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Income Taxes
12 Months Ended
Dec. 31, 2011
Income Tax Disclosure [Abstract]  
Income taxes
INCOME TAXES

Earnings (loss) before income taxes and the provision for income taxes are presented in the following table.

 
Year Ended December 31, 2011
 
Year Ended December 31, 2010
 
Year Ended December 31, 2009
(millions of dollars)
U.S.
 
Non-U.S.
 
Total
 
U.S.
 
Non-U.S.
 
Total
 
U.S.
 
Non-U.S.
 
Total
Earnings (loss) before income taxes
$
119.2

 
$
646.7

 
$
765.9

 
$
(26.7
)
 
$
504.6

 
$
477.9

 
$
(138.5
)
 
$
156.4

 
$
17.9

Provision for income taxes:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Current:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Federal/foreign
31.8

 
162.9

 
194.7

 
14.0

 
117.7

 
131.7

 
(2.7
)
 
42.7

 
40.0

State
1.7

 

 
1.7

 
2.2

 

 
2.2

 
1.5

 

 
1.5

Total current
33.5

 
162.9

 
196.4

 
16.2

 
117.7

 
133.9

 
(1.2
)
 
42.7

 
41.5

Deferred
17.4

 
(18.5
)
 
(1.1
)
 
(48.9
)
 
(3.3
)
 
(52.2
)
 
(51.6
)
 
(8.4
)
 
(60.0
)
Total provision for income taxes
$
50.9

 
$
144.4

 
$
195.3

 
$
(32.7
)
 
$
114.4

 
$
81.7

 
$
(52.8
)
 
$
34.3

 
$
(18.5
)
Effective tax rate
42.7
%
 
22.3
%
 
25.5
%
 
(122.5
)%
 
22.7
%
 
17.1
%
 
(38.1
)%
 
21.9
%
 
(103.4
)%

The provision for income taxes resulted in an effective tax rate of 25.5%, 17.1% and (103.4)% for the years ended December 31, 2011, 2010 and 2009, respectively. An analysis of the differences between the effective tax rate and the U.S. statutory rate for the years ended December 31, 2011, 2010 and 2009 is presented below.

 
Year Ended December 31,
(millions of dollars)
2011
 
2010
 
2009
Income taxes at U.S. statutory rate of 35%
$
268.1

 
$
167.3

 
$
6.2

Increases (decreases) resulting from:
 

 
 

 
 

Income from non-U.S. sources, including withholding taxes
(74.8
)
 
(55.8
)
 
(17.1
)
Affiliates' earnings
(13.4
)
 
(13.8
)
 
(7.5
)
State taxes, net of federal benefit
1.1

 
1.4

 
4.7

Business tax credits
11.5

 
0.2

 
(1.9
)
Accrual adjustment and settlement of prior year tax matters
(1.0
)
 
0.4

 
(6.3
)
Medicare Part D
0.1

 
2.9

 
1.7

Foreign tax credit valuation allowance

 
(21.2
)
 
7.7

Non-temporary differences and other
3.7

 
0.3

 
(6.0
)
Provision for income taxes, as reported
$
195.3

 
$
81.7

 
$
(18.5
)


The Company's provision for income taxes for the year ended December 31, 2011 includes $11.0 million of additional tax expense associated with the Company's patent infringement settlement, $2.7 million of additional tax expense associated with the loss from disposal activities and a tax benefit of $6.2 million resulting from other tax adjustments. These other tax adjustments related to a change in state corporate income tax legislation as well as an adjustment of the Company's tax accounts as a result of the closure of certain tax audits. During 2011, several countries enacted changes to their respective statutory income tax rates. None of these changes had a material impact on the Company's effective tax rate.

The Company's provision for income taxes for the year ended December 31, 2010 includes a favorable impact of $21.2 million related to the reversal of the Company's valuation allowance on U.S. based foreign tax credit carryforwards, the impact of the change in tax legislation related to Medicare Part D subsidies of $2.9 million, additional tax expense of $2.3 million associated with the BERU - Eichenauer equity investment gain and the tax benefit of $9.8 million associated with the Company's environmental litigation settlement.

A rollforward of the Company's total gross unrecognized tax benefits for the years ended December 31, 2011 and 2010, respectively, is presented below. Of the total $26.2 million of unrecognized tax benefits as of December 31, 2011, approximately $22.6 million of the total represents the amount, if recognized, would affect the Company's effective income tax rate in future periods. This amount differs from the gross unrecognized tax benefits presented in the table due to the decrease in the U.S. federal income taxes which would occur upon recognition of the state tax benefits included therein.

(millions of dollars)
2011
 
2010
Balance, January 1
$
27.6

 
$
34.8

Additions based on tax positions related to current year
0.5

 
1.1

Additions for tax positions of prior years
3.9

 
0.3

Reductions for closure of tax audits and settlements
(4.3
)
 
(6.6
)
Reductions for lapse in statute of limitations
(0.8
)
 
(1.3
)
Translation adjustment
(0.7
)
 
(0.7
)
Balance, December 31
$
26.2

 
$
27.6



The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. The amount recognized in income tax expense for 2011 and 2010 is $1.7 million and $2.5 million, respectively. The Company has an accrual of approximately $7.8 million and $6.3 million for the payment of interest and penalties at December 31, 2011 and 2010, respectively. During the year ended December 31, 2011, the Company closed/settled certain open years for the U.S federal and certain foreign jurisdictions resulting in no cash payments. Possible changes within the next 12 months related to other examinations cannot be reasonably estimated at this time.

