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Income Taxes | 12 Months Ended
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Dec. 31, 2014
Income Tax Disclosure [Abstract] |
Income Taxes | INCOME TAXES For each of the years ended December 31, 2014, 2013, and 2012 the tax data related to continuing operations is as follows:
| 2014 |  |  | 2013 |  |  | 2012 |
Income components: |  |  |  |  |
United States | $ | 44.5 |  |  | $ | 28.5 |  |  | $ | 33.0 |
International | 217.5 |  |  | 152.0 |  |  | 116.1 |
Income from continuing operations before income tax | 262.0 |  |  | 180.5 |  |  | 149.1 |
Income tax expense (benefit) components: |  |  |  |  |
Current income tax expense (benefit): |  |  |  |  |
United States – federal | 16.2 |  |  | 10.6 |  |  | (32.6 | )
United States – state and local | 0.7 |  |  | 4.2 |  |  | (8.7 | )
International | 54.6 |  |  | 39.6 |  |  | 46.8 |
Total current income tax expense | 71.5 |  |  | 54.4 |  |  | 5.5 |
Deferred income tax expense (benefit) components: |  |  |  |  |
United States – federal | (0.6 | ) |  | (331.2 | ) |  | 40.1 |
United States – state and local | 5.1 |  |  | (36.7 | ) |  | 9.9 |
International | (4.7 | ) |  | 3.9 |  |  | (15.9 | )
Total deferred income tax (benefit) expense | (0.2 | ) |  | (364.0 | ) |  | 34.1 |
Income tax expense (benefit) | $ | 71.3 |  |  | $ | (309.6 | ) |  | $ | 39.6 |
Effective income tax rate | 27.2 | % |  | (171.5 | )% |  | 26.6 | %
A reconciliation of the income tax expense (benefit) for continuing operations from the U.S. statutory income tax rate to the effective income tax rate is as follows for each of the years ended December 31, 2014, 2013, and 2012:
| 2014 |  |  | 2013 |  |  | 2012 |
Tax provision at U.S. statutory rate | 35.0 | % |  | 35.0 | % |  | 35.0 | %
Tax exempt interest | (10.3 | )% |  | (17.5 | )% |  | (19.7 | )%
U.S. tax on foreign earnings | 9.3 | % |  | (0.7 | )% |  | 0.5 | %
Valuation allowance on deferred tax assets | 8.6 | % |  | (191.1 | )% |  | 27.7 | %
Tax on undistributed foreign earnings | (8.1 | )% |  | 6.1 | % |  | 1.3 | %
Foreign tax rate differential | (6.2 | )% |  | (4.8 | )% |  | (3.0 | )%
State and local income tax | 1.6 | % |  | 0.6 | % |  | 1.4 | %
Other adjustments | (1.3 | )% |  | (0.6 | )% |  | (3.9 | )%
Foreign Tax Holiday | (1.3 | )% |  | (1.0 | )% |  | — | %
U.S. permanent items | (1.0 | )% |  | (1.3 | )% |  | 0.5 | %
Audit settlements & unrecognized tax benefits | 0.9 | % |  | 3.8 | % |  | (13.2 | )%
Effective income tax rate | 27.2 | % |  | (171.5 | )% |  | 26.6 | %
Our effective tax rate in 2014 was affected by changes in unrecognized tax benefits of approximately $1.6 and includes the completion of tax examinations and lapses in the statute of limitations. As a result of investment opportunities and other factors, and their impact on the Company’s expected liquidity, certain earnings generated in Hong Kong, Japan, Luxembourg, and South Korea may be repatriated in the future and are therefore not considered to be indefinitely reinvested outside of the U.S. In 2014, the Company repatriated certain foreign earnings and subsequently reversed the deferred tax liability on the undistributed foreign earnings by $21.1. We have not provided for deferred taxes on the remaining excess of financial reporting over tax bases of investments in foreign subsidiaries in the amount of $508.4 because we plan to reinvest such earnings indefinitely outside of the U.S. While the amount of U.S. federal income taxes, if such earnings are distributed in the future, cannot be determined, such taxes may be reduced by tax credits and other tax deductions. As of December 31, 2014, the amount of cash, cash equivalents and marketable securities held by foreign subsidiaries was $555.2. Our intent is to permanently reinvest these funds outside of the U.S., and current plans do not anticipate that we will need funds generated from foreign operations to fund our domestic operations. In the event funds from foreign operations are needed to fund operations in the U.S. and if U.S. tax has not already been previously provided, we would be required to accrue and pay additional U.S. taxes to repatriate these funds. We operate under tax holidays in China and Korea, which are effective until December 31, 2014 and 2019, respectively. The tax holidays are conditional upon our meeting certain research, employment and/or investment thresholds. The impact of these holidays decreased foreign taxes by $3.5, or $0.04, per diluted share in 2014. Deferred tax assets and liabilities include the following:
