represent future tax benefits or costs to be recognized when those temporary differences reverse. A valuation allowance of $3.1 million, $0.9 million and $0.3 million existed against deferred tax assets for 2012, 2011 and 2010, respectively.

The categories of assets and liabilities that have resulted in differences in the timing of the recognition of income and expense were as follows (in millions):



	2012		2011
Deferred income tax assets:
Current:
Accrued liabilities	$	11.8	$	11.8
Inventory valuation	11.5		11.1
Accrued vacation	11.1		10.4
Deferred compensation and other benefits plans	1.0		1.0
Intangible amortization	5.7		3.0
Long-term:
Postretirement benefits other than pensions	5.8		6.4
Accrued liabilities	9.4		18.3
Deferred compensation and other benefit plans	37.4		16.0
Tax credit and NOL carryforward amounts	34.0		28.2
Total deferred income tax assets	127.7		106.2

Deferred income tax liabilities:
Current:
Other items	1.3		2.2
Long-term:
Property, plant and equipment differences	54.6		24.3
Intangible amortization	65.3		57.0
Other items	—		0.7
Total deferred income tax liabilities	121.2		84.2

Net deferred income tax assets	$	6.5	$	22.0

At December 30, 2012, the Company had approximately $11.3 million of Canadian (federal and provincial) and U.K., Japan and other foreign net operation loss carry forward amounts, of which $1.9 million has no expiration date, and $7.2 million of Canadian federal net operating losses and $1.1 million of Canadian provincial net operating losses have expiration dates ranging from 2030 through 2031. Also, $0.9 million of Japan net operating losses begin to expire in 2014, and $0.2 million of other foreign net operating losses expire in 2015. The Company had Canadian investment tax credits of $32.5 million, which have expiration dates of 2027 through 2032. In addition, the Company had domestic federal and state net operating losses of approximately $4.6 million and $104.3 million respectively. The material federal net operating loss carry forward amounts are limited in their use by earnings of certain acquired subsidiaries, and have expiration dates ranging from 2024 to 2032 and the material state net operating loss carry forward amounts have expiration dates ranging from 2025 to 2027. Finally, the Company had a federal research and development credit carryover in the amount of $0.7 million which will begin to expire in 2028 and state tax credits of $2.5 million, of which $0.6 million has no expiration date and $1.9 million begins to expire in 2017.

Additional paid in capital was credited $8.4 million in 2012, $7.2 million in 2011 and $1.5 million in 2010 for the tax benefit resulting from the exercise of stock options.

The following presents a rollforward of our unrecognized tax benefits (in millions):



	2012			2011			2010
Beginning of year	$	25.8		$	10.1		$	25.2
Increase (decrease) in prior year tax positions (a)	18.1			18.7			(3.5		)
Increase for tax positions taken during the current period	1.5			0.7			0.6
Reduction related to settlements with taxing authorities	—			—			(9.2		)
Reduction related to lapse of the statute of limitations	(2.9		)	(3.5		)	(3.0		)
Impact of exchange rate changes	0.1			(0.2		)	—

End of year	$	42.6		$	25.8		$	10.1
a) Includes the impact of acquisitions in 2012 and 2011.

We recognized interest and penalties related to unrecognized tax benefits of $2.7 million and $1.7 million within the provision for income taxes in our statements of operations for fiscal year 2012 and 2011, respectively. Interest and penalties in the amount of $5.8 million and $2.5 million were recognized in the 2012 and 2011 statement of financial position, respectively. As of December 30, 2012, we estimated that $32.9 million of unrecognized tax benefits, if resolved in our favor, would positively impact the effective tax rate and, therefore, be recognized as additional tax benefits in our income statement. Of the $42.6 million of unrecognized tax benefits, $9.7 million would be offset by deferred tax assets.

We file income tax returns in the United States federal jurisdiction and in various states and foreign jurisdictions. The Company has substantially concluded on all U.S. federal income tax matters for all years through 2009, California income tax matters for all years through 2006 and Canadian income tax matters for all years through 2003. The Company is currently under audit in Canada for tax periods 2006 through 2011 and in California for tax years 2007 through 2009. The Company does not believe that the resolution of any of the audits will have a material adverse effect on the Company's results of operations. An appeal filed with a state tax authority for the 2011 tax year, if resolved favorably, could have up to a $1.0 million reduction in income tax expense. Substantially all other material state, local and foreign income tax matters have been concluded for years through 2006.

The Company anticipates the total unrecognized tax benefit for various federal and state tax items may be reduced by $13.7 million due to the expiration of statutes of limitation and settlements with tax authorities for various federal, state and Canadian tax issues in the next 12 months.

We consider the earnings of non-U.S. subsidiaries to be indefinitely invested outside the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash. At December 30, 2012, the amount of undistributed foreign earnings was $87.5 million. We have not recorded a deferred tax liability of approximately $19.6 million related to the $87.5 million in undistributed foreign earnings. Should we decide to repatriate the foreign earnings, we would need to adjust our income tax provision in the period we determined that the earnings will no longer be indefinitely invested outside in the United States.

Changes in tax laws and rates may affect the recorded deferred tax assets and liabilities and our effective tax rate. The American Taxpayer Relief Act of 2012 (the “Act”) was signed into law on January 2, 2013. Because a change in tax law is accounted for in the period of enactment, certain provisions of the Act benefiting the Company's 2012 U.S. federal taxes, including the research and development credit and the Subpart F controlled foreign corporation look through exception cannot be recognized in the Company's 2012 financial results and instead will be reflected in the Company's 2013 financial results. We estimate that a benefit of approximately $2.9 million will be accounted for as a discrete item in our tax provision for the first quarter of 2013. In addition, we expect the Act's extension for these provisions through the end of 2013 will favorably affect our estimated annual effective tax rate for 2013 by approximately 1.2 percentage points as compared to 2012.