Income Taxes

The sources of income (loss) before income taxes and equity in net earnings of affiliates were as follows for the years ended December 31, 2013, 2012 and 2011 (in millions):



	2013		2012		2011
United States	$	133.1	$	98.0	$	1.6
Foreign	669.5		502.8		559.4
Income before income taxes and equity in net earnings of affiliates	$	802.6	$	600.8	$	561.0

The provision for income taxes by location of the taxing jurisdiction for the years ended December 31, 2013, 2012 and 2011 consisted of the following (in millions):



	2013			2012			2011
Current:
United States:
Federal	$	9.2		$	(5.5	)	$	(6.1	)
State	9.9			2.8			—
Foreign	217.7			177.0			158.3
	236.8			174.3			152.2
Deferred:
United States:
Federal	30.2			(27.0		)	(148.9		)
State	—			—			—
Foreign	(8.5		)	(9.4		)	21.3
	21.7			(36.4		)	(127.6		)
	$	258.5		$	137.9		$	24.6

At December 31, 2013, the Company’s foreign subsidiaries had approximately $3.1 billion of undistributed earnings. These earnings are considered to be indefinitely invested, and, accordingly, no income taxes have been provided on these earnings. Determination of the amount of unrecognized deferred taxes on these earnings is not practicable; however, unrecognized foreign tax credits would be available to reduce a portion of the tax liability.

A reconciliation of income taxes computed at the United States federal statutory income tax rate (35%) to the provision for income taxes reflected in the Company’s Consolidated Statements of Operations for the years ended December 31, 2013, 2012 and 2011 is as follows (in millions):



	2013			2012			2011
Provision for income taxes at United States federal statutory rate of 35%	$	280.9		$	210.3		$	196.3
State and local income taxes, net of federal income tax benefit	5.6			3.9			1.4
Taxes on foreign income which differ from the United States statutory rate	(34.7		)	(19.8		)	(31.8		)
Tax effect of permanent differences	(7.6		)	11.5			(5.8		)
Change in valuation allowance	9.3			(64.3		)	(150.7		)
Change in tax contingency reserves	25.7			20.8			23.1
Research and development tax credits	(19.9		)	(26.3		)	(7.7		)
Other	(0.8		)	1.8			(0.2		)
	$	258.5		$	137.9		$	24.6

The “change in valuation allowance” for the year ended December 31, 2012 primarily relates to the usage of approximately $54.7 million of valuation allowance due to income generated in the United States during 2012. The 2012 income tax provision also includes a reversal of approximately $13.8 million of remaining valuation allowance previously established against the Company’s U.S. deferred tax assets (as reflected above in the “change in valuation allowance”) as well as the recognition of certain U.S. research and development tax credits of approximately $13.1 million. The “change in valuation allowance” for the year ended December 31, 2011 includes a reversal of approximately $149.3 million of valuation allowance previously established against the Company’s deferred tax assets in the United States. The reversal was required to offset deferred tax liabilities established as part of the acquisition accounting for GSI.

The significant components of the deferred tax assets and liabilities at December 31, 2013 and 2012 were as follows (in millions):



	2013			2012
Deferred Tax Assets:
Net operating loss carryforwards	$	69.7		$	94.9
Sales incentive discounts	68.7			55.8
Inventory valuation reserves	29.4			27.0
Pensions and postretirement health care benefits	69.7			102.4
Warranty and other reserves	108.5			138.1
Research and development tax credits	13.2			21.0
Other	64.0			38.8
Total gross deferred tax assets	423.2			478.0
Valuation allowance	(77.2		)	(74.5		)
Total net deferred tax assets	346.0			403.5
Deferred Tax Liabilities:
Tax over book depreciation and amortization	314.7			341.0
Other	21.6			21.3
Total deferred tax liabilities	336.3			362.3
Net deferred tax assets	$	9.7		$	41.2
Amounts recognized in Consolidated Balance Sheets:
Deferred tax assets - current	$	241.2		$	243.5
Deferred tax assets - noncurrent	24.4			40.0
Other current (liabilities) assets	(4.7		)	0.4
Deferred tax liabilities - noncurrent	(251.2		)	(242.7		)
	$	9.7		$	41.2

The Company recorded a net deferred tax asset of $9.7 million and $41.2 million as of December 31, 2013 and 2012, respectively. As reflected in the preceding table, the Company had a valuation allowance of $77.2 million and $74.5 million as of December 31, 2013 and 2012, respectively.

