Income Taxes

Income tax expense from continuing operations is summarized as follows (in thousands):



	Year ended August 31,
	2013			2012			2011
Currently payable:
Federal	$	24,809		$	22,078		$	(78	)
Foreign	13,335			10,396			20,903
State	902			1,534			586
	39,046			34,008			21,411
Deferred:
Federal	(13,514		)	(495		)	14,948
Foreign	(9,942		)	(4,598		)	(4,223		)
State	(218		)	439			(4,303		)
	(23,674		)	(4,654		)	6,422
	$	15,372		$	29,354		$	27,833

Income tax expense from continuing operations recognized in the accompanying consolidated statements of earnings differs from the amounts computed by applying the Federal income tax rate to earnings from continuing operations before income tax expense. A reconciliation of income taxes at the Federal statutory rate to the effective tax rate is summarized in the following table:



	Year ended August 31,
	2013		2012		2011
Federal statutory rate	35.0	%	35.0	%	35.0	%
State income taxes, net of Federal effect	0.9		1.2		0.4
Net effect of foreign tax rates and credits	(8.8	)	(14.6	)	(14.0	)
NOL utilization and changes in valuation allowance	(3.1	)	0.1		(3.0	)
Tax contingency reserve	(5.6	)	(2.2	)	(1.6	)
Prior period correction (1)	(6.5	)	—		—
Other items	(2.5	)	(0.5	)	3.4
Effective income tax rate	9.4	%	19.0	%	20.2	%

(1) During the fourth quarter of fiscal 2013, the Company recorded a $10.6 million adjustment to properly state deferred income tax balances associated with its equity compensation programs. The correction is not material to current or previously issued financial statements.

Temporary differences and carryforwards that gave rise to deferred tax assets and liabilities include the following items (in thousands):



	August 31,
	2013			2012
Deferred income tax assets:
Operating loss and tax credit carryforwards	$	35,071		$	16,393
Compensation related liabilities	20,812			9,909
Postretirement benefits	7,731			10,679
Inventory reserves	7,049			8,045
Book reserves and other items	11,523			12,781
Total deferred income tax assets	82,186			57,807
Valuation allowance	(22,777		)	(8,153		)
Net deferred income tax assets	59,409			49,654
Deferred income tax liabilities:
Depreciation and amortization	(129,498		)	(156,751		)
Other items	(1,985		)	(2,098		)
Deferred income tax liabilities	(131,483		)	(158,849		)
Net deferred income tax liability	$	(72,074	)	$	(109,195	)

Certain of the operating loss and tax credit carryforwards may be carried forward indefinitely, with the remaining $12.9 million expiring at various dates between 2014 and 2021. The valuation allowance represents a reserve for operating loss and tax credit carryforwards for which utilization is uncertain.

Changes in the Company’s gross liability for unrecognized tax benefits, excluding interest and penalties, are as follows (in thousands):



	2013			2012			2011
Beginning balance	$	24,608		$	26,179		$	28,225
Increase for tax positions taken in a prior period	3,601			3,400			4,026
Decrease for tax positions taken in a prior period	(7,622		)	(4,579		)	(6,072		)
Decrease due to settlements	(2,581		)	(392		)	—
Ending balance	$	18,006		$	24,608		$	26,179

Substantially all of these unrecognized tax benefits, if recognized, would impact the effective income tax rate. As of August 31, 2013, 2012 and 2011, the Company recognized $2.9 million, $4.5 million and $5.1 million, respectively for interest and penalties related to unrecognized tax benefits. With few exceptions, the Company is no longer subject to U.S. federal, state and local and foreign income tax examinations by tax authorities in our major tax jurisdictions for years before fiscal 2006. The Company believes it is reasonably possible that the total amount of unrecognized tax benefits could decrease up to $4.3 million within the next twelve months.

The Company’s policy is to remit earnings from foreign subsidiaries only to the extent any resultant foreign income taxes are creditable in the United States. Accordingly, the Company does not currently provide for the additional United States and foreign income taxes which would become payable upon remission of undistributed earnings of foreign subsidiaries. Undistributed earnings on which additional income taxes have not been provided amounted to approximately $427.1 million at August 31, 2013. If all such undistributed earnings were remitted, an additional income tax provision of approximately $79.8 million would have been necessary as of August 31, 2013.

Earnings before income taxes, for continuing operations, are summarized as follows (in thousands):



	Year Ended August 31,
	2013		2012		2011
Domestic	$	67,392	$	65,685	$	47,445
Foreign	95,557		88,945		90,576
	$	162,949	$	154,630	$	138,021

Both domestic and foreign pre-tax earnings are impacted by changes in sales levels, acquisition and divestiture activities (see Note 2, “Acquisitions” and Note 3, “Discontinued Operations”), restructuring costs and the related benefits, growth investments, debt levels, interest rates and the impact of changes in foreign currency exchange rates. In addition, fiscal 2012 domestic pre-tax earnings include a $16.8 million (domestic) debt refinancing charge.

Cash paid for income taxes, net of refunds was $42.1 million, $56.5 million and $23.1 million during the years ended August 31, 2013, 2012 and 2011, respectively.