NOTE J - INCOME TAXES

The components of income before income taxes were:


(THOUSANDS OF DOLLARS)	2012		2011		2010
U.S.	$	7,592	$	5,610	$	2,156
Non-U.S.		5,167		5,539		5,694
	$	12,759	$	11,149	$	7,850

The provision for income taxes consists of the following:


(THOUSANDS OF DOLLARS)	2012		2011		2010
Currently Payable (Receivable):
Federal	$	102	$	(1,185)	$	1,233
State		(145)		179		214
Foreign		1,085		921		1,094
		1,042		(85)		2,541
Deferred:
Federal		2,690		2,939		(797)
State		9		(10)		-
Foreign		(130)		(5)		(102)
		2,569		2,924		(899)
Total	$	3,611	$	2,839	$	1,642

The reconciliation of income taxes computed at the statutory Federal income tax rate to the provision for income taxes from operations is as follows:


(THOUSANDS OF DOLLARS)	2012		2011		2010
Statutory Federal income tax provision	$	4,465	$	3,902	$	2,747
State income tax expense, less Federal tax benefit		79		234		134
Foreign tax rate differential		(1,034)		(1,023)		(1,001)
Adjustment related to uncertain tax benefits		193		(16)		(223)
Miscellaneous		(92)		(258)		(15)
Income Tax Provision	$	3,611	$	2,839	$	1,642

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 29, 2012 and December 31, 2011 are as follows:


(THOUSANDS OF DOLLARS)	2012		2011
Current Deferred Tax Assets:
Additional costs inventoried for tax purposes and
inventory adjustments not deductible for tax purposes	$	725	$	1,077
Excess benefit plan		1,067		1,005
Accrued pension costs		769		689
Net operating loss carryforward		-		1,315
Other		1,543		1,548
		4,104		5,634
Less Valuation Allowance		(687)		(1,428)
Current Deferred Tax Assets	$	3,417	$	4,206


(THOUSANDS OF DOLLARS)	2012		2011
Long-Term Deferred Tax Assets and Liabilities:
Assets:
Intangible assets	$	-	$	212
Accrued warranty costs		658		733
Foreign tax credit carryforward		2,866		1,185
Net operating loss carryforward		2,782		3,047
Accrued pension costs		7,494		7,662
Deferred gain on sale of real estate		873		1,105
Other		1,651		1,507
		16,324		15,451
Less Valuation Allowance		(3,490)		(3,487)
Long-Term Deferred Tax Assets	$	12,834	$	11,964


Liabilities:
Property, plant and equipment, principally due to
differences in depreciation	$	(1,154)	$	(849)
Intangible assets		(110)		-
Long-Term Deferred Tax Liabilities	$	(1,264)	$	(849)
Net Long-Term Deferred Tax Asset	$	11,570	$	11,115
Net Deferred Tax Asset	$	14,987	$	15,321

At December 29, 2012 and December 31, 2011, undistributed earnings of foreign subsidiaries amounted to approximately $39.9 million and $35.5 million, respectively. These earnings could become subject to additional tax if they are remitted as dividends or if certain other circumstances exist. The amount of additional taxes that might be payable on the undistributed foreign earnings of $39.9 million approximates $9.5 million. This amount has not been recorded because it is the Company's intention to permanently invest the remainder of the undistributed earnings of its foreign subsidiaries in the growth of business outside the United States.

At December 29, 2012, the Company had state net operating loss carryforwards of approximately $23.6 million, which expire in fiscal years from 2013 to 2031. Net operating loss carryforwards for certain foreign subsidiaries were approximately $3.8 million for tax purposes. A portion of these losses will expire in fiscal years from 2013 to 2025 and a portion does not expire. A valuation allowance has been provided for the foreign and state net operating losses and temporary differences that are estimated to expire before they are utilized. The decrease of $0.8 million in 2012 and the increase of $0.3 million in 2011 in the valuation allowance primarily related to changes in state deferred tax assets.

Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise we consider all available positive and negative evidence, including reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. It is management's assertion based on the evaluation of this evidence that it is more likely than not that sufficient future taxable income will be generated to realize the tax benefit of the deferred tax assets, net of the valuation allowance.

As of December 29, 2012, the liability for uncertain tax positions is $0.5 million and $0.4 million of the unrecognized tax benefit would impact the Company's effective tax rate, if recognized.

The following is a tabular reconciliation of beginning and ending balances of unrecognized tax benefits.


(THOUSANDS OF DOLLARS)	2012		2011		2010
Beginning of Year	$	361	$	376	$	586
Gross increases - current period tax positions		199		16		92
Lapse of statute limitations		(11)		(31)		(302)
End of Year	$	549	$	361	$	376

The Company is currently subject to audit by the Internal Revenue Service (“IRS”) and certain foreign jurisdictions for the calendar years ended 2009 through 2012. In certain foreign jurisdictions, the Company is currently subject to audit for tax years prior to 2009; this varies depending on the jurisdiction. The Company and its subsidiaries' state income tax returns are subject to audit for the calendar years ended 2008 through 2012.

As of December 29, 2012 and December 31, 2011, the Company had accrued $0.1 million of interest and an immaterial amount of penalties related to uncertain tax positions. The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for income taxes. The liabilities recorded under the accounting standard related to uncertain tax positions, including tax, interest and penalty, are included in other long-term liabilities on the Company's consolidated balance sheet.

The Company is subject to income taxes in many jurisdictions around the world. Significant judgment is required in determining the worldwide provision for income taxes. In the ordinary course of business, there are many transactions and calculations in which the ultimate tax determination is uncertain. Although the Company believes the estimates for uncertain tax positions are reasonable and recorded in accordance with accounting standards, the final determination of tax audits and any related litigation could be materially different than that which is reflected in historical income tax provisions and accruals. Additional taxes assessed as a result of an audit or litigation could have a material effect on the Company's income tax provision and net income in the period or periods in which the determination is made. Changes in estimates made in fiscal 2012 and 2011 were the result of more precise information, current actions by taxing authorities and the expiration of statutes of limitation in certain jurisdictions.