Note 7—Income Taxes

A summary of pre-tax income from U.S. and non U.S. operations is as follows:

In millions	2013			2012		2011

Continuing operations
U.S. domestic	$	291.9		$	311.8	$	220.0
Foreign		41.1			34.6		25.0


Total pre-tax income from continuing operations		333.0			346.4		245.0


Discontinued operations
U.S. domestic		(132.4	)		40.6		(4.6	)
Foreign		71.9			14.6		11.1


Total pre-tax income (loss) from discontinued operations		(60.5	)		55.2		6.5


Total pre-tax income	$	272.5		$	401.6	$	251.5

The provision for income taxes from continuing operations is as follows:

In millions	2013			2012			2011

Current expense
Federal and State	$	97.2		$	114.1		$	65.3
Foreign		21.9			14.2			11.0


Total current expense		119.1			128.3			76.3


Deferred expense (benefit)
Federal and State		(8.2	)		(6.3	)		5.0
Foreign		(13.1	)		(4.3	)		(8.3	)


Total deferred expense (benefit)		(21.3	)		(10.6	)		(3.3	)


Total tax expense	$	97.8		$	117.7		$	73.0

A reconciliation of the tax provision for continuing operations computed at the U.S. federal statutory rate to the actual tax provision is as follows:

In millions	2013			2012			2011

Taxes at the 35% U.S. statutory rate	$	116.6		$	121.2		$	85.8
State and local taxes, net of federal income tax benefit		6.2			6.4			4.5
Benefit of foreign earnings taxed at lower rates		(3.0	)		(2.2	)		(0.1	)
Benefit for domestic manufacturing deduction		(9.7	)		(10.5	)		(6.9	)
Benefits from state tax incentives		(1.3	)		—			—
Benefit associated with foreign reorganization		(11.8	)		1.0			(5.0	)
Change in valuation allowances		0.8			(2.2	)		—
Other, net		—			4.0			(5.3	)


Tax expense	$	97.8		$	117.7		$	73.0




Effective income tax rate on continuing operations		29.4	%		34.0	%		29.8	%

Cash payments for income taxes, net of refunds, were $127.7 million, $100.8 million, and $73.5 million in 2013, 2012, and 2011, respectively.

Deferred tax assets (liabilities) at December 31 related to the following:

In millions	2013			2012

Deferred revenue	$	20.2		$	18.8
Warranty reserves		4.1			4.5
Inventory reserves		9.1			11.0
Doubtful receivables		1.9			4.1
Employee benefits		41.0			30.0
Foreign loss carry forwards		6.2			8.7
Deferred state tax attributes		18.2			14.7
Other, net		9.8			2.7


Gross deferred assets		110.5			94.5


Valuation allowances		(13.5	)		(10.3	)




Deferred tax assets after valuation allowances	$	97.0		$	84.2




Depreciation		(52.4	)		(53.4	)
Amortization		(43.2	)		(35.1	)
Acquired identifiable intangibles		(127.6	)		(140.7	)
Other, net		—			(1.0	)


Gross deferred liabilities		(223.2	)		(230.2	)


Net deferred tax liabilities	$	(126.2	)	$	(146.0	)

At December 31, 2013 the Company had no deferred tax assets related to net operating loss ("NOL") carryforwards for U.S. federal tax purposes but had a deferred tax asset for state NOL carryforwards of approximately $14.3 million (expiring 2015-2032) and deferred tax assets related to NOL carryforwards in foreign jurisdictions of approximately $6.2 million (expiring 2014-2020). The Company believes that it is likely that certain of the state NOL's will expire unused and therefore has established a valuation allowance of approximately $11.4 million against the deferred tax assets associated with these NOL carryforwards. Likewise, the Company believes that it is likely that certain of the foreign NOL's will expire unused and therefore has established a valuation allowance of approximately $2.1 million against the deferred tax assets associated with these NOL carryforwards. Although realization is not assured for the remaining deferred tax assets, the Company believes that the timing and amount of the reversal of taxable temporary differences, expected future taxable income and tax planning strategies will generate sufficient income to be fully realized. However, deferred tax assets could be reduced in the near term if our estimates of the timing and amount of the reversal of taxable temporary differences, expected future taxable income during the carryforward period are significantly reduced or tax planning strategies are no longer viable.

Deferred tax assets and (liabilities) are classified as current or long-term consistent with the classification of the asset or liability to which the difference relates. Foreign deferred tax assets and (liabilities) are grouped separately from U.S. domestic assets and (liabilities).

