Note 7 — Income taxes

Income tax expense includes the following:


	2013			2012		2011
Current:
U.S. federal	$	45,004		$	51,458	$	53,983
State and local		2,351			1,378		2,029
Foreign		36,829			38,760		35,469

Total current		84,184			91,596		91,481
Deferred:
U.S. federal		8,361			7,204		1,851
State and local		(991	)		782		23
Foreign		(2,248	)		1,842		(1,158	)

Total deferred		5,122			9,828		716

	$	89,306		$	101,424	$	92,197

Earnings before income taxes of domestic operations, which are calculated after intercompany profit eliminations, were $164,702, $177,035 and $181,258 in 2013, 2012 and 2011, respectively.

Income tax expense in 2013 also includes a benefit of $900 for the reduction of unrecognized tax benefits primarily related to expiration of certain foreign statutes of limitations. On January 2, 2013, the American Taxpayer Relief Act of 2012 was enacted which retroactively reinstated and extended the Federal Research and Development Tax Credit (Federal R&D Tax Credit) from January 1, 2012 to December 31, 2013 and extended certain other tax provisions. As a result, our income tax provision for 2013 included a discrete tax benefit of $1,700 related to 2012.

Income tax expense in 2012 includes a benefit of $2,717 related to the utilization of loss carryforwards and to the release of the valuation allowance related to loss carryforwards which are expected to be utilized in future years.

Income tax expense in 2011 includes a benefit of $2,027 from a reduction in unrecognized tax benefits, primarily related to settlements with tax authorities. In December 2010, the U.S. Congress passed and the President signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which provided retroactive reinstatement of a research credit. As a result, income tax expense for 2011 includes a tax benefit of $1,580 related to research credit generated in 2010. Income tax expense in 2011 also includes a benefit related to the utilization of loss carryforwards of $682.

A reconciliation of the U.S. statutory federal rate to the worldwide consolidated effective tax rate follows:


	2013			2012			2011
Statutory federal income tax rate		35.00	%		35.00	%		35.00	%
Domestic Production Deduction		(1.71	)		(1.82	)		(1.76	)
Foreign tax rate variances, net of foreign tax credits		(3.39	)		(2.31	)		(2.51	)
State and local taxes, net of federal income tax benefit		0.28			0.43			0.42
Amounts related to prior years		(1.00	)		(0.31	)		(1.31	)
Other — net		(0.48	)		0.10			(0.53	)

Effective tax rate		28.70	%		31.09	%		29.31	%

The Domestic Production Deduction, enacted by the American Jobs Creation Act of 2004, allows a deduction with respect to income from certain United States manufacturing activities.

Earnings before income taxes of international operations, which are calculated before intercompany profit elimination entries, were $146,421, $149,218 and $133,303 in 2013, 2012 and 2011, respectively. Deferred income taxes are not provided on undistributed earnings of international subsidiaries that are intended to be permanently invested in their operations. These undistributed earnings aggregated approximately $510,842 and $400,487 at October 31, 2013 and 2012, respectively. Should these earnings be distributed, applicable foreign tax credits would substantially offset taxes due upon the distribution. It is not practical to estimate the amount of additional taxes that might be payable on such undistributed earnings.

At October 31, 2013 and 2012, total unrecognized tax benefits were $5,717 and $3,140, respectively. The amounts that, if recognized, would impact the effective tax rate were $5,178 and $2,601 at October 31, 2013 and 2012, respectively. The increase in unrecognized tax benefits as compared to prior year relates primarily to foreign positions and, if recognized, a substantial portion of the gross unrecognized tax benefits would be offset against assets currently recorded in the Consolidated Balance Sheet. A reconciliation of the beginning and ending amount of unrecognized tax benefits for 2013, 2012 and 2011 is as follows:


	2013			2012			2011
Balance at beginning of year	$	3,140		$	2,576		$	4,078
Additions based on tax positions related to the current year		703			148			387
Additions for tax positions of prior years		3,261			896			138
Reductions for tax positions of prior years		(317	)		—			—
Settlements		—			0			(2,027	)
Lapse of statute of limitations		(1,070	)		(480	)		—

Balance at end of year	$	5,717		$	3,140		$	2,576

At October 31, 2013 and 2012, we had accrued interest expense related to unrecognized tax benefits of $1,085 and $304, respectively. We include interest accrued related to unrecognized tax benefits in interest expense. Penalties, if incurred, would be recognized as other income (expense).

We are subject to United States Federal income tax as well as income taxes in numerous state and foreign jurisdictions. We are subject to examination in the U.S. by the Internal Revenue Service (IRS) for the 2010, 2012 and 2013 tax years; tax years prior to 2010 and the 2011 year have been examined by the IRS. Generally, major state and foreign jurisdiction tax years remain open to examination for tax years after 2007. Within the next twelve months, it is reasonably possible that certain statute of limitations periods would expire, which could result in a decrease in our unrecognized tax benefits in a range of $0 to $470.

Significant components of deferred tax assets and liabilities are as follows:


	2013			2012
Deferred tax assets:
Employee benefits	$	66,148		$	90,707
Other accruals not currently deductible for taxes		16,984			16,105
Tax credit and loss carryforwards		13,077			17,145
Inventory adjustments		4,998			5,278
Translation of foreign currency accounts		384			929

Total deferred tax assets		101,591			130,164
Valuation allowance		(5,663	)		(5,046	)

Total deferred tax assets		95,928			125,118
Deferred tax liabilities:
Depreciation and amortization		146,500			121,348
Other — net		51			—

Total deferred tax liabilities		146,551			121,348

Net deferred tax assets (liabilities)	$	(50,623	)	$	3,770

At October 31, 2013, we had $1,498 of tax credit carryforwards of which $122 will expire in 2014 through 2017, and $1,376 of which has an indefinite carryforward period. We also had $16,939 Federal, $51,347 state and $10,980 foreign operating loss carryforwards, of which $68,658 will expire in 2014 through 2033, and $10,608 of which has an indefinite carryforward period. The net change in the valuation allowance was an increase of $617 in 2013 and a decrease of $1,005 in 2012. The valuation allowance of $5,663 at October 31, 2013, relates primarily to tax credits and loss carryforwards that may expire before being realized. We continue to assess the need for valuation allowances against deferred tax assets based on determinations of whether it is more likely than not that deferred tax benefits will be realized.