Note 6—Income Taxes

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

	Year Ended December 31,
	2012			2011			2010

Income before income taxes:
United States	$	145,856		$	176,739		$	225,334
Foreign	632,985			540,013			438,354
	$	778,841		$	716,752		$	663,688

Current tax provision:
United States	$	54,649		$	44,769		$	77,590
Foreign	163,060			128,608			79,607
	$	217,709		$	173,377		$	157,197

Deferred tax provision (benefit):
United States	$	7,749		$	17,733		$	3,020
Foreign	(6,125		)	(3,200		)	1,058
	1,624			14,533			4,078
Total provision for income taxes	$	219,333		$	187,910		$	161,275

At December 31, 2012, the Company had $54,946 and $3,517 of foreign tax loss and credit carryforwards, and U.S. state tax loss and credit carryforwards net of federal benefit, respectively, of which $32,603 and $45, respectively, will either expire or be refunded at various dates through 2027 and the balance can be carried forward indefinitely.

A valuation allowance of $17,896 and $19,129 at December 31, 2012 and 2011, respectively, has been recorded which relates to the foreign net operating loss carryforwards and U.S. state tax credits. The net change in the valuation allowance for deferred tax assets was a decrease of $1,233 and a decrease of $962 in 2012 and 2011, respectively, which was related to foreign net operating loss and foreign and U.S. state credit carryforwards.

Differences between the U.S. statutory federal tax rate and the Company’s effective income tax rate are analyzed below:

	Year Ended December 31,
	2012		2011		2010

U.S. statutory federal tax rate	35.0	%	35.0	%	35.0	%
State and local taxes	.6		.4		.8
Foreign earnings and dividends taxed at different rates	(7.9	)	(8.2	)	(11.5	)
Valuation allowance	(.2	)	(.2	)	(1.0	)
Tax impact of the delay in American Taxpayer Relief Act	1.5		—		—
Other	(.8	)	(.8	)	1.0
Effective tax rate	28.2	%	26.2	%	24.3	%

The 2012 tax rate reflects an increase in tax expense of $11,300, or $0.07 per diluted common share, resulting from the delay, by the U.S. government, in the reinstatement of certain federal income tax provisions for the year 2012 relating primarily to research and development credits and certain U.S. taxes on foreign income that are part of the tax provisions within the American Taxpayer Relief Act. Such tax provisions were reinstated on January 2, 2013 with retroactive effect to 2012. Under U.S. GAAP, the related benefit to the Company of $11,300 relating to the 2012 tax year will be recorded as a benefit in the first quarter of 2013 at the date of reinstatement; as such, between the fourth quarter of 2012 and the first quarter of 2013, there is no net impact on the Company from an income statement perspective. The 2011 tax rate reflects a reduction in tax expense of $4,493 for tax reserve adjustments relating to the completion of the audits of certain of the Company’s prior year tax returns. The 2010 tax rate reflects reductions in tax expense of $20,700 for tax reserve adjustments relating to the completion of the audit of certain of the Company’s prior year tax returns. Excluding these adjustments as well as the net impact of acquisition related expenses, the loss incurred related to the 2011 Sidney flood and the 2011 contingent consideration gain, the Company’s effective tax rate for 2012, 2011 and 2010 was 26.7%, 26.8% and 27.4%, respectively.

The Company’s deferred tax assets and liabilities included in Other Current Assets, Other Long-Term Assets and in Other Long-Term Liabilities in the accompanying Consolidated Balance Sheets, excluding the valuation allowance, comprised the following:

	December 31,
	2012		2011
Deferred tax assets relating to:
Accrued liabilities and reserves	$	21,841	$	16,363
Operating loss and tax credit carryforwards	17,967		18,270
Pensions, net	56,584		48,105
Inventory reserves	18,615		17,173
Employee benefits	30,298		29,760
	$	145,305	$	129,671

Deferred tax liabilities relating to:
Goodwill	$	90,506	$	74,013
Depreciation	6,982		7,086
Contingent consideration	6,591		6,591
	$	104,079	$	87,690

At December 31, 2012 and 2011, the amount of the liability for unrecognized tax benefits, including penalties and interest, which if recognized would impact the effective tax rate, was approximately $16,171 and $21,886, respectively.

A tabular reconciliation of the gross amounts of unrecognized tax benefits excluding interest and penalties at the beginning and end of the year for 2012, 2011 and 2010 are as follows:

	2012			2011			2010
Unrecognized tax benefits as of January 1	$	20,215		$	22,560		$	35,528
Gross increases and gross decreases for tax positions in prior periods	11,268			(64		)	2,036
Gross increases - current period tax position	1,483			2,278			2,968
Settlements	(3,127		)	(451		)	(11,880		)
Lapse of statute of limitations	(3,458		)	(4,108		)	(6,092		)
Unrecognized tax benefits as of December 31	$	26,381		$	20,215		$	22,560

The Company includes estimated interest and penalties related to unrecognized tax benefits in the provision for income taxes. During the years ended December 31, 2012, 2011 and 2010, the provision for income taxes included a net benefit of $315, $566 and $4,566 in estimated interest and penalties. As of December 31, 2012, 2011 and 2010, the liability for unrecognized tax benefits included $2,812, $3,131 and $2,591 for tax-related interest and penalties.

The Company operates in over sixty tax jurisdictions, and at any point in time has numerous audits underway at various stages of completion. With few exceptions, the Company is subject to income tax examinations by tax authorities for the years 2009 and after. The Company is generally not able to precisely estimate the ultimate settlement amounts or timing until the close of an audit. The Company evaluates its tax positions and establishes liabilities for uncertain tax positions that may be challenged by local authorities and may not be fully sustained, despite the Company’s belief that the underlying tax positions are fully supportable. As of December 31, 2012, the amount of the liability for unrecognized tax benefits, which if recognized would impact the effective tax rate, was $16,171 the majority of which is included in other long-term liabilities in the accompanying Consolidated Balance Sheets. Unrecognized tax benefits are reviewed on an ongoing basis and are adjusted for changing facts and circumstances, including progress of tax audits and closing of statute of limitations. Based on information currently available, management anticipates that over the next twelve month period, audit activity could be completed and statutes of limitations may close relating to existing unrecognized tax benefits of $5,600.