| 2014 |  |  | 2013 |
Deferred Tax Assets: |  |  |
Accruals | $ | 69.0 |  |  | $ | 64.5 |
Asbestos | 272.6 |  |  | 272.7 |
Employee benefits | 109.4 |  |  | 106.6 |
Credit carryforwards | 29.3 |  |  | 47.2 |
Loss carryforwards | 128.0 |  |  | 125.2 |
Other | 36.0 |  |  | 34.4 |
Gross deferred tax assets | 644.3 |  |  | 650.6 |
Less: Valuation allowance | 147.1 |  |  | 135.3 |
Net deferred tax assets | $ | 497.2 |  |  | $ | 515.3 |
Deferred Tax Liabilities: |  |  |
Undistributed earnings | $ | (61.2 | ) |  | $ | (82.3 | )
Intangibles | (58.7 | ) |  | (58.8 | )
Accelerated depreciation | (26.0 | ) |  | (25.8 | )
Investment | (0.4 | ) |  | (0.4 | )
Total deferred tax liabilities | $ | (146.3 | ) |  | $ | (167.3 | )
Net deferred tax assets | $ | 350.9 |  |  | $ | 348.0 |
Deferred taxes are presented in the Consolidated Balance Sheets as follows:
| 2014 |  |  | 2013 |
Current assets | $ | 56.2 |  |  | $ | 59.5 |
Non-current assets | 304.1 |  |  | 303.6 |
Current liabilities | — |  |  | — |
Other non-current liabilities | (9.4 | ) |  | (15.1 | )
Net deferred tax assets | $ | 350.9 |  |  | $ | 348.0 |
The table included below provides a rollforward of our valuation allowance on net deferred income tax assets from December 31, 2011 to December 31, 2014.
| Federal |  |  | State |  |  | Foreign |  |  | Total |
DTA valuation allowance - December 31, 2011 | $ | 327.0 |  |  | $ | 127.5 |  |  | $ | 25.9 |  |  | $ | 480.4 |
Change in assessment | — |  |  | — |  |  | (6.5 | ) |  | (6.5 | )
Current year operations | 25.8 |  |  | (5.1 | ) |  | 42.1 |  |  | 62.8 |
DTA valuation allowance - December 31, 2012 | 352.8 |  |  | 122.4 |  |  | 61.5 |  |  | 536.7 |
Change in assessment | (339.6 | ) |  | (35.0 | ) |  | 3.7 |  |  | (370.9 | )
Current year operations | (13.2 | ) |  | (42.7 | ) |  | 25.4 |  |  | (30.5 | )
DTA valuation allowance - December 31, 2013 | — |  |  | 44.7 |  |  | 90.6 |  |  | 135.3 |
Change in assessment | — |  |  | — |  |  | 2.5 |  |  | 2.5 |
Current year operations | — |  |  | 0.3 |  |  | 9.0 |  |  | 9.3 |
DTA valuation allowance - December 31, 2014 | $ | — |  |  | $ | 45.0 |  |  | $ | 102.1 |  |  | $ | 147.1 |
In the third quarter of 2013, the Company moved from a three-year adjusted cumulative domestic pretax loss position to a three-year adjusted cumulative domestic pretax income position. In measuring adjusted cumulative pretax income (loss), the Company adjusted pretax U.S. income (loss) for nonrecurring items and recurring permanent differences. The recurring permanent differences included excess stock option deductions which represented the amount of tax deductions in excess of book deductions, ultimately reducing book income on the tax return, and foreign earnings, the indefinite reinvestment of which was not asserted, and was not expected to be asserted in the foreseeable future, and dividends paid or expected to be paid. Each of these items was recurring in nature and representative of our book taxable income. In addition, we included adjustments for certain non-recurring costs directly attributable to the Distribution as these were not indicative of future taxable income. The three-year cumulative income position was strong positive evidence in evaluating the realizability of our deferred tax assets as of September 30, 2013. However, the Company considered all available evidence, both positive and negative, in its evaluation to reverse the valuation allowance at that time, including future earnings, industry trends, and certain contingencies, such as asbestos-related costs. Further, we considered future reversals of existing taxable temporary differences as a source of income available to recover a portion of existing deferred tax assets, future taxable income exclusive of reversing taxable temporary differences and carryforwards, and available tax-planning strategies in assessing the realizability of the deferred tax assets. Based on positive evidence, including the three-year cumulative positive income and the absence of any significant negative evidence, management determined that it was more likely than not that the Company's U.S. deferred tax assets would be realized except for certain deferred tax assets attributable to state net operating losses and tax credits. After