NOTE J Income Taxes

The components of earnings before income taxes are as follows:


	2014		2013		2012

	(thousands of dollars)
Earnings before income taxes:
United States	$	131,396	$	147,317	$	171,101
Foreign		229,307		200,864		199,679
Total	$	360,703	$	348,181	$	370,780

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


	2014		2013		2012

	(thousands of dollars)
Income taxes:
Current
Federal	$	48,981	$	35,820	$	45,468
State		4,724		4,337		4,012
Foreign		54,536		52,300		50,655
		108,241		92,457		100,135
Deferred
Federal		(9,465)		7,071		7,391
State		365		312		722
Foreign		1,338		964		(1,769)
		(7,762)		8,347		6,344
Total	$	100,479	$	100,804	$	106,479

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


	2014	2013	2012
Statutory U.S. federal rate	35.0%	35.0%	35.0%
State income taxes	1.1%	1.2%	1.2%
Foreign operations	(6.1%)	(6.3%)	(5.2%)
Export, manufacturing, and research credits	(0.8%)	(1.5%)	(1.0%)
Change in unrecognized tax benefits	(1.1%)	0.5%	(1.0%)
Other	(0.2%)	0.1%	(0.3%)
	27.9%	29.0%	28.7%

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


	2014		2013

	(thousands of dollars)
Deferred tax assets:
Accrued expenses	$	11,118	$	11,580
Compensation and retirement plans		32,317		23,578
NOL and tax credit carryforwards		3,471		3,279
LIFO and inventory reserves		5,482		5,037
Other		4,470		3,890
Deferred tax assets, gross		56,858		47,364
Valuation allowance		(3,471)		(3,228)
Net deferred tax assets		53,387		44,136

Deferred tax liabilities:
Depreciation and amortization		(49,901)		(45,737)
Other		(1,025)		(663)
Deferred tax liabilities		(50,926)		(46,400)

Prepaid tax assets		4,392		4,015

Net tax asset	$	6,853	$	1,751

Deferred income tax assets on the face of the balance sheet include $4.4 million and $4.0 million of prepaid tax assets related to intercompany transfers of inventory as of July 31, 2014 and 2013, respectively.

The effective tax rate for Fiscal 2014 was 27.9 percent compared to 29.0 percent in Fiscal 2013. The decrease in the effective tax rate is primarily due to the favorable settlement of a tax audit, the remeasurement of certain deferred tax assets due to a change in tax rates in certain foreign jurisdictions, and a favorable shift in the mix of earnings between tax jurisdictions. This was partially offset by tax costs associated with foreign dividend distributions and the expiration of the Research and Experimentation Credit in the U.S. in the current year.

The Company has not provided for U.S. income taxes on additional undistributed earnings of non-U.S. subsidiaries of approximately $914.0 million. The Company currently intends to indefinitely reinvest these undistributed earnings as there are significant investment opportunities outside the U.S. 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. In August 2014, the Company repatriated $52.4 million of cash held by its foreign subsidiaries in the form of a cash dividend. This dividend represented a portion of the total planned dividends for Fiscal 2015. At this time, the Company anticipates the net tax impact of the Fiscal 2015 dividends to be tax neutral.

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:


	2014		2013		2012

	(thousands of dollars)
Gross unrecognized tax benefits at beginning of fiscal year	$	18,419	$	16,514	$	20,005
Additions for tax positions of the current year		2,959		5,453		3,323
Additions for tax positions of prior years		1,706		407		261
Reductions for tax positions of prior years		(7,113)		(1,640)		(4,462)
Settlements		(240)		(277)		-
Reductions due to lapse of applicable statute of limitations		(726)		(2,038)		(2,613)
Gross unrecognized tax benefits at end of fiscal year	$	15,005	$	18,419	$	16,514

The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the fiscal year ended July 31, 2014, the Company recognized interest expense, net of tax benefit, of approximately $0.3 million. At July 31, 2014 and July 31, 2013, accrued interest and penalties on a gross basis were $1.7 million and $1.1 million, respectively.

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. With few exceptions, the Company is no longer subject to state and foreign income tax examinations by tax authorities for years before 2008. The IRS has completed examinations of the company’s U.S. federal income tax returns through 2012.

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 $1.0 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.