NOTE 18—Income Taxes:

Income before income taxes and equity in net income of unconsolidated investments and current and deferred income tax expense (benefit) are composed of the following (in thousands):


	Year Ended December 31,
	2011		2010			2009
Income before income taxes and equity in net income of unconsolidated investments:
Domestic	$	280,245	$	235,222		$	103,050
Foreign		270,378		156,881			57,223

Total	$	550,623	$	392,103		$	160,273


Current income tax expense (benefit):
Federal^(a)	$	82,379	$	14,620		$	(23,908	)
State		4,774		5,224			772
Foreign		28,179		25,776			14,388

Total	$	115,332	$	45,620		$	(8,748	)


Deferred income tax expense (benefit):
Federal	$	1,626	$	57,194		$	29,618
State		850		(691	)		1,341
Foreign		12,206		(9,404	)		(29,239	)

Total	$	14,682	$	47,099		$	1,720

Total income tax expense (benefit)	$	130,014	$	92,719		$	(7,028	)

(a)	Current income tax expense – Federal for the year ended December 31, 2010 is net of a tax benefit from an NOL carryforward of $9.6 million.

The significant differences between the U.S. federal statutory rate and the effective income tax rate are as follows:


	% of Income Before Income Taxes
	2011			2010			2009
Federal statutory rate		35.0	%		35.0	%		35.0	%
State taxes, net of federal tax benefit		0.7			1.3			1.1
Change in valuation allowance		(0.3	)		(0.4	)		(0.9	)
Impact of foreign earnings, net⁽ ^a ⁾		(9.8	)		(9.4	)^(c)		(22.6	)
Effect of net income attributable to noncontrolling interests		—			—			(0.8	)
Effect of completing domestic audits		—			—			5.7	⁽ ^b ⁾
Depletion		(0.8	)		(1.0	)		(1.7	)
Revaluation of unrecognized tax benefits/reserve requirements		(0.1	)		0.1			(19.7	)^(b)
Manufacturer tax deduction		(1.0	)		(1.6	)		—	^(d)
Other items, net		(0.1	)		(0.4	)		(0.5	)

Effective income tax rate		23.6	%		23.6	%		(4.4	)%

(a)

In prior years, we designated the undistributed earnings of substantially all of our foreign subsidiaries as permanently reinvested. The benefit of the lower tax rates in the jurisdictions for which we made this designation have been reflected in our effective income tax rate. During 2011, 2010 and 2009, we received distributions of $33.8 million, $68.7 million and $6.1 million, respectively, from various foreign subsidiaries and joint ventures and realized an expense, net of foreign tax credits, of $5.4 million, $2.7 million and $0.2 million, respectively, related to the repatriation of these high taxed earnings. We have asserted for all periods being reported, permanent reinvestment of our share of the income of JBC, a Free Zones company under the laws of the Hashemite Kingdom of Jordan. The applicable provisions of the Jordanian law, and applicable regulations thereunder, do not have a termination provision and the exemption is permanent. As a Free Zones company, JBC is not subject to income taxes on the profits of products exported from Jordan and currently all of the profits are from exports.

(b)	During 2009, the completion of IRS tax audits from 2005 through 2007 tax years provided a net benefit of $19.5 million.

(c)	The percentage impact of foreign earnings decreased significantly due to higher domestic earnings.

(d)	In 2009, limitations imposed by our domestic taxable income precluded us from claiming the manufacturer tax deduction.

The deferred income tax assets and liabilities recorded on the consolidated balance sheets as of December 31, 2011 and 2010 consist of the following (in thousands):


	December 31,
	2011			2010
Deferred tax assets:
Postretirement benefits other than pensions	$	15,705		$	15,332
Accrued employee benefits		37,861			22,682
Operating loss carryovers		72,570			84,185
Pensions		45,213			32,335
Tax credit carryovers		49,999			43,856
Other		16,097			24,330

Gross deferred tax assets		237,445			222,720
Valuation allowance		(36,419	)		(39,802	)

Deferred tax assets		201,026			182,918


Deferred tax liabilities:
Depreciation		(193,814	)		(197,123	)
Foreign currency translation adjustments		(6,979	)		(13,077	)
Other		(19,801	)		(15,193	)

Deferred tax liabilities		(220,594	)		(225,393	)

Net deferred tax liabilities	$	(19,568	)	$	(42,475	)


Classification in the consolidated balance sheets:
Current deferred tax assets	$	9,383		$	4,689
Current deferred tax liabilities		(2,005	)		(2,223	)
Noncurrent deferred tax assets		50,957			64,629
Noncurrent deferred tax liabilities		(77,903	)		(109,570	)

Net deferred tax liabilities	$	(19,568	)	$	(42,475	)

At December 31, 2011, we had approximately $51.3 million of domestic credits available to offset future payments of income taxes, expiring in varying amounts between 2016 and 2026. We have established valuation allowances for $2.7 million of those domestic credits since we believe that it is more likely than not that the related deferred tax assets will not be realized. We believe that sufficient taxable income will be generated during the carryover period in order to utilize the other remaining credit carryovers.

