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Income Taxes
 12 Months Ended
Dec. 31, 2011
Income Tax Expense (Benefit) [Abstract]  
Income Taxes

14. Income Taxes

The domestic and foreign components of income before income taxes were as follows (in millions):

 

 

                         
    Years Ended December 31,  
    2011     2010     2009  

Domestic

   $ 1,282     $ 727     $ 761  

Foreign

     1,640       1,670       1,447  
   

 

 

    

 

 

    

 

 

  
    $ 2,922     $ 2,397     $ 2,208  
   

 

 

    

 

 

    

 

 

  

The components of the provision for income taxes consisted of (in millions):

 

 

                         
    Years Ended December 31,  
    2011     2010     2009  

Current:

                        

Federal

   $ 484     $ 421     $ 526  

State

     37       34       35  

Foreign

     768       448       348  
   

 

 

    

 

 

    

 

 

  

Total current income tax provision

     1,289       903       909  
   

 

 

    

 

 

    

 

 

  

Deferred:

                        

Federal

     (28 )      (260 )      (249 ) 

State

     (3 )      (8 )      (5 ) 

Foreign

     (321 )      103       80  
   

 

 

    

 

 

    

 

 

  

Total deferred income tax provision

     (352 )      (165 )      (174 ) 
   

 

 

    

 

 

    

 

 

  

Total income tax provision

   $ 937     $ 738     $ 735  
   

 

 

    

 

 

    

 

 

  

The difference between the effective tax rate reflected in the provision for income taxes and the U.S. federal statutory rate was as follows (in millions):

 

 

                         
    Years Ended December 31,  
    2011     2010     2009  

Federal income tax at U.S. statutory rate

   $ 1,023     $ 839     $ 773  

Foreign income tax rate differential

     (152 )      (117 )      (120 ) 

State income tax, net of federal benefit

     22       17       18  

Nondeductible expenses

     42       40       30  

Tax benefit of manufacturing deduction

     (37 )      (19 )      (17 ) 

Foreign dividends, net of foreign tax credits

     9       15       10  

Change in deferred tax valuation allowance

     (18 )      —         —    

Change in contingency reserve and other

     48       (37 )      41  
   

 

 

    

 

 

    

 

 

  

Total income tax provision

   $ 937     $ 738     $ 735  
   

 

 

    

 

 

    

 

 

  

 

Significant components of our deferred tax assets and liabilities were as follows (in millions):

 

 

      $0.000       $0.000       $0.000  
    December 31,  
    2011     2010     2009  

Deferred tax assets:

                        

Allowances and operating liabilities

   $ 331     $ 344     $ 343  

Net operating loss carryforwards

     14       10       7  

Postretirement benefits

     14       17       12  

Foreign tax credit carryforwards

     106       220       —    

Other

     151       75       28  
   

 

 

    

 

 

    

 

 

  
      616       666       390  

Valuation allowance for deferred tax assets

     (13 )      (9 )      (8 ) 
   

 

 

    

 

 

    

 

 

  

Total deferred tax assets

     603       657       382  
   

 

 

    

 

 

    

 

 

  

Deferred tax liabilities:

                        

Tax over book depreciation

     204       213       168  

Intangible assets

     1,398       1,307       1,413  

Deferred income

     226       456       363  

Accrued U.S. tax on unremitted earnings

     70       149       49  

Other

     168       211       98  
   

 

 

    

 

 

    

 

 

  

Total deferred tax liabilities

     2,066       2,336       2,091  
   

 

 

    

 

 

    

 

 

  

Net deferred tax liability

   $ 1,463     $ 1,679     $ 1,709  
   

 

 

    

 

 

    

 

 

  

The balance of unrecognized tax benefits at December 31, 2011 and 2010 was $131 million and $118 million, respectively. Included in the change in the balance of unrecognized tax benefits for the period ended December 31, 2011 was an increase of $10 million associated with the acquisition of Ameron. Also included in the change in the balance of unrecognized tax benefits for the period ended December 31, 2011 was an increase of $12 million of unrecognized tax benefits associated with certain tax credits claimed in prior years plus the pricing of certain internal transfers of inventory that may not be accepted as a tax deduction in foreign jurisdictions. A $9 million reduction in the balance of unrecognized tax benefits resulted from the lapse of applicable statutes of limitations in foreign jurisdictions. Of the net increase of $13 million in the balance of unrecognized tax benefits, $10 million was recorded as an increase in Goodwill and $3 million was recorded as an increase of income tax expense in the current year and is reflected in the “other” category in the income tax rate schedule above. These unrecognized tax benefits are included in the balance of other liabilities in the Consolidated Balance Sheet at December 31, 2011. If the $131 million of unrecognized tax benefits accrued at December 31, 2011 are ultimately realized, $58 million would be recorded as a reduction of income tax expense.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):

