Income Taxes

The following summarizes pretax income:



	2013			2012			2011
U.S.	$	(499.8	)	$	(33.6	)	$	265.9
International	69.0			45.0			14.4
Total	$	(430.8	)	$	11.4		$	280.3

The tax provision contains the following components:



	2013			2012			2011
Current
Federal	$	(17.1	)	$	89.8		$	59.6
State	(2.1		)	1.9			3.4
Foreign	4.2			4.3			5.8
Total current	$	(15.0	)	$	96.0		$	68.8
Deferred
Federal	$	139.0		$	(104.0	)	$	20.3
State	57.8			(19.0		)	(2.0		)
Foreign	9.3			2.9			(0.2		)
Total deferred	206.1			(120.1		)	18.1
Total tax expense	$	191.1		$	(24.1	)	$	86.9

The income tax provision from operations differs from the tax provision computed at the U.S. federal statutory income tax rate due to the following:



	2013					2012					2011
Tax at U.S. Federal statutory rate	$	(150.8	)	35.0	%	$	4.0		35.0	%	$	98.1		35.0	%
State income taxes, net of Federal benefit	(12.2		)	2.8		(1.8		)	(15.8	)	6.3			2.2
State income tax credits, net of Federal benefit	(7.7		)	1.8		(9.8		)	(86.0	)	(5.4		)	(1.9	)
Foreign rate differences	(6.8		)	1.6		(4.6		)	(40.4	)	1.4			0.5
Research and Experimentation	(10.9		)	2.5		(3.2		)	(28.1	)	(10.2		)	(3.6	)
Domestic Production Activities Deduction	—			—		(8.8		)	(77.2	)	(4.7		)	(1.7	)
Interest on assessments	(0.6		)	0.1		0.3			2.6		0.8			0.4
Valuation Allowance - U.S. Deferred Tax Asset	381.0			(88.4	)	—			—		—			—
Other	(0.9		)	0.2		(0.2		)	(1.5	)	0.6			0.1
Total provision for income taxes	$	191.1		(44.4	)%	$	(24.1	)	(211.4	)%	$	86.9		31.0	%

Significant tax effected temporary differences comprising the net deferred tax asset are as follows:



	2013			2012
Long-term contracts	$	409.9		$	234.6
Post-retirement benefits other than pensions	26.6			28.6
Pension and other employee benefit plans	(68.0		)	(3.9		)
Employee compensation accruals	45.8			35.9
Depreciation and amortization	(123.7		)	(106.9		)
Inventory	3.4			(1.4		)
Interest swap contracts	0.9			(0.1		)
State income tax credits	61.1			49.8
Accruals and reserves	36.6			20.2
Deferred production	4.1			19.5
Deferred gain — severe weather event	(21.5		)	(39.1		)
Net operating loss carryforward	1.3			10.7
Other	4.2			1.1
Net deferred tax asset	380.7			249.0
Valuation allowance	(396.5		)	(10.4		)
Net deferred tax asset	$	(15.8	)	$	238.6

Deferred tax detail above is included in the consolidated balance sheet and supplemental information as follows:



	2013			2012
Current deferred tax assets	$	26.9		$	57.1
Current deferred tax liabilities	(0.5		)	(3.3		)
Net current deferred tax asset	$	26.4		$	53.8
Non-current deferred tax assets	—			192.0
Non-current deferred tax liabilities	(42.2		)	(7.2		)
Net non-current deferred tax asset	$	(42.2	)	$	184.8
Total deferred tax asset	$	(15.8	)	$	238.6

A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. When determining the amount of net deferred tax assets that are more likely than not to be realized, Management assesses all available positive and negative evidence. This evidence includes, but is not limited to, prior earnings history, expected future earnings, carry-back and carry-forward periods and the feasibility of ongoing tax strategies that could potentially enhance the likelihood of the realization of a deferred tax asset. The weight given to the positive and negative evidence is commensurate with the extent the evidence may be objectively verified. As such, it is generally difficult for positive evidence regarding projected future taxable income exclusive of reversing taxable temporary differences to outweigh objective negative evidence of recent financial reporting losses.