The Company and/or one of its subsidiaries files income tax returns in the U.S. federal, various state jurisdictions and various foreign jurisdictions. In certain tax jurisdictions, the Company may have more than one taxpayer. The Company is no longer subject to income tax examinations by tax authorities in its major tax jurisdictions as follows:

Tax jurisdiction
 
Years no longer subject to audit
 
Tax jurisdiction
 
Years no longer subject to audit
U.S. Federal
 
2008 and prior
 
Italy
 
2006 and prior
Brazil
 
2004 and prior
 
Japan
 
2009 and prior
France
 
2007 and prior
 
Spain
 
2005 and prior
Germany*
 
2004 and prior
 
South Korea
 
2006 and prior
Hungary
 
2008 and prior
 
United Kingdom
 
2009 and prior
_______________
*In Germany, the open tax years for the Company's BERU subsidiary are from 2003 and forward.

The gross components of deferred tax assets and liabilities as of December 31, 2011 and 2010 consist of the following:

 
December 31,
(millions of dollars)
2011
 
2010
Current deferred tax assets:
 

 
 

Employee related
$
28.0

 
$
26.2

Net operating loss carryforwards
4.3

 
9.8

Inventory
14.5

 
8.6

Warranties
4.5

 
6.3

Litigation & environmental
0.9

 
5.8

Customer claims
2.2

 
2.0

Derivatives
0.6

 
1.2

Other
5.7

 
6.8

Total current deferred tax assets
$
60.7

 
$
66.7

Current deferred tax liabilities:
 

 
 

Other
$
(3.7
)
 
$
(7.6
)
Total current deferred tax liabilities
$
(3.7
)
 
$
(7.6
)
Non-current deferred tax assets:
 

 
 

Foreign tax credits
$
158.2

 
$
183.4

Other comprehensive income
116.7

 
98.0

Research and development capitalization
76.7

 
49.3

Pension and other post employment benefits
33.9

 
44.6

Employee related
22.9

 
20.0

Net operating loss carryforwards*
35.1

 
15.0

Research and development credits
3.0

 
6.3

Warranties
4.7

 
4.4

Litigation and environmental
2.0

 
2.6

Other
5.1

 
8.1

Total non-current deferred tax assets
$
458.3

 
$
431.7

Non-current deferred tax liabilities:
 

 
 

Goodwill & intangibles
$
(155.5
)
 
$
(130.3
)
Fixed assets
(79.7
)
 
(84.8
)
Dividends accrued
(1.3
)
 
(2.8
)
Other comprehensive income
(2.9
)
 
(3.0
)
Other
(6.6
)
 
(7.7
)
Total non-current deferred tax liabilities
$
(246.0
)
 
$
(228.6
)
 
 
 
 
Total deferred tax items
$
269.3

 
$
262.2

Valuation allowances*
(23.6
)
 
(13.0
)
Net deferred tax asset
$
245.7

 
$
249.2

_______________
*Net operating loss carryforwards are shown gross with the corresponding valuation allowances located at the end of the table.

The deferred tax assets and liabilities recognized in the Company’s Consolidated Balance Sheets are as follows:

 
December 31,
(millions of dollars)
2011
 
2010
Deferred income taxes — current assets
$
58.5

 
$
75.8

Deferred income taxes — current liabilities
(6.5
)
 
(18.4
)
Other non-current assets*
313.9

 
305.5

Other non-current liabilities*
(120.2
)
 
(113.7
)
Net deferred tax asset (current and non-current)
$
245.7

 
$
249.2

________________
*Other non-current assets and liabilities have been netted within their respective taxing jurisdictions due to consolidation (primarily U.S. and Germany).

Deferred income taxes - current assets are primarily comprised of amounts from the U.S., France, Italy, Japan, Spain and South Korea. Deferred income taxes - current liabilities are primarily comprised of amounts from Germany. Other non-current assets are primarily comprised of amounts from the U.S. Other non-current liabilities are primarily comprised of amounts from Germany, Italy, Spain, Sweden and the U.K.

At December 31, 2011, certain non-U.S. subsidiaries have net operating loss carryforwards totaling $64.1 million available to offset future taxable income. Of the total $64.1 million, $35.4 million expire at various dates from 2012 through 2031 and the remaining $28.7 million have no expiration date. The Company has a valuation allowance of $1.5 million recorded on $5.5 million of non-U.S net operating loss carryforwards. Certain U.S. subsidiaries have state net operating loss carryforwards totaling $537.4 million which are completely offset by a valuation allowance due to risk of realization. Certain non-U.S. subsidiaries located in China, Korea and Poland have tax exemptions or tax holidays, which reduced tax expense approximately $21.8 million in 2011. All the existing tax holidays remain in effect during 2012 and the tax holiday in Poland is scheduled to expire in 2013. The U.S. has foreign tax credit carryforwards of $158.2 million, which expire at various dates from 2015 through 2020.

The Company has not recorded deferred income taxes on the difference between the book and tax basis of investments in foreign subsidiaries or foreign equity affiliates totaling approximately $1.8 billion in 2011, as these amounts are essentially permanent in nature. The difference will become taxable upon repatriation of assets, sale or liquidation of the investment. It is not practicable to determine the unrecognized deferred tax liability on the difference because the actual tax liability, if any, is dependent on circumstances existing when the repatriation occurs.