 

 

      $0,000       $0,000       $0,000  
    2011     2010     2009  

Unrecognized tax benefit at beginning of year

   $ 118     $ 58     $ 61  

Additions based on tax positions related to the current year

     9       1       10  

Additions for tax positions of prior years

     13       82       —    

Reductions for tax positions of prior years

     —         (5 )      (12 ) 

Reductions for lapse of applicable statutes of limitations

     (9 )      (18 )      (1 ) 
   

 

 

    

 

 

    

 

 

  

Unrecognized tax benefit at end of year

   $ 131     $ 118     $ 58  
   

 

 

    

 

 

    

 

 

  

The Company does not anticipate that the total unrecognized tax benefits will significantly change due to the settlement of audits or the expiration of statutes of limitation within 12 months of this reporting date.

 

To the extent penalties and interest would be assessed on any underpayment of income tax, such accrued amounts have been classified as a component of income tax expense in the financial statements consistent with the Company’s policy. During the year ended December 31, 2011, the Company recorded as a reduction of income tax expense a $1 million release of accrued interest and penalties related to uncertain tax positions, and as an increase in Goodwill a $1 million accrual of accrued interest and penalties associated with the uncertain tax positions of Ameron. At December 31, 2011, the Company has accrued approximately $8 million of interest and penalties relating to unrecognized tax benefits. These interest and penalties are included in the balance of other liabilities in the Consolidated Balance Sheet at December 31, 2011.

The Company is subject to taxation in the United States, various states and foreign jurisdictions. The Company has significant operations in the United States, Canada, the United Kingdom, the Netherlands and Norway. Tax years that remain subject to examination by major tax jurisdictions vary by legal entity, but are generally open in the U.S. for the tax years ending after 2007 and outside the U.S. for the tax years ending after 2005.

In the United States, the Company has $20 million of net operating loss carryforwards as of December 31, 2011, which expire at various dates through 2030. The potential benefit of $7 million has been reduced by a $7 million valuation allowance. Future income tax payments will be reduced in the event the Company ultimately realizes the benefit of these net operating losses. If the Company ultimately realizes the benefit of these net operating loss carryforwards, the valuation allowance of $7 million would reduce future income tax expense.

Outside the United States, the Company has $34 million of net operating loss carryforwards as of December 31, 2011, which expire in the year 2021. The potential benefit of $7 million has been reduced by a $5 million valuation allowance. Future income tax payments will be reduced in the event the Company ultimately realizes the benefit of these net operating losses. If the Company ultimately realizes the benefit of these net operating loss carryforwards, the valuation allowance of $6 million would reduce future income tax expense.

Also in the United States, the Company has $106 million of excess foreign tax credits as of December 31, 2011, which expire at various dates through 2021. These credits have been allotted a valuation allowance of $1 million and would be realized as a reduction of future income tax payments.

During 2011, the Company recorded $88 million in net deferred tax liabilities with a corresponding increase in goodwill related to the acquisition of Conner Steel Products Holding Company and Ameron.

Undistributed earnings of certain of the Company’s foreign subsidiaries amounted to $3,789 million and $2,503 million at December 31, 2011 and 2010, respectively. Those earnings are considered to be permanently reinvested and no provision for U.S. federal and state income taxes has been made. Distribution of these earnings in the form of dividends or otherwise could result in U.S. federal taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable in various foreign countries. Determination of the amount of unrecognized deferred U.S. income tax liability is not practical; however, unrecognized foreign tax credit carryforwards would be available to reduce some portion of the U.S. liability.

Because of the number of tax jurisdictions in which the Company operates, its effective tax rate can fluctuate as operations and the local country tax rates fluctuate. The Company is also subject to audits by federal, state and foreign jurisdictions which may result in proposed assessments. The Company’s future tax provision will reflect any favorable or unfavorable adjustments to its estimated tax liabilities when resolved. The Company is unable to predict the outcome of these matters. However, the Company believes that none of these matters will have a material adverse effect on the results of operations or financial condition of the Company.