NOTE K Income Taxes

The components of earnings before income taxes are as follows:


	2013		2012		2011

	(thousands of dollars)
Earnings before income taxes:
United States	$	147,317	$	171,101	$	117,562
Foreign		200,864		199,679		194,701
Total	$	348,181	$	370,780	$	312,263

The components of the provision for income taxes are as follows:


	2013		2012		2011

	(thousands of dollars)
Income taxes:
Current
Federal	$	35,820	$	45,468	$	26,675
State		4,337		4,012		3,555
Foreign		52,300		50,655		54,785
		92,457		100,135		85,015
Deferred
Federal		7,071		7,391		8,556
State		312		722		191
Foreign		964		(1,769)		(6,790)
		8,347		6,344		1,957
Total	$	100,804	$	106,479	$	86,972

The following table reconciles the U.S. statutory income tax rate with the effective income tax rate:


	2013	2012	2011
Statutory U.S. federal rate	35.0%	35.0%	35.0%
State income taxes	1.2%	1.2%	1.0%
Foreign taxes at lower rates	(6.1%)	(6.0%)	(6.6%)
Export, manufacturing, and research credits	(1.5%)	(1.0%)	(1.6%)
U.S. tax impact on repatriation of earnings	(0.2%)	0.8%	(0.3%)
Change in unrecognized tax benefits	0.5%	(1.0%)	0.1%
Other	0.1%	(0.3%)	0.3%
	29.0%	28.7%	27.9%

The tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows:


	2013		2012

	(thousands of dollars)
Deferred tax assets:
Accrued expenses	$	11,580	$	10,666
Compensation and retirement plans		23,578		52,986
NOL carryforwards		3,279		3,146
LIFO and inventory reserves		5,037		2,796
Other		3,890		3,697
Deferred tax assets, gross		47,364		73,291
Valuation allowance		(3,228)		(2,945)
Net deferred tax assets		44,136		70,346

Deferred tax liabilities:
Depreciation and amortization		(45,737)		(38,796)
Other		(663)		(394)
Deferred tax liabilities		(46,400)		(39,190)

Prepaid tax assets		4,015		4,251

Net tax asset	$	1,751	$	35,407

Deferred income tax assets on the face of the balance sheet include $4.0 million and $4.3 million of prepaid tax assets related to intercompany transfers of inventory as of July 31, 2013 and July 31, 2012, respectively.

The effective tax rate for Fiscal 2013 was 29.0 percent compared to 28.7 percent in Fiscal 2012. The increase in the effective tax rate is primarily due to the incremental benefits derived in Fiscal 2012 from the favorable settlement of tax audits. This was partially offset by an increase in tax benefits from international operations and the retroactive reinstatement of the Research and Experimentation Credit in the U.S. in the current year.

The Company has not provided for U.S. income taxes on additional undistributed earnings of non-U.S. subsidiaries of approximately $757.0 million. The Company currently intends to indefinitely reinvest these undistributed earnings as there are significant investment opportunities there or to repatriate the earnings only when it is tax effective to do so. If any portion were to be distributed, the related U.S. tax liability may be reduced by foreign income taxes paid on those earnings plus any available foreign tax credit carryovers. Determination of the unrecognized deferred tax liability related to these undistributed earnings is not practicable.

The Company has cumulative pre-tax loss carryforwards of $3.1 million, which exist in various international subsidiaries. If fully realized, the unexpired net operating losses may be carried forward to offset future local income tax payments of $0.9 million, at current rates of tax. The majority of the remaining net operating loss carryforwards expire more than 5 years out or have no statutory expiration under current local laws. However, as it is more-likely-than-not that certain of these losses will not be realized, a valuation allowance of $0.8 million exists as of July 31, 2013.

The Company maintains a reserve for uncertain tax benefits. The accounting standard defines the threshold for recognizing the benefits of tax return positions in the financial statements as "more-likely-than-not" to be sustained by the taxing authorities based solely on the technical merits of the position. If the recognition threshold is met, the tax benefit is measured and recognized as the largest amount of tax benefit that in the Company’s judgment is greater than 50 percent likely to be realized. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:


	2013		2012		2011

	(thousands of dollars)
Gross unrecognized tax benefits at beginning of fiscal year	$	16,514	$	20,005	$	18,994
Additions for tax positions of the current year		5,453		3,323		7,406
Additions for tax positions of prior years		407		261		668
Reductions for tax positions of prior years		(1,640)		(4,462)		(4,059)
Settlements		(277)		-		-
Reductions due to lapse of applicable statute of limitations		(2,038)		(2,613)		(3,004)
Gross unrecognized tax benefits at end of fiscal year	$	18,419	$	16,514	$	20,005

The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the fiscal year ended July 31, 2013, the Company recognized interest expense, net of tax benefit, of approximately $0.3 million. At July 31, 2013 and July 31, 2012, accrued interest and penalties on a gross basis were $1.1 million and $1.3 million, respectively.

The Company’s uncertain tax positions are affected by the tax years that are under audit or remain subject to examination by the relevant taxing authorities. The following tax years, in addition to the current year, remain subject to examination, at least for certain issues, by the major tax jurisdictions indicated:


Major Jurisdictions		Open Tax Years
Belgium		2011 through 2012
China		2003 through 2012
France		2010 through 2012
Germany		2009 through 2012
Italy		2003 through 2012
Japan		2012
Mexico		2008 through 2012
Thailand		2005 through 2012
United Kingdom		2012
United States		2011 through 2012

If the Company were to prevail on all unrecognized tax benefits recorded, substantially all of the unrecognized tax benefits would benefit the effective tax rate. With an average statute of limitations of about 5 years, up to $0.8 million of the unrecognized tax benefits could potentially expire in the next 12 month period, unless extended by audit. It is possible that quicker than expected settlement of either current or future audits and disputes would cause additional reversals of previously recorded reserves in the next 12 month period. Currently, the Company has approximately $0.2 million of unrecognized tax benefits that are in formal dispute with various taxing authorities related to transfer pricing and deductibility of expenses. Quantification of an estimated range and timing of future audit settlements cannot be made at this time.