Income Taxes

Earnings from continuing operations are summarized below:



(in millions)	2013		2012		2011
Earnings (loss) from continuing operations before income taxes:
Domestic	$	90.1	$	94.1	$	(24.8	)
Foreign	135.1		52.8		71.1
Total	$	225.2	$	146.9	$	46.3

Income tax expense (benefit) from continuing operations is summarized as follows:



(in millions)	2013			2012			2011
Current:
Federal and state	$	24.1		$	29.2		$	(20.9	)
Foreign	25.4			17.3			17.2
Total current	$	49.5		$	46.5		$	(3.7	)
Deferred:
Federal and state	$	(15.2	)	$	(5.2	)	$	13.6
Foreign	1.8			(3.3		)	3.7
Total deferred	$	(13.4	)	$	(8.5	)	$	17.3
Provision for taxes on earnings	$	36.1		$	38.0		$	13.6

The federal statutory income tax rate is reconciled to the company’s effective income tax rate for continuing operations for the years ended December 31, 2013, 2012 and 2011 as follows, which excludes the impact of discontinued operations which had an effective tax rate of (13.3)% for 2013:



	2013		2012		2011
Federal income tax at statutory rate	35.0	%	35.0	%	35.0	%
State income provision (benefit)	(0.5	)	0.3		(10.2	)
Manufacturing & research incentives	(3.3	)	(3.5	)	(4.3	)
Taxes on foreign income which differ from the U.S. statutory rate	(9.3	)	(7.7	)	(24.1	)
Adjustments for unrecognized tax benefits	(5.4	)	(6.7	)	7.2
Adjustments for valuation allowances	(1.0	)	9.2		20.2
Other items	0.5		(0.7	)	5.6
Effective tax rate	16.0	%	25.9	%	29.4	%

The 2013, 2012 and 2011 effective tax rates were favorably impacted by income earned in jurisdictions where the statutory rate was less than 35%.

During 2013, the company utilized a portion of its Chinese, Spanish, and UK tax loss carry forwards against current year income, which generated a partial release of valuation allowances and an income tax benefit of $3.4 million. As a result of Wisconsin legislation enacted in the second quarter of 2011, an income tax benefit of $5.5 million was recorded in the second quarter to release the previously recorded valuation allowance on net operating losses in the state. The company recorded a full valuation allowance of $2.4 million on the net deferred tax assets in Czech Republic and Italy during the fourth quarter of 2011 as the company determined that it was more-likely-than-not that certain deferred tax assets would not be utilized. The company continues to record valuation allowances on the deferred tax assets in China, the Czech Republic, France, Italy, Slovakia, Spain, and the UK, as it remains more-likely-than-not that they will not be utilized.

The company will continue to periodically evaluate its valuation allowance requirements in light of changing facts and circumstances, and may adjust its deferred tax asset valuation allowances accordingly. It is reasonably possible that the company will either add to, or reverse a portion of its existing deferred tax asset valuation allowances in the future. Such changes in the deferred tax asset valuation allowances will be reflected in the current operations through the company’s income tax provision, and could have a material effect on operating results.

No items included in Other items are individually, or when appropriately aggregated, significant.

Temporary differences and carryforwards that give rise to deferred tax assets and liabilities include the following items:



(in millions)	2013			2012
Current deferred tax assets (liabilities):
Inventories	$	32.3		$	26.0
Accounts receivable	(2.1		)	(1.2		)
Product warranty reserves	20.0			20.4
Product liability reserves	7.9			8.7
Deferred revenue, current portion	0.6			2.9
Deferred employee benefits	16.6			13.2
Other reserves and allowances	16.1			21.2
Less valuation allowance	(3.6		)	(7.0		)
Net deferred tax assets, current	$	87.8		$	84.2
Non-current deferred tax assets (liabilities):
Property, plant and equipment	$	(32.6	)	$	(33.1	)
Intangible assets	(296.3		)	(310.4		)
Deferred employee benefits	67.1			71.0
Product warranty reserves	4.2			2.5
Tax credits	2.3			1.7
Net operating loss carryforwards	192.7			211.3
Deferred revenue	5.9			4.8
Other	(2.4		)	(3.6		)
Total non-current deferred tax liabilities	(59.1		)	(55.8		)
Less valuation allowance	(146.2		)	(151.0		)
Net deferred tax liabilities, non-current	$	(205.3	)	$	(206.8	)

The net deferred tax assets (liabilities) are reflected in the Consolidated Balance Sheets for the years ended December 31, 2013 and December 31, 2012 as follows:



(in millions)	2013			2012
Current income tax asset	$	89.9		$	88.3
Long-term income tax assets, included in other non-current assets	9.0			13.8
Current deferred income tax liability, included in accounts payable and accrued expenses	(2.1		)	(4.1		)
Long-term deferred income tax liability	(214.3		)	(220.6		)
Net deferred income tax liability	$	(117.5	)	$	(122.6	)

The company has not provided for additional U.S. income taxes on approximately $732.9 million of undistributed earnings of consolidated non-U.S. subsidiaries included in stockholders’ equity. Such earnings could become taxable upon sale or liquidation of these non-U.S. subsidiaries or upon dividend repatriation of cash balances. It is not practicable to estimate the amount of the unrecognized tax liability on such earnings. At December 31, 2013, approximately $23.9 million of the company’s total cash and cash equivalents were held by its foreign subsidiaries. This cash is associated with earnings that the company has asserted are permanently reinvested. The company has no current plans to repatriate cash or cash equivalents held by its foreign subsidiaries because it plans to reinvest such cash and cash equivalents to support its operations and continued growth plans outside the United States through the funding of capital expenditures, acquisitions, research, operating expenses or other similar cash needs of these operations. Further, the company does not currently forecast a need for these funds in the United States because its U.S. operations and debt service are supported by the cash generated by its U.S. operations. The company would only plan to repatriate foreign cash when it would attract a low tax cost.