Deferred tax assets and (liabilities) are included in the balance sheet as follows:

In millions	2013			2012

Deferred income taxes	$	35.7		$	37.3
Accrued expenses	$	(0.8	)		—
Other long-term assets		4.9			4.9
Other long-term liabilities		(166.0	)		(188.2	)


Net deferred tax liabilities	$	(126.2	)	$	(146.0	)

The Company is not required to provide U.S. federal or state income taxes on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that are essentially permanent in duration. The Company's excess of financial reporting over the tax basis of investments in foreign subsidiaries is approximately equal to the cumulative undistributed earnings of its foreign subsidiaries. The Company reconsiders this assertion quarterly.

Generally, the Company considers all foreign earnings to be of a permanent investment nature. However, in late 2010 the Company acquired several foreign subsidiaries with unremitted earnings. During 2011 the Company determined that repatriation of significantly all of the unremitted earnings of an acquired Italian subsidiary would be advantageous for both treasury and tax reasons. At the time that the accumulated earnings were repatriated the Company provided for the associated tax expense and related tax benefits from foreign tax credits. The total dividend remitted in 2011 was $79.3 million, and the 2011 net tax impact of the repatriation was a tax benefit of $4.2 million. As part of the same tax planning strategy, the Company determined it would be advantageous for tax reasons to remit a portion of the 2012 earnings. Therefore, during 2012 approximately $4.0 million of the current year Italian earnings were repatriated. The Company does not intend to repatriate any further earnings of the Italian subsidiary.

At December 31, 2013, the Company intends to permanently reinvest abroad all of the earnings of its foreign subsidiaries. The Company has identified appropriate long term uses for such earnings outside the United States, considers the unremitted earnings to be indefinitely reinvested, and accordingly has made no provision for federal or state income or withholding taxes on such earnings. It is not practicable to calculate the unrecognized deferred tax liability on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries.

Unrepatriated earnings for the years ended December 31 were as follows:

In millions	2013		2012		2011

Indefinitely reinvested	$	403.8	$	300.5	$	266.9
Not indefinitely reinvested		—		—		0.9


Total	$	403.8	$	300.5	$	267.8

Unrecognized tax benefits reflect the difference between the tax benefits of positions taken or expected to be taken on income tax returns and the tax benefits that meet the criteria for current recognition in the financial statements. The Company periodically assesses its unrecognized tax benefits.

A summary of the movement in gross unrecognized tax benefits (before estimated interest and penalties) is as follows:

In millions	2013			2012			2011

Balance at January 1	$	9.3		$	9.6		$	13.1
Additions based on tax positions related to current year		1.3			1.5			1.8
Additions (reductions) related to purchase accounting		—			1.6			(2.8	)
Adjustments for tax positions of prior years		1.6			(0.4	)		0.2
Reductions due to statute of limitations		(2.0	)		(2.4	)		(2.6	)
Reductions due to settlementss		—			(0.6	)		(0.1	)


Balance at December 31		10.2		$	9.3		$	9.6

If the unrecognized tax benefits as of December 31, 2013 were to be recognized, approximately $8.5 million would impact the Company's effective tax rate. The amount impacting the Company's effective rate is calculated by adding accrued interest and penalties to the gross unrecognized tax benefit and subtracting the tax benefit associated with state taxes and interest.

The Company classifies and reports interest and penalties associated with unrecognized tax benefits as a component of the income tax provision on the Consolidated Statements of Earnings and Comprehensive Income, and as a long-term liability on the Consolidated Balance Sheets. The total amount of such interest and penalties accrued, but excluded from the table above, at the years ending 2013, 2012 and 2011 were $1.2 million, $1.3 million and $1.8 million respectively.

The Company is subject to U.S. federal income tax as well as income tax in multiple state and foreign jurisdictions. During the year the Company has worked with the IRS to complete its compliance assurance process for the 2012 tax year. The Company is currently working with the IRS to complete its compliance assurance audit for the 2013 tax year and expects conclusion of the process within the next twelve months.

Generally, state income tax returns are subject to examination for a period of three to five years after filing. Substantially all material state tax matters have been concluded for tax years through 2008. Various state income tax returns for subsequent years are in the process of examination. At this stage the outcome is uncertain; however, the Company believes that contingencies have been adequately provided for. The Company believes that any material results from income tax examinations underway in foreign jurisdictions have been adequately provided for.

Within the next twelve months state and foreign audits may conclude and statutes of limitations will expire affecting the amount of unrecognized tax benefits. The change in unrecognized tax benefits that may result is not known but the Company does not anticipate that there will be a material impact.