At December 31, 2011, we have $8.9 million of domestic net operating losses and $211.6 million of foreign net operating loss carryovers. We have established valuation allowances for $5.6 million of domestic net operating losses, and $102.7 million of those foreign net operating loss carryovers since we believe that it is more likely than not that the related deferred tax assets will not be realized. The realization of the deferred tax assets is dependent on the generation of sufficient taxable income in the appropriate tax jurisdictions. Although realization is not assured, we believe it is more likely than not that the remaining deferred tax assets will be realized. However, the amount considered realizable could be reduced if estimates of future taxable income change. We believe that it is more likely than not that our company will generate sufficient taxable income in the future to fully utilize all other deferred tax assets.

Liabilities related to uncertain tax positions were $30.7 million and $21.9 million at December 31, 2011 and 2010, respectively, inclusive of interest and penalties of $0.9 million for both years, and are reported in Other noncurrent liabilities as provided in Note 13. These liabilities at December 31, 2011 and 2010 were reduced by $21.8 million and $12.3 million, respectively, for offsetting benefits from the corresponding effects of potential transfer pricing adjustments, state income taxes and rate arbitrage related to foreign structure. These offsetting benefits are recorded in Other assets as provided in Note 9. The resulting net liabilities of $8.0 million and $8.7 million at December 31, 2011 and 2010, respectively, if recognized and released, would favorably affect earnings.

During the year ended December 31, 2009, we recorded a reduction of interest and penalties of $(2.8) million as a component of income tax expense (benefit) in connection with our liabilities related to uncertain tax positions.

The liabilities related to uncertain tax positions, exclusive of interest, were $29.8 million and $20.9 million at December 31, 2011 and 2010, respectively. The following is a reconciliation of our total gross liability related to uncertain tax positions for 2011, 2010 and 2009 (in thousands):


	Year Ended December 31,
	2011			2010			2009
Balance at January 1	$	20,949		$	23,416		$	77,548
Additions for tax positions related to prior years		—			—			5,082
Reductions for tax positions related to prior years		(1,639	)		150			(48,054	)
Additions for tax positions related to current year		10,802			463			1,495
Settlements		—			—			(12,627	)
Lapses in statutes of limitations		(323	)		(3,080	)		(28	)

Balance at December 31	$	29,789		$	20,949		$	23,416

We are subject to income taxes in the U.S. and numerous foreign jurisdictions. We are no longer subject to U.S. federal income tax examinations by tax authorities for years prior to 2008 since the IRS has completed a review of our income tax returns through 2007, or for any U.S. state income tax audit prior to 2002.

With respect to jurisdictions outside the U.S., we are no longer subject to income tax audits for years prior to 2006. During 2011, we completed tax audits for one of our Belgian companies for 2008 and 2009, our Japanese company for 2006 through 2010, and two of our Chinese companies through 2010. During 2010, we completed a tax audit for one of our Belgian companies for the 2007 tax year. No significant tax was assessed as a result of these audits. We were informed in 2011 that German tax authorities would commence an audit of one of our German companies for 2006 through 2009, and Chinese tax authorities would commence an audit of one of our Chinese companies for 2006 through 2010.

While we believe we have adequately provided for all tax positions, amounts asserted by taxing authorities could be greater than our accrued position. Accordingly, additional provisions on federal and foreign tax-related matters could be recorded in the future as revised estimates are made or the underlying matters are settled or otherwise resolved.

Since the timing of resolutions and/or closure of tax audits is uncertain, it is difficult to predict with certainty the range of reasonably possible significant increases or decreases in the liability related to uncertain tax positions that may occur within the next twelve months. Our current view is that it is reasonably possible that we could record a decrease in the liability related to uncertain tax positions, relating to a number of issues, up to approximately $5.9 million as a result of closure of tax statutes.