Annual report pursuant to Section 13 and 15(d)

Income Taxes

v2.4.0.8
Income Taxes
 12 Months Ended
Dec. 31, 2013
Income Tax Disclosure [Abstract]  
Income Taxes
Note 11 – Income Taxes

The sources of Earnings before income taxes were as follows:
(in millions)
2013
 
2012
 
2011
United States
$
174.7

 
$
134.0

 
$
45.7

Foreign
54.9

 
47.0

 
65.0

Earnings before income taxes
$
229.6

 
$
181.0

 
$
110.7



The Income tax provision (benefit) consisted of the following:
(in millions)
2013
 
2012
 
2011
Current tax expense:
 
 
 
 
 
U.S. Federal
$
33.4

 
$
4.1

 
$
—

State and local
7.3

 
2.2

 
1.6

Foreign
18.1

 
19.0

 
19.2

Total current
58.8

 
25.3

 
20.8

 
 
 
 
 
 
Deferred tax expense (benefit):
 
 
 
 
 
U.S. Federal
(514.4
)
 
11.7

 
6.0

State and local
(86.7
)
 
(0.9
)
 
0.8

Foreign
(3.3
)
 
(2.5
)
 
(7.5
)
Total deferred
(604.4
)
 
8.3

 
(0.7
)
 
 
 
 
 
 
Income tax provision (benefit)
$
(545.6
)
 
$
33.6

 
$
20.1



Temporary differences and carryforwards giving rise to deferred tax assets and liabilities at December 31, 2013 and 2012, were as follows:
(in millions)
2013
 
2012
Current deferred tax assets:
 
 
 
Product warranties
$
44.0

 
$
48.1

Sales incentives and discounts
26.7

 
26.8

Other
83.6

 
81.5

Gross current deferred tax assets
154.3

 
156.4

Valuation allowance
(11.6
)
 
(130.1
)
Total net current deferred tax assets
142.7

 
26.3

 
 
 
 
Current deferred tax liabilities:
 
 
 
Other
(5.1
)
 
(7.5
)
Total current deferred tax liabilities
(5.1
)
 
(7.5
)
Total net current deferred tax assets
$
137.6

 
$
18.8

 
 
 
 
Non-current deferred tax assets:
 
 
 
Pension
$
107.8

 
$
183.3

Loss carryforwards
93.1

 
107.3

Tax credit carryforwards
163.2

 
156.2

Depreciation and amortization
53.8

 
13.8

Deferred compensation
27.6

 
23.4

Postretirement and postemployment benefits
24.3

 
28.8

Equity compensation
19.4

 
25.7

Other
31.7

 
31.4

Gross non-current deferred tax assets
520.9

 
569.9

Valuation allowance
(76.6
)
 
(587.4
)
  Total net non-current deferred tax assets
444.3

 
(17.5
)
 
 
 
 
Non-current deferred tax liabilities:
 
 
 
Unremitted foreign earnings and withholding
(24.6
)
 
(29.9
)
State and local income taxes
(40.0
)
 
(35.0
)
Other
(2.7
)
 
(10.3
)
Total non-current deferred tax liabilities
(67.3
)
 
(75.2
)
 
 
 
 
Total net non-current deferred tax assets (liabilities)
$
377.0

 
$
(92.7
)


Since the third quarter of 2008, the Company has maintained a full valuation allowance against certain deferred tax assets for federal and the majority of its state and foreign jurisdictions, having determined it was more likely than not that the deferred tax assets would not be realized. The determination of recording and releasing valuation allowances against deferred tax assets is made, in part, pursuant to the Company's assessment as to whether it is more likely than not that the Company will generate sufficient future taxable income against which benefits of the deferred tax assets may or may not be realized. Significant judgment is required in making estimates regarding the Company’s ability to generate income in future periods. The Company continued to maintain its valuation allowances through the third quarter of 2013 as there was insufficient positive evidence to overcome the substantial negative evidence of cumulative losses in recent years.

In the fourth quarter of 2013, the Company reached the conclusion that it was appropriate to release valuation allowance reserves against a significant portion of its federal deferred tax assets and against certain state deferred tax assets due to the sustained positive operating performance of its U.S. operations and the availability of expected future taxable income. Additionally, the Company achieved a cumulative three year income position domestically, reached four consecutive quarters of positive pre-tax operating earnings, and completed its near- and mid-term business plans, all of which were significant positive factors that overcame substantive prior negative evidence. The Company also considered forecasts of future operating results and utilization of net operating losses and tax credits prior to their expiration. Reversal of deferred tax asset valuation allowances also were recorded in the fourth quarter of 2013 for business units located in Norway and Sweden. As a result, the Company recorded a $599.5 million reversal of its deferred tax asset valuation allowance reserves in the fourth quarter of 2013 after determining it was more likely than not that certain deferred tax assets would be realized.

At December 31, 2013, the Company had a total valuation allowance against its deferred tax assets of $88.2 million, of which $11.6 million was classified as current and $76.6 million as non-current. This valuation allowance is primarily due to uncertainty concerning the realization of certain deferred tax assets related to various state attributes. The remaining realizable value of deferred tax assets at December 31, 2013 was determined by evaluating the potential to recover the value of these assets through the utilization of tax loss and credit carrybacks, the reversal of existing taxable temporary differences, certain tax planning strategies and future taxable income exclusive of reversing temporary differences and carryforwards. At December 31, 2013, the Company retained valuation allowance reserves of $76.9 million against deferred tax assets in the U.S. primarily related to capital loss carryforwards, non-amortizable intangibles, and various state operating loss carryforwards and state tax credits that are subject to restrictive rules for future utilization, and valuation allowances of about $11.3 million for deferred tax assets related to foreign jurisdictions, primarily for Brazil, Portugal and Spain.

