Note 7 – Income Taxes

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

(In thousands)	2013		2012		2011

Domestic	$	262,220	$	105,945	$	118,208
Foreign		9,178		14,409		11,953

Income before income taxes	$	271,398	$	120,354	$	130,161

Income tax expense consists of the following:

(In thousands)	2013			2012			2011

Current tax expense:
Federal	$	69,565		$	33,152		$	43,127
Foreign		2,608			1,764			1,740
State and local		6,723			3,049			2,398

Current tax expense		78,896			37,965			47,265

Deferred tax expense (benefit):
Federal		17,694			570			(6,480	)
Foreign		(376	)		(2,015	)		344
State and local		1,895			161			1,946

Deferred tax expense (benefit)		19,213			(1,284	)		(4,190	)

Income tax expense	$	98,109		$	36,681		$	43,075

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 Company has approximately $100 million of undistributed foreign earnings for which it has not recorded deferred tax liabilities.

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)	2013			2012			2011

Expected income tax expense	$	94,989		$	42,124		$	45,556
State and local income tax, net of federal benefit		6,405			3,178			4,267
Effect of foreign statutory rate different from U.S. and other foreign adjustments		(1,026	)		(2,637	)		(560	)
Valuation allowance changes		—			(1,224	)		(443	)
U.S. production activities deduction		(4,445	)		(2,975	)		(3,850	)
Goodwill disposition		1,790			—			—
Tax contingency changes		(140	)		(3,224	)		(1,934	)
Other, net		536			1,439			39

Income tax expense	$	98,109		$	36,681		$	43,075

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.

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

(In thousands)	2013			2012

Beginning balance	$	3,259		$	6,572
Increases related to prior year tax positions		—			—
Increases related to current year tax positions		—			—
Decreases related to prior year tax positions		—			—
Decreases related to settlements with taxing authorities		(431	)		—
Decreases due to lapses in the statute of limitations		—			(3,313	)

Ending balance	$	2,828		$	3,259

It is reasonably possible that the $2.8 million of unrecognized tax benefits will decrease by the full amount over the next twelve months, none of which will impact the effective tax rate, if recognized.

The Company includes interest and penalties related to income tax matters as a component of income tax expense. The net reduction to income tax expense related to penalties and interest was immaterial in 2013 and in 2012, and $0.5 million in 2011.

The Internal Revenue Service (IRS) 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. The IRS is currently auditing the 2012 federal income tax return, and the Company is currently under audit in various state and foreign jurisdictions.

The statute of limitations is still open for the Company’s federal tax return and most state income tax returns for 2010 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)	2013			2012

Deferred tax assets:
Accounts receivable	$	490		$	447
Inventories		11,136			7,829
Other postretirement benefits and accrued items		13,548			14,767
Pension		—			10,489
Other reserves		12,441			14,905
Federal and foreign tax attributes		5,913			9,829
State tax attributes, net of federal benefit		24,663			29,880
Insurance Claim Receivable		—			8,048
Share-based Compensation		2,486			1,493

Total deferred tax assets		70,677			97,687
Less valuation allowance		(22,544	)		(30,394	)

Deferred tax assets, net of valuation allowance		48,133			67,293

Deferred tax liabilities:
Property, plant, and equipment		60,425			49,531
Pension		4,507			—
Other		2,209			983

Total deferred tax liabilities		67,141			50,514

Net deferred tax (liability) asset	$	(19,008	)	$	16,779

As of December 28, 2013, after consideration of the federal impact, the Company had state income tax credit carryforwards of $2.0 million, all of which expire by 2016, and other state income tax credit carryforwards of $11.9 million with unlimited lives. The Company had state net operating loss (NOL) carryforwards with potential tax benefits of $10.7 million expiring between 2014 and 2028. The state tax credit and NOL carryforwards are offset by valuation allowances totaling $19.4 million.

As of December 28, 2013, the Company had federal and foreign tax attributes with potential tax benefits of $5.9 million, of which $4.5 million has an unlimited life and $1.4 million expire from 2014 to 2018. These attributes were offset by valuation allowances of $3.2 million.

The change in the valuation allowance was primarily related to deferred assets that are fully reserved, such that the change had no material impact on the effective tax rate.

Income taxes paid were approximately $80.1 million in 2013, $38.4 million in 2012, and $45.9 million in 2011.