considering all available evidence, including a cumulative loss and the absence of any significant positive evidence, the Company recorded a valuation allowance against certain foreign net deferred tax assets in Germany and Venezuela. In addition, a portion of the deferred tax assets in Italy are no longer realizable. The Company continues to maintain a valuation allowance against certain deferred tax assets attributable to state net operating losses, state tax credits and certain foreign net deferred tax assets, primarily in Luxembourg, Germany, India and China which are not expected to be realized. Overall, the increase in the valuation allowance of $11.8 is primarily attributable to foreign net operating loss carryforwards in Luxembourg. We have the following tax attributes available for utilization at December 31, 2014:
Attribute | Amount |  |  | First Year of Expiration
U.S. federal net operating losses | $ | 1.9 |  |  | 12/31/2023
U.S. state net operating losses | $ | 1,355.6 |  |  | 12/31/2015
U.S. federal tax credits | $ | 23.4 |  |  | 12/31/2021
U.S. state tax credits | $ | 5.9 |  |  | 12/31/2027
Foreign net operating losses | $ | 297.0 |  |  | 12/31/2015
We have approximately $182.0 of net operating loss carryforwards in Luxembourg as of December 31, 2014 that do not expire. Shareholders’ equity at December 31, 2014 and 2013 includes excess income tax benefits related to stock-based compensation in 2014 and 2013 of approximately $10.4 and $8.7, respectively. Uncertain Tax Positions We recognize income tax benefits from uncertain tax positions only if, based on the technical merits of the position, it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The tax benefits recognized in the Consolidated Financial Statements from such positions are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. A reconciliation of the beginning and ending amount of unrecognized tax benefits for each of the years ended December 31, 2014, 2013, and 2012 is as follows:
| 2014 |  |  | 2013 |  |  | 2012 |
Unrecognized tax benefits – January 1 | $ | 161.2 |  |  | $ | 208.8 |  |  | $ | 198.7 |
Additions for: |  |  |  |  |
Prior year tax positions | 2.4 |  |  | 1.6 |  |  | 48.4 |
Current year tax positions | 2.8 |  |  | 8.0 |  |  | 0.8 |
Assumed in Acquisition | — |  |  | — |  |  | 3.8 |
Reductions for: |  |  |  |  |
Prior year tax positions | (2.8 | ) |  | (55.4 | ) |  | (4.8 | )
Settlements | (1.0 | ) |  | (1.0 | ) |  | (33.6 | )
Expiration of Statute of Limitations | (2.5 | ) |  | (0.8 | ) |  | (4.5 | )
Unrecognized tax benefits – December 31 | $ | 160.1 |  |  | $ | 161.2 |  |  | $ | 208.8 |
As of December 31, 2014, $55.8 and $56.0 of the unrecognized tax benefits would affect the effective tax rate for continuing operations and discontinued operations respectively, if realized. The Company operates in various tax jurisdictions and is subject to examination by tax authorities in these jurisdictions. The Company is currently under examination in several jurisdictions including Germany, Italy, Korea, the United Kingdom, the U.S. and Venezuela. The U.S. federal income tax audit for the years 2009 through 2011 has received Joint Committee on Taxation review. We anticipate that we will receive the final audit report within the next 12 months. The calculation of our tax liability for unrecognized tax benefits includes dealing with uncertainties in the application of complex tax laws and regulations in various tax jurisdictions. Due to the complexity of some uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax benefit. Over the next twelve months, the net amount of the tax liability for unrecognized tax benefits in foreign and domestic jurisdictions could change by $86.5 due to changes in audit status, expiration of statutes of limitations and other events. The following table summarizes the earliest open tax years by major jurisdiction as of December 31, 2014:
Jurisdiction | Earliest Open Year
China | 2009
Czech | 2013
Germany | 2006
Italy | 2005
Japan | 2010
Korea | 2006
Luxembourg | 2011
Mexico | 2009
United States | 2009