At December 31, 2013, the tax benefit of loss carryovers totaling $95.9 million were available to reduce future tax liabilities. This deferred tax asset was comprised of $72.7 million for the tax benefit of state net operating loss (NOL) carryforwards, $13.7 million for the tax benefit of foreign NOL carryforwards and $9.5 million for the tax benefit of unused capital losses. NOL carryforwards of $76.2 million expire at various intervals between the years 2014 and 2033, while $10.2 million have an unlimited life.

At December 31, 2013, tax credit carryforwards totaling $163.2 million were available to reduce future tax liabilities. This deferred tax asset was comprised of $53.7 million related to foreign tax credits, $77.0 million related to general business credits and other miscellaneous federal credits, and $32.5 million of various state tax credits related to research and development, capital investment and job incentives. The above credits expire at various intervals between the years 2014 and 2033.

The Company has historically provided deferred taxes for the presumed ultimate repatriation to the U.S. of earnings from all non-U.S. subsidiaries and unconsolidated affiliates. The indefinite reversal criterion has been applied to certain entities and allows the Company to overcome that presumption to the extent the earnings are indefinitely reinvested outside the United States.

The Company had undistributed earnings of foreign subsidiaries of $26.1 million and $21.5 million at December 31, 2013 and 2012, respectively, for which deferred taxes have not been provided as such earnings are presumed to be indefinitely reinvested in the foreign subsidiaries. If such earnings were repatriated, additional tax provisions may result. The Company continues to provide deferred taxes, as required, on the undistributed net earnings of foreign subsidiaries and unconsolidated affiliates that are not deemed to be indefinitely reinvested in operations outside the United States.

As of December 31, 2013, 2012 and 2011 the Company had $6.3 million, $27.8 million and $26.9 million of gross unrecognized tax benefits, including interest, respectively. Of these amounts, $5.9 million, $26.8 million, and $25.3 million, respectively, represent the portion that, if recognized, would impact the Company's tax provision and the effective tax rate.

The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. As of December 31, 2013, 2012 and 2011 the Company had $0.3 million, $3.1 million and $2.5 million accrued for the payments of interest, respectively, and no amounts accrued for penalties.

The following is a reconciliation of the total amounts of unrecognized tax benefits excluding interest and penalties for the 2013 and 2012 annual reporting periods:
(in millions)
2013
 
2012
Balance at January 1
$
24.7

 
$
24.4

Gross increases - tax positions prior periods
3.8

 
3.7

Gross decreases - tax positions prior periods
(4.3
)
 
(1.4
)
Gross increases - current period tax positions
1.1

 
1.5

Decreases - settlements with taxing authorities
(8.0
)
 
(2.2
)
Reductions - lapse of statute of limitations
(11.4
)
 
(1.1
)
Other
0.1

 
(0.2
)
Balance at December 31
$
6.0

 
$
24.7



The Company believes it is reasonably possible that the total amount of gross unrecognized tax benefits as of December 31, 2013 could decrease by approximately $2.2 million in 2014 due to settlements with taxing authorities or lapses in the statue of limitations. Due to the various jurisdictions in which the Company files tax returns and the uncertainty regarding the timing of the settlement of tax audits, it is possible that there could be other significant changes in the amount of unrecognized tax benefits in 2014, but the amount cannot be estimated.

The Company is regularly audited by federal, state and foreign tax authorities. The Company's taxable years 2010 through 2012 are currently open for examination by the Internal Revenue Service (IRS). The federal statute of limitations has expired for the taxable years 2006 through 2009. Primarily as a result of filing amended returns, which were generated by the closing of federal income tax audits, the Company is still open to state and local tax audits in major tax jurisdictions dating back to the 2004 taxable year. Following the completion in 2013 of the 2002 through 2007 Germany tax audit, the Company is no longer subject to income tax examinations by any major foreign tax jurisdiction for years prior to 2008.

The difference between the actual income tax provision (benefit) and the tax provision computed by applying the statutory Federal income tax rate to Earnings before income taxes is attributable to the following:
(in millions)
2013
 
2012
 
2011
Income tax provision at 35 percent
$
80.4

 
$
63.4

 
$
38.7

State and local income taxes, net of Federal income tax effect
3.5

 
0.1

 
(0.1
)
Deferred tax asset valuation allowance
(601.5
)
 
(31.2
)
 
(6.1
)
Income attributable to domestic production activities
(4.6
)
 
(2.8
)
 
—

Asset dispositions and write-offs
—

 
—

 
(13.1
)
Change in estimates related to prior years and prior years amended tax return filings
3.5

 
(1.4
)
 
(0.4
)
Federal and state tax credits
(14.7
)
 
(0.3
)
 
(5.9
)
Taxes related to foreign income, net of credits
1.9

 
4.9

 
2.0

Taxes related to unremitted earnings
(5.3
)
 
(3.4
)
 
6.8

Tax reserve reassessment
(12.8
)
 
3.8

 
(5.8
)
Other
4.0

 
0.5

 
4.0

Actual income tax provision (benefit)
$
(545.6
)
 
$
33.6

 
$
20.1

 
 
 
 
 
 
Effective tax rate
NM

 
18.6
%
 
18.2
%


NM = Not meaningful

Income tax provision (benefit) allocated to continuing operations and discontinued operations for the years ended December 31 was as follows:
(in millions)
2013
 
2012
 
2011
Continuing operations
$
(545.6
)
 
$
33.6

 
$
20.1

Discontinued operations
(2.4
)
 
0.7

 
(2.7
)
Total tax provision (benefit)
$
(548.0
)
 
$
34.3

 
$
17.4