Note 7 – Income Taxes

The components of income before income taxes were taxed under the following jurisdictions:

(In thousands)	2012		2011		2010

Domestic	$	105,945	$	118,208	$	88,262
Foreign		14,409		11,953		33,588

Income before income taxes	$	120,354	$	130,161	$	121,850

Income tax expense consists of the following:

(In thousands)	2012			2011			2010

Current tax expense:
Federal	$	33,152		$	43,127		$	32,132
Foreign		1,764			1,740			6,292
State and local		3,049			2,398			2,518

Current tax expense		37,965			47,265			40,942

Deferred tax (benefit) expense:
Federal		570			(6,480	)		(4,057	)
Foreign		(2,015	)		344			(2,036	)
State and local		161			1,946			(534	)

Deferred tax benefit		(1,284	)		(4,190	)		(6,627	)

Income tax expense	$	36,681		$	43,075		$	34,315

No provision is made for U.S. income taxes applicable to undistributed earnings of foreign subsidiaries that are indefinitely reinvested in foreign operations. It is not practicable to compute the potential deferred tax liability associated with these undistributed foreign earnings.

The difference between the reported income tax expense and a tax determined by applying the applicable U.S. federal statutory income tax rate to income before income taxes is reconciled as follows:

(In thousands)	2012			2011			2010

Expected income tax expense	$	42,124		$	45,556		$	42,647
State and local income tax, net of federal benefit		3,178			4,267			2,867
Effect of foreign statutory rate different from U.S. and other foreign adjustments		(2,637	)		(560	)		(2,143	)
Valuation allowance changes		(1,224	)		(443	)		(5,496	)
U.S. production activities deduction		(2,975	)		(3,850	)		(2,975	)
Tax contingency changes		(3,224	)		(1,934	)		(1,516	)
Other, net		1,439			39			931

Income tax expense	$	36,681		$	43,075		$	34,315

During 2012 and 2011, the Company released a valuation allowance of $1.2 million, or three cents per diluted share, and $0.4 million, or one cent per diluted share, respectively, due to the expectation that certain state tax attributes will be utilized.

During 2010, as a result of income from an insurance settlement in a foreign jurisdiction, the Company utilized a deferred tax asset and released a related valuation allowance of $5.5 million, or 15 cents per diluted share. Additional valuation allowance releases totaled $1.1 million, or three cents per diluted share, due to the expectation that certain state tax attributes will be utilized. The Company also added a valuation allowance of $1.1 million, or three cents per diluted share, to offset a foreign deferred tax asset generated during 2010.

The following summarizes the activity related to the Company's unrecognized tax benefits:

(In thousands)	2012			2011

Beginning balance	$	6,572		$	8,565
Increases related to prior year tax positions		—			—
Increases related to current year tax positions		—			—
Decreases related to prior year tax positions		—			(802	)
Decreases related to settlements with taxing authorities		—			—
Decreases due to lapses in the statute of limitations		(3,313	)		(1,191	)

Ending balance	$	3,259		$	6,572

Federal income tax benefits associated with state tax uncertainties and interest on federal tax uncertainties are recorded as a deferred tax asset. As of December 29, 2012, this asset totaled $0.2 million. Of the $3.3 million total unrecognized tax benefits and $0.2 million of accrued interest, up to $0.6 million could affect the effective tax rate, if recognized. Due to ongoing federal, state, and foreign income tax audits and potential lapses of the statutes of limitations in various taxing jurisdictions, it is reasonably possible that the Company's unrecognized tax benefits and accrued interest may decrease in the next twelve months up to $0.6 million.

The Company includes interest and penalties related to income tax matters as a component of income tax expense. Cumulative potential interest and penalties accrued related to unrecognized tax benefits totaled $0.2 million as of December 29, 2012 and December 31, 2011, without consideration of any applicable federal benefit. The net reduction to income tax expense related to penalties and interest was immaterial in 2012, $0.5 million in 2011, and $0.2 million in 2010.

The Internal Revenue Service concluded its audit of the Company's 2009 and 2010 federal income tax returns during 2012, the results of which were immaterial to the Consolidated Financial Statements. Audit settlements of the 2004 and 2005 years in Mexico resulted in tax expense of $2.0 million, or five cents per diluted share during 2010. The Company is currently under audit in various state jurisdictions.

The statute of limitations is still open for the Company's federal tax return and most state income tax returns for the 2009 return and all subsequent years. The statutes of limitations for certain state and foreign returns are also open for some earlier tax years due to ongoing audits and differing statute periods. While the Company believes that it is adequately reserved for possible audit adjustments, the final resolution of these examinations cannot be determined with certainty and could result in final settlements that differ from current estimates.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:

(In thousands)	2012			2011

Deferred tax assets:
Accounts receivable	$	447		$	424
Inventories		7,829			11,075
Other postretirement benefits and accrued items		14,767			13,880
Pension		10,489			10,673
Other reserves		14,905			14,671
Federal and foreign tax attributes		9,829			7,421
State tax attributes, net of federal benefit		29,880			30,478
Insurance Claim Receivable		8,048			244
Share-based Compensation		1,493			2,052

Total deferred tax assets		97,687			90,918
Less valuation allowance		(30,394	)		(29,705	)

Deferred tax assets, net of valuation allowance		67,293			61,213

Deferred tax liabilities:
Property, plant, and equipment		49,531			44,757
Other		983			893

Total deferred tax liabilities		50,514			45,650

Net deferred tax asset	$	16,779		$	15,563

As of December 29, 2012, after consideration of the federal impact, the Company had state income tax credit carryforwards of $0.9 million, most of which expire by 2015, and other state income tax credit carryforwards of $13.2 million with unlimited lives. The Company had state net operating loss (NOL) carryforwards with potential tax benefits of $15.8 million expiring between 2014 and 2027. The state tax credit and NOL carryforwards are offset by valuation allowances totaling $23.1 million.

As of December 29, 2012, the Company had federal and foreign tax attributes with potential tax benefits of $9.8 million, of which $4.6 million has an unlimited life and $5.2 million expire from 2013 to 2018. These attributes were offset by valuation allowances of $7.3 million.

Income taxes paid were approximately $38.4 million in 2012, $45.9 million in 2011, and $46.0 million in 2010.