(13) Income Taxes

Earnings from continuing operations before income taxes for 2011, 2010 and 2009 consisted of the following:

(Thousands of dollars)	2011		2010		2009

United States	$	76,025	$	50,278	$	17,880
Foreign		29,444		17,167		15,132

Total earnings before income taxes	$	105,469	$	67,445	$	33,012

The income tax provision for 2011, 2010 and 2009 consisted of the following:

(Thousands of dollars)	2011			2010			2009

Current:

U.S. federal and state income taxes	$	21,466		$	15,815		$	7,286
Foreign		8,465			6,663			4,793

Total current		29,931			22,478			12,079

Deferred:

U.S. federal and state income taxes		9,820			2,819			(1,186	)
Foreign		(253	)		(1,383	)		(360	)

Total deferred		9,567			1,436			(1,546	)

Total	$	39,498		$	23,914		$	10,533

Cash payments for income taxes totaled $30.5 million, $18.8 million and $22.0 million for 2011, 2010 and 2009, respectively.

A reconciliation of the income tax provision as computed at the statutory U.S. income tax rate and the income tax provision presented in the consolidated financial statements is as follows:

(Thousands of dollars)	2011			2010			2009

Tax provision computed at statutory rate	$	36,914		$	23,606		$	11,554
Tax effect of:
Expenses for which no benefit was realized		1,569			279			335
Change in effective state tax rate		(6	)		13			(44	)
Tax credit		(817	)		(1,065	)		(962	)
State taxes net of federal benefit		1,779			1,813			504
Benefit of manufacturing deduction		(1,492	)		(1,127	)		(481	)
Acquisition costs		1,919
Other, net		(368	)		395			(373	)

Total provision for taxes	$	39,498		$	23,914		$	10,533

Appropriate U.S. and foreign income taxes have been provided for earnings of foreign subsidiary companies that are expected to be remitted in the near future. The cumulative amount of undistributed earnings of foreign subsidiaries that the Company intends to permanently reinvest and upon which no deferred U.S. income taxes have been provided was $88.5 million at December 31, 2011, the majority of which has been generated in Argentina, Canada, and France. Upon distribution of these earnings in the form of dividends or otherwise, the Company may be subject to U.S. income taxes (subject to adjustment for foreign tax credits) and foreign withholding taxes. It is not practical, however, to estimate the amount of taxes that may be payable on the eventual remittance of these earnings after consideration of available foreign tax credits.

The primary components of the deferred tax assets and liabilities and the related valuation allowances are as follows:

(Thousands of dollars)	2011			2010

Deferred income tax assets:

Pension costs	$	36,430		$	10,138
Payroll and benefits		1,365			1,313
Accrued warranty expenses		1,425			1,078
Postretirement benefits		8,143			6,356
Accrued liabilities		591			2,526
Other, net		1,680			758

Total deferred income tax assets		49,634			22,169
Less valuation allowance		(1,117	)		(389	)

Total deferred income tax assets		48,517			21,780

Noncurrent deferred income tax liabilities:

Prepaid expenses		(993	)		(644	)
Depreciation		(34,143	)		(21,004	)
Inventories		(1,758	)		(1,486	)
Intangible assets		(8,784	)		(2,099	)
Other, net		(5,585	)		(4,877	)

Total noncurrent deferred income tax liabilities, net		(51,263	)		(30,110	)

Total net deferred tax liability	$	(16,178	)	$	(8,330	)

Current deferred tax asset

Continuing operations	$	1,140		$	3,554
Discontinued operations		-			69

Total current deferred tax asset		1,140			3,623

Non-current deferred tax liability

Continuing operations		(3,886	)		(11,953	)

Total non-current deferred tax liability		(3,886	)		(11,953	)

Total net deferred tax liability	$	(2,746	)	$	(8,330	)

At December 31, 2011, 2010 and 2009 there are $2.1 million, $1.8 million and $1.5 million, respectively, of unrecognized tax benefits that if recognized would affect the annual effective tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

(Thousands of dollars)	2011			2010			2009

Balance at January 1,	$	1,838		$	1,509		$	1,368

Gross increases- current year tax positions		791			372			593
Gross increases- tax positions from prior periods		115			233			93
Gross decreases- tax positions from prior periods		(657	)		(262	)		(372	)
Settlements		(27	)		(14	)		(173	)

Balance at December 31,	$	2,060		$	1,838		$	1,509

The Company conducts business globally and, as a result, Lufkin Industries, Inc. and its subsidiaries file income tax returns in the U.S. federal and state jurisdictions, and various foreign jurisdictions. For U.S. federal purposes, tax years prior to 2008 are closed to assessment. Statutes for years prior to 2008 remain subject to review in certain U.S. state jurisdictions; however, the outcome of any future audit is not expected to have a material effect on the Company's results of operations. The Company also remains subject to income tax examinations in the following material international jurisdictions: Canada (2008-2010), France (2009-2010), and Argentina (2005- 2010).

The Company has unrecognized tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next twelve months. The unrecognized tax benefits relate to tax credits and other various deductions. The Company estimates the change to be approximately $425,000.

The Company's continuing policy is to recognize interest and penalties related to income tax matters in administrative costs. The Company had $160,500 accrued for interest and penalties at December 31, 2010. Net penalty and interest income of $45,000 was recognized in December 31, 2011. Net penalty and interest expense of $30,000 and $58,000 was expensed in December 31, 2010 and 2009, respectively.