8. Income Taxes

In connection with the Separation, the Company and NOV entered into a Tax Matters Agreement, dated as of May 29, 2014 (the “Tax Matters Agreement”), which governs the Company’s and NOV’s respective rights, responsibilities and obligations. The Tax Matters Agreement sets forth the Company and NOV’s rights and obligations related to the allocation of federal, state, local and foreign taxes for periods before and after the Spin-Off, as well as taxes attributable to the Spin-Off, and related matters such as the filing of tax returns and the conduct of IRS and other audits. Pursuant to the Tax Matters Agreement, NOV will prepare and file the consolidated federal income tax return, and any other tax returns that include both NOV and the Company for all taxable periods ending on or prior to May 30, 2014. NOV will indemnify and hold harmless the Company for any income tax liability for periods before the Separation date. The Company will prepare and file all tax returns that include solely the Company for all taxable periods ending after that date. Settlements of tax payments between NOV and the Company were generally treated as contributions from or distributions to NOV in periods prior to the Separation date. Following the Spin-Off, the Company maintains the amount legally due to the tax authorities and maintains a due to/from NOV, Inc. for taxes related to periods prior to the Spin-Off that NOV is responsible for. After NOV files the tax returns for 2014, we anticipate there will be a settlement under the Tax Matters Agreement related to income taxes for the period of 2014 prior to the Spin-Off.

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


	Year Ended December 31,
	2014		2013		2012
United States	$	101	$	161	$	115
Foreign		77		61		50

	$	178	$	222	$	165

The provision for income taxes for 2014, 2013, and 2012 consisted of the following:


	2014			2013			2012
U.S. Federal:
Current	$	38		$	48		$	46
Deferred		3			6			(4	)

		41			54			42
U.S. State:
Current		4			4			4
Deferred		—			—			1

		4			4			5
Foreign
Current		18			20			14
Deferred		(1	)		(3	)		(4	)

		17			17			10

Total current income tax provision	$	62		$	75		$	57

The reconciliation between the Company’s effective tax rate on income from continuing operations and the statutory tax rate is as follows:


	Year Ended December 31,
	2014			2013			2012
Income tax expense (benefit) at federal statutory rate	$	62		$	78		$	58
Foreign income tax rate differential		(6	)		(5	)		(5	)
State income tax, net of federal benefit		3			3			2
Nondeductible expenses		2			2			1
Foreign dividends, net of foreign tax credits		—			(1	)		1
Change in contingency reserve and other		1			(2	)		—

Income tax expense (benefit)	$	62		$	75		$	57

Significant components of the Company’s deferred tax assets and liabilities were as follows (in millions):


	Year Ended December 31,
	2014			2013			2012
Deferred tax assets:
Allowances and operating liabilities	$	2		$	12		$	10
Net operating loss carryforwards		1			1			—
Book over tax depreciation		—			2			1
Trade credit		4			1			—
Bad debt reserve		3			2			1
Inventory reserve		9			11			12
Stock options		12			5			4
Other		3			2			1

Total deferred tax assets		34			36			29

Deferred tax liabilities:
Tax over book depreciation		(2	)		(2	)		—
Intangible assets		(18	)		(14	)		(9	)

Total deferred tax liabilities		(20	)		(16	)		(9	)

Net deferred tax asset	$	14		$	20		$	20

Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. In assessing the need for a valuation allowance, the Company looked to the future reversal of existing taxable temporary differences, taxable income in carryback years, the feasibility of tax planning strategies and estimated future taxable income and determined a valuation allowance is not needed. The need for a valuation allowance can be affected by changes to tax laws, changes to statutory tax rates and changes to future taxable income estimates.

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


	2014		2013			2012
Unrecognized tax benefit—January 1	$	—	$	2		$	2
Gross increases—tax positions in prior period		—		—			—
Gross decreases—tax positions in prior period		—		—			—
Gross increases—tax positions in current period		—		—			—
Settlement		—		—			—
Lapse of statute of limitations		—		(2	)		—

Unrecognized tax benefit—December 31	$	—	$	—		$	2

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 are classified as a component of income tax expense in the financial statements consistent with the Company’s policy. During the year ended December 31, 2014, the Company did not record any income tax expense for interest and penalties related to uncertain tax positions. At December 31, 2014, the Company has not accrued any interest and penalties relating to unrecognized tax benefits.

The Company is subject to taxation in the United States, various states and foreign jurisdictions. The Company has significant operations in the United States and Canada and to a lesser extent in various other international jurisdictions including the United Kingdom, Indonesia, 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 2009 and outside the U.S. for the tax years ending after 2006. The Company is indemnified for any income tax expense exposures related to periods prior to the Separation.

In the United States, the Company has no net operating loss carryforwards as of December 31, 2014 and December 31, 2013.

Outside the United States, the Company has $4 million and $1 million of net operating loss carryforwards as of December 31, 2014 and December 31, 2013. The majority of net operating loss carryforwards will expire between 2023 and 2024

Also in the United States, the Company has $0 and $3 million of excess foreign tax credits as of December 31, 2014 and December 31, 2013.

In general, it is the practice and intention of the Company to reinvest the earnings of its non-U.S. subsidiaries in those operations. As of December 31, 2014, the amount of unremitted earnings was approximately $187 million. The Company has not, nor do they anticipate the need to, repatriate funds to the United States to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs associated with domestic debt service requirements. These 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.