A valuation allowance is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company assessed the likelihood that its deferred tax assets would be recovered from estimated future taxable income and available tax planning strategies and determined that the valuation allowance at December 31, 2013 and 2012 was appropriate. In making this assessment, all available evidence was considered, including the current economic climate, as well as reasonable tax planning strategies. The Company believes it is more likely than not that the Company will realize the remaining deferred tax assets, net of the valuation allowance, in future years.

The Company had net operating loss carryforwards of $334.9 million as of December 31, 2013, with expiration dates as follows: 2014 - $0.0 million; 2015 - $8.7 million; 2016 - $95.2 million; and thereafter or unlimited - $231.0 million. These net operating loss carryforwards of $334.9 million were entirely net operating loss carryforwards outside of the United States.

The Company paid income taxes of $174.5 million, $147.7 million and $116.4 million for the years ended December 31, 2013, 2012 and 2011, respectively.

At December 31, 2013 and 2012, the Company had $122.2 million and $94.5 million, respectively, of unrecognized income tax benefits, all of which would affect the Company’s effective tax rate if recognized. At December 31, 2013 and 2012, the Company had approximately $61.9 million and $23.5 million, respectively, of accrued or deferred taxes related to uncertain income tax positions connected with ongoing income tax audits in various jurisdictions that it expects to settle or pay in the next 12 months. The Company accrued approximately $2.3 million and $3.8 million of interest and penalties related to unrecognized tax benefits in its provision for income taxes during 2013 and 2012, respectively. At December 31, 2013 and 2012, the Company had accrued interest and penalties related to unrecognized tax benefits of $14.4 million and $11.9 million, respectively.

A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits as of and during the years ended December 31, 2013 and 2012 is as follows (in millions):



	2013			2012
Gross unrecognized income tax benefits	$	94.5		$	71.1
Additions for tax positions of the current year	34.7			18.5
Additions for tax positions of prior years	3.6			7.3
Additions for tax positions related to acquisitions	—			1.1
Reductions for tax positions of prior years for:
Changes in judgments	(9.0		)	0.2
Settlements during the period	—			—
Lapses of applicable statute of limitations	(3.6		)	(5.2		)
Foreign currency translation	2.0			1.5
Gross unrecognized income tax benefits	$	122.2		$	94.5

The Company and its subsidiaries file income tax returns in the United States and in various state, local and foreign jurisdictions. The Company and its subsidiaries are routinely examined by tax authorities in these jurisdictions. As of December 31, 2013, a number of income tax examinations in foreign jurisdictions were ongoing. It is possible that certain of these ongoing examinations may be resolved within 12 months. Due to the potential for resolution of federal, state and foreign examinations, and the expiration of various statutes of limitation, it is reasonably possible that the Company’s gross unrecognized income tax benefits balance may materially change within the next 12 months. Due to the number of jurisdictions and issues involved and the uncertainty regarding the timing of any settlements, the Company is unable at this time to provide a reasonable estimate of such change that may occur within the next 12 months. Although there are ongoing examinations in various jurisdictions, the 2010 through 2013 tax years generally remain subject to examination in the United States by federal and state authorities. In the Company’s significant foreign jurisdictions, primarily the United Kingdom, France, Germany, Switzerland, Finland and Brazil, the 2008 through 2013 tax years generally remain subject to examination by their respective tax authorities. In Brazil, the Company is contesting disallowed deductions related to the amortization of certain goodwill amounts (Note 11).