The company has approximately $519.3 million of state net operating loss carryforwards, which are available to reduce future state tax liabilities. These state net operating loss carryforwards expire at various times through 2031. The company has recognized a deferred tax asset of $18.8 million for net operating loss carryforwards generated in the state of Wisconsin. The company determined that no valuation allowance is necessary on the deferred tax asset for Wisconsin net operating loss carryforwards.

The company also has approximately $672.1 million of foreign loss carryforwards, which are available to reduce future foreign tax liabilities, substantially all of which are not subject to any time restrictions on their future use.

The company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. The following table provides the open tax years for which the company could be subject to income tax examination by the tax authorities in its major jurisdictions:



Jurisdiction		Open Years
U.S. Federal		2007 — 2013
Wisconsin		2009 — 2013
China		2005 — 2013
France		2009 — 2013
Germany		2006 — 2013

Among other regular and ongoing examinations by federal and state jurisdictions globally, the company is under examination by the Internal Revenue Service (“IRS”) for the calendar years 2008 through 2011. In August 2012, the company received a Notice of Proposed Assessment (“NOPA”) related to the disallowance of the deductibility of a $380.9 million foreign currency loss incurred in calendar year 2008. In September 2012, the company responded to the NOPA indicating its formal disagreement and subsequently received an Examination Report which includes the proposed disallowance. The largest potential adjustment for this matter could, if the IRS were to prevail, increase the company’s potential federal tax expense and cash outflow by approximately $134.0 million plus interest and penalties, if any. The company filed a formal protest to the proposed adjustment during the fourth quarter of 2012. In January 2013, the company received a formal rebuttal from the IRS and notification of the assignment of this matter to its Appeals division. Subsequent to an Appeals conference in September 2013, the company has been advised by the Appeals division that the issue has been tentatively resolved in the company's favor. However, this tentative resolution is subject to review by the Joint Committee on Taxation and there can be no assurance that this matter will be ultimately resolved in the company’s favor. The company will continue to pursue all administrative and, if necessary, judicial remedies with respect to resolving this matter. The IRS also examined and proposed adjustments to the research and development credit generated in 2009. The company has tentatively resolved this issue; however, this tentative resolution is also subject to review by the Joint Committee on Taxation. Given the uncertainty, neither of the resolutions have been reflected in the current year results; however, should the resolutions be accepted by the Joint Committee on Taxation, the potential adjustments are not expected to have a material impact on the financial statements.

The company regularly assesses the likelihood of an adverse outcome resulting from examinations to determine the adequacy of its tax reserves. As of December 31, 2013, the company believes that it is more-likely-than-not that the tax positions it has taken will be sustained upon the resolution of its audits resulting in no material impact on its consolidated financial position and the results of operations and cash flows. However, the final determination with respect to any tax audits, and any related litigation, could be materially different from the company’s estimates and/or from its historical income tax provisions and accruals and could have a material effect on operating results and/or cash flows in the periods for which that determination is made. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, and/or interest assessments.

During the years ended December 31, 2013, 2012 and 2011, the company recorded a change to gross unrecognized tax benefits including interest and penalties of $(20.7) million, $(10.4) million, and $11.6 million, respectively. The effective tax rate in 2013 and 2012 were favorably impacted by the release of reserves of $9.4 million and $11.6 million, respectively, resulting from favorable audit outcomes, and other settlements.

During the years ended December 31, 2013, 2012 and 2011, the company recognized in the consolidated statements of operations $(9.3) million, $(1.4) million, and $0.5 million, respectively, for interest and penalties related to uncertain tax liabilities, which the company recognizes as a part of income tax expense. As of December 31, 2013 and 2012, the company has accrued interest and penalties of $12.8 million and $22.1 million, respectively.

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2013, 2012 and 2011 is as follows:



(in millions)	2013			2012			2011
Balance at beginning of year	$	47.3		$	56.3		$	45.2
Additions based on tax positions related to the current year	2.0			1.8			1.7
Additions for tax positions of prior years	3.7			3.6			17.1
Reductions for tax positions of prior years	(0.2		)	—			(1.7		)
Reductions based on settlements with taxing authorities	(11.5		)	(13.0		)	(5.4		)
Reductions for lapse of statute	(5.4		)	(1.4		)	(0.6		)
Balance at end of year	$	35.9		$	47.3		$	56.3

Substantially all of the company’s unrecognized tax benefits as of December 31, 2013, 2012 and 2011, if recognized, would affect the effective tax rate.

During the next twelve months, it is reasonably possible that federal, state and foreign tax audit resolutions could reduce unrecognized tax benefits and income tax expense by up to $14.5 million, either because the company's tax positions are sustained on audit or settled, or the applicable statute of limitations closes.