NOTE K Income Taxes

The components of earnings before income taxes are as follows:


	2012		2011		2010
	(thousands of dollars)
Earnings before income taxes:
United States	$	171,101	$	117,562	$	85,987
Foreign		199,679		194,701		144,189
Total	$	370,780	$	312,263	$	230,176

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


	2012			2011			2010
	(thousands of dollars)
Income taxes:
Current
Federal	$	45,468		$	26,675		$	25,455
State		4,012			3,555			2,206
Foreign		50,655			54,785			33,327
		100,135			85,015			60,988

Deferred
Federal		7,391			8,556			3,860
State		722			191			20
Foreign		(1,769	)		(6,790	)		(855	)
		6,344			1,957			3,025
Total	$	106,479		$	86,972		$	64,013

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


	2012			2011			2010
Statutory U.S. federal rate		35.0	%		35.0	%		35.0	%
State income taxes		1.2			1.0			0.8
Foreign taxes at lower rates		(6.0	)		(6.6	)		(8.2	)
Export, manufacturing and research credits		(1.0	)		(1.6	)		(0.9	)
U.S. tax impact on repatriation of earnings		0.8			(0.3	)		0.1
Change in unrecognized tax benefits		(1.0	)		0.1			1.2
Other		(0.3	)		0.3			(0.2	)
		28.7	%		27.9	%		27.8	%

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


	2012			2011
	(thousands of dollars)
Deferred tax assets:
Accrued expenses	$	10,666		$	12,243
Compensation and retirement plans		52,986			33,298
Tax credit and NOL carryforwards		723			1,173
Inventory reserves		7,482			9,545
Other		3,262			3,311
Deferred tax assets:		75,119			59,570
Valuation allowance		(522	)		(692	)
Net deferred tax assets		74,597			58,878
Deferred tax liabilities:
Depreciation and amortization		(38,796	)		(37,112	)
Other		(394	)		(1,119	)
Deferred tax liabilities		(39,190	)		(38,231	)
Net deferred tax asset	$	35,407		$	20,647

The effective tax rate for Fiscal 2012 was 28.7 percent compared to 27.9 percent in Fiscal 2011. The increase in effective tax rate is primarily due to an unfavorable shift in the mix of earnings between tax jurisdictions, which increased the underlying average tax rate over the prior year to 30.8 percent from 29.7 percent. The increase in the underlying average tax rate was partially offset by incremental discrete benefits resulting in Fiscal 2012. Fiscal 2012 contained $7.7 million of discrete tax benefits from the favorable settlements of tax audits, the expiration of statutes in various jurisdictions and other discrete items. Fiscal 2011 contained $5.8 million of discrete tax benefits primarily from the release of reserves after the favorable conclusions of foreign tax audits, the expiration of statutes in various jurisdictions, and the favorable impact of dividends from some foreign subsidiaries.

The Company has not provided for U.S. income taxes on additional undistributed earnings of non-U.S. subsidiaries of approximately $756.0 million. The Company currently intends to indefinitely reinvest these undistributed earnings overseas 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 $2.7 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 $0.7 million, at current rates of tax. Approximately 5 percent of these net operating losses expire within the next three years, while 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 $0.5 million exists as of July 31, 2012.

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:


	2012			2011			2010
	(thousands of dollars)
Gross unrecognized tax benefits at beginning of fiscal year	$	20,005		$	18,994		$	16,928
Additions for tax positions of the current year		3,323			7,406			3,122
Additions for tax positions of prior years		261			668			470
Reductions for tax positions of prior years		(333	)		(164	)		(179	)
Settlements		(4,129	)		(3,895	)		—
Reductions due to lapse of applicable statue of limitations		(2,613	)		(3,004	)		(1,347	)
Gross unrecognized tax benefits at end of fiscal year	$	16,514		$	20,005		$	18,994

The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the fiscal year ended July 31, 2012, the Company recognized interest expense, net of tax benefit, of approximately $0.3 million. At July 31, 2012 and July 31, 2011, accrued interest and penalties on a gross basis were $1.3 million and $1.5 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		2010 through 2011
China		2002 through 2011
France		2009 through 2011
Germany		2009 through 2011
Italy		2003 through 2011
Japan		2009 through 2011
Mexico		2006 through 2011
Thailand		2005 through 2011
United Kingdom		2011
United States		2011

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 $2.1 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.