Based on these criteria and the relative weighting of both the positive and negative evidence available, and in particular the activity surrounding the Company’s prior earnings history including the forward losses previously recognized in the U.S., management determined that it was necessary to establish a valuation allowance against nearly all of its net U.S. deferred tax assets at December 31, 2013. This determination was made as the Company entered into a cumulative loss position in recent years once results from the year ended December 31, 2013 were included, the threshold after which there is a presumption that a company should no longer rely solely on projected future income in determining whether the deferred tax asset is more likely than not to be realized. As of December 31, 2013, the total net U.S. deferred tax asset was $399.6. The net U.S. deferred tax asset after recording valuation allowances is $3.7. Valuation allowances recorded against the consolidated net U.S. deferred tax asset in the current year were $381.0. Additionally, the Company maintains a $14.9 valuation allowance against separate company state income tax credits and previously recorded other U.S. issues and $0.6 for other foreign issues which is an increase of $5.1 from the prior year. The Company will continue to monitor its deferred tax position and may adjust the valuation allowance, if necessary, for utilization of the underlying deferred tax assets through current taxable income or as available evidence changes.

Certain amounts in 2012 and 2011 tax footnote have been reclassified to conform to the 2013 presentation.

The increase from 2012 to 2013 in the long-term contracts deferred tax asset is primarily due to forward losses recognized during 2013 that are not currently deductible for tax.

The decrease from 2012 to 2013 in the severe weather event deferred tax liability represents the identification and capitalization of qualified replacement property for book purposes with a corresponding increase to the deferred tax liability for depreciation and amortization.

We have recognized cumulative book income for our international operations, but have incurred cumulative taxable losses in the United Kingdom. The resulting net operating loss carryforward is primarily due to the manner in which the United Kingdom treats long-term contract income accounting and capital allowances.

As required under FASB authoritative guidance, $0.0 and $1.1 was recorded to Additional Paid in Capital, representing the tax effect associated with the net excess tax pool created during the periods ended December 31, 2013 and December 31, 2012, respectively.

As of December 31, 2013, the Company has not provided U.S. tax on its cumulative undistributed earnings of foreign subsidiaries of approximately $129.0 because it is the Company’s intention to reinvest these earnings indefinitely. The calculation of the unrecognized deferred tax liability related to these earnings is complex and the calculation is not practicable. If earnings were distributed, the Company would be subject to U.S. taxes and withholding taxes payable to foreign governments. Based on the facts and circumstances at that time, the Company would determine whether a credit for foreign taxes paid would be available to reduce or offset the U.S. tax liability.

The beginning and ending unrecognized tax benefits reconciliation is as follows:



	2013			2012			2011
Beginning balance	$	16.9		$	15.5		$	15.2
Gross increases related to current period tax positions	3.8			4.2			6.1
Gross increases related to prior period tax positions	0.4			1.8			33.5
Gross decreases related to prior period tax positions	(2.7		)	(3.8		)	(9.3		)
Statute of limitations' expiration	—			(0.8		)	(0.8		)
Settlements	—			—			(29.2		)
Ending balance	$	18.4		$	16.9		$	15.5

Included in the December 31, 2013 balance was $16.5 in tax affected unrecognized tax benefits which, if ultimately recognized, will reduce the Company's effective tax rate. The Internal Revenue Service's examination of the Company's 2012 U.S. Federal income tax return is complete. The Company will continue to participate in the Compliance Assurance Process ("CAP") program for our 2013 tax year. Additionally, we have been selected for the Compliance Maintenance phase of the CAP program for the 2014 tax year. The CAP program's objective is to resolve issues in a timely, contemporaneous manner and eliminate the need for a lengthy post-filing examination. HM Revenue & Customs is currently examining our 2009, 2010 and 2011 U.K. income tax returns. The Directorate General of Public Finance is currently examining our 2011 and 2012 France income tax returns. While a change could result from the ongoing examinations, the Company expects no material change in its recorded unrecognized tax benefit liability in the next 12 months, other than the potential $12.2 reduction for Malaysia mentioned below.

