Note 7 — Income taxes

Income tax expense includes the following:


	2014			2013			2012
Current:
U.S. federal	$	52,985		$	45,004		$	51,458
State and local		1,900			2,351			1,378
Foreign		47,366			36,829			38,760

Total current		102,251			84,184			91,596
Deferred:
U.S. federal		8,695			8,361			7,204
State and local		(1,635	)		(991	)		782
Foreign		(3,571	)		(2,248	)		1,842

Total deferred		3,489			5,122			9,828

	$	105,740		$	89,306		$	101,424

Earnings before income taxes of domestic operations, which are calculated after intercompany profit eliminations, were $184,894, $164,702 and $177,035 in 2014, 2013 and 2012, respectively.

Income tax expense in 2013 included 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 included 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.

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


	2014			2013			2012
Statutory federal income tax rate		35.00	%		35.00	%		35.00	%
Domestic Production Deduction		(1.74	)		(1.71	)		(1.82	)
Foreign tax rate variances, net of foreign tax credits		(3.42	)		(3.39	)		(2.31	)
State and local taxes, net of federal income tax benefit		0.05			0.28			0.43
Amounts related to prior years		(0.24	)		(1.00	)		(0.31	)
Other — net		0.35			(0.48	)		0.10

Effective tax rate		30.00	%		28.70	%		31.09	%

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 $167,619, $146,421 and $149,218 in 2014, 2013 and 2012, 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 $622,914 and $510,842 at October 31, 2014 and 2013, 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, 2014 and 2013, total unrecognized tax benefits were $5,812 and $5,717, respectively. The amounts that, if recognized, would impact the effective tax rate were $5,175 and $5,178 at October 31, 2014 and 2013, respectively. The increase in unrecognized tax benefits in 2013 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 2014, 2013 and 2012 is as follows:


	2014			2013			2012
Balance at beginning of year	$	5,717		$	3,140		$	2,576
Additions based on tax positions related to the current year		196			703			148
Additions for tax positions of prior years		319			3,261			896
Reductions for tax positions of prior years		—			(317	)		—
Settlements		(110	)		—			—
Lapse of statute of limitations		(310	)		(1,070	)		(480	)

Balance at end of year	$	5,812		$	5,717		$	3,140

At October 31, 2014 and 2013, we had accrued interest and penalty expense related to unrecognized tax benefits of $2,025 and $1,085, 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 2012, 2013 and 2014 tax years; tax years prior to the 2012 year are closed to further examination by the IRS. Generally, major state and foreign jurisdiction tax years remain open to examination for tax years after 2008. Within the next twelve months, it is reasonably possible that certain statute of limitations periods would expire, which could result in a minimal decrease in our unrecognized tax benefits.

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


	2014			2013
Deferred tax assets:
Employee benefits	$	79,669		$	66,148
Other accruals not currently deductible for taxes		17,379			16,984
Tax credit and loss carryforwards		16,531			13,077
Inventory adjustments		5,276			4,998
Translation of foreign currency accounts		154			384

Total deferred tax assets		119,009			101,591
Valuation allowance		(7,672	)		(5,663	)

Total deferred tax assets		111,337			95,928
Deferred tax liabilities:
Depreciation and amortization		163,107			146,500
Other — net		—			51

Total deferred tax liabilities		163,107			146,551

Net deferred tax liabilities	$	(51,770	)	$	(50,623	)

At October 31, 2014, we had $4,161 of tax credit carryforwards of which $161 will expire in 2015 through 2017, and $4,000 of which has an indefinite carryforward period. We also had $19,535 Federal, $50,343 state and $13,213 foreign operating loss carryforwards, of which $70,084 will expire in 2015 through 2033, and $13,007 of which has an indefinite carryforward period. The net change in the valuation allowance was an increase of $2,009 in 2014 and an increase of $617 in 2013. The valuation allowance of $7,672 at October 31, 2014, related 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.