Note 14: Income Taxes

Income before income taxes consists of the following:


	2012		2011		2010
U.S.	$	175,927		202,476		104,036
Non-U.S.		185,635		184,505		127,815
Income before income taxes	$	361,562		386,981		231,851

The following table details the components of the provision for income taxes. A portion of these income taxes will be payable within one year and are, therefore, classified as current, while the remaining balance is deferred:


	2012			2011			2010
Current:
U.S. federal	$	42,450			69,164			31,459
U.S. state and local		9,211			5,283			2,392
Non-U.S.		47,414			41,084			24,646
Deferred:
U.S. federal		13,499			(3,048	)		1,680
U.S. state and local		548			(825	)		1,518
Non-U.S.		(16,053	)		(4,219	)		(4,798	)
Provision for income taxes	$	97,069			107,439			56,897

The U.S. federal corporate statutory rate is reconciled to the Company’s effective income tax rate as follows:


	2012			2011			2010
U.S. federal corporate statutory rate		35.0	%		35.0	%		35.0	%
State and local taxes, less federal tax benefit		1.7			1.2			1.7
Foreign income taxes		(7.0	)		(6.7	)		(10.7	)
Manufacturing benefit		(1.1	)		(1.2	)		(1.0	)
Repatriation, net of foreign financing tax effect		0.2			(0.3	)		(1.1	)
Valuation allowance adjustments		(1.6	)		(0.4	)		—
Other, net		(0.4	)		0.2			0.6
Effective income tax rate		26.8	%		27.8	%		24.5	%

The principal items that gave rise to deferred income tax assets and liabilities are as follows:


	2012			2011
Deferred tax assets:
Reserves and accruals	$	40,184			56,660
Postretirement benefits other than pensions		5,117			5,888
Postretirement benefits — pensions		9,979			12,483
Tax loss and interest carryforwards		29,045			26,952
Foreign tax credit carryforwards		6,422			5,545
Other		15,941			10,130
Total deferred tax assets		106,688			117,658
Valuation allowance		(6,720	)		(11,948	)
Deferred tax liabilities:
LIFO inventory		(3,070	)		(3,242	)
Property, plant and equipment		(17,824	)		(20,590	)
Intangibles		(108,357	)		(115,103	)
Other		(11,476	)		(7,588	)
Total deferred tax liabilities		(140,727	)		(146,523	)
Net deferred income tax liability	$	(40,759	)		(40,813	)

Total unrecognized tax benefits were $5.6 million, $5.3 million, and $4.5 million at December 31, 2012, 2011, and 2010, respectively. The net increase in this balance primarily relates to the recording of $1.3 million for tax positions in the current year, which were partially offset by the settlement of tax audits in the U.S. and foreign jurisdictions and benefits associated with the lapse of applicable statutes of limitations. Included in total unrecognized benefits at December 31, 2012 is $5.6 million of unrecognized tax benefits that would affect the Company’s effective tax rate if recognized, of which $2.1 million would be offset by a reduction of a corresponding deferred tax asset. Included in total unrecognized tax benefits at December 31, 2011 is $5.3 million of unrecognized tax benefits that would affect the Company’s effective tax rate if recognized, of which $1.5 million would be offset by a reduction of a corresponding deferred tax asset. Included in total unrecognized tax benefits at December 31, 2010 is $4.5 million of unrecognized tax benefits that would affect the Company’s effective tax rate if recognized, of which $2.3 million would be offset by a reduction of a corresponding deferred tax asset. The balance of total unrecognized tax benefits is not expected to significantly increase or decrease within the next twelve months. Below is a tabular reconciliation of the changes in total unrecognized tax benefits during the years ended December 31, 2012, 2011, and 2010:


	2012			2011			2010
Total unrecognized tax benefits at January 1	$	5,296			4,510			5,238
Gross increases for tax positions of prior years		208			1,449			1,396
Gross decreases for tax positions of prior years		(118	)		(364	)		(2,042	)
Gross increases for tax positions of current year		1,322			301			646
Increases due to acquisitions		—			2,412			—
Settlements		(903	)		(1,434	)		(464	)
Lapse of statute of limitations		(301	)		(1,513	)		(221	)
Changes due to currency fluctuations		130			(65	)		(43	)
Total unrecognized tax benefits at December 31	$	5,634			5,296			4,510

The Company includes interest expense and penalties related to unrecognized tax benefits as part of the provision for income taxes. The provision for income taxes includes interest and penalties in 2012, 2011, and 2010 of $0, $0.4 million, and $0.4 million, respectively. The Company’s income tax liabilities at December 31, 2012 and 2011 include accrued interest of $0.1 million and $0.2 million, respectively. Accrued penalties were $0 at December 31, 2012 and 2011.