Our U.S. federal income tax return for the 2010 tax year is subject to examination. We are also subject to examination in various states and foreign jurisdictions for the 2009-2013 tax years.

We report interest and penalties, if any, related to unrecognized tax benefits in the income tax provision. As of December 31, 2013 and December 31, 2012, accrued interest on our unrecognized tax benefit liability included in the consolidated balance sheets was $0.1 and $0.7, respectively. The impact of interest on our unrecognized tax benefit liability during 2013 and 2012 was $(0.6) and $0.6, respectively.

We operate under a tax holiday in Malaysia effective through September 2024. During the current year, management continues to maintain a reserve for potential uncertainty in meeting the tax holiday's conditional employment and investment thresholds. While management believes we have met the required employment and investment thresholds, we continue to work through the process of validating the results with the respective Malaysian governmental authorities. If we can successfully demonstrate that the objectives have been achieved and the respective Malaysian authorities certify the results, we expect a $12.2 reduction in our unrecognized tax benefit liability.

At December 31, 2013, we had $2.6 in United Kingdom net operating loss carryforwards that do not expire and $18.1 in North Carolina net operating loss carryforwards that expire in 2025.

At December 31, 2013, we had $1.1 of U.S. Foreign Tax Credit carryforwards, a portion of which will expire beginning in 2018.

On January 2, 2013, the President signed legislation retroactively extending the U.S. Research Tax Credit for two years, from January 1, 2012 through December 31, 2013. Our income tax expense for 2013 reflects the entire benefit of the Research Tax Credit attributable to 2012, which was $5.8. We also recorded the benefit of the 2013 Research Tax Credit of $5.1 in our 2013 tax expense.

Included in the deferred tax assets at December 31, 2013 are $36.6 in Kansas High Performance Incentive Program ("HPIP") Credit, $7.3 in Kansas Research & Development ("R&D") Credit, and $2.7 in Kansas Business and Jobs Development Credit, totaling $46.6 in Kansas state income tax credit carryforwards, net of federal benefit. The HPIP Credit provides a 10% investment tax credit for qualified business facilities located in Kansas for which $5.9 expires in 2024, $0.6 expires in 2025, $3.5 expires in 2026, $5.0 expires in 2027, $9.7 expires in 2028 and the remainder expires in 2029. The R&D Credit provides a credit for qualified research and development expenditures conducted within Kansas. This credit can be carried forward indefinitely. The Business and Jobs Development Credit provides a tax credit for increased employment in Kansas. This credit can be carried forward indefinitely. As previously discussed, management determined that it was necessary to establish a valuation allowance against nearly all of its net U.S. deferred tax assets at December 31, 2013. This determination was made as the Company entered into a cumulative loss position in recent years once results from the year ended December 31, 2013 were included, the threshold after which there is a presumption that the Company should no longer rely solely on projected future income in determining whether the deferred tax asset is more likely than not to be realized. As a result, a full valuation allowance against all Kansas credits included as deferred tax assets is reflected within the total valuation allowance amount.

Included in the deferred tax assets at December 31, 2013 are $6.8 in North Carolina Investing in Business Property Credit, $3.9 in North Carolina Investment in Real Property Credit, and $3.9 in North Carolina Creating Jobs Credit, totaling $14.6 in North Carolina state income tax credit carryforwards, net of federal benefit. The Investing in Business Property Credit provides a 7% investment tax credit for property located in a North Carolina development area and the Investment in Real Property Credit provides a 30% investment tax credit for real property located in a North Carolina development area. The Creating Jobs Credit provides a tax credit for increased employment in North Carolina. These North Carolina state income tax credits can be carried forward 20 years. It is management's opinion that $1.6 of these North Carolina state income tax credits will be utilized before they expire and a $12.9 valuation allowance was recorded, net of federal benefit.