Note 6—Income Taxes

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

	Year Ended December 31,
	2013			2012			2011

Income before income taxes:
United States	$	152,851		$	145,856		$	176,739
Foreign	693,794			632,985			540,013
	$	846,645		$	778,841		$	716,752

Current tax provision:
United States	$	47,526		$	54,649		$	44,769
Foreign	162,282			163,060			128,608
	209,808			217,709			173,377

Deferred tax provision (benefit):
United States	(134		)	7,749			17,733
Foreign	(1,778		)	(6,125		)	(3,200		)
	(1,912		)	1,624			14,533
Total provision for income taxes	$	207,896		$	219,333		$	187,910

At December 31, 2013, the Company had $61,473 and $3,897 of foreign tax loss and credit carryforwards, and U.S. state tax loss and credit carryforwards net of federal benefit, respectively, of which $39,689 and $54, respectively, will either expire or be refunded at various dates through 2028 and the balance can be carried forward indefinitely.

A valuation allowance of $19,400 and $17,896 at December 31, 2013 and 2012, 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 an increase of $1,504 and a decrease of $1,233 in 2013 and 2012, 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,
	2013		2012		2011

U.S. statutory federal tax rate	35.0	%	35.0	%	35.0	%
State and local taxes	0.6		0.6		0.4
Foreign earnings and dividends taxed at different rates	(9.4	)	(7.9	)	(8.2	)
Valuation allowance	0.2		(0.2	)	(0.2	)
Tax impact of the delay in American Taxpayer Relief Act	(1.3	)	1.5		—
Other	(0.5	)	(0.8	)	(0.8	)
Effective tax rate	24.6	%	28.2	%	26.2	%

The 2013 tax rate reflects a decrease in tax expense and 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 benefit to the Company of $11,300 relating to the 2012 tax year was 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 2013 tax rate also reflects a reduction in tax expense of $3,645 for tax reserve adjustments relating to the completion of the audits of certain of the Company’s prior year tax returns. The 2011 tax rate reflects reductions in tax expense of $4,493 for tax reserve adjustments relating to the completion of the audit of certain of the Company’s prior year tax returns. Excluding these impacts as well as the net impact of the 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 2013, 2012 and 2011 was 26.3%, 26.7% and 26.8%, respectively.

The Company’s deferred tax assets and liabilities included in Other current assets, Goodwill and 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,
	2013		2012
Deferred tax assets relating to:
Accrued liabilities and reserves	$	25,226	$	21,841
Operating loss and tax credit carryforwards	19,618		17,967
Pensions, net	35,221		56,584
Inventory reserves	18,846		18,615
Employee benefits	31,972		30,298
	$	130,883	$	145,305

Deferred tax liabilities relating to:
Goodwill	$	108,524	$	90,506
Depreciation	4,206		6,982
Contingent consideration	6,591		6,591
	$	119,321	$	104,079

At December 31, 2013 and 2012, the amount of the liability for unrecognized tax benefits, including penalties and interest, which if recognized would impact the effective tax rate, was approximately $14,937 and $16,171, 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 2013, 2012 and 2011 are as follows:

	2013			2012			2011
Unrecognized tax benefits as of January 1	$	26,381		$	20,215		$	22,560
Gross increases and gross decreases for tax positions in prior periods	1,373			11,268			(64		)
Gross increases - current period tax position	2,376			1,483			2,278
Settlements	—			(3,127		)	(451		)
Lapse of statute of limitations	(5,359		)	(3,458		)	(4,108		)
Unrecognized tax benefits as of December 31	$	24,771		$	26,381		$	20,215

The Company includes estimated interest and penalties related to unrecognized tax benefits in the provision for income taxes. During the years ended December 31, 2013, 2012 and 2011, the provision for income taxes included a net expense (benefit) of $197, $(315) and $(566), respectively, in estimated interest and penalties. As of December 31, 2013, 2012 and 2011, the liability for unrecognized tax benefits included $3,009, $2,812 and $3,131, respectively, 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 2010 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 2013, the amount of the liability for unrecognized tax benefits, which if recognized would impact the effective tax rate, was $14,937 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 $1,800.