In 2011, the IRS completed its examination of the Company’s federal income tax returns for the years 2008 and 2009. The settlement of the IRS audits did not have a material effect on the Company’s consolidated financial statements, and all federal tax reserves and related tax assets for those tax years were reversed. The statutes of limitations for U.S. state tax returns are open beginning with the 2008 tax year, except for one state for which earlier periods have been extended.

The Company is subject to income tax in approximately 30 jurisdictions outside the U.S. The statute of limitations varies by jurisdiction with 2004 being the oldest tax year still open. The Company’s significant operations outside the U.S. are located in the UK and Germany. In the UK, tax years prior to 2009 are closed. In Germany, generally, the tax years 2008 and beyond remain subject to examination. At the end of 2011, German tax audits through 2007 were finalized for 15 German subsidiaries without any material findings.

The Company had deferred tax assets associated with net operating loss and interest carryforwards from various jurisdictions of $29.0 million and $27.0 million as of December 31, 2012 and 2011, respectively. Valuation allowances associated with net operating loss carryforwards were $6.3 million and $11.8 million as of December 31, 2012 and 2011, respectively. Carryforwards related to interest expense unable to be deducted from current period income were approximately $14.1 million and $12.4 million at December 31, 2012 and 2011, respectively, and have an indefinite life. The Company recognized an income tax benefit of $7.0 million during the year ended December 31, 2012 due to the reversal of a valuation allowance associated with net operating loss carryforwards as the Company expects to realize the benefit of these assets. The expected expiration dates of our carryforwards as of December 31, 2012 and 2011 are as follows:


	December 31, 2012							December 31, 2011
	Tax Benefit		Valuation Allowance			Net Tax Benefit		Tax Benefit		Valuation Allowance			Net Tax Benefit
2012		—		—			—		205		(205	)		—
2013		247		(247	)		—		277		(242	)		35
2014		176		(176	)		—		215		(215	)		—
2015		353		(106	)		247		391		(112	)		279
2016		98		(68	)		30		344		(116	)		228
2017		231		(212	)		19		—		—			—
2018		16		—			16		41		—			41
2019		119		(2	)		117		124		—			124
2020		24		(9	)		15		—		—			—
2021		25		—			25		—		—			—
2022		70		(12	)		58		—		—			—
2023		—		—			—		505		—			505
2024		—		—			—		674		—			674
2026		554		—			554		—		—			—
2027		686		—			686		265		—			265
2028		—		—			—		147		—			147
2029		—		—			—		213		—			213
2030		43		—			43		—		—			—
2032		299		(265	)		34		—		—			—
Indefinite life		26,104		(5,238	)		20,866		23,551		(10,870	)		12,681
Total	$	29,045		(6,335	)		22,710	$	26,952		(11,760	)		15,192

In 2012, the Company provided for income taxes on earnings that were currently distributed, as well as the $5.5 million of deferred taxes associated with certain subsidiaries’ earnings that are expected to be distributed in 2013. No provision was made for U.S. or non-U.S. income taxes on the undistributed earnings of non-U.S. subsidiaries or for unrecognized deferred tax liabilities for temporary differences related to basis differences in investments in subsidiaries. Such earnings are expected to be permanently reinvested, the investments are essentially permanent in duration, or the Company has concluded that no additional tax liability will arise as a result of the distribution of the earnings. The undistributed earnings of certain non-U.S. subsidiaries were $531.8 million and $449.4 million as of December 31, 2012 and 2011, respectively. A liability could arise if our intention to permanently reinvest such earnings were to change and amounts are distributed by such subsidiaries or if such subsidiaries are ultimately disposed. It is not practicable to estimate the additional income taxes related to permanently reinvested earnings or the basis differences related to investments in subsidiaries.

American Taxpayer Relief Act of 2012

Passive income from controlled foreign corporations, such as dividends, interest, rents and royalties are normally treated as foreign personal holding company income and subject to immediate taxation under U.S. tax principles. In 2005, the U.S. Congress enacted a temporary law to allow the deferral of this type of income between related controlled foreign corporations. This temporary reprieve from U.S. taxation was extended through December 31, 2009 and subsequently through December 31, 2011. The rule was extended again as part of the American Taxpayer Relief Act of 2012 (the “Act”) for tax years 2012 and 2013. The Act’s provisions were not effective for the Company’s tax provision for the year ended December 31, 2012 based on its enactment date of January 2, 2013. The absence of the exemption resulted in tax expense of $3.1 million for the year ended December 31, 2012, which will be reversed in the first quarter of 2013.