We classify interest relating to tax matters as a component of interest expense and tax penalties as a component of income tax expense in our Consolidated Statements of Operations. During 2014 and 2013, we recognized $0.8 and $2.0 in net interest expense from continuing operations related to tax matters, respectively and tax penalties of $0.7 remain unchanged. We had $19.4 and $17.5 of interest expense accrued from continuing and discontinued operations related to tax matters as of December 31, 2014 and 2013, respectively. Tax Matters Agreement On October 25, 2011, we entered into a Tax Matters Agreement with Exelis and Xylem that governs the respective rights, responsibilities and obligations of the companies after the Distribution with respect to tax liabilities and benefits, tax attributes, tax contests and other tax sharing regarding U.S. Federal, state, local and foreign income taxes, other tax matters and related tax returns. Exelis and Xylem have liability with ITT to the U.S. Internal Revenue Service (IRS) for the consolidated U.S. Federal income taxes of the ITT consolidated group relating to the taxable periods in which Exelis and Xylem were part of that group. However, the Tax Matters Agreement specifies the portion, if any, of this tax liability for which ITT, Exelis and Xylem will bear responsibility, and ITT, Exelis and Xylem agreed to indemnify each other against any amounts for which they are not responsible. The Tax Matters Agreement also provides special rules for allocating tax liabilities in the event that the Distribution is determined to not be tax-free. The Tax Matters Agreement provides for certain covenants that may restrict our ability to pursue strategic or other transactions that otherwise could maximize the value of our business and may discourage or delay a change of control that may be considered favorable. Though valid as between the parties, the Tax Matters Agreement is not binding on the IRS. Pursuant to the Tax Matters Agreement, as the shared income tax liabilities are settled, ITT will make payments up to certain specified thresholds, with payments in excess of those specified thresholds shared among ITT, Exelis, and Xylem. If payments to the taxing authorities are less than certain specified thresholds, ITT will make payments up to the remaining specified thresholds to Exelis and Xylem. Settlement is expected to occur as the audit process by applicable taxing authorities is completed for the impacted years and cash payments are made. Given the nature of the shared tax liabilities, the maximum amount of potential future payments is not determinable. Any such cash payments, when they occur, will reduce the liability for uncertain tax positions as such payments represent an equivalent reduction of risk. The settlement of an examination could result in changes in amounts attributable to us through the Tax Matters Agreement entered into with Exelis and Xylem. Currently, we cannot reasonably estimate the amount of such changes. At December 31, 2014, ITT’s accrual for uncertain tax positions includes amounts related to certain shared tax liabilities; however, no receivables from Exelis or Xylem have been recorded as our estimate of their portion of the shared tax liabilities is not more than the amounts currently accrued for the uncertain tax position. If our estimate of exposures to the shared tax liabilities increases above the specified threshold, a receivable would be recorded. Our financial statements as of December 31, 2014 and 2013 include net tax-related balances less than $1.0, in the aggregate, related to Exelis and Xylem. Adjustments in the future for the impact of filing final income tax returns in certain jurisdictions where those returns include a combination of ITT, Exelis and Xylem legal entities and for certain amended income tax returns for the periods prior to the Distribution may be recorded to either shareholders’ equity or the statement of operations depending on the specific item giving rise to the adjustment. During 2012, $7.0 was recorded directly to shareholders’ equity as part of the Distribution of Exelis and Xylem.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 15 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32718-109319 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(h)) -URI http://asc.fasb.org/extlink&oid=26873400&loc=d3e23780-122690 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 08 -Paragraph h -Article 4 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32639-109319 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32537-109319 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32559-109319 + Details
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